Team Internet Group — More diverse, international, integrated

Team Internet’s capital markets day marked the company’s 10th year since IPO. While management took the opportunity to highlight the company’s strong track record of generating growth since IPO, the day was mainly focused on explaining how the business has put in place a diverse platform of products and partners, supported by a team and culture to sustain this strong growth trajectory.

Since IPO, Team Internet has built its business through organic growth and regular acquisitions, first building the company’s footprint in the global domain ecosystem and then expanding and building a diverse position in online marketing. The result is a business that has sustained robust organic growth, with a diverse set of offerings and partners within the digital ecosystem. CEO Michael Riedl discussed the group’s common purpose, spanning these operations, of 'Transforming how businesses and customers connect online’. In particular, the company is focused on delivering reciprocal success for itself, customers and partners through delivering well qualified, high-intent traffic to the group’s partner and customer base.

The company’s growth strategy from here on is set to continue in a similar vein with the goal of building a business that becomes progressively more diverse, more global and more vertically integrated. The company will continue to combine organic development initiatives with M&A to achieve this.

With a strong platform to build upon, organic development initiatives are now coming to the fore. For example, the company highlighted the development of Adsolutely, a supply aggregator as a mechanism for capturing more of the value chain within its Search operations. The company is also applying AI or machine learning across many elements of its business to optimise processes or improve efficiency.

On the M&A side, with Team Internet operating in a fragmented market, we continue to see good opportunities for the company to both broaden and strengthen its offering through acquisitions while maintaining a balanced approach to capital allocation.

Most successful businesses within the digital advertising and marketing space leverage partnerships with tier one ecosystem players and Team Internet is no exception. These partners are key to the group’s success and growth strategy, while key partner risk is considerably mitigated by the fact that these relationships are long standing and symbiotic, and the company’s network of partners continues to diversify. For example, the company’s Search division’s relationship with Google spans nearly 10 years, while the company has also added Yahoo and Bing as demand-side platforms, complementing the likes of Facebook, TikTok and Taboola on the supply side. In the Comparison division, Vergleich.org has partnered with Amazon for nine years, but also works with eBay, Otto and many other smaller retailers and with Axel Springer as media partner.

While Team Internet currently reports two segments – Online Marketing and Online Presence – the capital markets day gave equal weighting to four key business lines: Search, Comparison, Performance (all reported within Online Marketing), as well as Online Presence.

The company’s Search division includes a number of businesses providing traffic monetisation services for domain owners and traffic commerce solutions for advertisers and publishers. The division’s core value proposition is essentially to connect online consumers to the services they are looking for, generating revenues through delivering high intent traffic to the customer base of publishers, advertisers and domain owners.

This is the largest and most diverse division within Online Marketing, comprising of four brands:

Management cites the business’s commitment to innovation and value-added product development as a key success factor for operating in a digital traffic market that is complex, fragmented and dynamic. For example, machine learning is being used to optimise templates and key words to improve conversion rates.

The group is also continually expanding and optimising its offering through both organic development and M&A. To illustrate, management highlighted how the group is now able to provide each step in connecting advertisers with publishers through a combination of Parking Crew, Tonic, Aporia (acquired in September 2022) and Adsolutely (developed in house). Management estimates that through offering more integrated solutions, its share of a transaction has the potential to increase from 25% to 45–50%.

The group’s performance division is dominated by Vergleich.org, the leading data-driven B2C product comparison site in Germany, Europe’s largest e-commerce market. This business was acquired in February 2022 for an initial value of €67m (€60m EV) expanding by a potential €38m based on performance.

Vergleich’s key value proposition is to effectively and efficiently convert interested customers into buyers, often within two minutes. The business achieves this through developing, maintaining and promoting multiple specialist comparison websites, each representing specific product categories, for example, household, sports & leisure etc, which offer comparisons for over 20,000 product types covering over 300,000 products. The business operates websites under its own brand, and on a white-label basis for key media partners, the largest one being Axel-Springer (Bild, Auto-Bild, Computer and WELT).

The company then aims to ‘own’ the search results for any consumer considering buying a specific product, through running sites with very relevant content, site and key-word optimisation and paid search, etc.

The company derives the majority of its revenues from transaction fees from key retail partners, the largest of which is Amazon (50% of the German e-commerce market and a partner for nine years), but also eBay, Otto and many other general and specialist firms. The company is also seeing strong growth from fees from manufacturers for hosting sponsored products, with advertisements (Google AdSense) providing a revenue stream for non-converting traffic.

Vergleich is continuing to see good growth prospects in Germany. The German e-commerce market is forecast to grow 8% in 2023, according to Statista, which is supplemented by adding new partners and product categories. The company continues to develop and optimise its technology platform to further improve conversion and the scalability of the model. For example, AI is being used to support the generation of content.

The company has now taken its first steps internationally. A proof of concept has been started in France with a small team and limited set of product categories and partners. Initial work is focused on understanding what works and what does not from a French consumer’s perspective, which would then pave the way for a more concerted expansion. Beyond this, other European markets and eventually the US will also come into focus.

We believe that the growth opportunity for Vergleich could be very substantial. Through leveraging its core platform and key partnerships and adopting an incremental, data led approach, the company should be able to execute this strategy in an incremental, low risk way. We believe that further data points supporting the company’s international growth potential will be an important key performance indicator for investors.

The Performance division provides technologies and services to help customers track, analyse and optimise their online commercial activities. These services are provided to support both external customers and Team Internet’s own operations.

The division consists of three key brands, Zeropark and Voluum, acquired together in June 2020, and now joined by Adrenalads, acquired in early September 2023.

Zeropark is a commerce media platform that helps brands simplify the process of reaching high intent customers. Essentially, the product aims to maximise a customer’s return on their activities and processes in a complex digital environment where consumers have many more touchpoints to brands and spend more time researching buying decisions. The group recently announced a series of new partnerships for Zeropark: 1) it has been upgraded to a Tier 1 Demand Partner by Sovrn, a leading publisher technology platform reaching 500 million active consumers; 2) a significant deal with Booking.com, aimed at increasing vacation bookings through targeted ad campaigns run by Zeropark's media buying team; 3) Klarna, a buy now, pay later platform, has become a direct publisher on the Zeropark network.

Voluum is a SaaS ad tracking platform that allows advertisers to track any type of campaign or advertisement, then analyse and optimise future campaigns. It collects detailed data on clicks and conversions and has automation tools (eg automated AB tests) that enable the client to quickly take action and adapt their processes accordingly.

Adrenalads – this acquisition brought on board a team of very experienced media buyers who focus on direct navigation and search traffic. This acquisition was made to support the scaling of Team Internet’s existing businesses.

Online Presence was where it all started for Team Internet and now comprises a suite of platform and service providers in the global market for internet domains. The company has progressively expanded its range of offerings and market position through M&A since IPO, to the extent that it has become a critical component of the global online presence marketplace.

In recent years, the division has been somewhat of a cash cow for the group, but growth is now picking up again, with the division registering 15% growth on a 12-month trailing basis (TTM) 2023 compared to 5% for TTM 2022 at H122. This was attributed to the structural shift in demand towards top level domains where CentralNic has a competitive edge. Looking ahead, growth prospects could be further boosted by the progress the group is making in the government market and by iCann’s plans to begin accepting applications for the next round of top-level domain names in 2026.

Government – the company announced that its Registry business had been selected as one of two suppliers of critical domain services to the UK government’s Crown Commercial Service’s Network Services 3 framework. The company operates and manages the UK government’s .gov.uk and .london domains. Management is seeing good opportunities to expand its services with the UK government and with other government organisations, some of which are looking at the UK government’s structure as a blueprint for their own on-line services.

Proposed new GTLDs expand the envelope – ICANN, the organisation that oversees the global Domain Name System (DNS), is working towards making new generic Top Level Domains (gTLDs) available in 2026, 14 years after the last window, in 2012, which ultimately introduced over 1,200 new gTLDs to the DNS. This should drive demand for the company’s advisory services to 2026 followed by registry and distribution once new domains become available.

Resellers – operating through the brands CentralNic Reseller, Hexonet, Partner Gate and TPP Wholesale, Team Internet is the second largest domain name distribution network globally. The reseller operations provide technology and expertise to enable clients to run their TLDs effectively. For example, it ensures clients maintain compliance with ICANN’s guidelines, as well as providing value-added services such as Hosting and cybersecurity solutions. It is growing year on year.

Brand Services is a consultancy/advisor type business, where expert teams work with domain owners to help them protect and optimise their online presence. While this is a competitive market, it also high margin and the company enjoys long-standing relationships with brand names. Growth opportunities are being seen in the mid-market and emerging economies, while this division should be the first to benefit from ICANN’s new gTLD release in 2026.

Registry – the role of the domain registry is help TLD owners and managers to manage and maintain those TLDs. One of a small number of competitors and regulated by iCANN, the registry business provides the software, infrastructure and expertise to make sure customers’ domains remain online. The company’s progress with the UK government and ICANN’s proposed expansion of top level gTLD provide two clear growth opportunities for this business.

Retail – the company owns a portfolio of retail stores offering domains, email, website builders and security products to consumers, sole traders, SMBs and domain investors. The company is investing in technology to enhance sales performance, adding higher-margin, value-added services and is in the process of merging platforms and brands to simplify operations and enhance productivity.

Team Internet’s value ratings of 5.5x 2023 EV/EBITDA and 6.3x P/E are in stark contrast with its growth track record and our view of the company’s resilience and prospects for continued growth. The ratings are at substantial discounts to peers: 32% based on EV/EBITDA and 52% based on P/E. The company has also developed a good track record of meeting or beating estimates (eg our FY23 adjusted EPS estimate is now 22% higher than when initiated in March 2022) and we see no reason why this track record is about to be interrupted.

We believe that the capital markets day illustrated the extent to which the business has both diversified its risk profile and put in place the methodologies and culture to open up new growth opportunities. The business model is cash generative and the share price does not yet fully factor in the impact of its share buyback programme.