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Blue sky potential seen for NexJ Systems as pipeline climbs to record levels

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Analysts at TD Securities like NexJ Systems (TSE:NXJ), a company that provides cloud-based software for the financial services, insurance and healthcare industries, for the “big potential upside” it offers. 

The company sells large enterprise customer relationship management (CRM) solutions primarily to the wealth management and insurance verticals. 

In a research note in early May, analyst Scott Penner wrote that while he revised down his model on the company based on first quarter results that missed estimates, TD’s thesis is still based on better bookings in the second quarter and the second half of 2013, which is expected to begin the road back to profitability. 

For the first quarter that ended March 31, the company reported a wider net loss, at $6.7 million, but revenue increased 7 per cent year-over-year to $6.5 million. NexJ said in the release accompanying the figures in early May that while it continues to focus on revenue generation, it was “acutely aware” of the need to control costs, and has initiated procedures to reduce expenses, with contingency plans in place should it be warranted. 

The analyst noted the company also touched on deals that could hit in the second and third quarters, with deal sizes potentially ranging from $1 to $10 million, in the insurance and wealth management spaces. NexJ expanded its sales team to 29 people, with sales bidding activity year-to-date (as of early May) said to be already greater than all of 2012. 

Penner also highlighted NexJ’s OEM relationship with SAP, allowing either company to sell strategic solutions to the finance and insurance industries. 

The analyst said that although a mature category, the CRM market is large at $13 billion, and “always evolving”. Penner wrote:  ”The 2012 Gartner CEO Survey ranked CRM as the most important area of investment to improve business,” adding that competitive advantages for the company include the ability to roll up multiple data sources into a single “integrated advisor view” and its domain knowledge in financial services. 

“NexJ has an impressive customer list, including three of the top six global wealth management firms (including one deal of up to 35,000 seats), which we do not believe is reflected in the current stock price,” Penner took note. 

The company’s cash balance at the end of the quarter was $39.2 million, which represents $1.93 per share, or 74 per cent of its current market value at that time. In the latest research report by TD, Penner estimates that 2013 revenue will come in at $29 million, with an EBITDA loss of $17.4 million. 

The analyst, which now has a $4.00 price target and speculative buy rating on the stock, said his recommendation is based on a two-stage scenario analysis, with a stand-alone valuation and a take-out valuation. 

Currently, the stock is changing hands at $2.40 on the TSX. Key risks to the stock price outlined by Penner include high customer concentration, quarterly bookings and revenue volatility and slower than expected profitability, among other factors. 

Story by ProactiveInvestors


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