Canadian tech earnings results were pretty solid across most names, with top-line numbers coming in ~1% over street estimates on average.

Bottom-line results were the bigger story, with an average beat of over 8% driven by strong performance out of the tech roll-up names.

The smaller names performed well too, with in-line revenue and stronger profitability than expected.

We dug through conference call transcripts and filings, which had 3 main themes:

  1. Focus on profitable growth, as public market financing conditions remain challenging and companies are rapidly getting taken off the market

  2. AI timelines for internal benefits & monetization, as analysts sharpen their pencils on AI-related impacts

  3. Global expansion and diversification of revenue streams, as software competition continues and wallet sizes potentially shrink

Growth is proven, now show me the money

Over the past 5 years revenue growth has been strong from Canadian tech, with much of the group adding >20% annually to the top-line.

The margin profile has seen steady improvement too, as companies capture some of the operating leverage that comes with scale.

Free cash flow margins have been less stable though, particularly in the smaller names, where customer acquisition costs and payback periods are less certain than they are in the enterprise basket.

Despite sell-off, still trading at a premium

While the Canadian group has held up well relative to its U.S. counterparts, there’s been a clear rotation out of tech so far this year, which appears to be driven more by multiple contraction than deterioration of fundamentals (though that could come too).

Despite the reset tech still looks expensive on a FCF yield basis, so we’d be cautious on owning the basket in the near-term.

There could be opportunities within the Canadian universe though, especially in small cap tech, which has become a private equity target in recent years.

With Converge Technology Solutions (CTS) acquired by H.I.G. Capital in February in a $1.3B deal (>50% premium, ~8x EBITDA), it appears that interest hasn’t slowed down.

You might be interested in…

About Bullpen: Bullpen Finance Inc. publishes content on Canadian markets and provides paid research coverage of select Canadian issuers. Bullpen is paid in cash by covered issuers, does not accept stock or options, does not hold positions in covered securities, and does not conduct investment banking business. Bullpen and LodeRock Advisors Inc. are affiliated; LodeRock provides investor relations services to issuers, some of whom are covered by Bullpen Research. When a post discusses a covered issuer, a specific disclosure appears at the top of the post. This post is published for general information purposes. It is not personalized investment advice and is not tailored to any individual reader’s circumstances. Bullpen is not a registered investment adviser or dealer. For full disclosures, including analyst certification, jurisdictional statements, and conflict of interest policies, please see our Legal & Disclosures section on our website.