The rise of e-commerce continues, but with so many online platforms and stores for consumers to choose from, online retailers are having to find new tactics to attract customers.
The e-commerce opportunity
dotDigital (LSE:DOTD) is a software-as-a-service (SaaS) business that provides a cloud-based marketing platform for its clients. Serving over 4000 brands across 150 countries, the platform allows organisations to acquire, convert, and retain customers.
I hold DOTD in my own portfolio, so what is it that I like about the company?
Much like Salesforce, DOTD’s bespoke platform – known as Engagement Cloud – analyses customer data and performs automated digital marketing through emails, text messages, and social media platforms.
The business model is simple. Clients typically purchase a pre-paid contract for a length of 12, 24, or 36 months, during which time they have complete access to the platform.
It can be seamlessly integrated with existing ecommerce and CRM technology, forming a robust marketing engine.
Through the use of data-triggered marketing campaigns, clients can scale quickly to maximise their customer base. Email-based campaigns have proven to be the most successful with clients achieving an average of £42 extra income for every £1 spent on dotDigital’s platform, we’re told.
In recent years, management has shifted its strategy to focus more on e-commerce and B2B through partnerships with other companies – including Shopify, Microsoft, and Adobe.
Engagement Cloud’s ever-expanding functionality has boosted its value to clients each year. With a more powerful platform that clients are relying on, dotDigital has built up a substantial amount of pricing power. As such, both the recurring revenue stream and average revenue per user (ARPU) have seen significant growth.
|Total Revenue (£m)||42.5||36.9||32.0||26.9||21.4|
|Recurring Revenue (£m)||36.55||31.37||25.92||20.98||16.26|
Top-line revenue has expanded by an average of 20% year-on-year, with around 80% of it originating from a reliable recurring revenue stream.
Beyond reinvestment and retaining a talented sales team, the operational expenses are near negligible.
Operating profit margin has remained relatively stable at 25% over the past five years. This suggests that all the growth experienced in earnings is sourced directly from performance – an excellent sign in my eyes. While improving margins is undoubtedly a good thing, it’s not an endless source of increased profits.
This continual stream of steady, reliable income has allowed the firm to build up a generous war chest of cash. Besides acting as a protective barrier during times of uncertainty, it enables the company to develop new features for their software, either through research & development, or acquisitions.
In 2017 it acquired Comapi — an omnichannel messaging business — for £11m. Both its technology and people were successfully integrated into the company in 2019. After discontinuing the low-margin legacy businesses of Comapi, Engagement Cloud got a whole new suite of communication tools to further assist clients.
The bottom line
dotDigital is certainly not the only player in this space with fierce competition from Salesforce. However, through its strategic partnerships with e-commerce platforms, it has created powerful allies that drive new clients directly to them.
I think this gives the stock quite a competitive advantage that when combined with its pricing power makes it a force to be reckoned with, in an industry set to grow to £25.1bn by 2023.
Zaven Boyrazian owns shares in dotDigial and Shopify. The Motley Fool UK has recommended dotDigital Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.