Kinaxis Inc.

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Kinaxis Inc.

User Conference: No Change In Moderate Growth Expectations

Our Conclusion

Our time at the Kinaxis user conference (in Orlando) has not changed our Neutral rating nor our view that its stock should not be bought. The issue we have revolves around uncertainty regarding its revenue growth rate moving back up above 30%, which we see necessary to
justify an Outperformer rating. Our view is this recovery will take time and we will not see this happen before 2018.

Our C$82 price target assumes a slower growth forecast (~20%) and 2018 cash flow per share multiple equal to the peer average, or ~28x. Investors should wait for a more attractive entry point.

Implications

The Kinaxis user conference, entitled “Kinexions 2017,” is well attended with global companies who are customers or prospects and partners. The sectors with strongest prospects are Life Sciences, Consumer Products and Automotive. While these segments want to leverage the benefits of Kinaxis, it takes time to expand the platform across an organization. For this reason, revenue growth is likely to move up at a measured pace.

Our investment thesis is that overall sales growth can move up above 25% aided by partners such as Accenture, Deloitte, and Bain & Co. This, however, will take time due to the recent customer loss. Our thesis is based on these three points:

1. Accelerating revenue has been delayed. Subscription revenue growth has dropped to 21% compared to an average of 31% for the past two quarters and 26% in the prior 11 quarters. This should only move up at ~3%-4% per year.
2. EBITDA margins are expected to be ~28% in 2017. The improved mix has led to slightly higher margins (+2%). We model ~27% in 2018.
3. Valuation reflects lower growth through 2018. Ex cash per share, KXS trades at 27x 2018 cash flow; higher growth SaaS peers trade at
~30x.
The 2017 revenue guidance range calls for $131MM – $133MM. Our forecast is for revenue of $132MM and EPS of $1.11.

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