EXA Corporation BUY

Exa Corporation

EXA : NASDAQ : US$13.69
Target: US$16.00

Exa is the leading provider of simulation software to the
ground transportation industry. The firm’s technology is
used by more than 90 global vehicle manufacturers to
help design efficient products via digital prototype. Exa
was founded in 1991, went public in June of 2012, and
is headquartered in Burlington, MA.
All amounts in US$ unless otherwise noted.

Technology — Enterprise Software — Applications
Exa’s valuation is cheap enough and the firm’s business, which is basically
high fidelity fluid simulation, is seeing sufficient demand that we believe it is
reasonable for the firm to at least hit our estimates. If that happens, the most
likely baseline appreciation for the stock should be somewhere between
revenue and free cash flow growth, or about 15%. Exa would have to put up
some more “no drama” quarters before we would make the case, but if they do
so, you could make the case for a multiple expansion in the back half of 2014
as 2015 comes into view, which could propel the stock towards $20, which is
above our current price target (there are also obvious downsides if the firm
misses numbers, which we assume any investor with more than five minutes of
experience understands). Reiterate BUY.
 A nice quarter: return to double digit growth. Exa reported revenues and
adjusted EBITDA of $14.1M (+12% y-o-y) and $1.6M (11% margin), which
were respectively $0.4M and $0.1M ahead of our estimates. Non-GAAP
EPS of $0.05 was ahead of our $0.04 estimate, and YTD Exa has generated
operating cash flow of $4.4M compared to a ($4.1M) loss a year ago.
 Color from the call. Project activity in the passenger car segment has
gained momentum over the last two quarters, and Exa noted some early
renewal activity ahead of normal Q4 seasonality. While aerospace is
becoming a more meaningful contributor, the truck and off-highway
markets are showing little growth globally.
 Outlook:

A wide range, but in line for Q4. Management suggested that the firm will invest for growth if activity remains at current levels, so we have proactively trimmed our F2015 profit expectations. The firm’s goal remains to return organic revenue growth to the 15-20% range.


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