National Bank Financial cuts target on Kinaxis after Q2 miss

A rare miss for Kinaxis (Kinaxis Stock Quote, Chart, News: TSX:KXS) has National Bank Financial analyst Richard Tse cutting his price target on the stock.

On Tuesday, Kinaxis reported its Q2, 2017 results. The company earned $5.64-million on revenue of $32.9-million, a topline that was up 14 per cent over the same period last year. CEO John Sicard explained why the company was lowering its guidance.

“Demand from global enterprises for RapidResponse’s concurrent planning capabilities continues to grow, driving our revenue growth and strong adjusted EBITDA margin in the quarter,” he said. “Our strategic partner relationships have played an increasingly important role in generating awareness that the conventional approach to supply chain planning no longer fits today’s business environment. These relationships provide us access to a much broader audience of prospective clients with a shared desire for end-to-end supply chain visibility. While these strong fundamentals underlie our long-term prospects, our 2017 forecast has been revised for two reasons. First, a large Asia-based customer, whom we have been working with for over one year, has breached its contractual obligations during the second quarter. As a result, we are no longer recognizing revenue from this company and have removed future revenue from the guidance. Second, our strategic partners are increasing their role in deploying new customer implementations and gaining the related professional services revenue as a result. This positive trend has occurred earlier than we anticipated — which in turn has reduced our outlook for professional services revenue growth for 2017. While this has a short-term revenue impact, we are excited by the acceleration of partner contributions to our business. This also creates a stronger mix of subscription revenues in our business model. As a result of these developments, we have updated our 2017 revenue guidance to a range of $131-million to $133-million. The outlook for the business remains strong as we continue to deliver on combined subscription growth and strong EBITDA performance.”

Tse says the development with the Asia-based client will leave lingering questions for customers and therefore investors.

“According to the Company the Q2 shortfall and 2017 downward guidance revision was cause by two items – the exclusion of revenue from a customer in breach of contract and increasing Professional Services revenue going to Kinaxis’s partners,” the analyst says. “The latter is not a concern to us as we believe Kinaxis was moving in that direction already given building partner momentum. What’s less clear is the breached contract on the part of a large (recent) customer of Kinaxis which we speculate is Samsung. According to Kinaxis management, it believes it has met all the obligations of the contact while the customer has not with payment being one of the primary contractual obligations. Even so, there’s no denying the dispute and exclusion of revenue will raise questions and create uncertainty, which is obviously negative for the stock. Those questions undoubtedly will surround the potential impact on the outlook from existing and prospective customers.

In a research update to clients today, Tse maintained his “Outperform” rating on Kinaxis, but lowered his one-year price target on the stock from $100.00 to $90.00, implying a return of 13 per cent at the time of publication.

Tse thinks Kinaxis will generate EBITDA of (all figure in USD) $36.2-million on revenue of $132.1-million in fiscal 2017. He expects those numbers will improve to EBITDA of $42.8-million on a topline of $155.5-million the following year.