A Closer Look At F2024 Subscription Growth Our Conclusion
Kinaxis is currently trading at 5.4x EV/S (2025E), a discount to similar growth
peers trading at an average of 5.7x. We believe this discount reflects
concern around SaaS growth, given the declining ARR and backlog growth
over the last four quarters. Historical data implies that SaaS growth for the
next year could be as low as 21%-23%, based on our analysis, and with the
Street modelling 24% we see potential for a negative reaction following 2024
guidance on February 28. However, we see the downside as mostly priced in
at these levels and see the potential for F2024 margin upside as Kinaxis
focuses on profitability. We retain our Outperformer rating and $185 price
target.
Key Points
Weaker ARR Growth Could Weigh On Near-term SaaS Guidance: With
ARR growth declining for four sequential quarters amid a difficult macro
environment, we assessed historical ARR growth relative to SaaS growth.
Our analysis showed that Q3 ARR growth has shown a tight (0.9) correlation
with SaaS guidance for the following year over the last five years, implying
Q3’s 18% Y/Y ARR growth may lend some insights into the year ahead. The
Street is currently modelling 24% SaaS growth for 2024; however, our trend
analysis suggests the guidance could be as low as 21%-23% if Q3 ARR
growth continues to be a good barometer for the following year’s subscription
guidance. We are forecasting 22% subscription revenue growth in F2024.
Slower Backlog Growth Appears To Be In Street F2024 Estimates, But
May Impact F2025: Alongside ARR, backlog growth has also been slowing.
On average, Kinaxis’ disclosed “backlog to be recognized in the following
fiscal year” as of Q3 has represented ~68% of Street SaaS revenue
estimates for the following year. Backlog to be recognized in 2024 of
$225MM currently represents 68% of consensus subscription revenue of
$332MM, implying the Street has already adequately incorporated the slower
backlog growth into estimates for F2024. However, forward revenue
coverage has declined for the first time in five years for both the one-year
forward and two-year forward periods, implying F2025 estimates may be a
touch ambitious.
Strong Margin Guidance Could Be A Positive Surprise: Kinaxis has
elected to tilt its Rule-of-40 focus towards profitability amid a challenging
macro, and as the company has completed the majority of its internal
investments, we continue to view 2023 as a margin trough. G&A expense
and sales and marketing expense have been declining as a % of revenue
since early 2022, and we expect the company will continue to see operating
leverage in 2024 and to a greater extent in 2025 when Kinaxis completes its
public cloud transition. We are modelling 18% EBITDA margin for 2024, and
with this note we are revising our F2025E margin higher by 200 bps, to 21%.
Strong margin guidance could be a positive surprise; the Street is currently
forecasting 18% for F2024.