Ebiquity — Digital acceleration

Ebiquity has a well-respected position as an independent voice in the global marketing sector, advising brand owners on how best to allocate their budgets for best effect and with which partners. It works with 70 of the world’s largest 100 advertisers. The challenge for the reinforced and reinvigorated management team is to translate those relationships into a scalable commercial proposition, rather than, or at least in addition to, the traditional consultancy business. The acquisition of Digital Decisions in January 2020, while of relatively modest scale (initial consideration of £0.6m), looks to have been transformative in bringing a credible product to tackle providing accurate and actionable information to brand owners in the complex and opaque digital market. The group’s CEO, Nick Waters, who took over the reins in July 2020, has set out his ambitions to build activities in this sphere. With the nature of the market, especially the prevalence of programmatic advertising, there is more scope to grow the automated element and productise the group’s output. This not only improves the business’s scalability but gives scope to improve margins substantially from the 9.0% achieved in FY19.

Key highlights from the half-year figures, published in September, are given below:

The valuation is at a small discount to other smaller UK media stocks and to the wider global peer set. Parity across averaged P/E, EV/EBITDA and EV/EBIT ratios for FY21e (forecasts for FY20 are too unreliable due to the pandemic and significant economic uncertainty caused by it) suggest a price of 28.4p. We would view it as a base level, as it does not reflect the group’s move into faster-growing digital markets and the potential for improving margins and quality of earnings through productisation. Our DCF, based on a WACC of 8.5% and terminal growth of 2%, indicates that if the revenue were to grow at 3.4% across FY22–27 (the long-term sector growth rate) and EBITDA margin expand to 12% (from 13.4% in FY19, then 3.2% on our FY20 forecast), then the valuation would increase to 43p, more than double the current level.

The financial performance has sensitivities within and without management’s control. The onset and progress of the COVID-19 pandemic has had a heavy impact on clients and on H120 figures but, for now, there is more stability in the market. Changes to the competitive landscape have been to Ebiquity’s advantage, with the withdrawal of Accenture from media auditing. Key to progress over the next three years is grasping the opportunity to build a substantial and scalable business in digital, especially in the US and Asia Pacific markets.

Ebiquity is an independent media and marketing consultancy. Specialising in analytics, its services and products help brands and advertisers maximise the return on their media and marketing budgets, either by reducing costs or increasing sales. As the group does not buy or sell media, Ebiquity is able to provide impartial advice to optimise return on media investment by channel, industry, brand and country. It conducts no media buying or trading on its own account or for its clients, with this commercial independence a key operating advantage.

Ebiquity was founded in 1997 and, over the decades to 2017, made a series of significant acquisitions, which established it with a global media presence. It provides services to nearly 700 clients, including 70 of the world’s 100 largest advertisers. Its headquarters are in London and it has c 550 employees across 17 offices globally. In FY19, approximately 50% of revenues were generated in the UK and Ireland, 26% from Continental Europe, 13% from the US and 11% from Asia Pacific. The group has access to significant quantities of relevant second- and third-party data through its relationships with advertisers and agencies. This highly commercial asset, now described as the Media Data Vault, is reported by management to be the world’s largest independent pool of media performance and cost data. This represents a notable barrier to entry hat would be very difficult to replicate by the major consultants that compete both with Ebiquity and with its clients.

The disposal of Ebiquity’s Ad Intel operation, completed early January 2019, decreased the size of the group (Ad Intel generated 23% of FY18 revenues) but made it notably simpler and able to focus on its core competency: working with advertisers to optimise their media spend and performance, with a weighting towards consultancy. However, it also left the group subscale and with limited scalability.

After the departure of the previous CEO in November 2019, CFO and COO Alan Newman covered the CEO on a caretaker basis while a new incumbent was recruited. Alan had joined in January 2019 after a long tenure as CFO of YouGov, which he had helped to steer from a market capitalisation of around £70m when he joined in 2008 to around £370m on his retirement in late 2018. In April 2020, Ebiquity announced that Nick Waters would be joining as CEO from the beginning of July, with Alan reverting to his previous responsibilities. Nick joined from Dentsu Aegis Network (formerly Aegis Group), a multinational media and digital marketing group, where he worked for 10 years. He was most recently executive chairman, UK and Ireland, having previously been CEO of Asia Pacific for nine years. Before that, he held senior roles at global media agency Mindshare over more than 10 years, which he joined from international advertising and marketing agency, Ogilvy & Mather. At Mindshare he progressed to become CEO of EMEA having been CEO of Asia Pacific and previously CEO of Southeast Asia. He therefore brought considerable experience from an agency perspective, with senior client relationships. Since arriving, he has been getting to know the business and its people under the considerable constraints of the COVID-19 restrictions. He sets out his observations and intentions in the video interview, below.

The CMD showcased Waters’ appraisal of the group’s positioning and opportunities and gave a platform to the operational and regional management teams to give more colour on their markets, operations and opportunities. The key takeaways were:

The trajectory is to transform the business from a ‘McKinsey model to a McDonalds model’, with the attributes as shown in the graphic below. We would regard the shift in emphasis from being project-based to building recurring or subscription revenues as central. The building of a central resource, or vault, of media data will become a very valuable asset. Ebiquity is in a unique position to source and to pool data because of its independence from other aspects of the marketing ecosystem, including data from inside what are referred to in the industry of the ‘walled gardens’ of the major online groups such as Google and Facebook.

This is not an expensive transformation plan, requiring major capital expenditure and should be able to be carried out without compromising the operating margin short term. Much of the practical heavy lifting has already been carried out within Digital Decisions.

The following sections describe the existing business and its functions, on which the ‘new’ business will build.

The group reports its revenues under the two segments Media and Analytics & Tech. At the CMD, a little extra granularity was given, as shown in Exhibit 1. The indication is that these reporting lines may be adjusted to give a clearer picture of the development of the business, at which point we will make similar adjustments to our modelling.

Media management typically encompasses media agency selection and management of those relationships. It also covers setting and monitoring the remuneration model. As well as external relationships, Ebiquity’s media management service can evaluate, plan and manage the in-housing of media buying where this suits the client’s business model. Ebiquity has been focusing on standardising and broadening the service it offers clients, with new specialists appointed in the UK and the US. The group’s independence, objectivity and detailed knowledge of market dynamics deliver a valuable dimension to the process. It is likely FY21 will be a busy year in this sphere, as many relationships are negotiated for three years and the last major peak of reviews were in 2018.

The emphasis on traditional media audit – verifying media that has been paid for has actually appeared – is in gradual decline as the market has been shifting towards digital and other concerns have become more pressing. Contract Compliance has historically involved physical examination of records. Obviously, during lockdown, this was not a practical possibility and H120 revenues were affected as described in the financial section, below. The group has now reached agreement with agencies on remote access to the information required for its audits, which is enabling the backlog to be tackled, with deferred projects set to proceed or already in action benefiting H220.

Within the Analytics & Tech practice, the advanced analytics capability covers modelling, forecasting and predictive analytics. The adtech service draws together evaluation to improve the selection of partners or conduct feasibility studies on in-housing media buying for clients. The martech service comprises data analytics and optimisation and areas such as UX (user experience for customers visiting websites).

There are opportunities in multi-market analytics contracts, where the group’s broad geographic spread is a distinct advantage over localised partners. The group also has an adtech advisory service, covering areas such as appraising the potential returns for clients from in-housing programmatic media buying.

The inherent contradiction between consultants giving marketing advice while also selling solutions was confirmed by Accenture’s decision to wind down its media consultancy’s auditing arm, announced in February 2020. This used to review the work that media-buying agencies performed for clients and was therefore akin to marking its own homework.

Ebiquity has had success in winning new clients previously served by Accenture, in competition with local and global providers (more information on the competitive landscape is given below). The Spanish operation has been particularly successful, taking on more than 20 clients by September, while it has also given a meaningful step up to the US business – a crucial market if Ebiquity is to realise its ambitions.

The market for advisory services to the marketing industry is split between regional and national players and those who operate on a global basis. These are represented in a graphic produced by the company (Exhibit 5), with the size of the various bubbles roughly proportional to the relevant comparative revenue.

As is shown, Ebiquity is the largest of the global providers. The general auditors also have substantial businesses in this area but do not disclose their business by revenue stream in the necessary granularity. Of the other substantive businesses, R3 Worldwide is independent and has the nearest comparable profile, although a narrower range of services, whereas Ascential Medialink is a subsidiary of Ascential and has its core business in the US. All of these companies handle media and pitch management and digital consultancy, with most also covering adtech consultancy.

Ebiquity is the only company in the space specifically handling media compliance. While this has been a part of the landscape in Europe, there is no particular history of this activity in the US, which is part of the reason that the breakdown of trust over issues of transparency of ad viewability, brand safety and fraud have had such a destabilising effect on the relationships between brands and agencies. With the growth of digital in the mix, and in particular the growth of programmatic advertising, and with much of the process between commissioning and result happening within a proverbial ‘black box’, there has been a growing disconnect between brand and agency. Determining the return on investment of a campaign, where between 15–30% of spend is wasted (source: Source Data Monitoring from Digital Decisions), is itself a challenge.

The group’s initial target market is (sensibly) the largest spenders, specifically the world’s top 100 advertisers, who between them spend an estimated $50bn on digital advertising. 0.5% of this spend (the level indicated by management as an incremental medium-term opportunity) would be worth $250m. While this may sound ambitious, it should be noted that 70 of the world’s 100 largest advertisers are already clients of the group.

The US market is the largest by far, at just over one-third of the global total by value of total media spend. With an increasing proportion of agency remuneration now driven by performance incentives, and a complex ecosystem dominated by the large tech platforms, external validation and benchmarking is becoming more important.

Ebiquity is also targeting growing its position in Asia Pacific, where digital is already over half the market. It is often overlooked that local advertisers represent a significant proportion of the total spend. Having an established local presence is crucial to build and grow these relationships. The competition is also less intense, with Deloitte the only general auditor with a meaningful presence and R3 Worldwide and Maximise Media Management the main national consultants, albeit at smaller scale than Ebiquity.

We consider Ebiquity’s newly outlined growth strategy, which builds on its existing strong foundations, as a relatively low-risk approach to accelerating and securing its longer-term growth profile. Nevertheless, any change of direction carries risk. Investors should also consider the following:

Ebiquity’s share price has dropped back from a high of 39p at the end of February and has been sitting at or around current levels since the beginning of October. With a market capitalisation of £16.5m and limited trading volumes, it is likely to be below the radar of many potential investors. The lack of visibility on earnings may also have restricted market interest. With the direction of travel now clarified, a leadership team in place and the prospect of more detailed guidance over the next few months, there is scope for a rerating.

Ebiquity is primarily a consulting business and therefore has limited comparability on day-to-day activities with the smaller quoted marketing services companies. This group has been getter smaller in number, mostly through M&A. Nevertheless, there is no better obvious peer set to use for a contextual comparison. We show the UK listed companies and the global average for context.

Based on FY21 estimates, Ebiquity is valued at a discount to these other UK quoted small- to mid-sized marketing services groups of around 11% on a P/E basis, 27% on EV/EBITDA, and 21% EV/EBIT. The EV/sales metric is a poor tool in this context due to the varying definitions and nature of the revenues.

Using FY21 projections, due to the exceptional economic factors in FY20 that distort forecasts, parity on a P/E basis would imply a share price of 23.6p, parity on EV/EBITDA on FY21 suggests a share price of 32.0p and on EV/EBIT 29.6p. We would view these price indications, averaging at 28.4p, as a base level, as they are yet to fully reflect the group’s move into faster-growing markets and the potential for improving margins and quality of earnings.

A DCF calculation self-evidently looks ahead further, so would be expected to – and does – return higher indicated price ranges. Our modelling shows EBITDA margin returning to 9% for FY21 (vs 13% in FY19), but we would expect margins to expand steadily if management’s intentions to automate and productise much of the group’s deliverables are fulfilled, possibly up to mid- to high- teens. Overall advertising expenditure has averaged 3.4% since 2000, a blend of flat or declining traditional media and faster-growing digital advertising. At this rate of growth, which we would expect the group to exceed if the strategy implementation proceeds to plan, and using a 12% EBITDA margin (and built on a WACC of 8.5% and a terminal growth rate of 2%), a DCF indicates a share price of 43.1p. This is unchanged from our last report in September.

As there was no new financial information given at the CMD, we have made no adjustments to our forecasts at this juncture. The H120 financial results were described in our update note of September, highlighting the heavy impact of COVID-19 and the associated lockdowns on the marketing industry and on Ebiquity in particular.

Media revenues declined 19% on the prior year, although this also varied considerably by region. However, it picked up substantial new business from Accenture’s withdrawal from media auditing, with the team in Spain doing particularly well on this front. It has also been able to pick up Accenture clients in the important US market, including major names in the retail, consumer electronics, alcoholic beverage and credit card categories (under NDAs). Along with projects deferred from H120, this gives a strong underpinning to a rebound in H220. Prospects through FY21 should also be helped by the phasing of media reviews, which are set to be considerably greater in number.

Within Media, Contract Compliance (c 10% of Media revenues), is now catching up on reviews that were deferred from H120, having reached agreement with agencies on remote access to information required for its audits. This should also benefit H220.

Digital Decisions, bought in January (see Edison’s Flash note), has put in a very encouraging performance, and looks likely to hit its targets. Its dashboards and analyses are central to Ebiquity’s plans to build out its digital service and product offerings. Over the year to August, it brough 11 new clients on board and had over $4bn of ad spend in scope, across more than 80 markets. Monthly revenues January through August grew at an average of 26.2%.

As shown in Exhibit 9 below, our model continues to assume a lower rate of year-on-year decline in H220 as the deferred work comes through and work for new clients builds through H220 and into FY21. This tallies with management’s indication for better revenue performance in H220. We have made provisional assumptions that this results in a 10% revenue uplift in FY21e, with a recovery in operating margin, as shown.

As highlighted by Exhibit 9 below, the Analytics & Tech segment had a tougher period than might have been expected given it had previously been the higher growth segment, but much of this is down to its sector vertical exposure, particularly to the automotive industry. Major projects were deferred or cancelled by some of its largest clients in the airline, retail and automotive sectors. The year-on-year revenue comparison is also disadvantaged by the inclusion of Stratigent in H119, without which the decline would have been closer to that posted by Media. The Advanced Analytics practice was down by just 4%, while adtech retrenched 41%. Martech was down by 81%, but only by 41% if Stratigent is excluded. Martech now solely consists of Digital Balance in Australia (but working globally). Adtech assists in evaluating in-housing decisions and the selection of advertising partners. Delays to large client purchase approvals, due to COVID-19, held the adtech practice back in H120. New client wins in the US and Italy should help through the rest of the year and into FY21.

While there is no management guidance for FY21, our model assumes that Analytics & Tech revenue growth is roughly in line with that of Media in FY21 and that margins start to recover.

Our forecasts do not reflect any benefit from the strategy outlined at the CMD. In terms of growing the top line, the potential is clearly substantial, considering the group has limited exposure to the digital half of the advertising market and the half is growing (FY20 possibly being the exception). We would hope to be in a position to quantify the opportunity when management has been through its three-year planning process and defined its KPIs, which we would expect to be at the publication of the FY20 results in Q121.

The indication was that there need not be any major infrastructure spend to realise the ambitions, but there will need to be repurposing of assets and of people to new roles.

The role of automation is important in facilitating the margin expansion. Restoring the group operating margin, post central costs, to FY19 levels of 9.0% would be a first point, but the potential should be for low double-digits within a relatively short horizon. Over the medium term and if all goes to plan, then, those margins could climb through the teens. A highly productised and automated output might deliver operating margins into the mid-teens, with the platform and outputs embedded into the clients’ workflows, potentially generating high levels of ‘sticky’ recurring revenue. The business currently generates high levels of repeat revenues and has low client churn, but this partly reflects the difficulty and disruption of replicating historical data. The intention is to replace existing arrangements with longer-term contractual relationships. As an example, YouGov, which shifted much of its business from one-off bespoke projects to a highly productised set of products and services grew its EBITDA margin from 8.0% to 23.2% and its operating margin from 6.7% to 13.5% between 2009 and 2019.

This year’s cash flow is obviously reflective of the difficult trading in H120, although the impact is softened by a stronger working capital position. Generally, as a primarily consultancy business, often project-based and selling people’s time, the group’s cash-flow attributes have not been particularly attractive. This was compounded by the historic running of the group on a geographically devolved basis, with limited commonality of systems and procedures. This aspect has been professionalised over recent reporting periods, with greater focus on collections and working capital management.

A total of £0.6m was paid for the initial tranche of acquisition cost for Digital Decisions in January 2020. Future payments are dependent on performance through FY20 and FY21/FY22. At 30 June 2020, the net present value of the expected payments was £5.1m. The group also bought out the 49% minority in its Italian operations in May 2020, for £154k in cash and £818k in shares. The balance of £2.286m will have been paid by March 2021.

The conversion of operating profit into cash should improve under the outlined business trajectory.

The balance sheet at end June showed net debt of £5.1m (excluding leases), from £5.6m at the previous year-end. This was made up from £14.5m of cash, with £19.0m of bank debt and a £0.8m US payment protection programme loan, which is expected to convert into a grant. By end-August, net debt had increased to £7.0m, with the cash balances at £12.6m. There remains £5.0m undrawn within the revolving credit facility (RCF). The group has agreed modified covenants on this RCF that run through to December 2021. These involve a monthly liquidity test, requiring a minimum of £5.0m (in cash plus any undrawn facility) to be available at the end of each month.

Our projection for the year-end remains for net debt of £8.8m, with an improvement through FY21 as trading conditions improve, the benefit of the business won from Accenture starts to register and Digital Decisions’ revenue momentum continues.