‘Unrealistic expectations’: D2L scales back its IPO – TheRecord.com

D2L’s founder and chief executive officer John Baker is pictured in this 2019 file photo.

By Brent DavisRecord Reporter

Fri., Oct. 29, 20212 min. read

KITCHENER — Online learning firm D2L Inc. is scaling back the size of its initial public offering, in the face of what one analyst said were “unrealistic expectations.”

The Kitchener company has dropped the offer price for its shares to $17, for gross IPO proceeds of about $150 million. That’s down from a previously announced share price of between $19 and $21, which would have raised about $200 million.

The move suggests “unrealistic expectations about the market and its willingness to accept D2L as a public company,” said Charles Plant, founder of the Narwhal Project, which tracks and advises growing tech companies.

“It’s odd, and it should be slightly embarrassing, for investment bankers to come out with a pronouncement and then fail to reach that,” he said. “Something’s going wrong there.”

Shares could begin trading on the Toronto Stock Exchange next week, under the symbol DTOL; an updated prospectus says the closing is expected to occur as early as Wednesday, and no later than Nov. 10.

Underwriters, led by TD Securities Inc. and BMO Nesbitt Burns Inc., have an over-allotment option to sell additional shares worth up to $22.5 million within 30 days of closing. Nearly $57 million of gross proceeds is earmarked to cover income tax payments related to shares distributed by an existing employee trust, and to repay a company loan.

The pace of D2L’s revenue growth may be putting some investors off, Plant said, but the company may not have many alternatives left to raise money other than going public.

A pandemic-prompted demand for online learning options saw D2L’s revenue increase 15.4 per cent in fiscal 2021, up from a 5.8 per cent increase in fiscal 2020.

“I think they’ve run out of options for venture capital,” Plant said. “That’s well below what venture capitalists are willing to invest in, in terms of growth rates.”

The six-month period ending July 31, 2021, saw a 20.4 per cent increase in revenue compared to the same period a year earlier. According to the prospectus, D2L aims to have annual revenue growth of 20 to 25 per cent by fiscal 2025.

But Plant said software companies that have gone public in the United States over the last eight years had an average annual growth rate of 60 per cent.

Looking at the three years of financial results included in the prospectus, Plant believes D2L wasn’t spending enough in certain areas.

“I think they’re a great company with a great product, but they needed substantially more spending on sales and marketing to boost that growth rate to get interest.”

D2L’s stated desire to broaden its reach in the overall education technology market bodes well, and should drive up sales and revenue growth, Plant said.

Formerly Desire2Learn, the company would be the second Waterloo Region firm to go public this year following Magnet Forensics’ TSX launch in April.