Media publishing company XLMedia (LON:XLM) today issued a strategic update which had bad effects for profits for the next year: a change in strategy to move away from lower margin markets will be reducing both revenues and EBITDA. The share price immediately declined:
In truth, this does not show the full picture, and the share price has sunk to pre-2016 levels. The share price was massively inflated going into 2018, and a series of profit warnings revolving around uncertainty has decimated the price.
XLMedia are perhaps not that well known, but have done a remarkable job in the past few years. They describe themselves as ‘performance-based marketing’, which in real terms translates to the creation of websites and content which’ funnel’ users into purchasing items, from which they gain revenues. This is not as easy as it looks, with successful search engine optimisation (SEO) being a bit of a dark art in itself.
The main form of revenue has been from gambling – many comparison sites and social media sites are under XLMedia’s control. This is also by far the most lucrative stream – companies often pay per new user, but also recurring incomes depending on that users losses. However, this is subject to the most regulations. Some countries such as Australia have banned gambling advertising content altogether, and many others are in the process of regulating just how affiliates market their content.
To combat this XLMedia have branched out into ‘safer’ fields such as personal finance, but this has been a slow and expensive process. Instead of creating new content, the method behind getting into these fields is simply acquisitions. Until last year, the firm was delivering a fast rate of growth, with revenues and profits being up by over 30%.
An ominously titled ‘Strategic and Trading Update’ RNS provided the information. We start with some information that might be already known: that there is a withdrawal from non-core markets as well as investment into content. This is quantified as follows:
Trading update & impact of strategy change – Trading for 2019 has started in line with management’s expectations although still seeing operational and regulatory headwinds. However, the strategic shift away from Media is expected to reduce 2019 revenues by approximately US$30 million. This, together with increased Publishing investment, will largely account for an expected reduction in 2019 adjusted EBITDA of between US$6-7 million. However, in the medium-term these changes are expected to deliver higher profit margins and better quality of earnings.
This is a massive hit: H1 revenues from Media was $23.4m, so it appears that the company are almost withdrawing from this market.
There is a helpful explanation of the separation between businesses:
The Company currently uses two principal performance marketing methods – Publishing and Media buying. Within the Publishing division, XLMedia owns hundreds of informational and content rich websites globally, which act as a conduit to channel users to our clients. The Group’s Media buying activity centres on creating and deploying self-funded online media campaigns across a range of platforms, utilising formats such as paid search, display, social, mobile and in-app advertising, to drive traffic to both our own sites and our clients’ sites.
It comes as no surprise that Publishing has much higher margins, as there is more control, less competition and more ways to monetise content.
As we may expect from an acquisitive company, there will have to be write-offs of capitalised goodwill:
To continue this focus on Publishing, the Board has made the strategic decision to proactively cease its involvement in much of its existing Media activities. This will result in a one-off impairment of US$11-13 million, for the year ended 31 December 2018, mainly related to the intangible assets of acquired assets in the Media division.
XLMedia have always traded on a low multiple. They are not a business without drawbacks – the Israeli ownership will bother some, the poor visibility of revenues is another factor (it may be unpredictable that another company might suddenly produce better content), and then there is the ethics of promoting gambling. Recent ‘strategies’ such as using Twitter masquerading as ‘tipsters’ is an example.
What can’t be denied is that this approach has paid off well for the company, which has generated plenty of cash – and for shareholders providing they sold out whilst the going is good (it is noteworthy that some of the directors did). The cash generated has been used for acquisitions, to pay dividends, and more recently, to buy back shares. The recent interims show that another $42.6m was raised by means of a share issue to finance even more acquisitions.
A clip from the results presentation demonstrates how much more effective Publishing is over Media:
A problem some might have with the balance sheet is that because of acquisitions, it is heavy with intangibles. XLMedia acquire websites which have little value on their own, but are valued on the traffic and revenues that they bring in. As such almost all the consideration will be capitalised as goodwill and intangibles. There is something like $120m of these sitting on the balance sheet now. Fine when things are going well, but when they are not, they may have to be impaired in quick time, such as the media assets today. That being said, the position is good: having raised money for acquisitions, they have avoided using their cash pile (for now), and the working capital position is favourable.
It could be said there is potential for decent operational leverage. The group owns something like 2,300 websites now, and with a content management system in place, existing sites could be optimised very quickly. Data analytics across such a huge media estate may also allow it to have advance notice of further trends.
Helpfully a broker note on Research Tree was also released today, which projects that revenues drop to $115m and PBT, $22.4m.
XLMedia is a tricky company to value. Arguably, this will never deserve a high multiple of earnings because of the nature of its business, and the lack of visibility of revenues into the future. In my opinion it is not providing a service that one needs or could not get elsewhere. Many of its sites are unattractive and obviously set up for the purpose of affiliate links. But while they enjoy such good search engine rankings, the argument is that this is unnecessary. An ugly site with lots of traffic easily beats a beautiful one with none.
The company also appears reliant on just a few clients. Despite the move away from media and into different areas such as personal finance, there is still a big dependence on gambling. Moving into other areas may be difficult. Things such as utilities and insurance are already well covered, and these sites do provide value for the end user (for example, comparing tariffs).
So the way forward will still be largely dominated by acquisitions, in my view. It is hard to know whether good value is being paid for these or not. It is also quite difficult to know whether the current level of revenues in Publishing is going to be sustainable. There are several aspects which are outside the control of the company. Regulation may force greater transparency, or clients may decide to offer fewer incentives. We have seen both of these happen in some markets.
There may also be some type of diminishing returns in play. For instance, once a user gets a gambling or credit card, the chances of them getting another drop significantly. The proliferation of other genuinely informative money sites might also increase the proportion of people never to be sucked in by adverts.
Riding against all this is that the shares are extremely cheap at present. A good percentage of the market cap is in cash and whatever you may think about its websites, they demonstrably generate money. Stockopedia also loved this at one point, with its ratings well into the 90s, although this has declined of late and sits at 77.
My gut feeling is that there may be further bad news ahead as the Media operations are wound down. The business itself is a good model but not something I would like to own. 3/5.