Avondale On Industrial SaaS: Silver Spring, QAD Started at Outperform, Zebra Tech at Market Perform

Avondale Partners’ Michael Morosi initiated coverage of QAD Inc. QADA and Silver Spring Networks Inc SSNI with Market Outperform ratings, and of Zebra Technologies Corp. ZBRA with a Market Perform rating.

QAD

The price target is at $29. QAD’s business model is “undergoing a rapid transformation,” with an increasing number of customers adopting the company's cloud ERP solution, analyst Michael Morosi said. Although subscription revenue comprised merely 14 percent of QAD’s total revenue in FY15, it has recorded a CAGR of 33 percent since 2012.

The transition to cloud offers a more stable revenue base for the company as well as increasing annual recurring revenue by three-to-four times, as maintenance revenue is exchanged for higher-value subscription revenue.

Morosi believes the stock is “attractively valued” and expects it to re-rate as the transition of QAD’s cloud business progresses and the model “displays evidence of continued margin and operating cash flow leverage.”

Silver Spring

The price target is at $16. Silver Spring offers a communications platform for the next-gen smart grid networks, smart cities, and connected infrastructure. Silver Spring’s installed base is currently at 23M utility endpoints, and is expected to grow double-digits for the next decade, the analyst said.

From this, the company earns revenue from onetime hardware sales as well as recurring software and services. Morosi pointed out that with an increasing recurring revenues, this financial model would generate continued margin leverage.

“Further, while the US smart meter opportunity has reached the middle innings, international markets, which represent 90% of addressable endpoints, remain significantly underpenetrated,” the Avondale Partners report stated. Silver Spring would capture an increasing share of both US and international contract wins, “driven by an expanding technology leadership position,” Morosi wrote.

Zebra Tech

The price target is at $80. “Zebra Technologies' suite of Enterprise Asset Intelligence products seeks to improve efficiency, workflow management, productivity, and asset utilization of its global customer base,” the analyst mentioned.

The company acquired Motorola Solutions’ Enterprise business for $3.5B, which has caused a considerable net debt position in its balance sheet. Zebra Tech aims to reduce this from 4.7x at yearend FY15 to 3x exiting FY17.

The two businesses have been integrated under the One Zebra platform. Although there have been $130M in acquisition synergies to date, these have been offset by continued platform investments, Morosi commented.

Moreover, growth has decelerated in both Enterprise and legacy Zebra businesses in recent quarters, due to a weak macro environment, an aging product refresh cycle, and currency volatility.

“While we view the company as attractively levered to secular trends in mobility, Internet of Things, e-commerce and omni-channel retail, we await further clarity regarding the near-term trajectory of revenue and EBITDA growth, with implications for the ultimate pace of deleveraging,” Morosi wrote.