D2L Inc.
(DTOL-T) C$14.47
Q3/F22 Results: Execution on Track
Event
D2L reported Q3/F22 results and held its conference call yesterday morning.
Impact: SLIGHTLY POSITIVE
The stock was down ~1% on the day, amid a broad market sell-off, (also down ~15% since its $17.00 IPO) on what we thought was a good quarter and upbeat tone on the company's first earnings call. We consider this a buying opportunity, given our intact thesis that the company is well-capitalized, attractively priced relative to its peers, and has high visibility to its future revenues.
SUNY and BC were big wins, but there are still more large contract opportunities in the pipeline. The SUNY contract did not contribute a significant amount of ARR in the quarter and is expected to ramp into next year as more campuses go live. Similarly, the BC deal is expected to have a gradual ramp, with initial ARR contribution in Q4/F22 and revenue starting to materialize in H2/F23. We like that these wins ramp over time since it provides D2L with a steadier growth profile and gives us more confidence in the company's growth targets. In addition to these wins, the pipeline remains robust, with additional large state and country-wide deals, some larger than the BC win. We believe these large wins will help grow the pipeline and improve win-rates.
Elevated gross margins sustainable. Adjusted gross margins came in at 64.2%, materially better than our 60.6% estimate. Lower COGS resulted from normalized usage patterns, as students returned to classrooms, and D2L's ongoing cloud optimization. These higher levels are likely sustainable. We have increased our gross-margin estimates.
Minimal AWS outage impact. The AWS outage affected all LMS vendors; however, D2L's modern stack and high availability allowed it to fare better than its competitors. D2L's customers could still access the D2L platform, but did not have access to certain services for only ~2 hours. Instructure and Blackboard were down for 18 and 12 hours, respectively. We believe D2L's service reliability helps it stand out from the competition and was a key differentiator, according to customers we spoke with.
TD Investment Conclusion
We are maintaining our C$24.00 target price. We continue to believe that the shares' risk/reward looks attractive.