This week, we will look into the earnings of some of the public Canadian companies that demonstrated solid execution, accelerated growth and are potentially interesting ideas for investors.
Earnings: In the second quarter, VHI reported solid topline and earnings growth. Revenue grew 47% to $23.8 million compared to the same quarter last year, driven by a 55% growth in Annual Recurring Revenue (ARR) to $79.6 million. Organic growth and acquisition contributed to around 14% and 36%, respectively. Gross margin continues to be solid at 81%. Management indicated that the acquisition pipeline continues to be healthy.
Opinion on the quarter: The most recent quarter has again proven the ability of VHI’s management to execute. VHI has been one of the most successful emerging software serial acquirers in the Canadian market in recent years. Its track record of compounding capital at a high rate as an acquisitive company is still early, but quite solid. VHI’s playbook is to issue shares at a high multiple to acquire private businesses, with a much lower revenue multiple in addition to cost synergies and cross-selling opportunities. This strategy has created tremendous shareholder value. VHI could potentially be a multi-bagger story in the making within the Canadian technology landscape.
2. Constellation Software Inc. (CSU)/ Lumine Group (LMN)
Earnings: Both CSU and LMN reported really solid earnings numbers in the most recent quarter. CSU reported a strong 15% topline growth despite its size, while organic growth has accelerated to around 5%, which is the strongest number in recent years. On the other hand, LMN reported a revenue of $184 million, representing a growth rate of 13% compared to the same quarter last year, including 6% organic growth (9% if excluding currency impacts), which is also a nice reacceleration in recent quarters.
Opinion on the quarter: The organic growth profile of these two CSU entities has drastically improved compared to recent trends. These groups of companies have experienced weakness due to concerns about AI threats that could potentially disrupt vertical market software (VMS) businesses. We are fairly confident these companies still have good long-term potential. Management indicates that there are still thousands of possible deals that all CSU entities can do within the VMS universe. AI worries may actually increase the deal pool as well. We think the long-term story of CSU-entities remains intact, and we expect the company can continue to compound free cash flow per share at a healthy rate going forward.
3. TerraVest Industries Inc. (TVK)
Earnings: For the company’s third-quarter results, TVK posted revenues of $405.7 million, a slight miss compared to the expectation of $425.9 million. In addition, EPS came in at $0.53, missing estimates of $0.99, while the EBITDA miss was a bit less stark at $68.1 million relative to $70.91 million expected. Sales from acquisitions contributed meaningfully to the total topline growth of 70% for the quarter, but the organic growth saw a decline of 2%. TVK’s results were quite volatile given the cyclicality of the industry.
Opinion on the quarter: Overall, the quarter’s result was quite weak, driven by softer demand for storage tanks and other product lines. It looks like the weakness is attributable to some tariff/economic uncertainty. However, this is more of a macro issue rather than a company-specific issue. The company announced that it will resume the buyback program soon if the share price trades at attractive levels. From a long-term perspective, we don't think a whole lot has changed here.
4. Leon's Furniture Limited (LNF)
Earnings: For the second quarter, the company reported a revenue of $644 million, a 4.3% growth driven by strong performance in the furniture category and commercial appliance business. The same-store sales growth of 4.3%, the strongest in recent quarters. The company’s gross margin also improved to 44.8%, compared to 43.9% in the same quarter last year, due to a more favourable sales mix with the growth in the furniture category and higher volume rebates, while adjusted EPS grew 29.5% to $0.57. LNF also announced a 20% increase in its quarterly dividend
Opinion on the quarter: Since new management took over, LNF’s fundamentals have improved meaningfully. Overall, LNF experienced solid business momentum in recent quarters as most categories showed growth. Management mentioned the strong result was due to the disciplined execution and cost control. Though furniture sales were strong, investors need to keep in mind that there may be some 'pull-through' sales here as consumers aim to avoid possible tariff-related price hikes. There continues to be potential upside from the spinout of the real estate portfolio that has been working on in recent quarters.
Earnings: For the second quarter, SHOP’s EPS came at $0.35, beating estimates of 0.29; revenue of $2.68 billion, which also beat estimates of $2.54 billion, driven by a sales growth of 31%. SHOP’s guidance was raised to 'mid to high twenties' percentage growth, vs 22% estimates. Gross Merchandise Value (GMV) was $87.8 billion, $6 billion higher than estimates. Operating margin rose 1.5 points to 16%, while free cash flow margin is also at a record level of 16%.
Opinion on the quarter: This was a very solid print, and the guidance was also very strong. SHOP’s management discussed its prior spending efforts, which are now paying off. As a bonus, the negative tariff impact did not materialize as expected. AI is really helping merchants understand their business and customers, and this is leading to better sales and customer retention. Europe is going well, with significant growth. Overall, the merchant base is 'resilient'. US business accelerated, and the company does not believe this is just a forward pull-through from tariffs. SHOP’s management also puts a heavy emphasis on profitability now. Overall, it was a very strong quarter and good outlook with good margins.
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Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in the securities mentioned.
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