|Investment Research Report for Nuvo |
Here is my August 2006 Investment Research Report on Nuvo Network Management. This report is shared with the Nuvo community to help them better understand Nuvo’s business model and its investment opportunity. You can share this report if you wish.
Although I have tried to be thorough in my analysis, everyone should do their own due diligence (DD). (You can listen to the last conference call. It will give you a very good insight as to what’s coming: 1-800-677-6425, reference number: 3437333, until August 10th. Also read the various management reports on Sedar sedar.com )
The report includes:
Trends in IT spending
Nuvos’ Financial Summary
Nuvo’s high growth period
Entry Point and Target price
Nuvo has been around for over 10 years. They have had their up’s and downs and over the past 3 years, have transformed themselves from a small company with an undefined market strategy, low focus and many distractions to one with a more refined market focus and are providing significant industry leadership in the security and remote network management of data, voice and video. In the last two years they have bought 4 businesses. Two are in the US, to expand their market share, and two are in Ottawa, to broaden their service offering.
Nuvo works with partners such as IBM, BT-Infonet, 3COM and GE-IT to establish clients from whom they derive 60% of their revenues. The remainder is generated by Nuvo’s sales force and smaller local service providers.
The market for security services is estimated to be around $9 billion (not including VOIP) (Gartner) in 2006. Nuvo is also in the field of Network management and VoIP which provides them greater overall market opportunities.
Trends in IT spending
In this year’s “Eweek’s supplement on Innovation”, Eweek identified 10 IT projects that businesses wants to implement in 2006. Nuvo can help businesses in 5 of those top 10 IT projects.
1 - VoIP (It explains why Nuvo is currently bidding on a contract for the management of over 100,000 IP phones)
2 - Outsourcing (Nuvo offers a wide range of outsourcing projects related to Networks)
8 - Application Performance Management (Through the use of its MAXmonitor service)
9 - Business analytics (as it pertains to network and security management through the use of its MAXanalyse service)
10 - Compliance tracking (Integrated in all of its services)
Nuvos’ Financial Summary
FY---------- - 06---------- - 07
Revenues---- - 17M$ (E)---- - 22M$ (E)
Gross margin - 38%--------- - 45 (E)
Profits----- - 250K$ (E)----- 2M$ (E)
Employees--- - 109 ---------- 109 (E)
EPS--------- - 0.53c------- - 0.73c
Share Price- - 0.40c------- - 1.80$ (Target Price)
Below is a summery of meaningful events that occurred in the past 5 years
• They signed a partnership agreement with GE Capital IT Solutions in April 2002. Under the terms of that arrangement, GE shut down its network operation centres, or NOCs, in Toronto and Kentucky. All of its 24-hour, seven-day a week network management services for existing customers were outsourced to Nuvo. Also, GE received warrants to acquire up to 11M shares (1.85M after consolidation) if they bring 10M$ in contracts by December 2003.
• They hired Phil Weaver, formerly from JetForm. Phil decided to joined Nuvo because he said that Nuvo had the potential to become a 100M$ company. (July 2002)
• They acquired four companies (Linmor, Network Performance Services, Network Guidance (FY-04) and Domus IT lab from IBM (FY-06)
• They secured a 6M$ equity offering. NUVO Officers and Directors purchased 4.9% of the offering.
• They double their capacity in FY-05 which affected their gross margin.
• There was a share consolidation (6 to 1) in March 2005 which brought the shares from 0.20c to 1.20$.
• They signed a partnership agreement with 3COM (Q2-06). The person who organized this partnership is Jim Williams. He is head of 3COM American Sales and worked a year with Nuvo prior to his appointment.
• They signed a 15M$ agreement with IBM in Q3-06. IBM can earn warrants of up to 1.5 million shares, proportional to incremental revenues received for the mid-market outsourcing services business generated by IBM. The full extent of the equity agreement will be achieved at $15 million in contract value over the next 30 months.
• They signed 8.2M$ in new contract last quarter.
Nuvo relies heavily on its channel partners to gain new clients. Some of the largest partners being IBM, Compucom (formerly General Electric IT), British Telecom through its subsidiary BT-Infonet and PWGSC. They also signed a partnership agreement with 3COM last February which should foster new clients and revenues in the next few quarters. They also have several small local solution providers as partners.
Nuvo’s strength relies on:
• Its management: Through their knowledge of the market, vision, long term planning and hard work they are able to develop long and sustainable partnerships, understand the market direction and capitalize on available opportunities, and finally, make the appropriate decisions to ensure profitability. (Under Weaver, the company has been profitable 10 out of 15 quarters and raked in 1.2M$ compare to a cumulative lost of 5.4M$ in the 8 quarters prior to his arrival.)
• Its products: They are scalable and integrated. The portal, MAXadvantage, the latest in a series of high margin product releases, is gaining a lot of momentum. This is a solution like Salesforce.com that gives the managers an instant view of the network and all of it’s component, be it physical or virtual, data or voice etc., and the possibility to manage them. This seems to respond to the needs of the market to have an aggregated tool to manage all elements of the networks. They have a good breath and depth of services. The Linmor acquisition has help Nuvo in increasing its productivity by automating many aspect of network management.
• Its employees: They are very professional and knowledgeable. They are able to respond to their clients needs and to sustain great relationship with them.
• Its process and capacity: Nuvo can presently increase its revenues without increasing its expenses. This will represent huge gains in profitability as revenue grows. Nuvo is certified ISO 9001:2000 and follows ITLL change management process.
• Its revenue stream: 93% of its revenues are recurring.
• Its financial situation: With 1.6M in cash and a debt of around 400K$, Nuvo is in a good financial situation. Cash should continue to grow over the next quarters as Nuvo should bring 500k in profits starting Q1-07. The increase is due to increase sell and increase gross margin.
Nothing is perfect in this world. The same holds true for Nuvo. Here are a few elements that are affecting Nuvo:
• Rise of the Canadian Dollar (The C$ went from .60 to .91c in the last 3 years.) Although it has receded and that analyst predicts that it will go back down to 0.80 by July 2007, it might still go higher.
• Resistance from big companies to outsource IT services related to Network Management. (From what I have seen and heard, the portal is breaking this resistance because the ROI, both tangible and intangible, for the business is phenomenal.)
• Sales forces seem weak. They seem to have a lot of customers that only use one product or service. sedar.com P. 5
• Low volume and trades on the TSX-V.
• Most acquisitions 2 years ago where made with shares. A total of around 25M shares where given, 4.1M after consolidation. This has put pressure on the share price and still might have in the near future.
• They had a 6-1 consolidation last year.
• After 8 positive quarters they have had five negative quarters due to the increase in capacity and the strength of the Canadian dollar. (They have returned to profitability and have been back in the black for last 2 quarters and they should be profitable thereafter.)
>Nuvo’s high growth period
Nuvo as entered a high growth period last Q. They have signed a record 8.2M$ in new contracts. Most of these new contracts are three year in duration and have the potential to increase revenues by 680K’s per quarter when fully implemented. From the information provided by the CEO during the Q3 conference call, the on-going discussions with potential new clients and their partners are extremely positive. This implies that the sales opportunities are gaining momentum. The outlook is very good for the next few quarters. Another very positive sign is that they are currently taking business away form competitors based on their products, their approach and sound business model.
Nuvo entered a new phase in Q3 (July /06), one of record growth. They signed a record 8.2M$ in new contracts. Most of those contracts are three year in duration, should be re-occurring and have the potential to increase revenues by 680K's per quarter when fully implemented. From the information provided by the CEO during the last conference call, various on going discussions with potential new clients and their partners are extremely positive and many are nearing final stages. This implies that overall sales are steadily increasing and offers a very high growth potential looking forward for the next few quarters.
Now, this is not to say there was no growth prior to last quarter. Growth has been around Nuvo for a few years. For instance, from Q4-04 to Q2-06 Nuvo signed over 33M$ in contracts of which almost 25M$ were new contracts. Unfortunately during the same period the he C$ strengthened from 0.76c to 0.91c inhibited the profit margins on and the overall profits. They had to buy out a few contracts either because they were pointing Nuvo in the wrong direction or because they were not profitable anymore. Short term, pruning of the contracts did have a negative impact on the overall revenues and share price but I believe it will prove to be an effective strategy in the long term.
Phil Weaver, Nuvo’s CEO, has been plagued by the strength of the C$ since his arrival. When he came onboard in 2002, the C$ was at 0.63c. It is now at 0.88c and had a peak of 0.91c. We have to give him credit for making Nuvo a profitable company despite the rise of the C$. Nuvo would most certainly have had higher revenues if the C$ would have been around 0.70US$ to 0.75US$.
Entry Point and Target price
Nuvo’s share are now at around 0.40c, down from a peak of 1.20$-1.30$ 18 months ago. It’s an excellent entry point. I don’t believe it will go much lower. In my opinion, considering my target price, anywhere under 1$ is a good entry point. Of course lower is always better but again I don’t think it will go much lower. Insiders have been buying at 0.50c., 0.66c and at 1$. This is surely a sign of confidence going forward.
As far as target price is concern, I think that the share price will gravitate around 1.80$ in 6 to 12 months from here, most likely after the Q1-07 quarterly release.
My reasoning is simple. From Q1-03 to Q4-04, Nuvo was a 12M$ company. It had 8 profitable quarters which brought in almost 1M$ in profits. With a float of 175M share, the share price was around 0.20c.
In FY-05, they secured a 6M$ placement and made a 6 to 1 share consolidation. Management bought shares at .17$ or (1.02$ after consolidation). Later the reverse split brought the share price to the 1.20$-1.30$ range.
In FY-05 Nuvo became, through its acquisition, a 16M$ company. Unfortunately, due to the strengthening of the C$ and the effect of an investment of 700K$ to increase its capacity, Nuvo had 5 non-profitable quarters. This brought the share price in the 0.30c to 0.40c price range.
Nuvo started to be profitable, once again, a few quarters ago (Q2-06) and should continue to be profitable thereafter. Nuvo is also growing its revenues as we saw in Q3 where they signed 8.2 million in new contracts. I expect that Nuvo will continue to sign between 6M$ and 10M$ in new contracts over the next few quarters.
Nuvo should end FY-06 with 17M$ in sales and 300K$ in profits. For FY-07, I expect revenues of 22M$ and profits of 2.5M$. Nuvo will see 25% growth Q/Q in all 4 quarters. Q1-07 should bring 5M$ in revenues compared to 3.95M$ in Q1-06 with a profit of around half a million compared to a lost of 270K$. EPS should be around 0.73$ compare to 0.53$ for FY06.
These increases will be mainly due to increase in sales and gross margin as well as the weakening of the C$. RBC analysts are predicting that the C$ should be around 0.80$US by mid 2007.
Considering Nuvo’s positive financial situation, its strong growth and the fact that similar businesses have been bought at 3 times EPS, I think that Nuvo’s share should be estimated by multiplying EPS by a factor of 2 or 3. This would give a share price that would be between 1.46$ to 2.19$. I have use a factor of 2.5 X EPS. Hence, the target price of 1.83$. This should happen somewhere between January and August 2007 as we will have then seen the results of Q4-06, Q1-07, and if need be Q2 and Q3-07.
Nuvo’s share price will not go up to 1.83$ tomorrow but I expect it will do so in 6 to 12 months. Nuvo is a company with great fundamentals, it was able to increase its revenues and return to profitability despite the rise of the C$ from 0,63c to 0,91c. It has great products, great management, great employees and great partners.
The results from Q4 should be positive and I expect that new contracts signed will be around 6Ms to 10M$. If this happens then Nuvo will have definitely entered a high growth period in Q3-05.
Nuvo’s revenues for Fy-07 should be around 22M$ and profits between 2M$ and 3M$. The results from Q4-06 will provide us a good indication of future trends. The CEO still envision Nuvo to be a future 100M$ company. He has had many success in the past providing the leadership for growth and a proven track record building profitable business through acquisitions and growth through the channel partners and he is poised to accomplish this again with Nuvo over the next several years.
The basic ingredients are there such as; an effective growth through acquisitions strategy, rapid growth through channel partnerships, an excellent mix of products and services while continually adding new profitable services with higher margins, experienced senior management leadership with a proven track record, excellent partners and a cream of the crop employee base who collectively maintain a very high customer retention rate of over 90%.
I hope you enjoyed this report. If you have any questions, you can inbox me.
Ps.: If you are wondering how I reached my conclusions, the answer is that I have been following this business for over 5 years and I have done plenty of DD. I have read all of the reports I could find relating to Nuvo, including some from Wellington West, listened to the conference calls, spoken with analyst as well as present and former employees, including the current CEO.
I have never worked directly or indirectly with this company. I am only a private investor and of course I do own shares in Nuvo. :-)