Kinaxis Catches Activist Attention With Its Underperformance

A Member of Pat McKeough’s Inner Circle recently asked for his advice on Kinaxis Inc., a SaaS (Software-as-a-Service) company that specializes in supply chain operations.

Pat likes the company’s reliable recurring revenue through long-term subscriptions, a solid balance sheet and an expanding global footprint. However, the company has underperformed its competitors, and an activist investor now wants the firm to sell itself.

We keep an eye o n activist investors, as they tend to look for the samethings we do—companies with undervalued assets that they can sell or spin off to improve shareholder value. This target has attractive assets and has attracted a U.S.-based activist.

KINAXIS INC. (Toronto symbol KXS; www.kinaxis.com) provides cloud-based subscription software that big companies use to manage their supply chains. Kinaxis is based in Ottawa. The company’s shares began trading in June 2014 at $13 a share.

Kinaxis’s main product is RapidResponse, which helps manage supply, demand, inventory, order fulfillment, and capacity planning. Its applications include matching production and inventory to demand, analyzing sales patterns, and forecasting.

The company now operates under a Software-as-a-service (SaaS) model. That’s where its subscribers pay a monthly or yearly fee for software implementation, support and upgrades. That replaces the traditional model of charging customers a one-time fee on the initial sale of software. SaaS also increases client retention and recurring revenue streams. For the customer, it’s like renting the software instead of owning it.

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In August 2022, Kinaxis bought Netherlands-based MPO for $45 million. MPO’s platform connects, in real time, various parties in the supply chain, including manufacturers, shippers, and end users.

The MPO acquisition has been a good fit for Kinaxis. Its RapidResponse software lets customers plan for various supply-chain scenarios. Without MPO, Kinaxis would have only limited ability to help users deal with short-term disruptions, which are increasingly common.

MPO also operates a network for what it calls “multiparty orchestration.” It connects various entities in a supply chain, such as manufacturers, logistics providers and retailers, to let them better execute orders.

Inner Circle: Kinaxis’ revenue growth isn’t enough to please this activist

In the three months ended September 30, 2024, revenue increased 12% to $121.5 million from $108.1 million a year earlier. Revenue was higher mostly due to a 16% increase in SaaS sales combined with an 8% jump in professional services revenue.

Kinaxis earned $6.8 million, or $0.24 a share, in the latest quarter. That was down 8.6% from $7.4 million, or $0.26.

The company operates in a highly competitive industry. However, its SaaS model provides a steady inflow of recurring subscription revenue from major customers.

U.S.-based activist shareholder Daventry Group now holds 1.4% of Kinaxis’ stock—and wants the company to put itself up for sale in a take-private transaction with a private-equity buyer. The activist points out that Kinaxis’s shares are down from where they were at the end of 2020—despite strong demand from businesses for supply-chain software. Daventry wants new owners to oversee the hiring of the company’s next CEO. In August 2024, Kinaxis’ CEO, John Sicard, announced his retirement after a three-decade career at the company.

Meantime, how Kinaxis will respond to Daventry is uncertain—but either way, it draws attention to its longer-term prospects.

Recommendation in Pat’s Inner Circle: Kinaxis Inc. is a hold.

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