Improving profitability

CLIQ Digital 11 October 2019 Update
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CLIQ Digital

Improving profitability

Media

Scale research report - Update

11 October 2019

Price

€2.05

Market cap

€13m

Share price graph

Share details

Code

CLIQ

Listing

Deutsche Börse Scale

Shares in issue

6.2m

Last reported net debt as at 30 June 2019

€8.0m

Business description

CLIQ Digital is a direct marketer of digital entertainment products to consumers via mobile and online marketing channels, using its own payment and distribution platform.

Bull

Exposure to the fast-growth mobile marketing sector.

Experienced management.

Breadth of content.

Bear

Regulated, fast-moving markets.

Dependence on major mobile carriers

Limited exposure to the potentially faster growth developing markets.

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5737

Russell Pointon

+44 (0)20 3077 5757

CLIQ Digital’s half year report shows progress quarter-on-quarter, although gross revenues were 8% down on prior year. Margins are starting to improve after earlier cost cutting, and customer base value (CLIQ’s measure of expected future revenues) has edged ahead from the end FY18 level. Consumer appetite for digital entertainment remains very strong across product groups and the company needs to ensure that its content portfolio remains sufficiently attractive to bring in (and retain existing) subscribers. The market valuation is at a persistent discount to peers.

Quarter-on-quarter progress

While gross and net revenues were both down against H118 (by 8% and 4% respectively), Q219 was 5% up on both measures over Q119, that quarter having shown 2% and 4% improvements over Q418. The CLIQ-Factor (the ratio of revenue from a customer compared to the cost of customer acquisition) also moved ahead over these three consecutive quarters, from 1.32x to 1.34x to 1.46x in Q219. Marketing spend has been relatively stable, implying that it has been more effectively focused through better use of data. Lower personnel costs following earlier headcount reductions helped lift the operational EBITDA margin to 8.3% in the half (6.5% after redundancy costs) compared to 6.6% in H118. A swing from net finance income of €0.6m in H118 to an expense of €0.4m is down to fair value movements on financial instruments taken through the P&L. The earnings impact was mostly offset by tax gains on prior year adjustments and reversals of temporary differences.

Digital entertainment core activity

Of H119 revenues, 90% came from digital entertainment services; the balance from digital marketing services. FY18 revenues were generated 80% in Europe (a half year revenue split is not given). H119 accounts show a large increase in minority interests, at €1.0m of the €1.5m net income. Subsidiaries include Red27 Mobile in the UK, 51% owned, and Hype Ventures in The Netherlands, 80% owned.

Valuation: Discount to peers

CLIQ trades at a discount of around 40% to a broad peer set of user acquisition groups, on an average of FY1 and FY2 EV/sales, EV/EBIT and P/E multiples. The range of multiples, however, is wide, reflecting different growth dynamics within the peer group. This discount in part reflects CLIQ’s smaller size. Delivery on improving revenue and profit margins could lead to its narrowing.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

EV/EBIT (x)

P/E
(x)

Yield
(%)

12/17

70.5

4.5

0.52

0.0

4.0

3.9

N/A

12/18

58.2

3.4

0.34

0.0

7.0

6.0

N/A

12/19e

55.3

2.4

0.25

0.0

7.0

8.2

N/A

12/20e

57.0

3.3

0.35

0.0

5.5

5.9

N/A

Source: Refinitiv

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 H119 results

Exhibit 1 below details CLIQ’s operational performance during H119 and the trends from H117 on. The key difference between the reported and the adjusted figures is the €0.5m of redundancy costs included in operating expenses within the reported figures.

Exhibit 1: P&L highlights

H117

H217

2017

H118

H218

2018

H119

Revenue (€m)

34.9

35.6

70.5

30.6

27.7

58.2

28.2

Growth y-o-y %

-13

-22

-17

-8

Gross profit (€m)

17.9

8.4

7.7

16.1

7.9

Growth y-o-y %

-10

-6

Opex (€m)

12

6.7

5.3

12

5.6

Growth y-o-y %

-2

-16

EBITDA (€m)

2.5

3.0

5.5

2.0

1.9

3.9

1.8

Adj EBITDA (€m)

1.7

2.4

EBIT (€m)

2.4

2.8

5.2

1.5

1.5

3.0

1.4

Adj EBIT (€m)

1.2

1.9

Growth y-o-y %

-38

-46

-42

-8

PBT (€m)

2.04

2.46

4.5

2.05

1.35

3.4

0.95

Attributable profit (€m)

1.47

1.904

3.3

1.41

0.79

2.2

0.48

EPS diluted (€)

0.23

0.29

0.52

0.22

0.12

0.34

0.08

Growth y-o-y %

-4

-59

-35

-64

Gross profit margin

25.4%

27.5%

27.8%

27.7%

28.0%

EBITDA margin

7.2%

8.4%

7.8%

6.6%

6.9%

6.7%

6.5%

Adj ABITDA margin

5.6%

8.3%

EBIT margin

6.9%

7.9%

7.4%

4.9%

5.4%

5.2%

4.9%

Adj EBIT margin

3.6%

6.7%

Attributable profit margin

4.2%

5.4%

4.7%

4.6%

2.9%

3.8%

1.7%

Source: CLIQ Digital accounts, Edison Investment Research

Underlying revenue declines easing

FY18 was a difficult year for CLIQ as it transitioned from affiliate marketing to direct media buying. Delays in new product launches meant that marketing spend was curtailed in Q417, affecting the sales of subscription services in the new calendar year. H218 continued to struggle, in part attributed to the warm summer. The improvements logged on a quarter-by-quarter basis from Q418 on are therefore welcome, albeit that the cumulative H119 revenue and gross profit figures are still below those achieved in the prior year. H219 figures will be against easier comparatives.

Profitability helped by personnel cost savings

Personnel expenses of €4.1m were 9% lower than the comparative period, with this figure including €0.5m of redundancy costs (FTE down by 20 people). Excluding this sum, H119 EBITDA margin would have increased from 5.6% to 8.3%, underpinning consensus forecasts that are looking for a 7.0% margin figure for the full year and the assumption of 8.0% for FY20e. The absence of any impairment charges in H119 resulted in a broadly flat EBIT margin on prior year of 5.2%.

Marketing spend stable over the half

Exhibit 2 below highlights how the KPIs have driven the P&L performance from FY17 to date.

Exhibit 2: Development of KPIs

H117

H217

2017

H118

H218

2018

H119

Revenue (€m)

34.9

35.6

70.5

30.6

27.7

58.2

28.2

Growth y-o-y %

12

4

8

-13

-22

-17

-8

CLIQ factor (ARPA/CPA)

1.48

1.47

1.38

1.33

1.36

1.40

Growth y-o-y %

2

4

-7

-7

+1

Customer base value (€m)

27

26

25

24

24

24.5

Growth y-o-y %

40

24

-7

-8

-2

Marketing spend (€m)

9.6

18.6

9.9

8.9

18.8

9.8

Growth y-o-y %

-6

-14

10

1

-1

Source: CLIQ Digital accounts, Edison Investment Research

Marketing spend held just below €10m for the half year, but the emphasis has shifted from the scale of the investment to its efficacy, by reducing media spend on less profitable segments. This should improve the quality of the business as well as lifting the CLIQ-Factor (ARPU divided by CPA), ARPU being average net revenue per user over the first six months and CPA being the cost of acquiring that user.

The pick-up in the CLIQ-Factor should also presage an improvement in profitability and margin.

Cash flow

In H119, the company saw an operating cash outflow of €0.1m from an inflow of €1.2m in H118, mostly down to swings in working capital. The overhead reduction and improving efficiency of marketing spend should lead to a reversal in the second half.

During the reporting period, CLIQ renegotiated its financing facilities, extending them by €0.5m to €13.5m with a maturity in March 2022 and adding Postbank AG to Commerzbank AG as providers.

There were no new acquisitions in the period and contingent acquisition consideration at the half year was €0.6m, all in current liabilities.

Forecasts and valuation

Consensus estimates were reviewed following the Q119 figures published in May, when a more cautious view was taken by investors on the potential for short-term revenue growth. Revenue expectations were adjusted to a 5% year-on-year decline for FY19 and flat EBIT, implying an improvement in margin.

For the following year, FY20, market expectations are for modest top-line growth of 3%.

Exhibit 3 below summarises the earlier FY19 KPIs provided by the company and progress towards them to date.

Exhibit 3: FY19 original KPI targets

FY19 target

H119 progress

Revenue

Steady organic growth

Revenues down 8% y-o-y, but customer base value up on 31 December, revenues picking up quarter-on-quarter and easier comparatives for H2

Gross margin

Increase

Increase of 2% y-o-y, due to shift in billing method

ARPU/CPA (CLIQ factor)

Stable

Increase from 1.38 in H118, 1.33 in H218 to 1.40 in H119

Marketing spend (€m)

Increase

Broadly flat y-o-y at €9.8m

Operational EBITDA* (€m)

Increase

40% increase y-o-y from €1.7m to €2.4m

Operational net income* (€m)

Sustainable increase

Operational net income up 70% to €1.4m (prior year adjustments, fair value movements and redundancy costs result in a 17% decrease in net profit)

Source: CLIQ Digital accounts, Edison Investment Research. Note: *Operational EBITDA and net income as defined by the company.

The share price started the year at €1.91 then had a strong run up to €3.31 in early February. From early April, the price drifted off, trading in a range of €1.90 to €2.50 from early May to date as earlier expectations of improved FY19 financial performance moderated.

The shares still trade at a substantial discount to the wider peer group across all metrics. Of particular note are FY1e EV/sales (CLIQ: 0.4x vs peers average 1.1x) and the P/E (CLIQ: 8.8x vs peers average 15.8x) multiples. Some of this discount reflects CLIQ’s smaller size. Delivery on improving revenue and margins could lead to its narrowing.

Exhibit 4: Peer comparison

Name

Market cap (m)

Sales growth (%)

EV/sales (x)

EV/EBIT (x)

P/E
(x)

Hist div yield (%)

FY1

FY2

FY1

FY2

FY1

FY2

FY1

FY2

Last

IMImobile

£243

13

18

1.6

1.3

16.0

13.8

20.6

18.2

0.0

XLMedia

£111

(32)

(2)

1.2

1.2

3.9

3.5

7.3

6.1

5.5

Tremor Video

£166

44

13

0.3

0.3

2.6

2.0

3.9

3.4

0.0

Claranova

€268

62

55

0.9

0.6

17.3

8.8

31.6

13.9

0.0

Kape Technologies

£117

37

17

1.5

1.3

9.3

6.6

15.4

10.9

0.0

Average

24.8

20.2

1.1

0.9

9.8

6.9

15.8

10.5

1.1

CLIQ Digital

€14

(5.0)

3.0

0.4

0.4

7.3

5.8

8.8

6.3

0.0

Discount

64%

55%

26%

16%

44%

40%

Source: Refinitiv. Note: Prices as at 1 October 2019. Claranova is a research client of Edison Investment Research.

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Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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General disclaimer and copyright

Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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