Nitro’s High Growth Requires Investment First

This story features NITRO SOFTWARE LIMITED. For more info SHARE ANALYSIS: NTO

E-document software provider Nitro Software has surprised market analysts by guiding to both high growth and large losses in the coming year as it seeks to integrate growth strategy acquisitions. 

-Nitro Software’s net loss guidance for the coming year surprised the market to the downside
-High operating costs relate to increasing workforce to support growth initiatives
-Guidance did not disappoint on all fronts, with the company maintaining a strong growth foundation

By Danielle Austin

Continuing growth at an elevated pace is proving to be a balancing act for Nitro Software ((NTO)), with the company following up its reported net loss of -$7.6m for FY21 by surprising the market with guidance for a net loss of -$18-21m for FY22.

The young gun e-document software provider is targeting sizeable growth and high net losses are reflective of this strategy and the costly acquisition of Belgian e-signing business Connective late last year. Nitro Software intends to grow its workforce to meet the demands of the acquisition by as many as 100 additions in the coming year, driving a notable ramp up in operating costs. 

Despite its strategy somewhat disappointing the market in the wake of the Connective acquisition, management believes Nitro remains positioned for a year of strong growth ahead. The company operates in a global space with a total addressable market of $28bn that continues to offer deep penetration potential to early adopters. Further, the company’s strong $48.2m cash position at the end of 2021 should support investment and growth initiatives. 

Annual recurring revenue is guided to increase 43% to $64-68m and revenue is projected to increase 32% to $65-69m. Earnings losses are expected to peak in 2022 before moderating in the following financial year. The company runs a January-December financial year.

Larger Losses Weigh On Short-Term Valuations

Following Nitro's market update, brokers across the board have penciled in larger losses for the coming year.

Of the broker’s within FNArena’s coverage who reported on Nitro Software’s update, Bell Potter issued the largest earnings downgrade, with the broker’s expected loss increasing to -$18.7m from -$5.4m. Jarden increased its expected loss to -$18.6m from -$9.7m, while Wilsons increased its expected loss to -$17.7m from -$13.6m and Shaw, while Partners now forecasts a -$17.7m loss. 

Bell Potter noted the company’s full year net loss for the past financial year (-$7.6m) was slightly better than the broker’s anticipated -$7.8m loss. Bell Potter retained a Buy rating but decreased its target price to $2.75 from $3.25, noting high costs are related to the integration of the Connective acquisition into Nitro Software’s existing operations as well as to further development that should provide additional benefit to customers. 

Jarden also retained its Buy rating and reduced its target price to $3.54 from $4.54. Jarden analysts noted Nitro shares have suffered from heavy selling pressure as cash operating losses drive a reduction in the company's short-term valuation. This could offer opportunity for investors willing to buy into a longer term story, the broker suggests.

Wilsons noted its net loss forecast reflects that the company continues to target revenue growth above 30% in the medium-term and continues to invest as long as this strategy remains attractive. 

The broker further noted the company has historically been conservative in its guidance, and expects this year to be no different. Wilsons considers it likely Nitro management will upgrade annual recurring revenue as well as revenue forecasts and reduce its loss forecast throughout the year. 

Despite deeper-than-expected cash burn guidance, Shaw and Partners likes that Nitro Software is addressing a global market opportunity and that its retained cash balance of $48.2m allows a buffer for the coming year of further investment.

The broker retained a Buy rating while reducing its target price to $3.50 from $4.00, noting Nitro Software presents long-term opportunity. Shaw observed the current market is unforgiving for growth stocks with increasing cash burn, like Nitro, particularly as competitors manage to decrease cash burn.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms