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Eight Capital lowers target on D2L

A more muted growth outlook from Canadian online learning company D2L Inc (D2L Stock Quote, Charts, News, Analysts, Financials TSX:DTOL) has Eight Capital analyst Christian Sgro lowering his expectations. In a Friday update to clients, Sgro maintained a “Buy” rating on the stock while dropping his target price from C$14.00 to C$11.00, saying the macro picture is looking more challenging for the company.

Toronto-based D2L, a cloud-based learning management system for K-12, higher education and corporate clients, released on Wednesday its second quarter fiscal 2023 financials for the period ended July 31. D2L generated revenue up 12 per cent year-over-year to $41.2 million and an adjusted EBITDA loss of $1.5 million. The topline was below the consensus forecast at $42.4 million as well as Eight Capital’s call for $43.6 million, while EBITDA was ahead of the Street’s and Eight Capital’s estimate at negative $3.7 million. (All figures in US dollars except where noted otherwise.)

“We continue to see healthy long-term demand across our education and corporate markets as organizations replace legacy technology and experiences with modern platforms built for the future of work and learning,” said John Baker, President and CEO, in a press release.

At the same time, the company acknowledged the slower growth rate over the fiscal second quarter and put out an updated and more conservative guidance. Management is now calling for full fiscal 2023 revenue in the range of $168-$170 million compared to the previous outlook of $175-$178 million, while the adjusted EBITDA loss has been updated to $6-$8 million compared to the previous $9-$11 million.

“[T]he overall pace of new business growth in the second quarter was slower than we expected, mainly reflecting delays in expanding our sales and marketing teams, as well as the impact of changes in foreign exchange rates,” Baker said.

Turning to management’s comments in the conference call, Sgro said D2L still exudes confidence regarding the resilience of the academic learning industry, with the company staying focused on growing the corporate segment of its business, a higher growth end market for its products. At the same time, management said it plans to scale benefits and optimize cloud-hosting costs to improve its margin profile, Sgro noted.

“D2L revised its outlook with the FQ2 print, setting growth expectations lower while charting an accelerated path to meaningful profitability,” Sgro wrote. “Beyond delays in hiring and sales cycles, we think the macro backdrop has become more challenging across academic and corporate markets however remain positive on D2L’s product leadership and market positioning.”

“We think that a natural operating leverage exists in D2L’s model as the cash flow profile matures to become more comparable to that of key academic learning peers. With top-line growth expectations reset lower, we see less execution risk to profitability as D2L tactically hires and invests in areas of growth,” he said.

Sgro said D2L’s drive to profitability and its now medium-term targets have been accounted for in his updated model, where he is calling for full fiscal 2023 revenue of $168.7 million (previously $176.8 million) and adjusted EBITDA of negative $5.5 million (previously negative $6.2 million). For fiscal 2024, the analyst is modelling revenue of $191.5 million (previously $208.2 million) and EBITDA of $5.5 million (previously negative $1.9 million). Further afield, Sgro is forecasting 2025 revenue and EBITDA of $219.0 million and $24.1 million, respectively.

“D2L currently trades at 6.1x (note C2024 equates to F2025), compared to similar SaaS peers at 16.4x and key academic learning peers at 16.7x. Key risks to our target include delays to sales cycles and difficulty attracting and retaining talent,” Sgro wrote.

D2L completed its IPO in November of last year, raising C$150 million in the process. The stock came on board just as the market started souring on tech and growth stocks, especially those with negative earnings, and it’s been mostly downhill for DTOL over the past ten months. Year-to-date, shares are down about 54 per cent.

At the time of publication, Sgro’s new C$11.00 target implied a projected one-year return of 119 per cent.

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