DIS the anchor, mixed but improving elsewhere

DIS continues to anchor the financial performance, with revenues up 2% y-o-y to $103.9m and EBITDA up 29% to $10.7m. An unprecedented number of net contract wins over the period combined with efficiency gains should deliver sustained double-digit EBITDA growth. Comparison (net revenue $27.9m, down 11% y-o-y, EBITDA $5.4m, -27%) softened in Q1 (largely due to Google algorithm changes) but returned to growth towards the end of the period. The division’s international drive is progressing well and the business’s headroom for organic expansion is significant. France, Italy and Spain are all at or nearing profitability, and the UK portal has been launched with the US next. Search gross revenue fell by more than expected ($132.1m, -52% y-o-y), due to the transition away from AFD, but remained profitable (EBITDA $8.5m, - 72% y-o-y). Revenues from newer platforms (RSoC and others) grew 160% y-o-y to 24% of gross revenues, which we see as a positive indicator of the businesses' ability to navigate the transition, although visibility remains low.

Profitability forecasts unchanged

New win momentum in DIS and the transitions in Comparison and DIS should start to come through in improved mix and margins from H2. We have reduced our FY25 and FY26 gross revenue forecasts by 26%, reflecting mainly the drop-off in low-margin Search revenues. However, our gross profit, EBITDA and EPS estimates are essentially unchanged, with DIS EBITDA upgrades offsetting a trim to Comparison and reflecting a $24m reduction to the FY26 cost base vs FY24.

Valuation: SOTP on modest comps suggests upside

Our sum of the parts (SOTP) analysis, applying modest peer value multiples for each division, results in a fair value above 110p. DIS and Comparison (plus net debt) alone generate a fair value of 80p, implying Search is being ascribed a negative value. We believe that further evidence that the Search business is successfully migrating to RSoC, with good conversion rates, will be the key catalyst for more value to become ascribed to this division.

Divisional overview

Domains, Identity and Software

Sales momentum and optimisation driving EBITDA growth

Domains, Identity and Software (DIS) continues to anchor the group’s financial performance. Revenues grew by 2% y-o-y to $103.9m, moderated by the division’s focus on quality over quantity, a process that has involved pruning lower-margin contracts. However, EBITDA grew 29% y-o-y to $10.7m, reflecting this improved mix as well the early benefit of a rationalisation and optimisation programme which should drive further margin expansion into H2 and FY26.

Business development activity over the period looks robust, with management reporting an unprecedented number of net contracts wins, which will support further growth and further margin expansion from H2. The most high-profile of these was the 10 years to run Colombia’s .co top-level domain (10-year deal to run the .co domain), which will start to contribute from Q4. This win should enhance the company’s credentials for secure management of other nationally significant domain assets. DIS could also benefit in FY26 and beyond from the ICANN (the organisation that oversees global domain names and the internet address system) initiative to enable the expansion of the internet’s domain name system through introducing new top-level domains.

Targeting sustained margin expansion

We believe that the growth drivers detailed above, operational leverage and a lower cost base should drive continued margin expansion into FY26 and FY27. It is worth noting that management is mapping out a programme for sustained operational improvements to deliver competitive benefits and margin expansion beyond this, targeting 40% EBITDA to net revenue margin in the medium term (vs 28% in H125). Consequently, we believe that the company has good potential to deliver sustained double-digit EBITDA growth though FY27 into FY28.

Comparison

Navigating Google turbulence, but internationalisation provides significant growth potential

Comparison softened early in H125, affected mainly by more frequent algorithmic changes from Google as it develops its AI search capability. Revenues returned to growth later in the period as the division successfully optimised its own optimisation and paid search strategies to adapt. Net revenue fell 11% y-o-y to $27.9m, with EBITDA declining 27% to $5.4m, and performance improved as the period progressed.

Significantly, we are now seeing encouraging signs that Comparison can be scaled internationally, beyond the core DACH (Germany, Austria and Switzerland) market. International revenues reached $5m in H1 versus zero a year ago, France is already profitable while Italy and Spain are nearing break-even, indicating that international growth can be delivered without significantly compromising margins. The UK portal has now also been launched and the United States is next.

Progressive international expansion, but with a high ceiling on organic growth

We expect international growth in each market to be progressive rather than spectacular as the company manages growth versus margins and progressively develops relationships with retail partners (of which Amazon is the most important). Nevertheless, in aggregate, these markets expand TIG’s addressable market by 7x in terms of population and by 10x in terms of GDP, giving the company a very high ceiling in terms of organic growth potential.

Search

More visibility on the AFD to RSoC transition

Visibility was always going to be acutely impaired in Search during the transition from AdSense for Domains (AFD) to newer Related Search on Content (RSoC) and other platforms. However, while gross revenues declined by more than we had modelled (down 52% y-o-y to $132.1m), EBITDA was somewhat stronger than we would have anticipated at $8.5m.

While the transition is ongoing, visibility will remain impaired at the gross revenue level. However, management is seeing early indications that net revenues can start to move forward again. Sales from newer formats, RSoC and others grew 160% y-o-y to $31.7m, and now account for 24% of gross revenues, providing validation that the division is able to scale its business on these new platforms. The key success factor from here will be the extent to which the division is able to sustain a strong growth rate while improving conversion rates from impressions to paid click-throughs on Google adverts. While the price per click on RSoC is substantially higher than for AFD, the conversion rate of traffic to paid click on a Google advertisement is significantly lower due to the advertisement sharing space with non-paid Google results and because adverts typically appear on sites with richer content. The company is progressively optimising the layout and content of RSoC landing pages to improve the conversion rate and we understand that progressive improvements are being seen. Management expects campaign margins to align with or exceed historical levels as optimisation drives conversion and engagement in RSoC content. We believe that evidence that conversion rates are improving and margins improving will be a key catalyst for a more positive scenario for Search to become priced in. As we have seen with the rapid growth in RSoC revenues in H1 and of the growth in the division’s AFD revenues before that, strong growth is possible if the company gets it right.

It is worth noting that the rate of transition and near-term performance will also significantly depend on the extent to which the division directs traffic to RSoC sites versus AFD, which are currently more profitable. Google’s approach to the de-prioritisation of AFD appears to be relatively progressive at present, in that many advertisers have not yet been asked whether they want to opt in to advertise on AFD sites. Even once the process is complete, there will be a proportion of advertisers who do opt in to AFD, so revenues from this platform are unlikely to disappear in the near term, but will likely be a small fraction of historical levels.

Operating model

Exhibit 1: Divisional operating model

Source: Team Internet, Edison Investment Research

Estimate changes

Our estimate changes for the group are detailed below. While gross revenues are reduced by 26%, our P&L estimates are little changed from gross profit down. Given the significant difference in gross profit margin between the divisions, we believe that gross profit is a much better indication of the overall momentum of the group.

The expansion in margins reflects the change in mix towards the higher-margin DIS and the benefit from cost synergies, with $26m of cost savings expected to be realised starting in H2 and fully in FY26.

Divisionally, we have upgraded our EBITDA forecasts for DIS (from $23m to $25m for FY25 and from $24m to $29m for FY26) reflecting the growth prospects and impact of rationalisation.

This is offset by Comparison (FY25 EBITDA reduced to $14m from $19m and FY26 EBITDA reduced to $16m from $22m) reflecting the weak start to H125 and a more conservative approach looking ahead.

With margins in Search holding up better than expected, despite the significantly lower gross revenues, FY25 EBITDA is upgraded to $21m from $17m and FY26 to $25m from $21m.

The increase in our net debt forecast reflects higher cash tax payments in Germany ($22m in FY25, $21m in FY26), which have been provided for in the P&L and drawn down from tax liabilities. These payments moderate the deleveraging of the group, but the company’s balance sheet remains comfortable. Trailing Twelve Month net debt/EBITDA was 1.7x at H125, which we expect to reduce to 1.6x at FY25 and further in FY26. The company has $80m of capacity remaining on its revolving credit facility.

Exhibit 2: Estimate changes

Source: Edison Investment Research

Valuation

A SOTP valuation is our preferred methodology, given the differing profiles of each division and that management has stated that it will consider sales of individual businesses to deliver shareholder value. It is now possible, with segmental reporting extended to the EBITDA level and with Comparison reported separately.

Better visibility of transition benefits should support an upward re-rating

Nevertheless, on absolute terms, Team Internet’s rating of 5.1x EV/EBITDA and 6.1x P/E in FY25e, dropping to 4.4x and 4.9x respectively in FY26e, is clearly a discount rating. We believe that if it executes as expected, by the FY25 results we should start to see evidence of growth at the group level, returning a more resilient and fit-for-the-future group emerging. Key catalysts for an upward re-rating include evidence of growth and further margin expansion coming through in DIS, further internationalisation in Comparison and successful transition to RSoC and newer platforms in Search.

Exhibit 3: Peer valuation multiples

Source: Company reports, LSEG Data & Analytics consensus

SOTP implies TIG is undervalued on modest comparators

Applying modest fair value multiples for each division results in a fair value of c 110p. This has moved up from 90p previously given the increasing contribution from DIS (the most robust and highly rated division) to EBITDA in our model. Given DIS’s robust profile and scope for sustained double-digit EBITDA growth, we believe this business could potentially command a higher multiple than the peer median we have applied here.

It is difficult to attribute a fair multiple for Search at this transitional stage, but even if we were to exclude it completely from the total, our SOTP valuation would be 80p versus the current 62p share price, implying that this business is being ascribed a negative value. We believe that successful migration of revenues to RSoC will be the key catalyst for more value to become ascribed to Search.

Exhibit 4: SOTP valuation

Source: Company reports, LSEG Data & Analytics consensus

Exhibit 5: Financial summary

Source: Company data, Edison Investment Research