Datamonitor is on the acquisition trail. With £16 million cash, a fast reviving share price and revenues rising at a near-15 per cent annual rate, founder and chief executive officer Mike Danson is looking to augment the company's global presence in a market worth some £2.3 billion a year world-wide.

The business

A year ago, when Danson returned to take over the reins at Datamonitor, the picture was very different. The company, which he had started in 1988, had never made a full-year profit since its flotation at the height of the dotcom frenzy.

At his point of re-entry, Datamonitor was heading for annual 2002 losses more than doubled to £6.6 million on revenues poised for an 11 per cent fall to £31.5 million. The shares, which had been close to £2 apiece in early 2001, were descending inexorably to a low of 17.5p, a state of affairs that Danson, as 40 per cent shareholder, was not anxious to tolerate.

The group provides commercial and other clients with regular reports, updates and specially commissioned research on sectors covering 70 per cent of global gross domestic product. There was a ready market for its wares, subject to economic and business cycles, but the company had overreached itself and was paying dearly.

Under the enthusiastic American chief executive Tom Gardener, Datamonitor had, in the words of one analyst, 'built an infrastructure for a company with annual revenues of £100 million or more. Unfortunately, these did not come in time'.

There was no problem with the quality of Datamonitor's work, especially in the fields of consumer finance and health, which remained 'of strategic value to clients'. The trouble, as Danson puts it, lay in 'management and cost controls and the nuts and bolts'.

Under Danson, Datamonitor's fortunes have revived, helped with some key senior appointments and stern housekeeping measures. The company has achieved a turnaround in the first half of this year from a £3.4 million loss to pre-tax profits of £500,000 on revenues up 13.5 per cent to £17 million.

Strategy

Danson wants Datamonitor to build on its strengths and increase its share of a market he sees as 'fragmented, with lots of small, badly-financed companies' struggling to keep afloat. He aims to do this by organic growth as well as acquisition.

Datamonitor derives nearly three quarters of its revenues from 'premium subscription services' and around 23 per cent for 'one-off' information products. On average, subscription clients, whose renewal rate has increased in a year from 56 per cent to 61.4 per cent, pay £32,000 a year for these. Some pay many times that for much more extensive information and analysis, while you could, for example, pay £500 for a copy of an old report.

The company is working to find wider applications for the information its 235 researchers and analysts obtain and to make more of the intellectual property it has acquired in the process. To this end, Datamonitor has increased its healthcare coverage to include neuropathic pain, prostate cancer and diabetes and targeted it at the investment community.

The company has undertaken more detailed consumer surveys and expanded its technology coverage to healthcare and financial services. It is launching a new series of consumer trend reports and re-opening its financial services division in the USA, as well as developing new data sets on the automotive and logistics areas for the American market.

At present, the company draws 37 per cent of revenues from the UK, 38 per cent from the rest of Europe, 23 per cent from the USA and two per cent from Asia. Danson's target is 40 per cent USA, 40 per cent Europe (including the UK) and 20 per cent Asia.

On the acquisition front, Datamonitor bought the business assets of bust news, analysis and business information outfit Computerwire, publisher of Computer Business Review, from the administrative receivers in October for £565,000 and a commitment to contribute £110,000 to staff lay-off costs. If Datamonitor sells Computer Business Review before October 2007, it will pay the receivers 20 per cent of any sale price above £100,000.

The Computerwire assets were losing £1.2 million a year when acquired. Danson says they are now making money.

This year the company has pruned waste and undue overheads, setting and achieving a target of £4 million annual cost savings. Capital spending has been kept to 'controlled but sensible levels' – spending on websites for instance has been cut from £4 million to an annual rate nearer £200,000.

Management

Danson, a former business consultant described by observers as 'a steady, sober character', brought in some new people at the top to enable Datamonitor to put its house in order and prosper. Andrew Gilchrist, a former finance director of quoted publishing group Columbus, became Datamonitor's finance director in October and Bernard Cragg, who spent five years up to 1992 as finance director of Carlton Communications, joined in February.

Russell Chambers, a former managing director of Wall Street giant Merrill Lynch's UK investment banking team and later head of investment banking at Investec (Datamonitor's house broker), joined as a non-executive director in July. Cragg says a further non-executive director will be appointed 'in due course'.

This combination gives Datamonitor a blend of experience, skill and contacts in business and finance. The people now in charge are well rated in the City.

Prospects

Danson and his team are concentrating on sorting out Datamonitor's internal structures and ways of thinking, but they are also looking at the wider market. He says this has flattened overall, but has lately been showing signs of life.

Aiming to progress by increasing market share and moving into 'niche' areas, Datamonitor argues that the right investment in the right content could significantly accelerate its profits recovery. As Danson puts it, 'the key is, once you have the right content, to sell as much as you can.

'That means costs should not increase much as revenues increase and so growth goes straight through to the bottom line.' Datamonitor is set to show a full-year profit, which Investec's Malcom Morgan puts at £1.1million, for earnings of at least 1.6p a share.

These are pretty modest figures set against likely revenues of between £31 million and £35 million and suggest that significantly higher profits are on the cards for 2004 and 2005 if the formula works. Danson will not commit the board to proposing a dividend this year, but says the company will look at the possibility at the full-year stage, if by then there is a chance to pay out a meaningful sum that is at least twice covered by earnings.

Valuation

Datamonitor's shares have powered up from their 17.5p low as investors have grasped the recovery that has been gaining momentum at the company. Even at 71.5p, the shares are well below half their previous peaks.

Danson says 'banks have been knocking at the door' to finance acquisitions and projects, now that the company has regained financial credibility. But he insists Datamonitor has 'no short-term need for fundraising'.

A big deal with another significant player might be a different matter, as the process of expected consolidation in the sector gathers pace. But, short of that, Cragg and Danson are unlikely to tap the market yet awhile, with £16 million of cash at their disposal.

If the company does achieve earnings of 1.6p this year, that would put the shares on an apparently demanding prospective multiple of nearly 45. But that earnings figure, if achieved, would be only the first shoot of recovery, which would more fairly be measured in relation to prospects for 2004 and 2005.