Kinaxis looks to be thriving, despite Q2 stumble
Software firm loses $350M in market value but CEO expresses confidence
When a company suddenly loses $350 million in market value, as Kinaxis did last week, it’s ordinarily a time for serious soul-searching. Not this time. “We show up every day and punch the giants in the nose,” says John Sicard, the company CEO since January.
Sicard, 55, was making the point recently that his firm rests on very secure foundations. While less than pleased with having to report that company revenues of US$32.9 million came in six per cent short of forecast, Sicard views the second quarter as an aberration.
His confidence comes from a good place. Few people understand the relatively obscure business of building supply chain software as well as Sicard, or Kinaxis’s place in it.
“Something like (the secondquarter miss) is more difficult psychologically than in reality,” he told the Citizen. “When you look at the actual business, it’s solid.”
Indeed, the firm’s earnings of 30 cents per share were better than expected, one of the reasons Kinaxis ended June with US$150 million cash on its books.
The Kanata company is showing no sign things are amiss. It has dozens of open positions and expects its workforce will top 500 by yearend, including more than 300 in the capital region.
Kinaxis is also expanding its infrastructure outside North America. It already operates two data centres in South Korea and plans to open another one before yearend in Europe. While the South Korean facilities could be viewed as a heightened risk in light of the war of words between the U.S. and North Korea, Sicard has his eye on the long game. Kinaxis has been landing significant new business in Asia and customers there like it better when their corporate data is stored nearby.
Although Sicard took over the top job at Kinaxis only recently, he has been a manager there for 23 years. He was a key figure, along with former CEO Douglas Colbeth, in transforming Kinaxis into one of the country’s most successful software companies.
The catalyst was a gutsy decision 12 years ago to tackle the very difficult job of changing the way Kinaxis sells software. It’s now done as a service through a multi-year subscription, rather than by installing packages of licensed software, typically paid for upfront.
During the transition, as customers converted to software-as-a-service, Kinaxis’s upfront revenues weakened. But with the transformation complete, company executives can now count on a steady, profitable stream of subscription revenue.
The only thing that upsets this happy scenario is when a large customer with one of those multi-year deals gums up the works.
Kinaxis reported Tuesday that a significant customer in Asia “had breached its contractual obligations.” Accordingly, Kinaxis eliminated the US$1 million-per-quarter revenue stream from its accounts, representing a threeper-cent drop. Not huge, but significant.
That wasn’t all, however. Kinaxis revealed it is also facing a separate revenue squeeze.
While the company generates most of its revenue on software subscriptions, it also charges for professional services related to the design and installation of its heavy-duty software. Kinaxis technology helps very large corporations track inventories and shipments, and decide when and what to reorder. Last year, the company’s professional services group accounted for nearly 28 per cent of Kinaxis revenues.
But the relative contribution of Kinaxis’s in-house consultants is falling. Here’s why: To more quickly expand its software sales globally, Kinaxis is signing alliances with major-league consultants such as Deloitte and Bain & Co. to help corporations install Kinaxis software in return for a cut of the revenues. The result is that Kinaxis is losing an estimated US$1.5 million per quarter in revenue formerly earned by its inhouse professionals.
And it’s happening at a faster pace than Sicard had expected. “The uptake (by partners) is well ahead of schedule,” he acknowledged this week.
Still, Kinaxis is betting that giving partners strong financial incentives to install Kinaxis’s technology platform will result in more customers over the long haul, producing a richer stream of revenues. The company makes significantly more profit on sales of subscription software than it does providing professional services.
For the moment, Kinaxis predicts its revenues for 2017 will now be somewhere between US$131 million and US$133 million, roughly US$10 million less than previously forecast. But it expects profits (adjusted earnings before tax and other non-cash items) to be more than 25 per cent of revenues, a very healthy ratio.
Certainly independent analysts don’t see a lot to be concerned about, unless the dispute with the Asian customer turns out to signify larger issues. And this doesn’t appear likely. When queried by an analyst whether other Kinaxis contracts were at risk of a breach, Sicard’s reply was a flat “no.”
Analysts with TD Financial and National Bank Financial shaved their price target somewhat in the wake of the earnings report but continue to believe it will hit at least $90 per share by this time next year. It closed Friday at $65.79.
There is also the remarkable history of Kinaxis to consider when evaluating its ability to roll with the punches.
Since its launch 33 years ago by three former Mitel managers, the company has undergone several transformations and name changes. It started life as Cadence Computer Corp., then became Carp Systems International, Enterprise Planning Systems, WebPlan and, finally, Kinaxis.
Throughout, the firm’s engineers have remained faithful to the idea that they can help large corporations manage their increasingly complex supply chains.
“I’m really proud of the way we’ve developed our software using all-Canadian code, 15 million lines of it,” Sicard said. “We haven’t done any outsourcing.”
Somewhere along the way, the company has developed an instinct for knowing when to adapt to the next waves of technology. Its pioneers would have been astonished at the idea their company could lose $350 million in market value and still be worth $1.7 billion.
But they wouldn’t have been surprised at the strength of the technology that underpins it.
I’m really proud of the way we’ve developed our software using all-Canadian code, 15 million lines of it.