Good EPS growth on higher operating margin

Ebiquity is an independent marketing performance specialist and a leading provider of business-critical media and marketing analytics to advertisers and media owners on an international basis. Its strategy is to become the leading and most respected independent provider of data-driven actionable insights to the global marketing community. Over the past six years, the group has made a series of significant acquisitions, which have established it with a global media presence. The group operates from 20 global offices plus an extensive partner and franchise network, and provides services to over 1,100 clients across 70 countries, including 85 of the world’s 100 largest advertisers. It benefits from one of the largest international media databases and the largest and one of the most comprehensive in the UK, which have been built over the past decade and represent a significant barrier to entry. The business is structured into three reporting segments:

Although some discount might be expected against larger-cap companies, Ebiquity is trading at a significant discount to all our suggested metrics when compared to selected proxy comparators. We believe that, in the medium term, Ebiquity has the expertise and capability to grow profits at 10%+ pa through organic growth, economies of scale and further acquisitions, although this could be affected by c two-thirds of group revenue being subject to currency fluctuations.

Net debt on the balance sheet at 31 October 2015 stood at £30.8m, a rise from £26.4m at 30 April 2015, reflecting primarily acquisition-related payments of £4.1m. We anticipate that net debt will decline to £29.8m at 31 December 2015 (Dec 2014: £31.6m). We believe that the estimated deferred consideration of £4.4m at 31 October 2015 can be comfortably satisfied by operating cash inflow, available banking facilities and current cash resources.

The major sensitivities for the company include:

A material change in any of these could surprise either on the upside or the downside.

Ebiquity is changing its year end from April to December this year and consequently these interim results (HY Oct 2015) are the last to be reported for an October half-year period. On 30 March 2016, the group will report results for the eight months ending 31 December 2015, together with performance on a pro forma basis for calendar year 2015 and comparative 2014. The board has stated that this change to a December year end will provide greater certainty of year-end out-turn earlier within the group’s financial year end. Following the group’s maiden dividend payment in October 2015, management intends to pay a final dividend for the period to 31 December 2015.

In addition to the reported results, management has again provided data on a constant currency basis (CC), which presents HY Oct 2015 foreign currency-denominated results at HY Oct 2014 foreign exchange rates. The results for HY Oct 2015 show revenue ahead of the comparative period in 2014, up 4.6% CC and up 1.9% reported. Underlying operating profit before central costs rose 6.3% CC and 1.7% reported. Central costs decreased 6.9% CC and 6.4% reported, largely due to reduced recruitment costs and foreign exchange gains. While the tax charge as a percentage of underlying pre-tax profit increased significantly to 27.2% CC, 27.3% reported (HY Oct 2014: 24.4%) as available tax losses are now almost exhausted, underlying EPS grew 23.0% to 3.69p CC and 13.0% to 3.39p reported (HY Oct 2014: 3.00p).

This January, Michael Karg was appointed CEO. He succeeds the CEO for the past eight years, Michael Greenlees, who decided that, having built Ebiquity into a world-leading international marketing analytics company, it is the right time for new leadership to take the business to the next stage of its development.

Since 2013, Michael Karg has been CEO of Razorfish International, the digital business transformation agency of Publicis Groupe, having served previously as COO at Razorfish and Digitas International since 2010. He has worked globally over a 15-year career with Razorfish and Digitas, advising some of the world's largest companies on their omni-channel marketing strategies. While at Razorfish, he was responsible for growth and development in Europe, India, China, South-East Asia and Australia. Michael holds a degree in finance and accounting and a doctoral degree in management. He served as a visiting Fellow at Harvard University from 1999 to 2000. He is also currently a director of Travelzoo (NASDAQ: TZOO).

Michael Greenlees will remain on the board as an executive director until an orderly handover and transition has been completed, and will serve the company in an advisory capacity for two years from 30 April 2016.

Historically, Ebiquity’s business has been second-half weighted to its now old April year end. Investors should note that management has indicated that this seasonal bias is likely to be less pronounced under the new December year-end reporting regime.

MVM saw an increase in client engagements as a result of a large number of media agency reviews, with revenue advancing 6.2% CC, 1.4% reported and by 1.5% like-for-like1 CC. While operating profit and margin declined marginally on a reported basis, these both improved under CC by 7.7% and 30bp respectively.

MPO, the group’s newest and fastest-growing segment, continued to record significant momentum, with revenue growth of 34.9% CC, 38.2% reported and 27.5% like-for-like1 CC. During HY Oct 2015, investment in this segment’s resource was increased to ensure sustainable revenue growth in MPO, resulting in an expected decline in operating margin, though the latter is the highest of the group’s three segments at 33.2% CC and 32.7% reported (HY Oct 2014: 39.5%).

MI benefited from recent investment in its Portfolio platform, which management says has received positive client response with renewals increasing to 96% (HY Oct 2014: 90%). This improvement slowed the decline previously experienced in Portfolio subscription services, though this segment’s project-based services have faced a more challenging climate. The latter significantly contributed to revenue declining 6.1% CC and 7.6% reported. However initiatives taken to improve the efficiency of data capture and processing enabled operating margin to improve to 14.4% CC and to 14.5% reported (HY Oct 2014: 13.8%).

64% HY Oct 2015 of group revenue had foreign currency exposure, affecting revenue by £1.0m and underlying operating profit by £0.3m. If maintained, sterling’s weakness over the past month could reverse the recent currency headwinds to positive and provide added comfort to our FY16e numbers.

Founded as Thomson Intermedia in 1997 and renamed in 2008, Ebiquity is an independent marketing performance specialist and is a leading provider of business-critical media data, analysis and consultancy services to advertisers and media owners on an international basis. Since 2007, Ebiquity has been transformed into a global insights company from a predominately UK-focused business. Over the past six years, the group has made a series of significant acquisitions, which have established it with a global media presence, and it now provides services to over 1,100 clients across 70 countries, including 85 of the world’s 100 largest advertisers. Ebiquity cross-sells its services with 17% of clients (FY Apr 2014: 15%) taking two or more of the group’s offerings as at April 2015.

The group benefits from one of the largest international media databases and one of the most comprehensive in the UK, which have been built over the past decade and represent a significant barrier to entry for any potential competitor. As the group does not buy or sell media, Ebiquity is able to provide a totally independent and impartial viewpoint to optimise return on media investment by channel, brand and country.

The group structures its business into three reporting segments:

The growth of online media, the fragmentation of traditional media, and the increasing demand, particularly in the US, for transparency in media markets are strong drivers for the group’s businesses as advertisers are increasingly motivated to understand how to achieve the best value for money from their marketing spend.

Ebiquity’s business is being driven by an increasing demand for independent marketing and media performance measurement; with the group’s comprehensive data-driven evaluation tools, advertisers and brand owners can explore ways to improve the effectiveness and efficiency of their marketing activities. This helps brand owners gain concrete insight into brand performance and ascertain the return on investment (ROI) of their marketing spend.

The changing face of the media marketing environment has become more diverse by the proliferation of marketing and media channels. This is compounded by the increasing empowerment of consumers through user-generated content such as social media and blogs. In addition, there is a growing demand for procurement departments to be able to demonstrate value for money and compliance with contracts that cover ever-changing and complex media markets.

Ebiquity has built a range of products and services that enable brand owners to reconcile the financial demands and disciplines that are now embedded in modern corporate regulation on all expenditure with the need to measure the return on this investment in the increasingly complex media market.

51.7% of revenue for HY Oct 2015 (FY Apr 2015: 54.2%)
52.6% of underlying operating profit pre central costs for HY Oct 2015 (FY Apr 2015: 63.9%)

MVM includes the group’s media benchmarking, financial compliance and associated services, plus the January 2014 acquisition of China Media Consulting, which extended the group’s geographic footprint into China. In May 2014, the group acquired the outstanding 15% minority interest in Billetts America, the largest of the group’s US MVM businesses. In February 2015, Media Value SL, the group’s franchise partner for media auditing in the Iberian market, was also acquired.

Using proprietary tools, methods and benchmark pools, and applying extensive knowledge of the local media markets in which Ebiquity operates, MVM analyses the actual performance of clients’ media budgets and how their agencies are performing. This enables clients to measure the cost-efficiency of their agencies’ media buying, and assess the quality of their planning and execution, both offline and online. As a result, clients can hold their agencies to account – often with a direct saving – and drive future planning and buying based on independent, data-driven insights.

Each year, Ebiquity analyses over $20bn of real media spend. This data bank is captured and organised using the group’s bespoke systems, and analysed through databases and algorithms generated by internal data analytics specialists. MVM has business operations serving domestic and international client assignments in the UK, Europe, North America and Asia-Pacific. In addition, the group has a worldwide partner network to provide clients with global expertise.

MVM has significant growth prospects from the increasing demand for the group’s services to help advertisers hold their agencies to account for year-on-year cost savings guarantees via its ‘Value Track’ product, as well as financial compliance auditing. In addition, this segment advises clients through an increasing wave of media agency reviews, where they are evaluating the service offering of different agency partners. The lack of transparency in media markets has led to Ebiquity being appointed (alongside a corporate investigation firm) by the Association of National Advertisers, the US trade association for advertisers, to conduct a study of the US media market. This reflects a growing sense of unease among the world’s advertisers as to the value they are achieving from their budgets.

Management expects increasing growth internationally, particularly as clients look to penetrate markets across Asia. To facilitate growth prospects in this region, in January 2014, Ebiquity purchased its long-time partner in China, China Media Consulting Group, a leading independent media auditing and benchmarking company with offices in Shanghai and Beijing, specialising in helping advertisers establish key media buying performance metrics enabling better media value delivery and continuous performance measurement. In June 2014, the group opened an office in Singapore to service its growing business in South-East Asia.

34.1% of revenue for HY Oct 2015 (FY Apr 2015: 34.9%)
24.4% of underlying operating profit pre central costs for HY Oct 2015 (FY Apr 2015: 19.6%)

MI, which includes the group’s advertising monitoring, reputation management and research/insight services, has the capability to provide competitive intelligence in up to 70 markets worldwide.

Enabling businesses and their agencies to understand what is being said to consumers about the brands in their market, via advertising and in earned and owned channels, MI globally monitors advertising spend and creative messaging and captures online news as well as social media mentions. These data are analysed to establish what is being said and how widely it is being communicated. MI works with clients to assess the likely impact, and to develop successful advertising and communication strategies to seize opportunities and guard against threats to their brand.

This segment monitors marketing and advertising content and activity across the full media range. It collects data internationally on online and offline advertising, covering both paid and ‘earned’ (social media). The group captures virtually every advertisement run in the UK across every medium and provides advertising monitoring, and, following the 2010 acquisition of Xtreme, the group has advertising monitoring and competitive analysis capabilities in more than 60 countries worldwide. The group’s very large global databases represent a significant barrier to entry.

Data are captured, coded, tagged and formatted at the group’s four data centres in Newcastle (UK), Chicago (US), Baden Baden (Germany) and Sydney (Australia), and the group provides related information and insight through subscription-based platform products used by brand owners.

These monitoring services provide consumer insight, validation, strategic insights, competitive positioning, analysis of price and competitive claims and market landscaping. Clients typically take the group’s platform products on an annual subscription through an online near real-time portal.

MI is beginning to show signs of recovery in some markets, as a result of further platform investment and innovation for its Portfolio product, as well as the group’s increasing profile and reputation supporting new business conversion. The recent improvement in renewal rates (HY Oct 2015: 96% versus HY Oct 2014: 90%) has slowed the decline experienced over the past couple of years in the group’s Portfolio subscription services. Management says that this provides confidence towards the outlook for MI in FY16.

14.2% of revenue for HY Oct 2015 (FY Apr 2015: 10.9%)
23.0% of underlying operating profit pre central costs for HY Oct 2015 (FY Apr 2015: 16.5%)

MPO consists of the group’s marketing effectiveness services and the August 2013 acquisition of Stratigent, a US-based multi-channel analytics provider that helps its clients to measure and optimise their consumer communications and engagement, mainly focused on ‘owned’ channels.

MPO aims to enable businesses to optimise performance against the identified metrics, such as footfall, cost per acquisition, sales and profit. By applying research, analysis and advanced statistical modelling to activity and effect data, MPO can help clients attribute the impact of different marketing communications activity on performance. As a result, clients can adjust their budgets, media and message mix to improve ROI.

The primary services offered by this segment are:

During 2015, MPO co-produced with the CMO Council a research study into the emerging needs of today’s marketing professionals, which showed that managing data is the number one priority in the new marketing landscape. This is a core area of MPO’s expertise to enable clients to improve their marketing performance.

Our base-case scenario is predicated on six key assumptions, outlined below. A material change in any of these has the potential to surprise either on the upside or the downside.

Historically, the group has benefited from a very high level of recurring and repeat revenue. During FY Apr 2015, contract renewals (by value) remained high with MVM renewals at 94% and MI renewals at 95%, though renewable revenue in MPO was lower at 26%.

In the UK and internationally, Ebiquity has one of the largest media and related cost databases. The sheer size and cost of building these databases is a significant barrier to entry, though MI continues to operate in a competitive market. However, competitors could emerge if they are willing and able to finance such an undertaking, especially as the media industry is dominated by very large global companies, such as Nielson and Accenture.

The group does have significant exposure to foreign currency movements, primarily the euro and the US dollar, and to a lesser extent the Australian dollar. The group calculated the effect of a 10% strengthening of sterling against these currencies would have had a £0.17m impact on FY Apr 2015 underlying pre-tax profit of £10.6m. During HY Oct 2015, 64% of group revenue had FX exposure, primarily to the euro (29%), the US dollar (24%) and Australian dollar (7%), leading to foreign exchange impact on revenue of £1.0m and on underlying operating profit of £0.3m. However, since HY Oct 2015 period end, each of these currencies has strengthened against sterling.

A significant change in levels of advertising and media spend could affect revenue. Industry forecasters are suggesting that global advertising spend increased by around 2% in 2015 and by c 4% in 2016 (source: Warc). However, the potential ROI enhancement from using the group’s services can become even more important should a downturn emerge, while the group’s MI segment is often regarded as a ‘must-have’ service among advertisers’ marketing departments.

The group has been very successful in achieving a leading position in the UK media monitoring, performance measurement and consulting markets. However, the long-term potential of the group lies in building its overseas operations. This has been addressed by the acquisitions made over the past six years. While the integration of these acquisitions appears successful, it should be noted that significant overseas expansion has been a pitfall for many a successful UK company. The group’s top management, including the new incoming CEO, has many years’ experience of managing global operations, which should provide comfort in this regard.

Ebiquity relies on sophisticated IT systems to deliver services to customers, with a substantial emphasis on delivery via the internet. An interruption to such services or the emergence of an alternative, more efficient delivery solution could affect revenue. Ebiquity has a dedicated team of IT professionals that maintain its IT systems, and has invested heavily in back-up systems and procedures to mitigate any problems.

There are no quoted companies that are directly comparable competitors to Ebiquity’s business. For the MI segment, we believe that the main competitor is Nielsen Media Research, owned by Nielsen Holdings (NLSN.N). In the MVM division, we regard the main competitors as Accenture Media Management, part of the Accenture group (ACN.N), and media agencies themselves.

We have identified a selection of companies that have interests in businesses with similar disciplines, eg media research, marketing analytics/intelligence, consultancy and advertising. While these proxy group companies are significantly larger, Exhibit 3 provides some benchmarks for a realistic rating that investors could attribute to Ebiquity.

Ebiquity’s management suggests that the potential addressable market for the group’s products and services is c $30bn within an estimated $600bn global media marketing and advertising market. In addition, management expects that the potential addressable market for the group’s products could reach $100bn by 2018. This implies a significant growth opportunity for Ebiquity, especially as the group has positioned itself well to scale its business globally following the series of acquisitions over the past six years. We believe that Ebiquity has the expertise and capability to grow revenue c 5-10% pa over the medium term, with the MVM and MPO segments being the main growth drivers.

Although some level of discount might be expected against larger-cap companies, Ebiquity is trading at a significant discount to all our suggested metrics when compared to selected proxy comparators. While FY Dec 2015e and FY Dec 2016e normalised underlying EPS growth is likely to be affected by a rise in the tax charge due to the benefit of available tax losses now being almost exhausted, we believe that in the medium term, Ebiquity can grow EPS at 10+% pa through organic growth, economies of scale and further acquisitions, although this could be affected by c two-thirds of group revenue being subject to currency fluctuations.

We are maintaining our FY15 and FY16 estimates. However, if sustained, sterling’s weakness over the past month could reverse the recent currency headwinds to positive and provide added comfort to our maintained FY16 estimate.

Over the past six years, the group has made a series of significant acquisitions, which has established it with a global media presence. Most of these acquisitions have been purchased with an initial cash payment followed by multi-year earn-out payments based on the performance of the acquired business. Exhibit 4 shows those acquisitions that are currently in earn-out mode at 31 October 2015, with estimated remaining deferred consideration totalling £4.4m – all these amounts are expected to be fully paid by August 2017. With the available banking facilities (see below), current cash resources and our estimated strong operating cash inflow, we believe the prospective deferred consideration earn-out payments can be comfortably satisfied.

In July 2014, the group refinanced its banking facilities. The committed facility, totalling £40m, comprises a term loan of £10m, of which £6.9m remains outstanding at 31 October 2015 (31 Oct 2014: £9.4m), and a revolving credit facility (RCF) of £30m, of which £29.0m was drawn down at 31 October 2015 (31 Oct 2014: £26.0m). Both the term loan and the RCF have a maturity date of 2 July 2018. The £10m term loan is being repaid on a quarterly basis to maturity. These facilities may be used for deferred consideration payments on past acquisitions, to fund future potential acquisitions, or for general working capital requirements. In addition, the group has an accordion option to increase these banking facilities by a further £20m.