Ebiquity — Providing clarity for advertisers

Numerous high-profile incidents over the last year have served to raise the awareness of the need for greater transparency with regards to media spend: last year’s report by the ANA into the issue of agency rebates; Dentsu’s $2.3m refund having overcharged for adverts; and admissions by Facebook regarding miscalculation in its metrics, to name a few. As an independent consultancy, with a global network, Ebiquity is well placed in an environment that demands greater accountability. To enable the group to take advantage of its position, last year management announced its Growth Acceleration Plan. This required an increase in investment to widen the reach of higher-growth service lines and becoming more client centric, while at the same time stepping up investment in the group’s digital capabilities and organisational support structure. In doing so, management expects to accelerate the top-line growth profile.

Ebiquity is at the start of its five-year Growth Acceleration Plan and it is still too early in the transition to point to clear evidence that the group-wide investment is converting to growth. However, management is making progress against the milestones set out, which we forecast will start to convert to a stronger top line from next year. H117 trading is reflective of the current uncertain environment in the media markets with media budgets being put under additional scrutiny benefitting parts of Ebiquity’s business (FirmDecisions), while causing headwinds in other areas (US media). While the client churn in the US MCA division was unforeseen, it appears contained and we have revised down our EPS estimates by 2% and 1% in FY17 and FY18, respectively, to reflect the weaker MPO performance and H1 operating margin, offset in part by a slightly lower tax rate to take account of the impact this has on the geographic mix of earnings.

Management believes that on a more sustainable EBIT margin of 12-13% (15-16% delivered historically), it can accelerate revenue growth to 10% over the next five years. Our reverse DCF suggests that the shares discount this lower margin profile, but with revenue growth remaining at a notional 2-3%. Ebiquity’s 12.4x FY18 P/E rating and 9.9x EV/EBIT rating also compare favourably to other small-cap agencies, which trade on averages of 15.5x P/E and 11.4x EV/EBIT.

Ebiquity has strong foundation on which to build. It is a market leader in media benchmarking, media auditing and advertising monitoring and its standing in the industry was highlighted last year when it was asked by the ANA to draft recommendations to provide a framework for greater media business practice clarity. It has deep sector knowledge in several verticals and has a significant understanding of media technology. It also has an international presence and relationships with 80 of the world’s largest 100 advertisers. For the shares to fully discount their potential, we would expect to see evidence that the US MCA business has been brought back on track and, as we move into FY18, that organic rates of growth are trending towards management’s medium-term target.

The market is competitive and highly price-sensitive. Ebiquity’s services help clients extract greater value from their media budgets; nevertheless, the trend towards zero-based budgeting could also have an impact on its advisory business. 68% of revenues are non-sterling denominated and fluctuations in exchange rates may affect forecasts.

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.

Ebiquity was founded in 1997 and over the past decade has made a series of significant acquisitions, which have established it with a global media presence. It provides services to over 1,000 clients across 85 countries, including 80% of the world’s 100 largest advertisers. Its headquarters are in London, and it has c 900 employees across offices in 14 countries. In FY17, approximately 27% of revenues were generated in the UK, 24% from North America, 38% from the rest of Europe and the balance from Asia-Pacific regions. The group also owns two of the largest international media cost and creative databases, representing a significant barrier to entry.

Business is organised across three reporting segments: Media Value Measurement (MVM), Market Intelligence (MI) and Marketing Performance Optimisation (MPO).

Although currently the smallest division by revenues, MPO has been Ebiquity’s fastest growing division (H117 aside, which we discuss in the forecast section of this report), and the focus of management’s strategy to accelerate Ebiquity’s overall top-line growth.

MPO solutions guide clients as to where to allocate and how to optimise their marketing investments, which marketing technologies to select and how to improve digital customer journeys. There are two main service lines: Marketing Effectiveness and Multichannel Analytics.

Competition comes from a wide range of companies including technology companies, media agencies or other consultancies. Ebiquity’s client first (rather than ‘black box’ technology) approach, coupled with its impartiality serve as key differentiators in this vast but highly competitive market.

MVM services help clients to increase efficiency and transparency in their media investment; for instance by helping clients select and manage their media trading partners and reporting on agencies’ compliance with contractual terms.

Ebiquity has a leading position in this segment. Services draw on its media cost pool database (one of the world’s largest, which analyses c $20bn of media spend annually) 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 a client’s agency performance against sector and peer averages or agreed performance targets (which is important in the calculation of agency bonuses).

The largest services are media benchmarking and cost savings/guarantee tracking, and in Q416 a new strategic media consultancy division was launched bringing together the wider expertise from across the group.

MI aims to provide clients with a clear picture of their own and their competitors’ advertising spend and media strategies in order 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). Adverts across 85 markets and all key platforms are captured, coded, tagged, formatted and priced at the group’s four data centres in Newcastle (UK), Chicago (US), Baden-Baden (Germany) and Sydney (Australia), with deep-dive services available in the UK, Germany and Australia. The product also draws on the group’s media cost database and insights are delivered on a near real-time basis via a dashboard (Portfolio platform). 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 90% from products rather than services).

Ebiquity has a leading position in this market, competing principally against Kantar, Nielsen and Competitrack. Over the last few years, the division has struggled in the face of pricing pressure and the rapid rise in digital advertising. An upgrade to the Portfolio platform was introduced last year and to complement its services in traditional media, in H117 it launched its Digital platform in Australia, followed by Europe and APAC, which will enable it to offer a complete picture. The positive effects of this started to become evident in the H117 interim results, which saw this division stabilise, with subscription revenues growing c 5%.

The issue of media transparency has been in the headlines over the last year following the publication of the ANA report and several high-profile accounts of misreporting. As Ebiquity is an independent adviser, this should provide a supportive backdrop for Ebiquity’s services.

John Wanamaker (1838-1922, US merchant and politician) coined the phrase, “Half the money I spend on advertising is wasted; the trouble is I don't know which half.” With intelligent audience targeting, performance-based pricing and data analysis, advertisers should have a better understanding today as to which advertising spend yields the best results. However, 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. Ebiquity’s study into the economics of programmatic online advertising (Seeing Through the Financial Fog) estimates that on average only 58% of spend reaches the publisher, although once viewability issues or fraudulent transactions are taken into account, this can be as low as 15%.

Media transparency issues affect many areas of media buying. The issue of trust was highlighted last year following the publication of the ANA-commissioned report on the issue of agency rebates. K2 Intelligence conducted the fact-finding study over a six-month period and published its findings in June 2016. The report found that numerous non-transparent business practices were pervasive across a sample of the US media ad-buying ecosystems and a wide range of media. Notable extracts from the report include:
“A fundamental disconnect between advertisers and agencies about the basic nature of their relationship…Opaque business practices, rebates, agency principal transactions and more have shaken the bond of trust between advertisers and agencies…and…transparency concerns reflect the inability of advertisers to understand the media transaction process due to increasing opacity.”

Ebiquity’s standing was recognised in a high-profile way last year when it was selected by the ANA to draft recommendations for advertisers to help them improve media transparency.

Further highlighting the issue, in September 2016 Dentsu Japan had to repay $2.3m to advertisers as a result of overcharging for digital ads. In October 2016 Facebook made the first of a series of admissions regarding miscalculation in its metrics, leading to an audit by the Media Rating Council and a change in policy to ensure that its verification partners receive more detailed information about its ad impressions on Facebook and Instagram to help provide better insights to advertisers (CMO).

Advertisers and publishers have started to take action. For example, P&G’s Marc Pritchard (chief brand officer at P&G, the world’s largest advertiser) has been vocal in his criticism of the convoluted nature of the digital ad sector, calling for its clean-up. P&G has now started a thorough review of its agency contracts to bring more transparency into its media supply chain and is insisting that its media suppliers adopt Media Rating Council-accredited third-party verification. The Guardian’s suit against Rubicon Project is also notable, alleging that it did not disclose the fees it charged advertisers when buying the publisher’s inventory. Other companies may follow suit: 90% of 59 advertisers surveyed by the World Federation of Advertisers (WFA) said they are reviewing their programmatic digital ad spend and contracts.

Michael Karg was appointed CEO in January 2016, replacing Michael Greenlees, who had been CEO for eight years. Karg has 20 years’ 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 group CFO in September 2016, replacing Andrew Beach (CFO since 2008). Michael Higgins, who has been on the board since 2006, continues his longstanding oversight as non-executive chairman. Further details can be found at the back of this report.

The additional scrutiny that brands are starting to apply to their media budgets should be supportive to growth for Ebiquity given its position as an independent voice in the industry. However, to date, growth has been inconsistent (Exhibit 5).

Following a strategic review last year, management announced its ‘Growth Acceleration Plan’, which aims to better leverage its brand, relationships and global footprint in order to capitalise on the current momentum for change.

Management believes that by making the group technology enabled, widening its service offering and deepening its relationships with clients it will be able to accelerate revenue growth to a CAGR of 10% over the next five years, with margins moving to a more sustainable 12-13% (from the historical three-year average of 16%). Central to this will be driving organic growth in the MVM and MPO practices, which it expects to account for c 80% of group revenues by 2021.

There are five core elements to this plan:

H117 revenues increased by 5.6% to £44.6m, including a 5.9% currency benefit. Like-for-like (lfl) constant currency revenues were down slightly (-0.4%), as a result of a much weaker performance in the MCA practice in the US and headwinds in the US MVM business, offset by a very strong performance from FirmDecisions and a stabilisation within MI. Operating margins at 15.1% (H116: 20.3%) were affected in part by increased investment (c 0.7pp) in line with the group’s Growth Acceleration Plan, lower transactional foreign exchange gains (c 1.1pp) but also the weaker US MCA performance. Consequently, normalised PBT decreased by 21.9%. Reported PBT of £3.2m includes £3.0m of one-off or non-cash items. These relate to acquisitions and strategy costs (£0.5m) and severance related to leadership changes in France and China (£0.8m), deferred consideration (£0.4m), share-based payments (£0.4m) and amortisation of acquired intangibles (£1.0m). H117 results are summarised in Exhibit 6 below.

The MPO practice has experienced very rapid growth over the last three years and the 12.5% reduction in like-for-like revenues was unforeseen, although it should also be taken in the context of the very strong basis of comparison (H116 +53%). Within MPO, the US-based MCA business, which has a high concentration of revenues with its largest clients, saw a number of these clients opt to bring services in house and revenues contracted year-on-year. Marketing Effectiveness (ME) revenues continued to grow strongly in the UK; however, the Spanish business was affected by earnout-triggered leadership changes. The weakness within MCA had a material impact on margins, which decreased to 14.2% (H116: 35.8%).

MVM had a solid first half overall with 2.7% lfl revenue growth and operating margins of 29.5% broadly as expected. FirmDecisions performed very strongly, benefiting from marketing efforts as well as the industry’s increased engagement on the issues of media transparency. The new strategic consultancy, which launched in Q4 last year, has had an encouraging start, working with a number of global clients to help them improve transparency around their programmatic trading activities. The media benchmarking business in Europe was strong, while the UK and Asia was broadly flat year-on-year. However, the MVM business in the US has, like a number of other agencies, been affected by headwinds from lower overall media spend and the trend towards zero-based budgeting.

MI revenues increased by 0.4% lfl. The roll out of the new Portfolio platform in 2016 and the launch of the Portfolio Digital platform in Asia-Pacific and Europe saw subscription revenues grow by 4.8%, which offset the continued decline in project-based revenues, now less than 7% of MI revenues. Margins, at 12.2% (H116: 13.6%), decreased as the new platform’s amortisation kicked in.

MPO stabilised in Q2 (over Q1) and management also points to positive momentum from recent wins, putting it on track to meet its full-year expectations. Nevertheless, we are updating our forecasts to capture a weaker H1 performance from MPO, net of a slightly lower tax rate (a consequence of the weaker H1 performance in the US). Forecast changes are summarised in Exhibit 7.

Net debt of £26.3m comprises a £2.5m term loan (repayable on a quarterly basis) and a revolving credit facility of £29m. The maturity date of both has been extended to 30 June 2019 (covenants set at 2.5x EBITDA). In addition, the group has an accordion option to increase these facilities by a further £20m.

Over the last few years, Ebiquity has been funding the earnout payments on the acquisitions of Stratigent (2013), China Media (2012), Billets America (2014) and Media Value (2015). Consequently, net debt has remained relatively stable. The remaining earnouts related to these acquisitions is estimated to be £2.3m. Including Digital Balance, we forecast acquisition-related payments to decrease to £3.4m in FY17. Inclusive of these payments, capital expenditure (£2.5m) and the dividend, we forecast year-end net debt to decrease slightly to £27.2m.

Media budgets are being put under additional scrutiny, which lends itself well to parts of Ebiquity’s business (FirmDecisions), while causing headwinds in other areas (media benchmarking). While the performance of the US MCA division is a setback, it appears contained and we forecast the group to return to a more normal growth rate in the second half.

The shares are up 17% ytd and now trade on FY18e multiples of 12.4x P/E and 9.9x EV/EBIT. This compares favourably to other small-cap agencies, which trade on FY18 consensus averages of 15.5x P/E and 11.4x EV/EBIT.

Given the group’s strategy to invest now in order to secure a sustainable revenue growth of approximately 10% over the next five years, with the EBITDA margin moving to 14-15%, we think it appropriate to use a DCF to benchmark the valuation. Assuming an 8.5% WACC and 2% perpetuity from year FY10, the current share price appears to be discounting the group’s transition to a lower-margin business, without giving it any credit for the targeted improved revenue profile as a result of this increased investment.

While it is still too early in the transition to point to clear evidence that the investment will convert to growth, management is making progress against the milestones set out in its Growth Acceleration Plan. We believe the group is well positioned to execute its strategy, which should result in a higher-quality earnings base and a more sustainable growth profile over the medium to longer term. Investors should bear in mind:

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: 68% 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 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 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, along with the current headwinds being experiences in the US).

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