Ottawa software company Kinaxis tells viewers of its website "We're Different … But in a Good Way."
They may be right. Kinaxis Inc. was the top-performing initial public offering on the TSX in 2014. Part of a plethora of emerging "software as a service" companies, Kinaxis eschews heavy spending on sales and marketing, making it more profitable than many better-known vendors. And, perhaps best, Kinaxis shares are still cheaper than many peers, despite their runup over the past few months, possibly due to a lack of attention from investors south of the border.
It all adds up to an interesting opportunity for Canadians willing to buy into this growing – and volatile – technology sector.
Broadly speaking, "software as a service" departs from the old model of customers purchasing a software license and installing it on hardware at their offices. Instead, users pay a periodic subscription fee and access the software, hosted on faraway servers, over the Internet. (Hence, the increasingly popular references to "cloud computing.")
Kinaxis's niche is supply-chain management, a company's process of evaluating its suppliers, component parts and inventory and trying to make it more efficient. Even in this day and age, many large companies have disparate computer systems that don't communicate well, so they try to plug a bunch of information manually into Microsoft Excel spreadsheets and figure it out.
Kinaxis believes it has a better idea with its RapidResponse software, and it has the customer testimonials to back it up. Analyst Thanos Moschopoulos of BMO Nesbitt Burns Inc. says Kinaxis's team connects RapidResponse to all the various data sources, including suppliers, translates data into a common format and presents the nearly real-time results in an Excel-like screen that allows users to make better decisions.
"For example, what if a customer calls and wants to know whether you can deliver an extra 1,000 widgets next week?" Mr. Moschopoulos posits.
"Kinaxis's software will show the impact that this new order would have on the existing orders slated for production. If it determines that the order can't be produced or delivered in time, it would clearly show why. Is it due to insufficient labour? Is it due to a shortage of a specific component?"
The user can then change scenarios to add shifts of labour (and the resulting costs); move inventory from another location or procure parts from a different vendor.
Mr. Moschopoulos says Schneider Electric SE of France, a company with 255 factories and 100 distribution centres, rolled out RapidResponse in several months and reduced its inventory by $200-million (U.S.). Arizona-based First Solar, a company with $3-billion in revenue, used RapidResponse to cut inventory by $100-million in six months. Other major customers include Ford Motor Co., Flextronics International Ltd., Cisco Systems Inc., Qualcomm Inc., Lockheed Martin Corp., Honeywell International Inc., Raytheon Co., Genzyme Corp. and Canada's own Celestica Inc., which uses it internally and offers it as an outsourcing solution to its customers.
Analyst Richard Tse of Cormark Securities calls supply-chain management "one of the three foundation pillars" of business software, along with enterprise-resource planning and customer-relationship-management applications. But while those two global markets are roughly $25-billion (U.S.) in size, supply-chain management software, or SCM, is smaller, at less than $10-billion. "We see the same opportunity when it comes to SCM," he says. "We believe SCM will follow a similar path of growth."
One downside, perhaps, is that Kinaxis's potential customers need to have a large, complex supply-management chain in the first place. Mr. Moschopoulos of BMO spoke to a candy bar company that had a limited number of raw inputs – milk, sugar and cocoa beans – and simply didn't have the need for the software.
The flip side is that, because Kinaxis knows it has a somewhat limited list of potential customers – it targets the 5,000 largest companies in the world – it hasn't spent a boatload on sales and marketing. Those expenses represent 25 per cent of sales at Kinaxis, versus more than 50 per cent of revenue at salesforce.com, NetSuite and Halogen, says Mr. Moschopoulos.
The result is that Kinaxis is posting EBITDA, or earnings before interest, taxes, depreciation and amortization, that's 20 per cent or more of revenue. (A quick peek at 21 software-as-a-service companies in S&P Capital IQ reveals only nine even posted positive EBITDA in the prior 12 months, and only three, including Kinaxis, recorded EBITDA margins of 20 per cent or higher.)
The prospect of annual 20-per-cent revenue growth, combined with profitability (Kinaxis is expected to post positive net income this year) and a relatively inexpensive valuation means Kinaxis has won universal praise from analysts. Eight of eight call the stock a "buy," with an average target price of $21.57 (Canadian), a modest increase over Friday's close of $18.86. With the exception of one small quantitative U.S. firm, all the analysts are from Canada, suggesting the Kinaxis story has yet to spread.
It's worth noting the risks, however. One of the big questions is how well the legacy enterprise-computing companies such as SAP and Oracle will adapt to cloud computing and compete with the newcomers. Mr. Moschopoulos says he believes SAP, which is already used by most of Kinaxis's customers for some functions, "will look to fully refresh its supply-chain platform over perhaps the next three years." Right now, though, "RapidResponse stands up very well relative to SAP's current solutions."
In the short term, Kinaxis needs to meet and beat analyst expectations, because it's part of a group of companies with high valuations driven by the growth narrative. Two companies in the space – ChannelAdvisor Corp. and E2Open Inc., the latter a direct Kinaxis competitor – disappointed the street, and their shares are down roughly 60 per cent in the past six months.
So far, Kinaxis has posted two solid quarters since its IPO in June. It'll get another bite at the apple in coming weeks with its full-year 2014 results – another chance to sell investors on the idea it's different, and better.
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David Milstead