SKU Build Expansion And Control Tower Will Open New Markets

Key Takeaways

• Significant cost reductions and strategic appointments have improved net margins and profitability, positioning Pivotree for enhanced revenue generation.
  
• Expansion of SKU Build and Control Tower's enhanced capabilities boost growth potential, supported by strong demand and multiyear contracts.
  
• The decline in legacy managed services and revenue volatility signals challenges in revenue stability and potential liquidity concerns despite positive cash flow forecasts.

Catalysts

Designs, integrates, deploys, and manages digital platforms in commerce, data management, and supply chain for retail and branded manufacturers worldwide.

• Pivotree has completed significant cost reductions amounting to $8.5 million annually, leading to a record high adjusted EBITDA of $1.7 million in Q4 2024. This positions the company to improve net margins and profitability moving forward.
  
• The SKU Build product has expanded rapidly with 1.4 million new SKUs added, reaching a total of 2 million SKUs. This expansion, coupled with automation tools, could boost revenue growth due to increased customer interest and multiyear contracts.
  
• Enhanced functionality of the Control Tower platform, including new integrations and active dashboards, may drive future growth in high-margin revenue from the company’s technology ecosystem offerings.
  
• Strategic appointments of a new Chief Revenue Officer and Chief Product Officer have enhanced the company’s focus on revenue generation and product development, possibly leading to increased revenue and improved net margins.
  
• Overall, MIPS TCV bookings were up 14% year-over-year, showcasing strong demand and indicating potential revenue growth, particularly with the emphasis on high-demand services such as SKU Build and the capability to close large, multiyear contracts.

Pivotree Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pivotree's revenue will decrease by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -12.4% today to 15.7% in 3 years time.
• Analysts expect earnings to reach CA$10.8 million (and earnings per share of CA$0.3) by about July 2028, up from CA$-9.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.0x on those 2028 earnings, up from -3.4x today. This future PE is lower than the current PE for the CA IT industry at 36.3x.
• Analysts expect the number of shares outstanding to grow by 0.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.65%, as per the Simply Wall St company report.

Pivotree Future Earnings Per Share Growth

Risks

• The decline in legacy managed services, which experienced a 30% drop in revenue for the year, is expected to continue as customers migrate to newer technologies. This ongoing decline presents a risk to overall revenue stability.
  
• The company noted a sequential decline in MIPS revenue, with an 11% drop in Q4, suggesting challenges in achieving consistent revenue growth despite a promising backlog.
  
• TCV bookings in the professional services segment have experienced volatility and were down quarter-over-quarter compared to 2023. This unpredictability in bookings may impact future revenue recognition.
  
• A 27% year-over-year decline in revenue from legacy managed services significantly impacted total revenue in Q4, decreasing by 13% year-over-year, indicating ongoing challenges in replacing this revenue stream.
  
• Cash consumption of $1.6 million due to timing of working capital and restructuring payments may indicate potential liquidity concerns, although management has forecasted positive trends in future cash flows.

Valuation

• The analysts have a consensus price target of CA$2.0 for Pivotree based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$2.75, and the most bearish reporting a price target of just CA$1.75.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$68.4 million, earnings will come to CA$10.8 million, and it would be trading on a PE ratio of 6.0x, assuming you use a discount rate of 7.7%.
• Given the current share price of CA$1.23, the analyst price target of CA$2.0 is 38.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.