Kinaxix CEO John Sicard in his office in Kanata, on Friday, Dec. 14, 2018.Justin Tang/Globe and Mail
Kinaxis Inc. became one of Canada’s more successful publicly traded technology firms by helping manufacturers get a quick handle on operations when disasters, such as hurricanes, wildfires and cyberattacks, hit. Now, the Ottawa company is seeking to win back investors after a minor crisis of its own.
In November, Kinaxis missed a forecast, reporting revenues of $36.6-million and adjusted operating earnings of $9.5-million for the third quarter, both 8 per cent below consensus estimates. It cited delays in closing new deals, saying it expected full-year revenue to be as high as $153-million, trimmed from its earlier projections of up to $156-million.
That shortfall wasn’t huge, but it came from a firm that had commanded a premium valuation compared with other subscription software firms, thanks to a record of revenue growth in the mid-to-high 20-per-cent range (it was 19 per cent in the quarter). Many investors were unforgiving, given the overall stock-market swoon. Kinaxis shares closed Friday at $65.12 on the Toronto Stock Exchange, down 26.5 per cent since the announcement; the stock, which used to trade at 9.5 times the ratio of its enterprise value to sales, is now valued at around 6.5 times, on par with other subscription software firms.
“When the market is taking down all these high-valuation names, it’s not surprising you’d see this,” National Bank of Canada analyst Richard Tse said.
But analysts regard the disappointment as a mere blip for a company regarded as a leading global supplier of supply-chain planning tools.
Kinaxis leadership has exuded confidence. It frames the miss as a function of the fact that, as a company that signs 10 to 15 big deals a year and has a sales cycle of up to 18 months, timing lags on contracts are no big deal. “It’s just a tiny issue for this quarter,” said Kinaxis board chairman Ian Giffen, one of five officers and directors who, combined, bought more than $900,000 of shares after the report. “Next quarter if we deliver what we say, everything will be back on track.”
“It’s very difficult to maintain perfection forever,” CEO John Sicard said. “We certainly were disappointed things didn’t fall into the quarter as we anticipated. [But] we remain hyper-confident in where we are with those particular deals.” He said Kinaxis will deliver “accelerated growth” in 2019, adding that investors have “zero reason" to worry.
Three ex-Mitel engineers founded Kinaxis’s predecessor, Cadence Computer Corp., in 1984 to help large companies make timely business decisions. Its technology cut the time for clients to run “what-if” simulations to 14 minutes, down from 36 hours. Today, Kinaxis offers its platform over the internet, allowing disparate employees to monitor all aspects of an organization’s supply chain and quickly run hypothetical business scenarios by creating virtual “digital twins” of company data where they can play with numbers without altering what is in their systems.
Customers say Kinaxis software has helped them cut costs, improve bids, determine their capacity to take on new orders and recover from disruptions. Ford Motor Co. uses Kinaxis as its global-enterprise resource-planning system, while Boston Scientific plans global operations through Kinaxis software, which cut its planning cycle to four weeks from six, BMO Capital Markets analyst Thanos Moschopoulos said. Drug giant Merck & Co. and California-based Keysight Technologies used Kinaxis last year to help restore operations after a debilitating cyberattack and wildfires, respectively.
Kristen LeBaron, director of supply chain with Indiana-based Lippert Components, said implementing Kinaxis software in 2016 “has enhanced visibility across the company,” leading to less inventory shortages, optimized ordering and quicker, more concise costing for bids. “We didn’t realize the power of this tool,” she said. “It has really served as a cornerstone for us.”
Kinaxis still has much room to grow. The company, which has more than 100 customers, has captured 5 per cent of a US$4-billion market for supply chain planning tools. Market awareness of how Kinaxis’s platform can replace manual processes is still low. “Just about every time we describe what we do in terms of the technology and the concurrency, most people think it is fantasy,” Mr. Sicard said.
Since its IPO, Kinaxis has expanded beyond its core sectors of electronics, aerospace, defence and life sciences into automotive (recent customers include Toyota and Nissan) and consumer packaged goods. Mr. Sicard said Kinaxis is looking to expand its presence in Europe and is eyeing new sectors such as energy, forestry and retail. “Those are areas [of] opportunities. All of it is a matter of time.”
Much of Kinaxis’s business has come from displacing SAP SE’s legacy supply chain planning software or bidding successfully against the German giant’s new replacement offering, Mr. Moschopoulos said.
“We’re punching SAP in the nose every day,” said Mr. Sicard. SAP spokesman Carole Wagner responded to questions about Kinaxis, saying: "SAP is a market leader in supply chain software, with the highest market share and top rankings from industry analysts.”
Kinaxis “is in the early days of capturing a very large market opportunity,” Mr. Moschopoulos said. “There’s still a big untapped opportunity, there are still lots of customers not using something like this that should be.”