LONDON (ShareCast) - dotDigital, which provides digital software services to marketing professionals, is to chase market share in the software as a service (SaaS) space, which is likely to hit revenue growth and profits in the short-term.

"Whilst services remain an important part of our overall client offering our main strategic focus will be on growing our revenues from SaaS products," revealed Peter Simmonds, Chief Executive of the group.

"We anticipate the impact in the short term will be some increased sales and marketing costs ahead of the annuity revenue streams that will be delivered from international expansion and an impact on revenue due to pricing that encourages both new and existing clients to commit to longer term contracts," he added.

Because revenue from SaaS is spread out over the lifetime of a contract rather than front-loaded, revenue typically takes a hit when software companies switch to this model, but many companies prefer it because it provides greater visibility and makes the revenue stream less lumpy.

The upshot is that the group warned that these planned changes will result in "a very modest reduction" in the growth of fiscal 2012/13 revenue compared to market expectations.

Forecast pre-tax profits in 2012/13 are also expected to be hit as the group invests further in sales and marketing to enable international growth and growth from its self service product propositions.

"We still expect very healthy growth in the SaaS revenues and the board is confident that both revenues and profits for the 2013/14 financial year will benefit from our strategy and return to levels above current expectations," Simmonds assured.

Revenue from continuing operations in the financial year to June 30th rose to £11.99m from £8.95m the year before.

Reported profit before tax tumbled to £2.77m from £3.31m the year before as the company set aside £1.1m for possible payments relating to an acquisition made three years ago.

Headline profit before tax of £2.9m was up 25% from £2.3m the year before, and in line with expectation. Moreover, earnings before interest, tax, depreciations and amortisation (EBITDA) increased 31% to £3.4m.

Growth in both of dotDigital's business units continues apace. Its SaaS email marketing and email managed service increased revenues 38% to 9.5m, while services and search revenues were up 19% at £2.5m.

Cash flow from operating activities was £3.2m up 33% from last year’s £2.4m. Cash balances at the year end were £4m and other than operating leases there is no debt finance.

Analyst Richard Nunn from house broker Charles Stanley said: ‘Our long-term view continues to be positive even though earning for the full year 2013 are marginally impacted. We increase our price target to 16p (from 14p) and reiterate our Buy recommendation.”



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