Pender growth newsletter Q2, 2024July 29, 2024
New to the Top 10
During the quarter we took the opportunity to increase our weight in D2L Inc. (TSX: DTOL) (Desire2Learn) and make it a top ten holding. D2L provides cloud-based learning management system (LMS) software to higher education, K-12 and corporate customers. Annual recurring revenue has grown from US$112 million revenue exiting FY 2020 to US$188 million at the end of FY 2024, representing a CAGR of approximately 14%. Despite modest market share across its current geographies, D2L has a win rate of approximately 50% for new implementations in higher education. More recently in the quarter, D2L announced the spinoff of SkillsWave to prioritize its core Brightspace platform, which also heightens D2L’s focus on balancing growth and profitability. The spinoff is partly owned by the CEO as well as D2L, and D2L is providing a shareholder loan to help finance the company. This transaction was initially frowned upon by shareholders given the non-arms-length nature of the transaction. After digging in, we gained confidence this was in the best interest of all shareholders. We think D2L is well suited to win a notable share of contracts that are upcoming for renewal given Brightspace’s differentiated LMS platform.
On July 25, it was announced that KKR & Co Inc and Dragoneer Investment Group are acquiring D2L’s key competitor, Instructure Inc, for US$23.60 per share (US$4.8 billion enterprise value). This works out to an EV/Revenue multiple of 6.6x (2025E) whereas D2L currently trades with an EV/Revenue multiple of 1.9x (2025E), which illustrates the discrepancy in public and private market valuations in the Education Technology space. As D2L continues to grow and increase profit margins, we see significant room for share price growth.