This edition of CIBC’s Tech & Innovation Newsletter is dedicated to our colleague Brent Layton, Co-Head of our Technology & Innovation Investment Banking franchise
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In Memoriam – Brent Layton We are deeply saddened to announce the passing of Brent Layton, after a very courageous battle with cancer. He was a passionate client advocate and many of our clients benefitted from his thoughtful and expert advice. Brent joined our bank in 2019 as a Managing Director, adding deep expertise in the technology sector and reinvigorated our franchise in this important sector. Soon after joining, he took on an expanded role as Co-Head of our Technology & Innovation Investment banking franchise. A remarkable mentor and focused leader, we will miss Brent immensely. In his memory, CIBC will be making a donation to the Canadian Cancer Society. |
Canadian technology sector performance and valuation
| EV / NTM revenue multiples1 | LTM sector price performance1 |
|---|---|
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Source: FactSet and Pitchbook; as at August 31, 2021; in C$ unless otherwise noted.
1Please refer to the end of the document for technology group constituents.
Canadian Venture Capital market update
Noteworthy Canadian deals
| Company | Size | Sub-sector | Lead investors |
|---|---|---|---|
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US$210M | Software |  |
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US$175M | Software |  |
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US$131M | Software |  |
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C$150M | Software |  |
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C$103M | Commercial Services |  |
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C$100M | eCommerce |  |
T&I @ CIBC
Deal announcement – CIBC Global Investment Banking
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Converge Technology Solutions – $259 million follow-on equity offering Converge Technology Solutions is a software-enabled IT & Cloud Solutions provider focused on delivering industry-leading solutions and services. |
Deal announcement – CIBC Innovation Banking
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Altus Assessments – Credit Facility Altus Assessments is changing the way medical schools recruit top candidates by providing reliable and validated methods that can better assess the entire individual than standard academic measurements alone. Altus’s testing is taken by more than +200,000 applicants every year, including 90% of Canadian and US medical school applicants. This month, Altus acquired One45, another medical education company. CIBC Mid-Market Investment Banking acted as exclusive financial advisor to One45. |
Canadian Depository Receipts: Buying U.S. Stocks in CAD made easy
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Following the recent launch of Canadian Depository Receipts (“CDRs”) by CIBC, Canadians now have affordable access to foreign stocks as they can now invest in the most popular public companies through fractional share ownership, in Canadian dollars, and with a built-in currency hedge. An industry first, CDRs represent a groundbreaking innovation in the way Canadian investors buy and hold shares of global companies. Amazon.com, Google, Tesla, Apple, and Netflix CDRs now trading on the NEO Exchange. With CDRs, investors can now “own the company, not the currency™!”. |
Technology & Innovation in‘sites’ with CIBC Equity Research
T&I ‘Bits & Bytes’
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E-Commerce web traffic momentum has slowed down – a lot Preliminary Q3 results has shown that e-commerce momentum is slowing down- with August’s Y/Y growth being the lowest it has been in the last two years across most e-commerce platforms we track. As vaccination rates increase in North America (66% of Canadians and 52% of Americans are fully vaccinated as of August 25)- consumers are more comfortable venturing into public spaces. Web traffic data shows that Q3 Y/Y web traffic growth for Shopify is ~10%. This starkly contrasts Q2 and Q1 web traffic growth of 19% and 68% respectively. Lightspeed saw similar diminishes in rates in Y/Y web traffic growth with Q3 reporting 57% growth vs. 90% in Q2 and 166% in Q1. However, with back to school season just around the corner, we expect to see a lift in sales that will increase Shopify’s gross merchandise volume (GMV) by 40% Y/Y and Lightspeed’s gross transaction volume (GMV) by ~100% Y/Y. |
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Platform fees under scrutiny – South Korea looks to ban in-app purchasing commissions Lawmakers in South Korea are taking steps to become the first major economy to limit Apple and Google from charging commissions on in-app purchases. Commissions of 30% on in-app purchases have become standard for major app store operators, and third-party app developers and governments around the world are looking to put limits on those payments. The issue is also being litigated closer to home, with Epic Games and Apple awaiting a verdict in a lawsuit that centers around the legality of those same in-app purchase commissions. The outcome of that lawsuit and other international efforts to curb in-app purchasing could have a notable impact on technology firms that make sales through third-party marketplaces or look to take a percentage of payments made through their own marketplaces. |
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Ready to spend – Expect M&A to ramp up as the pandemic recedes Canadian tech companies took a pause on M&A through the pandemic, as travel restrictions made due diligence difficult and an uncertain environment led to valuation disconnects. While pausing M&A, Canadian tech companies saw a surge in cash flow as the pandemic accelerated demand. Cash currently represents a median of 33% of LTM revenue at CIBC’s companies under coverage. With pandemic concerns starting to recede, tech M&A activity has surged in Canada, with Q1 deal volumes up 29% from the LTM average. Companies under our coverage are well-positioned to ramp up M&A with an average net leverage of 1.1x and average LTM free cash flow (FCF) margin of 17%. |
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Q2/21 Software & Services Recap – Margins begin to normalize, consensus moves higher Our Software and Services coverage reported solid results in Q2, with average revenues and EBITDA beating most consensus estimates. Valuations rebounded in the quarter, with the sector now trading roughly one turn above average two-year EV/Sales multiples. The valuation recovery was broad-based, with all of our names under coverage trading above two year averages. In this type of environment, we prefer our business services and mature software names, which are more levered to the reopening. |
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Right to repair in an IoT-Dominant World – Users advocate for cost effectiveness and flexibility The Biden Administration continues to target anti-competitive corporate practices, and his broad executive order signed in July aimed to promote competitive markets has reignited the “right to repair” debate. The right to repair movement grew out of opposition to manufacturer restrictions over who can access and repair products. Supporters of the movement argue that third-party technicians can help lower costs of repairs, increase innovation, and reduce e-waste by extending device lifetimes. Some manufacturers oppose the movement, citing safety and privacy concerns, and damaging brand images. While this is not an entirely new problem, technological advances and adoption of IoT devices are exacerbating the issue. The Federal Trade Commission (FTC) endorsed a broader right to repair in a policy statement passed in July but detailed lawmaking and implementation at the federal level remain in the works. |
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Recent technology news
“Meet the year’s biggest technological breakthrough”
One of the biggest challenges in transitioning our society to clean energy is the fact that solar and wind power are intermittent. Form Energy, an upstart energy company backed by powerful investors such as Bill Gates and Jeff Bezos, may have found the next alternative energy source.
Read the full article at Medium.com.
“Cyber in Afghanistan: tech’s vital role in Kabul evacuation”
While some media coverage may depict a century-old, Lawrence of Arabia-type conflict in Kabul, this is not the reality in today’s digital age. The Taliban has leveraged social media to great effect to gain local support through popular channels such as Instagram, Whatsapp, Facebook and Twitter. More worrying however, is Taliban’s access to bio-metric databases of the Afghani people.
Read the full article at GovTech.com.
“The social-media stars who move markets”
“If you turn on CNBC, it’s all these older white guys, and it’s hard to relate to them”- that’s a direct quote from one of today’s leading stock pickers- influencer Rose Han. Young investors are flocking to social media for financial advice from influencers, many of whom have no formal training. It sounds like it may be the influencers who we will be making the money.
Read the full article at Wall Street Journal.
“It’s hard to be a moral person. Technology is making it harder”
If you have not, you can blame your smartphone or social media. As popularized in Netflix’s The Social Dilemma- these platforms and devices are capable of shortening our attention spans. But is technology also making us less empathic, less connected and overall less ethical? There is a growing number of social scientists that indicate that may be the case.
Tech & Innovation Key Contacts
Canadian Technology Constituents
High-Growth Canadian SaaS – Ceridian, Descartes, Dialogue, Docebo, Kinaxis, Lightspeed, Magnet Forensics, Shopify, Thinkific
Large Cap Canadian Tech – Altus, Blackberry, CGI, Constellation Software, Converge Technologies, Dye and Durham, Enghouse, Evertz Technologies, Nuvei, OpenText, Real Matters, Softchoice
Mid Cap Canadian Tech – Absolute Software, Calian, Celestica, Computer Modelling Group, Farmers Edge, Sierra Wireless, TECSYS, WeCommerce
Small Cap Canadian Tech – Alithya, Baylin Tech, BBTV, Blackline Safety, Kneat, MindBeacon, Optiva, Pivotree, Quarterhill, Sangoma, Sylogist, Terago, Vecima, Vitalhub
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