Avatar Systems Inc. (OTCBB: AVSY)
Beacon Research Announces Coverage on Avatar Systems (AVSY) with a Rating of “Outperform” and a Price Target of $2.07
New research report is issued on a highly profitable, yet undiscovered microcap company in the software services sector with a strong history of solid financial discipline and performance
To view the report in its entirety, please visit: www.BeaconEquityResearch.com
Company
Avatar Systems, Inc. (AVSY) (www.AvatarSystems.net) provides enterprise resource planning (ERP) solutions software for the oil and gas industry. The Company offers integrated software solutions for the automation and integration of data and work flows for companies engaged in petroleum exploration and production activities.
Investment Highlights
Company’s recent acquisition of Questa Software Systems, Inc. should increase its client base to 620 oil and gas companies from the current level of 360 via addition of 260 new customers. The acquisition is also expected to increase its earnings per share by 300% to 400% over the next 12 months.
Company’s impressive second quarter (of FY2006) performance and improving third quarter numbers instill confidence about the FY2006 results.
High industry growth rate supports the Company’s business prospects.
Large existing customer base provides solid recurring revenues.
The Company’s aggressive acquisition plans fuel its growth in the technology sector and other IT industry verticals (e.g. financial services, healthcare industry).
An expert management team is leading the Company to a higher growth path.
Partnerships with Microsoft, Hewlett Packard and Kaspersky forged earlier this year improve the Company’s technical expertise, enabling it to offer additional value to existing customers and facilitating its expansion into new markets.
Initiatives taken by the oil and gas industries to upgrade their systems will help increase demand for Avatar’s software and document imaging/management products. Avatar should also be a direct beneficiary of the record profits in the oil and gas sector, as these companies with large cash reserves try to increase production efficiency.
Continued rise in crude oil prices and sustained technological upgrading by oil companies with record high profit margins is expected to result in an improved financial performance for Avatar systems in the near term.
Strong demand for its ASP (SAAS) format software and professional services are expected to help the Company sustain its second quarter revenue growth during the third quarter. The Company has a very solid base of ASP (SAAS) subscribers who already license its software.
Revenue Model
Sources of Revenue: Software licensing fees, maintenance, professional services and hardware sale are the main sources of Avatar’s revenues. The company experienced a 35.5% revenue increase to $926,288 for the quarter ended June 30, 2006. This is compared to revenue of $683,738 posted in the same period a year ago. The increase in revenues resulted primarily from the petroleum companies’ drive for updating information systems while experiencing economic growth due to higher crude oil prices.
Software: Avatar’s software sales for the quarter ended June 30, 2006, increased 55.6% to $306,768, compared to revenue of $197,154 reported in the same period a year ago. The main growth driver for software sales was the strength of the energy sector due which is likely attributed to high oil prices. The Company has also completed an engagement with one customer that included installation of its AS400 software and a document imaging system.
Maintenance: Avatar’s maintenance revenues for the quarter ended June 30, 2006, increased 22.1% to $374,685 from $306,810 recorded in the same period a year ago. The revenue growth in this segment was primarily due to strong demand for its software that it provides in an ASP format. The Company has increased its maintenance prices during the third quarter of 2005 and higher sales of its licensed software products have also increased its maintenance revenue.
Professional services: Avatar’s professional services revenues for the quarter ended June 30, 2006, increased 131.1% to $153,628 from $66,490 recorded in the same period a year ago. The revenue growth reflects increased training and system conversion services related to software sales and installations of ISYNERGY document management software that required professional implementation services.
Hardware: Hardware revenues for the quarter ended June 30, 2006, declined 19.5% to $91,207 from $113,284 recorded in the same period a year ago. Hardware sales in the first quarter of 2006 consisted of scanning equipment that the Company sells with its document management system and peripheral products for the IBM AS400.
Questa Acquisition: The acquisition is expected to add around $1.7 million to Avatar’s revenue stream in the coming financial year. Out of this, $800,000 will be of recurring nature and earned from maintenance contracts. We assume these contracts to be a steady source of revenue for the Company in the coming years.
Avatar’s positive second quarter results in FY 2006 indicate a continuation of the strong improvement reported in the first quarter of the year. Avatar is benefiting from a strong demand for its software and document imaging/management products as the oil and gas industry continues to upgrade its systems in an attempt to further boost efficiency. Demand for the Company’s products is expected to remain strong as a result of higher oil and natural gas prices, increased exploration and production activity by independent oil and gas companies, and the entry of more companies into this industry. We expect Avatar to post strong financial numbers in the third quarter of the year with increase in its customer base and its product portfolio because of its recent acquisition of Questa Software.
Avatar’s future growth will be determined by the Company’s ability to keep pace with changes in its industry, develop new products and services, build on existing customer relationships and penetrate new markets such as health care and financial services. If the management team is successful in executing the Company’s existing business plans and strategies, and managing the risks of the business within reasonable costs and resources, Avatar Systems is likely to create wealth for its shareholders in the years ahead. Avatar’s success also depends upon its efficiency to synchronize its recent acquisition of Questa Software as the Company expects a huge revenue generation following the acquisition.
Beacon Equity Research Disclosure
Beacon Equity Research (otherwise known as BER) is an independent research firm specializing in small and micro capitalization companies. BER has no investment banking or consultation conflicts thereby minimizing the inherent conflicts of interest between the research analysts and the companies they cover. BER is not a r3gistered 1nvesment adv1s0r or br0ker dealer. No information in this report should be construed as an endorsement to either buy or sell any securities mentioned in this report. The analyst(s) who prepared this report rely on publicly available information which neither the analyst, nor BER, can guarantee to be error-free or factually accurate. All conclusions in this report are deemed reasonable and appropriate by the author. The Private Securities Litigation Reform Act of 1995 provides investors a “safe harbor” in regard to forward-looking statements. To fully comply with the requirements of this law, BER cautions all investors that such forward-looking statements in this report are not guarantees of future performance. Unknown risk, uncertainties, as well as other uncontrollable or unknown factors may cause actual results to materially differ from the results, performance or expectations expressed or implied by such forward-looking statements. Investors should exercise good judgment and perform adequate due-diligence prior to making any investment. Beacon Equity Research has been directly compensated twenty-two thousand five hundred dollars for an enrollment in its research program by Avatar Systems. Ratings and price targets in this report should not be construed as recommendations or stock price predictors. Readers of this report are urged to use due diligence in any purchase of security list herein. Readers should consult the Company’s SEC filings as well as our initial report on the firm to better understand the inherent risks associated with this security. There may be many uncontrollable or unknown factors which may cause actual results to materially differ from the results, performance or expectations expressed or implied by such forward-looking statements. Investors should exercise good judgment and perform adequate due-diligence prior to making any investment. All decisions are made solely by the analyst and independent of outside parties or influence.
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