Printing and marketing services company Data Communications Management Corp. (DCM:TSX; DCMDF:OTCQX) posted revenues of CA$68.1 million for the second quarter, surpassing Clarus Securities’ forecast of CA$58 million.
“Q2 is normally the seasonally weakest quarter, but revenues were almost in line Q/o/Q with the seasonally strong Q1/22 result,” analyst Noel Atkinson wrote for Clarus in an updated research note on Wednesday. “(Adjusted) EBITDA of (CA$9.5 million) was also a big beat versus our (CA$6 million) estimate and actually slightly ticked up Q/o/Q from Q1.”
Clarus increased its 2022 and 2023 estimates for the company due to the “monster” results and “management’s expectation for business momentum to continue at least through the end of 2022 as post-COVID normalization continues.”
Atkinson reiterated his Buy rating on the stock and raised the target from CA$2.50 to CA$3.
“We continue to expect enterprise subscription revenues from DCM’s new digital asset management cloud offering to begin in H2/22e,” Atkinson wrote.
“Q2 is normally the seasonally weakest quarter, but revenues were almost in line Q/o/Q with the seasonally strong Q1/22 result.”
—Clarus Securities analyst Noel Atkinson
DCM helps companies with branding, communications, and logistics, and provides customer loyalty programs, data and content management, location-specific marketing, labels and asset tracking, multimedia campaign management, and workflow management.
Atkinson said the stock continues to trade at a “substantial discount to its peer group, even though the underlying business is enjoying a strong post-COVID recovery and leverage is modest.”
Normalization of post-COVID traffic for retail and financial services companies is driving more marketing spending, which drove the increase, Atkinson wrote. The company also has a lot of inventory in stock to offset supply chain disruptions.
The company had CA$10 million in new contracts in Q2, on top of the CA$12 million from Q1.
Gross margin of 30% exceeded Clarus’ 29.2% estimate and was up from 29.3% in Q1. The company reported that it was starting to pass through input cost increases and was raising prices for one-off projects.
The digital asset management (DAM) enterprise cloud solution and related technology services pipeline remained above CA$10 million of annual recurring revenue with more than 50 existing clients in the pipeline.
The first DAM-related revenues could occur in the second half of 2022, Atkinson wrote. Overall tech-enabled subscription services and fees more than doubled to CA$2.4 million in Q2 from CA$1.1 million in Q1.
“While the numbers are still small, DCM is focused on driving its pure digital revenues as a means of increasing gross profit, expanding its service offering to expand beyond print outputs, and to leverage one of the most impressive and comprehensive corporate and government client bases in Canada,” Atkinson wrote.
Clarus would consider revisiting its target multiple if DCM can further capitalize on its digital solutions.
“DCM shares offer exposure to solid revenue growth, one of the largest and most diversified corporate client bases in Canada, some inflation protection via contractually-permitted input cost passthroughs, and further potential torque if the Company gets traction with new high-margin subscription-based enterprise cloud offerings,” Atkinson stated.
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Disclosures for Clarus Securities, Data Communications Management, Aug. 10, 2022
J.R. Kingsley Ward, a director of the Company, is a director of the parent company of Clarus Securities Inc.
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