LON:DOTD | Dotdigital - Revenue Growth Not What It Seems?

25th Feb '21 by HHR

5 comments 471 reads

Apologies if this point has been made elsewhere but I couldn't find any previous discussion on Stocko. I'm keen to get feedback if you think I'm not being fair or have overlooked something.

To me the revenue growth reported today in dotd's interims is nowhere near as impressive as it seems and neither is it 'organic' as claimed. By my analysis revenue is up only 9.9% - a long way short of the 22% reported.

In Nov 2017 Dotdigital acquired Comapi, an exclusively UK focussed SMS marketing tool with break even profitability achieved on £7.8m revenue.

However the acquisition didn't work out, and in May 2019 dotd announced it would 'discontinue' Comapi's 'non-core' revenues.

So far so good, although it was disappointing that dotd's long awaited second acquisition had gone the same way as its first (Netcallidus was also closed a couple of years after acquisition).

However things then started to get a little murky...... almost 2 years on from the announcement of closure, Comapi is still going strong, contributing £1.55m of 'discontinuing' revenue in today's interims (down from £4m last year). At the same time as Comapi's revenue has been winding down, the core dotd platform has experienced a series of much needed 'expectation beating', revenue upgrades driven by - you guessed it - low margin, UK focussed, SMS revenue.

Essentially dotd has acquired a chunk of low margin revenue, parked it in 'discontinuing operations' and is now gradually moving it back into 'continuing operations' thus giving the illusion of better than expected core revenue growth.

It's not just these interims that have been enhanced by this paper based movement of existing revenue - last year's finals reported growth of 12% when the actual figure was only 7%.

I hold dotd and I have made a good return over the years but a forward PE of 42 for a company growing at mid-single digits on deteriorating margins looks expensive to me especially when you throw in the track record of failed acquisitions and patchy success in expanding overseas.

Note, Stocko's figures for dotd exclude the Comapi 'discontinued' revenue.

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jonkingston

25th Feb '21

If it's of any interest, Chris Boxall from Fundamental Asset Management discussed his thoughts about Dotdigital here -

He's quite bullish on the company.

ls2g08

Very interesting point you a raising here. Surprising no Analysts are picking this up.

smegster

HRR, I can't see any reference to £1.55m (2020) or £4m (2019) Comapi revenue in the interim announcement

Back solving the number I think I can see how you get to your calculated growth of 9.9% (you added the £1.55m and £4m back to the revenue numbers). Is this correct?

Companies growth 22% (28.2m H1 2021) ( 23.1m H1 2020:)

Your calculated growth 9.9% (28.2+1.55 = 29.776 H1 2021) ( £23.1 +4 m= 27.1 H1 2020)

Now this is where I get abit confused, you seem be saying that dotDigital (LON:DOTD) has been moving discontinued revenue over to continued revenues but that doesn't seem to be the case (maybe the £1.55m and £4m refers to the continued operation part of Comapi revenue which is already included in the continued revenues?)

(I am a holder of dotDigital (LON:DOTD) )

HHR

Hello Smegster,

Apologies - when I reread my post I realised it's not very clear.

If you search todays interims for 'Geographical Revenue and Results' you will see that total group revenue was £29,748. Subtracting from that figure the £28.2m headline number reported at the top of the report gives £1.55m which is the discontinued Comapi revenue.

If you look at last years interims and finals you will see a similar approach to the reporting of Comapi. Dotd admits in the report and in it's upgrade announcements that it is UK SMS based revenue that is boosting performance, i.e. precisely the area Comapi specialised in.

The fact that this 'discontinued' revenue is not obvious in the announcement itself is one of the things that gives me concern about the situation and makes me suspect that dotd is trying to paint an artificially rosey picture.

Hope that answers your point but please let me know if I am missing something.

HHR, your post now makes more sense.

The "Geographical Revenue and Results" section seem to include all revenue (continued and discontinued) while the income statement only includes continued revenue above the line (with losses from the discontinued operation shown below the profit line)

This way of presentation will has two impacts
- it makes the continued revenue growth higher (which could be consider as a way of making the accounts look more rosy)
- It also makes overall revenues look smaller (as discounted revenue are not added to the top line so this would make the accounts look less rosy).

Personally I always prefer to look at the change in operating cash flows and free cash flow to better judge a companies performance rather that income statement numbers.

dotDigital (LON:DOTD) still seems to be generating decent cashflow (it's cash balance keep on going up), whether this is sufficient to justify the high share prices is a question we have to judge for ourselves

dotdigital - Revenue growth not what it seems?

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HHR

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