D2L keeps Buy rating with Eight Capital

Eight Capital analyst Christian Sgro has lowered his view on D2L Inc (D2L Stock Quote, Charts, News, Analysts, Financials TSX:DTOL), having maintained a “Buy” rating in a Friday report while dropping his target price from C$20/share to C$14/share for a projected one-year return of 100 per cent.

According to Sgro, the lower target is intended to reflect reduced near-term growth and valuation pressure across the peer group.

Kitchener-based D2L Inc provides learning solutions for the school-aged and higher education environments as well as the working world. The company operates D2L Brightspace, a cloud-based software platform designed to help its customers deliver courses in person and online.

Sgro’s latest analysis arrives after D2L released its first quarter financial results for the 2023 fiscal year.

“Management was positive on the market outlook, particularly within corporate given the demand for training, upskilling, and retaining employees,” Sgro said. “Professional services were stronger than expected in the quarter, with D2L working more closely with customers in areas including implementation, training, and content creation.”

D2L’s quarterly report was headlined by $41.9 million in revenue for a 21 per cent year-over-year increase, though the figure came in slightly below the expectations set out by both the consensus ($42.4 million) and Eight Capital ($42.6 million). Sgro points to subscription revenue as a reason for the slight miss as the reported $35.8 million, despite being a 17 per cent year-over-year increase, was slightly behind the Eight Capital estimate of $37.3 million. (All figures in US dollars except where noted otherwise.)

Company management also unveiled revised financial guidance, lowering their revenue range to $175-$179 million, paired with new adjusted EBITDA guidance of a loss between $9-$11 million.

“The reduced revenue guidance was partially due to the war on talent, where the company has had difficulty attracting and retaining sales team members,” Sgro said. “The company is actively hiring to build out its sales team which we now expect to span through the year instead of being an aggressive H1/F23 build.

Annual recurring revenue was also a slight miss at $159.3 million compared to the Eight Capital forecast of $161.2 million, though it was still a 17 per cent year-over-year increase.

Meanwhile, the company’s gross profit of $26.4 million with 62.9 per cent margin was in line with consensus and Eight Capital estimates, while the adjusted EBITDA loss of $1.5 million came in well ahead of the estimates set out by both the consensus ($3.6 million loss) and Eight Capital ($3.9 million loss).

“We expect a significant positive free cash flow quarter in FQ2 given seasonal invoicing and collecting patterns,” Sgro said. “We do not expect the company to be active on the M&A front in the nearterm, with the company focused on organic growth initiatives.”

All told, the company ended the quarter with $98.1 million in cash and no debt.

“We continue to see a healthy demand environment as more schools, universities and businesses invest in online learning and digitizing the classroom,” said John Baker, President and CEO of D2L in the company’s June 8 press release. “Our conversations with academic and business leaders reinforce the pressing need for investments in better learning technology. During past economic cycles, our business has benefited from the resilience of our end markets, and our expectation is that investments in improving learning outcomes will be largely unaffected by the macroeconomic conditions.”

The lagging first quarter from D2L, along with the revised management guidance, has prompted Sgro to revise his financial estimates moving forward, dropping his 2023 revenue target from $181.2 million to a revised $176.8 million for a 16.4 per cent potential year-over-year increase, though it projects lower than the consensus forecast of $180.4 million. 

Looking ahead to 2024, Sgro lowered his forecast from $218.6 million to a projected $208.2 million for a potential year-over-year increase of 17.8 per cent, though it again comes in below the consensus estimate of $217.5 million.

From a valuation perspective, Sgro forecasts the company’s EV/Revenue multiple to drop from the reported 1.3x in 2022 to a projected 1.1x in 2023, then dipping to a projected 1x in 2024.

On the margins, Sgro forecasts a slight lift in the gross margin in 2023 from 63.2 per cent to 64.1 per cent, along with a raised 2024 expectation from 65.3 per cent to 65.5 per cent.

Sgro also made updates to his adjusted EBITDA forecasts, improving his 2023 loss projection from $13.1 million to $10.3 million, while his 2024 forecast now calls for a $1.9 million loss instead of a $2.2 million loss.

D2L’s share price has dropped by 48.7 per cent over the course of 2022 after an early high of C$15.55/share on January 19, though it has lost the majority of its value from April 18 onward, dropping as low as C$6.90/share on May 25.