Third Quarter Earnings Preview
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The third quarter earnings season is about to kick off! TSX issuers have until November 14th to report their financials, while TSX-V issuers have until the 29th.
Are you expecting any surprises? Who's going to beat expectations? Who's going to disappoint?
I have a trio of TSX underdogs for you today. Here's what I'll be watching for!
Underdog to Watch: Illumin Holdings (TSX: ILLM)
Illumin, formerly AcuityAds, is an adtech platform and a poster child for the COVID frenzy in Canadian microcaps, followed by a harsh return to reality. As the stock ran up to over $33 per share in early 2021 ($1.8 billion market cap), insiders cashed in on huge gains, and the company subsequently failed to deliver meaningful results. Illumin lost 95% of its value over the next three years while it changed its name and delisted from NASDAQ.
Simon Cairns was hired as the company's new CEO in March 2024 to rethink the strategy and return Illumin to growth and profitability. I met him last month and was very impressed by his background.
The thesis here is fairly simple. A few years ago, the previous management moved away from managed services to develop a self-serve platform for its clients. By trying to migrate clients to the self-serve platform, it cannibalized its managed services business. The result is that you had pretty much flat revenues over the last five years while self-serve grew and managed services declined. Oh, and the company went from 15-17% EBITDA margins in its good years (2020-2021) to 1% last year.
The new CEO's message is that both sides of the business are viable and present attractive growth opportunities and margins. It shouldn't be one at the expense of the other. Both can coexist and grow together. I think there are two ways to win here: 1) the company returns to growth, or 2) the company can't grow and starts cutting its bloated cost structure to get back to meaningful profitability. Either way, the valuation appears reasonable at 0.4x EV/Revenue (LTM). Assuming the company could return to a 15% EBITDA margin, the stock would be trading at a pro-forma EV/EBITDA of 2.5 times. Lastly, the balance sheet is pristine, with over $50 million in cash and no debt.
The company will report on November 8 before the market opens, and I'll be looking for a return to growth and improved profitability.
Underdog to Watch: Thinkific Labs (TSX: THNC)
Thinkific is a leading platform for creating, marketing, and selling courses, digital products, communities and learning experiences online.
Thinkific is another former market darling, having IPO'd near the top of the last small-cap bull market in April 2021. After reaching a peak of $19.47, the stock declined to a low of $1.40 (-93%) due to slowing revenue growth and a deflation of its valuation multiples.
Today, you have a SaaS company with highly recurring revenues expected to grow about 15% per year, trading at an EV/Revenue multiple of 1.2 times. After spending aggressively to grow in 2021 and 2022, the company became more disciplined and reached a slightly EBITDA-positive state a few quarters ago.
Again, I think there are two ways to win here: more growth or higher profitability. The beauty of the SaaS business model is that management can make those tradeoffs depending on how efficient the growth engine is. I suspect Thinkific has not found the right balance yet, as it's spending too much to grow too little. Over time, I expect them to figure out how to get better returns on their marketing dollars or cut that spending and focus on cash flows.
It's unclear if this coming quarter will be the catalyst, but I expect the stock to rerate higher when we see better growth or profitability.
Thinkific reports on November 5 after the market close.
Underdog to Watch: Coveo Solutions (TSX: CVO)
Coveo Solutions provides AI platforms that enable individualized, connected, and trusted digital experiences. Its AI platform powers search, recommendations, and generative answering in digital experiences across commerce, service, website, and workplace applications.
Coveo's market cap has always been a bit high for my fund's mandate, so I can't say I have done a ton of research on this one.
That said, when I see a GenAI SaaS company growing modestly (7% in FY24 at the mid-point of their guidance and a 3-year CAGR of 25%), near EBITDA breakeven, with a pristine balance sheet, buying back shares and trading at 1.5x EV/Revenue, my ears perk up.
The stock is down 45% this year. What's up? From what I've read, the company provided disappointing guidance at the start of the year, as they're seeing some churn in a portion of their business. Are investors expecting the big technology companies to eat Coveo's lunch on the Generative AI initiatives?
I have more questions than answers at this point. But at this valuation, it seems pretty hard to lose money, right? Any kind of positive outlook or guidance increase would likely lead to a higher stock price following the upcoming results.
Coveo will report after the close on November 4.
If you have any thoughts on the company, please reply in the comments or send me a message!
Tread Carefully: Zedcor (TSX-V: ZDC)
Zedcor provides low and zero-emission mobile surveillance towers that offer protection for commercial and industrial applications.
To be fair, the company has executed flawlessly over the last few years and I've been very impressed by the management team. I'm not calling out Zedcor here due to fundamental underperformance but because its valuation is getting up there.
At $2.79 per share, the stock is up 381% this year. The market cap is now $267 million. Compare that to consensus estimates of $31 million in revenue and $10.6 million in EBITDA in 2024, and the valuation appears relatively high. Even on forward estimates calling for 65% revenue and 76% EBITDA growth, the valuation is over 5.5x EV/Revenue and 15x EV/EBITDA.
From my experience, even the best microcaps occasionally disappoint for one or two quarters. Who knows if Zedcor will continue on its trajectory? I hope they will. But one lousy quarter could see the stock take quite the beating at these multiples. I would watch this one carefully if I owned it.
That's all I have for this earnings season. May your portfolio holdings report strong earnings!
What are some of the companies you'll be watching? Let me know in the comments.
Disclaimer
This publication is for informational purposes only. Nothing produced under the Stocks & Stones brand should be construed as investment advice or recommendations. Mathieu Martin, the author, is employed as a Portfolio Manager with Rivemont Investments. This publication only represents Mathieu Martin’s own opinions and not those of Rivemont. Rivemont may own positions and transact on any securities mentioned in this publication at any time without prior notice. At the time of this writing, the Rivemont MicroCap Fund holds a position in Illumin Holdings (TSX: ILLM). Always do your own research and consult a professional before making investment decisions.
If you’d like to invest in small public companies, check out this post.