QUICK TAKE: EARNINGS UPDATE
Q3/F25: SOLID MARGIN BEAT
THE TD COWEN INSIGHT
While Subscription revenue was in line with estimates, disciplined cost management drove a solid EBITDA beat, even after excluding the benefit from a one-time professional services re-evaluation. With guidance raised higher, the implied Q4 guide suggests a sequential step down in margin, although still consistent with prior messaging that margins will exit the year in the low-to-mid-teens range.
Event
Q3/F25 results.
Conference Call: Thursday, December 5, 2024, 8:30 a.m. ET; Canada: (833) 470-1428; International: (404) 975-4839. Access code: 27545.
Impact: SLIGHTLY POSITIVE
In line Subscription revenue; EBITDA beat. Subscription revenue of $46.8mm was in line with estimates and grew 12.8% y/y. Professional Services (PS) revenue of $7.5mm included $1.2mm of additional recognized revenue from the re-evaluation of certain PS engagements. This incremental revenue flows 100% through to EBITDA, helping to drive $10.4mm of EBITDA in the quarter, or 19.2% EBITDA margin. Excluding the PS re- evaluation, EBITDA would have been $9.2mm, or 17.4% margin, which is still a solid beat above us at $7.1 (13.7% margin) and consensus at $6.7mm (13.2% margin).
The company added $3.4mm of ARR, which was lower than the $6.1mm we were expecting, but is consistent with the ~$4mm of organic ARR added last quarter, suggesting the macro backdrop is stable. We will look for further detail on the call regarding the success of the recently expanded product portfolio, which was noted in the press release to have seen "strong customer response and pipeline generation." This could imply ARR is set to accelerate as cross-sell/up-sell initiatives convert to revenue.
F2025 guidance raised. The company raised F2025 revenue and EBITDA guidance (see Exhibit 1). Using the midpoint of the revised guide implies Q4 revenue of $52.5mm and EBITDA of $7.3mm, or 14.0% EBITDA margin, which is slightly below consensus at 15.1%. It is, however, still within management's previous guide of "low-to-mid-teens", and we believe the company is making good progress towards balancing revenue growth and profitability. Leaning into additional growth investments to re-accelerate ARR would be welcomed, in our view.
Solid balance sheet. D2L generated $11.3mm of FCF to end the quarter with $108.3mm of cash and no debt. The company repurchased ~69k shares in the quarter for $0.6mm and renewed its NCIB for another year. We believe the company is well-capitalized for continued share repurchases, organic growth investments, and M&A.
We will review our target, estimates, and rating following the conference call this morning.