D2L Inc T.DTOL

TD Reaction

[retiredcf]

D2L Inc.

(DTOL-T) C$13.05

Q4/F22 First Take: More Time to Convert Large Deals into Revenue

Event

D2L released Q4/F22 results last night.

Conference Call: 8:30 a.m. ET; Canada: [phone] or [phone]; U.S.: [phone]. Access code: 856 621.

Impact: SLIGHTLY NEGATIVE

D2L's Q4/F22 results exceeded expectations, but we believe investors will be focused on D2L's F2023 revenue guidance of $179mm-$182mm, or 18-20% growth y/y. This is below the 20-25% revenue growth per year that management is targeting. We discussed these results with management and the recently won large deals are taking longer to convert into revenue as the implementations take longer than small deployments. However, good progress is being made, with 57 of SUNY's 64 campuses already having elected to migrate to D2L. We are assured that the sales pipeline remains healthy. Given that these deals are already won, we are not too concerned with the revenue guidance since it is merely a timing issue, rather than something more structural. Management also remains committed to growing revenue by 20-25% per year in F2024 and F2025 and its margin targets remain unchanged. We remain positive on the name and do not see any structural changes in the thesis.

In-line revenue; margins beat. Revenue of $41.4mm, up 22% y/y, was in line with our $41.3mm estimate and consensus at $41.0mm. Adjusted gross margin of 64.1% was above estimates of 63.1% (TD)/62.2% (consensus). EBITDA of ($0.4mm) was well above expectations of ~($4.4mm) as slower hiring, due to the tight labour market, brought opex below expectations. ARR of $154.5mm was below our estimate, largely due to the recent deals taking longer to convert into revenue and from the timing of some deal closures slipping into the following quarters. Nonetheless, ARR grew by a strong 21.5% y/y, supporting management's target to grow by 20-25% in F2024 and F2025. We also note that net revenue retention remained a strong 107% for the year, consistent y/y, suggesting that it continues to successfully upsell into its existing customer base.

Strong balance sheet. D2L used $4.1mm of FCF in the quarter to end the quarter with $115mm of cash and no debt following the IPO. We believe the company is well- capitalized to execute its growth strategy.