DATA Group Inc. announces second quarter results for 2012

HIGHLIGHTS

Q2 2012

• Second quarter 2012 ("Q2") Revenues of $82.6 million, Q2 Gross Profit of $21.1 million, and Q2 Net Income of $0.6 million
• Q2 Dividends declared of $3.8 million or $0.163 per share
• Q2 Adjusted EBITDA of $6.1 million (See Table 2 and "Non-GAAP Measures" below)

YTD 2012

• Year to Date 2012 ("YTD") Revenues of $169.3 million, YTD Gross Profit of $44.3 million, and YTD Net Income of $4.2 million
• YTD Dividends declared of $7.6 million or $0.326 per share
• YTD Adjusted EBITDA of $13.8 million (See Table 2 and "Non-GAAP Measures" below)

BRAMPTON, ON, Aug. 9, 2012 /CNW/ - DATA Group Inc. (TSX: DGI) ("DATA Group") announced its financial and operating results for the second quarter ended June 30, 2012, which includes the operating results of its subsidiaries DATA Group Ltd., The Fulfillment Solutions Advantage Inc. ("FSA") and FSA Datalytics Canada Inc. ("Datalytics").

"I am encouraged by our progress on our growth strategy on a number of fronts in the second quarter and the first six months of 2012 as we continue to reposition DATA Group for sustainable, long term growth.  We generated increased new business revenue and increased overall revenue, reduced operating costs and improved gross profit, launched new products and services which are getting positive responses from the marketplace and we won significant new business agreements that will take effect later this year.  At the same time, our Adjusted EBITDA and net income did not meet expectations.  Going forward, we will continue to focus on the successful execution of our strategic growth plan in a prudent, well managed fashion.  We will closely manage the cost of our investment in the growth plan along with our financial results and we will also balance this investment and our results with the financial strategy of our business", said Michael Suksi, President and Chief Executive Officer.

DATA Group is pleased to announce that its board of directors has appointed Bill Albino as a director.  Mr. Albino has extensive experience in document process outsourcing, business process outsourcing, digital print and technology services.  Mr. Albino has already begun providing valuable insight into the Data Group's strategy in these areas.

Outlook

DATA Group remains strategically focused on being the leading document management service provider in Canada, while expanding in marketing communications and concentrating on providing high value-added products and services.  Under the DATA Group's new strategic growth plan, it has implemented numerous initiatives to establish new revenue streams and to generate incremental cost savings to improve its profitability.  These include bundling DATA Group's new capabilities with its traditional core marketing offerings to create broader, single source solutions that provide greater value to clients and generate new revenues.  DATA Group remains focused on the successful, ongoing execution of this plan in a prudent, well managed fashion, balancing its investment in the growth plan with its financial strategy.  DATA Group's strategic goals for the remainder of 2012 include:

• Develop new, high growth digital products and services.  DATA Group will continue to research additional new products and services in both the digital direct marketing and the digital document management categories for future launch.  In the second quarter of 2012, DATA Group announced two additional new products and services that will positively impact its business in the future. The first of these is Marketing Campaign Management. This software based service enhances the effectiveness of marketing departments by creating collaborative, automated workflows between the client's marketing staff, their agencies and DATA Group. This allows for faster and more effective marketing campaign planning, creative design, execution and reporting on results.  DATA Group will charge a fee for the Marketing Campaign Management service.  In addition, this offering is bundled with DATA Group's other marketing services to create a complete client solution. Consequently, the Corporation expects this new offering will create additional new revenue and profit in all of these categories. The second new capability is Document Process Management. This is a progressive extension of DATA Group's existing Document Management Services.  Rather than only managing the client's supply of documents that have not yet been completed, Document Process Management will allow Data Group to also provide services associated with managing the client's completed documents.  More specifically, DATA Group will be adding new capabilities such as document management related workflow consulting, electronic document workflow automation, scanning and archiving of completed documents, and related data extraction from completed documents.
• Complete acquisitions that are aligned with DATA Group's growth plan and that are accretive immediately.  In November 2011, DATA Group completed the acquisition of FSA and a 70% interest in Datalytics, which was subsequently increased to 82.35%.  The products and services offered by FSA and Datalytics fit extremely well with DATA Group's recently launched web-based direct marketing services such as its gift card, direct mail and other marketing services.  The acquisition of FSA was immediately accretive.  DATA Group will continue to pursue additional acquisitions in the areas of digital direct marketing and digital document management.
• Continue DATA Group's aggressive sales effort to expand its market share in its core markets of document management and marketing services in order to generate new business.  DATA Group has expanded its capability in the growing areas of short run, on demand marketing print, and retail gift card and loyalty card production.  DATA Group has also expanded its sophisticated web-based ordering systems for digital print solutions, and has implemented a number of initiatives to gain market share, which include changes in its sales compensation program, additional sales resources, increased sales training, implementing sale process automation, and direct marketing campaigns to promote its products and services in the marketplace.  DATA Group will continue these and other growth-orientated initiatives in 2012.  In the second quarter and the first six months of 2012, DATA Group won $6.6 million and $10.4 million in new business.  As part of its expanded sales efforts, DATA Group will look to expand into markets in the United States as it follows its Canadian customers' expansion efforts.
• Find innovative new ways to generate incremental cost savings.  DATA Group's strategic sourcing department, process improvement initiatives and a focus on lease costs continued to generate incremental savings of approximately $1.1 million in the second quarter of 2012 and $2.1 million in the first six months of 2012 which contributed to DATA Group's improved gross profit.  DATA Group expects material cost savings from these initiatives in 2012.
  
  

Table 1    The following table sets out selected historical financial information for the periods noted.

Table 2     The following table provides a reconciliation of net income (loss) to Adjusted EBITDA for the periods noted.  See "Non-GAAP Measures".

RESULTS OF OPERATIONS

Revenues
For the quarter ended June 30, 2012, DATA Group recorded revenues of $82.6 million, an increase of $2.6 million or 3.3% compared with the same period in 2011.  The increase, before intersegment revenues, was the result of a $3.3 million increase in the DATA East and West segment and was offset by a $0.2 million decrease in the Multiple Pakfold segment.  For the six months ended June 30, 2012, DATA Group recorded revenues of $169.3 million, an increase of $5.0 million or 3.0% compared with the same period in 2011.  The increase, before intersegment revenues, was the result of a $5.8 million increase in the DATA East and West segment and a $0.1 million increase in the Multiple Pakfold segment. Beginning November 1, 2011, the results of FSA and Datalytics are included in the DATA East and West segment.

Cost of Revenues and Gross Profit
For the quarter ended June 30, 2012, cost of revenues increased to $61.5 million from $59.8 million for the same period in 2011.  Gross profit for the quarter ended June 30, 2012 was $21.1 million, which represented an increase of $0.9 million or 4.3% from $20.2 million for the same period in 2011.  The increase in gross profit for the quarter ended June 30, 2012 was attributable to a gross profit increase of $0.9 million in the DATA East and West segment and was offset by a gross profit decrease of $0.1 million in the Multiple Pakfold segment.  Gross profit as a percentage of revenues increased to 25.5% for the quarter ended June 30, 2012 compared to 25.2% for the same period in 2011.  For the six months ended June 30, 2012, cost of revenues increased to $125.0 million from $122.7 million for the same period in 2011.  Gross profit for the six months ended June 30, 2012 was $44.3 million, which represented an increase of $2.7 million or 6.5% from $41.6 million for the same period in 2011.  The increase in gross profit for the six months ended June 30, 2012 was attributable to gross profit increases of $2.6 million in the DATA East and West segment and $0.1 million in the Multiple Pakfold segment.  Gross profit as a percentage of revenues increased to 26.2% for the six months ended June 30, 2012 compared to 25.3% for the same period in 2011.

Selling, General and Administrative Expenses and Severance Expenses
Selling, general and administrative ("SG&A") expenses, including administrative expenses of DATA Group Inc. but excluding amortization of identifiable intangible assets, for the quarter ended June 30, 2012 increased $1.7 million to $16.4 million compared to $14.7 million in the same period in 2011.  As a percentage of revenues, these costs were 19.8% of revenues for the quarter ended June 30, 2012 compared to 18.4% of revenues for the same period in 2011.  The increase in SG&A expenses for the three months ended June 30, 2012 was attributable to the inclusion of FSA and Datalytics in DATA Group's results of operations and investments to launch new products and services initiatives.  For each of the quarters ended June 30, 2012 and 2011, DATA Group incurred $0.3 million of severance expenses.  SG&A expenses for the six months ended June 30, 2012 increased $3.8 million to $33.4 million compared to $29.6 million for the same period of 2011. The increase in SG&A expenses was attributable to the inclusion of FSA and Datalytics in DATA Group's results of operations and investments to launch new products and services initiatives. As a percentage of revenues, these costs were 19.7% of revenues for the six months ended June 30, 2012 compared to 18.0% of revenues for the same period in 2011.  For the six months ended June 30, 2012 and 2011, DATA Group incurred $0.4 million and $0.5 million of severance expenses, respectively.  Severances costs for the three and six months ended June 30, 2011 and 2010 were included in SG&A and were related to the Data Group's on-going productivity improvements and cost reduction initiatives.  Severance costs for the three and six months ended June 30, 2012 and 2011 were included in SG&A and were related to DATA Group's ongoing productivity improvements and cost reduction initiatives.

Corporate Conversion Costs
During the six month periods ended June 30, 2012 and 2011, DATA Group incurred total professional fees of $0.1 million and $0.4 million, respectively, related to the conversion.  During the quarter ended June 30, 2011, DATA Group incurred total professional fees of $0.2 million related to the conversion of the Fund to a corporation on January 1, 2012.

Adjusted EBITDA
For the quarter ended June 30, 2012, Adjusted EBITDA was $6.1 million, or 7.4% of revenues.  Adjusted EBITDA for the quarter ended June 30, 2012 decreased $0.8 million or 11.1% from the same period in the prior year primarily due to the cost of DATA Group's investment it its growth strategy.  These costs included selling, general and administration expense as described above.  The Adjusted EBITDA margin for the quarter, as a percentage of revenues, decreased from 8.6% of revenues in 2011 to 7.4% of revenues in 2012.  Adjusted EBITDA for the six months ended June 30, 2012 was $13.8 million, or 8.1% of revenues. Adjusted EBITDA for the six months ended June 30, 2012 decreased $1.1 million or 7.3% from the same period in the prior year and the Adjusted EBITDA margin for the six month period, as a percentage of revenues, decreased from 9.1% of revenues in 2011 to 8.1% of revenues in 2012.

Interest Expense and Finance Costs
Interest expense on long-term debt outstanding under DATA Group's credit facilities and DATA Group's outstanding $45.0 million aggregate principal amount of 6.00% Convertible Unsecured Subordinated Debentures (the "6.00% Convertible Debentures") was $1.5 million for the three months ended June 30, 2012 compared to $1.4 million for the same period in 2011, and was $3.0 million for the six months ended June 30, 2012 compared to $2.8 million for the same period in 2011.  The increase in interest expense during the three and six months ended June 30, 2012 was the result of higher outstanding balances and higher rates of interest charged on those balances.

Finance costs for the three and six months ended June 30, 2011 included recoveries of $0.8 million and $1.0 million, respectively, related to the change in the fair value of the Fund's conversion options.  The conversion options were the conversion feature in each of the Fund's outstanding convertible debentures, which is measured at fair value at each reporting date.  The Fund's obligations under those convertible debentures were assumed by the Corporation in connection with the Arrangement.  As a result of the Fund's conversion to a corporation on January 1, 2012, those conversion option liabilities were classified as equity on the financial statements of the Corporation due to the change in the nature of the underlying security to shares from units and are not re-measured at fair value at each reporting date.

Income Taxes
DATA Group reported income before income taxes of $0.8 million, a current income tax expense of $0.8 million and a deferred income tax recovery of $0.6 million for the three months ended June 30, 2012 compared to income before income taxes of $2.0 million, current income tax expense of $0.4 million and a deferred income tax expense of $0.2 million for the three months ended June 30, 2011.  DATA Group reported income before income taxes of $3.0 million, a current income tax expense of $2.1 million and a deferred income tax recovery of $3.3 million for the six months ended June 30, 2012 compared to income before income taxes of $4.5 million, a current income tax expense of $1.0 million and a deferred income tax expense of $0.3 million for the six months ended June 30, 2011.  The current tax expense for the three and six months ended June 30, 2012 were higher than the same periods in 2011 due to the Fund's conversion to a corporation, which resulted in more income being subject to income taxes.  The deferred income tax recovery was due to the conversion, a change in estimates of future reversals of temporary differences and new temporary differences that arose during the three and six months ended June 30, 2012.  As a result of the conversion, DATA Group re-measured its deferred tax assets and liabilities at the corporate tax rates applicable to corporations, which are lower than the top marginal tax rate for individuals used by the Fund.  In addition, the Fund's conversion option liabilities were reclassified as equity on January 1, 2012 and the associated deferred tax liability was reversed.  As a result of these changes, DATA Group recorded a deferred income tax recovery $2.0 million during the first quarter of 2012.

Net Income
Net income for the quarter ended June 30, 2012 was $0.6 million compared to a net income of $1.4 million for the quarter ended June 30, 2011.  The decrease in comparable profitability for the quarter ended June 30, 2012 was due to higher SG&A expenses, finance costs, and current income tax expense, respectively.  The decrease in comparable profitability was partially offset by the deferred income tax recovery due the change in estimate of future reversals of temporary differences, higher gross profit in the second quarter of 2012 as a result of cost savings realized from DATA Group's ongoing productivity improvement and cost reduction initiatives and the acquisition of FSA, respectively.

Net income for the six months ended June 30, 2012 was $4.2 million compared to a net income of $3.2 million for the six months ended June 30, 2011.  The increase in comparable profitability for the six months ended June 30, 2012 was substantially due to higher gross profit, the acquisition of FSA, and the deferred income tax recovery due to the change in estimate of future reversals of temporary differences and the conversion of the Fund to a corporation.  The increase in comparable profitability during the first half of 2012 was partially offset by higher SG&A expenses, a larger recovery related to the change in the fair value of the conversion options in the Fund's outstanding convertible debentures in 2011, and a higher current income tax expense as discussed above.

INVESTING ACTIVITIES

Capital expenditures for the quarter ended June 30, 2012 of $0.7 million related primarily to maintenance capital expenditures.  For the six months ended June 30, 2012, DATA Group incurred capital expenditures of $1.0 million related primarily to maintenance capital expenditures and $0.4 million related to the investment in identifiable intangible assets consisting of software licences.  These capital expenditures were financed by cash flow from operations and existing cash resources.

FINANCING ACTIVITIES

At June 30, 2012, DATA Group had a bank overdraft of $0.4 million which consisted of financing provided by its suppliers in the form of outstanding cheques of $4.5 million offset by cash and cash equivalents of $4.1 million.  During the three and six months ended June 30, 2012, DATA Group repaid $1.5 million and $2.5 million of its Revolving Bank Facility outstanding, respectively.  For the three and six months ended June 30, 2012, DATA Group paid aggregate cash dividends of $3.8 million and $6.3 million, respectively, to its shareholders.  For the six months ended June 30, 2012, DATA Group paid aggregate cash distributions of $1.3 million to holders of the common shares of DATA Group (formerly unitholders of the Fund).

About DATA Group Inc.

DATA Group Inc. is a leading provider of document management and marketing solutions.  We provide integrated web and print based communications, information management and associated professional services.  We differentiate ourselves and provide value to our customers by focusing on innovative, high value solutions and on exceptional performance at delivering on our promises and commitments.  We have over 1,950 employees working from 34 locations across Canada to accomplish this.

Additional information relating to DATA Group Inc. is available on www.datagroup.ca, and in the disclosure documents filed by DATA Group Inc. on the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com.

All financial information in this press release is presented in Canadian dollars and in accordance with generally accepted accounting principles ("GAAP") measured under International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB") for publicly accountable entities, unless otherwise noted.  Financial figures presented prior to January 1, 2012 are those of The DATA Group Income Fund, the predecessor to DATA Group Inc.

FORWARD-LOOKING STATEMENTS

Certain statements in this press release constitute "forward-looking" statements that involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, objectives or achievements of DATA Group, or industry results, to be materially different from any future results, performance, objectives or achievements expressed or implied by such forward-looking statements.  When used in this press release, words such as "may", "would", "could", "will", "expect", "anticipate", "estimate", "believe", "intend", "plan", and other similar expressions are intended to identify forward-looking statements.  These statements reflect DATA Group's current views regarding future events and operating performance, are based on information currently available to DATA Group, and speak only as of the date of this press release.  These forward-looking statements involve a number of risks, uncertainties and assumptions and should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such performance or results will be achieved.  Many factors could cause the actual results, performance, objectives or achievements of DATA Group to be materially different from any future results, performance, objectives or achievements that may be expressed or implied by such forward-looking statements.  The principal factors, assumptions and risks that DATA Group made or took into account in the preparation of these forward-looking statements include the risk that DATA Group may not be successful in growing its business or in managing its organic growth; DATA Group's ability to develop and successfully market new products and services; competition from competitors supplying similar products and services; DATA Group's ability to grow its sales or even maintain historical levels of its sales of printed business documents; the impact of economic conditions on DATA Group's businesses; risks associated with acquisitions by DATA Group; increases in the costs of paper and other raw materials used by DATA Group and DATA Group's ability to maintain relationships with its customers. Additional factors are discussed elsewhere in this press release and under the heading "Risks and Uncertainties" in DATA Group's management's discussion and analysis and in DATA Group's other publicly available disclosure documents, as filed by DATA Group on SEDAR (www.sedar.com).  Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results may vary materially from those described in this press release as intended, planned, anticipated, believed, estimated or expected.  Unless required by applicable securities law, DATA Group does not intend and does not assume any obligation to update these forward-looking statements.

NON-GAAP MEASURES

This press release includes certain non-GAAP measures as supplementary information. When used in this press release, EBITDA means earnings before interest and finance costs, taxes, depreciation and amortization.  Adjusted EBITDA for the three months ended June 30, 2012 means EBITDA adjusted with no adjustments.  Adjusted EBITDA for the three months ended June 30, 2011 means EBITDA adjusted for corporate conversion costs.  Adjusted EBITDA for the six months ended June 30, 2012 and 2011, respectively, means EBITDA adjusted for corporate conversion costs.  DATA Group believes that, in addition to net income (loss), EBITDA and Adjusted EBITDA are useful supplemental measures in evaluating the performance of DATA Group and its predecessors.  EBITDA and Adjusted EBITDA are not earnings measures recognized by IFRS and do not have any standardized meanings prescribed by IFRS.  Therefore, EBITDA and Adjusted EBITDA are unlikely to be comparable to similar measures presented by other issuers.

Investors are cautioned that EBITDA and Adjusted EBITDA should not be construed as an alternative to net income (loss) determined in accordance with IFRS as an indicator of DATA Group's performance.  For a reconciliation of net income (loss) to Adjusted EBITDA, see Table 2 above.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE (LOSS) INCOME

CONSOLIDATED STATEMENTS OF INCOME AND 
COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

CONSOLIDATED STATEMENTS OF CASH FLOWS

CONSOLIDATED STATEMENTS OF CASH FLOWS

SOURCE: DATA Group Inc.