Ebiquity — A guiding hand for advertisers

Strong position in the industry

Ebiquity is well placed to assist advertisers in the rapidly changing and complex media environment where trust in media partners has been compromised. Its independence distinguishes it from the consultancies that have moved into the arena, but which also offer some of the services on which they advise. Ebiquity’s brand is highly respected within the industry, with its authoritative reports and keynote speeches. The group works with 70 out of the world’s top 100 leading brands, across a broad variety of sectors, including FMCG, automotive, telco, retail, finance and healthcare. It also partners leading advertiser associations globally, including the US Association of National Advertisers (ANA) and World Federation of Advertisers (WFA). It was contracted by ANA to write a landmark report and recommendations on media transparency in 2016.

Focused on core strengths

The last 18 months or so have been difficult for the group as it sought to reconfigure to coalesce around its core strengths. The disposal of the Ad Intel business, which had limited scalability, was a positive move, despite reducing the size of the group (Ad Intel represented 23% of whole group FY18 revenues and 13% of operating profit). However, the referral to the CMA led to a lengthy delay and damaging uncertainty, and absorbed a great deal of management time and resource. The completion of the disposal in January 2019 draws a line and allows us to offer an appraisal of the health and prospects of Ebiquity in its new configuration.

Stronger management team

The management team has been strengthened by the recruitment of Alan Newman in January 2019 as CFO and COO. He was lately CFO of YouGov, until his retirement last year, and brings considerable experience in running a global business driven by data. We expect him to be standardising and tightening reporting procedures across the various offices, which should improve the group’s visibility and enable any issues arising at local level to be recognised and acted on where necessary. Increasing Ebiquity’s process efficiency through greater automation and creation of a shared delivery centre should help to reduce costs and further improve the service delivered to clients, including by easing the collection of data from media agencies.

Growth goals set

Five-year goals for the continuing business were set up in 2017 across five areas: people, product, process, profile and performance. The last of these, performance, is to deliver sustainable, double-digit revenue growth at sustainable operating margins. Our short-term forecasts are drawn more conservatively than this, with revenue growth of high-single digits, similar to the 8% revenue growth delivered by the continuing businesses in FY18. The operating margin (continuing business, underlying basis) fell in FY18 from 14% to 9%, in part due to planned investment not producing revenue growth to the extent originally anticipated. During FY19, Ebiquity will be carrying some continuing costs associated with the disposed business (property and people), but we model the operating margin starting to recover from FY20e.

Strengthened balance sheet

The disposal has considerably strengthened the balance sheet. End FY18 net debt stood at £27.5m, but the £20.0m proceeds from Ad Intel were received on completion in the first week of January. This gives the group the scope to cover the duplicated costs referred to above and to make appropriate capital investment to support growth in the continuing business. We forecast net debt at end FY19 of £7.2m.

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.

Ebiquity was founded in 1997 and, over the decade 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 (post Ad Intel disposal) it has c 570 employees across 18 offices globally. In FY18, approximately 29% of revenues were generated in the UK, 20% from North America, 37% from the rest of Europe and 14% from the rest of the world. The group has access to significant quantities of relevant second- and third-party data through its relationships with advertisers and agencies, which management describe as the world’s largest independent pool of media performance and cost data. This represents a notable barrier to entry – one that would be difficult to replicate by the major consultants that compete both with Ebiquity and with its clients.

With the disposal of the Ad Intel operation, Ebiquity is now in a position to focus on its core competency: working with advertisers to optimise their media spend and performance. The disposal to Nielsen was for £26.0m, with the net proceeds of £20.0m received on 2 January 2019. The group is now smaller (in revenue terms), but also simpler and more focused. The FY18 accounts have been presented with Ad Intel as a discontinued business and with the assets separately identified on the balance sheet. The cash flow, however, represents that of the whole group as it stood for the year. The Ad Intel business was primarily a product business, whereas the media offering is heavily weighted toward consultancy.

The group is now organised in two segments, as shown above. In earlier reporting periods, these segments were known as Media Value Measurement (MVM) and Marketing Performance Optimisation (MPO). The Ad Intel business was reported as Media Intelligence (MI). The new reporting segments offer far greater clarity.

The aim of the Media segment is to help clients to “achieve higher media performance through best-in-class media management and transparency”.

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 out the service it offers clients, with new specialists appointed in the UK and the US.

The second element is a media performance service. This generally includes media spend benchmarking, media spend tracking and/or digital media assessment: assessing and optimising media buying performance with one global methodology across key marketing channels.

The third area of service offering is in contract compliance, centred on FirmDecisions, a leading global consultancy in marketing financial transparency, founded 19 years ago and bought by Ebiquity in 2012. It covers marketing and media agencies, incorporating creative, media, digital, events, point of sale, or direct marketing below-the-line agencies. The contract compliance practice has been growing strongly and expanding this internationally has been a key priority.

In combination with the consultancy business offering, Ebiquity has also developed tools in the Media practice:

These two practices made up the balancing 22% of FY18 continuing revenue of the Ebiquity service offering. 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 comprises data analytics and optimisation and areas such as UX (user experience for customers visiting websites).

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

The business model centres on taking media and marketing data from advertisers and from markets, analysing it and using the outputs to drive greater marketing returns and business impact. Because of its independent positioning, the group has access to significant data sets not available to others and has developed the infrastructure and toolset to process the data quickly and efficiently.

The graphic below, based on the company’s own version, demonstrates how the overall group service offering can be pulled together to support a client’s CMO in their core activities in order to make best use of their media involvement.

We expect the reconfigured management team (see below) to be defining and refining the corporate strategy over the next weeks and months. The previous Growth Acceleration Plan was centred around the five ‘P’s in this section heading, which retain their relevance:

The ethos is one of organic growth, although bolt-on acquisitions that would bring in a particular skill- or tool-set, especially in data analytics, or those that might accelerate the growth of the group especially in the key US market, could be attractive. This is always with the proviso that the pricing would need to be sensible.

Ebiquity’s CEO is Michael Karg, who joined the group in January 2016. He was previously CEO international of Razorfish, a digital agency acquired by Publicis in 2009, advising clients on their marketing and digital strategies. In January 2019, a new CFO/COO was appointed: Alan Newman, recently retired CFO of 10 years tenure at YouGov. During that time, he helped YouGov to grow its revenues and profits significantly.

Rob Woodward was appointed chairman in May 2018, having joined the board a couple of months earlier. Rob was CEO of STV for 11 years, implementing that company’s digital transformation.

Large, complex and growing market

A lot of the most useful commentary on the state of the advertising market comes from Ebiquity itself. Its latest reports are available at www.ebiquity.com/news-insights/

Global ad spend forecasts have been pulled back over the last year, reflecting concerns over the Chinese economy and the prospect of escalating trade wars, but are still showing reasonably healthy growth.

2019 is expected to be the year when digital ad spending in the US is greater in value than traditional advertising spending in 2019, according to eMarketer and others. The growth is heavily weighted towards Google and Facebook, with a stronger showing still from Amazon as it expands its remit into new consumer and B2B arenas. eMarketer suggests that digital advertising will exceed two-thirds of total US media spending by 2023. Other territories tend to follow the pattern set by the US, the largest global market.

As digital has gained traction, negotiating the advertising ecosystem has become increasingly complex, hampered by the lack of transparency.

A recent widely-quoted report released by Winmo stated that the average tenure of a chief marketing officer was around three-and-a-half years, roughly half the average tenure of a CEO. This matters as the change in CMO will generally prompt an agency review within 18 months. There is therefore a constant source of potential business for Ebiquity as each newly installed CMO reviews their existing supplier relationships.

Transparency

The breakdown of trust between clients and media agencies built over a number of years, fuelled by a lack of transparency over issues such as rebates, and came to the fore in 2015. In 2016, the Association of National Advertisers (ANA) in the US commissioned K2 Intelligence and Ebiquity’s FirmDecisions to write an authoritative report on the issue, with recommendations on how to restore trust and understanding into the relationship. This has only partly been successful. A new (January 2019) ANA study found that only 29% of its 400-plus member marketers surveyed ranked the current level of trust between client-side marketers and advertising agencies as “high.”

Brand safety

Brands finding that their adverts have been served up alongside illegal or offensive content has led to a crisis of confidence with platforms such as YouTube, leading some to withdraw from the platforms completely until more effective controls can be put in place.

In-housing

Some high-profile advertisers have responded to the trust issues, and in response to pricing, by bringing their media buying in-house. Some are also bringing in other aspects of their advertising and marketing back from external agencies.

With constant pressure on advertising and marketing budgets and the increasing requirement for projects to demonstrate the effectiveness in terms of return on investment, as well as some of the issues briefly outlined here, there is a clear role for an independent and authoritative advisor to the CMO – a role that Ebiquity is well placed to fulfil.

We consider Ebiquity’s 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:

With the potential revision of the group KPIs later in the year, our forecasts – and the market appraisal of the group’s prospects – are based on the continuing businesses and their potential returns. Clarification of additional investment costs and timing of de-duplication will obviously affect the valuation that the market is willing to afford to the group in the shorter term.

Ebiquity is primarily a consulting business and therefore has limited comparability on day-to-day activities with the smaller quoted marketing services companies. Nevertheless, there is no better, obvious peer set to use for a contextual comparison. S4, included below, is a start-up with a highly acquisitive strategy, so its current year multiples are consequently inflated.

To calculate the EV for Ebiquity in this context, we have used the net debt figure including the capital inflow from the Ad Intel disposal a few days post year-end, which brought in just under £20m. Ebiquity is clearly valued at a discount to these other UK quoted small- to mid-sized marketing services groups of around 28% on a P/E basis and just over 44% on EV/EBITDA, EV/EBIT. The EV/sales metric is a poor tool in this context due to the varying definitions and nature of the revenues.

Parity on a P/E basis would imply a share price of 57.6p (averaged across the two forecast years).

Parity on EV/EBITDA across FY1 and FY2 suggests a share price of 81.3p.

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 10% for FY19 and FY20, although we would point out that this is based on potentially conservative assumptions about top line growth and overhead recovery. Even if this were to be ‘peak’ medium-term margin and there were to be no revenue growth at all, which would be a very disappointing scenario, our DCF (built on a WACC of 8.5% and a terminal growth rate of 2%) suggests a share price of 75.4p.

Within the reported numbers, the results from the discontinued business are shown below the line on the income statement and as assets and liabilities held for sale on the face of the balance sheet. The formal cash flow statement, though, is not fully separated out due to the extent of the previous integration at an operational level. Summary cash flow split out between continuing and discontinued was given in the results presentation and is shown below. We have presented our financial summary (Exhibit 11) in exactly the same format as the company.

In FY18, Ad Intel (and the smaller Reputation business, also sold in the year) generated revenues of £20.3m and operating profit of £1.0m. Revenues were 13% below prior year, but there was a more marked decline in profitability, with the operating margin (before highlighted items) retrenching from 13% to 5%.

We withdrew our forecasts last November due to the lack of clarity over the timing of the disposal and the financial implications of the delay. The scale of the impact is considerable; including discontinued business, FY18 revenue increased by 3% to £89.6m over prior year, but underlying operating profit retrenched from £12.0m to £7.3m, a reduction of 39%. £2.0m of the discrepancy is down to the deterioration in the performance of the Ad Intel business as it suffered from the uncertainty resulting from the delay to the transaction stemming from the CMA referral, with both clients and employees affected.

The scale of the disposal makes comparisons with earlier forecasts of limited relevance. The table below therefore shows the results from the continuing business. The measure of operating profit used here is in line with the company’s definition, as being before highlighted items (share-based payments, amortisation of purchased intangibles and non-recurring items).

This breakdown clearly shows the extent of the disruption from the sale process on the continuing business; the impact on Ad Intel itself is no longer relevant to Ebiquity, as the sale was completed at the price originally struck with Nielsen, despite the delay.

The 8.0% growth delivered for FY18 is inevitably a blend of divergent underlying performances, with the Media segment’s contract compliance operations, FirmDecisions, ahead by 12%. Geographically there was also variance, partly explained by the relative maturity of the business units, with the UK (29% of group) up by 5%, while the US (20% of group revenue) grew by 26%.

Given the underlying markets, the Analytics and Tech operations should be capable of greater growth than we have modelled, particularly as they are more suitable for productisation and therefore more potentially scalable. Double-digit revenue growth should be achievable. The Media operations are more mature, with growth likely to come from geographic expansion and through increasing revenue per client through selling additional products and services.

Achieving sufficient scale in the US market with the right products and services would make the difference between delivering respectable growth and strong growth.

Operating margins clearly retrenched in FY18. Gross margin on continuing business slipped from 49.2% to 45.8% with higher external partner and production costs and direct partner staff costs. We have assumed some further slippage here to 44.0%, although this may prove overly cautious.

At the operating level, financial performance was affected by increased investment in people and systems across the year which was then not recouped by sufficient top-line progress. The destabilising influence of the extended sale process for Ad Intel on the rest of the group was likely also to have been a factor. The investment should not be regarded as a negative, though. Some was directed towards improving efficiency; the rollout of new tools to increase the amount of automation and standardisation, as well as improving data security, together with a new shared service centre in Spain. The balance of investment (not quantified) was in people/talent within contract compliance and advanced analytics, plus a new UK Tech advisory team, as well as funding directed at raising the group’s profile and brand prominence and putting in a team of client managers to drive revenues in the largest trading partners.

For FY19, the group will need to carry some of the contractual costs relating to servicing the Ad Intel business until the support element is fully extracted and there are then also the elements of spreading the central costs over a smaller base. There may be some reconfiguration of the allocation of cost between the divisions and the centre to enable a more accurate picture to be presented. Our modelling shows the operating leverage starting to kick in from FY20e as the top line progresses, leading to a steady recovery in margin. Given the degree of uncertainty over timings, management is reluctant to issue meaningful guidance at this point.

Highlighted costs in the accounts for FY17 and FY18 were as shown in the table above. We have split off the share-based payments and acquired intangible amortisation as these are shown separately within our financial summary, Exhibit 11, below. The goodwill associated with the Chinese operation was written down as it had not performed as had been hoped. A new manager has been appointed who is focused on driving growth and profitability. Costs relating to the Ad Intel disposal totalled £2.0m. Severance payments included those relating to senior management changes in Europe, while the onerous lease payments relate to offices in Hamburg and Sydney vacated by Ad Intel.

The reduction of the debt position post receipt of the Ad Intel proceeds should lead to a saving in interest costs, which we have quantified at just short of £500k in the current year, with a further reduction the following year.

The underlying tax rate charged in FY18 was 28%, compared to 32% in the prior year, reflecting lower corporation tax rates. The group should benefit from further reductions in rates in the UK and the US in the current year and FY20e. Our model therefore indicates EPS growing by 16% in FY19e and 24% in FY20e, on a PBT number rising 5% in the current year and 20% the year after.

The dividend for FY19 was held at 0.71p and we model an increase to 0.85p in FY19 and to 0.95p for FY20, which would be covered 5.0x, then 5.6x, by earnings.

As primarily a consultancy business, albeit one with a technical and data-driven input basis, the requirement for funding large-scale infrastructure projects is limited.

The £6.4m cash balance shown in this table is net of bank overdrafts of £2.4m, thus tallying with the £8.8m shown on the balance sheet. The £4.4m cash generated from continuing activities includes the highlighted items in Exhibit 8 and, on an underlying basis (adding back the non-cash elements) was £8.8m, representing cash conversion of operating profit of 138%.

In forecast years, the cash flow will be lifted by a lower interest charge post the reduction in debt and we have modelled a slightly lower underlying capex cost of £1.8m, inflated in FY19 to £3.6m by planned property moves associated with reconfiguration for the continuing business.

As at the balance sheet date, net debt stood at £27.5m. This figure was reduced by £20.0m (net of tax and costs) in early January, hence our use of £7.5m in calculating the group’s enterprise vale for the valuation section, above. Our modelling indicates a year-end figure of £7.2m, coming down to £4.3m by end FY20. The disposal proceeds have been used in part to repay £17.0m of the revolving credit loan facility.

As might be expected in what is primarily a ‘people’ business, the bulk of the group’s assets are goodwill and other intangibles.