D2L is still a Buy, says Eight Capital

After solid fourth quarter results from Canadian learning tech company D2L Inc (D2L Stock Quote, Charts, News, Analysts, Financials TSX:DTOL), Eight Capital analyst Christian Sgro has maintained a “Buy” rating while dropping his target price due to valuation compression in the market. In an update to clients on Wednesday, Sgro lowered his target from C$22/share to C$20/share for a projected return of 50 per cent.

Founded in 1999 and headquartered in Kitchener, Ontario, D2L Inc provides learning solutions for K-12, higher ed and and the working world. The company operates D2L Brightspace, a cloud-based software platform designed to help customers deliver courses in person and online. Sgro’s updated analysis comes after D2L released its fourth quarter financial results for its 2022 fiscal year, along with accompanying year-end figures.

“We are encouraged by D2L’s leadership in an attractive end market, with IPO proceeds accelerating G2M initiatives,” said Sgro, whose target drop came on account of lowering the 2022 EV/Revenue multiple from 5x to 4.5x. “With a medium-term view, we expect that D2L can drive sustained 20 per cent growth with exceptionally high visibility.”

D2L’s quarterly report was headlined by $41.4 million in revenue (all report figures are in US dollars, unless otherwise noted) for a 22 per cent year-over-year increase, with the report coming in slightly ahead of the $40.9 million estimate set out by Eight Capital, as well as the $41 million forecast from the consensus.

Subscription revenue accounted for 87.4 per cent of the company’s revenue mix, with its $36.2 million figure constituting a year-over-year increase of 19 per cent and staying in line with the Eight Capital projection of $36.4 million.

D2L also announced a 19 per cent year-over-year increase in annual recurring revenue at $154.5 million, compared to $129.5 million from the same point in 2021.

“D2L is seeing tailwinds in higher ed, D2L’s largest market, where win rates continue to improve,” Sgro said. “The company continues to lean on channel partners, in particular internationally, where D2L has announced some larger wins in multiple geographies.”

Meanwhile, D2L also reported a gross profit adjusted for share comp of $26.5 million for a 64 per cent margin, beating the consensus estimate of $25.5 million and the Eight Capital projection of $25.6 million.

Though the company’s adjusted EBITDA came in at a $400,000 loss, that figure still beat the Eight Capital projection of a $4 million loss, as well as the consensus forecast of a $4.4 million loss.

In terms of a forward margin forecast, Sgro projects seasonality will have an effect on the company in the opening quarter of its 2023 fiscal year, pointing to variability in usage through the school year as a catalyst.

“As we look ahead to a new fiscal year, our outlook for sustained growth is supported by increasing demand for better learning experiences as evidenced by robust RFP activity both in North America and internationally,” said John Baker, President and CEO of D2L in the company’s March 28 press release. “With a strong balance sheet, we are pursuing a strategy to press our advantage by making significant investments in both direct and indirect go-to-market strategies and enhancements to our platform that will bring even greater value to educators, employers, and learners.”

With 2022’s full financial results now in the books, Sgro has made some revisions to his projections moving forward. Ater the company closed its 2022 fiscal year with $151.9 million in revenue for a 20 per cent year-over-year increase, Sgro slightly downshifted his 2023 projection from $183.1 million to $181.2 million, though the new figure still implies a year-over-year increase of 19.3 per cent while being in line with the consensus estimate of $181.5 million. Looking ahead to 2024, Sgro lowered his revenue expectation from $223.9 million to $218.6 million, which would be a year-over-year increase of 20.6 per cent while matching the consensus forecast.

From a valuation perspective, Sgro forecasts the company’s EV/Revenue multiple to drop from 3x in 2022 to a projected 2.5x in 2023, then to a projected 2.1x in 2024.

Meanwhile, in the name of matching the midpoint of management guidance, Sgro now forecasts an adjusted EBITDA loss of $13.1 million (previously projected as a loss of $11.1 million) in 2023, while the new 2024 forecast is a $2.2 million loss (previously projected as a $1.5 million loss).

D2L’s share price has dropped by 22.6 per cent since it began trading on the Toronto Stock Exchange in November, with a six per cent loss in place since the start of 2022. After reaching an early high of C$17.05/share on November 12, the stock has dropped off steadily, hitting a low of C$11.61/share on February 23.