Strategic Integration Drives Long-Term Growth at DCM Amid Short-Term Revenue Challenges in Q3

DATA Communications Management Corp. (“DCM” or “the Company”) is a Canadian-based provider of marketing and business communication solutions to companies in North America. Its technology-enabled content and workflow management capabilities solve the complex branding, communications, logistics, and regulatory requirements of leading enterprises so its customers can accomplish more in less time. Its services include printing, content management, digital asset management (DAM), labels & asset tracking, location-specific marketing, social media analytics, and multimedia campaign management. (1.0) QUARTERLY HIGHLIGHTS: (1.1) Revenue Performance: Revenue was $108.7 million in Q3/2024, down 11.4%, and lower than our estimate of $128.9 million. Revenue fell due to reduced enterprise client spending and strategic exits from low-margin accounts. However, YTD Revenue increased 14.5%, driven by the MCC acquisition. (1.2) Gross Profit and Margin: Gross Profit for Q3/2024 was $28.0 million, down 7.7% Y/Y. Gross Margin improved to 25.8%, supported by MCC integration synergies, pricing strategy improvements, and a focus on higher-margin business opportunities, offset by some legacy MCC margin challenges. (1.3) SG&A Expenses: SG&A expenses were $22.4 million in Q3/2024, down 10.5% Y/Y, reflecting restructuring efforts and ongoing cost control measures. (1.4) EBITDA Growth: Adjusted EBITDA for Q3/2024 rose 6.6% to $12.6 million, with a margin of 11.6%. YTD Adjusted EBITDA increased 25.4%, reflecting MCC acquisition benefits and cost reduction initiatives, as the Company continues to target Adjusted EBITDA margins above 14%. (1.5) Strategic Initiatives: DCM continues to diversify revenue streams with tech-enabled solutions, launching the ASMBL platform in Q3/2024 and recently acquiring Zavy Limited. Plant consolidations and investments in new equipment are expected to enhance production efficiency and reduce costs. (1.6) Cash and Debt Management: Cash stood at $8.9 million as of September 30, 2024, while net debt decreased significantly to $77.2 million since the MCC acquisition. Debt reduction remains a priority, with plans to allocate future free cash flow to further deleveraging, acquisitions, or dividends. (2.0) FINANCIAL ANALYSIS & VALUATION: (2.1) We estimate an equal-weighted price target of $6.57 based on a DCF valuation ($9.81/share), a Revenue Multiple valuation ($5.20/share), and an EBITDA Multiple valuation ($4.70/share). (2.2) We are maintaining our Buy rating and our one-year price target of $6.55.