Last week was certainly one to forget with Friday particularly bad for most portfolios (the FTSE-100 was down 3.5% on Friday and tech stocks were again hit – Nasdaq was down 1.7% on the day). With the war in the Ukraine continuing the economic outlook looks bleak. We already had sharply rising inflation and sanctions against Russia are driving up the price of oil and gas which is never good for the economy. As anyone who has received a utility bill of late will realise, consumers and industry are going to be hit by sharply rising prices in the next few weeks which will affect many businesses.
There was already a downward trend in the market and I expect this will continue unless peace breaks out in the Ukraine which does not look likely until Russia has achieved its objectives which might take some weeks, if ever. Taking over a country where the population is totally opposed to you is never easy, particularly when outside assistance is being provided and sanctions are biting. Ukrainians are not apparently going to accept defeat.
One of my investments which was worst hit last week was DotDigital (DOTD) but not because of the war. The company provides an “omnichannel marketing automation platform” as they call it (email and sms messaging). The share price fell by 60% after an interim announcement on Wednesday that suggested the forecasts for the second half were not going to be met. In addition the CFO and Chairman are departing (the latter on health grounds).
This is a company I have held for some years first buying at around 8p in 2011 and selling some at around 200p in 2021 when enthusiasm for technology stocks drove the price up to unsustainable levels. The price now is 58p.
The company is profitable, has no debt and lots of cash on the balance sheet and has shown steady growth so there is much that is positive about the company. But clearly the expansion of US operations on which forecasts relied has gone seriously wrong. I attended the results webinar on Friday and submitted the following question:
“Clearly one of the reasons for reduced forecasts is the disappointing figures from the USA. Why after several years has DotDigital not established itself well there? Why has the management of that region not been changed as a result? There does not seem to be anyone on the board with experience in the USA. As you are looking for a new Chairman could you please ensure that a suitable person is appointed with some knowledge of operating in the USA”. The question was not answered but there was enough information disclosed to make it clear that all was not as it should be.
A question on margins got a response that margins will be lower in the second half because marketing spend will be going up. As regards the US management issues, it was indicated that a couple of management teams had been poached by competitors offering higher salaries. Lots of money from VCs and private equity was going into competitors. It was mentioned that “customer attrition had stabilised” which was a remarkably negative comment. With this kind of product (which I use myself) where there is high recurring revenue people are generally reluctant to change platforms. They should not be losing customers! But the figures suggest they are losing some customers and gaining very few new ones in the USA.
So it would seem that after some years of trying to make a success of the US market they are back at square one with a new management team. It looks like another example of a UK business entering the USA but falling flat on its face in terms of marketing approach.
I will try and find out more next week but I have not quite given up on the company completely as yet. These issues might be minor ones if they take appropriate steps.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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