EARNINGS UPDATE
Q2/F25: WELL POSITIONED FOR GROWTH
THE TD COWEN INSIGHT
D2L continues to execute well as product innovations are resonating with new and
existing customers, in addition to cross-sell momentum with H5P. We believe this sets the company up for growth acceleration, continued margin expansion, and improved FCF, all supporting multiple upside. Trading at 2.0x forward sales, we believe the company remains undervalued. Maintaining BUY, raising PT to C$15.00.
Impact: SLIGHTLY POSITIVE
See our previous note for a review of the results.
Green shoots emerging. Despite a slower RFP environment, D2L continues to win share in core and international markets. Part of the company's success is attributed to new product innovations, co-developed with customers to drive better alignment. Attach rates for new products is ~60%, which management believes is an indication it is making the right investments to widen the product moat and differentiate against competitors. We also believe the competitive landscape, with major peers being taken private, could drive elevated uncertainty with customers and could present an opportunity to gain further share. While new bookings are not expected to contribute materially to revenue in F2025, we believe the company is well positioned to benefit from accelerating growth in F2026 and beyond.
Early momentum from H5P. The H5P integration is largely complete, with combined go-to-market and joint planning initiatives already showing early signs of cross-selling success as several existing Brightspace customers are already adopting H5P's products. Management believes the acquisition accelerates the Creator+ roadmap, a key product focus as interactive-led learning drives better learner outcomes and better engagement with the platform. Non-Brightspace customers will also continue to have access to H5P's tools, which could drive future client conversions off competing platforms over time, particularly Moodle, where H5P has strong presence.
FCF provides investment optionality. Management believes LTM FCF of ~$24mm is a sustainable level it can maintain in the near-term. With ~$98mm of cash and no debt, we believe the company has ample capacity to support continued organic investments, tuck-in acquisitions to further broaden the platform, and share repurchases through the NCIB. We believe this financial flexibility differentiates D2L from its main two competitors, Instructure and PowerSchool, which may shift focus to debt repayment following their respective private equity take-out deals.