dotDigital and marketing’s sweet spot

dotDigital (DOTD) saw its adjusted cash profits grow 13 per cent to £10.5m in the first half of its financial year, in a sign that digital marketing may have avoided the worst of the pandemic-induced uncertainty weighing on the rest of the advertising industry. 

An increase in both new and existing client spend, as well as a surge of companies rushing to target their customers across a wider array of media, meant that dotDigital’s average revenue per customer (ARPC) shot up by 20 per cent to £1,196 per month. “Whether it be bricks-and-mortar companies, or actually enhancing online experiences...marketers are getting a lot more sophisticated” said chief executive Milan Patel. 

This looks like a worldwide, secular trend: international sales grew to around a third of total turnover - and excluding an uptick in demand for SMS (mobile texting) channels, that figure stood at almost two-fifths. A more global client base was no doubt helped by the group’s partnerships with other big, international businesses. Revenues from its collaboration with Shopify (US:SHOP) more than doubled, and sales through all its connectors into strategic partners grew by 20 per cent to £12.8m. 

Elsewhere, management pushed 11 per cent of its revenues into research and development, down slightly from 13 per cent at the same point last year - although this could be in anticipation of some costs beginning to resurface as markets re-open. Still, product innovation appears to be progressing well, with enhanced artificial intelligence and data visualisation for product recommendations. 

Patel is confident that the group will be able to continue to deliver, even as a number of struggling sectors pull back their spending on advertising. “Digital as a proportion of marketing budgets is increasing because it’s a lot more cost effective. It’s easier to measure the return,” he said. “I think the squeeze is going to happen a lot more in traditional marketing.” 

This optimism is not misplaced. Expenditure on marketing technology has grown by 22 per year-on-year, and dotDigital has been bagging higher value customers. Its shares were mostly flat following the results announcement, possibly because management did not make any changes to its guidance for the rest of the financial year. But with a reasonable forward price to earnings ratio of 21, we think dotDigital still warrants a buy. 

Last IC view: Buy, 174p, 25 Feb 2021