The stock has been smacked around by the market pullback in tech over the past half-year, but Christian Sgro of Eight Capital is still a fan of Kinaxis (Kinaxis Stock Quote, Charts, News, Analysts, Financials TSX:KXS). Sgro looked at the company’s latest quarterly results in an update to clients on Monday where he maintained a “Buy” rating and target price of $230/share for a projected return at the time of publication of 66 per cent.
The Ottawa-based organization provides cloud-based subscription software for supply chain operations in Canada, the US, Europe and Asia. Through its RapidResponse platform, Kinaxis serves technology and electronics, aerospace and defense, life sciences and pharmaceuticals, industrial, automotive, consumer products and retail markets.
Sgro said Kinaxis’ first quarter 2022 financials came in ahead of expectations, with company management being upbeat about prospects going forward.
“We believe a more aggressive go-to-market strategy will potentially widen the sales pipeline as new and existing customers grapple with the current macro,” Sgro said. “We expect Kinaxis’ subscription model to drive financial performance at the high end of guidance with the view that there may be upside to the current guide.”
Kinaxis created $98.1 million in revenue for the quarter for 43 per cent sequential growth and a 70 per cent year-over-year increase, while also beating out the consensus projection of $89.2 million and the Eight Capital estimate of $93.5 million. In addition, the company’s ARR grew by 24 per cent in the quarter, while also posting a book-to-bill ratio of 1.44x.
Approximately half of the company’s revenue came from SaaS at $49.3 million, which represented five per cent sequential growth and a 22 per cent year-over-year increase, and was roughly in line with the Eight Capital projection of $50.3 million.
Kinaxis also produced a beat in regards to adjusted EBITDA, as its $33.1 million report with a 34 per cent margin came in ahead of the Street estimate of $23.4 million and a 26 per cent margin, along with the Eight Capital projection of $25 million and a 27 per cent margin. Sgro attributed the margin beat to strength in sub-term licensing despite greater investment in the quarter.
“We expect opex to increase steadily through the year, with deliberate investment in the team and platform,” Sgro said. “The platform’s scalability is agnostic of customer size and improved team utilization supports margin expansion in the long term.”
Meanwhile, generating $22 million in cash from operations helped the company end the quarter with $222 million in cash and equivalents available, an increase from the $203 million reported in the previous quarter.
“Uncertainty and disruption are the only true constants in today’s supply chain, regardless of industry,” said John Sicard, President and CEO of Kinaxis in the company’s May 5 press release. “We continue to be humbled by the number of world leading companies that put their trust and confidence in Kinaxis and RapidResponse to bring about transformative improvement in supply chain planning performance. We will continue to invest to meet the growing opportunity in front of us.”
According to Sgro, the company has a healthy partner channel despite direct engagement going down, adding 15 partners in the quarter to bring the company’s total above 90, with the partners now taking a more prominent role in the majority of solution deployments.
Since the release of the financial results, Kinaxis announced a partnership with Wahupa LLC, an Atlanta-based software company working to resolve supply chain issues, to bring Wahupa’s probabilistic multi-echelon inventory optimization (MEIO) to the Kinaxis RapidResponse platform to help companies maximize service levels and lower costs, with the MEIO helping to calculate optimal inventory targets and safety stock settings through market-driven service planning.
“Traditional approaches to inventory planning assume that everything is known, precise and exact, so any type of volatility can cause chaos. With our probabilistic approach, we help organizations quantify this uncertainty so they can create plans that take into account these variables,” said Stefan de Kok, CEO of Wahupa in a May 9 release. “Partnering with Kinaxis allows us to realize our mission to minimize waste and margin erosion at a scale that was not possible before.”
Sgro has updated his financial expectations for the company, raising his 2022 revenue target from $343.3 million to $352.7 million for a potential year-over-year increase of 40.7 per cent, while his 2023 estimate was raised from $388.6 million to $400.7 million for a potential year-over-year increase of 13.6 per cent.
In terms of valuation, Sgro sees the company’s EV/Revenue multiple dropping from the 2021 figure of 11.2x to an estimated 7.9x in 2022, then to a projected 7x in 2023.
Sgro also forecasts increased adjusted EBITDA going forward, raising his 2022 forecast from $61.6 million and a 17.9 per cent margin to a projected $66.5 million and a margin of 18.9 per cent. Looking ahead to 2023, Sgro raised his target from $65.7 million and a 16.9 per cent margin to $70.8 million and a 17.7 per cent margin.
From a valuation perspective, Sgro introduces an EV/EBITDA multiple of 42.1x in 2022, then drops it to a projected 39.6x in 2023.
After starting 2022 trading at $170.71/share, Kinaxis has seen its stock price drop by 22.6 per cent, dropping to a 2022 low of $129.21/share on Thursday.
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