Data Communications Co. Maintains Momentum in Q1

In releasing its financial results for the first quarter, Data Communications Management Corp. (DCM:TSX; DCMDF:OTCQX) announced its revenues and gross profit had increased considerably over the first quarter of 2023.

Q1 2024 revenues of CA$129.3 million were up 69.9%, or CA$76.1 million, quarter-over-quarter. Gross profit increased 57.9%, or CA$13.7 million, during the same time period to CA$37.3 million, the company said.

The company is coming off of a "transformative" year when DCM completed the acquisition of Moore Canada Corp. (MCC) and integrated the companies' operations and organizations.

"Our focus in the first quarter and for the balance of the year is on delivering our post-acquisition integration commitments," said President and Chief Executive Officer Richard Kellam. "These priorities include consolidating our plant network, integrating legacy MCC systems, completing our restructuring plans, focusing on profitable growth, and realizing total annualized post-acquisition synergies of between (CA)$30 and (CA)$35 million within the next year."

Analyst Noel Atkinson of Clarus Securities wrote in an updated research note on May 14 that the company's gross margin jumped to 28.9% "thanks to seasonal product mix and operating efficiencies from the ongoing MCC merger integration."

"We had not expected the gross margin to get back towards 29% before Q1/25e, and this bodes well for potential gross margins once the integration is fully completed early next year," wrote Atkinson.

Atkinson maintained his Buy rating on the stock with a target price of CA$5.50 per share and wrote that the company was having "solid contract-win momentum" to start the year.

"Tech-enabled subscriptions, hardware and services revenue were above forecast," Atkinson wrote. "There were 10 new client wins and 30 new wins with existing clients in Q1, which together provided (CA)$14MM of new revenue to underpin growth for the rest of 2024e."

The Catalyst: Improving Margins

According to DCM, selling, general, and administrative (SG&A) expenses were CA$25.4 million, or 19.6% of revenues in Q1 2024, compared to 18.1% of revenues in Q1 2023. Higher relative SG&A expenses in the quarter primarily related to a one-time consulting project.

Adjusted EBITDA was CA$18.7 million, an increase of 46.2% over the prior year. That amount represented 14.4% of revenues, compared to 16.8% for the same time period in 2023, "consistent with our planned objectives to improve Adjusted EBITDA margins to more than 14%," the company said.

Analyst Noel Atkinson of Clarus Securities wrote in an updated research note on May 14 that the company's gross margin jumped to 28.9% "thanks to seasonal product mix and operating efficiencies from the ongoing MCC merger integration."

Net income rose from a loss of CA$2.4 million to CA$1.5 million quarter-over-quarter, and adjusted net income was CA$4.9 million compared to CA$5.9 million last year.

DCM noted that net debt was down 46.1%, or CA$66.9 million, since the closing of the MCC acquisition to CA$78.3 million at the end of Q1 2024.

The company said it ended the quarter with a net debt to trailing 12 months Adjusted EBITDA (net of lease payments) ratio of 1.8x.

"We continue to expect net debt to drop to under (CA)$20MM by the end of 2025e as DCM should become a free cash flow machine once the MCC merger integration program is complete," Atkinson with Clarus wrote.

Analyst Nick Corcoran of Acumen Capital wrote in an updated research report that the company "delivered strong competitive wins in the quarter."

"The Q1/24 results demonstrate progress on improving margins," Corcoran wrote. "We look to the balance of the year for evidence of organic growth."

Exposure to 'Solid Revenue Growth'

Headquartered in Ontario, Canada, Data Communications Management provides digital and print solutions to help large enterprises simplify their marketing and communications operations and workflows, according to its website.

Whenever possible, DCM employs digital options before print ones. Its approach, technologies, and end-to-end services allow its clients to get more done efficiently and easily. The companies DCM works with span numerous sectors, including financial services, retail, healthcare, energy, other regulated industries, and the public sector.

As a testament to its performance in 2023, DCM earned a place on the 2024 OTCQX Best 50 List of Top Performing Companies, as noted in a news release. It ranked fifth.

Data Communications' business falls into at least two sectors, which, according to research-based reports, are expanding rapidly: marketing technology, or "martech," and digital asset management, or DAM.

The global martech industry is forecasted to experience "unprecedented growth" in the coming years, increasing in value by 21% to US$489 billion this year alone, up from US$403 billion in 2023, according to a 2024 report by The Business Research Co. 

As for the global DAM market, The Business Research Co. predicted its size will reach US$12.29 billion in 2028, expanding at a 16.8% compound annual growth rate. The field of DAM comprises software-based solutions for storing, retrieving, and using digital assets.

"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 pass-throughs, and further potential torque if the company gets traction with new higher-margin recurring-revenue digital offerings (digital signage, digital asset management, etc.) now entering the market," Atkinson wrote. "There is also increasing evidence of DCM building an economic moat within the Canadian commercial printing sector after the MCC acquisition."

Ownership and Share Structure

According to Reuters, insiders own around 23% of Data Communications Management. The top insider owners are Director Michael Sifton with 9.16%, Board Vice Chairman Greg Cochrane with 6.35%, Director J.R. Ward with 4.38%, and Chief Executive Officer Richard Kellam with 1.4%.

Institutions own nearly 7% of the company's shares. Of these, the top holders are CI Global Asset Management with 2.73% and BMO Asset Management with 2.45%.

Retail ownership accounts for the remaining 70% interest.  

The company's market cap is CA$162.32 million, and its 52-week trading range is CA$2.42−3.85 per share.

Important Disclosures:

1. Steve Sobek wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee.
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