The Q2 top line results from supply management company Kinaxis (Kinaxis Stock Quote, News, Chart TSX:KXS) may have been a little underwhelming but analyst Daniel Chan of TD Securities thinks that management’s margin guidance for the rest of the year deserves attention.
Ottawa-based Kinaxis reported its second quarter fiscal 2019 financials on August 1, coming in with total revenue of $42.4 million and adjusted EBITDA of $11.6 million. The top line was a nine-per-cent bump from the previous year, with SaaS revenue growing at double the pace at 18 per cent and amounting to $28.3 million. Quarterly EBITDA was a five-per-cent improvement year-over-year while adjusted EPS was $0.28 per share.
And while EBITDA and EPS turned out to be a little higher than expected —the Street was calling for $9.9 million and $0.24 per share, respectively— it was the $42.4 million in revenue that was notably lower than the consensus expectation of $43.8 million and caused a dip in share price. The stock dropped almost four per cent in trading immediately following the quarterly release but has made up some of that ground over ensuing days.
A slowdown in recurring subscription growth is in part to blame, but Kinaxis management isn’t worried, with CEO John Sicard emphasizing new customer wins gained over the Q2 and the company’s impressive backlog — $247.3 million of minimum contracted revenue backlog as of June 30, 2019.
“We closed a number of large marquee customers in the quarter and also expanded upon existing deployments. This new business has driven a record-setting backlog for Kinaxis and continues to fuel my confidence in hitting our full year growth outlook,” said Sicard in the quarterly earnings call on August 2.
Kinaxis: TD Securities quizzes on margins
On the call, Chan asked about the company’s margin guidance, which calls for a strong finish to the year.
“The first half margins have been really strong. Are there a number of investments that you expect to ramp significantly in the second half?,” Chan asked. “If my math is correct, second half EBITDA margins would have to come in at around 21 per cent for you to get to the midpoint of your margin guidance. And we haven’t seen that kind of level in H2 since you’ve been a public company. So are you expecting outsized investments in the second half coming in to drive that margin guidance that we see?”
In response, Kinaxis’ CFO Richard Monkman, said that while the company’s subscription term license —one of the main impacts on EBITDA margins— is expected to be at a lower level for Q3, it will be “considerably stronger” in Q4.
“The other key driver is obviously our investment and our spend. And we’ve talked about the increases across the board, but in particular in sales and marketing and product. And so these are actually well underway. And given that they’re heavily focused on people are going to be sustained through the next two quarters. So yes, we are signalling that we are [continuing] to accelerate our investment in sales and marketing, and you’ll see that uptick in the next two quarters,” said Monkman.
On August 2, Chan reiterated his “Buy” recommendation for KXS, forecasting sales of $185 million for 2019 (a 23-per-cent increase) and $212 million for 2020.