Q3/F24: MOTIVE/AXYOM HELP DELIVER A POSITIVE NOVEMBER SURPRISE
THE TD COWEN INSIGHT
EBITDA margins surged above pre-Motive/Axyom levels, which we think should help give investors comfort with LMN's focus on carve-outs, even ones that are large and/or break- even/unprofitable. We expect M&A deal flow to remain strong, helping support their superior revenue/FCF growth profile. The solid Q3 for TOI/LMN, especially EBITDA, bodes well for CSU to deliver a strong Q3 and potential beat.
Impact: POSITIVE
Axyom helps drive revenue beat. Revenue grew 35% y/y to $177.3mm, ahead of our $167.5mm estimate. Motive revenue was $22.7mm (up 6% q/q) while Axyom revenue surged to $11.5mm (vs. $1.6mm in Q2).
Despite the q/q improvements, Motive/Axyom remain a drag on organic growth (in-line at -8% y/y; -9% in cc).
Big EBITDA beat; FCFA2S remains weak. EBITDA of $63.1mm was well above our $44.0mm estimate, driven by the revenue beat and significantly lower-than-expected TSA (transition service agreement) expenses for Motive. EBITDA margins surged to 35.6% from 23.9% in Q2 and was even above the 33.0% in Q1 (i.e., pre-Motive/Axyom).
Despite the strong EBITDA performance, FCFA2S was just $10.4mm, as headwinds from elevated DSOs due to Motive (Nokia is remitting customer payments to LMN) is expected to continue into F2025.
Strong performances by Motive/Axyom with both now profitable. After being a significant drag to Q2 organic growth and profitability, Motive/Axyom delivered a strong rebound in Q3.
The q/q jump in Axyom's revenue was driven by increased order activity, led by Verizon, its lead customer. With the business now in financially strong hands, increased customer confidence and engagement is helping order flow. LMN expects stronger growth at Motive next year, as it is currently focused on strengthening the business/boosting margins.
Even more impressive in our view is the big profitability gains, especially at Motive, which generated $3.4mm in net income (~15% net margin) vs. an $8.9mm net loss in Q2 (-42% net margin). Axyom generated $0.9mm in net income (~7.5% net margin) vs. a $3.5mm net loss in Q2. LMN expects further profitability gains at Motive/Axyom.
PT increased to C$41 (was C$35), based on 26.5x (was 24.5x) our increased F2025 EBITDA estimate (up ~7% to $289mm). The increase in our target multiple is due to higher peer valuations and its improved margin profile.
Despite the 20% return to our new price target, we expect the shares to be up significantly this morning such that the total return would be consistent with a Hold rating.
Within the CSU family, we continue to favour LMN, with CSU (Hold) next, and then TOI (Hold).