Results offer glimpse into how investors put different prices on investments

Mitel and Kinaxis are tech powerhouses with very different stock valuations

Kinaxis and Mitel Networks have a lot in common. Both are software powerhouses and pioneers of Ottawa’s tech community. Each has undergone several profound metamorphoses to ensure survival.

The two Kanata firms are today the city ’s second- and third-mostvaluable tech franchises behind e-commerce star Shopify. Coincidentally, Kinaxis and Mitel on Wednesday reported first-quarter financial results, offering a fascinating glimpse into how investors put starkly different prices on their tech investments.

Consider that Mitel, a communications software specialist, reported first-quarter revenue of US$313.8 million, up a robust 41 per cent from the same period a year earlier. Mitel shares closed Wednesday at C$14.38 on the TSX, giving it a market value of C$1.7 billion.

Wednesday evening, Kinaxis published substantially smaller revenue — US$36.8 million, up just 14 per cent from a year earlier. Yet its C$82.05 share price accorded the firm a market value of C$2.1 billion.

How is it that Mitel,with more than eight times the revenue of Kinaxis, is the less valuable of the two firms? Earnings obviously have a lot to do with it, but equally important is the fact each is at different stage in its latest corporate transformation.

Kinaxis reported first-quarter net profit of US$5 million (17 cents per share) compared to US$3.4 million (12 cents per share) a year earlier.

Mitel, in sharp contrast, produced a first-quarter loss on continuing operations of US$21.0 million, up from a loss of US$19.7 million during the same period a year earlier. Mitel has been losing money for years, thanks in large part to profound changes shaking the foundation of its industry. More and more customers are buying telecommunications services through monthly subscriptions (cloud services) rather than by expensively acquiring telephone systems upfront and running things themselves. The result for suppliers such as Mitel has been to flatten near-term revenue.

Mitel has responded by bulking up. It has acquired a string of rivals such as Toronto-based Aastra and, more recently, California-based ShoreTel. That’s why Mitel’s firstquarter revenue appeared to jump so fast. But if you compare the results assuming ShoreTel had been part of Mitel a year ago, the yearover-year increase in revenue for the combined Mitel operation was little more than one per cent.

And meantime, Mitel has to expend enormous effort consolidating and streamlining the various properties it has acquired. It’s not a very exciting story to sell investors, one of the reasons Mitel agreed last week to be acquired for US$2 billion by Searchlight Capital, a pri- vate equity firm based in London. But assuming the transaction actually goes through and that Mitel completes its move to subscription-based sales, the Kanata firm could be in position to grow profitably. That would be the time for Searchlight to sell Mitel shares to public investors, presumably at a much richer valuation.

Kinaxis, a master in the art of supply chain management software, is much further along in the transition to subscription services. The vast majority of its revenue is generated through subscriptions, and those that aren’t related to the provision of professional services.

Analysts like this because not only is subscription revenue growing rapidly, it is more predictable than sales generated by selling software licences upfront. In short, Kinaxis has secured a piece of international business it can mine profitably for years to come.

It’s possible Mitel will get there, too. And maybe that’s the positive message to take from Wednesday’s financial results.