Bagnall: Martello stocks soar after former Canopy CEO Bruce Linton muses about his role with them

The capital region’s tech scene has rarely seen anything like this. Shortly after Bruce Linton was sacked July 2 as CEO of Canopy Growth, the country’s biggest cannabis products firm, he mused about spending more time at Martello Technologies.

“I would like to help Martello both define and execute their strategy on acquisitions,” Linton said. That simple declaration was enough to trigger a quintupling of Martello’s stock price over the following week to $1 per share on the TSX Venture Exchange.

Investors scrambled to figure out what Martello does and who runs it. Turns out the nine-year-old firm makes some pretty esoteric stuff — software that tracks and visualizes how computer and communications networks are running, and suggests ways of improving their efficiency. Of more than passing interest: Martello is co-chaired by Linton and tech legend Terry Matthews.

Still, there was a lot of uncertainty about Martello’s prospects. The company’s share price bounced all over the place and fell back to 61 cents on Tuesday.

On Wednesday morning, there was finally some clarity about the firm’s business operations. The share price began climbing again after Martello published detailed financial results covering the year ended March 31. Of note was the revelation that annual revenues had doubled to $10.4 million, compared to the previous year.

Yes, the company also lost a hefty $5.4 million — but this is what you might expect from a fast-growing enterprise that is building a global organization through hiring, and acquiring other firms. Martello now employs about 100, with half of the workforce based in Kanata.

Martello CEO for the past two years, John Proctor, did not offer a precise financial forecast for fiscal 2020, but based on its recent fourth quarter, the company shouldn’t have much trouble topping $13 million in annual sales. The wild card is Martello’s future acquisitions — and that’s where Linton comes in.

“We have a list of targets,” Linton said in opening Wednesday’s telephone conference call with independent analysts and investors. “The prospect of additional acquisitions is quite strong,” he added.

Linton’s exact role at Martello is a little unclear for the moment. He was careful to note that while he was a member of the board of directors, he “was not management.” Proctor and the company’s chief financial officer Erin Crowe fielded all of the queries on the conference call about Martello’s results and prospects.

The impact of recent acquisitions orchestrated by Proctor has been huge. Two-thirds of last year’s increase in revenues was generated by Elfiq of Montreal (network performance management software) and Netherlands-based Savision (visualization software). Martello’s original core business (network analytics software) — which depends heavily on Mitel’s sales channels — grew about 33 per cent year over year.

Martello’s grand strategy is to grow its existing business lines and add complementary ones by buying other firms. The idea is to offer technology that offers a full view of company-owned networks, especially if these are also linked to systems operated by third parties (the cloud).

With just $6.6 million cash on hand as of March 31, Martello for the moment has to rely heavily on the value of its shares as currency. Acquisition targets have to be sold on the notion that Martello’s share price will go up.

Look for the company to take advantage of the recent jump in share price by issuing more shares to the public. That would boost its cash reserves.

Linton and Proctor were no doubt encouraged by investors’ reaction to Martello’s latest financial results. The share price jumped 16 per cent in early morning trading Wednesday before settling back to a more measured gain of 10 per cent.

That gave the company a market value of nearly $130 million — or about 10 times estimated revenues for fiscal 2020. That’s not cheap, though it is within the range of other companies that make a living selling software-as-a-service. Nor does it include the possible impact of Linton-engineered acquisitions, which could reduce the ratio to less expensive levels.

For what it’s worth, Morningstar, a rating agency, reckons Martello’s “fair value” in advance of its earnings release this week was 81 cents per share.

Little more than two weeks ago, when Linton was getting his final notice from Canopy Growth, a trade at that level would have seemed ridiculously high. Not now.

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Source: Ottawacitizen.com

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