Fresh out of the IPO gate, Halogen doesn't dissappoint

One of the key pieces of advice for any Canadian tech entrepreneur considering an initial public offering over the next 12 months is this: make sure the business is set up to perform well out of the gate. Ask any portfolio manager what the #1 crime is post-IPO, and most will agree that it’s “falling flat on your face.”

With that in mind, it was nice to see Halogen Software (HGN:TSX) surprise Bay Street with last night’s quarterly financial results. And when I say “surprise”, I don’t mean the bad kind of surprise that would earn the derision of our late dear friend Ross McMaster: “Electrofool” was his nickname for Electrofuel when that company stumbled.

I don’t want to put too much pressure on HGN management, but the fate of every high quality tech IPO candidate has been resting on your shoulders (see prior posts “Halogen IPO filing gives Canadians their first chance to taste tech in far too long” April 2-13 and “Halogen IPO a true blowout” May 10-13). Now that this quarter is out of the way, investment bankers and their Institutional Sales colleagues can breathe a sigh of relief. The stock traded up nicely post IPO, and then showed 30% year-over-year growth in its Q3 recurring revenue.

Here are the summaries from two Bay Street research analysts from this morning:

Kris Thompson, MBA
National Bank Financial

Strong revenue and lower than expected opex narrows loss
Target: Cdn$18.00 (Unchanged)
Stock Rating: Outperform (Unchanged)
Risk Rating: Above Average (Unchanged)
Est. Total Return: 30%

Halogen reported strong Q3 results.

Key Takeaways:

Total revenue of $12.3 mln beat our $11.9 mln estimate and consensus of $11.7 mln. Recurring revenue of $10.7 mln grew 30% y/y. Most of the growth came from the United States, but the company is focusing on growing international operations starting in the U.K. and Australia, which account for less than 8% of total revenue today. A new VP of Sales was added to the roster to support this effort. Management increased 2013 revenue guidance. We lowered our opex only slightly, which results in a much improved EPS outlook. This is a great stock to tuck away with little requirement to worry about quarterly results due to the recurring cloud revenue model and a strong management team with a solid track record. Remain Outperform.

Robert Young
Richard Davis
Honghua Chen
CanaccordGenuity

Halogen Software Inc.
HGN : TSX : C$13.85 | C$299.3M | Buy, C$19.00

• Q3/13 driven by 30% recurring revenue growth; maintain BUY and C$19.00 target

Investment recommendation

Halogen reported strong Q3/13 results, beating expectations on both top and bottom lines, and nudged F2013 guidance by a similar amount to above our and consensus expectations. International sales growth of 66% YoY bodes well for sales investment outside of US/Canada. We continue to believe that Halogen is very well positioned to benefit from a significant, untapped middle market and an accelerating shift towards cloud based tools and Talent Management software. We like Halogen’s strong management, predictable model and growth profile and are maintaining our BUY rating with a target price of C$19.00, based on 6x 2014E EV/Sales and supported by comps and DCF.

Investment highlights

• Strong top line with record recurring revenue — Recurring revenue underpinned growth with a very impressive 30% YoY and 6% QoQ growth spike to a record $10.7M. Revenue was $12.3M (up 27% YoY and 8% QoQ), beating our and consensus estimates of $11.9M. Adjusted EPS was $(-0.03), also beating our estimate of $(-0.12) and consensus of $(-0.13).

• Annual guidance increase — For Q4, Halogen expects revenue of $12.2-12.4M, with recurring revenue of $11.0-11.2M, up 21% and 26% YoY at the midpoint. Halogen raised 2013 revenue guidance to $47.6-47.8M (from $47.0-47.4M), with recurring revenue of $41.8-42.0M (from $41.5-41.9M).

• International inflects — Halogen announced record new international customer signings and impressive international revenue growth of 66% YoY.

Valuation

Halogen’s current valuation of 4.1x C2014E EV/Sales lags larger HCM SaaS vendors at 10.5x, and is slightly below sub $1B SaaS vendors which average at 4.8x despite Halogen’s higher expected 2014 growth and HCM focus. We believe a premium valuation is warranted and base our target on 6x C2014E EV/Sales.

MRM
(disclosure: I own HGN)