Astea International: 2Q Improvement; Fails To Meet Profitability Targets; Expects Strong 3Q

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 |  About: Astea International, Inc. (ATEA)
by: Micro-Cap Gem Finder

Summary

ATEA reported a 10% sequential revenue growth and 38% lower losses. Software license revenues were $1.2M almost tripling 1Q 2014 license fees and 32% higher than the year ago quarter.

The company failed to meet a key minimum profitability bank loan covenant target during the quarter, but it expects to meet the 3Q 2013 six-month trailing profitability target of $450K.

The company expects a big 3Q 2014 because of deferred revenues, contracts that closed after the end of 2Q 2014, and contracts that they expected to close in 3Q 2014.

Astea International Inc. (NASDAQ:ATEA), a Field Service Management (FSM) solutions provider reported 2Q 2014 financial results after hours on August 14, 2014. The company showed improved results sequentially and Y/Y in key metrics as seen in the summary table below, but failed to meet minimum profitability targets as stated on a new bank loan provided by Silicon Valley Bank on June 13, 2014. However, the company expects to regain compliance with bank covenants regarding profitability by the end of 3Q 2014. In the meantime ATEA paid a $3,500 forbearance fee to SVB for violating the minimum net income covenant ($1 net income or break-even) for 2Q 2014.

2Q 2014 earnings summary:

Key metric

2Q 2014

1Q 2014

2Q 2013

Revenues, $M

5.297

4.839

5.295

Income/(Loss), $M

(0.827)

($1.336)

($1.029)

Income/(loss), $/share

(0.23)

(0.37)

(0.29)

License Fees, $M

1.187

0.463

0.898

Cash, $M

1.245

0.692

1.339

Stockholders equity, $M

1.651

0.516

3.076

Click to enlarge

The table shows that the company made significant sequential improvements in all metrics. Revenues increased about 10% sequentially while losses were reduced by 38%. Most importantly, license fees almost tripled to $1.187M. This is important because license fees generate recurrent maintenance fees of about 20% of on-premise contracts going forward. Most metrics were also favorable on a Y/Y basis.

Despite the progress made, the company failed to meet the minimum SVB profitability covenant target of $1 net income for 2Q 2014 (page 15). The company attributed this shortfall to several contracts that they expected to close during 2Q 2014 and slipped into 3Q 2014. Several examples were given in the earnings press release and discussed in the conference call. The most significant being a recent joint win with one of the company's strategic partners, Capgemini, for approximately 1,000 cloud subscribers in Europe.

When asked whether or not the company expected to be in compliance with the profitability covenant for 3Q 2014 of $450,000 net income on a trailing six-month basis, Rick Etskovitz, CFO & Treasurer, stated during the conference call:

"Yes, Gary, this is Rick. Our expectation is that based on our knowledge of the pipeline and deals we have closed to-date as well as deals that we expect to close by the end of the third quarter is that we're back in compliance with bank covenants. And coincidently if we in fact we meet those covenants it will also put our equity back above the NASDAQ level. So, we're confident that we can achieve those goals and address both the NASDAQ requirement and the bank covenant by the end of the third quarter."

This means that in order to meet the profitability covenant by the end of 3Q 2014 the company expects to record a net income of at least $1.28 M. This would translate to revenues ranging from $7 to $8 M in 3Q 2014, or 20 to 30% higher than in 2Q 2014.

Now, regarding the minimum equity required by NASDAQ, the company's $1.651M equity at the end of 2Q 2014 falls short of the $2.5M minimum. During the CC, Mr. Etskovitz stated:

"We've proactively sent them (NASDAQ) a message, a letter, communication with them explaining the results and the operations and that generally what's been happening on the ground is consistent with the compliance plan that we gave them. So they are currently reviewing that. And we are optimistic that they will exercise their discretion to continue allow us to remain listed until roughly the first week of October. Mr. Etskovitz added, "The staff has the ability and again it's up to their discretion, but has the ability under the rule of NASDAQ, I believe there is 180 days original notice until October 6th to allow us to continue to evidence compliance."

Investors might recall that in order to cure the 1Q 2014 minimum equity requirement, CEO Zack Bergreen converted $2M of his own money into 797, 448 preferred shares at a cost of $2.51/share on June 20, 2014. Mr. Bergreen has done this several times in the past to ensure continued NASDAQ listing and to minimize dilution.

Regarding the outlook for 3Q 2013, CFO Etskovitz commented in the earnings press release:

"We remain very encouraged by the increasing adoption rate of our cloud offering and expect strong growth moving forward. Although we started our cloud offering with a relatively small base, we are showing significant growth. From June 30, 2013, the number of subscribers to our cloud offering has increased over 600% and our monthly contracted recurring revenue has grown by over 400%. While we do not expect to maintain those growth rates, we are very excited about the adoption rate and are optimistic about our ability to maintain this momentum and continue to add new customers so that we can make hosting a significant contributor of revenue and profitability to our business."

CEO Bergreen further added, "Our latest product release continues to receive high accolades from industry analysts, customers and prospects, as we continue to have a superior product when it comes to addressing the needs of service organizations around the globe. We are seeing many more very large user count opportunities, in our pipeline, than we have in the past. Additionally, our partner ecosystem growth strategy is reaping results, with the number of partner-driven opportunities now accounting for a larger percentage of our global pipeline. Our solid product portfolio, longevity in the service management space, and domain expertise have proven to be a difficult combination for our competitors to beat. We expect continued momentum as we move forward through 2014."

Conclusion

ATEA made significant sequential progress in most metrics but it failed to meet the minimum profitability covenants required by June 2014 SVB $3M loan. The company is also not in compliance with NASDAQ's minimum equity requirement of $2.5M as it ended the quarter with $1.651M in equity. Both issues appear not to be serious since the covenant violation was temporarily solved by paying SVB a $3,500 forbearance fee and the company has until October 6, 2014 to come up with a plan to regain NASDAQ's minimum equity requirement. Furthermore, with the contracts signed after the close of 2Q 2014 and the ones that they expect to close during 3Q 2014, company executives are confident they will achieve the revenue and net income required to meet both the NASDAQ requirement and the bank covenant by the end of the third quarter. This means that 3Q 2014 will likely be one of the biggest quarters in the last three years both in terms of revenues and net income. It should be noted that when the company announces large contracts, the PPS usually spikes significantly as it did on June 10, 2014 when the PPS jumped over 100% after one such announcement. It is likely that there will be several contract announcements going forward in order to meet 3Q 2014 high revenue and net income targets.

Disclosure: The author is long ATEA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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