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‘Supply-side bubble’ wallops some B.C. unicorns as legacy players prove profitable

Profitability hasn't staved off plunging market caps for some major tech players on West Coast
Telus, which saw profit climb from $1.3 billion to $1.7 billion over its past two fiscal years, plans to invest $70 billion in building out its network infrastructure across Canada | Chung Chow, BIV

Maybe unicorns really are a myth.

An explosion of tech startups with valuations of at least $1 billion flooded B.C.’s tech ecosystem during the first two years of the pandemic as central banks sought to spur the economy via cheap capital.

And for Brent Holliday, the old adage in business circles of “in a hurricane, even turkeys fly” soon began unfolding in real time.

“There was so much capital that shifted towards tech,” said the CEO of Vancouver-based Garibaldi Capital Advisors Ltd., which provides mergers and acquisitions (M&A) and capital-raising advisory services to tech companies. “You could see a supply-side bubble coming a mile away. There was just too much money.”

After enjoying buoyant growth, big valuations and sizeable market capitalizations, large swaths of B.C. tech companies have spent much of 2022 returning to reality amid revenue misfires, sinking share prices and mass layoffs. But some unicorns and legacy tech players have proven consistently profitable and look poised to weather a potential economic downturn.

The market caps for all three of the publicly traded unicorns to emerge from B.C. during the pandemic have fallen significantly since the start of the year.

Shares in online education and training platform Thinkific Labs Inc. (TSX:THNC) traded as high as US$18.50 in June 2021 before falling to $1.56 in late November. Its market cap now sits at $122 million after starting at more than $1 billion.

Copperleaf Technologies Inc.’s (TSX:CPLF) shares debuted at more than $24 in October 2021 for a market cap of $1.3 billion. As of late November, its shares were trading at just over $4 for a market cap of $290 million.

Each company’s losses are in the tens of millions of dollars through 2022’s first three quarters. Thinkific was among the first tech companies to begin mass layoffs in B.C. earlier this year, and Judi Hess, who led Copperleaf to unicorn status last year as its CEO, announced in September that she would transition out of the top job and serve as vice-chairwoman of the board by the start of 2023.

But there have been some major winners among both unicorns and the broader tech sector in B.C., with profits going towards everything from paying out dividends to investing in infrastructure.

AbCellera Biologics Inc. (Nasdaq:ABCL)

AbCellera kicked off B.C.’s unicorn frenzy in late 2020 with a blockbuster initial public offering that raised US$555.5 million. It’s best known for specializing in antibody discovery and partnering up with American pharmaceutical giant Eli Lilly and Co. (NYSE:LLY) on a COVID-19 treatment.

Since then, shares have come back down to Earth, trading at US$14 as of late November compared with US$61 two years ago.

Its market cap has fallen from US$5.3 billion to US$4 billion since December 2020. Profit, though, has been rising steadily.

AbCellera generated US$119 million and US$153 million in net earnings in fiscal 2020 and fiscal 2021, respectively. Through the first three quarters of fiscal 2022, it has generated US$270 million in net earnings.

The company is investing in major infrastructure projects, breaking ground last year on a campus in Vancouver’s Mount Pleasant neighbourhood. The new headquarters will encompass two buildings totalling nearly 400,000 square feet. Another 130,000-square-foot bio-manufacturing facility is being built three kilometres to the east – an effort estimated to cost up to $250 million.

“By committing to building here, this is going to have ripple effects in the ecosystem,” Murray McCutcheon, AbCellera’s senior vice-president of corporate development, told BIV in September.

He likened the potential behind setting up an anchor of AbCellera’s size in Vancouver with how Cambridge, Massachusetts, and South San Francisco have been able to attract and expand life sciences companies within their ecosystems.

Telus Corp. (TSX:T)

Net income for the Vancouver-based telecom giant surged 35 per cent between fiscal 2020 and 2021, growing from $1.3 billion to $1.7 billion, as demand swelled for everything from bandwidth for video calls to telemedicine offerings from subsidiary Telus Health.

Last year it ponied up $1.95 billion to acquire 5G spectrum licences from the feds.

And this past spring Telus earmarked $70 billion towards filling out its network infrastructure across the country over the next four years. Telus said the latter investment would create 5,500 jobs in B.C. with about $17.5 billion set to be spent in the company’s home province.

More recently, Telus closed its $2.3 billion acquisition of human resources provider LifeWorks Inc. in September.

“I'd say the acquisition provides Telus Health with significantly enhanced scale and meaningful acceleration of growth profile on a global basis,” Telus Health chief operating officer Michael Dingle told BIV.

And in a call with investors earlier this month, CEO Darren Entwistle revealed the company would be increasing its year-over-year dividends by 7.2 per cent.

“This now represents over $17 billion in dividends since 2004,” he said.

Ritchie Bros. Auctioneers Inc. (TSX:RBA)

The Burnaby-based company specializing in online auctions for heavy machinery saw shares surge through the course of the pandemic, going from $41 in March 2020 to $72 as of late November for a market cap of $8 billion, as e-commerce became the norm.

Ritchie Bros. generated net income of US$170 million and US$152 million, respectively, in fiscal 2020 and 2021. Net income through 2022’s first three quarters hit US$274 million – more than double what it was during the same period one year ago.

The company has been on an acquisition spree during the pandemic – one that has garnered pushback from regulators and some investors.

Its first target was U.S. data intelligence firm Rouse Services LLC, which it bought for US$275 million in October 2020 before spending US$175 million for Connecticut-based SmartEquip Inc., which specializes in helping companies acquire equipment parts for large fleets and managing equipment services.

CEO Ann Fandozzi vowed last spring to continue hunting for companies to buy after British regulators put the kybosh on a £775 million ($1.2 billion) deal to acquire Euro Auctions UK Ltd.

Last month Ritchie Bros. announced its intent to acquire American auto retailer IAA Inc. (NYSE: IAA) in a deal worth US$7.3 billion, including US$1 billion of IAA’s debt.

Ancora Holdings Group LLC, which owns four per cent of IAA’s outstanding shares, called the deal “flawed and rushed” in a letter sent to IAA’s board. Ancora said it believes IAA could likely fetch a better price with more time and effort.

Representatives working on behalf of Ritchie Bros. and IAA did not respond to inquiries from BIV.

The downturn

“Valuations got silly,” Holliday said, referring to the broader global tech sector.

Public markets started to turn on major American tech companies in March, with shares falling as much as 75 per cent in some cases.

“And then by June, they're like, ‘OK, this isn't a blip,’” he said, adding belt-tightening really began in earnest over the summer and has continued into the fall with mass layoffs becoming more common.

Holliday said it’s going to be tougher for direct-to-consumer tech firms to navigate any economic downtown in the new year as customers cut their own personal spending.

On the flip side, it will be tougher for companies to cut spending on enterprise-facing software now that these b2b products have become so ingrained in daily operations ranging from billing to human resources.

“Companies can't afford to ditch tech. They can't,” Holliday said.

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