Looks like the acquisition of $DTC by Ideagen is progressing, with the market assuming the deal with likely complete based on today's announcement that the Deed has been signed.

ASX Announcement

At an acquisition price of $0.24 this deal looks very different depending on your perspective.

I held $DTC from July 2020 until June 2021, losing about half my capital when I concluded it was a cash incinerator that appeared unlikely to build a sustainable business. (Lots of historical threads on here). I got out at $0.87, and consider I dodged a bullet.

Of course, some clever (or lucky or both) souls bought shares earlier in 2023 at $0.065. Those who held are laughing all the way to the bank with a 3-bagger in less than a year. Good on ya.

$DTC annoucemed their 4C report this mornings.

Their Highlights

Cash Highlights

• Free cash flow $0.51 m vs pcp negative ($1.6m);

• Operating cashflow of $3m vs up 131% on pcp basis of $1.3m;

• 5th consecutive quarter of positive operating cashflow.

Financial Highlights

• Quarterly Revenue of $7.4m, same as prior quarter;

• EBITDA of $2.72 m, up 145% on pcp basis of $1.1m;

• EBITDA Margin of 37%, up 164% of pcp basis of 14%;

• Q4 Gross Margin 79%;

• Client churn 1.8%;

• Refinanced existing debt facilities, providing investor certainty

CF Trend Analysis

Below is my standard CF trend analysis. Note that the trendlines are plotted for the last 8Q only.

This is another former cash burner which has now successfully tackled costs to generate consistent positive Operating CF. However, the expense has been a slowing revenue growth.

My Key Takeways

$DTC appears to have succeeded in using the imperative of the changing market environment to turn from a cash burner to a cash generator. Certainly, on an operating cashflow basis, this is looking sustainable, with the 5th consecutive quarter of positive OpCF.

Topline growth is still there, looking at the 8Q trend, albeit slower than historically, and it remains to be seen what the continuing growth trajectory looks like.

Positively, churn was low, and a historical large churn event (which management excluded from their churn reporting to my irritation) is now outside the window, and so once again reported churn is a clean result.

I've historically criticised $DTC from being insufficiently focused "too many modules, too many verticals". That too seems to be improving with a reported focus on mining and civil construction.

On valuation, $DTC is on a modest 1.2 EV/EBITDA. Recently SP has been knocked down as it began to take on debt to see it through the "transformation" without having to raise cash.

If the market believes that the reported strong prospects ahead of it will convert into contracts, we could see $DTC re-rate quite quickly, now that it truly is at the inflection point.

I'm more sceptical, and want to see continued movement on the top line, while costs and investment levels are contained. I've no doubt I'll miss some of the re-rate, but Im not a trader and the long term thesis sin't yet restored.

All credit to management - they've done what I criticised them for not doing before - getting the firm to proftable growth.

Disc: Not held in RL and SM (formerly held)

I am posting below my 4C analysis for $DTC. 11 months ago I removed $DTC from my watch list on concerns about i) lack of strategic focus in its investment phase ii) cash burn with no evidence of emerging positive operating economics iii) better opportunities elsewhere. (Exited IRL on 28-06-21 taking a c. 50% loss but have never held on SM.)

@Chagsy's “Bull Case” post last week got my attention, so I took another look at the most recent results and also the recent contract announcements. I wont repeat info from @Chagsy's post, as it is a good summary. My reason for writing this post is that I always remain alert to the probability that I was wrong!

So, first the 4C analysis (below). The last Q is undoubtedly positive, but 1Q does not for me give evidence of a positive trend in operating economics, despite management assertions. However, should this continue for another couple of quarters, then looking at the more recent period (6Qs), you could argue the corner has been turned, which is what Christian Damstra is saying.

So, what of the future prospects? The 3 recently announced deals are all interesting:

·      North East Link Project – Work Force Management modules

·      Barrick – eLearning modules

·      Capstone Copper – multiple modules across the whole Enterprise Project Platform

Collectively, in the context of annual revenues of $30m, the minimum spend in these deals is not material, but they do hold the prospect of significant upside if the clients find value in them and roll them out. (I’ve spent a good part of my career working on mega-projects and have had a lot of exposure to procurement of systems on them. There’s a big difference between signing up a customer and getting a strong system implementation, partly because mega-projects are themselves such chaotic environments.)

Furthermore, the 8^th June announcement of “Update on new customer wins and material contracts” involved updates on items that were not actually material in the context of $30m annual revenue. (This is in contrast to another Strawman favourite, $ALC, where CEO Kate Quirk has made clear that they are going to stop updating on immaterial contracts and instead provide a one-slide summary of major developments in each quarterly briefing, in line with ASX rules, as done in the latest presentation.)

 It was disappointing to see that the table in the Quarterly Performance section reported metrics excluding the ended Newmont contract to show positive churn and revenue retention. My objection is that there is no mention of the value of the metrics had the loss of the major contract been accounted for. (Some may recall that $NEA had to deal with a significant churn event in the USA 1-2 years back. In their case, they reported the bad numbers, but then added commentary on what the result would have been if the cases were excluded. This is a more honest approach in my opinion. The numbers are the numbers. Anything else raises questions of integrity for me.)

Finally, I am encouraged by the statement by CEO Christian Damstra that the investment phase is completed. (We heard similar from $ELO recently, another SaaS firm that has been through a costly investment phase building their platform over the last 3-5 years.) This is positive because it will mean than management attention is on customers and execution to implement the platform, rather than acquiring to build it. This should have both positive revenue and cost benefits.

My conclusions are as follows, stated in terms of what I need to see to consider investing in $DTC again:

1.      2 consecutive, further quarters of results to confirm positive operating economics.

2.      Progress on the existing customers showing progressively increasing utilisation and rollout across multiple sites.

3.      Evidence of a customer-led focus on which modules add most value and are being implemented. This should drive simplication/high-grading of the platform. (I am still worried that there are too many elements to maintain.)

4.      Less management “spin” in results reporting. This is going to take a polite email to CEO Christian or the Chairman. (Several of us have learned the harsh lessons of $LVT.)

$DTC back on the watch list. Thanks @Chagsy !

Disc: Not held IRL or SM.

Here are the headlines from the release:

• Annualised Recurring Revenue (ARR) of $34.5 million, up 63% on the prior corresponding period (pcp)
• Strong revenue growth of 40% on pcp to $27.4 million1 , with 87% of this revenue being annually recurring
• Operating leverage drives continued gross margin expansion to 78.9% (FY20: 68.5%2 )
• Strong EBITDA result of $6.6 million, consistent with pcp following the acquisition of the previously loss-making Vault business
• EBITDA margin remains robust at 24.3%
• Cash receipts of $31.7 million, up 51% on pcp
• Key operating metrics:
  • Users increased by 74% to 737k (FY20: 423k)
  • Clients increased by 159% to 724 (FY20: 279)
  • Churn remains minimal at ~1%

But here is some of what lies beneath:

• If you ignore government grants, operating cashflow was barely +$0.5m from receipts of $31.7m, which paints a slightly different picture from the GM expansion message and references to operating leverage
• In order to maintain a cash balance of c. $10m, borrowings of c. $10m have been taken on from the facility announced earlier

In Q&A from Chairman and CEO, there was quite a bit of discussion about the cash position and even a reference to seeing "positive free cash flow is the recent months".

I exited DTC earlier this year at a significant capital loss for two reasons:

• Strategy: I see the EPP strategy as too broad. Too many modules, too many verticals, too many countries. From my perspective the strategy lacks focus - a big red flag.
• Economics: with ARR of c$35m, I can't see how this is generating cash. I fully expect DTC will be back to the market for more cash or otherwise (given they said they won't do that) then we'll see a weakening balance sheet as they take on more debt.

Conclusion

• AVOID - I exited DTC based on concerns about cash burn and lack of a focused strategy
• Today's results reinforce my belief that the thesis is broken
• Removing from my watchlist today as there are too many high growth tech firms that have positive economics.

[Disc. Not Held in SM or IRL]