Every online interaction leaves a trace - a data point that can be collected, stored, analysed, and acted upon. It might be the way a consumer moves around an ecommerce site, the phrasing they use when leaving a review, or comments they make on social media.
Data is valuable, and in today’s digital economy data is being captured and analysed on a massive scale with companies seeking to leverage data insights to gain a competitive edge.
The complexities of data capture, data management, and the sophisticated analysis required to extract value has led to the emergence of specialist providers that can help companies manage the accumulation of data while keeping that data secure and ensuring compliance with regulations such as GDPR. This is the niche area in which AIM listed data services provider D4T4 Solutions (D4T4) operates.
MIA Ratings
Here’s the scorecard from the MIA Stock Report for D4T4 at the time of writing:
The lower quality score stands out and needs further investigation. We’ll take a closer look at this below. The remaining scores look pretty good, with the valuation and safety margin scores suggesting some recent negative sentiment. D4T4 falls into the category of AIM growth stocks, and with the AIM All Share Index down ~11% YTD any negative sentiment may simply be a result of the recent wider market correction, but we should take a look to check if there is also anything company specific contributing to these scores.
As always, the scores in this report shouldn’t be relied upon to make any investment decisions.
Quality
The detailed scorecard of quality metrics shows a strong cash position, a good Return On Capital Employed, with reasonable margins and recurring revenue. It’s pretty obvious where we need to focus our attention though. What is happening with D4T4’s revenue and margin growth? The charts below show D4T4’s revenue and operating margins for the last 5 years:
Revenue growth does indeed appear to have stalled. In FY21 revenue was ~10% lower than in FY19. In the same period the operating margin has almost halved. The effect of this on operating profit is even more pronounced, as shown in the chart below:
Let’s look at that big drop in operating margin in 2021 first. The income statement shows this was the result of modest revenue growth of ~5% combined with a 35% increase in administration expenses compared with the previous year. More than half of that expense increase can be attributed to staff costs with the remainder mostly foreign exchange related. Total employee remuneration increased by ~17% in 2021, while headcount only increased by 5%. That’s equates to a fairly substantial increase per employee in the region of 10%.
Turning to the revenue, at first glance the lack of revenue growth might suggest that sales have stalled. The majority of D4T4’s revenue is generated by the sale of software licences for its flagship data capture products sold under the Celebrus brand. Historically these licences have been sold as perpetual licences with a single upfront payment. Like many software companies, D4T4 is now transitioning to a subscription based model where revenue is collected over the term of the subscription. The recurring revenue from the new subscription based model will offer longer term stability and revenue visibility but the short term effect is that revenue that previously could have been booked under a perpetual license deal is deferred.
The lack of revenue growth appears then to be a change in the way that revenue is recognised rather than faltering sales. Chairman Peter Simmonds commented on this in the 2020 Annual Report:
…the Board is confident that had the majority of these new contracts closed on a perpetual licence basis then there would have been significant top line revenue growth in the year.
The Chairman also commented that some deals had been deferred due to contracts being redrafted to accommodate the new subscription based terms.
2021 saw a slight revenue uplift, but more revenue deferral, this time attributed to the pandemic. From the 2021 Annual Report:
…the global pandemic situation inevitably forced some customers to focus on internal challenges, resulting in some client projects and new initiatives being paused or slowed. This had a modest impact on top line growth in 2020/21.
In the last few years an increased weighting of the Celebrus products in the company’s revenue along with the transition to a subscription based model has seen recurring revenue increase, as shown in the charts below.
In their 2020 Capital Markets Day presentation the company stated that they had a target of achieving 70% recurring revenue over the next 2-3 years. Recent results suggest that it might take a little longer than that. The chart on the left above shows that the level of recurring revenue in 2021 was broadly similar to that in 2020, and the latest interim results reported a slight decline. The 2021 Annual report acknowledges that while progress in increasing recurring revenue has been made, “the pace is ultimately driven by customer requirements.” It may be proving harder to persuade clients to adopt a subscription model than the company initially anticipated.
Valuation And Safety Margin
D4T4’s valuation score of 72 is based largely on its price to earnings relative to its recent history, its sector, and other stocks in the MIA investment universe. The safety margin score of 65 is heavily weighted by D4T4’s 25% share price decline from its all time high in August last year.
The interim results released at the start of December revealed a lack of progress in growing recurring revenue, due to the loss of a client. The company did also state that “The Board is confident of ARR increasing in the second half” but the results still triggered a short lived but reasonably sharp sell off.
The share price recovered towards the end of last year only to be caught up in the general market sell off of growth stocks that has so far been the defining feature of 2022. To put D4T4’s share price decline into context, the FTSE AIM All Share peaked at roughly the same time as D4T4’s all time high last August and has since declined by ~18% compared to D4T4’s decline of ~25%. If you like to look at absolute valuations, a trailing P/E in the mid thirties means a lot of growth is still priced in to D4T4.
Outlook
Products
D4T4’s ‘Celebrus‘ branded suite of products consists of a Customer Data Platform (CDP), a newly launched (and now award winning) Fraud Data Platform (FDP), and a cloud based Customer Data Management Solution that can combine data from multiple different sources.
Both of the data platform products (CDP/FDP) focus on the collection of consumer interaction data across different digital channels (websites, apps, etc), and the creation of digital customer profiles that are made available to connected decisioning systems for analysis. The 2021 Annual Report describes the benefits of the Celebrus product suite to its clients like this:
[our customers] can collect all relevant data from every customer interaction across all digital channels in real time….enabling customer analytics, optimised customer experiences and more accurate targeted marketing, or for risk and fraud applications.
A key differentiator for D4T4 is that its products are “first party” solutions. They do not for example rely on using 3rd party cookies (like, say, Google Analytics) and all collected data is retained by the client. This keeps D4T4 on the right side of GDPR compliance. Another differentiator is D4T4’s data capture mechanism which is is protected with patents and captures all user interaction data.
Markets
The combined CDP and FDP markets are already worth tens of billions of dollars. A recent report by Juniper Research found that global spending on fraud detection and prevention platform services will grow from $9.3 billion in 2021 to more than $11.8 billion in 2025. D4T4’s 2020 Annual Report notes that the CDP market is also growing rapidly:
The Customer Data Platform (CDP) market size is projected to grow from USD 2.4 billion in 2020 to USD 10.3 billion by 2025, at a Compound Annual Growth Rate (CAGR) of 34.0%.
We may have to wait until D4T4’s transition to a subscription based licensing model fully unwinds before we can assess if revenue growth is keeping pace with the growth of the wider market.
Towards The North Star
D4T4’s strategy is based around the long term digital transformation journey that it believes enterprises are now embarking on. This journey defines the evolution of the way in which consumer data is collected and used to provide ever more personalised and instantaneous digital interactions. The ultimate destination of being able to provide real time, AI driven, one-to-one personalised interactions is what D4T4 calls the ‘North Star‘.
Strategic progress can be evidenced by the recent introduction of machine learning and natural language processing (NLP) into the Celebrus products. These features enhance the products’ capability to distil the vast amount of data that they collect into potential “marketing signals” that can be passed on to connected decisioning systems, enabling the creation of personalized content in real time.
Announcing the new features, the company said:
The value of the new NLP functionality lies in the ability for enterprises to immediately understand ‘customer sentiment’ in all digital channels including online chatbots, complaints feedback and product review forums. This speed is significant because it allows clients to make meaningful interventions ‘in the moment’ to safeguard customer relationships and reinforce their brand values.
Growth will be driven by “the proliferation of customer channels and the growth in the volume of transactions and interactions occurring online” and by the fact that the vast majority of enterprises are still in the very early stages of D4T4’s digital transformation model.
D4T4’s ‘North Star’ vision of identifying, predicting and responding to consumer behaviour at the individual level in real time has the potential to generate much bigger returns on investment for D4T4’s clients than the marketing or fraud prevention techniques currently employed by most enterprises.
The data sets required to power this kind of real time decision making are vast, requiring the collection and analysis of millions of consumer digital interactions. The online experience of the future will be built on the profiling and behavioural analysis enabled by big data. That is why big data is watching you.
This article is intended for informational purposes only. It is not a recommendation to buy or sell shares or other investments. Always do your own research before buying or selling any investment or seek professional financial advice.
MIA owns shares in D4T4 Solutions.