Revenues Up for Data Communications Co. After Acquisition

Print and marketing services company DATA Communications Management Corp. (DCM:TSX; DCMDF:OTCQX) reported Q1 2023 revenues were up 9.8% or CA$6.8 million over the same quarter in 2022 for total revenues of CA$76.1 million.

The company's gross profit accelerated 16.3% or CA$3.3 million for a total of CA$23.7 million, and gross profit as a percentage of revenues grew from 29.3% to 31.1% during that period.

The results do not include R.R. Donnelley & Sons' Canadian operations, Moore Canada Corp., which DCM closed its acquisition of last month. The union is expected to almost double the company's revenue.

"During the first quarter, we were competitors," Chief Financial Officer James Lorimer said of DCM and Moore Canada during a conference call on the results Thursday. "Now that we're collaborators, we're really excited about the opportunities to grow the combined business. We will be reporting in the second quarter a consolidated picture and the reporting for Moore Canada will be effective April 24."

"DCM anticipates that this deal will establish a long-term, sustainable enterprise that caters to Canadian and U.S. customers," wrote Chris Thompson of eResearch.

The former RRD subsidiary provides print and related services to thousands of customers across Canada and had a revenue of about CA$250 million in 2022 and 1,000 employees.

Analyst Chris Thompson of eResearch said that the companies have complementary operating models.

"The consolidated firm is poised to offer enhanced value and innovation to its customers, while DCM anticipates that this deal will establish a long-term, sustainable enterprise that caters to Canadian and U.S. customers," Thompson has written, maintaining a Buy rating on the stock with a one-year price target of CA$4.50 per share.

The new company would have about CA$520 million in annual sales, an expanded customer base serving more than 400 enterprise clients, and an enhanced product portfolio, DCM said.

The Catalyst: Client List Includes 'Virtually Every Large Co. In Canada'

DCM said there were no restructuring expenses or one-time costs, other than the CA$6.1 million related to the acquisition of Moore Canada.

The purchase price was CA$130.8 million cash through revolving credit and floating rate bridge facilities from a Canadian-chartered bank and a new CA$50 million fixed-rate credit facility from Fiera Private Debt, the company said.

Included in the purchase are three sites owned by RRD with an implied net value of about CA$30 million. DCM said it had entered a sale and lease-back arrangement for one of the sites and expects to realize net proceeds of about CA$23 million that will be used to substantially repay the bank bridge facility.

DCM President and Chief Executive Officer Richard Kellam said during the conference call that the combined companies will have expanded product offerings, improved execution capabilities, and increased speed to market.

"And I can tell you that we (have) come together very, very fast as organization," Kellam said. "We were very well prepared for day one, thanks to all the work we were doing with … Boston Consulting Group to help us get prepared, as well as how well our teams have kind of leaned into the program or into the acquisition."

"We end up with a company that's projected to have sales of more than CA$500 million a year. And its list of clients includes virtually every large company in Canada," Zeret said. "It would be harder to find a company it doesn't deal with."

Mark Zeret, chief strategist of the Teraz Fund at Spartan Fund Management, said he likes DCM because of its rapidly expanding digital segment. Its "digital first" strategy enhances its traditional paper-based business by managing digital assets that often connect to its paper products.

"We end up with a company that's projected to have sales of more than CA$500 million a year. And its list of clients includes virtually every large company in Canada," Zeret said. "It would be harder to find a company it doesn't deal with."

Analyst: Sectors Set to Grow

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.

Its clients are in many industries, including financial services, health care, emerging markets, retail, non-profits, energy, hospitality, and transportation.

The tech-enabled marketing and digital asset management (DAM) sectors are forecasted to grow annually by 15% and 21%, respectively, Thompson said. DAM services generated only 1.3% of the company's revenue in 2020.

But "with the proliferation of video and digital content, the total DAM addressable market is forecasted to reach US$6 billion by 2025; thus, there is plenty of upside revenue potential," Thompson wrote.

Ownership and Share Structure

Management and insiders own about 45% of DCM, including a share program that gives employees close to 4% ownership.

Top insider shareholders include Director Michael Sifton with 10.2% or 4.5 million shares, Board Vice Chairman Greg Cochrane with 7.43% or 3.28 million shares, Chairman of the Board J.R. Kingsley Ward with 5.54% or 2.44 million shares, and the CEO Kellam with 1.67% or 0.74 million shares, according to Reuters.

According to the company, the rest, 55%, is retail. Reuters lists KST Industries Inc. as the top shareholder in the company overall, with 11.69% or 5.15 million shares.

The company is covered by Noel Atkinson of Clarus Securities and Chris Thompson of eResearch. Newsletter writer Clive Maund also covers the stock. 

It has a market cap of CA$123.82 million with about 44 million shares outstanding and about 29 million shares free-floating. It trades in the 52-week range of CA$3.81 and CA$1.01.

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