Kinaxis Inc T.KXS

RBC

[retiredcf]

Their upside scenario target is $240.00. GLTA

August 10, 2023

Outperform

TSX: KXS; CAD 156.59

Price Target CAD 220.00

Kinaxis Inc. Navigating through macro

Our view: Q2 was largely in line with our expectations and consensus. Despite smaller initial deal sizes (due to macro-related procurement headwinds) and a SaaS win recognized as term license, Q2 SaaS revenue was in line. Key leading indicators are strong, including record new customer wins, shrinking sales cycles and an increasing sales pipeline. Maintain Outperform, as Kinaxis remains a compelling long-term growth story.

Key points:

• Largely in-line Q2. Q2 revenue rose 31% Y/Y to $106MM, in line with RBC/consensus at $106MM. SaaS revenue was $64MM, also in line with RBC/consensus at $64MM/$65MM. Adj. EBITDA of $15MM matched consensus at $15MM and was above our estimate ($12MM) on higher term license revenue. Adj. EPS of $0.25 was slightly below consensus at $0.28 on higher taxes (RBC $0.21).

• Strong leading indicators. Kinaxis is seeing record customer interest, as supply chain transformation is a top priority, given organizations’ desire to improve supply chain agility and efficiency. Kinaxis saw a record number of customer wins, shrinking sales cycles, increasing win rates, and expansion into new markets (SMB adds to existing focus on enterprise and mid-market). The company reiterated FY23 guidance (17% Y/Y mid-point revenue growth, 25-27% Y/Y SaaS growth, 14-16% adj. EBITDA margins) and medium-term targets for >30% SaaS growth and >25% adj. EBITDA margins.

• However, new wins are starting at smaller sizes. Given macro-related procurement scrutiny, deals are starting at smaller sizes than typical. However, Kinaxis expects contracts to ramp faster than historical (e.g. recent deal expected to increase 3x over 2 years vs. historical expansion of 2x over 3 years). Due to smaller initial deal sizes, ARR has slowed from a peak of 28% organic CC Q3/FY22 to 22% Q2. Despite slower near- term ARR growth, Kinaxis expects SaaS growth to accelerate to its >30% medium-term target over the next 2-4 years.

• And another SaaS deal was recognized as term license. Q2 term license upside ($7MM vs. RBC/consensus at $5MM) came from a SaaS deal with an on-premises option (similar event occurred Q1). This is a combined 100 bps headwind to FY23 SaaS growth. As a result, management believes it will be more challenging to hit the high end of FY23 SaaS guidance, but has more confidence in FY23 term license guidance. Following Q2, our revenue and adj. EBITDA estimates are largely unchanged.

• Maintain Outperform. Kinaxis represents a compelling long-term growth story. We believe the company has strong competitive advantages, a growing TAM, and solid economics. Kinaxis is trading at 7x FTM EV/S, below peers (at 9x) despite similar FTM revenue growth (16% vs. peers at 16%) and below the mid-point of its 5-year historical range. Our C$220.00 price target equates to 9x CY24e EV/S (unchanged), in line with peers; we expect Kinaxis’ valuation multiple to expand as SaaS growth accelerates.