Damstra (ASX:DTC) share price stoops 11% amid downgraded margins

Damstra is pressing the reset button as it looks to get back into growth.

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Key points

  • Investors are selling down Damstra shares on Monday following its first-half results
  • The loss of its contract with Newmont has weighed on the company, with revenue growth slowing to 9% year on year
  • FY22 revenue guidance has been reaffirmed, however, EBITDA margins have been revised to the downside

The Damstra Holdings Ltd (ASX: DTC) share price is falling following the release of its FY22 first-half results.

At the time of writing, shares in the workplace management solutions provider are trading 7.4% lower at 25 cents. Earlier in trade, the Damstra share price reached 24 cents apiece, representing a fall of 11%.

Damstra share price tumbles as the business resets

  • Revenue up 9.2% over prior corresponding period to $13.2 million
  • Annual recurring revenue of $27.8 million, representing a 15% increase
  • Net client retention fell to 104% compared to 114% in previous first half
  • Net loss after tax of $56 million, deepening from $5.49 million
  • Held $18.7 million in cash and cash equivalents as at 31 December 2021
  • Reaffirmed revenue guidance between $30 million and $34 million for FY22

What else happened during the half?

The six months ending 31 December 2021 presented a challenging period for Damstra, having lost one of its major clients — Newmont. In combination with COVID-19 impacts, the client loss resulted in earnings before interest, tax, depreciation, and amortisation (EBITDA) coming in at a loss of $200,000.

Following this, the company tried to offset some of the pressure on the bottom line by implementing cost optimisations. To date, this has led to more than $1 million in savings across the business.

However, parts of Damstra's operations still incurred notable expenses during the half. For example, general and administration expenses increased to ~43% of revenue from ~25%.

While not as drastic, sales and marketing expenses also jumped to ~36% of revenue versus its previous ~32%. Likely, these increased costs are weighing on the Damstra share price today.

During the half, Damstra acquired Sydney-based workplace safety and compliance company TIKS Solutions. The total consideration involved a mix of cash and shares worth $18 million.

According to today's report, the company is focused on three key areas: geographic expansion, verticals, and product. A $20 million capital raise in December last year will be used to push forward with these targeted items.

What did management say?

CEO Christian Damstra commented on the results:

Excluding Newmont, our business grew by 16% during the first half, and while our EBITDA performance was below our expectations, the second quarter was EBITDA positive. With COVID restrictions continuing to ease across our clients' operations, activity accelerated towards the end of Q2, and we believe this trend will continue for the rest of the financial year. We see our key metrics improving in many areas of the business and this, along with the capital raise we successfully completed in December, provides a strong foundation for growth in the second half and beyond.

What's next?

In a positive sign, Damstra has reaffirmed its forward guidance for FY22. Although, the same couldn't be said for its EBITDA margin guidance. Previously, the company anticipated an EBITDA margin of 15% to 20% — but now it is guiding for 2% to 5%.

There are signs that "positive trends" are emerging, according to the Damstra CEO. In addition, no contract renewals are coming due in FY22, providing some near-term stability.

Damstra share price snapshot

The performance of the Damstra share price has been hellacious over the past year, tumbling 75%. In light of the sell-off, ASX-listed Damstra now holds a market capitalisation of $68 million.

If the company were to be valued on a forward-looking price-to-sales (P/S) ratio, based on its own revenue guidance for FY22, it would be between 2 to 2.26 times sales.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Damstra Holdings Ltd. The Motley Fool Australia owns and has recommended Damstra Holdings Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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