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Dotdigital's recurring revenues race higher

Recurring revenue charges from product functionality increased by 156%
Dotdigital's recurring revenues race higher
The core business continues to perform strongly

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Dotdigital's (LON:DOTD) US foray is progressing well, the email marketing company revealed in its half-year results.

The group's revenue in the six months to the end of 2015 was up 29% to £12.9mln from £10.0mln in the same period of 2014, with a 91% increase in revenues from the US to $2.1mln catching the eye.

The company's focus on winning higher value clients, as well as growth in recurring spend from existing clients plus higher levels of client retention driven by clients signing up longer term contracts has led to strong organic growth, dotdigital said. This is evident by the average monthly billing from all clients increasing by 31% from £400 per month to £525, it added.

Recurring monthly revenue from metered usage of the dotmailer software-as-a-service (SaaS) rose by 35% from a year earlier to £10.0mln.

Profit before tax surged to £3.29mln from £2.53mln in the second half of 2014, while net cash generated from operating activities was 139% higher this time round at £3.3mln, leaving the company with a strong net cash position of £14.8mln at the end of 2015.

The first half of 2016 will see a keen focus on developing a robust channel and reseller pipeline especially in support of the company's geographic ambitions in the USA and the Asia-Pacific region.

“Based on the strong performance at the half year to 31 December 2015, the growing demand for marketing automation, the newly released product features and investment strategy, the board remains confident of delivering strong growth, underlying profitability and increasing shareholder value for this year,” said Milan Patel, the chief financial officer who is acting as chief executive officer (CEO) of dotdigital while CEO Simone Barratt recovers from surgery.

“The investments were slower than expected in 15/16 and therefore will lead to an increased EBITDA in the current year but will see a marginally slower revenue growth in 16/17. The long term outlook for dotdigital remains positive and we look forward to providing further progress at the time of our year end trading update in July 2016," Patel added.

Speaking via webcam at a press briefing, Barratt expanded on the reasons for the slower-than-expected investment, saying it related to the company's efforts to hire a Channel Manager in the US to handle indirect sales.

“Our expertise is not in indirect [sales]. We found one good candidate, but they dropped out, and then we found another, and they dropped out, at which point the penny dropped. Channel managers in the US are more interested in pre-IPO propositions, so we switched to plan B, which involved hiring consultants, and in fact we think this might be a better way to address the market,” Barratt said.

For his part, Patel said he took the decision to rein in marketing spend in the US until the company had properly analysed the return on investment.

“I did not want to spend marketing dollars for the sake of it,” he said, adding that one of the lessons learnt as a UK company used to treating a country as a homogeneous block was the need for marketing in the US to be localised.

The commentary about marginally slower growth in 2016/17 knocked the shares, which were down 5.9% at 45.42p in lunchtime trading. The shares are up 23% over the last year.

Broker Shore Capital said the half-year results were largely as flagged in the January trading statement with a few notable exceptions: the US division performed slightly better than expected, and underlying earnings (EBITDA) are now expected to be up slightly year-on-year, compared to market expectations of a 1.8% decline.

“Additionally, revenue growth for next year is expected to be 'marginally slower,' which seems sensible to be cautious about at this point as it was looking a little bit high to us at 27.7%. We also note a lower tax rate of 9.6% versus 13.9% during the same period last year, slightly up from the second half of last year,” Shore's Peter McNally said.

“While valuation for dotDigital tends to drive some investors away, we believe it is fairly valued at 17.4x EV [enterprise value]/EBITDA, and this metric drops to 12.2x in 2017. With high recurring revenue and growth metrics that most companies dream of, the company appears to executing well and maintaining high levels of growth. While we note the revenue growth for next year has been trimmed slightly, it appears to still have much new business to go for and we see potential for further growth,” McNally said.

Meanwhile, house broker finnCap has upped its earnings per share (EPS) forecast for the current year by 5% to 1.72p but trimmed next year's EPS estimate by 8% to 2.28p, which is still a 33% year-on-year advance.

It has introduced forecasts for 2018 for the first time, going for EPS of 2.78p.

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