CLIQ Digital — Cliq here for entertainment

Cliq provides streaming entertainment services. It recruits its customers through marketing activity, often through searches for typical terms via search engines such as Google, or from social media and publisher marketing referring to categories such as sport, music or films. Links then lead the potential customer to a group website or portal (which could be branded to the content category) where they are encouraged to subscribe, with the first month of subscription typically being free of charge. When a customer signs up, payment details are taken through a wide range of payment options, as illustrated below.

The group is rolling out its all-in-one subscription offer, currently available in Germany and Austria, across territories at attractive price points – €14.99 in Europe. For this, up to five members of a household gain access to unlimited content across film, music, audiobooks, eBooks, sport and games. The content tends to be more ‘backlist’ oriented, licensed from a wide variety of sources and appealing to a mainstream, over-25 market. The library consists of over 1,000 films (including one Hollywood blockbuster per month on an all-in-one subscription), hundreds of curated music playlists, 150k audiobooks in more than 10 languages and over 1.2k core and casual games. Sports would tend to be curated highlights rather than long form, and cover sports such as Bundesliga, Champions League, NBA, MMA, NFL and Formula One among others.

With the first month usually free, the economics per customer obviously improve the longer they are retained. The group uses a metric, the CLIQ Factor, which represents ARPU divided by CPA, to determine its marketing efficiency. The growing historic data resource gives the group a clear indication of how profitable a subscriber is likely to be ‘within minutes’ of them signing up, through determining their likely subscription length compared with previous members, based on their profile and journey history. The example cited is of a subscriber with their first month free then paying €15 for five months, who cost €50 to recruit, giving a CLIQ Factor of 1.5x (=(5x15)/50). The minimum is set at 1.4x, equivalent to a 30% gross margin. The extensive data that has been built up over the years of operation allows Cliq to determine almost immediately a new subscriber’s expected profitability within the first six months, after payment service provider costs.

Historically, Cliq carried out the bulk of its marketing and recruitment through affiliates which would earn a cut. From FY19, the emphasis switched to direct media buying. Here, the data referred to above has come into its own, by allowing the group to focus its marketing spend on audiences that should deliver greater profitability. In FY18, less than 10% of marketing spend was direct. By FY20, it accounted for around €19m of the €34m spent. Over that period, the CLIQ Factor improved from 1.36x to 1.68x. This approach has fuelled the strong growth in North America (see below). The switch to own media buying is now being put in place in Europe, with sales teams recruited and productivity ramping up.

The group is constantly on the look out for complementary content. Upping the amount of local and localised content can also act as a differentiator from the premium market alternatives. We would assume that most customers would take a Cliq subscription additionally to services such as Netflix or Spotify. The addition of content categories and expansion of existing ones will be a key additional revenue driver. The type of content in which the group specialises means that it is unlikely to get drawn into the highly competitive end of the market, where prices have been spiralling. The recent partnership with Utomik on games suggests a less investment-intensive way of extending available content.

The group is also open to M&A opportunities for expansion in content, category, licensing or to gain footholds or step-ups in particular geographies.

Global sales across all media types are forecast to grow at a 10% CAGR over the next four years, driven primarily by improved global digital infrastructures. Underlying growth has also benefited from lockdown-driven consumer demand during 2020, which is expected to have a lasting positive net impact with 2025 sales forecasts upgraded from $390bn pre-COVID-19 to US$414bn post.

Global internet penetration forms the basis of growth assumptions and in 2021 is anticipated to be 7.3% higher than in 2020 at 59.5%, driven by the development of telecommunication networks and infrastructure. On-the-go media consumption has been fuelled by an increasing number of smartphone users and supported by rising internet connection speeds. 5G has been the latest development in this area and is expected to surpass 4G in terms of speed by a factor of 10, which allows for the creation of innovative media content such as VR/AR, 360 video and latency-free multi-user gaming.

Europe and the US, Cliq’s main geographies, lead in key market indicators. Global internet penetration in 2020 was highest in the UK at 91.4%, with the US at 85.8% and Europe at 78.3% versus a global average of 60.5%. The UK also had the highest smartphone penetration in 2020 at 87.6%, with the US at 85.6% and Europe at 73.9% versus a global average of 54.6%. Consumer spending per capita was also highest in these regions, with the US leading at $42,912, the UK at US$26,807 and Europe at US$14,327 versus a global average of US$6,534.

Cliq’s share price performance has been extremely strong as the market has grasped the scale of the opportunity and management’s success to date in monetising it. At the beginning of 2020, the shares were priced at €2.90 and by close of the year they had reached €16.60. The pace of appreciation has accelerated in FY21 to date, increasing by another 121%. A year ago, management guidance was for FY20 revenue of €75.0m and EBITDA of €7.5m. The delivered numbers were revenue of €107.0m (43% ahead of original guidance) and EBITDA of €15.9m, more than double the originally targeted level.

We have looked at CLIQ’s current valuation in comparison with other entertainment and customer acquisition groups across various metrics, as shown below. It should be noted that these groups are of greatly differing scale and have widely differing business models, with correspondingly disparate growth characteristics. We have used the median to represent the average to try to counter some of the variance. Cliq’s revenue growth is at the higher end of the range, yet its valuation is at a discount on EV/Sales, EV/EBIT and P/E for both FY21e and FY22e. Were the shares to be priced at parity to these peers (averaged across both years and these three metrics), the implied share price would be €69.22.

We have also looked at a DCF under various WACC and terminal growth assumptions, as shown above. Beyond our explicit forecast years, we have assumed a moderation of revenue growth rate and some drift in EBITDA margin as content costs rise. On a WACC assumption of 8.5% and a terminal growth rate of 2%, the derived value would be €60.79, a little below that implied by the peer valuation approach, but still well ahead of the current level. The midpoint of these two derived values is €65.01.

Revenues are driven by marketing spend. Exhibit 5 below clearly shows the shift in management strategy on the approach to sales implemented in FY18 and its subsequent positive impact on revenue and margin. Marketing spend is monitored on a daily basis, so that the group can adjust profitability.

A detailed analysis of the FY20 results was given in our March Scale update, which shows the breakdown half-year by half-year. In that report, we also outlined the development of historic management KPIs, along with FY21 guidance, shown again below. For the CLIQ Factor, a small reduction is anticipated from €1.68 to €1.60, as the new European media buying team gets up to speed. Customer base value, shown in this exhibit, represents the number of members (customers) multiplied by the remaining lifetime value per member – effectively the current book of business.

Marketing spend for FY21e is guided to around one-third of revenues. The element that can be directly allocated to new subscribers to subscription services (€30.5m of the total €34.2m FY21e spend) is accounted for and capitalised in the balance sheet as contract costs. These costs are released to the income statement over the member’s revenue lifecycle with a maximum amortisation period of 18 months. Other costs of sales are mainly connectivity costs to payment service providers and content costs for licensed products. Personnel expenses were 12.8% of revenues and the largest element of operating cost.

Our forecasts are predicated on continuing top-line growth driven, as explained, by the marketing spend, increasing 33% in FY21e and 22% in the following year. We anticipate better growth from Europe as the new direct media buying efforts produce results, with continued growth in the North American market, albeit not at the spectacular pace experienced in FY20. Our FY21 projection of €142.0m is a shade ahead of management guidance, as is our EBITDA projection of €22.6m (guidance: c €22.0m). Our modelling suggests that this translates into EPS of €1.61, up 39% on the prior year.

Improved profitability translating to cash

Operating cash flow improved markedly in FY20, increasing from €2.5m to €14.8m, with free cash flow of €10.5m. This is a clear benefit of the scaling up, with limited capital spend required in the business model. Capex was €0.7m in FY20, up from €0.4m in the prior year. There will be some increase in overhead needed in FY21 as the direct media buying team in Europe is put in place, built into our modelling.

At the balance sheet date, the group had net cash of €0.9m (net debt of €1.1m including leases under IFRS 16), from net bank debt of €9.6m (€10.2m including leases) in FY19. The FY20 amount comprised cash of €4.9m and bank debt of €4.0m, including €0.2m of capitalised finance expenses. The balance sheet also carries contingent consideration of €0.7m. Our model shows a growing net cash resource, building to €8.4m by end FY21 and to around €17m by the end of the following year. We expect the group’s financing facility of €13.5m, which runs through to March 2022, to be extended before expiry.

This gives scope for acquisitions but, as indicated above, there is no ambition to enter into the competitive market for high-profile original content. The content licensing model, away from ‘front list’ properties, will continue to form the bulk of the activity. M&A is more likely to take the form of a small digital marketing company, content supplier or streaming business that can bring in additional expertise, geographic specialisation or deliver new audiences.