Last week, Dalet announced earnings results for the first half of 2020. Given Dalet’s position in the media technology value chain, the release is a timely financial data point on the impact of the 2020 market disruption to the asset management and orchestration software categories.
Dalet customers, especially in newsroom, have been busy during 2020. Here is an excerpt from a Dalet release dated April 22, 2020, “DALET is working with multiple News stations, which currently have very large audiences, to help them overcome the technical difficulties linked to the remote work of a large part of their staff.”
Dalet revenues for 1H 2020 were €25.9 million, an increase of 5% versus the first half of 2019. It is unclear how much of the growth is attributable to organic initiatives versus revenue from the Ooyala Flex Media Platform, acquired by Dalet in mid-July 2019.
The closest to a disclosure about Ooyala’s contribution to 1H 2020 is a statement of a level of €1 million of subscription revenues recognized in the period. The totality of the Flex Media Platform is almost certainly larger. At the time of acquisition, management indicated Ooyala had annual SaaS and maintenance revenue of €3.9 million with an additional backlog of professional services and licenses in an amount of €2.2 million. Dalet’s annual report for 2019 indicates Ooyala contributed €1.9 million to Dalet’s 2019 result, but also generated an additional €800,000 of revenue not collected by Dalet (retained by seller). Since the acquisition was completed on July 12, 2019 and most of Ooyala’s revenue was recurring in nature, these data points would suggest (assuming no growth) Ooyala has a 6-month revenue profile of between €2 – €3 million. Such a contribution level would represent more than 100% of Dalet’s growth in the period.
There is no reason to apologize for inorganic growth, as it is still growth. The above exercise is intended to better isolate how the current market environment is impacting aggregate customer spend and organic supplier revenues.
(For those interested Dalet paid €4.3 million for Ooyala’s Flex business, though only €1.7 million in cash. Echoing comments from an earlier Devoncroft post, the Dalet accounting of the transaction ascribed €405,000 of deal value to the Ooyala Flex brand, almost 30% of the value ascribed to the software assets of Flex.)
In a release dated February 19, 2020 Dalet management expressed a revenue growth objective of 8% to 12% for 2020. Market conditions changed rapidly after that announcement. In the current release, Dalet describes the market environment as follows:
“…the development of the health crisis in Europe and the United States has led some customers to slow down or postpone their investments, thus impacting the Group’s growth and profitability improvement objectives for the 2020 financial year.”
A closer review of the revenue composition is further illustrative of the current market dynamics.
Geographic Revenue Breakdown
On a geographic basis (chart below), Dalet saw healthy growth of 10% in both EMEA and the Americas. In contrast, Asia Pacific (Dalet’s smallest geography) experienced a meaningful decline. Management attributes the decline in Asia Pacific to the year-earlier comparable that included large projects in Australia and Japan.
Revenue Composition
The first acquisition bullet in Dalet’s July 15, 2019 announcement of its purchase of the Ooyala Flex Media Platform reads “Acquisition widens Dalet’s market offering and accelerates its move to recurring revenue model.”
As already noted, the former Flex business contributed €1 million of subscription revenue to Dalet’s first half results. If this is the start of the journey to a SaaS business model, it is truly the start since at the end of July 2020 only 4% of Dalet’s revenue had transition to SaaS. In fairness, Dalet’s management team is not strictly focused on SaaS revenue, but rather recurring revenue.
Licenses and services (professional services tied to delivering the software solutions) declined 10% in 1H 2020. This is notable since these are the activities tied to the delivery of new business. In comparison the activities tied to former installations (another word might be ‘legacy’) grew by 13% in the first half and now represents more than 40% of Dalet’s business.
The margin profile of taking care of the past appears slightly less flattering since gross margin in the period declined 300 basis points.
The good news is the recurring revenue (Maintenance plus Subscription) is 46% of Dalet’s revenue, up from 36% in the first half of 2019. As hinted above, a cynic would view Maintenance as payments tied to historical technical infrastructure and subject to decline as customers shift spend to future technology infrastructure. Even if true, it is better to get paid to take care of legacy than to take care of legacy and not get paid.
Typical of most businesses, Dalet is using the past and current revenue streams of the business to fund the future. It is just particularly acute in this example.
Below is a presentation of several Dalet Income statement categories for the first half of 2020 with a column showing the comparison to 1H 2019 and a column indicating the comparative value of the category to total revenue.
Dalet’s ‘About us’ in the earnings release includes this declaration: “The integration of the Ooyala Flex Media Platform business has opened vast opportunities for DALET customers to deploy successful strategies that better address their audience…” The integration also included a non-insignificant addition to operating expenditures, including research and development (“R&D”).
Based on the disclosures in Dalet’s Annual Report, in the just over 6 months (during 2019) Dalet owned the divested assets, Flex contributed an operating loss of €2.8 million. Ooyala’s incremental R&D impact in 2019 was €1.6 million, only slightly less than its total revenue contribution – for a business that had only 50 customers (half SaaS clients).
Dalet’s R&D expenditures in the first half of 2020 increased by 31% compared to the year-earlier period and totaled 35% of sales in the first half. The same figure was 28% in 1H 2019 and 25% in 1H 2018. Management attributed the €2.1 million increase in R&D to investments for future growth, most notably “the convergence of product lines.”
The main takeaway: Dalet is making a tremendous investment in its future product portfolio, highlighted by the Ooyala acquisition and the continued support of R&D into the new products. Given the current economic environment, even greater emphasis is deserving in the preceding sentence.
Also worth noting, Dalet benefited from some assistance by way of the United States Treasury in the form of a €1.5 million Paycheck Protection Program (PPP) loan.
What to Expect in the Remainder of 2020?
Dalet management is targeting a flat year in terms of revenue (excluding hardware) and an operating income level close to break-even. 2019 full year revenue was €58.5 million. This contrasts with the previous (noted above) guidance of 8% to 12% revenue growth.
Bookings in the first half were €14.3 million, a 19% decrease versus 1H 2019, and a 3% decline compared to 1H 2018. The total billable order book for the second half of the year is €28.5 million (compared to €49.7 million at start of year).
Dalet’s revenue levels are proving resilient in the current environment. This is a byproduct of a business model with high levels of recurring revenue and a testament to the team’s ability to continue to achieve healthy levels of bookings.
Related Content:
Press release on Dalet 1H 2020 Results
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