Data#3: Quietly confident
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 17 February 2023, 8:00 AM
- Sectors Covered:
- Telecommunications, Technology
- Data#3's (ASX:DTL) 1H23 result was strong and broadly inline with recent upwardly revised expectations. Management recently pointed to the top end of guidance provided at the AGM last year. Today they hit the top end.
- From our perspective the highlight, other than another impressive result, was the fact that customer demand remains very resilient. Management always highlight a large May/June so providing full year guidance is difficult but to-date they are confident things are going well and customer demand has not slowed into 2H.
- We increase our EPS forecasts ~15% and TP to (login to view). Hold retained.
DTL’s 1H23 result was, as flagged, at the upper end of guidance and therefore broadly inline with market expectations.
It was a strong result with revenue +17% YoY, Gross Profit +14% YoY; Profit Before Tax +33% YoY and EPS/DPS +38% YoY. This was an impressive result from a team that keep delivering.
As expected no formal FY23 guidance was provided.
Forecast and investment view
We have reassessed our 2H23 forecasts and have increased confidence, stemming from management commentary, that things will remain buoyant in 2H23. We have lifted our EPS by ~15% in FY23 and FY24.
Our Target Price lifts to (login to view) and we retain our Hold recommendation.
Management noted that DTL is not seeing any slowdown in demand as we enter 2H23. Analytics firm Gartner predicts Australian IT spend to grow at ~6% in CY2023 which is the same growth rate as CY2022 and well above the long term average growth rate of <3% pa. DTL have historically grown at multiples of system.
Supply chain challenges are easing and DTL’s backlog is being worked through. This backlog seems unlikely to be fully cleared by the end of FY23 but it is definitely improving. Management hope to not have to report a backlog in the future.
Revenue under contract dipped slightly HoH to 65%. This isn’t material, just timing related. Management noted that major projects are not “recurring” or contracted in nature but typically end up being repeatable. Customers want an outcome so if/when DTL does a good job this tends to place them well to win the next round of work and therefore repeat business.
DTL’s headcount grew at a similar pace to this time last year. Management only hire new roles to service contracts they have successfully won. Management also noted that access to skilled labour is improving with international arrivals picking up. Internal staff costs increased by 12% YoY and this was a combination of wage increases and headcount growth which was predominantly in the services segment.
Public cloud is typically a 3 year project/trend and it continues to have positive momentum. Cloud revenue is more than 50% of total revenue. Management noted “growth in the cloud business is a major competitive advantage as it provides essential data for the solutions provided to Data#3’s customers”. This is illustrative of the holistic approach DTL take to servicing the end customer and one of the many reasons they continue to grow well above system. While services is important, DTL also grew product sales at ~3x system.
The two biggest segments by revenue are software (66% of total revenue) and infrastructure (21%). Both grew at an impressive 18% YoY rate. Discover and support services declined YoY but all other parts of DTL delivered double digit YoY revenue growth rates in 1H23.
Cash conversion, as always was negative in 1H before a likely reversion in 2H.
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