Great explanation, thanks!

Very helpful insights @Trancer

I recently engaged with data#3 as a potential customer with a small, unique project utilising AI or another solution. I have to say I was both happy and impressed with how their various teams put the proposal together and worked collaboratively to service us. So as a potential customer but also a shareholder IRL, it all looked good to me.

@Trancer really helpful, so I’m thinking MSFT are re directing the effort of their distributors rather than reducing the pie, the distributors need to adjust to the changes to be ok . Thanks again

@Solvetheriddle If anything they’re increasing the pie. They’ve got AWS, GCP and others hot on their heels. The marketing / partnership spend is being distributed more broadly, and across service providers that can implement and provide managed services around their technology. The resellers that can adjust their business model to capture this whilst seeking diversification with other partners will do better here.

With Microsoft it’s all about driving consumption. Getting sticky with customers, driving a land and expand motion and getting them into the cloud is what the Account Executives are paid on.

@Trancer

Thanks for sharing. I would imagine becoming a cloud service provider means more work and thus potentially lower margin

When you think about it that way that sort of makes sense why Data#3 put out the lower guidance.

Oh definitely. It will impact business. Margin / cost-plus on software transactions falls almost uninterrupted to the bottom line… delivering services is less profitable. A lot of work will be required to fill the gap.

Industry has known for years that this day would come. The writing was on the wall five years ago. Some will be more prepared than others. SoftwareOne’s move is interesting.

My thinking is companies like Data#3 transitioning to be a cloud provider need to find ways to achieve scale rapidly in order to maintain earnings and win more business.

There is already the ingredients there with existing relationships and strong management added to the fact this isn't a small cap. Just need to go out and execute.

Yeah I have added a bit extra to my position this morning. Interesting that they have added EPS downgrades of 6-8% overall.

Isn't the downgrade just more or less taking 3% off the GP and working it through to the bottom line? Gross profit last year was $270m, 3% of that is $8.1m, take that off NPBT of ~$62.1m and you get $54m NPBT which is $37.8m NPAT v reported FY24 NPAT of $43.3. The reduction is ~13%. It's possible that UBS has just halved that rate to downgrade FY25 EPS given the change kicks in 1 Jan 2025. The SP reaction seems reasonable given where DTL trades, imo.

I wouldn't rely on companies always marking things as price sensitive when they should be. One of my first ever trading "strategies" back when I was at uni was to look for announcements marked non-PS that were in fact PS and then wait for the market to catch up.

That's just the change to their forecasts - could have been other factors re UBS. I don't have access to the full report so can't say.

Thanks @UlladullaDave for the different perspective and it totally makes sense now that you fleshed it out further. Microsoft reseller makes up 66% of the NPAT, which would likely be why UBS is forecasting 8% instead of the 13% reduction that you referred to. Services was already a low margin offering so this does squeeze things a bit more from that aspect.

That said, the changes will increase the benefit their service side of the business, which is already a higher margin offering and where Data#3 is pivoting towards. The announcement also indicates that Infrastructure solutions will not be impacted by the reseller changes.

When you look at the adjusted revenue that contributes to NPAT, the software solutions aspect is such a small part of the overall contribution, and is why I think that the correction is an overstatement.

From my perspective, DTL has a strong track record of finding ways to deliver growth in changing markets, and I believe them when they say that they will still be able to meet their earnings projections for the FY. Pre tax revenue from on their announcement will be an increase in the mid single digit range from previous FY results.

Totally biased position as a shareholder, but my 2c on this announcement.

Images Sourced from DTL Annual Report and Presentation.

Throw me into the bias camp as well @SudMav as a current investor in SM & IRL portfolios. Have done some buying IRL earlier this morning @ $6.60/share. I agree that this seems a massive overcorrection for a business that continues to deliver!!

Microsoft reseller makes up 66% of the NPAT, which would likely be why UBS is forecasting 8% instead of the 13% reduction that you referred to. Services was already a low margin offering so this does squeeze things a bit more from that aspect.

Hi @SudMav

No I don't think it has anything to do with MSFT reseller NPAT contributions and they have just taken disclosed GP decline, inferred the NPAT affect for the year and divided by two then done the same to FY25 with whatever opex adjustments the saw fit to add.

When you look at the adjusted revenue that contributes to NPAT, the software solutions aspect is such a small part of the overall contribution, and is why I think that the correction is an overstatement.

DTL has always been a business where gross profit matters more than revenue. You are comparing apples with oranges using that table. Under revenue recognition adjustments introduced this year, DTL is now treated as the agent rather than as the principal on that software revenue and they are only recognising the commission they earn – in effect, the gross margin is near 100%. That is why in yesterday's downgrade they spoke in the adjustment to gross profit not revenue – so analysts, investors etc wouldn't have to try and parse what the share of principal v agent revenue was and how to adjust for it.

@UlladullaDave

That's easier said than done.

Unless you have a super advanced ASX announcement platform which can search non price sensitive that should be price sensitive!

Most platforms have a tick for price sensitive only. If unticked you get both just to be clear meaning you need to trawl through everything

It seems like an overreaction to me too, though I can’t quite see a catalyst that will boost sentiment in a hurry.

I could be wrong, but I think you can take your time to buy/add here.

Thanks @UlladullaDave

It appears that my interpretation of 'in isolation' within this announcement might have been a bit wrong on this one, and your 3% figures seem to be pretty reasonable on that basis.

I have had another go and my figures worked out to around the $41.6m NPAT and gets back to around the $43m NPAT mark once you factor in growth over the next few years. This uses the NPAT margin of 15.9% from last year (which doesn't account for the loss in margin from Microsoft, but factors in the increase in services revenue of late) and results in the same valuation as UBS being between 7-7.25.

As for the revenue recognition model, I thought the commentary in Note 3 meant that they have already made the changes to the reporting to align with the new AASB 15 requirements and. If this is the case, the it was already considered with the non-IFRS figures in the image provided, and the reseller business only accounted for $63m in Revenue for this work once you excluded the agent fees and commissions.

Pretty much confirms my fear that this is like a mining stock dressed up as an IT stock.

I'll just hold for now, not willing to add to my holding.

I bet this will be out of the ASX 200 soon so I will wait till then.

And I'll give an arm and a leg if someone can show me how to see non-price sensitive announcements.

Maybe chuck a pound of my flesh on top also and pretty much anything else I own!

As an example of what I mean, see below - first screen - Price sensitive only

Second screen, Untick Price sensitive and you get DOUBLE the amount of content to wade through - I really have better things to do...

Sorry I digress.

As for the revenue recognition model, I thought the commentary in Note 3 meant that they have already made the changes to the reporting to align with the new AASB 15 requirements and. If this is the case, the it was already considered with the non-IFRS figures in the image provided, and the reseller business only accounted for $63m in Revenue for this work once you excluded the agent fees and commissions.

It doesn't matter how they recognise revenue for the purpose of understanding what's going on under the hood. Why do you think they chose to report the potential impact on gross profit not revenue? It's because there is a huge variation in the gross margin based on how they account for various revenue items. The $63m is only the commission revenue not revenue once commissions are excluded.

@edgescape, you might need to find a subscription service that offers this - or a broker (or ask @Strawman to put this feature on your Xmas list)?

I've not tried this one but it looks like Market Index offer this kind of thing for free - doesn't say Price Sensitive only so this could work, and seems like they'll e-mail you when your watchlist stocks announce to the ASX.

Otherwise - Commsec only do Price Sensitive Alerts, not sure about other brokers - but that would probably be the most cost effective way - open an account with one who can do this?

Actually I just checked and SelfWealth seem to do this but don't seem to have an e-mail alert option.

You'd need to add stocks under "Watchlist" and view this curated list to see what's announced for your stocks

Let me know how you get on and I'll DM you for where to send me your arm and leg - I'll take the non-dominant sides for each limb please!

We looked at this a few years ago. The license from the ASX alone is $25k pa, and then you need an upgraded feed from a 3rd party data provider. So, at the time, it was something like $40k a year to get ASX announcements.

Wait, isn't this public information? Yes, yes it is.

All I'll say is, it must be nice to have monopolistic powers and a friendly regulator in your pocket.

@Slomo @Strawman

Think I need to clarify

I want to see only non price sensitive announcements only (minus price sensitive).

Market index forces you to see all announcements if you don't press the price sensitive button if you see my screenshot.

@edgescape, ah I see.

Sounds more bespoke than something you'll be able to get off the shelf.