Team Internet Group — Growth and returns, acquisition bolsters outlook

Team Internet Group (AIM: TIG)

Last close As at 22/05/2024

GBP1.82

7.00 (4.00%)

Market capitalisation

GBP430m

More on this equity

Research: TMT

Team Internet Group — Growth and returns, acquisition bolsters outlook

Team Internet’s FY23 results exceeded our forecasts and consensus on revenue and EBITDA. Online Marketing was driven by increased consumer engagement, reflecting investment in delivering more targeted ads across a wider array of channels. The group’s latest acquisition, Shinez, strengthens Online Marketing via diversification of publishers and is earnings accretive with scope for further synergies. Online Presence returned to strong revenue growth, driven by demand for exotic domains, pricing optimisation and strategic partnerships. Robust free cash flow enabled diverse capital allocation, focused on shareholder returns.

Max Hayes

Written by

Max Hayes

Associate Analyst

TMT

Team Internet Group

Growth and returns, acquisition bolsters outlook

FY23 results

Software and comp services

19 March 2024

Price

135p

Market cap

£351m

US$1.28/£

Net debt (US$m) at 31 December 2023
(includes pre-paid finance costs of US$4.1m and debt-related derivates of US$0.2m)

74.1

Shares in issue

288.7m

Free float

76%

Code

TIG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.9)

10.1

3.3

Rel (local)

(2.2)

8.6

(1.9)

52-week high/low

140p

109p

Business description

Team Internet Group is a global internet company that derives recurring revenue from privacy-safe, AI-based customer journeys that help online consumers make informed choices, as well as from the distribution of domain names.

Next events

AGM

18 April 2024

Q124 trading update

13 May 2024

Analysts

Max Hayes

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5700

Team InternetTeam Internet Group Group is a research client of Edison Investment Research Limited

Team Internet’s FY23 results exceeded our forecasts and consensus on revenue and EBITDA. Online Marketing was driven by increased consumer engagement, reflecting investment in delivering more targeted ads across a wider array of channels. The group’s latest acquisition, Shinez, strengthens Online Marketing via diversification of publishers and is earnings accretive with scope for further synergies. Online Presence returned to strong revenue growth, driven by demand for exotic domains, pricing optimisation and strategic partnerships. Robust free cash flow enabled diverse capital allocation, focused on shareholder returns.

Year end

Revenue (US$m)

Adjusted EBITDA* (US$m)

PBT*
(US$m)

Diluted EPS* (c)

EV/EBITDA
(x)

P/E
(x)

12/22

728.2

86.0

64.3

15.4

5.9

10.7

12/23

836.1

96.4

82.6

22.4

5.3

7.4

12/24e

909.6

103.0

87.7

25.8

5.0

6.4

12/25e

964.5

106.1

90.7

27.1

4.8

6.1

Note: *Excludes impact of share-based payments, foreign exchange charges and non-core operating costs.

Robust results amid a tough advertising environment

FY23 gross revenue was up 15% y-o-y to US$836.1m, with both divisions growing by double digits. Online Presence revenue increased 17% y-o-y to US$179.8m, driven by growing demand for ‘exotic’ names, pricing optimisation and partnerships (see our November update note). Online Marketing revenue rose 14% y-o-y to US$656.3m, validating the strategy to build an Omni-media Omni-monetisation (OM2) Platform. OM2 aims to optimise targeted ad placements across channels, expanding traffic volumes, which was key to offsetting weaker FY23 click prices. The recent acquisition of Shinez for US$41.8m opens up a previously unaddressed monetisation channel and is another step towards completing the OM2 vision. Management is confident in meeting current FY24 consensus estimates. Our FY25 forecast indicates further revenue growth of 6% y-o-y, which does not yet take into account the acquisition (completion expected in late April/early May 2024, first full consolidation in Q324).

Continued margin progression

FY23 adjusted EBITDA rose 12% to US$96.4m, representing 50.7% conversion on US$190.3m net revenue, up 2.3pp y-o-y despite inflation. We forecast margins to remain at these high levels over FY24 and FY25, now at the top-end of management’s target. Robust FY23 free cash flow enabled US$40m of buybacks, US$3.6m of dividends and US$22m of deferred consideration. Reported net debt increased to US$74.1m (0.8x adjusted EBITDA) to support these initiatives but remains low compared to historical levels. Our estimates drive an expected net debt reduction in FY24 to US$28.5m, before swinging to net cash of US$23.6m in FY25.

Valuation: Shinez brings US$1bn+ revenue potential

Across FY24e and FY25e, the group remains at a steep discount versus peers, despite delivering faster FY23 revenue growth and margin expansion. Pro-forma with Shinez, US$1bn+ mid-term revenue seems achievable. Combined with continued operationally geared organic growth, this could drive stock upside.

Organic progress made in FY23, more to come

Team Internet reported FY23 revenue of US$836.1m, slightly ahead of our US$833.7m forecast and substantially ahead of the US$800.7m consensus estimate.

Online Marketing gross revenue increased by 14% y-o-y to US$656.3m, driven by consumer engagement growth from 4.6bn traffic journeys in FY22 to 5.9bn in FY23, more than offsetting the value capture per thousand decline from $105 to $95 amid weaker click prices. Team Internet’s FY23 presentation highlighted its social media specialisation benefiting from rising usage, privacy-safe solutions and diverse return on investment (ROI) optimisation tools. Notably, advertisers are transitioning from pay per impression (PPM) to pay per click (PPC) and pay per action (PPA) models, where investment is directly linked to consumer engagement outcomes. PPC and PPA are core to Team Internet’s platform, lowering risk for advertisers while aligning revenues with performance.

While providing no specific figures, management affirmed the success of its PPA platform Vergleich.org’s international expansion into France through meilleurs.fr in FY23. Building on this accomplishment, it aims to broaden Vergleich.org’s footprint across five additional markets in H224, further capitalising on the global opportunity.

Online Presence returned to strong growth, with gross revenue up 17% y-o-y to US$179.8m. Its performance was primarily driven by increased demand for ‘exotic’ domain names, reflecting the rise of domains like ‘.ai’ that coincide with rising trends as well as the saturation of more typical domains like ‘.com’.

Looking to FY24, momentum with exotic domains and progress with the UK government could provide additional scope for growth. Team Internet’s Registry business has been selected as one of two suppliers of critical domain services to the UK government’s Crown Commercial Service’s Network Services 3 framework. Further out, ICANN’s proposed release of new generic top-level domains in 2026 will provide additional growth opportunities.

Exhibit 1: FY23 results summary

US$m

FY21

FY22

y-o-y growth

FY23

y-o-y growth

Gross revenue

410.5

728.2

77%

836.1

15%

Online Marketing

261.3

574.7

120%

656.3

14%

Search*

N/A

67%

N/A

67%

-

Comparison*

N/A

6%

N/A

6%

-

Affiliate Advertisers (Zeropark)*

N/A

5%

N/A

5%

-

Analytics SaaS (Voluum)*

N/A

1%

N/A

1%

-

Online Presence

149.3

153.5

3%

179.8

17%

Net revenue

118.5

177.7

50%

190.3

7%

Online Marketing

65.2

125.1

92%

130.9

5%

Online Presence

53.3

52.6

-1%

59.4

13%

Adjusted EBITDA

46.3

86.0

86%

96.4

12%

Adjusted EBITDA/net revenue

39%

48%

9%

51%

2%

Free cash flow

36.2

70.9

96%

65.2

-8%

Reported net debt

81.4

56.6

-31%

74.1

31%

Source: Team Internet. Note: *Percent of total gross revenue.

Adjusted EBITDA of US$96.4m was also ahead of our forecast, reflecting the group’s initiative of combining business units to reduce consumer friction and operating leverage. Faster adjusted EPS growth of 45% y-o-y to 22.4c reflects a deferred tax asset impact and lower than estimated tax rates.

Free cash flow remained robust at US$65.2m, with the 8% y-o-y decline attributable to one-off working capital impacts, which we expect to normalise in FY24 and beyond. Despite the fall, cash generation enabled two FY23 share buyback programmes totalling US$40m, as well as US$3.6m in dividends, showing that management is delivering on its shareholder returns commitment. Reported net debt increased to US$74.1m to support these initiatives, as well as settle US$22m deferred consideration. That said, net debt to adjusted EBITDA of 0.77x remained at a healthy level and significantly below the financial covenant of its senior facilities agreement of 2.5x.

Exhibit 2: Edison TV – Executive interview covering FY23 results and Shinez acquisition

Source: Edison Investment Research

Shinez acquisition could drive sales in excess of US$1bn

On 19 March, Team Internet announced the acquisition of Shinez, its first major acquisition in the last 18 months. Shinez is being acquired for an enterprise value of US$41.8m, on a net debt free basis and subject to customary adjustments for net working capital, payable in cash. The initial consideration represents a multiple of 4.0x Shinez’s FY23 adjusted EBITDA. Additional contingent consideration of up to US$12.3m will be due subject to Shinez achieving ambitious financial targets over the next two years, payable in cash. The acquisition will be funded through a combination of cash reserves and the group’s rolling credit facility.

Shinez will bolster the capabilities of Team Internet’s Search division, driving further traffic growth from the 40 sites it operates, as well as enhancing the company’s prominence across key publishers like Google, Amazon, Facebook, X and Yahoo. Additionally, as shown Exhibit 3, the acquisition expands Team Internet’s traffic monetisation model by incorporating PPM tools, which is a key next step in the OM2 vision. While we have noted that PPC and PPA are becoming the preferred tools for advertisers, the addition of a PPM model could provide diversification advantages and potentially be the more favoured option in certain verticals.

Exhibit 3: Shinez expands tools to monetise traffic

Source: Team Internet

On a pro forma basis, the consolidated entity would have combined revenue of US$947.9m (Shinez: US$111m), indicating that achieving gross sales of US$1bn+ in the mid-term appears achievable. At an FY23 EPS level, management believes the consolidation would have driven a pro forma 9.4% accretion to 2.4c.

Shinez's FY23 free cash flow yield of c 18% versus Team Internet’s 14% underpins strong value accretion potential once the deal closes (expected in mid-Q224). From a cash flow perspective, management expects the transaction to yield a higher potential ROI than share buybacks and it is therefore aligned with the group’s cash allocation model.

Management expects the acquisition to complete by late April/early May 2024, with the first full consolidation in Q324.

New FY25 forecasts indicate swing to net cash

Our headline FY24 forecasts remain materially unchanged. However, we have adjusted our interest expense projection to align with the group’s interest expense in FY23, leading to a 4.5% reduction in the FY24 forecast for reported PBT. We have raised our net income forecast by 9.1%, assuming similar tax rates to FY23 of around 20% (excluding any deferred tax benefit). This has resulted in a reduction of c US$5m to our previous tax charge forecast, offsetting the interest expense impact. The increase in EPS is slightly lower due to a higher estimated average share count, reflecting the carry-over impact of the share buyback programme in FY24.

As discussed previously, we expect growing general social media popularity alongside Team Internet’s OM2 investment to drive FY25 Online Marketing growth. Online Presence should also deliver robust growth, albeit lower than current levels given that FY23 has been an especially strong year for exotic domain transactions.

Exhibit 4: Summary of forecast changes

Year end 31 December

Forecast

Reported

Change

y-o-y

Old

New

Change

y-o-y

New

y-o-y

US$'000

2023e

2023

growth

2024e

2024e

growth

2025e

growth

Gross revenue

833,705

836,100

0.3%

15%

909,572

909,572

-

9%

964,461

6%

Net revenue

190,585

190,300

(0.1)%

7%

208,116

203,363

(2.3)%

7%

209,255

3%

Adjusted EBITDA

94,416

96,400

2.1%

12%

103,017

103,017

-

7%

106,091

3%

Profit before tax (norm)

80,087

82,555

3.1%

28%

89,299

87,683

(1.8)%

6%

90,682

3%

Profit before tax (reported)

34,090

31,755

(6.8)%

114%

47,202

45,083

(4.5)%

42%

48,082

7%

Net income (normalised)

57,663

68,555

18.9%

66%

64,295

70,147

9.1%

2%

72,546

3%

Basic average number of shares outstanding (m)

267

272

257

262

258

EPS – basic normalised (c)

21.58

23.22

7.6%

49%

25.00

26.76

7.1%

15%

28.12

5%

EPS – diluted normalised (c)

21.37

22.41

4.9%

45%

24.75

25.79

4.2%

15%

27.09

5%

Revenue growth (%)

14.5

14.8

9.1

8.8

6.0

Gross Margin (%)

22.9

22.8

22.9

22.4

21.7

Adjusted EBITDA margin (%)

11.3

11.5

11.3

11.3

11.0

Adjusted EBITDA/net revenue (%)

49.5

50.7

49.5

50.7

50.7

Closing net debt/(cash)*

80,867

73,927

(8.6)%

31%

35,109

28,481

(18.9)%

(61)%

(23,618)

N/A

Source: Team Internet, Edison Investment Research. Note: *Excludes debt related derivatives.

We forecast net revenue to adjusted EBITDA conversion to remain broadly flat in FY25, as we believe the group has reached the target level set by management. Delivering continued high margins should drive free cash flow, which we expect will swing the group to a net cash position. However, this may change once the acquisition of Shinez is accounted for, which we will look to incorporate into our forecasts closer to the deal completion date in Q224.

Exhibit 5: Financial summary

$'000s

2021

2022

2023

2024e

2025e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

410,540

728,237

836,100

909,572

964,461

Cost of Sales

(292,041)

(550,541)

(645,800)

(706,209)

(755,207)

Gross Profit (net revenue)

118,499

177,696

190,300

203,363

209,255

EBITDA

 

 

46,251

86,024

96,400

103,017

106,091

Normalised operating profit

 

 

42,737

83,045

93,100

98,914

101,905

Amortisation of acquired intangibles

(18,291)

(36,399)

(38,800)

(38,100)

(38,100)

Exceptionals

(7,087)

(7,395)

(7,500)

0

0

Share-based payments

(5,006)

(5,698)

(4,500)

(4,500)

(4,500)

Reported operating profit

12,353

33,553

42,300

56,314

59,305

Net Interest

(10,798)

(18,736)

(10,545)

(11,230)

(11,223)

Joint ventures & associates (post tax)

0

0

0

0

0

Exceptionals

0

0

0

0

0

Profit Before Tax (norm)

 

 

31,939

64,309

82,555

87,683

90,682

Profit Before Tax (reported)

 

 

1,555

14,817

31,755

45,083

48,082

Reported tax

(5,097)

(16,895)

(5,000)

(17,537)

(18,136)

Profit After Tax (norm)

25,551

41,409

68,555

70,147

72,546

Profit After Tax (reported)

(3,542)

(2,078)

26,755

27,547

29,946

Minority interests

0

0

0

0

0

Net income (normalised)

25,551

41,409

68,555

70,147

72,546

Net income (reported)

(3,542)

(2,078)

26,755

27,547

29,946

Basic average number of shares outstanding (m)

227

266

272

262

258

EPS - basic normalised (c)

 

 

11.24

15.59

23.22

26.76

28.12

EPS - diluted normalised (c)

 

 

10.91

15.44

22.41

25.79

27.09

EPS - basic reported (c)

 

 

(1.56)

(0.78)

9.83

10.51

11.61

Dividend (c)

0.00

0.01

0.02

0.02

0.02

Revenue growth (%)

71.0

77.4

14.8

8.8

6.0

Gross Margin (%)

28.9

24.4

22.8

22.4

21.7

EBITDA Margin (%)

11.3

11.8

11.5

11.3

11.0

EBITDA/Net Revenue (%)

39.0

48.4

50.7

50.7

50.7

Normalised Operating Margin

10.4

11.4

11.1

10.9

10.6

BALANCE SHEET

Fixed Assets

 

 

271,830

365,062

347,196

317,381

287,400

Intangible Assets

254,169

347,938

327,038

294,938

262,838

Tangible Assets

8,601

7,358

7,258

9,543

11,662

Investments & other

9,060

9,766

12,900

12,900

12,900

Current Assets

 

 

128,391

193,650

199,603

238,017

296,146

Stocks

895

646

200

219

234

Debtors

71,363

98,231

106,730

99,679

105,694

Cash & cash equivalents

56,133

94,773

92,673

138,119

190,218

Other

0

0

0

0

0

Current Liabilities

 

 

137,129

197,712

208,300

206,505

205,366

Creditors

117,016

190,348

187,800

186,005

184,866

Tax and social security

0

0

0

0

0

Short term borrowings

18,276

5,456

18,900

18,900

18,900

Lease liabilities

1,837

1,908

1,600

1,600

1,600

Long Term Liabilities

 

 

149,110

193,667

184,692

180,892

180,681

Long term borrowings

119,251

145,872

147,700

147,700

147,700

Other long term liabilities

29,859

47,795

36,992

33,192

32,981

Net Assets

 

 

113,982

167,333

153,807

168,000

197,498

Minority interests

0

0

0

0

0

Shareholders' equity

 

 

113,982

167,333

153,807

168,000

197,498

CASH FLOW

Op Cash Flow before WC and tax

23,360

54,195

73,855

87,287

90,368

Working capital

4,091

7,245

(7,700)

12,237

(6,969)

Exceptional & other

15,804

24,434

14,845

15,730

15,723

Tax

(2,230)

(8,399)

(5,600)

(17,537)

(18,136)

Net operating cash flow

 

 

41,025

77,475

75,400

97,718

80,985

Capex

(4,810)

(6,543)

(10,200)

(7,819)

(7,856)

Acquisitions/disposals

(18,344)

(81,396)

(5,600)

(10,000)

(200)

Interest paid

(8,695)

(7,766)

(12,100)

(11,230)

(11,223)

Equity financing

0

58,187

(39,700)

(14,410)

0

Change in borrowing

24,721

34,691

15,000

0

0

Dividends

0

0

(3,600)

(6,529)

(7,277)

Other

(3,700)

(30,730)

(24,500)

(2,285)

(2,330)

Net Cash Flow

30,197

43,918

(5,300)

45,446

52,099

Opening net debt/(cash)

 

 

84,985

81,394

56,555

73,927

28,481

FX

(2,718)

(5,278)

3,200

0

0

Other non-cash movements

(23,888)

(13,801)

(15,272)

0

0

Closing net debt/(cash)

 

 

81,394

56,555

73,927*

28,481

(23,618)

Source: Edison Investment Research. Note: *Excludes debt-related derivatives of US$0.2m.

General disclaimer and copyright

This report has been commissioned by Team Internet Group and prepared and issued by Edison, in consideration of a fee payable by Team Internet Group. Edison Investment Research standard fees are £60,000 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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