Cliq Digital — Digital content marketing

Cliq Digital’s (CLIQ) core business involves the direct marketing of value-added products and services such as entertainment, apps, software and games to end customers via its predominantly mobile sales channels which include its network of approximately 250 affiliate partners as well as its own direct marketing platform and affiliate network, Grumbl Media. It is active in 34 countries, reaching a pool of up to 2.2bn potential customers each month. In 2016, 82% of sales were derived in Europe, 10% in the Asia Pacific region and approximately 8% in the Americas. It employs approximately 100 staff, is headquartered in Dusseldorf and also has an office in Amsterdam.

The company was founded in 2003 as Bob Mobile AG and has been listed on the Frankfurt Stock Exchange since 2005. An early mover into internet and mobile advertising, it consolidated its position in mobile in February 2012 when it acquired Dutch mobile specialist Cliq BV (for €20m in cash and vendor loans and 9.9m new shares). Cliq BV itself was formed from the 2010 merger of TMG (Triscreen Media group) and Blinck International BV, both mobile content providers. Bob Mobile AG renamed itself to Cliq Digital (CLIQ) in September 2012 and withdrew from the MMORG browser games market during 2013 to focus exclusively on the promotion of mobile products and services.

There have been two fundraisings over the last few years. In October 2013 it raised €1.7m (335k new shares at €5 per share) and in October 2014 it raised a further €2.6m via a 3:1 rights issue (1480k shares at €1.5 per share) and a convertible bond with a nominal value of €0.394k (converted).

In common with other German listed companies, CLIQ Digital has a two-tier board structure, where the management board sits beneath the (non-executive) supervisory board.

The management board comprises CEO Luc Voncken and Managing Director, Ben Bos.

After a career in banking at ING and then ABN AMRO, Luc founded his first company in 2000 and Blinck International BV in 2002. Luc joined CLIQ following the acquisition of Cliq BV in 2012, where he was a non-executive director.

Ben spent his earlier career at Arcade Entertainment BV and then as a managing director at ID&T Entertainment (1993-2000) following which he acted as an independent corporate financial advisor with Odd World Consultancy for ten years. He joined CLIQ in 2014 and his responsibilities include finance, legal, corporate development and capital markets.

The supervisory board comprises Dr Mathias Schlichting (chairman), Niels Walboomers (deputy chairman) and Karel Gustaaf Tempelaar (non-executive director).

The members of the management board and supervisory board hold 26% of the shares and voting rights with the remainder classified as free float on the Scale segment (for small and mid- sized companies) of the Frankfurt Stock Exchange.

A team of five source and licence content and apps from developers and publishers, where they believe there is a market opportunity. In certain circumstances, where CLIQ sees a cost advantage, it may also develop its own content. However, for the majority of content, product development is subcontracted or licenced.

CLIQ offers a broad range of products which it loosely classifies into four groups. Management does not break down the contribution by category; however, we understand that no one product or category is dominant.

While management classifies its products into four groups, the business model for each is largely similar. Publishers contract with CLIQ to help them bring products to market both within and outside the market leading app stores (Google Play and iTunes). CLIQ reaches on average 5m customers each day through its affiliate partner network, directly through its own media buying team or via its own affiliate network (Grumbl Media). The most significant share of promotional activity is via mobile banner advertising, although email marketing and other formats are also used. Where CLIQ has a pre-existing contractual relationship with a user it may also fund a marketing campaign on behalf of a customer.

Typically, content is offered on a subscription basis (daily, weekly or monthly fee) although there are some one off pay per download fees and to a lesser extent it also offers Fremium content where users can download and use content for free after registration and where these users are then monetised by a combination of micro payment add-on sales and advertising.

The vast majority of traffic to CLIQ’s services are currently generated via its affiliate partners; a network of specialist genre specific marketing companies which promote CLIQ’s campaigns, driving traffic to an on line or mobile site where users can subscribe to CLIQ’s services. Affiliate marketing partners are rewarded on a fixed CPA basis (cost per customer acquisition).

Payment is made either through premium SMS (PSMS), direct carrier billing (DCB), app store billing, credit card or PayPal. Payment via mobile carriers is one of the more effective ways of converting a mobile lead into a sale and the majority of CLIQ’s payments are invoiced via the mobile carriers, to which CLIQ’s own payment platform (cliqpay, see below) links either directly or via gateway companies (eg NTT DoCoMo or Gemalto).

cliqpay is a full service gateway for mobile payments. The platform offers billing services (DCB and PSMS), reporting, campaign analysis and customer services. It can also directly integrate app monetisation solutions (ie advertising) and product marketing via its sales network.

Cost of sales is largely variable. A large share relates to technology costs paid to network operators or gateways that provide connections to network operators. These costs can range from 25% to 70% subject to market and operator with European markets averaging approximately 40%. It also includes fees for payment services (most revenues are collected via network operators which have higher fees than credit card companies), licence fees for content and customer service costs.

CLIQ capitalises customer acquisition costs and amortises them over a maximum 18-month period (in line with revenues and weighted towards the first 12 months); consequently, these costs are not reflected in EBITDA, but are reflected at the EBIT level. Other operating expenses relate largely to the cost of the c 100 employees and the day-to-day running of the business.

Since 2014 the group has been fully focused on the mobile business. Following the strengthening of its balance sheet (as outlined on page 2) it moved its banking facility from ABN AMRO to Commerzbank. The extra flexibility provided has enabled it to step up investment in marketing spend (the main driver of revenues) and it has been able to reduce net debt considerable to €10.6m at 31 december 2016. The growth strategy is placing an emphasis on:

Evidence that the above strategy is enabling CLIQ to drive a similarly strong return on its marketing investment is the key catalyst for the share price performance. The quarterly results should enable investors to guage the group’s momentum.

The market for digital content and value-added services (VAS) started with voice mail, ring tones and SMS voting, but has exploded over the last ten years since the advent of the first iPhone, to include a wide range of products including entertainment services, information services, games, utility applications, mobile advertisements, mobile money and m-commerce more generally.

Demand is ultimately driven by increased smartphone usage, itself a function of continued improvements in connectivity as operators move towards universal 4G coverage, the availability of affordable handsets (particularly relevant in the fast-growing developing markets), and improvements in the quality and range of services on offer as technologies improve (eg HTML5, Google’s Accelerated Mobile Pages). Furthermore, more general consumer acceptance of mobile payments and the deregulation of the mobile payments markets, particularly carrier billing, is opening up the market to a wider range of digital goods (eg ticketing, donations and gift cards).

Almost half the world’s population has internet access (3.4bn, eMarketer) with approximately three quarters using a mobile connection, of which almost half is via a smartphone (47.4%) and penetration is forecast to continue to expand at a steady rate. The market for mobile goods is already significant and is forecast to continue to grow rapidly.

Analytics group AppAnnie estimates that in 2016 consumer spend on apps was $62bn and forecasts this to increase to $139bn by 2021. The vast majority of this relates to games (81% of consumer spend via stores in 2016), although in-app subscription revenues for non-gaming services is forecast to grow even more quickly over the next five years (25%). Many non-game apps also monetise through advertising or m-commerce, both of which account for a significant share of industry revenues. In 2016, global mobile advertising revenues surpassed desktop to reach $99bn with 27% growth forecast in FY17 (eMarketer) and m-commerce is now almost a trillion dollar market (Euromonitor, 2016).

In short, CLIQ operates in a very large and dynamic market. Provided it can retain access to a supply of high quality content and nurture its relationships with key affiliates it is well placed to benefit from this structural growth backdrop.

In a fairly fragmented market, CLIQ is one of the leading independent marketers of digital content worldwide. Its main competitors include IMI Mobile (UK listed, FY16 revenues €72m), Buongiorno (acquired by NTT DoCoMo in 2012 for $267m, 0.9x FY11 revenues), Acotel Group (listed, FY16 revenues €37m), NeoMobile (private), Zed Worldwide (private), Freenet digital (a small part of the Freenet group, relevant revenues €137m in FY16). In addition, many larger advertising agencies and an increasing number of advertising technology platforms offer similar services.

Management tracks a number of KPIs including revenue, number of sales per year, total marketing spend, and the customer base value (a proxy for the total estimated cash flow from the current user base over the coming five years). Alongside these absolute performance measures, it also tracks a number of per user metrics: ARPU (average revenue per user in its first six months – the period when they make the most revenue from a customer); and CPA (cost per acquisition which includes the cost of acquiring media).

Marketing spend is one of the largest costs for the group and the efficiency of marketing spend is one of the most important variables for the group. The ‘CLIQ Factor’ is a measure of the efficiency of the company’s marketing expenditure, with a higher CLIQ factor meaning the earlier it is recovering its marketing spend from new users. It is calculated as the average net revenue per user in its first six months divided by the CPA.

By working with over 200 affiliates, as well as via its own direct efforts, Cliq has access to the usage patterns of up to 5m potential customers each day. Based on data and experience built up over a number of years, market testing and its relationships with these affiliates, CLIQ can estimate, with a fair degree of accuracy the CPA by market and product as well as the likely ARPUs based on a customer’s profile.

CLIQ increased its investment in marketing by 9% in FY14, 28% in FY15 and 23% in FY16 and on all measures the increased investment in marketing appears to have generated good returns.

Due to the discontinuation of its Mexican affiliate by mobile operator Telcel, the group closed its Mexico business in Q115. This contributed to the reduction in the number of sales per year. However, the group’s increased investment in higher ARPU European markets (which constituted 81.9% of total revenues in 2016, vs 69.1% in 2015, Exhibit 3) enabled it to grow revenues by 18% and 17% respectively in FY15 and FY16. Importantly, the CLIQ Factor has remained fairly steady at 1.40 and 1.41 over the last two years meaning this was profitable growth. This, in combination with the increasing sales to existing users, as seen by the 28% and 9% increase in the customer base value, has underpinned the group’s strong financial performance over the last two years.

Over the last three years the group’s restructuring and focus on mobile and higher ARPU European markets has underpinned a significant expansion in both EBITDA and EBIT margins (Exhibit 4).

EBITDA margin was 40% in FY16, up 4pp over FY15 supported by strong revenue growth and a slight expansion of the Cliq Factor. Net of amortisation of marketing investment, the EBIT margin increased to 6.9% (from 4.7% in FY15) and EBIT increased 73% to €4.5m. The gearing effects of a flat interest burden (the underlying interest charge decreased in line with debt, but overall finance costs remained flattish as a results of exchange differences) meant that growth at the net profit level was even greater. In FY16 net profit doubled to €2.8m.

Capital expenditure relates principally to capitalised marketing expenses. Cash conversion (EBIT/ operating cash net of investing activities) was 96% in FY16 and CLIQ reported net debt of €10.6m at December 2016, a 29% reduction on FY15. The group has access to an overdraft facility with Commerzbank of up to €13m (at 2.1% to 3.3% plus Euribor). The facility runs to 28 February 2018 and at the year-end €10.6m had been drawn down.

Management plans another increase in marketing investment in the current year which it expects to convert to a double-digit increase in EBITDA and net profit. Q117 results, announced on 8 May, show that CLIQ has had a strong start to the year and is comfortably on track to deliver on this expectation. Q117 revenues increased 11% y-o-y to €17.6m. Tighter regulations and the companies focus on more profitable markets meant that marketing spend was 15% below the same period last year. However, the CLIQ factor increased to 1.44 (from 1.41) and the customer base value to €20.5m (up 9%), resulting in a 43% increase in EBIT to €1.1m.

As the group grows, maintaining the current Cliq Factor may become increasingly difficult. In addition, the current investment into the commercialisation of its mobile payments platform (cliqpay), as well as into area sales teams may hold back the margin progression in the near term. This appears to be reflected in consensus forecasts which are factoring in an 11% and 10% increase in revenues in FY17 and FY18 respectively, but with flat EBITDA margins (40%) and only very modest expansion in EBIT margins (7.2% in FY17 and 8.1% in FY18).

There are few pure play listed peers against which we can benchmark CLIQ’s valuation. Italian listed Acotel Group, UK listed IMI Mobile and Indian listed OnMobile are the most relevant peers, in our view. We also include within our peer group affiliate marketing company XL Media and a number of ad-tech companies which are also involved in lead generation or the monetisation of mobile apps.

The share price has more than doubled over the last six months as the market caught up with the company’s strong FY16 performance and outlook statement. The FY17 P/E of 15.2x is towards the upper end of its peer group which average of 13.8x (excluding negatives) and broadly in line in FY18, suggesting it is up with events. However, consensus is forecasting revenue growth of 11% and 10% in FY17 and FY18, respectively. Evidence that management is managing to maintain or improve marketing efficiency could drive further upside.

CLIQ Digital’s financial and share price performance may be sensitive to the following factors: