Data Communications Co.'s Revenues Nearly Double YoY

Data Communications Management Corp. (DCM:TSX; DCMDF:OTCQX) announced that its third-quarter revenues were up 93.6% to CA$122.7 million compared to the same quarter in 2022 as the company continued to see momentum from its purchase of a competitor in the second quarter.

The print and marketing services company saw its gross profit jump by 52.4% to US$30.3 million from the third quarter of last year, and adjusted EBITDA went up 28.2% to US$11.8 million.

The company purchased R.R. Donnelley & Sons' Canadian operations, Moore Canada Corp., in the second quarter for CA$130.8 million cash.

"We understand the summer was a bit soft, but September came back strongly; management also noted that there was some seasonal product mix effect," Clarus Securities analyst Noel Atkinson wrote in an updated research note. He maintained a Buy rating on the stock with a one-year price target of CA$5.50, which would be a 100% return based on the stock's CA$2.75 price Monday afternoon.

"We continue to expect DCM to become a cash flow machine in 2025e once the cost synergies are realized," Clarus Securities analyst Noel Atkinson wrote.

"Nonetheless, gross profit margin of 24.7% was above our 24.4% outlook," Atkinson wrote.

DCM President and Chief Executive Officer Richard Kellam said, "Our post-merger initiatives are progressing ahead of plan, and given our success to date driving savings and efficiency improvements, we are revising our guidance for expected total annualized synergies to a range between CA$30 and CA$35 million over the next 18 to 24 months, from a previous range of CA$25 to CA$30 million. We are excited about the opportunities in front of us to build on our strong start as a combined company focusing on driving growth and value creation."

Atkinson wrote that the company had better-than-expected gross margins during the quarter.

"We continue to expect DCM to become a cash flow machine in 2025e once the cost synergies are realized," he wrote.

The Catalyst: 'An Important Milestone'

The company said it closed the acquisition of Moore on April 24. Second quarter results included one week of April and the months of May and June with the combined companies — not quite a full quarter.

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 the planned synergies between DCM's and Moore's operations should improve 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 company said it had a total debt of CA$95.5 million at the end of Q3 2023, down 32% since the April close of the merger.

This follows the company's second-quarter revenues, which had risen 74.7% CA$50.9 million YoY to CA$119 million. Gross profit went up 56.7% during that period, or CA$11.6 million, for a total of CA$32 million.

"The combined business delivered solid performance-building value with existing customers, securing new client wins and optimizing strategic revenue opportunities," Kellam noted.

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."

Clients Are in Many Industries

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 had "overlapping facilities" that benefitted from consolidation, Thompson wrote.

"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$151.31 million with about 55 million shares outstanding. It trades in the 52-week range of CA$3.81 and CA$1.28.

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