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September 6, 2019

Strong Backlog a Good Sign for Future Growth at Tecsys (TSX:TCS)

Disclaimer: The writer of this article may have positions in the securities mentioned in this article. The fact they hold positions in securities has had no impact on the production of this article

By Mathieu Litalien

September 6, 2019

Did you know there are only four Canadian Dividend Aristocrats in the technology industry? Aristocrats have a history of raising dividends for at least five consecutive years.

It is not surprising as tech stocks are known for their high-growth rates. Typically, companies that are in growth mode don’t pay a dividend.

Why? They prefer to re-invest into operations or making acquisitions so it can grow the business.

This is why tech dividend growth companies are so rare, and so valuable. Technology stocks that have proven to be capable of balancing growth and returning cash to shareholders appeal to both income and growth investors.

On Thursday, one of these tech companies – Tecsys (TSX:TCS) – reported strong first quarter 2020 earnings. The company posted a net loss of $0.01 per share, beating estimates by a penny and revenue of $24.3 million topped estimates by $1.2 million.

It marked the first time in over a year since the company beat on both the top and bottom lines.

Revenue jumped 49% over the first quarter of 2019, of which 15% was organic. It saw strong growth in both of its segments – cloud, maintenance and subscription revenue (+40%), and professional services (+61%) – as demand drove strong organic growth.

Gross profit jumped 52% and margins increased by 100 basis points.

Of particular importance, its backlog jumped 59% over the first quarter of last year and 29% came from organic bookings. Annual recurring revenue led the way with 43% growth and its professional services backlog increased by 37%.

It was a very strong quarter for the company. It is worth pointing out that the company is in the midst of a significant strategic shift. It is moving from a perpetual (one-time) licensed model, to a software as a service (SaaS) company.

As per Mark Bentler, Chief Financial Officer, the shift will “help (them) to deliver a more predictable recurring revenue stream”.

It is a strategy that is beginning to bear fruit. Analysts are unanimous in their coverage of the company – Tecsys is a “buy”. They have a one-year price target of $16.93 per share, which implies 20% upside from today’s price.

Given the strong results and a healthy backlog, expect these numbers to be revised upwards over the next few months.

Tecsys is currently trading at the mid-range of its 52-week high. It has posted modest gains of 14% in 2019 but is down 18% from where it was a year ago. In the past month, the stock has seen significant buying and is up 11% over the past 30 days.

It is also worth noting however, the company is currently in overbought territory with a 14-day RSI of 81. Tecsys is worth a look on any short-term weakness.

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Mathieu Litalien

Mathieu is an individual investor and has been investing part-time for the better part of the past 20 years. He is primarily interested in fundamental analysis, focusing on the long-term and his portfolio is composed primarily of dividend-paying equities. Mathieu has a moderate risk profile and also looks for growth and value. His passion for finance and the markets have led him to his MBA and writing for Seeking Alpha, Motley Fool and Stocktrades. Mathieu also focuses primarily on stock research and content production for Stocktrades.ca Premium and the Stocktrades blog.

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