Q4/F24: IN-LINE Q4 AND MIXED GUIDANCE; FCF MACHINE SHIFTING TO GROWTH MODE
THE TD COWEN INSIGHT
Given the strong run into the Q4 release (up 20% in the last week, including 14% this week), we believe the stock could take a pause given the slightly disappointing Q1 guidance. However, we remain bullish, as we expect STC to return to growth this year, with improving margins, continued strong FCF (mid-teens FCF yield), and declining leverage levels. Target price increased to C$10 (was C$8).
Event
STC reported its Q4/F24 results and held its conference call after market close last night.
Impact: MIXED
In-line Q4. Revenue of $60.9mm and Adjusted EBITDA of $11.1mm were in-line. Revenue declined 4% y/y, driven by an 18% y/y decline in Product revenue primarily due to macro headwinds. Services revenue fell slightly q/q again due to disruptions from the GTM strategy changes. Adjusted EBITDA margins were solid at 18.2%, in-line with last quarter.
F2025 guidance in-line; Q1/F25 guidance below expectations. STC expects F2025 revenue of $250mm-$260mm (~1%-5% growth) and Adjusted EBITDA of $42mm-$46mm, including $2.1mm of one-time ERP costs. Excluding the one-time ERP costs, Adjusted EBITDA guidance is in-line and implies ~18.1% margins, consistent with H2/F24.
Q1/F25 revenue guidance ($61mm-62mm) was slightly below expectations, with a bigger miss on Adjusted EBITDA ($9mm-$10mm vs. TD/consensus at ~$10.8mm), due in part to one-time ERP costs and higher seasonal expenses.
Strong FCF drives leverage down to 1.7x. FCF was $7.6mm and >$30mm on a LTM basis (~15% yield), almost 3x F2023 FCF. Net debt fell to $72.9mm from $81.1mm last quarter, with leverage levels falling to 1.7x (vs. 2.3x last year). Management is guiding to reducing bank debt to $55mm-$60mm exiting F2025, which would imply leverage levels of ~1.0x or less.
Increased capital allocation flexibility. Debt repayment remains STC's top capital allocation priority. STC's strong FCF is helping it quickly repay debt, providing lower interest costs and more flexibility to deploy capital for M&A or other uses down the road.
Pivoting towards growth. As part of the GTM strategy changes, STC is focused on supporting its top 400 partners who contribute ~80% of revenue. STC will be investing more resources to support these partners, including a more collaborative sales effort. It is also promoting vertical-specific bundled offerings that is helping lead to larger opportunities, including with enterprises, however these deals have longer sales cycles.
Index tailwind. The shares are up ~14% this week, we believe aided by news that STC is getting added to the S&P/TSX Capped Info Tech Index this Friday, after the close.