Dye & Durham (TSX: DND) stock slipped 10% after it reported weak fiscal second-quarter earnings. The legal practice management software follows a July to June financial year. The December quarter revenue rose marginally by 3% to $110.2 million, while it reported a net loss of $34.8 million. Its revenue and losses were similar to the ones reported in the December 2022 quarter.
Is it that the company saw no improvement throughout 2023 and has no potential for recovery? We will decode the causes of the flat financial performance and if the stock is a buy at the dip.
Should you be worried about Dye & Durham’s losses?
Dye and Durham’s profits turned into losses in calendar 2023. Its 12-month loss reached $170.6 million due to high financing costs, which ballooned to $131.86 million from $42.37 million a year ago. The company raised debt to fund two acquisitions of Link and TM Group, but they fell apart, and DND was left with high costs.
It has now slowed down on growing through acquisition and is focusing on reducing its debt and increasing its free cash flow through organic growth. Like all software companies, DND is focused on growing its annual recurring revenue. If we remove the impact of financing and restructuring, Dye and Durham actually increased its net income by 7.3%. This shows it has the potential to grow organically and remain profitable. You need not worry about the current losses as they are from the failed acquisitions and not because of operational inefficiency or low revenue.
What has kept Dye & Durham earnings from growing?
Dye & Durham is a mission-critical software that helps legal professionals manage their workflow. A majority of its revenue is exposed to real estate transactions, which brings seasonality to its revenue. Its second and third fiscal quarters (December and March) are seasonally low as spending is skewed towards holiday and tax season.
Moreover, a high-interest environment burst Canada’s property price bubble. Real estate transactions slowed as people waited for the Bank of Canada to cut interest rates. Dye & Durham also saw a slow uptake of its Unity platform as most companies have slashed their technology budgets amid business uncertainty. Other software companies like BlackBerry also reported a slow uptick due to tight tech budgets.
Should you buy the dip?
The above economic conditions will reverse once the economy revives. The Bank of Canada will cut interest rates sometime in 2024. All you need to do is buy and hold. DND stock’s 10% fall has put it at its second-lowest trading price of $12.2. Its all-time low was $7.46 in October 2023, when the overall TSX bottomed out. And if you see the graph, the stock recovered with a whooping 86% jump in less than two months over expectations of a rate cut.
Now is a good time to buy the stock while it trades at its low. It could surge more than 50% when interest rate cuts are announced. And recovery in the real estate sector could boost DND’s earnings as its software is sticky for those transactions.
Investing tip
Before investing in Dye & Durham stock, understand the risk. It is a small-cap stock that is highly volatile. Such stocks can give you 50-60% growth but can also fall with equal strength. Invest only the amount you are willing to lose.
Although DND’s second-lowest trading price has reduced the risk of a downside, the risk is there. Do not panic if the stock falls further in the short term. It will remain volatile if economists’ fear of a recession materializes during DND’s peak season of the June quarter.
