Print and marketing services company Data Communications Management Corp. (DCM:TSX; DCMDF:OTCQX) announced its revenues went up 74.7% in the second quarter YoY, growth driven mostly by the company's purchase of competitor R.R. Donnelley & Sons' Canadian operations, Moore Canada Corp., in the second quarter.
Revenue for Q2 2023 was up CA$50.9 million to CA$119 million. Gross profit went up 56.7% YoY, or CA$11.6 million, for a total of CA$32 million.
"Gross profit as a percentage of revenue for the second quarter of 2023 exceeded our expectations," said President and Chief Executive Officer Richard Kellam. "We are very optimistic we will deliver on our revenue plan and of exceeding our targeted 5% annual revenue growth rate."
The company's stock was up 5.1% early Friday afternoon after the news. Clarus Securities analyst Noel Atkinson, who has a Buy rating on the stock, raised his target price per share from CA$5 to CA$5.50 after the company's revenue beat his CA$110 million forecast by CA$9 million, calling it a "big Q2 beat" for the company.
In the first quarter, DCM reported revenues were up 9.8% over the same quarter, and its gross profit accelerated by 16.3%. But the Moore acquisition was not included in those numbers.
"We had been initially quite cautious about RRDC's potential contribution in Q2, given that acquired businesses can have some risk of customer loss in the immediate aftermath of a deal," Atkinson wrote Friday. "However, management noted that they are seeing little to no merger-related churn in the RRDC enterprise client base, and in fact are finding 'more opportunities than skeletons' in the RRDC business unit."
DCM did see one-time adjustments of CA$3.8 million related to acquisition and integration costs for Moore and restructuring costs of $2.7 million for the quarter.
"Some of these things are going to take a little bit of heavy lifting," said Chief Financial Officer James Lorimer during a company webcast after the release of the earnings.
The Catalyst: Millions in Synergy Savings Expected
The company said it closed the acquisition of Moore on April 24. The second quarter results include one week of April and the months of May and June with the combined companies — so not quite a full quarter.
Carus Securities analyst Noel Atkinson, who has a Buy rating on the stock, raised his target price per share from CA$5 to CA$5.50 after the company's revenue beat his CA$110 million forecast by CA$9 million, calling it a "big Q2 beat" for the company.
Because of Moore's lower average gross margins, the gross profit margin for the entire company was 26.9% for the second quarter of 2023 vs. 30% for the second quarter of 2022. The company said planned synergies between DCM's and Moore's operations should improve those numbers.
Lorimer said CA$25 million to CA$30 million of savings are expected over the next 24 months, "roughly about a third of those by the end of the year."
Also, during the webcast, Kellam said on the first day of the combined company, they conducted sessions with sales teams on how to work together.
"We have not lost any clients," Kellam said.
An Important Milestone
In the first quarter, DCM reported revenues were up 9.8% over the same quarter, and its gross profit accelerated by 16.3%. But the Moore acquisition was not included in those numbers.
The acquisition is "an important milestone" for the company, noted analyst Chris Thompson of eResearch Corp. in a June 14 research note.
The acquisition is "an important milestone" for the company, noted analyst Chris Thompson of eResearch Corp. in a June 14 research note.
It provides "an opportunity to build a better and much bigger business with a larger presence in the Canadian market," wrote Thompson, whose one-year price target on the stock is CA$6.90.
"DCM plans to accelerate its growth by capitalizing on an expanded range of products and services, better execution capabilities, and improved time-to-market for new offerings," Thompson wrote.
'Exposure to Solid Revenue Growth'
To round out the Q2 2023 results, DCM said adjusted EBITDA increased 48.6% compared to 2022 and was CA$13.8 million or 11.6% of revenue vs. CA$9.3 million 13.7% in the same quarter last year.
DCM said its total net debt at the end of the quarter was CA$93.6 million, down more than 30% since closing the Moore acquisition.
The purchase price of CA$130.8 million cash for Moore came 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 were three sites owned by Moore with an implied net value of about CA$30 million. DCM said it had closed a sale and lease-back arrangement for one of the sites for CA$23.1 million.
The company also raised CA$26.1 million in gross proceeds from a brokered private placement of about 8.7 million shares at CA$3 per share.
Atkinson has written that the company has been "trying to balance the timing of merger integration efforts with cash flow."
"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 high-margin subscription-based enterprise cloud offerings under development," wrote Atkinson.
Companies Have 'Overlapping Facilities'
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 has said.
DCM and MCC have "overlapping facilities" that would benefit from consolidation, Thompson wrote.
Streetwise Ownership Overview*
Data Communications Management Corp. (DCM:TSX; DCMDF:OTCQX)
"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," he wrote.
Ownership and Share Structure
Management and insiders own 31% of DCM, including a share program that gives employees close to 3% ownership.
Top insider shareholders include Director Michael Sifton with 9.2%, Board Vice Chairman Greg Cochrane with 6.3%, Chairman of the Board J.R. Kingsley Ward with 4.4%, and CEO Kellam with 1.4%, according to the company.
The rest, about 69%, is retail. KST Industries Inc. is the top shareholder in the company overall, with 9.4%.
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$154.66 million with about 55 million shares outstanding. It trades in the 52-week range of CA$3.81 and CA$1.16.
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- Data Communications Management Corp. is a billboard sponsor of Streetwise Reports and pays SWR a monthly sponsorship fee between US$4,000 and US$5,000.
- Steve Sobek wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee.
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