Ebiquity — Update 28 September 2016

In a complex and fragmented media ecosystem, it is hardly surprising that recent surveys indicate that the most challenging part of a chief marketing officer’s job is to manage, analyse, exploit and optimise the explosion in consumer data. The need for high-quality independent advice has become increasingly necessary – evident in Ebiquity’s growth profile, which has seen a 40% three-year CAGR in revenues in its marketing data and analytics services (MPO division).

Management plans to widen the reach of the MPO division (17% FY16e revenues). This will start with the launch of marketing effectiveness in the US and additional European markets followed by the Asia-Pacific region. Alongside this it will expand the digital capabilities of the MVM and MI divisions to widen and improve its overall service offering. Finally, with only 17% of customers taking two or more services, there is an opportunity to improve client service penetration and plans also include a realignment of the group to support a more integrated approach. In doing so, management plans to position Ebiquity as a leading global technology enabled independent media and marketing analytics consultancy with a more robust longer-term growth profile.

Management believes that on a more sustainable EBIT margin of 12-13%, it can accelerate revenue growth to a CAGR of 10% over the next five years. We update our forecasts to FY17, to capture the initial investment phase of management’s new strategy, as well as today’s interim results, which, with like-for-like revenue growth of 5.2% y-o-y, were broadly as expected.

Management has a strong foundation to execute its plan and we consider the 10.3x FY17e P/E and 8.3x EV/EBITA rating unchallenging (peers average 15x P/E and 12x EV/EBITA). Notably:

Ebiquity competes against large global consulting groups in a price-sensitive market place. As a people-based business, the tight labour market for consultants with appropriate skill sets may affect the pace and cost of management’s expansion plan. 66% of revenues are non-sterling denominated and fluctuations in exchange rates may affect forecasts.

Ebiquity is an independent media and marketing consultancy. Its services and products help brands and advertisers maximise the return on their media and marketing budgets. As the group does not buy or sell media, Ebiquity is able to provide impartial advice to optimise return on media investment by channel, brand and country.

Founded in 1997, over the past decade 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 1,000 clients across 85 countries, including 80% of the world’s 100 largest advertisers. Headquartered in London, it has c 900 employees across offices in 14 countries. Approximtely 50% of revenues are generated in the UK, with c 20% from North America, 20% from the rest of Europe and the balance from its Eastern Europe and Asia-Pacific regions. The group also owns two of the largest international media cost and creative databases, representing a significant barrier to entry.

The group structures its business into three reporting segments: Media Value Management (MVM), Market Intelligence (MI) and the smaller, but rapidly growing Market Performance Optimisation division (MPO).

MPO – rapidly emerging position

The MPO division offers marketing effectiveness and analytics services to improve the ROI of a brand’s cross media strategy.

Marketing effectiveness services use statistical analysis of sales and marketing data to correlate and estimate the impact of marketing tactics and other variables (eg price, location, weather) and forecast the impact of a marketing strategy. The multichannel analytics services support the planning, implementation, measurement and interpretation of data to improve the understanding of customer journeys across multiple channels.

Ebiquity estimates that the current market for marketing optimisation is c $500m, with marketing analytics c $100bn. Although currently the smallest division by revenues, it is the fastest growing, and the focus of management’s strategy to accelerate Ebiquity’s overall top-line growth.

MVM – driving media transparency

The Ebiquity Rack is an industry standard benchmarking tool used to determine the efficiency and quality of ad spend. It is embedded into many contracts between a client and an agency; Ebiquity is the global market leader in this category. It operates directly in 14 markets across Europe, North America and Asia-Pacific.

Services draw on its media cost pool database (one of the world’s largest, which analyses c $20bn of media spend annually), proprietary analytics engine (Value Track captures data from agencies and delivers it to clients via a dashboard) and consultants’ knowledge of the local markets. Using these tools, Ebiquity helps clients set realistic goals for their agencies, analyses and audits the performance of a client’s media budget, and benchmarks their client’s agency performance against sector and peer averages or agreed performance targets (which is important in the calculation of agency bonuses).

FirmDecisions provides advertisers with transparency into their media and marketing agencies and particularly into the compliance of their agencies with the terms of their contracts.

MI – Competitor monitoring and market insight

MI provides tools that enable brands to monitor the advertising and marketing activity of competitors, enabling them to respond and plan appropriately. The backbone of these services is Ebiquity’s advertising creative database (one of the most comprehensive in the world with over 25m adverts, updated daily since the 1950s). Advertising creative across 40 markets (with deep-dive services available in the UK, Germany and Australia) and all key platforms is captured, coded, tagged, formatted and priced (drawing on its media pool database) at the group’s four data centres in Newcastle (UK), Chicago (US), Baden-Baden (Germany) and Sydney (Australia). This information is delivered via a dashboard (Portfolio platform) on a near real-time basis. Whereas the other divisions are services led (c 95% of revenues are generated from services in MVM and MPO), MI is a product-led business model (c 85% from products rather than services). Ebiquity competes principally against Kantar, Nielsen and Competitrack.

The publication of the ANA report on media transparency and subsequent recommendations highlights the need for independent validation of media spend in a market that has become increasingly complex in a digital data-driven environment.

As the media landscape becomes increasingly digital, there is more need for companies to be able to manage and understand large and complex data sets to optimise campaigns in near real time. To do so, advertisers need to negotiate a very complex and fragmented supply chain, compounded by issues such as online advertising fraud, viewability concerns and ad blocking. These complexities can undermine brand building efforts and have a significant effect on the returns on media investments. Recent surveys indicate that the most challenging part of a chief marketing officer’s job is to manage, analyse, exploit and optimise the explosion in consumer data.

Media transparency issues affect many areas of media buying. However, the issue of trust was highlighted this year following the publication of the ANA-commissioned report on the contentious issue of agency rebates. K2 Intelligence conducted the fact-finding study over a six-month period and published its findings in July 2016. The report found that numerous non-transparent business practices were pervasive across a sample of the US media ad-buying ecosystem and a wide range of media. Notable extracts from the report include:

Ebiquity’s standing in the industry was recognised in a high-profile way when it was selected by the ANA to draft a framework to provide business practice clarity.

The increasing demand for transparency has already started to become evident in Ebiquity’s results. Over the last four years, like-for-like growth has tracked up from 2-3% in FY13 and FY14 to 8% in FY14 and FY15 (and 5% H116 – reported today). The acceleration in growth reflects a marked pick-up in growth at MVM and exceptional growth from MPO, dragged down by persistent weakness in MI (Exhibit 4). Excluding the drag on growth from the MI division, revenues from the MVM and MPO divisions grew by 20% in FY15 and 15% in H116.

The new management team today formally unveiled its strategy, which builds on the existing strong foundations to accelerate the longer-term revenue growth profile of Ebiquity.

Appointed CEO in January 2016, Michael Karg replaced Michael Greenlees, CEO of eight years, who will remain in an advisory capacity for two years. Karg has 20 years of experience in the digital marketing industry, most recently as CEO of Razorfish International, the digital transformation division of Publicis. Andrew Noble, who joined Ebiquity in February 2015 as group finance director, was appointed as group CFO earlier in September. He replaced Andrew Beach, who had been CFO since 2008 but resigned in July; Beach has committed to remain at Ebiquity to ensure an orderly transition. Michael Higgins, who has been on the board since 2006, continues his longstanding oversight as non-executive chairman.

Although currently the smallest division by revenue, it is MPO that offers the greatest growth opportunity. CAGR over the last three years has been 40% and this exceptional growth continued in H1, at 53%. Given the strong momentum and significant global addressable market (billions of dollars), management sees an opportunity to scale this division across a wider geographic area, which is where resources are being focused. In parallel, it will invest in the digital capabilities across the group as a whole, and has started a wider group realignment, improving the IT infrastructure and processes to support a more integrated, client-focused group.

In doing so, it expects to create a more geographically diverse, higher-quality business with a more sustainable longer-term growth profile.

Management believes that revenue growth can be accelerated to a CAGR of 10% over the next five years, with margins moving to a more sustainable 12-13% (from the historic three-year average of 16%), still ahead of other agencies operating in this arena. A roadmap has been put in place (Exhibit 5) and we highlight some of the key initiatives below:

MPO – roll-out: Management plans to roll-out the existing MPO services to some of its other geographies. There are two core service offerings: multichannel analytics (offered in the US) and marketing effectiveness (offered in the UK and Spain). This will start with the launch of marketing effectiveness in the US and additional European markets in 2017 followed by the Asia-Pacific region later. Investment will also be directed towards developing and launching a digital attribution model to complement its existing services in traditional media.

MVM – adding service lines: The ANA report has significantly raised awareness of the issues of transparency and Ebiquity’s involvement in the publication of a best-practice guide has also led to an improvement in its brand profile in the US. Management plans to capitalise on its position as an independent voice by widening the service offering and improving its product capabilities. This will include the launch of a new strategic media consultancy, the development of a digital paid media performance measurement platform (Optix) and the launch of a data management platform (Connect).

MI – updated platforms: A new platform, which combines creative and spend data and new reporting and dashboard functionalities, was launched in September, and it is now being rolled out across Ebiquity’s clients. In addition, a digital portfolio offering, which captures banner adverts, to complement the offerings in traditional media will be launched in the coming months. Finally, investment is being made to improve the data capture processes and technology.

Organisational: With the majority of clients still only taking one service line (c 83%), there is considerable opportunity to improve service penetration into its client base. Ebiquity is moving away from a local market based sales structure towards a client-focused one across regional and global lines. Investment will be directed towards improving the robustness of its IT systems, training to update skill levels, as well as an increase in sales and marketing activities to drive brand awareness of the newer services.

The interim results were as we had expected with like-for-like revenues up 5%, reflecting the increasing demand for analytics alongside continued weakness in MI. Our forecast changes reflect currency tailwinds and the investment in the digital product offering.

The company has moved from an April to a December year end and these are the first interim results on that basis. Results were as flagged in the 27 July trading update. Total revenues increased 6.8% on a reported basis (+5.2% l-f-l) to £42.3m, with a 2.5% benefit from currency movements. Operating margins of 20.3% were slightly up on last year. Due to the first-half weighting of revenues, operating margins tend to be higher in that period. Separately disclosed items of £3.4m includes £0.9m of purchased intangible amortisation, £1.6m of deferred consideration adjustments, £0.2m share option charges and £0.7m acquisition and integration costs.

Consistent with recent periods, it was the exceptional performance of the analytics services (MPO) and solid growth from MVM that underpinned this, with MI continuing to struggle.

MPO – H1 revenue growth of 53% continues to reflect the increasing reliance on data-driven analytics in marketing, and this division is now making a significant contribution to group revenues (16%) in H116, and operating profit (20%).

MVM – FY15 was an exceptional year for MVM with 15% revenue growth, as the company benefited from a significant level of client reviews ($40bn of global advertising spend was tendered last year vs $20bn in a more typical year). In H116, revenues increased by 5% (l-f-l), despite some clients in the US delaying spend in advance of the publication of the ANA report. This report has now been published and management expects to see accelerated growth in the second half of the year.

MI – The MI division continued to struggle in H1 with revenues down 11% y-o-y including revenues from the platform based business, which decreased by 4.5%. However, the initial reaction to the new platform (Portfolio) has been positive and it is being rolled out more widely across Ebiquity’s clients, which should support renewal rates (currently 91%).

Overall, we make no change to our FY16 EPS and reduce our FY17 EPS by 14%:

Net debt at 30 June was £28.1m, comprising £6.2m cash and £34.4m debt. The group has a £5m term loan (repayable on a quarterly basis) and a revolving credit facility of £30m (£29.4m drawn), both of which have a maturity date of 2 July 2018 (and covenants set at 2.5x EBITDA). In addition, the group has an accordion option to increase these facilities by a further £20m.

Ebiquity is cash generative, last year converting 110% of operating profit to perating cashflow. However, over the last few years it has been funding the earnout payments on the acquisitions of Stratigent (2013), China Media (2014) and Billets America (2014) and consequently net debt has remained relatively stable. We forecast the last significant payment of £4.3m relating to these acquisitions in H216, decreasing to £2m in FY17. Inclusive of these payments, capitalised R&D spend and the payment of the FY15 dividend, we forecast a year-end net debt of £28.3m, decreasing to £24.0m in FY17.

The company paid a maiden dividend for the year ended 30 April 2015 of 0.4p per share and maintained the same dividend for the eight months to December 2015 (a pro-rata increase). The payment of this dividend was conditional on the cancellation of the company’s share premium account, which was effected on 9 June. An interim dividend of 0.4p has been announced in lieu of this (ex-dividend date of 6 October, payable on 28 October). Going forward, interim dividends will not be paid, however, the board has reiterated its commitment to pursuing a progressive final dividend policy.

With its good brand awareness, recurring client relationships and a global network across 14 countries and 20 offices, we believe that Ebiquity has a solid foundation on which to roll-out its MPO services globally, and improve services penetration into clients more generally. In doing so, it should create a higher-quality company with a more robust longer-term growth profile.

Larger agency and consulting peers trade on average FY17 P/E and EV/EBITA multiples of 17x and 14x, respectively, and small-cap agencies on 14x P/E and 10x EV/EBITA. Although the step up in investment means an earnings contraction in FY17, this reflects the initial investment phase of Ebiquity’s more ambitious growth strategy and we consider the 10.3x FY17e P/E and 8.3x EV/EBITA rating unchallenging. Given the brand, relationships and global footprint that Ebiquity already has, we believe management has a good chance of delivering its strategy. The roadmap the company has laid out (Exhibit 5) will enable investors to monitor the group’s progress.

Know-how: Ebiquity employs c 900 employees, half of whom are consultants. It has deep sector knowledge in several key verticals (eg automotive, FMCG, finance) and a significant understanding of media technology.

Brand: Ebiquity is a market leader in media benchmarking and auditing worldwide and is one of the largest three media monitoring providers globally. A number of Ebiquity’s ‘quality’ tools (eg The Rack) are embedded into many advertiser/agency agreements as a matter of course.

Network: By leveraging existing client relationships across its network of 14 offices, the costs and risks associated with launching new products and services is somewhat mitigated. Ebiquity is already working with 80% of the world’s largest 100 advertisers and over 1,100 clients. This provides a good springboard from which to expand.

Embracing structural changes, which are moving in its favour: Management is building on already very strong momentum in the MPO division.

Revenue visibility: 84% revenues are from renewable contracts and Ebiquity enjoys a high renewal rate.

Independence: The group does not buy or sell media and Ebiquity is able to provide an independent and impartial viewpoint to optimise return on media investment by channel, brand and country. Independence is becoming increasingly important to clients.

Unique databases: Continuously built over the last decade, the group owns two significant international media databases. The ‘media cost pool’ is one of the world’s largest media cost databases (c $20bn of media spend analysed each year), and it also owns one of the world’s most comprehensive advertising creative databases (over 25m adverts).

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:

Competition: While Ebiquity’s large media and related cost databases provide a significant barrier to entry, new 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.

Foreign currency exposure: 66% of revenues are non-sterling denominated. Fluctuations in sterling may affect our forecasts. A 10% strengthening of sterling against these currencies would have had a 2% impact on FY15 underlying pre-tax profit.

Level of advertising and media spend: 84% of revenues are from renewable contracts. With a historically high renewal rate, this provides a good degree of forward visibility. However, these contracts are often based on the value of media spend being monitored, hence a significant change in levels of advertising and media spend could affect revenue.

People business: Ebiquity has c 900 employees across its 14 offices worldwide. Attracting and maintaining highly skilled employees, with the necessary data and technology skills, is becoming increasingly challenging. This may affect the pace and cost of expansion.

Overseas expansion: The long-term potential of the group lies in building out its MVM and MPO practices overseas. 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. However, as companies become more diverse, execution risk can increase.

Technology enabled: Unlike most other consulting industries, media and marketing consultants rely on technology to support their service offerings. Maintaining state-of-the-art systems and processes to support their consultants’ strategic advisory and analytics services is becoming ever more crucial as companies seek to harness wider datasets to understand and predict their customers’ behaviour. Investment requirements may vary from the current plan.

Brexit: We expect Ebiquity to be fairly cushioned from the current uncertainty in the UK economy. 84% of revenues are recurring and as its services are geared to helping companies maximise the efficiency of their ad spend, demand may well increase in times of austerity (as it did for MVM during the 2007/08 period).

M&A: Management has presented an organic growth strategy. However, should opportunities arise to strengthen this plan, we believe acqusitions would be considered.