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Created By Cambium | Read the whole conversation
Some nice movement of late. This is a very overlooked stock. I agree with the 25p target.
I have become interested in dlm, too,
early days but could be a winner imo
Just completed my write-up on DOTD.
Click the link for access to it on TMF & I'll reproduce edited version in post below.
http://boards.fool.co.uk/share-idea-dotdigital-dotd-digital-powerhouse-12471874.aspx
Regards,
GHF
dotDigital (DOTD) - Digital Marketing Powerhouse.
I've produced a fairly comprehensive write-up on the company and happy to invite comment.
For those wishing to cut to the chase, I’ve listed the pro’s and con’s – all IMHO - at the foot of this post.
Having profited in 2011 when their UK peer Smartfocus (STF) was the subject of a 61% bid premium, I believe that dotDigital exhibit a more comprehensive offering and greater growth potential than STF. It is profitable and growing at a lick. In 2011 they produced Full year results ahead of forecast with turnover +49%, operating profits +68%, EPS +75% with strong cash generation exhibited. Importantly recurring revenues were c. 65% of group revenue.
As I’ve intimated, their peer Smartfocus was recently acquired and I’ve documented the other mouth watering take-out valuations in the sector.
What do they do?
dotDigital is a technology-enabled software development company selling digital media solutions to client businesses predominately in the UK.
Ehh? What does that mean?
Well, a better way may is to explain that dotDigital are benefitting from the explosive growth in email and internet usage which has prompted a marked increase in the marketing and selling of products online, as I’m sure we are all aware. With consumers spending more and more time online, investment in marketing has moved away from traditional media areas such as newspapers, radio and television and onto laptops, smartphones and tablets.
dotDigital have developed digital marketing technology that addresses numerous different markets. They have a specific focus on email marketing through their main product known as “dotMailer” which is the fastest growing UK company in this space.
I’ll discuss the company products later (see Background) but quick synopsis of their main revenue streams are;
• E-mail marketing
• Search engine optimisation (SEO) & pay-per-click (PPC)
• Ecommerce
• Website design
• Managed services.
Interested? Read on.
Market Data
dotDigital- EPIC: DOTD
http://www.dotdigitalgroup.com/
Presentations accessed here
http://www.dotdigitalgroup.com/constitutional-documents/presentations/
Price 10.0p
Shares in issue 274,972,000
Market cap £27.5m
(AIM Listed)
NMS 10,000
52-week 7.13p Low
10.25p High p
Major Shareholders %
BlackRock Inc 9.61
Peter Simmonds (CEO and FD) 7.26
Legal & General Group PLC 6.98
BlackRock Smaller Companies Trust 3.74
Christopher Potts 3.64
Ian Taylor (COO) 19.59
Simon Bird (CTO) 16.68
Newedge Group SA 11.42
Total 78.92%
Financials
The shares have only been listed on AIM for a year and underwent a share consolidation while listed on PLUS markets. I’ve found it difficult to reconcile previous earnings and rather than spend a disproportionate time attempting to normalise earnings and look through historic reports, share issues, etc, I feel it more beneficial to list Profit Before Tax (PBT) and provide links to the latest Interim and Full year results to provide a flavour of where the company has been and more importantly, where it’s going.
PBT
2007 £0.3m
2008 £0.75m
2009 £0.9m
2010 £1.4m
2011 £2.2m normalised (*see note on IFRS treatment of deferred consideration in 2011 results listed below which flattered PTP)
Quick run through of Interim & Full year results.
2010 Interims – 31st Dec 2010 (while still listed on PLUS)
http://www.dotdigitalgroup.com/includes/documents/cm_docs/2011/d/dotdigital-final_2010sw.pdf
Key Highlights
• Revenues increased by 48% (From £2.7m to £4.1m)
• Profits after tax increased by 48% (From £520k to £771k)
• Strong growth in customer numbers (700 customers added)
• Earnings per share up 50%
2011 Preliminary Results – 30th June 2011
http://www.investegate.co.uk/Article.aspx?id=201110130700160930Q
2011 Highlights
• Turnover & Profits ahead of market expectations
• Turnover up 49% to £8.95m (2010: £6.01m)
• Operating Profit up 68% to £2.30m (2010: £1.38m) before exceptional and one off items
• PBT of £3.3m (* includes a one off P&L credit of £1.13m relating to a revised estimate of the final Netcallidus purchase consideration as prescribed by IFRS 3)
• Cash £2.6m up from £1.3m
• Considerable investment in hardware and product R&D
• Continued strong growth in new client acquisition
• 1,470 new customers added in the period
Outlook
"The market for the Company's products and services continues to remain buoyant despite the world economic crisis. Moreover, the growth in the number of customers remains unabated as they continue to embrace the power of digital marketing.
"With a growing customer base we plan to focus on cross-selling our integrated suite of digital marketing products and services to existing customers. Evidence thus far demonstrates that this is a very cost effective way to grow sales and we expect this trend to continue.
"Our cash position remains strong, even after the acquisition of Netcallidus and we expect the business to continue to be cash generative. Because of this we believe we are well placed to continue to invest in hardware, research and development and further acquisitions.
"Brand recognition of the Group's products continues to grow and through this strong awareness, combined with the customer testimonials, increased marketing activity and continuously improving products will position the business well in securing new clients in the future.
"We look forward to the new financial year with confidence, although remaining aware that the overall economic situation may cause some clients and potential new clients to defer decisions or ease back on marketing investment."
2011 Interim Trading Update – 31st Dec 2011 – released 9th January 2012
http://www.investegate.co.uk/Article.aspx?id=201201090700441827V
“The Group continues its excellent growth with revenues for the period to 31 December 2011 increasing by circa 30% compared to the same period in 2010.
This strong revenue growth was driven across all areas of the business with a 37% increase from e-mail marketing activities; 25% from search marketing; 57% for managed services despite a 9% decline in agency project work.
dotMailer, the Group's e-mail marketing business, continues to demonstrate strong growth in client acquisition adding 831 new clients in the six month period to 31 December 2011 compared to 693 in the same period last year.
The Group also witnessed a continued increase in the size of average monthly invoices of approximately 5%; an encouraging trend and a demonstration of dotDigital's maintained competitive position. “
Interim results will be released mid-February 2012.
Forecasts
On the back of the January trading update, broker Charles Stanley upgraded forecasts EPS forecasts by 23.7% from 0.59p to 0.73p for 2012 which equates to a PBT upgrade of £500k to £2.7m and 2013 forecasts by 19% and PBT upgrade of £300k.
06/2012
PTP £2.7m
EPS 0.73p
PER 13.7
06/2013
PTP £3.5m
EPS 0.90p (+19%)
PER 11.1
06/2014
PTP £4.2m
EPS 1.07p (+19%)
PER 9.3
Background – Brief History & recent developments
dotDigital was founded in 1999 and joined the PLUS market in 2009 via a reverse listing.
Originally a penny share they underwent a 1 v 5 consolidation while listed on PLUS (January 2011) with share price consolidating to 6.875p.
The shares listed on AIM in March 2011 providing the company with a market capitalisation as at Admission of £21 million based on the middle market price of 7.875p per share.
Their main products;
“dotMailer” which is the fastest growing UK company in this space and was ranked 3rd in revenue terms at the beginning of 2011. Given the sterling growth they indicated via a recent trading statement (revenue growth in email marketing +37%) then I reckon they will now have assumed the 2nd placed ranking and should have delivered revenue c. £6.3million during 2011 (see table via link below)
http://www.nmamarketingservicesguide.co.uk/sector.php?section_id=4
The Company is enjoying fantastic levels of organic growth, with client numbers increasing at an average rate of 139 per month (up from 116 per month the previous year) with average monthly spend also increasing. Its customer list now numbers over 4,700.
Search engine optimisation is also a growth area that dotDigital service through “dotSearch”. This basically ensures that a Google search will successfully return a higher ranking. Again, the January trading update indicated that this area had observed revenue growth in this area of 25% during H1 2012.
Next up is “dotCommerce”, an e-commerce platform that ensures companies have a developed ecommerce offering and again, the trading update indicated that the company had experienced 57% revenue growth in this area during H1 2012.
They are busy developing a number of other innovative products that are close to moving into commercialisation and for example include the forthcoming roll out of a market survey product called “dotSurvey” which will rival the US based “Survey Monkey”.
In May 2010 dotDigital acquired Netcallidus a search business for an initial sum of £1m cash and a deferred consideration of £2.9m in a mixture of cash (40%) and equity (60%). However, it would appear that Netcallidus did not meet the growth expectations mooted by the earn out arrangement which mean that 2011 results were flattered by an exceptional credit, with a reduction of the estimated total deferred consideration by a sum of £1.1m and in accordance with the IFRS 3 shown as finance income in the consolidated income statement.
Profits will again be flattered this year (2012) due to a further exceptional credit following the IFRS 3 treatment of the Netcallidus acquisition. A final deferred consideration of £1.2m was pencilled in (see Page 51 of the 2011 Annual Report) but in November 2011 dotDigital made a final cash settlement of £170k to the vendors taking care of all outstanding deferred consideration which again will result in an exceptional credit of just over £1m this year per IFRS 3.
The company have made a substantial investment in their infrastructure during 2011 (well documented in 2011 results) acquiring key employees and IT and although they are seeking acquisitions, most of the focus is on organic growth.
Peers acquired at mouth-watering premiums
It is worth noting that companies in this space command steep valuations and this also translates into high take out premiums as I’ve evidenced below;
• IBM acquired Unica
http://www.reuters.com/article/idUSTRE67C23Z20100813
Cash offer at 120% premium to Unica’s share price (valuing company at $480m) and 4x forecast revenues for FY2010
• Francisco Partners acquired Emailvision
http://capnote.com/?p=554
Cash offer for 59% of share capital at a 35% premium to Emailvision’s share price(valuing company Eur 83m)
• Pitney Bowes acquired Portrait Software (was AIM listed EPIC:PST)
http://www.investegate.co.uk/Article.aspx?id=201006100705063796N
Cash offer at 35% premium to Portrait’s share price (valuing company at £44.4m) and on an E/V/ sales multiple of 2.7 times.
• Emailvision then acquired Smartfocus (was AIM listed EPIC:STF)
http://www.investegate.co.uk/Article.aspx?id=201104110700146491E
Cash offer at a 61% premium to Smartfocus’s share price (valuing company at £25.3m) and 2 x revenues or, and I like this, at 31 x 2011 forecast earnings. Eeek !!!
• SDL acquired Alterian in December 2011 (was AIM listed EPIC:ALN)
http://www.investegate.co.uk/Article.aspx?id=201112020700162415T
Cash offer at a 73% premium (valuing company at £68m) and at x 1.8 revenues or 19 x EBITDA.
Each of these deals have been priced at a multiple of sales and substantial premiums to the prevailing share prices, but dotDigital differs in the case of the UK acquisitions in the list as it delivers higher margins and profitability than it’s former UK peers.
…those all important Pro’s & Con’s
Pros
• Strong balance sheet - cash generative with net cash
• Bullish trading – Broker increased EPS forecasts +23% for current year following January’s trading statement.
• Profitable growth – PBT increased from £0.3m in 2007 to £2.3m in 2011.
• “dotMailer” - Fastest growing UK email marketing company (UK’s 2nd largest in revenue terms). Gross margin 80%. Over 4,700 clients.
• Recurring revenue strength – 2011 Full Year results indicated that 65% recurring out of total revenue.
• R&D expensed as incurred rather than capitalised and flattering profits as we see with many tech companies
• Client wins – Win-rate for new business increasing (+20% on previous year) and size of clients larger.
• Increased client spend – Average client spend increasing from £220 per client per month to £240. Target of £260 for 2013.
• Cross selling opportunities – “dotSurvey” and “dotShop” under development and can be bolted onto their “dotMailer” product.
• Management hold c. 43% of equity so performance closely aligned to shareholders
• Potential as an acquisition target – Listed as a pro given the level of acquisition activity in this sector & premiums commanded (as documented in the write-up)
Cons
• Technology becoming obsolete – Always a concern for any technology company & requirement to continually innovate
• Computer server failure / hosting issues – Group spreads risk by running multiple servers in multiple locations.
• E-mail marketing spam regulations – Although “dotMailer” acts as a data processor it is reliant on clients complying with EU or US anti-spam regulations. It monitors closely compliance rates, but again risk to reputation if client breaches.
• Retention of employees – Seem well incentivised, but still a risk.
• Competitive sector – just have to look at the number of recent acquisitions of peers to confirm this.
I always love how my pros always outweigh the cons by some margin.
(Note to self – get those rose tinted specs off ;-)
Conclusion
Hopefully this write-up will provide a few links & background information to any investor that wishes to pursue further research.
I firmly believe that dotDigital have a dynamic management team and are operating in a number of growth areas. As indicated in the write-up, they have delivered consistent growth in PBT since 2007. Their 2011 results came in ahead of expectations and a recent trading update also prompted the house brokers to ratchet up forecasts further.
They are clearly providing a product in demand with “dotMailer” delivering increased client wins and client spend, providing an excellent 80% gross margin and 65% recurring revenue stream. We can expect further product bolt-on and cross selling opportunities to accelerate growth.
Having read considerable literature and viewed a number of their presentations I am left with an opinion that the management team have well incentivised staff (average age of the 100 or so employees…..only 26 years!!!) and appear ready and able to develop further revenue streams.
At the current mid price of 10p they are on a current PER 14 which appears about right at this moment in time given their growth to-date, future prospects and rating of peers. They have invested a considerable amount this year in attracting key personnel and improving their IT infrastructure. Earnings were originally forecast to dip in light of this investment but given their strong trading they are now forecast to increase EPS this year, with the EPS forecasts recently receiving a 23% upgrade.
I think they will leave these upgraded brokers forecasts behind and continue the trend of exceeding expectations. As their broker notes, dotDigital’s products have all been developed internally and are intuitive while delivering high levels of functionality. So they appear to have “the product” while the management team are keen to ensure that they have high levels of customer support in place to ensure satisfaction with the product. Simples!
The shares are tightly held and if they continue with the strong momentum they currently exhibit in the development and role-out of new products then I happen to believe that they will deliver results exceeding those increased forecasts, which would see the share price appreciate considerably. That is if they remain out the clutches from a would-be suitor.
The write-up is intended to stimulate research and no investment advice is intended.
Disclosure
I have built a modest holding in DOTD.
Kind regards,
GHF
Tweeted By glasshalfull | Retweet
Fantastic post, GHF. Thanks for sharing. The chart looks perfectly set for further breakout, too!
Very good write up GHF. Sums up the case very comprehensively. What attracted me was:
1. Very strong growth and the likelihood of them exceeding forecasts - when I bought in from last August, my feeling was that the forecasts were way too low.
2. High take out prices for similar companies.
3. The obvious one that the SP significantly undervalued the company.
4. Absence of counterindications - the only thing that was a negative for me was that the price to sales ratio was a bit high, but not outrageously so.
Hopefully you will have an audience for your excellent summary on the Fool boards. I think at present this stock does not have high awareness amongst investors but I would expect that will change in time.
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