D4T4’s expensive quest for scale

D4T4 Solutions’ (D4T4) market value dropped by a tenth on the morning of its results, after it revealed that a fast-growing cost base had weighed on earnings in the year ended in March. Adjusted operating pre-tax profit dropped 12 per cent to £4.5m, as expenses climbed up to 49 per cent of total revenue, compared with 38 per cent in 2020. 

The company, which provides data analysis and management solutions, said that it had incurred additional staff costs following the launch of its new fraud prevention platform (‘FDP’). The product is only expected to deliver modest recurring revenues in the current period, but opening up access to an $18bn market looks promising in the long run. 

Naturally, growth does not come cheap. Marketing and product investment behind the FDP launch is expected to further increase the company’s operating expenditure and analysts at house broker finnCap do not expect a return to EPS growth until 2023.

Overall, its core own-IP businesses appear to be trading well, with revenues growing by almost a fifth to £9m. Annual recurring revenue grew by 11 per cent in the period to £10.6m, and now accounts for almost half of D4T4’s total turnover. Meanwhile, gross margins for continuing operations improved to 62.4 per cent from 60.7 per cent in FY2020. 

D4T4 looks as though it has made decent progress in the period and building up its intellectual property portfolio is a smart move, albeit an expensive one. But for now, a forward price/earnings (PE) ratio of 57 keeps us on the sidelines. Hold.