Tag: DotDigital

DotDigital Webinar, Wandisco Announcement and Immigration Laws

I watched the DotDigital (DOTD) interim results presentation on the Investor Meets Company platform this morning. I have held the shares for a number of years and have been happy with the company’s progress in general.

For the half year revenue was up 9%, with 95% being recurring. Adjusted EBITDA was slightly down but cash balance was up 24%. What are they going to do with the cash? They are looking at M&A activity.

There was a good competitive review. It is clear that the market for similar products is now quite mature so poaching from other suppliers is the name of the game and more consolidation among suppliers is likely. Their US market position is still unclear although they report “early evidence of success in the USA” after management changes and rebuilding the sales team.

It seems likely that steady growth should be achievable from more geographic expansion, more partnerships and the addition of more product features regardless of US success.

Another technology company that made a devastating announcement this morning was Wandisco (WAND). They said “The Board now expects that anticipated FY22 revenue could be as low as USD 9 million and not USD 24 million as previously reported. In addition, the Company has no confidence in its announced FY22 bookings expectations”. They blame one senior sales employee for “significant, sophisticated and potentially fraudulent irregularities with regard to received purchase orders and related revenue and bookings”. The shares have been suspended

I have looked at this share a number of times as I have a historic interest in database replication, but never acquired the shares. I can understand the need for what they sell but the accounts always looked dubious to me. Revenue very volatile and profits non-existent. I prefer to invest in relatively boring companies like DOTD with large recurring revenue based on a different business model.

On the political front an enormous amount of media coverage is on the small boat crisis and the attempts by the Government to halt illegal immigrants. These are mostly economic migrants, not people fleeing war or other disasters.

It is suggested that the proposed Government legislation would be illegal, because it contravenes the European Convention on Human Rights and the Refugee Convention. The latter was established in 1951 to help people made homeless or stateless by the Second World War and was a very positive move at the time. But it was never intended to enhance the rights of economic migrants who wish to move to a wealthier country.

I suggest that a breach of a Convention is not necessarily illegal and that the UK can withdraw from Conventions whenever it considers it necessary to do so. The country is being swamped by migrants, both legal and illegal ones.  This is putting enormous pressure on housing and social services.

For example the London Borough of Lewisham have recently published a new “Local Plan” and it reports these statistics: The population has grown by 23% over the last 20 years and is still growing rapidly. Some 46% of the residents identify as BAME heritage which rises to 76% for the school population. This shows the impact of uncontrolled immigration over the last 50 years, but the Council is still “planning for an open Lewisham”. That’s undefined but suggests that they are open to even more migration.

The BBC, as is now commonplace, spouts the views of left-wing commentators including that of a well-known footballer for no good reason. His views on football may be sound but he does not understand the problem of illegal immigrants.

Will the Government be able to halt the flow of illegal immigrants? Only if they take a very tough stance in my view.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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A Week to Forget in the Stock Market and DotDigital

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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Two High Fliers Back Down to Earth

This week saw a couple of high-flying digital automation suppliers move back into more realistic pricing levels. On Tuesday DotDigital (DOTD) announced their preliminary results for the year to June. The share price fell sharply on the day and is now down over 25%, possibly prompted by negative comments on Stockopedia.

I won’t go into detail on the issues because this blog post would otherwise be a very long one. But I did attend the results presentation on the Investor Meet Company platform this morning when some of my questions, and others, were covered.

One question raised was about the reporting of “discontinued” revenue from the Comapi business. It was stated that this was definitely closed down completely by June this year so won’t appear in future. There was also concern that SMS business was impacting revenue and profits but it was stated that it was not cannibalising email revenue. But SMS business is at lower margins and there was clearly a spike last year in SMS business (if you are signed up for NHS services you will have realised that they are now tending to use that communication channel which I find quite annoying).

There was a good review of the competitive landscape and it seems there is good growth coming via partners with “connectors” such as Magento, Shopify, Big Commerce and MS Dynamics.

In summary my comment would be that I think this is still a fundamentally sound business which can grow some more, but I would prefer to see the accounts presented in a simpler way. However the share price had grown very rapidly in the last year and in my view was overvaluing the business. It’s now at a more realistic level.

The other company whose share price has taken a big knock is GB Group (GBG). Yesterday they announced a share placing at a price of 725p to raise money to enable them to acquire a similar US business. It looks to be a sensible acquisition. But the share price was at a discount of 17% on the market price and involves substantial dilution of existing shareholders.

Again I would suggest that this has reset the share price to a more realistic level. Retail investors may be able to participate via the Primary Bid platform.  

As I hold shares in both DotDigital and GB Group, these events have not done wonders for my portfolio valuations but I had been reducing my holding in these companies (top slicing) in recent months as the valuations did seem to be departing from reality. They are now back down to earth.

The Covid epidemic has certainly driven more digitisation of processes which both companies have benefited from but the valuations of such businesses have become strained in my view. Can the growth continue at the same rate in the next couple of years? Perhaps so but that is not certain.

Readers should of course form their own view on the valuations of these businesses and not rely on my comments. But they are both key players in the automation of marketing and financial services so are well placed for the future.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Market Musings

The stock market seems to be positively benign at present, if not almost somnambulant. While certain sections of the economy have gone to hell in a handcart, the enthusiasm for technology stocks has not abated. My very diversified portfolio is up today at the time of writing by 0.4% helped by good news from Dotdigital (DOTD) today and a sudden enthusiasm for GB Group (GBG). Optimism about a more general recovery in the economy seems to be still prevalent.

It’s probably a good time to consider overall market trends with a view to adjusting portfolios for the future. It is very clear for example that the UK at least, if not the world, is heading for a “net zero” world, i.e. a world where we are not emitting any carbon which implies a very high reliance on electricity generated from wind, solar and hydroelectric sources.

Whether that can be achieved in reality, and in my lifetime, remains to be seen. Whether it is even rational, or economically justified, is also questionable. But now that the religion of zero carbon has caught on, I do not think it is wise for any individual investor to buck the trend. As with any investment fashion it’s best to jump on the bandwagon and as early as possible. So I hold no oil companies and few interests in coal miners, except where they are part of diversified mining companies who are also mining copper (essential for the new electrification) and steel (not easily replaced). But I have recently invested in “renewable infrastructure” investment companies of which there are several, and in funds that provide battery support and load smoothing systems. Wind farms and solar panels tend to generate intermittent electricity so there is a big demand for emergency sources of power.

There was a very good article by Bearbull in last weeks Investors Chronicle headlined “The Net Zero Perversion” on this subject. He commences by saying “It is surely the new paradigm – that economic recovery from the damage caused by the response to Covid-19 can only be achieved by a fundamental shift towards a zero-emissions future. This is stated as fact – that reducing greenhouse gas emissions to ‘net zero’ by 2035 will be the powerhouse of economic growth – when, of course, it’s just a contention; much like the complementary one that investing in companies that are wonderfully compliant in meeting their economic, social and governance (ESG) commitments will bring excess investment returns”.

He goes on to say, after some other comments that must have enraged the uneducated environmental enthusiasts: “Yet there is plenty of evidence that the pursuit of net zero is brimming with unintended consequences, which is what you might expect from a movement driven by a weird mixture of idealism and greed”. He points out that rewiring our homes and expanding the grid to cope with the new electricity demand might cost £450 billion, i.e. £17,000 per household. Similarly the banning of the sale of new internal combustion powered vehicles from 2035 just causes the pollution generated from the manufacture of electric vehicle power systems and associated mining activities to happen elsewhere in the world. But overall emissions might not fall.

This fog of irrationality and attacks on personal mobility via vehicles using the Covid-19 epidemic as an excuse is now happening in several London boroughs, encouraged by central Government “guidance” and funding. Roads are being closed. In the Borough of Lewisham, adjacent to where I live, road closures have caused increased traffic congestion, more air pollution and gridlock on a regular basis. There is enormous opposition as the elderly and disabled rely on vehicles to a great degree while in the last 75 years we have become totally dependent on vehicles for the provision of services (latterly for our internet deliveries). Councillors in Lewisham think they are saving the world from global warming and air pollution that is dangerous to health when they won’t have any impact on overall CO2 emissions and there is scant evidence of any danger to health – people are living longer and there is no correlation between local borough air pollution and longevity in London. Air pollution from transport has been rapidly falling while other sources (many natural ones) are ignored. Lewisham and other boroughs have partially backed down after a popular revolt but local councillors still believe in their dogma. There is a Parliamentary E-Petition on this subject which is worth signing for those who think that the policy is misguided: https://petition.parliament.uk/petitions/552306

The Bearbull article concludes with this comment which matches my opinion: “All of which means investors should preserve their scepticism. But they should also recall their purpose in investing – to make money, not to go to war with the climate change movement, however ridiculous they may see some of its follies. Sure, as consumers they should see much of the pursuit of net zero for what it is – another charge on their net income. But as investors they should see it as an opportunity to join the momentum and, at the very least, to park some of their capital in a fashionable part of the market”.

When it comes to investment, markets can be irrational for a very long time. That is surely the situation we are currently seeing with stock markets kept buoyant by a flood of cheap money and there being nowhere else to stash it. With traditional industries and businesses in decline, most of the money is going into technology growth stocks or internet shopping driven businesses such as warehousing. That trend surely cannot continue forever. But in the meantime, following market trends is my approach as ever.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Serco Charges, Unilever Trading and DotDigital AGM

I like to report on the latest evidence of fraudulent accounting just to remind folks how little one can trust the accounts of companies. I have not mentioned Serco (SRP) previously but it is now reported that two executives of the company have been charged with fraud and false accounting by the Serious Fraud Office (SFO).

The charges related to false reporting of tagging of offenders to the Ministry of Justice and the company has previously entered into a deferred prosecution agreement over the allegations which date back to 2010-2013. They agreed to pay over £20 million in fines and costs.

The two defendants deny the allegations but is it not good to see the SFO pursue such cases, even if they could do so a lot quicker! Justice has to be swift if it is to an effective deterrent.

Unilever (ULVR) provided a “Sales Update” this morning. It said business was challenging in South Asia and West Africa and as a result underlying sales growth would be “slightly below its guidance” for 2019. However it also said “earnings, margin and cash are not expected to be impacted”. There were also some negative comments about growth in 2020 which is probably what really spooked the market. Regardless the share price has been falling for most of the day and is now down 7% at the time of writing which is a pretty major shift.

I recently purchased some shares in Unilever so this is another case where I misjudged a big company probably due to relying on analysts’ forecasts. However, I did not buy many shares as it was a new holding and had already sold some of them as the share price drifted down of late. Clearly the bad news had been leaking out! I’ll wait to see where it settles and for revised analyst forecasts before deciding whether to sell the remainder or buy more.

This morning I attended the DotDigital (DOTD) Annual General Meeting. I have held shares in the company for some years and it has made steady progress. Sales last year were up 15% (including discontinued operations) at £42 million and adjusted earnings up 33% with positive cash flow. The company originally focused on an email service for use in marketing, newsletter distribution, etc, but is now a multi-channel communication service. They acquired a company called Comapi to add functionality in that area last year but decided to close down part of that business which was non-core, and a large write down of goodwill was the result.

I’ll cover some the questions from attending shareholders, which were generally good ones.

One question was about how the company plans to expand, e.g geographically. The answer is that this is generally done by dipping a toe into the water before developing the market and making significant investment. Some 30% of revenue now comes from international markets and they have appointed a General Manager in North America who starts in January.

I questioned the high losses of non-exec directors in the last year and were they looking for new ones? The answer was yes they are, and hope to appoint someone soon. Founder Tink Taylor who has been acting as interim Chairman will be stepping down although he will continue to do some consultancy work for the business.

There was a question on the use of cash on the balance sheet which is now substantial, but only 10% of market cap according to the CEO, Milan Patel. They do not intend to use it for market share purchases, other than to satisfy share options. They would prefer to invest in the business or use on acquisitions, but it does not sound like there are any short-term prospects of the latter.

A question on competition was asked and Emarsys was mentioned as a competitor in the mid-range market which is a name new to me I must admit. But there is probably a very diverse competitive landscape. I use a competitor product but only because it used to be a lot cheaper and it is always a hassle to change software as one has to learn a new user interface. These kind of products are remarkably “sticky” with customers and it was mentioned that 50% of their end-users are now “integrated” in some way which would make it even more difficult for them to change supplier.

Another question was on the large amount of capitalised development cost (£5.5 million last year, with £2.5 million of previous cost amortised which is done over 5 years). You can understand why the figure is so large if you know that they have 78 development staff which was the answer to one of my questions! Some of these are ex rocket scientists based in Byelorussia and there are some in South Africa also.

There were a couple of Brexit related questions but the answers were of no great concern. I did not pick up any issues that worried me about this business and it was generally a useful AGM.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Woodford Closure, Renishaw Trading, DotDigital Results, Accesso Technology Bids Disappearing and Probate Fees

The big news today was that the Woodford Equity Income Fund is to be wound-up after a decision by Link Fund Solutions, the fund administrator. Neil Woodford has made known his opposition to the move but it is something I have advocated for some time. Decisive action was required because a fund that nobody wants to buy into and with a name on it that puts investors off is going nowhere. Blackrock and PJT Partners will take over the fund immediately and wind it down although it seems likely to be some months before investors receive any cash return. That’s just from the liquid listed investments. Some of the illiquid or small cap holdings could take much longer and valuations are questionable. Neil Woodford surely needs to retire.

What’s the moral of this story? That investors should keep a close eye on their fund holdings and not put up with poor performance for more than a short period of time. They should not have absolute faith in star fund managers however good their past records, and they should be more sceptical about recommendations from their share platforms.

The other issues to be looked at are the EU regulations on liquidity and how Woodford ignored the rules by listing stocks in the Channel Islands. The Financial Conduct Authority does also need to tackle the problem of open-funded funds holding unlisted stocks or property.

Another favourite holding of private investors has been Renishaw (RSW) whose stock price has been falling of late. This morning a trading statement indicated a sharp fall in revenue for the first quarter. The share price is down by 11% at the time of writing. The company’s statement is full of negative phrases – “reduced demand for our products”, “challenging global macroeconomic environment” and “trading conditions are expected to remain challenging”. I am glad I sold my holding some time back. Has the market for the company’s products changed, particularly in the APAC region? I don’t know but shareholders need to ask some tough questions and perhaps it is time for a change of leadership.

Other bad news was from Accesso Technology (ACSO)  in which I still hold a few shares. This company had entered a formal sale process but it seems none of the offers received were considered good enough. The sale process is still on-going but the share price has fallen 15%.

But there was good news from DotDigital (DOTD) one of my “ten-baggers” which was first bought ten years ago. Sales and profits were ahead of expectations for the full year in a Final Results Statement. Revenues were up 19% and recurring revenues are now 86% of the total – the latter rose even higher in the first quarter of this year which “has started well” they say.

Investors Chronicle ran an article in last Friday’s edition on how to identify multibagger stocks. It focused particularly on pharmaceutical and resource stocks but these are very tricky sectors in reality. You might strike lucky with a blockbuster drug or exploration company but you can also lose a lot on failed projects. The better approach is simply to aim for companies that consistently grow revenues and profits like DotDigital. That company also meets the profile of the companies I like as documented in my recent book “Business Perspective Investing”.

DotDigital has strong IP, high customer loyalty, small transactions, diverse customers and high recurring revenue. What more do you want?

More good news from wealthy investors came as the Government announced it was to rethink the proposed change on probate fees – effectively scrap the major hike for large estates that was due to be imposed in April next year. The previous proposals generated a lot of criticism as it was seen as a new way to generate tax to go into Government coffers instead of an equitable fee to cover the cost of the work involved on larger estates.

I watched the Queen’s Speech yesterday for the first time live. The Queen has never been a great speech maker but she managed to turn what should be exciting announcements about future Government policies and programmes into a dull recital. Perhaps a change of management is required there also?

You can read her full text here: https://www.gov.uk/government/speeches/queens-speech-2019 , although there is little that might affect investors directly.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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All Change at Superdry and Intercede – Perhaps

Readers are probably aware that founder Julian Dunkerton managed to win the votes yesterday at the EGM that he requisitioned at Superdry (SDRY). The votes to appoint him and Peter Williams were won by the narrowest of margins despite proxy advisors such as ISS recommending opposition. My previous comments on events at Superdry are here: https://roliscon.blog/2019/03/12/superdry-does-it-need-a-revolution/ . It did not seem clear cut to me how shareholders should vote, but I did suggest there was a need for change.

There will certainly be that because the incumbent directors (including the CEO and CFO although that does not necessarily mean they have quit their executive positions) have all resigned from the board although some of the non-executive directors are serving out their notice. Dunkerton has been appointed interim CEO.

Perhaps the most apposite comment on the outcome was by Paul Scott in his Stockopedia blog. He said “To my mind, the suits have made a mess of running this company, so bringing back the founder seems eminently sensible to me”. However, I suggest there is still some uncertainty as to whether the Superdry fashion brand can be revived – perhaps the world has moved on and it has gone out of fashion. But Dunkerton should be able to fix some of the operational problems at least. Retailing is still a difficult sector at present so I won’t personally be rushing in to buy the stock.

Another momentous change took place at Intercede (IGP) yesterday. This company provides secure digital identities and has some very interesting technology. But for many years it has failed to turn that into profits and revenue has been also remained flat. But yesterday the company announced a large US Government order and hence they expect a “return to profitability”. This certainly surprised the market as another loss was forecast. The share price jumped 60% yesterday after it had been in long decline for several years.

I have held a small holding in the stock since 2010 (very small prior to yesterday) but I was never convinced that the company knew how to sell its technology – a common failing in UK IT companies. The former CEO and founder Richard Parris who was there for 26 years was surely part of the problem but he departed in 2018. Has the company actually learned how to make money under the new management? Perhaps, but one deal does not totally convince. One swallow does not make a spring as the old saying goes.

Even after the jump yesterday, the market cap is still not much more than one times revenue which is a lowly valuation for such a company. But investors need to be aware that the company has £4.6 million of convertible loan notes which would substantially dilute shareholders if they were converted. A company to keep an eye on I suggest, to see if it has really changed its spots.

Another surprising change yesterday was the abrupt departure of Richard Kellett-Clarke from the boards of both DotDigital (DOTD) and IDOX (IDOX) “due to private matters in his other directorships” according to the announcement from DOTD. DOTD is looking for a new Chairman. I wonder what that is about? We may find out in due course.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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