Smallcap Dispatch #81: Earnings Release: Hamilton Thorne, Total Telcom, and Renoworks Software

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Subject: Smallcap Dispatch #81: Earnings Release: Hamilton Thorne, Total Telcom, and Renoworks Software

We got a batch of Q3 earnings releases over the last couple weeks. Hamilton Thorne (HTL.V / HTLZF:PINK), Total Telcom (TTZ.V / TTLTF:PINK), and Renoworks Software (RW.V / ROWKF:PINK) reported. All decent results, but nothing that’s going to excite this market.

Many of our largest holdings have September 30th year-ends. This means January will be a BIG month for us. But for now, we’ll start with these three.

Hamilton Thorne

Hamilton Thorne (HTL.V / HTLZF:PINK) reported their Q3 on November 21st. They had the best set of financials we got in the last two weeks. These guys are really consistent.

HTL, you’ll recall, makes speciality lasers and consumables for the in-vitro fertilization (IVF) market. This is the breakthrough science that allows fertility-challenged couples to have kids.

Headline revenues were $6,050,000, up 147% y/y for Q3. Blowout numbers? Not easy to tell as HTL made two major acquisitions over the last year.

Those were Embryotech in September 2016 and Gynemed in April 2017. Both are in the IVF space and boosted HTL’s recurring revenue through services and consumables.

As we said in our last HTL update, we need to assess two things:

1) Are revenues and earnings increasing per share? (since HTL has diluted to make acquisitions).

2) Is the core instrument business stable or growing?

Question 1 is easy:

We’ve been diluted 50% over the past year. But revenues are up 150% and EBITDA is almost up 4X. That’s a winning formula.

For question 2, we’ll start with estimates for the two acquisitions. We know from HTL’s investor deck Embryotech does ~$5M in revenue per year and Gynemed does ~$9.6M. Assume flat growth and you’ll see HTL’s core instrument business did $2.4M this quarter vs $2.25M last year (need to estimate as last year had two weeks of Embryotech).

That’s 6% growth on HTL’s core business. Check. Growing organically and by acquisition is a recipe for a healthy stock in our experience.

By our calculation, HTL is trading around 20X operating income and ~3X revenues. We’ve talked about how hot the IVF industry is. We’ve talked about industry leader Vitrolife -- which trades at 18X revenues and 60X earnings. We sound like a broken record.. But HTL continues to look like a bargain to us. We wouldn’t be surprised to see this one back over $1.00 next year.

We talk to CEO David Wolf often. He asks us at the end of each call what more he can do to keep the market happy. We tell him the same thing. Just keep doing what you’re doing. Don’t change a thing. The market will take care of itself.

HTL remains one of our largest holdings, having added as high as $0.74 recently.

Total Telcom

Total Telcom (TTZ.V / TTLTF:PINK) was out with numbers last week. Results were just okay -- this was their second straight quarter of flat growth. There’s reason in the commentary to be optimistic for next quarters. But we need to see proof in the financials before getting excited about this one again.

TTZ, you’ll recall, makes hardware and software that enables communication in remote places. Think of a desert car or motorcycle race in Baja, Mexico. You are in the middle of nowhere -- but you need in communication in case of an accident. That’s exactly what TTZ’s MotoTrax package offers. It’s been a big growth driver over the last year.

Now to the numbers. Revenues were $350,000, flat with last year. Expenses were also flat and TTZ lost $6,000 for the quarter.

There were no hardware sales in the quarter. The good news is recurring revenues are almost enough to cover all operating expenses. The bad news is you need hardware sales to grow future recurring revenues -- and we got none for the second quarter in a row.

Now there is seasonality at play. You can see the winter months are big ones for the racing business:

The next reported quarter should have racing revenues in it. Remember a single race can generate $100,000+ in revenue. Management talked a lot about developing their new AlerTrax module for races in the quarter. It feels like racing is where management is placing their bets.

Was management sacrificing small hardware sales this quarter to focus on big fish in the racing business? We will soon find out.

Management states they are working on new business lines that will reduce seasonality in the business. Tracking software for beer kegs is one example. While these are exciting ideas, the reality is a new product can take many months -- if not years -- to develop and commercialize.

TTZ’s racing product and their WiFi heater controller are the two growth products. They are why we invested. And they are what we are counting on to show growth over the next two quarters.

TTZ remains a hold for us until we see proof the business is back on a growth path.

Renoworks Software

Renoworks Software (RW.V / ROWKF:PINK) announced on November 29th. RW, you’ll recall, makes home visualization software for the remodeling industry. Their software helps homeowners preview changes to their home on a computer or mobile device. It’s pretty slick.

Revenues hit $800,000, up 10% from Q3 last year. This was the second straight quarter of record revenues. RW is a steady grower -- although their growth rates are unlikely to wow the market.

Once again results were driven by the graphic services business. This business started by accident. A customer asked if they could help with this and RW thought maybe other customers have the same need? Just a few months later it is RW’s fastest growing segment.

Now let’s turn to the cost side. Gross margins dipped from 77% to 73%. R&D expenses increased to $150,000, up 50% y/y. G&A expenses increased to $646,000, up 55% y/y.

The reason for all the increase is investing for future growth -- specifically the graphic design business. Most of the increase came from hiring. So these are recurring expenses vs one-time. We never like to see expenses grow faster than revenues -- unless we are sure that growth will make up for it.

We do believe in RW’s business model. We believe in management’s strategy. But we still need to see two things to get excited about RW again:

Acceleration of revenue growth (25+%)
Return to profitability

Let’s see what next quarter brings. In the meantime, this one remains a hold for us.

To your wealth,

Paul & Brandon

Disclosure: Paul, Brandon, and Keith are long RW.V, HTL.V, and TTZ.V

86 East 23rd Ave, v5v 1w9, Vancouver, Canada

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Subject: Smallcap Dispatch #81: Earnings Release: Hamilton Thorne, Total Telcom, and Renoworks Software