Tech companies are starting to profit from cost-cutting. But can they rev up growth again?

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Fast-growing Canadian technology companies that slashed spending last year to focus on the bottom line are starting to hit their profit targets.

On Tuesday, Vancouver-based Thinkific Labs Inc. THNC-T reported that, for the first time since going public, it had generated positive earnings before interest, taxes, depreciation and amortization and further adjustments for items including share-based compensation and related payroll taxes. The measure, known as “adjusted EBITDA,” is not a recognized accounting standard, but the company earned US$700,000 by that yardstick in the third quarter ended Sept 30, up from negative US$5.7-million in the same period last year. The surprise achievement came one to two quarters ahead of company forecasts and makes Thinkific the third company, after Docebo Inc. DCBO-T last year and Lightspeed Commerce Inc. LSPD-T last week, to go into the black on adjusted EBITDA. Online learning company D2L Inc. is expected to follow imminently.

Thinkific, which provides a platform for entrepreneurs and businesses to create and run online courses, also generated $3.5-million in cash from operations and managed to increase cash and cash equivalents by almost $2-million since the end of the second quarter, to US$86.6-million.

“We did the difficult things early on” by cutting the work force by 20 per cent in March, 2022, and another 21 per cent in January, chief executive officer Greg Smith said in an interview. “Acting quickly paid off for us.”

It paid off on the markets Wednesday as the company’s chronically underperforming stock surged more than 30 per cent at one point on the Toronto Stock Exchange before closing up 11 per cent on the day.

Thinkific’s profitable turn came just days after Montreal-based commerce software vendor Lightspeed reported that it had achieved positive adjusted EBITDA for the first time as a public company in its second quarter ended Sept. 30, likewise igniting its stock.

Other Canadian publicly traded software companies have been shrinking their operating losses after pledging to accelerate their march to profitability. On Monday, Quebec City corporate search technology vendor Coveo Solutions Inc. CVO-T said its adjusted operating loss shrank to US$1-million in its second quarter from US$4.7-million a year earlier. Coveo also said that, after posting two straight quarters of positive operating cash flows, it was ahead of its commitment to achieve positive operating cash flow in its fiscal year starting next April 1.

Kitchener-based D2L DTOL-T has forecast it will generate adjusted EBITDA of between US$6-million and US$8-million this fiscal year, up from negative US$2.9-million last year. Other Canadian public companies, including Blackline Safety Corp. BLN-T and Q4 Inc. QFOR-T, have also been rapidly shrinking their losses.

Meanwhile, online training software vendor Docebo is ahead of most of its Canadian peers after reaching operating profitability several quarters ago.

Now the key question is when these companies will accelerate their revenue growth. This month marks two years since the start of the tech downturn. It hit stocks of publicly traded companies, then spread to private markets, particularly those that had soared during the pandemic and had spent freely to chase revenue growth while eschewing profitability.

Tech companies globally have cut more than 410,000 jobs since the start of last year in an effort to control costs and gird for a prolonged period of high inflation and interest rates and economic uncertainty. Many companies have failed, have been sold for meagre amounts or have undergone severe recapitalizations as funding dried up. Every one of the 20 tech companies that went public on the TSX from mid-2020 to late 2021 has traded below its issue price at some point, and Thinkific shares are still more than 75 per cent below their $13 issue price in April, 2021.

The muted economic conditions have hit sales cycles and slowed revenue growth for enterprise software companies. Meanwhile, many like Shopify Inc. SHOP-T, which benefited from a surge in business during the sheltering-at-home phase of the pandemic, have left behind the tougher year-over-year results that followed as growth rates subsided.

That leaves companies like Thinkific in pursuit of a tricky balance: trying to revive growth, which has typically interested investors, while staying in the black. Subscription software companies are typically considered top of the class by achieving a combined revenue growth rate plus operating profit margin of 40 – for example, a revenue expansion of 30 per cent plus an adjusted EBITDA margin of 10. Reaching that “rule of 40″ is a key driver for Lightspeed, and the company will shift spending to increasing merchant counts this fiscal year to pursue that goal, CEO Jean Paul Chauvet promised last year.

The rule of 40 still matters to investors, said ATB Financial analyst Martin Toner. “Investors are open-minded to depressed margins in the short term if you are growing revenue quickly enough. When that goes away, people question the whole concept. There are big total addressable markets for a lot of these companies and still potential for a long duration of revenue growth. That’s why revenue growth will always be the focus in this space.”

That’s something Thinkific needs to prove out, he said. After steadily increasing its paying customer count, Thinkific’s growth stopped cold in the first quarter of 2022 at 33,300 customers. That number remained unchanged for two quarters and has only nudged up to 34,300. Revenue growth has likewise shrunk substantially, reaching 13 per cent year-over-year in the most recent quarter, when Thinkific brought in US$15-million. The company has forecast fourth-quarter revenue will grow by less than 12 per cent, but it “needs to grow revenue more than it needs to print double-digit profit margins,” Mr. Toner said. “We haven’t seen much evidence of progress.”

Mr. Smith said new product initiatives, including the launch of artificial intelligence and commerce tools and an enhanced offering for larger customers, generated much brisker sales in the quarter and would improve overall revenue growth going forward. “We will do everything we can to accelerate it and expect to accelerate it,” he said. Meanwhile, the company has also initiated a stock buyback. “We believe the value of the company is underappreciated so we’re putting our money behind that,” he added.