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D2L to benefit from ‘generational shift’ in education, says Eight Capital

Eight Capital analyst Christian Sgro is down with D2L Inc (D2L Stock Quote, Charts, News, Analysts, Financials TSX:DTOL), maintaining a “Buy” rating and target price of $22/share for a projected return of 52 per cent in an update to clients on December 9.

Founded in 1999 and headquartered in Kitchener, D2L Inc provides cloud-based learning solutions for K-12, higher education and corporate clients. The company operates the D2L Brightspace platform designed to help its customers deliver courses in person and online.

Sgro’s updated analysis comes after D2L released its third quarter financial results for its 2022 fiscal year.

“D2L delivered strong 20 per cent annual recurring revenue (ARR) growth in Q3/F22, the beginning of what we expect to be a series of predictable, consistent recurring revenue growth quarters,” Sgro said. “The recent State University of New York (SUNY) and BC MoE wins are important proof points, backed by D2L’s increasing win rates, all suggesting to us that a stable cadence of adoption/NRR expansion, and new customer adds will drive predictable revenue growth.”

Annual Recurring Revenue was the major win for D2L in the quarter, as the company has experienced a 20 per cent year-over-year increase to $149.6 million through October 31 (all report figures in US dollars unless otherwise noted), up $25 million from the same point in 2020. Overall, the company produced $39.1 million in revenue for the quarter, with $34.9 million coming from subscription and support revenue, good for a 20 per cent year-over-year increase in the category. 

The company’s adjusted gross profit came in at $25.1 million for a 64.2 per cent margin, a 30 per cent year-over-year increase.

Meanwhile, the company reported a loss of approximately $300,000 in adjusted EBITDA in the quarter compared to $2.1 million positive in the same quarter last year. D2L also reported a $41.5 million net loss in the quarter, which the company attributed to a one-time, non-cash stock-based compensation expenses of $65.8 million related to the unwinding of the Employee Stock Trust.

Sgro notes D2L’s strength in the corporate market as the company engages larger, up-market enterprise and trending in a positive direction, with increased usage patterns also expected to lead to some permanence in the higher margins the company has reported.

“We’re having a strong year at D2L, and we experienced continued momentum across the business during the third quarter,” said John Baker, President and CEO of D2L in the company’s December 8 press release. “Our results reflect an increase in new customers and expanded relationships with existing customers – early returns from our investments in sales – as well as sustained adoption of digital learning experiences across our core markets.”

“In our more than 20-year history, the market backdrop and opportunity have never been stronger,” Baker added. “D2L’s mission to transform the way the world learns is also more vital than ever, as we work with educators to tackle learning loss from the pandemic and support employers to meet the pressing need for upskilling in the workforce. With new growth capital from the recent IPO, we are executing on an expanded strategy to press our advantage and become the category leader in learning.”

The new financial results prompted Sgro to slightly revise his financial projections, raising his revenue projection for 2022 from $150.2 million to $151.4 million, representing a potential year-over-year increase of 19.8 per cent. The growth pattern is expected to continue into 2023, with Sgro projecting a slight increase from $182.3 million to $183.1 million for year-over-year growth of 20.9 per cent.

Meanwhile, Sgro’s gross profit projections also experience a slight shift, raising his expectation for 2022 from $92.8 million to $95.2 million for an elevated gross margin of 62.9 per cent (previously 61.8 per cent). For 2023, Sgro expects similar growth from $114 million and a 62.5 per cent margin to $115.8 million and a 63.2 per cent margin.

Sgro’s adjusted EBITDA projections for D2L have also taken a step forward, lowering his 2022 loss projection from $7.6 million to $3.3 million, and the 2023 loss projection from $11.7 million to $11.1 million.

With present trading at 2.7x compared to its SaaS peer group of 4.8x and the academic learning peers at 8.2x, Sgro believes D2L represents a discount, as well as being in a solid place moving forward.

“With the proceeds of the IPO hitting the balance sheet in Q4/F22, we believe D2L is well-positioned to invest in and capitalize on a generational shift in digital learning environments,” Sgro said.

Since it began trading on the Toronto Stock Exchange on November 8, D2L is down about 16 per cent.

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Geordie Carragher is a staff writer for Cantech Letter
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