Digital media solutions: where are the catalysts? (NYSE:DMS)

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Violeta Stoimenova

Digital Media Solutions (New York stock market :SGD), a digital platform that connects consumers and advertisers, is struggling to gain traction as companies are forced to allocate their capital as best they can in the difficult economic environment in which they currently operate.

Since March 22, 2021, the date on which was trading above $14.00 per share, the company experienced a downward spiral, plunging to a low of $1.05 per share on August 22, 2022. It continued to trade in a range of around 1, $05 to $1.28 before an offer to acquire the company for $2.50 was made by Prism Date, LLC, which would take the company private if approved.

This temporarily took the stock price to near $2.38 per share before heading back down from a range of $1.80 per share to an average of around $2.00 per share. until Nov. 8, 2022. After its earnings report failed to impress investors, its stock price fell again, appearing to find support at around $1.65 as a floor. It will likely trade in a tight range between that and near $1.80 for the immediate future.

The problem for DMS is that it simply lacks the catalysts to drive business growth, and its leverage looks ominous with little cash available.

In this article, we’ll look at recent earnings numbers, the one segment that’s doing well for DMS, the lack of growth catalysts, and why the best option would likely be to sell the business.

Last earnings

The income in the third quarter was $90.1 million, down 16% year-over-year.

EPS during the reporting period was ($0.15), down from EPS of $0.10 in the third quarter of 2021.

Net loss for the quarter was $10.1 million, compared to net profit of $5.4 million in the same quarter last year.

Operating expenses were $33.8 million, up $9.0 million year over year.

Gross margin for the quarter was 26.3%. Adjusted EBITDA was $5.1 million.

The company ended the third quarter with $18.3 million in cash and cash equivalents and overall debt of $217.1 million.

Orientations for the fourth quarter of 2022:

Net income: $97-102 million, gross margin: 25-30%, variable marketing margin: 30-35%, adjusted EBITDA: $7-10 million

Orientations for the year 2022:

Net income: $385-390 million, gross margin: 25-30%, variable trading margin: 30-35%, adjusted EBITDA: $26-29 million

As the numbers show, it was a tough quarter for DMS, and I really don’t think it’s going to get any better in the foreseeable future.

Decompose its segments

Customer’s purchase

Customer acquisition involves customers entering into acquisition contracts with DMS for the purpose of providing potential buyers or prospects to the customer, based on personalized characteristics provided by the customer.

Its Brand Direct unit had revenue of $41.4 million, down $22 million, or 35% from the same 2021 reporting period.

Customer acquisition revenue for Marketplace was $53 million, down $5.0 million or 9% for the third quarter.

Revenue from its much smaller managed services was $937,000 in the reporting period, down $1.1 million from $1.67 million in the third quarter of 2021.

The weaker performance of its Brand Direct and Marketplace segments stems from “macro-challenges within the insurance industry that continue to put downward pressure on cost-per-click (“CPC”) and cost-per-click pricing. per lead (“CPL”)”. In other words, competition in the field is intensifying and competing on price to gain market share as economic forces change the way companies in the sector do business. This is not a good market environment for the business as it is likely to get worse before it gets better. A bright spot for the company’s insurance was its auto insurance business in its market segment. Its auto insurance business generated $38.3 million in the third quarter, following $37.3 million in the second quarter of 2022 and $35.5 million in the first quarter of 2022. The focus on expanding agents was attributed to the growth.

Company acquisition offer

In a press release of September 8, 2022, DMS’s board of directors announced that it had received an offer from Prism Data, LLC to acquire all of the company’s outstanding common stock at $2.50 per share in cash.

Prism Data, LLC is an investment vehicle associated with DMS CEO Joseph Marinucci and DMS COO Fernando Borghese

Upon announcement of the agreement shares in the company climbed 52% in post-market trade. But as mentioned earlier, since then it has receded. If the deal is not approved, based on the company’s performance over the past year, I expect its stock price to suffer.

The price action suggests to me that shareholders and investors are on the closing line as to whether this is going to be approved or not.

Conclusion

DMS has a tough road ahead if it is not approved for the takeover bid. For at least the next two to three quarters, the macro-economic environment will remain challenging. And with huge debt and a relatively small amount of cash, the company has limited options about what actions it can take to meaningfully support growth initiatives.

The best thing the company can do operationally is to continue to find ways to cut costs while investing moderately in growth. Right now, the market just isn’t there to justify major growth expenditures.

Another factor is that the company is not very liquid, as it trades very few stocks on a daily basis, which potentially makes it difficult to enter or exit a trade in a timely manner.

Adding it all up, this is a company to avoid unless investors want to bet on the company being acquired. Since it is trading at $1.65 as of this writing, this gives a substantial upside if the acquisition goes through.

On the other hand, if it doesn’t, the stock price is going to get hammered and likely test its 52-week low.

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