Gatekeeper Systems Continues Its Outstanding Financial Performance During Q3 2020
Gatekeeper Systems (CA:GSI – $0.46 & US:GKPRF – $0.36 & GER:1GK – €0.30) reported its fiscal Q3 results for the three month period ending May 31, 2020 this week. It represented the 9th consecutive quarter of year-over-year revenue growth for the Company. Revenue, gross profit and net income reached Q3 record highs.
In addition to releasing these excellent results, the Company followed up with an update for its $6.3 million SEPTA contract. $1.8 million of that amount was recorded as revenue for Q3, with at least $4 million of the remaining contract to be billed in Q4. Traditionally, Q4 is the strongest quarter for Gatekeeper. So this additional $4 million on top of normal course operations will set the tone for a record financial performance in the current quarter. As revenue was $12.6 million for the first three quarters, we think that Gatekeeper is well on pace to achieve annual revenue of close to $20 million.
We previously mentioned that Gatekeeper made a strong investment candidate during the market bottom in March. At that time, the Company confirmed that it was deemed an essential business during the outbreak. It’s good to see this promise kept and our thesis intact. Gatekeeper’s CEO Doug Dyment stated: “I could not be more pleased with the fantastic results that our team delivered during a quarter which was overshadowed by a global pandemic and economic uncertainty. We adjusted our operations quickly and efficiently to protect our employees, allowing them to design new solutions for our customers and operate as an essential service, delivering the excellent service our valued customers expect. It portrays the dedication of our employees and the solid foundation on which the company is built. We are now rapidly advancing our new AI-based intelligent platform for Smart Cities and designing technology solutions that improve passenger safety and transit efficiency as cities reopen following COVID-19 lockdowns. This platform will host future applications such as thermal camera sensors or passenger counting and forms the basis of our evolution to a data company, which we expect will significantly contribute to our continued growth.”
Third Quarter 2020 Financial Highlights
Revenue grew 31% from $4,308,506 to $5,653,462 for the three months ended May 31, 2020. Gross profit grew 22% from $1,973,883 in Q3 2019 to $2,407,160 in Q3 2020. Gross margin was 43% for Q3. Comprehensive net income dramatically improved 115% from $616,572 to 1,325,428.
Revenue grew 42% from $8,846,803 to $12,584,503 for the nine months ended May 31, 2020. Gross profit grew 36% from $4,027,298 in Q3 year-to-date 2019 to $5,489,642 in Q3 YTD 2020 while gross margin was 44%. Comprehensive net income turned from a net loss of $526,332 to a net profit of $1,415,647. Gatekeeper has recorded positive net income in four of the last five quarters with a narrow loss in Q1. Its net income for the last four quarters combines to be $1.58 million, leading to a trailing four quarters EPS of $0.02.
A major factor contributing to Gatekeeper’s increased profitability has been its ability to contain costs while aggressively growing its revenue. Operating expenses were up only 3% for Q3 and down 3% for the first nine months of the year. This type of efficiency and well-managed business is what small cap investors like to see out of their companies.
Gatekeeper appears to be in that sweet spot where it has enough cash to fund its growth and serve its growing client base without needing to dilute. Operating cash flow was $127,453 for Q3 YTD 2020, a dramatic improvement over the $2,335,749 outflow for Q3 YTD 2019. While operating cash flow might seem low relative to the strong net income numbers, it’s impacted by a $459,750 increase to inventory during the period. The increase in inventory is in alignment to a point we mentioned previously. Gatekeeper built up a surplus amount of inventory in preparation of the Chinese New Year. Because of doing this, it did not experience a shortage and has been able to fulfill orders despite the global supply chain disruption from COVID-19 related shutdowns.
Working capital improved from $6,346,481 at the end of February to $7,729,471 at the end of May. Given Gatekeeper’s ability to generate operating cash flows, this amount looks to be sufficient to fund its growth. The 88.8 million shares outstanding has remained steady throughout the last couple of years and we expect dilution risk to be nearly non-existent going forward. As Gatekeeper does not yet pay a dividend and is experiencing heavy growth, it’s best to continue to use its cash to reinvest into its operations, like it has been doing with its inventory build. The inventory balance is up 27% from August 31, 2019 to May 31, 2020. This is a reasonable figure considering the revenue growth.
Gatekeeper Has Changed From A Secret Gem On TSX Venture Into A Well-Known Outperformer
Over our last several articles, we have concluded with GSI being an undiscovered gem on the TSX Venture. Shareholders who have held from then to now should be happy to see that the undiscovered part of that message no longer applies. GSI rose five-fold from its low of $0.12 in March to as high as $0.63, coming very close to our $0.69 price target. It has pulled back a bit, as any stock that went on a wild run would do. It currently sits at $0.46, a solid return for shareholders over the last few months.
Gatekeeper showed that it is a well-oiled machine both on the operating side and corporate side as it did not require an extension to release its financials like so many of its TSX Venture peers have during the COVID-19 outbreak. Despite that and its major run, its market cap is still only around $40 million, meaning its revenue multiple is less than 2x for such strong growth and robust margins. As trailing EPS is $0.02, it is trading at a 23x price to earnings multiple. Having any sort of price to earnings multiple is rare for a microcap technology stock, let alone one that is generally below the typical tech company listed on the NASDAQ.
Gatekeeper has everything a small cap investor could possibly want in an investment: transparent financials, a straightforward and successful business plan, a solid balance sheet, and a strong leadership and management team led by a CEO who has laid down a significant amount of his own money to purchase more shares. Smallcaps Recommendation: BUY.
|Smallcaps.us Advice: Buy||Price Target: $0.69||Latest Company Report (pdf)|
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