A recent review of three security analysts’ reports on Canadian technology stocks highlighted only one ‘buy’ and two ‘holds’.
Overall, technology stock Kinaxis Inc. (TSX—KXS) is now reaping the rewards that it sowed, says Toronto-based Laurentian Bank analyst Nick Agostino as Kinaxis beat the consensus forecast for sales in all its segments. He says investments over the past two years have led to a beat on his third-quarter 2019 estimates, resulting in the company also raising its full-year 2019 guidance.
As a result, Mr. Agostino bumps his “buy” rated target price up to $110 per share from $100, adding that the company’s backlog and pipeline pump up the company’s prospects in the near term.
Increased investments in sales and marketing, as well as research and development, since the start of 2018, are starting to pay off. The investments led to continued expansion in partnerships (at 25), and more aggressive expansion into Europe/Asia. It is driving sales acceleration, notably for software-as-a-service sales (SaaS), says Mr. Agostino.
Total sales of US$47.1 million beat consensus and analyst estimates. All sales segments performed better than the market expected.
Of particular importance to the analyst, SaaS growth was 28 per cent year-over-year versus 18.5 per cent in the second quarter. In fact, this level of quarterly SaaS growth is the second highest rate witnessed since Kinaxis started breaking out its SaaS backlog in first-quarter 2018 (largest expansion was US$24.5 million in fourth-quarter 2018).
It beat the analyst’s 24 per cent growth estimate as well. Mr. Agostino expects this SaaS growth rate to continue for the foreseeable future.
Record backlog of US$289.7 million at quarter end is up US$42.4 million quarter-over-quarter. The beat was driven by subscriber services/SaaS backlog growth of US$17.6 million quarter-over-quarter, to US$246.9 million, the analyst reports.
Reflecting strong third-quarter results, management increased their total revenue guidance to US$188-to-US$190 million versus US$183-to-US$188 million previously. Adjusted EBITDA (earnings before interest, tax, depreciation and amortization) margin guidance was upped by 200 basis points to 27-to-29 per cent.
“Kinaxis ended the third quarter with a very strong pipeline diversified across all geographies (with acceleration from Asia/Europe reflecting about 21 months of growth investments in those regions) and sectors (with particular growing interest from the consumer-packaged good market).
“Furthermore, the company noted on the call it is not seeing any headwinds from supply chain spending cuts, tied to either the overall economy or tariffs,” Mr. Agostino concludes.
Kinaxis is a supplier of cloud-based subscription software.
Hold Sierra Wireless as it transitions
Technology hardware manufacturing stock Sierra Wireless Inc. (TSX—SW; NASDAQ—SWIR) is pivoting towards a stronger business model (that is, more recurring services and higher margin), say Raymond James financial analysts Steven Li and Bill Zhang. They say the 2019 year was a substantial investment period for the company, which they expected. But now it looks to them like 2020 will also be in transition with revenues flattish at best.
“The shares are inexpensive but with few catalysts near-term, we are moving to sidelines for now,” the analysts state. They reduce their recommendation down to “market perform” and their target price for Sierra to US$13 per share from US$20.
Regarding the pivot towards more recurring services, management noted that LTV (lifetime value) of subscription services contracts won in third quarter was more than twice the second-quarter LTV. Similarly, year-to-date LTV already represents 170 per cent of all contract wins in 2018. Management believes they are on track to double its recurring revenue from US$100 million currently to US$200 million by mid 2022 and US$400 million by mid-2024. Total revenue was US$794 million in 2018.
Hold BlackBerry during product development
Wireless handsets, software and services provider BlackBerry Limited (TSX—BB; NYSE—BB) continues to face concerning hurdles, this time in the form of its ongoing spotty Enterprise Software and Services (ESS) performance. This has held back Toronto-based Raymond James financial analyst Steven Li for some time and this quarter, ESS was even worse (down 16 per cent year-over-year).
Management expects ESS softness to continue for a couple more quarters before returning to more normal growth rates. Cylance (Blackberry’s malware protection) was also a little slower than expected. Revenue guidance reflects these new developments and the analyst has adjusted his forecasts and lowered his target share price to US$9.50 from a previous $10.50. The analyst gives the stock a ‘Market Perform’ rating.
BlackBerry reported GAAP revenue of US$244 million, non-GAAP US$261 million below the consensus of US$266 million. Total fiscal 2020 non-GAAP revenue growth is now expected by the analyst to be 23 to 25 per cent.
The analyst says: “In prior notes, we have been highlighting ESS spotty performance in fiscal 2019 and a weak first fiscal quarter 2020 to start the year. This quarter shortfall was blamed on weak execution/retooling of the sales force causing some disruptions. CEO John Chen expects the softness in ESS to last another two quarters.
“A product in development is Spark, which is currently in beta, with initial use case showing positive results from industry and customers alike. The release of BlackBerry Intelligence Security is also generating interest with 10 customers in beta. BIS uses a combination of contextual and behavioral factors to assign a unique risk score for each user interaction. Based on this score, a user is granted access to specific device applications/services as defined by IT admin. This adds a layer of adaptive security around an organization’s existing UEM (unified endpoint management).”
This is an edited version of an article that was originally published for subscribers in the December 2019/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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The MoneyLetter •2/11/20 •