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Beacon Securities Ltd.| 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H1 |416.643.3830|www.beaconsecurities.ca
Astrix Networks Inc. (OEE – V)
July 14, 2015
I Can See Clearly Now
Company Profile
Burlington-based Astrix Networks, operating as Memex Automation is
a provider of business intelligence solutions to the manufacturing
sector.
Investment Thesis
We believe that the relatively robust macro environment for industrial
companies, the large and untapped addressable market, the high
ROI associated with Memex’s products, and its strong traction to
date could enable the company to outperform the organic growth
profile of comparable software peers and drive ongoing
improvements in its profitability profile.
Investment Highlights
- Memex’s Merlin platform provides actionable data on plant-
floor equipment. The data can be used to show how the current
conditions on the plant floor can be optimized to improve
output.
- Memex brings several benefits, which ultimately help to drive a
very quick, and high ROI (a few months in some cases).
o Provides real-time production visibility into plant floor
equipment;
o Analyzes data to uncover reasons for downtime, thereby
helping to maximize production throughput and minimize
job interruptions;
o Analyzes operating and maintenance performance to
find potential issues before they become expensive
problems and helps customers reduce capex spend by
improving utilization rates of existing equipment.
- We estimate Memex’s market opportunity at ~$225B with
adoption rates below 5%, which we believe suggests there is still
significant organic growth opportunities. We factor 85–100%
revenue growth in our forecast period.
- ROI represents a key purchasing decision variable and our
discussions with customers suggest a very rapid payback, which
could help to accelerate adoption of the company’s platform.
- Memex has already generated strong traction with 80 customer
installations most of which are initial small deployments. Over
time, we believe this existing customer base could contribute
another $30M in potential sales as deployments accelerate.
- We are initiating coverage with a Speculative Buy rating and
$0.40/sh target, which is based on our DCF analysis or 5x FY17e
EV/Sales. We feel our target multiple is fair given our forecasted
3-year revenue CAGR of 96% (FY14–FY17e).
-
$0.24
$0.40
67%
YE: Sept FY15e FY16e FY17e
Revenue (M) 1.9 3.5 7.0
EBITDA (M) -2.1 -2.0 -0.1
EPS ($) -0.03 -0.02 0.00
FY15e FY16e FY17e
EV/Sales 11.4x 6.1x 3.1x
EV/EBITDA n/a n/a n/a
P/E n/a n/a n/a
96.3
Shares O/S (FD) 102.4
Market Cap (Basic) $23.1
Market Cap (FD) $24.6
Cash $3.4 $0.03/sh
Debt $0.4 $0.00/sh
EV $21.6
Stock Performance (1 year)
Stock Data (M)
Shares O/S (Basic)
Gabriel Leung 416-507-3963
Initiating Coverage
Prev ious Close
12-month Target Price
Potential Return
Estimates (C$)
Valuation
Company Description
Burlington- based Astrix Networks (operating as Memex
Automation) is a provider of business intelligence solutions to
the manufacturing sector. The company has 80 customer
installations with a strong focus on the aersopace sector
Research Team
Spec. Buy $0.40
Who They Are and What Do They Do?
• Burlington-based Astrix Networks, operating as Memex Automation, was founded in 1992 and
over the years has evolved into a provider of business intelligence solutions for companies in the
manufacturing sector.
• The company’s flagship product, Merlin, is a M2M solution that helps identify plant problems by
capturing real-time production information from factory-floor machines and relaying this
information in real-time visible dashboard metrics for the entire plant floor and management to
see. Inefficiencies can be quickly identified and addressed resulting in improved uptime, reduced
costs, and improved profitability.
• Memex’s solutions are marketed to customers in discrete manufacturing, most notably within
aerospace. It has over 80 installations across 3 continents, and boasts impressive customers
including Magellan, Heroux Devtek, Mazak, Ingersoll Rand and Com Dev to name a few.
• Memex has 29 employees, including 6 in direct sales.
• The company recently (early June) boosted its balance sheet with a $3.9M financing at $0.15/sh.
1Gabriel Leung, 416-507-3963
Investment Thesis
• We believe Memex has developed a compelling (and validated) M2M platform for capturing
real-time plant floor data for the purpose of improving efficiency and profitability. We view this
as a large ~$225B addressable market opportunity, which has been largely underpenetrated.
• In our opinion, Memex’s Merlin platform brings several benefits, which ultimately help to drive a
very quick and high ROI (a few months in some cases):
– provides real-time production visibility (data collection and reporting) into plant floor equipment;
– analyzes data to uncover reasons for production downtime, thereby helping to maximize production
throughput and minimize job interruptions;
– helps to identify potential maintenance issues before they become expensive problems; and
– helps customers to reduce capex spend by improving utilization rates of existing equipment.
• We believe that the relatively robust macro environment for industrial companies, the large and
untapped addressable market, the high ROI associated with Memex’s products, and its strong
traction to date could enable the company to outperform the organic growth profile of
comparable software peers and drive ongoing improvements in its profitability profile.
2Gabriel Leung, 416-507-3963
Bringing Visibility to the Plant Floor
3Gabriel Leung, 416-507-3963
• Memex’s Merlin platform (stands for Manufacturing Execution Real-Time Lean Information
Network) is a Manufacturing Execution System (“MES”) that provides actionable data on plant-
floor equipment. The data can be used to show how the current conditions on the plant floor
can be optimized to improve production output. The company’s platform consists of both
software and hardware solutions (largely used for connectivity).
• One of the main hurdles preventing companies from realizing efficiencies in their operations is
the inability of manufacturing machines to communicate with management in real-time (due to
a diverse range of plant equipment/controllers who all speak different language/protocols).
Merlin enables real-time XML communication, thereby turning any piece of discrete
manufacturing equipment into a webserver.
• Key features provided by Merlin, include real-time production visibility, including alerts through
email or text, production data collection and reporting, labor productivity tracking, usage-based
preventative maintenance, visual dashboards, scheduling and multiple data element collection.
• Ultimately, the company’s goal is to improve communications on the plant floor, which helps to
identify production and potential maintenance issues, thereby allowing management to address
bottlenecks, whether it be equipment, labor or process related.
Bringing Order To Data Chaos
4Gabriel Leung, 416-507-3963
Source: Company filings.
Real-Time Dashboard Analytics
5Gabriel Leung, 416-507-3963
Source: Company filings.
Product Offering Summary
6Gabriel Leung, 416-507-3963
Manufacturing Execution System (MES) Products Connectivity Solution Products
Merlin OEE Machine Monitoring Dashboard Software Ax9150 UMI - MT Connect
Merlin Dynamics AX Connector Ax760 MT Connect
Merlin Operator Portal Ax9150 Universal Machine Interface
Merline ERP Connector Ax650 Control Interface Board
Mx1053 Universal Network Interface
Behind-The-Tape Reader
Highlight Of Memex's Product Portfolio
Source: Company filings
This is a Big Market Opportunity
7Gabriel Leung, 416-507-3963
• There are ~16M computerized numerical control machine tools installed globally, which are
typically supported by 3 other assets
• As such, we view the addressable market for Memex as being represented by 64M assets
• At an ASP of ~$3.5k per asset (i.e. the mid-point of what Memex charges its customers), we
estimate the total addressable market at ~$225B.
• At present, only 2 – 3% of assets are connected so we believe there is still a lot of growth
opportunities for Memex.
• Our discussions with management also suggest that within the company’s existing customer
base, there is an addressable market of ~$30M (i.e. if all customers were to deploy Memex on a
corporate-wide basis).
• Furthermore, we believe the company is dealing with a pipeline of opportunity representing
another ~$30M in potential sales, including some very large opportunities.
Pricing Model and Sales Strategy
8Gabriel Leung, 416-507-3963
• A typical sales cycle for Memex involves an initial pilot (i.e. managing several assets at one plant)
and based on the outcome of that pilot a customer will provide follow-on orders.
• The company sells its products on a per asset basis (ranges between $2 – 5k), along with
modest initial set up/professional service fees. The company also generates annual recurring
maintenance revenues of ~15% of the initial sale.
• The company’s sales effort to-date has been primarily through its direct sales force, which
consists of 6 individuals. We estimate this sales team has the capacity of generating up to $5.5M
in annualized revenues, which is roughly the company’s EBITDA break-even revenue level.
• More recently, the company has partnered with Mazak, which is a large Japanese machine tool
builder (Memex is dealing with Mazak’s North American subsidiary). Mazak initially started off as
a Memex customer with the goal of achieving productivity improvements of 1%. Ultimately,
Mazak was able to realize a 42% increase in equipment utilization. Based on these results,
Mazak also becomes a Memex channel partner, which we believe is a significant validation of
Memex’s value proposition. We understand the company is also in discussions to potentially
partner with several other large tech vendors.
Happy Customers Are Repeat Customers
- In our opinion, happy customers are repeat and become strong reference customers. We believe
this is important for Memex, particularly given the large market opportunity, along with the fact
that customers will typically start with a small deployment and grow over time.
- Below, we’ve highlighted two case studies, which we believe underlines the strong ROI associated
with the Memex story.
- Magellan Aerospace (MAL – T, NR) initially started a pilot installation on 3 assets in one plant,
which saw a $20k investment result in $480k of additional production in the first year and a cost
breakeven at 20 days.
- Our discussions with Magellan suggests that the plan is to move this pilot to a plant-wide roll out,
and then ultimately a corporate roll out (i.e. 600 machines across 14 plants).
- Meanwhile, Heroux Devtek (HRX – T, NR) has seen a 90% increase in OEE (overall equipment
effectiveness) since deploying Memex corporate-wide across its 10 plants, which has resulted in
increased productivity and also a reduction in new machine capex (i.e. given the higher utilization
of existing machines).
9Gabriel Leung, 416-507-3963
Sample Customer List
10Gabriel Leung, 416-507-3963
Source: Company reports.
Financial Analysis
11Gabriel Leung, 416-507-3963
- Revenues are derived from several sources including hardware (revenues recognized once
shipped), installation (once work is complete), software (once installed on customer equipment),
and support (recognized on a monthly basis).
- We are factoring revenue growth in the range of 85 – 100% for our forecast period based on
strong pipeline demand from existing customers, along with early discussions with several large
prospects.
- Gross margins are currently in the ~65% range, although we believe it can move to the 70%
range as revenues ramp (i.e. due to more high margin software revenues and higher utilization of
its professional services team).
- We expect the company to remain EBITDA negative in FY15 and FY16 and exit FY17 in positive
territory.
Financial Analysis (continued)
12Gabriel Leung, 416-507-3963
- On the balance sheet, we anticipate that the company will end fiscal Q3 (ending June) with
~$3.4M in cash (against $436k in debt) after factoring the recent $3.9M (gross) financing at
$0.15/sh. We anticipate the company will have enough cash to hit our EBITDA positive target of
end FY17.
- We also estimate the company’s outstanding in-the-money options and warrants outstanding,
could yield (if exercised) $2.9M in gross cash contributions and 19M to shares outstanding.
- While the company does not have a backlog per se, we note that based on its existing customer
base, it has the potential to deploy another ~$30M worth of solutions (i.e. unaddressed assets).
- The company currently has ~$2.4M in unrecognized income tax deductions and credits. Capex
is relatively light at ~$10 – 15k per quarter.
- From a geographic perspective, ~75% of sales are derived from the US, 20% from Canada and
the remainder from outside North America.
Initiating With a Spec. Buy and $0.40 Target Price
13Gabriel Leung, 416-507-3963
- As an early stage fast growing entity, we feel a DCF analysis is appropriate to derive our target
price.
- Based on a 10-year revenue CAGR of ~40%, EBIT margins capped at 20%, a discount rate of
13% and terminal growth of 8%, we derive a $0.40/sh target.
- Our target price is equivalent to applying a ~5x EV/Sales multiple to our FY17e estimate of $7M,
which we feel is fair given our significant revenue growth forecast.
- Ultimately, we believe Memex is on the cusp of capitalizing on a massive and largely
underpenetrated market opportunity. As the company continues to gain traction, we believe it
could ultimately find itself a takeout target (possibly by an IT services group or machine
manufacturer like Mazak).
- We are launching coverage with a Speculative Buy rating and $0.40/sh target price.
Risks to Our Analysis
14Gabriel Leung, 416-507-3963
Lumpy revenues – Despite our projected strong revenue growth profile, we would remind investors
that this is an inherently lumpy business given the lack of material recurring revenues and long sales
cycles. That said, we believe the company’s backlog of potential business within existing customer,
along with its growing base of recurring maintenance revenues could help to offset this lumpiness.
We also believe that the company is working on new services (e.g. remote data monitoring), which
could ultimately translate into more recurring, SaaS-type revenues.
Competition – While the machine monitoring market is still at a relatively early stage of adoption,
there are a number of competitors vying for market share including the likes of ShopVue,
Shoplogix, Forcam, and 5ME. That said, we believe the market is large enough to support several
vendors. Furthermore, we believe Memex’s full solution suite and its strong portfolio of existing
customers represent key competitive differentiators.
Lack of profitable operations – The company is currently not profitable, although it does have ~$3M
in cash thanks to its recent equity offering (and before factoring in-the-money options and
warrants). Based on our current growth projections, we anticipate the company will hit EBITDA
positive results during our forecast period without the need for another financing. However, slower-
than-expected growth could create potential balance sheet issues.
Seasoned Team With Strong Tech Experience
15Gabriel Leung, 416-507-3963
David McPhail, President & CEO, has been involved with the company and its predecessors since 2008.
Mr. McPhail was previously VP Operations for Process Systems Integration, a factory automation services
company from September 2004 to December 2007 where he was a founding partner.
Dave Edstrom, CTO, was recently President and Chairman of the Board of the MTConnect Institute, where
he was instrumental in the creation of the MTConnect Standard. Mr. Edstrom has spent 35+ years in the
computer industry, 23 pf which with Sun Microsystems (last role: CTO Global Software).
Ed Crymble, CFO, has experience in senior management positions with two multi-national companies that
traded on the Toronto Stock Exchange. He has provided accounting, income tax and business
development advice to small and medium-sized businesses for more than 10 years.
John Rattray, VP Sales & Marketing, Mr. Rattray has 30 years of sales and marketing experience in the
Information Technology sector with the leading enterprise ERP companies (SAP, Oracle), and a number of
start-up companies and new product launches. He is a founder of Soft Services Sales Inc. a technology
distributorship focused on the manufacturing sector.
Rick Mosca, COO, was recently VP Consulting Services at Mind Over Machines. He has over 25 years of
experience in the software products and services industries. Mr. Mosca has held VP Application
Engineering positions at T. Rowe Price and UPS.
Board of Directors
16Gabriel Leung, 416-507-3963
Peter Lackey, Executive Chairman, Cervus Equipment Corporation
Robert Chafee, Chairman, Tonolli Canada Inc.
Richard Morley, Technology entrepeneur
Joe Brennan, Partner, Shea Nerland Calnan LLP
Scott Kaplanis, Partner & Portfolio Manager, Epic Capital Management Inc.
David McPhail, Founder, President & CEO Memex Automation
Edward Crymble, CFO, Memex Automation
Capital Structure
17Gabriel Leung, 416-507-3963
Description
Basic Shares Outstanding 96,269,177
Warrants 27,182,248 (Exercise price between $0.10 - 0.25)
Options 4,803,697 (Exercise price between $0.10 - 0.20)
Fully Diluted Shares Outstanding (ignoring strike price) 128,255,122
Memex - Capital Structure
Source: Company filings, Beacon Securities
July 14, 2015 |Page 2 Gabriel Leung| 416.507.3963 | [email protected]
theScore, Inc. Astrix Networks Inc.
FY13 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 FY15 FY16 FY17
31-Dec-14 31-Mar-15 30-Jun-15 30-Sep-15
Revenue:
Hardware, software, installation and support 689,953 936,646 501,178 401,749 353,144 513,923 1,769,994 3,522,057 7,044,114
Growth q/q 143.8% -19.8% -12.1% 45.5%
Growth y/y 35.8% 219.0% 1.1% 100.0% 150.0% 89.0% 99.0% 100.0%
Government and other grants 225,146 21,693 39,368 89,100 0 0 128,468 0 0
Growth q/q #DIV/0! 126.3% -100.0% #DIV/0!
Growth y/y -90.4% 163.0% 1225.3% #DIV/0! #DIV/0! 492.2% -100.0% #DIV/0!
Total revenue 915,099 958,339 540,546 490,849 353,144 513,923 1,898,462 3,522,057 7,044,114
Growth q/q 163.0% -9.2% -28.1% 45.5%
Growth y/y 4.7% 214.1% 21.5% 100.0% 150.0% 98.1% 85.5% 100.0%
Total cost of sales 98,491 288,947 206,551 173,966 123,600 179,873 683,990 1,232,720 2,324,557
Gross profit 816,608 669,392 333,995 316,883 229,544 334,050 1,214,471 2,289,337 4,719,556
Gross margins 89.2% 69.8% 61.8% 64.6% 65.0% 65.0% 64.0% 65.0% 67.0%
Operating expenses:
Development 497,912 1,021,205 182,852 198,485 250,000 250,000 881,337 1,300,000 1,520,000
Selling and marketing 400,485 728,692 310,082 350,705 400,000 400,000 1,460,787 1,840,000 2,100,000
Administration 237,599 680,312 294,665 286,157 300,000 300,000 1,180,822 1,300,000 1,400,000
Gain on foreign exchange -3,894 -21,500 -9,110 -25,133 0 0 -34,243 0 0
Total operating expenses 1,132,102 2,408,709 778,489 810,214 950,000 950,000 3,488,703 4,440,000 5,020,000
Operating income -315,494 -1,739,317 -444,494 -493,331 -720,456 -615,950 -2,274,232 -2,150,663 -300,444
Operating margins -34.5% -181.5% -82.2% -100.5% -204.0% -119.9% -119.8% -61.1% -4.3%
EBITDA -290,985 -1,478,897 -407,161 -443,311 -670,436 -565,930 -2,086,839 -1,950,583 -100,364
EBITDA margins -31.8% -154.3% -75.3% -90.3% -189.8% -110.1% -109.9% -55.4% -1.4%
Interest and accretion -92,853 -182,639 -16,212 -18,338 0 0 -34,550 0 0
Public listing expense -104,900 -131,327 0 0 0 0 0 0 0
Pre-tax income -513,247 -2,053,283 -460,706 -511,669 -720,456 -615,950 -2,308,782 -2,150,663 -300,444
Taxes 0 0 0 0 0 0 0 0 0
Tax rate 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Net income -513,247 -2,053,283 -460,706 -511,669 -720,456 -615,950 -2,308,782 -2,150,663 -300,444
Net margins -56.1% -214.3% -85.2% -104.2% -204.0% -119.9% -121.6% -61.1% -4.3%
EPS :
Basic -0.01 -0.04 -0.01 -0.01 -0.01 -0.01 -0.03 -0.02 0.00
FD -0.01 -0.04 -0.01 -0.01 -0.01 -0.01 -0.03 -0.02 0.00
Shares outstanding:
Basic 35,367,200 51,702,440 67,559,239 69,871,722 79,025,555 96,269,177 78,181,423 96,269,177 96,269,177
FD 35,367,200 51,702,440 67,559,239 69,871,722 79,025,555 96,269,177 78,181,423 96,269,177 96,269,177
Astrix Networks - Income Statement (C$)
Source: Company filings, Beacon Securities
July 14, 2015 |Page 3 Gabriel Leung| 416.507.3963 | [email protected]
theScore, Inc. Astrix Networks Inc.
FY13 FY14 Q1 FY15 Q2 FY15
31-Dec-14 31-Mar-15
Assets:
Current assets:
Cash 3,719 1,357,121 1,051,281 481,934
Cash in trust 116,825
Trade and other receivables 40,478 443,849 406,297 596,047
Inventory 60,013 111,124 68,624 67,949
Income tax recoverable 153,400 0
Prepaid expenses 40,995 38,258 36,468 34,919
Total current assets 415,430 1,950,352 1,562,670 1,180,849
Property and equipment 60,553 88,498 115,885 117,440
Intangible assets 515,066 418,785 406,364 399,266
Total assets 991,049 2,457,635 2,084,919 1,697,555
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities 369,554 227,189 210,061 232,055
Unearned revenue 21,340 452,851 232,279 326,517
Payable to related parties 315,756 0
Current portion of long-term debt 72,000 96,000 96,000 96,000
Total current liabilities 778,650 776,040 538,340 654,572
BDC term loan 328,000 232,000 208,000 184,000
Provision 18,900 149,000 152,200 155,500
Payable to shareholders 735,607 156,294 156,294 156,294
Total liabilities 1,861,157 1,313,334 1,054,834 1,150,366
Shareholders' equity:
Capital stock 50,600 2,802,110 3,075,876 3,083,505
Shares to be issued 116,825
Warrants 621,996 676,333 673,704
Stock-based compensation reserve 231,698 246,085 269,095
Contributed surplus 579,313 583,313 584,076
Deficit -1,037,533 -3,090,816 -3,551,522 -4,063,191
Total shareholders' equity -870,108 1,144,301 1,030,085 547,189
Total liabilities and shareholders' equity 991,049 2,457,635 2,084,919 1,697,555
Astrix Networks - Balance Sheet
Source: Company filings, Beacon Securities
Beacon Securities Ltd.| 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H1 |416.643.3830|www.beaconsecurities.ca
Disclosure Requirements
Does Beacon, or its affiliates or analysts collectively, beneficially own 1% or more of any class of the issuer's equity securities? Yes No
Does the analyst who prepared this research report have a position, either long or short, in any of the issuer’s securities? Yes No
Does Beacon Securities beneficially own more than 1% of equity securities of the issuer? Yes No
Has any director, partner, or officer of Beacon Securities, or the analyst involved in the preparation of the research report, received remuneration for
any services provided to the securities issuer during the preceding 12 months?
Yes No
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this issuer in the past 12 months? Yes No
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Department? Yes No
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Are there any material conflicts of interest with Beacon Securities or the analyst who prepared the report and the issuer? Yes No
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the IIROC. All facts and statistical data have been obtained or ascertained from sources, which we believe to be reliable, but are not warranted as
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All projections and estimates are the expressed opinion of Beacon Securities Limited, and are subject to change without notice. Beacon Securities
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decisions based on the content of this report.
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As at June 30, 2015 #Stocks Distribution
Buy 50 65.7% Buy Total 12-month return expected to be > 15%
Speculative Buy 14 20.9% Speculative Buy Potential 12-month return is high (>15%) but given elevated risk, investment could result in a material loss
Hold 3 4.5% Hold Total 12-month return is expected to be between 0% and 15%
Sell 0 0.0% Sell Total 12-month return is expected to be negative
Under Review 5 9.0% Under Review Currently undergoing a change of analyst coverage
Total 72 100.0%
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The Beacon Securities Analyst named on the report hereby certifies that the recommendations and/or opinions expressed herein accurately
reflect such research analyst’s personal views about the company and securities that are the subject of the report; or any other companies
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be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report.