DMS - Digital Media Solutions: Where Are The Catalysts?

Summary

• Digital Media struggling to find sustainable growth catalysts.
• Its auto insurance marketplace was the one bright spot in the quarter.
• Probably the most important move by the company will be to continue to find ways to cut costs.
• Another key element would be if the offer to acquire the company by Prism Date, LLC were to be approved.

Digital Media Solutions ( DMS ), a digital platform that connects consumers and advertisers, is struggling to gain traction as businesses are forced how best to allocate capital in the difficult economic environment, they're now operating in.

Since March 22, 2021, when it was trading at over $14.00 per share, the company has been on a downward spiral, plunging to a low of $1.05 per share on August 22, 2022. It continued trading in the range of about $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.

That temporarily brought the share price up to near to $2.38 per share before started dropping again, moving in a range of $1.80 per share to an average of approximately $2.00 per share until November 8, 2022. After its earnings report failed to impress investors, its share price dropped again, looking like it's finding support at around $1.65 as a bottom. It will probably trade in a tight range between that and close to $1.80 for the immediate future.

The problem for DMS is it simply lacks the catalysts to drive the growth of the company, and its debt load looks ominous with little cash on hand.

In this article we'll look at the recent earnings numbers, the one segment that is performing well for DMS, lack of growth catalysts, and why the best option would probably be to sell the company.

Latest earnings

Revenue in the third quarter was $90.1 million, down 16 percent year-over-year.

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

Net loss in the quarter was $10.1 million, in contrast to the net income 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 in the quarter was 26.3 percent. 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.

Guidance for Q4 2022:

Net Revenue: $97 - $102 million, Gross Margin: 25 percent - 30 percent, Variable Marketing Margin: 30 percent - 35 percent, Adjusted EBITDA: $7 - $10 million

Guidance for Full-Year 2022:

Net Revenue: $385 - $390 million, Gross Margin: 25 percent - 30 percent, Variable Marketing Margin: 30 percent - 35 percent, Adjusted EBITDA: $26 - $29 million

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

Breaking down its segments

Customer Acquisition

Customer Acquisition involves customers entering in acquisition contracts with DMS for the purpose of delivering potential buyers or leads to the client, based upon customized characteristics provided by the customer.

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

Customer acquisition revenue for Marketplace came in at $53 million, down $5.0 million or 9 percent for the third quarter.

Revenue from its much smaller Managed Services was $937,000 in the reporting period, down $1.1 million from the $1.67 million in Q3 of 2021.

The weaker performance of its Brand Direct and Marketplace segments came from "macro challenges within the insurance industry which continue to apply downward pressure on cost per click ("CPC") and cost per lead ("CPL") pricing." In other words, competition in the field is heating up and competing on price to gain market share as economic forces change the way companies in the sector do business. That's not a good market environment for the company, as it's likely to get worse before it gets better. One bright spot for the company insurance was it auto insurance business within its marketplace segment. It auto insurance business generated $38.3 million in the third quarter, following up on $37.3 million in the second quarter of 2022, and $35.5 million in the first quarter of 2022. Focusing on agent expansion was attributed to the growth.

Offer to acquire company

In a press release on September 8, 2022, the Board of Directors of DMS announced it had received offer from Prism Data, LLC to acquire all the outstanding common shares of the company at $2.50 per share for cash.

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

At news of the deal shares in the company soared 52 percent in postmarket trading. But as mentioned earlier, since then it has pulled back. If the deal doesn't get approved, based upon the company's performance over the last year, I expect its share price would get punished.

The price action suggests to me that shareholders and investors are on the fence line as to whether or not it's going to be approved.

Conclusion

DMS has a rough road ahead of it if it doesn't get approved for the acquisition bid. Over the next two to three quarters at least, the macro-economic environment is going to remain tough. And with a huge debt load and a relatively small amount of cash in hand, the company has limited options concerning the actions it can take to significantly 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. At this time the market simply isn't there to justify large spending on growth.

Another factor is the company isn't very liquid, as it trades very few shares on a daily basis, making it potentially difficult to enter or exit a trade on a timely basis.

Adding everything together, this is a company to avoid unless investors want to make a bet on the company being acquired. Since its trading at $1.65 as I write, it does give substantial upside if the acquisition goes through.

On the other hand, if it doesn't the share price is going to get hammered and probably test its 52-week low.

For further details see: