Kinaxis success won’t fuel IPO boom: Experts

Despite the success of a local software firm’s recent initial public offering, observers say the capital shouldn’t expect a flood of high-tech IPOs in its wake because investors are moving to trendier markets and managers are considering quicker exit strategies.

Supply chain management solutions provider Kinaxis held this year’s only Ottawa-based tech IPO in June, more than a year after Halogen Software did the same in May 2013.

It's a decision Kinaxis had been mulling for a few years, but only began talking about seriously at the beginning of 2014. It ended up earning the company $100.6 million, about twice what Halogen raised in its IPO.

In the most recent quarter following Kinaxis’s debut on the Toronto Stock Exchange, the company reported revenues of $14.9 million, an increase of 14 per cent from the same quarter last year.

Halogen had similarly optimistic results after it went public. The software maker’s share price gained more than 14 per cent on opening day and the company had a record-breaking second quarter of 2014, with recurring revenue, international revenue and total revenue at all-time highs.

Kinaxis CFO Richard Monkman attributes the company’s success to a strong balance sheet, high top-line growth and long-term visibility.

The problem, he says, was the company wasn’t that well-known in the broader market. By going public, the firm aimed to both increase its profile and raise the capital needed to sustain that increasing growth.

“On both measures, it’s been very successful,” says Mr. Monkman. “We’re pleased to see increased inbound interest from not only potential investors, but also from employees.”

Kinaxis is one of only a few companies in Ottawa’s tech sector to go public in recent years. That’s on par with the tech sector Canada-wide, which as a whole is “not as frothy” as it was a couple of years ago, saysLaBarge Weinstein partner Debbie Weinstein.

“We’re certainly not seeing an avalanche of (IPOs),” she says. “I think you’ll continue to see one or two a year from Ottawa, but I don’t see any big momentum to take off the way they did in the ’90s.”

Although the capital has plenty of tech companies in the revenue and growth range required to consider an IPO, they may only be dominating a relatively small market and lack the pedigree to go public, says Ms. Weinstein.

“If you are growing at a modest rate … you’re not going to get a lot of traction in the public market,” she says. “So while we have lots of stable companies doing well … they’re not necessarily in sectors that are sexy or going to be scaling at the kind of exponential levels that Bay Street wants.”

One sector that does have that “sexiness” factor is the medical marijuana industry, which has seen several companies recently listed on the TSX and more soon to come.

Smiths Falls-based Tweed, one of only a dozen medical marijuana growers newly licensed in Canada, completed an initial public offering this spring. In late August, OrganiGram and Bedrocan saw their shares jump as they joined Tweed on the TSX, according to media reports. Others such as Mettrum and PharmaCan Capital, a holding company involved with three other licensed producers, are also expected to debut very soon.

For an emerging company, going public means lots of planning, risk and the willingness to take the business to another level, says Mahesh Mani, an Ottawa-based partner at accounting firm KPMG.

“Investors and managers are taking a close look at their exit or capitalization strategies and doing what’s best for the company and shareholders,” he says, “which sometimes would be an IPO, but there are other alternatives as well.”

In the tech sector, it’s more common that competitors or larger companies with gaps to fill will recognize the innovative products and expertise that small but fast-growing tech companies have to offer and acquire them instead, many observers say.

Indeed, Ottawa may have fallen flat on IPOs in recent years, but Silicon Valley North has experienced a boom in mergers and acquisitions.

“Good companies are getting bought out before they can get big enough to go public,” says Ms. Weinstein.

According to an annual survey of emerging companies, that’s exactly what most of them want. The costs and risks associated with an IPO are often a turnoff and most startups would prefer to sell within the first three years, according to PwC. Its recent survey of 150 chief executives found that 78 per cent are looking for some sort of way out and nearly two-thirds would prefer a simple acquisition.

The exceptions are companies with large and broad client bases that span across multiple industries, which is what makes an initial public offering viable, says Ms. Weinstein.

“They have scalability because of their customers and what they’ve built … that can grow exponentially if they have proper sales and marketing,” she says. “There’s very few companies like that and very few leaders like that.”

But Mr. Mani believes success stories such as Kinaxis could pave the way for more companies to take the leap.

“I think Ottawa tech is still ramping up,” he says. “The tech sector is very strong and I think that Kinaxis’s IPO is motivating for other companies, not only in Ottawa but across Canada.”

Many eyes are still on Shopify, a fast-growing e-commerce provider that could be the next Ottawa tech company to go public. The firm said last year that an IPO is “definitely one of the options” to give its investors a great return, but that decision is still a couple of years away.

For Kinaxis, the public realm means the company will be able to show current and potential clients what it’s made of while continuing to grow.  

“The customers we work with want to know that we’re going to be around and supporting them over an extended period of time, so they look at our financials, and it’s now readily available … so it gives them that level of comfort,” says Mr. Monkman, adding that new customers can see the “instant credibility and strength of the company.”

From here, there are multiple paths the firm could take. Mr. Monkman says first and foremost is to continue to broaden its investor base and deliver on market expectations.

Being on the TSX also offers the opportunity to later cross-list on the NASDAQ.

“That’s not in the works right now, and that’s some period of time out,” he says. “But that could be an opportunity for the company.”

 

Tech IPOs from Ottawa companies in the last 10 years:

2014 — Kinaxis Inc. (TSX:KXS) $100.6 million

2013 — Halogen Software Inc. (TSX:HGN; NASDAQ: HGENF) $55 million

2013 — Magor Communications Corp. (TSX-V:MCC) $5.9 million

2010 — Mitel Networks Corp. (TSX:MNW; NASDAQ:MITL)  $147.4 million

2007 — DragonWave Inc. (TSX:DWI; NASDAQ:DRWI) $32 million

2007 — Bridgewater Systems Inc. $35 million

2006 — RAMTelecom Inc. $2.5 million

2006 — Corel Corp. US$69 million

2005 — March Networks Corp. $56.4 million