Kinaxis Inc T.KXS

RBC Earnings Preview

[retiredcf]

Kinaxis Inc. (TSX: KXS)

Canadian Technology: Q1 preview – Areas of resiliency, areas of softening

Outperform, C$210.00 price target

We expect Kinaxis to report a solid quarter, with revenue in line with consensus and continued SaaS and ARR growth momentum. As a result of Kinaxis’ high visibility and strong pipeline, we believe Kinaxis may increase FY23 guidance. Moreover, Kinaxis may report Q1 adj. EBITDA above consensus, which appears overly conservative. Maintain Outperform.

Kinaxis is reporting Q1/FY23 on May 3. Kinaxis is reporting Q1/FY23 results on May 3, after market close. The conference call is scheduled for May 4 at 8:30 a.m. ET. Webcast available here.

Even though headlines are likely to be lacklustre, Q1 is expected to be a healthy quarter, with SaaS up 29% Y/Y CC. Due to the timing of term license renewals, we forecast Q1 revenue up only 3% Y/Y to $101MM, which matches consensus. As a result of the decline in high margin term license (down 72% Y/Y), we model adj. EBITDA to fall 34% Y/Y to $22MM (consensus at $17MM) and adj. EPS down 30% Y/Y to $0.46 (consensus at $0.36). Despite these headlines, we expect the quarter to be fundamentally solid, with SaaS revenue up likely 26% Y/Y (29% CC), an improvement from 22% (28% CC) in FY22.

Based on movements in FX, FX is likely a diminishing headwind to Kinaxis’ revenue. We estimate FX could be a $2.5MM headwind (250 bps Y/Y) to Q1 revenue, slightly below the $2.9MM in our model and down materially from $5.0MM Q4.

Kinaxis may raise FY23 guidance. We believe it is possible that Kinaxis increases FY23 guidance after Q1, given: 1) FY23 guidance is conservative, as shown by high SaaS RPO coverage (86% vs. 83% 3-year average); 2) the FX headwind has declined since Q4 results; and 3) we believe the demand environment for Kinaxis remains healthy. As a result of solid SaaS growth, Kinaxis may also slightly increase FY23 adj. EBITDA margin guidance. Consensus estimates for $427MM revenue and $61MM adj. EBITDA are currently at the mid-point of FY23 guidance for $420-430MM (16% Y/Y mid-point), 25-27% Y/Y SaaS growth, and 13-15% adj. EBITDA margins. 

Canadian Technology: Q1 preview – Areas of resiliency, areas of softening

Anticipate continued solid ARR growth momentum. Excluding FX, we anticipate Kinaxis to report Q1 CC ARR growth in the high twenties, which would be towards the high end of FY23 SaaS revenue guidance for 25-27% Y/Y growth. FX is likely a 250bps Y/Y headwind to ARR growth. Therefore, we expect Q1 reported ARR in the mid-20% range including FX, slightly above 24% Q4. On March 29, Kinaxis announced that RapidResponse is available on Microsoft Azure Marketplace. Subsequent to Q1, on April 5, Kinaxis announced the renewal of its contract with Alstom, a global manufacturer of rolling stock. The renewal includes the expansion of RapidResponse to all of Alstom’s rolling stock and component sites.

Possible upside to consensus Q1 adj. EBITDA. Even though Kinaxis continues to add headcount (Q1 up 26% Y/Y, effectively in line with 3-year average), we believe Kinaxis may report Q1 adj. EBITDA above consensus. Our outlook calls for Q1 adj. EBITDA of $22MM, above consensus at $17MM on higher gross profit. Kinaxis guided for $6.5MM term license revenue in Q1. Since term license has 100% gross margins, we estimate Kinaxis to report Q1 total gross growth of $67MM (66% margin), above consensus at $63MM (63% margin). We believe consensus estimates are overly conservative in regard to Kinaxis’ gross margin Q1.

According to LinkedIn, Kinaxis’ employees rose 26% Y/Y to 1,729 in Q1, slowing from +31% Y/Y in Q4. Headcount increased 6% Q/Q in Q1 vs. 3% in Q4.

Reiterate Outperform. Kinaxis is benefitting as companies are deploying software to improve supply chain resiliency amidst global turmoil. Kinaxis is trading at 9x FTM EV/S, in line with peers (at 9x) and towards the mid-point of its 5-year historical range. We believe the stock is attractive, given the company’s growth, likely resilient demand, strong differentiation, and long track record of value creation.