Kinaxis will be just fine, says National Bank Financial

While the market today had a tepid reaction to the company’s results, National Bank Financial analyst Richard Tse is taking the long view of Kinaxis (Kinaxis News, Stock Quote, Chart TSX:KXS).

On Thursday, Kinaxis reported its Q2, 2019 results. The company earned (USD) $4.0-million on revenue of $42.4-million, a topline that was up nine per cent over the same period last year.

“Our second quarter results further support our strong growth outlook for the year. We secured major new customer wins in every theatre this quarter, which are reflected in our record-breaking backlog. These contracts reinforce our confidence in 2019 guidance, drive increased revenue in Q3 and Q4, and support our accelerated investments in sales force expansion,” CEO John Sicard said. “We are very pleased to have been able to announce a number of these new relationships, including Johnson Electric and Yamaha.”

Tse says this is a familiar result and a familiar reaction, but cautions as to why KXS should not be underestimated.

“We’ve been here before. Through the past year, Kinaxis has lost its mojo following the quarterly results,” the analyst explains. “While a big part of that has had to do with the financial reporting changes that’s distorted the comparable results, there’s no denying that the pace of growth in recurring subscription revenue has declined. If you’ve followed our research, you’ll know we have a view on that. In our opinion, a growing prospect of larger engagements and expansions has forced the Company to make operational changes which, in our opinion, have not taken full effect in the reported results –that includes Q2. That said, we believe the leading indictors from pipeline and more importantly reported backlog are suggesting an acceleration in revenue, which we’ve anecdotally corroborated in our channel checks. The reality is that we’ve been here before – largely because those operational changes need time to take effect given the average sales cycles of 18-24 months, which points to an acceleration in growth in Q4. Nothing has changed for us on that front and it’s our view investors will be rewarded by getting in ahead of that…”

Kinaxis stock has upside remaining

In a research update to clients today, Tse maintained his “Outperform” rating and one-year price target of $100.00 on Kinaxis, implying a return of 25 per cent at the time of publication.

Tse thinks KXS will post EBITDA of (USD) $49.8-million on revenue of $185.7-million in fiscal 2019. He expects those numbers will improve to EBITDA of $55.4-million on a topline of $210.1-million the following year.

Tse says he knows everyone’s eyes are on the top line, but he encourages investors to look just a little deeper at KXS.

“Despite revenue growth coming in softer than expected, profitability was solid with Adj. EPS of $0.28 and Adj. EBITDA of $11.6 mln, essentially in line with our Street-high estimates and above consensus of $0.24 and $9.9 mln, respectively,” the analyst adds. “Strength in profitability came from a better than expected gross margin (up 130 bps to 69.3% Y/Y) and stock-based compensation excluded from the adjusted numbers. We understand profitability matters less for a growth name like Kinaxis, but it does show the potential operating leverage available in its model.”