Direct Digital Holdings - DRCT
Is delaying an earnings release a bad sign? Part deux!
I asked that question in a post last Thursday (a paid subscriber only post) after DRCT postponed their Q4 earnings release date by a few days in order to complete their audit.
Well, based on the stock currently trading down close to 50% in the after-hours market, we now know the answer to that particular question, for DRCT at least, appears to be a resounding yes!
I first shared my “quick take” of DRCT a few days earlier on March 19th (the subject of the post was only revealed to paid subscribers) in a post titled “Having an Amazon as your primary customer is always a good thing, right?” and was surprised to find that they would delay their earnings call so close to the filing deadline. Most companies now have to file their 10K within 60 days of the end of their fiscal year, but certain small companies are still allowed to file inside the 90 day deadline. Nothing, however, prohibits any company from filing or announcing their fourth quarter or year-end results prior to their 10K filing date. For a company as small as DRCT and involved within a single digital market segment (there’s no inventory of widgets to count here), giving investors at least a rough idea of their results should not have been too difficult or time-consuming to produce. Thus, my skepticism that everything was going well when they decided to postpone their earnings release.
Let’s drill down and take a look at their numbers, what really happened, and where they are guiding investors for the year.
First of all, remember that on November 9th the company guided FY 2023 revenues to a range of $170M to $190M, which implied Q4 revenues were to be $54M to $74M. In mid November things were apparently looking good enough for the company to make that prediction. What did they announce?
Total revenues in Q4 were $41M, down a solid 30% sequentially (though up 33% year over year), but they completely missed the $64M mid-point estimate the company had guided to on November 9th.
Buy-side gross margins declined to 58% from 61% in 2022, while sell-side gross margins increased slightly to 15% from 14% in 2022.
The company announced a $1.2M quarterly loss vs. an expected positive $4M in net income and compared to positive $1.5M in net income in 2022.
The company announced $2M in net income for 2023 vs. $4.2M in 2022.
“Adjusted EBITDA” for the quarter fell slightly to $2.3M from $3.1M in 2022, while for the year the overall number rose slightly to $11.3M from $10.2M.
The company guided FY 2024 revenues into the $170M - $190M range, which was what 2023 was initially supposed to be before this big miss.
So how could they get it so completely wrong? I’m trying to give these folks the benefit of the doubt, but when you see the company file a flurry of Form 4’s a week before an earnings disaster, it makes one wonder.
On November 9th the company was about 40 days into their 91 day quarter, and for arguments sake, let’s assume that revenues for these folks happen fairly linearly throughout each quarter. That would mean that 4/9ths or their revenues, or about 44%, were in the bag when they guided revenues on November 9th. If they were guiding to the mid-point, or $64M, then that means close to (0.4444) * $64M = $28.44M of revenues were already in the bag.
That also means that the last 51 days of the quarter, from November 10th through December 31st, revenues were only $41.012M - $28.444M = $12.57M. Revenues basically fell off a cliff in the back two-thirds of the quarter, and the company apparently didn’t see it coming.
What we don’t know at this point is what percent of their revenues came from their “Amazon” Customer A and whether or not that was the reason for the revenue shortfall. If anything interesting comes up in the earnings call transcript I will be sure to pass it along.