NexJ Systems needs to sell more of its business software if it wants to convince investors it has a bright future, said TD analyst Scott Penner.
Software license sales dropped 88 percent in the 2013 third quarter from $2.5 million for the same period in 2010, according to third-quarter financial statements for those years.
Total revenue for the 2013 third-quarter was $6.6 million, up slightly from $6 million in 2012 for the same period. NexJ Systems, a Toronto-based company, develops software that helps financial and healthcare businesses manage its clients.
Profit magazine named NexJSystem Canada’s fastest growing company in 2012.
The company has posted year-over-year third-quarter losses due to growing expenses since its entry into the Toronto Stock Exchange in 2011.
Penner said the company has dedicated more resources within the past year to selling licenses for its healthcare software, Connected Wellness. However, sales are not following — net losses grew 400 per cent from 2010 to 2013.
According to Penner, the company has made healthcare the focus of its marketing efforts but hasn’t provided substantial information on how much money they’re making.
“They have this health business that really doesn’t generate a lot of revenue but there’s quite a bit of investment going into it,” Penner said.
The analyst said in an interview that some fluctuation is to be expected, but more sales would be better.
“When you’re dealing with relatively small numbers and a relatively small number of customers, you’re going see some of those dramatic ups and downs” Penner said.
“In itself it’s not any sort of death knell, but we would like to see them booking a lot more business before being a little bit more positive on the outlook,” he continued.
In its MD&A for the 2013 third quarter, NexJ Systems noted that its sales tend to fluctuate across quarters because product implementation timelines range from nine to 18 months.
But in the same document, the company noted that allowing other companies to resell its software was a potential area for revenue growth. In the first quarter of 2013, NexJ Systems signed a deal with SAP, a German software company, to resell some of its products.
Penner said the company has had two changes of senior management in its sales division since 2011, which makes it “tough to get any real continuity.”
Richard Davis, an analyst at Canaccord Genuity, echoed Penner’s outlook on the company. In a letter to investors dated Nov. 3, Davis suggested that if the company can sell more software licenses, its stock might improve. The share price has lagged for the past year between $1.71 and $4, down from its initial offering of $9 in 2011.
Penner said Canada’s weaker dollar could help NexJ Systems sell more software licenses in the United States. Three-quarters of its 2012 revenue, representing $20.7 million, came from the U.S., according to corporate documents.
Furthermore, the company recently publicized a new American business opportunity. On Jan. 21 NexJ Systems announced it had struck a deal with Ransford Health, an American management-consulting firm. It will begin offering NexJ Systems’ Connected Wellness software to its clients.
Despite NexJ Systems’ challenges in license sales, analysts aren’t ready to declare the company a sell just yet. In December the TSX granted NexJ Systems permission to buy back one million of its shares, a positive sign to investors.
“They obviously think there’s value in their shares at this price and they have the cash, so why wouldn’t they buy them themselves,” Penner said.
Penner said the buyback is an indication of a healthy amount of cash in the company and confidence in its share value.
At the end of 2013 third quarter, NexJ Systems had $28 million in cash and cash equivalent assets. It had $46 million in the third quarter of 2012.
NexJ Systems is expected to release its 2013 fourth-quarter results in early February.