CLIQ Digital — Steady progress and share buyback announced

CLIQ has transformed from a single-content portal to a comprehensive bundled content subscription-based platform offering across five primary categories: movies and series, music, audiobooks, sports and games. The group now operates in over 40 countries and expanded into Asia in Q423. CLIQ has continued to deliver robust revenue growth in North America at 25%, while Europe was slower than its historical rate, up 7% in FY23. North America made up 60% of group revenues in FY23 (FY22: 57%), while Europe contributed 33% (FY22: 37%), Latin America 4% (FY22: 1%) and the rest of the world 2% (FY22: 5%).

CLIQ’s success in scaling revenue and profits rapidly over the last five years has been due to the effectiveness of its marketing spend through Google Display. However, also because of the high marketing bidding prices CLIQ has experienced over the past two years, management is diversifying its marketing traffic mix to generate a better return on spend. Consequently, CLIQ will reach more potential customers through advertising via search engines, video, email and social media and through business-to-business (B2B) partnerships and affiliates. CLIQ has existing B2B partnerships with Lidl, New Yorker, Call a Pizza and COMPUTER BILD in Germany, and recently announced a partnership for cliq.de with German newspaper Frankfurter Allgemeine Zeitung. CLIQ’s B2B partnerships to date are with strong brands with broad-reaching customer bases for CLIQ to advertise its bundled content offering to.

CLIQ is utilising AI to provide greater insights into its data analytics, informing its marketing strategies to generate high conversion rates and a robust return on marketing spend. The use of AI in delivering efficient marketing could provide the opportunity for further margin expansion, while the use of AI in content curation could enhance the user experience. Furthermore, the addition of alternative payment methods for customers such as credit card, PayPal, Google and Apple Pay should facilitate ease and streamlining of payments.

The company has continued its geographic expansion with the entry into Asia in Q423. Having successfully entered Latin America in Q322 and subsequently grown revenues to 4% of the group, management will be looking to emulate similar success in this new geography by offering localised content to the region. The expansion into new geographies alongside continued growth in its core markets of Europe and North America provides us with confidence in CLIQ’s future revenue growth.

CLIQ continued to deliver a robust performance in FY23 despite the backdrop of a weaker consumer environment and more competitive bidding prices, particularly in Europe. Revenue was up 18% to €326m (Edison estimate: €345m, FY22: €276m) while EBITDA grew 16% to €50.3m (Edison estimate: €51m, FY22: €44m), driven by a 21% increase in marketing spend. Revenue came in below both management’s guidance and our expectations due to a slower ramp-up in customer conversion despite the elevated marketing spend. EBITDA, however, was in line. Marketing spend was targeted towards more profitable customers with a higher expected lifetime value, which helped grow the lifetime value of the customer base to €164m (FY22: €141m). Against a challenging backdrop of high marketing bidding prices, particularly in Europe, the EBITDA margin dipped 34bp to 15.4% (Edison: 14.8%, FY22: 15.8%), although this was a better margin than we had anticipated. Customers continue to be drawn to CLIQ’s bundled content offering as it improves the quality and breadth of its content catalogue across a number of media channels. Bundled content streaming services accounted for 94% of FY23 revenue versus 88% in FY22, highlighting CLIQ’s strategic shift towards this offering.

The group continues to make good progress against its performance indicators, as shown in Exhibit 2. Although the membership base fell slightly from 1.3m in FY22 to 1.2m in FY23, CLIQ has focused on more profitable subscribers. Consequently, the expected lifetime average value of a customer increased significantly to €85 (FY22: €73), highlighting CLIQ’s strategy of acquiring customers who are more valuable to it in the long term.

The group ended the year with a net cash position of €15.7m, broadly in line with our previous expectations. This was because of an improvement in operating cash flows in the year, mostly due to the higher profitability, offset by higher investment and the dividend payment in the year. Free cash flow improved as the group’s investment in platform development and the licensing of the new content remained the same as a proportion of revenue. At end-FY23, the group had a maximum amount available from its credit facility of €15m (FY22: €37.5m).

Management announced on 20 February that it would be returning up to €13m to shareholders by way of a share buyback programme as opposed to a dividend distribution. Historically, the company has issued a dividend at a 40% payout ratio. On the earnings call management noted that it had made this decision following discussions with existing shareholders, who preferred a share buyback as a means of a return over a dividend also due to tax implications. CLIQ has not issued any guidance for its capital distribution plans for FY25 and notes that it will decide on a yearly basis the best means to return capital to shareholders.

We have moderated our FY24 forecasts to management’s updated guidance, in which it anticipates generating revenues of €360–380m and EBITDA of €52–58m. We have downgraded our revenue and EBITDA estimates by 6%, and now anticipate growth of 15% in revenue to €375m and 11% in EBITDA to €56m. We have increased the marketing spend by 16% to €157m as we expect marketing bidding prices to remain high, as flagged by management. The slower rate of growth reflects the lapping of an already high comparator. Our forecasted net cash position of €35.1m does not include the potential €13m outflow from the share buyback programme and is boosted due to no dividend being paid in the year. If management were to fully complete the share buyback programme by the full €13m indicated, the net cash position would be €22.1m. We will reflect the share buyback programme as and when it happens in our updated numbers.

We introduce our FY25 forecasts, in which we expect an acceleration in growth as new geographies become more material from a contribution perspective and as CLIQ grows its subscriber base. We estimate revenue growth of 17% to €439m, with EBITDA of €66m as we maintain the margin at 14.9%. We continue to forecast an increase in marketing spend of 15% and believe CLIQ’s strong track record of converting marketing expenditure into customer acquisition will continue to drive revenues and profits. The net cash position in FY25 of €51.1m is again artificially high due to the compounding effect of the exclusion of the share buyback from the FY24 figure and the uncertainty over management’s capital return plans for FY25. As such we would expect it to be lower, however we do not reflect this in our numbers.

We have looked at CLIQ’s valuation in comparison with selected entertainment and customer acquisition companies across various metrics. Many of these companies operate at a different scale to CLIQ and have widely different business models, with correspondingly disparate growth characteristics.

We believe the most suitable valuation metric to use is EV/sales given that some of CLIQ’s peers are EBITDA loss-making. As with our 9M23 update, we are now using the average peer multiple, excluding Netflix, given the relatively small size of the peer group. We have excluded Netflix from the peer average due it trading at significantly higher multiples than the peer group, which distorts the comparison. In the last quarter, CLIQ’s peers have seen an appreciation in multiples. If priced at parity to peers on this basis, taking an average across FY23 and FY24 EV/sales multiples of 1.43x, CLIQ’s implied share price would be €75. At 343% above the current share price of €16.82, this represents significant upside, in our view. We expect that delivery against its financial guidance will narrow the valuation gap.