Higher marketing spend key to growth

Cliq Digital 23 April 2018 Update
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CLIQ Digital

Higher marketing spend key to growth

Media

Scale research report - Update

23 April 2018

Price

€5.08

Market cap

€32m

Share price graph

Share details

Code

CLIQ

Listing

Deutsche Börse Scale

Shares in issue

6.2m

Last reported net debt (€m) at end December 2017

5.5

Business description

CLIQ Digital is a sales and marketing group for digital products and services. It also operates a proprietary payments platform. It is headquartered in Dusseldorf and has offices in Amsterdam, London and Paris. Via its network of affiliate partners and its own direct media buying platform it has customers across the globe. In 2017 76% of sales were generated in Europe, 13% in the Asia Pacific region and 8% in Africa.

Bull

Exposure to the fast-growth mobile marketing sector.

Experienced management.

Strong revenue momentum over the last few years.

Bear

As the group scales it may become harder to maintain the same rate of marketing efficiency.

Dependent on major mobile carriers and gateways for customer access and invoicing.

Limited exposure to the potentially faster growth developing markets.

Analysts

Bridie Barrett Schmidt

+44 (0)20 3077 5700

Alasdair Young

+44 (0)20 3077 5700

CLIQ Digital’s FY17 results were slightly short of guidance and consensus estimates, yet still delivered 23% increase in net income underpinned by improved marketing efficiency and lower overall marketing spend in H217. With new products launched in Q118 and the benefit of the recent acquisitions, CLIQ plans to increase marketing spend again in FY18, key to delivering its target for another year of double-digit improvements to net income. While the backdrop of increasing media spend accountability has affected the overall sector rating, CLIQ trades at a 30%+ discount to peers on a multiples basis. Evidence of delivery to plan could prompt a re-rating.

FY17 results: Acquisitions drive growth

Driven by double-digit ARPU growth and a 24% y-o-y increase in the customer base value, mainly from the UME acquisition, CLIQ reported an 8% and 23% improvement to revenues and net income, respectively. Lower marketing spend and an elongated integration time for new products in Q4 meant revenues did not meet the 10%+ guided to by management or the 20% forecast by consensus. Organic performance was muted, with revenues down by 3.5%. Net debt stands at €5.5m, substantially down from €10.6m at year-end 2016.

Marketing efficiency improves as total spend falls

While the ‘CLIQ factor’ (marketing spend efficiency) continued its upward trajectory (up 4% y-o-y), overall marketing spend fell 14%, contrary to management’s target and the enlarged group size. This is in part down to the group’s efforts to ensure a high quality of traffic and in part the Q4 delays to new product launches. While the marketing cuts underpinned an increase to net income in FY17, looking forward, it is important for CLIQ to find profitable opportunities to increase this investment. Given recent product launches, the company expects to return marketing expenditure to plan.

Valuation: Sector-wide headwinds taking their toll

Increased scrutiny regarding online user targeting and a weaker H2 has seen the shares fall almost 50% from their peak, erasing all of 2017’s gains. On a multiples basis, CLIQ trades at a 30%+ discount to the (imperfect) peer group of user acquisition groups. In our view, investors should look for renewed marketing spend increases, which could support a narrowing of the discount.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16

65.3

3.6

0.44

N/A

11.5

N/A

12/17

70.5

4.5

0.53

N/A

9.6

N/A

12/18e

79.5

5.3

0.59

N/A

8.6

N/A

12/19e

87.5

5.9

0.67

N/A

7.6

N/A

Source: Bloomberg, company accounts

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Review of FY17 results

Driven by a strong improvement in ARPU (up 12% y-o-y and 21% h-o-h) and the integration of UME, CLIQ Digital reported revenue growth of 8% for FY17. While the cost per acquisition (CPA) also increased, the critical CLIQ factor also nudged up 4% to 1.47. This is indicative of continuing improvements in the efficiency of marketing expenditure (our initiation report provides more information on the group’s business model).

Exhibit 1: Development of key performance indicators

 

2014

2015

2016

2017

Revenues (€m)

47.3

55.7

65.3

70.5

Number of sales per year

3,123,901

2,263,852

2,599,000

2,066,018

ARPU (€)

5.91

10.8

11.73

13.16

CPA (€)

4.37

7.74

8.32

8.98

ARPU/ CPA (CLIQ factor)

1.35

1.40

1.41

1.47

Customer base value (€m)

15

19.2

20.9

26

Marketing spend (€m)

13.7

17.5

21.6

18.6

Source: Company accounts

CLIQ Digital’s business model is based on generating a return on user acquisition strategies. While a decrease in marketing expenditure underpinned an increase in net income in FY17, looking forward, it is important for the company to find profitable opportunities to increase this marketing investment.

In FY17, CLIQ posted a 14% reduction in marketing spend and a 21% fall in the number of sales over the period, which comes despite the acquisition of UME in July 2017. Furthermore, while the customer base value has grown significantly y-o-y (mainly due to UME), it was down slightly at €26m from €27m at the interim results.

These reductions are a result of the group’s strategy of shifting focus towards more profitable geographies. As a result, marketing spend was faded down in several lower-margin territories (and on lower-margin products). Evidence for this shift can be seen in the regional breakdown of revenues, which saw higher ARPU in North America contribute 2% of revenues (FY16: 0%) and Australia contribute 8% (FY16: 4%). In the current environment of increased scrutiny regarding on online privacy, the group also stepped up its efforts to ensure its marketing spend is fully compliant, adopting a zero risk approach and deciding to reduce the number of marketing affiliate partners with which it works. Furthermore, the company experienced several delays in Q417 with regard to the roll-out of new product portfolios.

Exhibit 2: Summary of P&L

€m

2014

2015

2016

2017

Revenue

47.3

55.7

65.3

70.5

Gross profit

20

28.5

36.6

38.5

Gross profit margin

42%

51%

56%

55%

EBITDA

11.5

20.0

26.1

26.1

EBITDA margin

24%

36%

40%

37%

Amortisation and impairment of CAC

(9.3)

(15.4)

(21)

(20.6)

Adjusted EBITDA

2.2

4.6

5.1

5.5

Adjusted EBITDA margin

4.6%

8.3%

7.8%

7.8%

EBIT

0.3

2.6

4.5

5.2

EBIT margin

0.7%

4.7%

6.9%

7.4%

Profit before tax (as reported)

1.7

1.7

3.6

4.5

Net income (as reported)

1.0

1.4

2.8

3.4

EPS (basic) (€)

0.22

0.22

0.44

0.53

Source: Company accounts

On an organic basis, revenues and net profit were lower than in FY16. The UME acquisition added €7.5m to revenues and €1m to net income for the year. On an organic basis, revenues decreased 3.5% and net profit by 13.7% (although this does include one-off costs relating to the integration of the new products). After stripping out the UME acquisition costs, the enlarged group’s EBITDA margins remained stable at 40%. Despite flat EBITDA, a combination of lower amortisation and impairment charges drove 15% and 20% improvements to EBIT and net income respectively.

Balance sheet and cash flow

Cash conversion (EBIT/operating cash net of investing activities) remained high, at c 100% which, coupled with a reduction in marketing expenditure, meant that net debt was substantially reduced to €5.5m.

Exhibit 3: Summary balance sheet and cash flow

2014

2015

2016

2017

Balance sheet

Total non-current assets

51.6

52.6

51.7

54.9

Total current assets

9.4

9.9

10.9

11.1

Total assets

61.0

62.4

62.6

66.1

Total current liabilities

(10.8)

(14.6)

(13.4)

(17.8)

Total non-current liabilities

(11.0)

(7.1)

(5.8)

(1.7)

Total liabilities

(21.8)

(21.7)

(19.2)

(19.5)

Total equity

39.2

40.7

43.4

46.6

Cash flow statement

Net cash from operating activities

9.2

18.2

25.5

25.2

Net cash from investing activities

(13.9)

(17.3)

(21.2)

(20.0)

Net cash from financing activities

0.8

(4.8)

(3.8)

(0.1)

Net cash flow

(3.9)

(3.9)

0.5

5.1

Cash & cash equivalent (overdraft facility) at end of year

(7.2)

(11.1)

(10.6)

(5.5)

Financing

Bank borrowings

15.5

14.9

10.6

5.7

Cash and equivalents

0.2

0.07

0.05

0.17

Source: Company accounts

Outlook: Marginal gains

The company is targeting another year of double-digit growth in net income in FY18, although Q118 may be affected by the lower marketing investment in Q417.

Maintaining a high CLIQ factor will likely be critical to meeting these projections, as is an increase in marketing spend overall. We understand that the integration issues surrounding the new product have been substantially resolved and the new products (including fitness programme, football and basket-ball highlights packages) have launched. We note that as marketing spend begins to increase again, it may become harder to maintain or improve the CLIQ factor as more of the ‘low-hanging fruit’ is taken, with corresponding decreasing marginal returns per dollar of marketing spend. The groups ‘zero tolerance’ policy to user acquisition fraud may also add margin pressure in the short term – although longer term it should strengthen the group’s position.

Exhibit 4: FY18 KPI targets

FY18 target

Net income (€m)

Double-digit increase

Number of sales

Stable

ARPU (€)

(Slight) increase

CPA (€)

(Slight) increase

ARPU/CPA (CLIQ factor)

Stable

Customer base value (€m)

(Slight) increase

Marketing spend (€m)

(Slight) increase

Net income (€m)

Number of sales

ARPU (€)

CPA (€)

ARPU/CPA (CLIQ factor)

Customer base value (€m)

Marketing spend (€m)

FY18 target

Double-digit increase

Stable

(Slight) increase

(Slight) increase

Stable

(Slight) increase

(Slight) increase

Source: Company accounts

AffiMobiz and CMind acquisitions

Further to the €10m (of which €4m is contingent) UME acquisition in 2017, in February 2018 CLIQ acquired an 80% interest in media buying companies AffiMobiz (France) and increased its stake in CMind (Netherlands) from 67% to 80%. These acquisitions are complementary to the group’s strategy, as they will reduce dependence on a small group of media partners, while improving the vertical integration of the business. The benefits of these acquisitions are likely to be seen in improved marketing efficiency as opposed to immediate revenue growth. Terms of the deals have not been disclosed.

Valuation

The shares have fallen almost 40% since their peak above €9 in January 2018 and now trade at their lowest level since the end of 2016.

Exhibit 5: Share price performance

Source: Bloomberg, Edison Investment Research

Management expects the rising penetration of mobile payments and improving bandwidth (4G/5G coverage) to provide a tailwind over the mid-term. These factors are expected to continue to drive consumption of digital content, thereby expanding the market opportunity available to the business. While the current environment of heightened scrutiny regarding online customer targeting may lead investors to approach the whole sector with more caution, based on consensus estimates against its peers, CLIQ trades at a significant discount on most metrics. The 8.6x FY18e P/E is a discount of 45% vs peers, and 7x FY18e EV/EBIT represents a 47% discount. However, these discounts narrow when looking at FY19e numbers, potentially indicating that the market is cautious about CLIQ’s near-term growth potential.

Reassurance that the company can return marketing spend to growth (while maintaining a high CLIQ factor) could be the catalyst for a re-rating.

Exhibit 6: Peer comparison

Name

Market cap (m)

Sales growth FY1 (%)

Sales growth FY2 (%)

EV/Sales FY1 (x)

EV/Sales FY2 (x)

EV/EBIT FY1 (x)

EV/EBIT FY2 (x)

Hist P/E last (x)

P/E FY1 (x)

P/E FY2 (x)

Hist div yield last (x)

CLIQ Digital

32

12.7

10.1

0.5

0.5

7.0

6.4

15.3

8.8

7.8

N/A

Imimobile

176

39.9

11.7

1.5

1.4

N/A

N/A

14.8

25.1

20.9

N/A

Acotel Group

17

15.6

8.0

0.5

0.5

(1.6)

(3.9)

N/A

(5.5)

(16.4)

N/A

XLMedia

338

10.0

6.6

2.9

2.8

10.5

9.9

17.8

14.0

12.7

3.6

Taptica International

206

55.7

10.5

0.9

0.8

8.3

7.3

28.0

10.7

9.6

1.2

Rhythmone

136

94.3

49.0

0.5

0.4

16.2

4.1

N/A

17.0

4.7

N/A

Jackpotjoy

594

8.9

8.0

2.7

2.5

17.3

14.5

N/A

7.0

6.3

N/A

Stride Gaming

161

10.8

11.8

1.4

1.3

9.4

7.3

N/A

10.5

8.6

1.4

Kape Technologies

148

13.5

8.1

1.9

1.8

16.8

12.9

N/A

27.3

22.7

N/A

Average

31.1

14.2

1.6

1.4

13.1

9.3

17.8

15.9

12.2

2.1

Source: Bloomberg. Note: Prices as at 17 April 2017.

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