Archive for November, 2010

AdThink Media: Company Visit

November 26, 2010

I recently visited AdThink Media (ALADM, France-listed) at their headquarters near Lyon, France. AdThink operates in the internet media business, which in France, is less-penetrated and faster-growing than the slower-growing, more-competitive US market. Only 55% of France’s 70M inhabitants use the internet today. 15k new internauts enter the French market each day.

Furthermore, France is a very difficult market for foreign firms to crack. Google just opened up an office in Paris. Others have not been able to take the plunge. This places AdThink, and a small number of French competitors, in the enviable position of visible high-growth for the next three years. In fact, the most likely scenario will be for large international players to acquire French internet media companies to gain market access.

I liked the work ethic and structure of the 85 AdThink employees. There has been no voluntary turnover. Lyon is a bit more stable workplace than Paris, and certainly steadier than the US or Asia. The average age is 29 years, and they have been working and learning together over the past few years. They have a high energy level – most people were plugging away when I left at 6pm. Three separate teams run independent profit centers in a very entrepreneurial way. The result is that new products and concepts are continually introduced and monetized by a wide base of employees.

AdThink Media estimated 2010 revenues of €25M ($33M) are derived from Online Publishing (57% of first-half 2010 revenues), and Audience Monetization / Traffic Acquisition (43%). Internet Publishing includes dating, digital games, IT professional sites, and a men’s site (unhomme) similar to GQ in the US. Dating and games have rapidly growing subscriber bases, and are subscription-based pricing. IT Pro and unhomme are advertising based, as well as selling certain user data. The most promising is dating and games, which have high potential.

Audience Monetization is achieved via Advertstream and Adsmarketplace. Advertstream can be viewed as an online ad agency with a core specialization in cooking, family and women. Advertstream covers several web sites with 26 million unique visitors. Advertstream’s technology targets its audience and analyzes user behavior, leading to very specific user profiles for commercial clients such as Nestlé. Adsmarketplace is an online market for internet publishers to sell their sites’ ad space to commercial bidders. Adsmarketplace has 11,000 internet site publishers and 10,000 commercial bidders. Adverstream is also used for direct online performance marketing based on banners, email routing and click-throughs. The company also has a very promising micropayment platform that should add a lot of value to the group in the next few years.

First-half 2010 revenues rose 24% from last year to €10.7M. Audience Monetization / Traffic Acquisition revenues rose 48% in the first-half of 2010 led by a 132% jump in Advertstream-related sales. Online Publishing sales rose 10%. The biggest improvement came at the bottom line. Net profits excluding amortization of goodwill from acquisitions was €0.3M versus a €1.3M loss in the year-ago period, driven in part by lowering dependency on expensive Google ads as well as an improved product mix. First-half net profit including goodwill amortization was €0.015M. Moreover, management gave extremely high guidance for the second half of 2010 with EBITDA of €1.5M to €2M, versus €0.5M in the first half, and a 10% EBITDA margin for the full year. These numbers were re-confirmed during my November 2010 visit.

2010 revenues should rise by 28% to €25M, after increasing 25% in 2009. We expect a similar rise in 2011 and 2012 revenues aided by a number of new products coming out including a powerful micropayment platform, international expansion of certain product groups, more aggressive positioning of dating and digital gaming web sites now that critical mass has been reached, and other initiatives. Moreover, Advertstream’s rapid growth should continue unabated. Operating margins should rise from 5% in 2009 to 10% this year, and should rise to 12% next year. Operating margins should reach 15% by 2012 and near 20% over the long run. Larger-peer Rentabiliweb (BIL, Belgium) has operating margins near 20%. Similar-size Weborama (ALWEB, France) and Adverline (ALADV, France) are at 20% and 10%, respectively. Ramping revenues and margins should create explosive bottom-line growth, as seen in the projections below.

€, million 2006 2007 2008 2009 2010e 2011e 2012e
Revs 3.5 8.6 15.6 19.5 25.0 32.0 40.0
%chg +140% +145% +80% +25% +28% +28% +25%
EBITDA 0.36 0.95 0.69 0.93 2.50 3.84 6.00
mgn 10.3% 11.0% 4.4% 4.8% 10.0% 12.0% 15.0%
Net Inc 0.24 (0.28) (0.99) (1.12) 1.20 2.05 3.60
mgn 7.2% (3.2%) (6.3%) (8.0%) 4.8% 6.4% 9.0%
EPS NA (0.06) (0.20) (0.22) 0.24 0.41 0.72
%chg NA NA NA NA NA +71% +76%

AdThink Media is at the profitability inflection point where fixed costs are now covered and major investments are in the past, so that the contribution margin of incremental revenues is very high. Few new employees will be needed to generate strong revenue growth for at least the next three years. This scalable business model is very attractive.

Currently priced at €2.97 with just under 5M shares outstanding, Adthink’s current market cap is €14.8M. Enterprise value is €14.4M after subtracting net cash of €0.4M, which is only 0.6x 2010 revenues. AdThink is trading at 12x 2010 EPS of €0.24, and 7x 2011 EPS of €0.41 (or 9x 2010 EPS of €0.34 excluding amortization of goodwill from acquisitions, and 6x 2011 EPS of 0.50 excluding amortization of goodwill from acquisitions). Cash is expected to increase to about €5M by the end of 2010 (versus €3M at midyear), and debt should decline to €2M (versus €2.6M at midyear).

AdThink Media has a cheap absolute and relative valuation versus peers. EV / 2010 EBITDA is only 4x, and profits are growing exponentially off of a low base. French peers have an average EV / 2010 EBITDA multiple of 12x.

Why is AdThink so cheap?

* it is a microcap with low but recently growing liquidity
* it was not a profitable company until recently, although that was due to heavy past investments that are now bearing fruit
* some Parisian investors feel that the quality of technology people in Lyon are less than the grandes écoles of Paris
* currently lacks the scale of some of its larger competitors like Rentabiliweb

What are the risks?

* dependence on Google – although lowered to 50% of ad costs in 2010 versus a much higher / expensive level in prior years, and was achieved without sacrificing traffic via technological enhancements
* advertising is economically sensitive
* saturation of the market in about 4-to-5 years when France penetration rates approach 80%-to-90% (versus 55% today)

AdThink is not going back into the red for the foreseeable future, and in fact, should exhibit extremely strong profit growth given their scalable business model and fast-growing, somewhat protected market. When you add the fact that it has a dirt-cheap valuation, the end result is an expected return of a multiple of its current share price over the next 18 months.