D4t4 Solutions - Stockopedia comments3 Apr 2023 11:03
D4t4 Solutions (LON:D4T4)
Share price: 173p (-16.5% at 09.00)
Market cap: £69m
Trading update
Today’s trading update from this AIM-listed data solutions provider is unfortunately a profit warning.
D4T4 Solutions’ products are used to help companies to manage and extract insights from their customer data.
Checking back in the archives, Paul commented in December that H1 results were not very good, showing a £1.3m loss. However, the company’s results had historically had a strong H2 weighting, so this wasn’t necessarily a problem.
Contract delays: The company says that it’s encountered delays signing two contracts. One of these is with an existing banking customer, while the other is with a new customer for the company’s Celebrus system.
My guess is this may be the same contract wins announced here in November, but I should stress this is only an assumption.
D4T4’s financial year ended on 31 March, so this clearly came down to the wire.
Trading update: management says that annual recurring revenue from software and related services is expected to have risen by 14% to £16m during the year just ended. I’d imagine this should drive an increase in profit margins, although this isn’t explicitly confirmed.
The company says new wins during the second half of the year included a bank in Spain, a US healthcare organisation and an Asian insurer. A “key upsell” was also secured with a US bank client.
Revised guidance: Helpfully, the company has provided clear guidance on the financial impact of these contract delays:
FY23 Revenue: £21.5m (FY22, £24.5m, previous forecasts: £28.1m)
FY23 adjusted pre-tax profit: £3.5m (FY22: £3.3m, previous forecasts: £4.2m)
While D4T4 still looks set to deliver double-digit profit margins this year, we can see that profit growth this year is likely to be fairly minimal, compared to previous expectations.
My view: I’ve always had a fairly positive view of this business, which has a long track record of revenue growth and (mostly) double-digit profit margins:
However, profitability has weakened over the last couple of years. Management said last year that this was due to a temporary increase in sales of low-margin third-party products.
This mix was expected to improve in FY23, so I’ll be interested to see how margins have improved over the last year, perhaps driven by the higher recurring revenues.
By my estimate, today’s profit warning has left D4T4 shares trading on c.22x FY23 earnings. That seems high enough to me for now. Profit warnings often travel in company, so I’d like to see the company’s FY23 results and get some visibility on the outlook FY24 before forming a more detailed judgement.
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