London-based web analytics company Ebiquity (LON:EBQ) today released an updated trading statement which had good news and bad news attached to it. The good news came first: organic revenues are slightly up, and the CMA have cleared the sale of one of its divisions. The bad news was that operating profits this year are expected to be below expectations. Predictably, the markdown in share price was harsh: at the first count, we are down by a third:
It should be noted in the bigger term picture, Ebiquity has been a disappointment for some time. Earnings estimates have declined for the past year, along with the share price. For long-term holders, this has probably represented the ultimate roller-coaster: a typical decline in value from IPO, then up to very high levels of 240p, losing 90% of this value over the next two years. The price has been relatively stable over the past 8 years, showing modest increases, but this year has not been a good one, and the price is back at where it was in 2008. Over this time investors have seen few dividends, and the ones that have come along have been tiny.
Perhaps the story can be understood a bit better with what the company do. Ebiquity offer independent marketing analytics to firms, which encompass things such as optimisation, reputation management, competitor monitoring, research and insights. Even larger firms who have their own analytics departments would also engage firms such as this to gain an independent view free from bias. With business going increasingly online, the prospects look good for companies such as these. Unfortunately for Ebiquity, there are plenty of these types of company around to provide competition.
That said, the market tends to be more bullish regarding these type of companies, often assigning them large price/earnings ratios. Some of the reasons are in the structure, lacking any type of physical asset, these businesses are portable and easy to acquire, and with the language of analytics being roughly uniform across the world, there are worldwide opportunities.
The warning was more or less the same as the one re-iterated in July, that the ongoing sale of their Intelligence division and increased investment in other areas would lead to operating profit being under expectations:
Despite the revenue delays in Germany and challenges in the US Digital Analytics practice, the Media, Analytics and Tech practices (being the retained business following the disposal of the Advertising Intelligence business) continue to make strong progress in most territories, with overall revenue growth in line with expectations at circa 8% with particularly encouraging performances in the UK & Ireland and French markets. Encouraging new business wins in H2 include a global multi-year assignment across VW Group and the appointment as a global analytics partner to Nestle. Overall however, at an operating profit level, continued investment in these practices will mean profits are anticipated being below expectations.
The revenue delays in Germany relate to another part of the business being shut.
These expectations are not quantified, but the most recent estimates were for EPS to be 8.14p.
Given the share price collapse, it could be expected to find a business in disarray, but that is not necessarily the case here. Ebiquity has been consistently profitable over the years, although it could be said that whilst revenues have shown a steady increase, profits have not. This may be due to the nature of the business: values for contracts may vary considerably depending on the work required and competitive pressures.
Debt is the obvious worry. At a market cap of around £35m at these reduced share prices, the net debt is approaching almost 100% of this. That will be mitigated by the sale of the Intelligence Division, which should realise £26m. There was little room in the revolving credit facility (£32m drawn from £35m), and whilst the covenants are not stipulated, it seems that this sale would have come just in time.
This sale is not peripheral to the company though: the division is one of the largest, and drives almost one quarter of underlying profit.
One of the biggest downsides is the balance sheet, which is heavy with intangibles and goodwill: unsurprising seeing that development costs are capitalised in this way. With net debt due to be largely wiped out this should prove to be less of a problem. There appears to be little immediate danger to the business.
The company seems to have had a rough few years of it. However, the sale of the Intelligence division seems to be the ultimate turning point for it, for after the consideration is received in the accounts, it will not be able to be used as any type of excuse for further trading updates.
Whether that turning point is up or down is a little more difficult to read. The business operates in a good sector, which is seeing plenty of change. That, allied to the growth prospects are good things. But some of the bad things are more concrete: there are several competitors around, and there appears to be quite a lot of setup costs involved in boarding new clients. It also is quite difficult to gain real visibility outside the lumpy contracts; if there is to be any competitive advantage gained in this sector, it may be more to do with human inputs: for example, who builds the programs to analyse the data, who processes it, and who presents it. These assets could potentially leave the company for someone else.
Consolidation might be an aspect to consider: expansion might be easier by simply acquiring other companies in the territories needed. And Ebiquity could be a target themselves: at this type of price one might wonder if there are any synergies to be had for Sir Martin Sorrell’s S4 Capital.
With these uncertainties, it will be filed as too complicated to read, and a 3/5 rating.