KXSCF - Kinaxis Is Primed For Further Growth And Upside

2023-05-05 18:07:54 ET

Summary

• Kinaxis recently reported its Q1 2023 financial results, beating both revenue and earnings estimates.
• The firm provides supply chain planning and management software to companies worldwide.
• Kinaxis' management has guided to strong topline revenue growth, and the company has a debt-free balance sheet while producing good free cash flow.
• My outlook on Kinaxis is a Buy at around CAD$181 per share.

A Quick Take On Kinaxis

Kinaxis Inc. ( KXS:CA ) recently reported its Q1 2023 financial results , beating revenue and earnings per share estimates.

The firm provides supply chain planning and management software worldwide.

Given management's strong forward growth guidance, the firm's debt-free balance sheet and solid free cash flow , my outlook on Kinaxis Inc. at its current price of around CAD$181 is a Buy.

Kinaxis Overview

Kinaxis Inc. is a software company that provides cloud-based supply chain planning and management software. The company was founded in 1984 and is headquartered in Ottawa, Canada. Kinaxis' CEO is John Sicard.

Businesses use the firm's software in a variety of industries, including manufacturing, retail, and healthcare.

Kinaxis' primary offerings include the following:

• RapidResponse: A cloud-based platform that helps businesses plan, source, and deliver products and services.

• Demand Driven MRP: Helps businesses optimize their supply chains.

• RapidPlan: Assists in planning and execution of production schedules.

• RapidReact: Enables organizations to respond to disruptions in their supply chains.

• RapidStart: Software for businesses to implement Kinaxis solutions quickly.

Kinaxis acquires new customers through a variety of channels, including direct sales, partnerships with systems integrators, consulting firms, technology companies, and channel partners.

Kinaxis' Market & Competition

According to a 2022 market research report by Verified Market Research, the market for supply chain management software and services was an estimated USD$22.5 billion in 2021 and is forecast to reach USD$56.7 billion by 2030.

This represents a forecast CAGR of 10.9% from 2023 to 2030.

The main drivers for this expected growth are demand for increased supply chain visibility, especially after the disruptions caused by the COVID-19 pandemic.

Also, the chart below from Allied Market Research shows the supply chain management market changes between 2020 and 2030, by solution type:

Major competitive or other industry participants include:

• Epicor Software

• HighJump

• Info

• IBM

• JDA Software Group

• E2open

• Manhattan Associates

• Oracle

• SAP

• Descartes Systems Group

• Others.

Kinaxis' Recent Financial Trends

• Total revenue by quarter has grown per the following chart:

• Gross profit margin by quarter has dropped in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter have produced the following trajectory:

• Operating income by quarter has fluctuated around breakeven:

• Operating leverage by quarter turned negative in the most recent quarter:

• Earnings per share (Diluted) have varied recently but with some strong quarterly results:

(All data in the above charts is IFRS and CAD$)

In the past 12 months, Kinaxis Inc.'s stock price has risen 33.36% vs. that of Manhattan Associates, Inc.'s ( MANH ) rise of 43.24%, as the chart indicates below:

For the balance sheet, the firm ended the quarter with CAD$368.5 million in cash, equivalents and short-term investments, and no debt.

Over the trailing twelve months, free cash flow was CAD$38.7 million, of which capital expenditures accounted for CAD$17.3 million. The company paid CAD$38.5 million in stock-based compensation, or SBC, in the last four quarters, the highest in the previous eleven quarters.

Valuation And Other Metrics For Kinaxis

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha, CAD$)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

Kinaxis' most recent Rule of 40 calculation was 34.3% as of Q1 2023's results, so the firm has performed fairly well in this regard, per the table below:

(Source - Seeking Alpha.)

Commentary On Kinaxis

In its last earnings announcement (Source - Seeking Alpha ), covering Q1 2023's results, management highlighted a high new customer win rate (without providing metrics) despite an uncertain macroeconomic environment driving some prospects to delay their purchase decisions under greater scrutiny.

The firm recently announced a relationship with HAVI, a company that manages the supply chains of global quick-service restaurant chains.

Total revenue for Q1 rose 11.4% year-over-year but gross profit margin dropped a full eleven percentage points.

SG&A as a percentage of revenue rose seven percentage points, indicating the firm is spending significantly more for each incremental dollar of revenue.

Looking ahead, management guided 2023 total revenue to be CAD$580.5 million at the midpoint of the range, which, if achieved, would represent a 20% revenue growth rate over 2022.

The company's financial position is quite strong, with ample liquidity, no debt, and positive free cash flow.

Regarding valuation, the market is valuing KXS:CA at an EV/Sales multiple of around 9.2x.

The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 5.5x on April 27, 2023, as the chart shows here:

So, by comparison, Kinaxis is currently valued by the market at a substantial premium to the broader Meritech Capital SaaS Index, at least as of April 27, 2023.

The primary risk to the company's outlook is the potential for a macroeconomic slowdown, which may reduce trade activity, lengthening sales cycles, and reducing revenue growth.

In the past twelve months, the firm's EV/Revenue valuation multiple has bounced around within a range, but made no net headway, returning to slightly above 9x, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include a pause in central bank interest rate hikes, reducing downward pressure on valuation multiples across the technology vertical.

Given Kinaxis Inc. management's strong forward growth guidance, the firm's debt-free balance sheet, and solid free cash flow, my outlook on Kinaxis at its current price of around CAD$181 is a Buy.

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