Marketing agency saw revenue increase to record levels due to investment in staff and tech
Companies: Digital Globe Services
Marketing agency Digital Globe Services (AIM: DGS), reported a mixed set of FY 2016 Results this morning. On the one hand revenue rose to record levels, but on the other hand bad debtors and a revenue reversal drove a greater than expected loss.
Revenues rose 19% to $47.8m, a record for the company. This was driven largely by an increase in contact centre agent staff by 20% and investment in technology, according to management. The majority of the revenue growth has come from business outside DGS's core media and telecoms offering.
While the revenue boost is encouraging, it appears to have been at zero margins as gross profit remained flat year-on-year at $13.2m. The Digital Marketing sector is a competitive area and there is currently a race for market share. As a result, the strategy of getting your foot in the door with new clients on a low margin basis in order to cross-sell and improve margins in the future makes a lot of sense.
The mixed part of the results relates to the provisions for bad debt and a reversal in previously booked revenues. DGS reported a net loss of $4.9m, of which $3.3m related to ageing accounts receivables being written off, and $0.8m related to a revenue reversal "due to change in revenue recognition policy for merchant activity". These write-offs should be one-off in nature but it is disappointing to have receivables of that magnitude being written off.
The dividend has been paused leaving just the interim dividend distributed in 2016. However, looking at the balance sheet, the company looks to be healthy with net debt close to zero and a decent working capital credit line.
Panmure Gordon's Jonathan Helliwell published an update this morning following the Results. He flags the revenue reversal as the driver of the earnings miss, confirming it was not expected by the market:
"Results for the year to June were in line with July’s guidance on revenues (up 19% to $47.7m, compared to guidance of around $48m) but even lower on EBITDA ($2.5m, compared to guidance of $3.1m and our previous forecast for the year of $4.4m). The outcome included a $0.8m charge related to a change in revenue recognition policy on merchant processing."
Mr Helliwell remains optimistic on DGS recovering margin and sees FY16 as an investment for earnings growth in FY17:
"Going forwards, DGS remains confident that the investments made in FY16 should drive good revenue growth and a recovery in margins back towards historic levels (mid-teens)...
DGS remains cash generative, soundly financed (net debt $0.2m) ... Valuation is very low even on these reduced estimates."
Shares opened down c.4% as the market were surprised by the lower than expected earnings.
Jeff Cox, CEO of DGS commented:
"This financial year has been characterised by significant investment in both our technology and our people including growing our contact centre agent staff by 20%. Consequently we have recorded our highest ever revenue at $47.8M and increased our revenue from verticals outside of the Company's core telecoms and media clients to $19.2M from $15.3M in FY15. Furthermore, we are delighted to have won our first major European telecoms customer which we expect to start generating revenue for us in FY17.
The consequence of the investments we made this year is a compression in margins causing our Adjusted EBITDA to drop to $2.5M from $3.0M in FY15. We expect the progress made in FY16 to continue into FY17 with a recovery in our margins as our investments bear fruit. We are confident in achieving continued growth and a significant increase in profitability in FY17."
