Description

PM Summary: An investment in Cision (“CISN”) offers a highly compelling risk / reward profile, with limited downside of less than 20% and upside of over 100% in our base case and 250% in our upside case.

CISN is the dominant provider of software solutions for Communications Officers and Public Relations professionals at Fortune 1000 and PR agencies globally. It holds ~35% market share across N.A, W.EU and APAC.

While CISN operates in a mature industry, it is growing organically and will continue to do so in the foreseeable future. CISN’s competitive standing is strong and improving in about 80% of its operations (measured in terms of EBIT). The remaining 20% of the business is under potential pressure but the company is addressing the threats and should be able to protect its turf.

 We see CISN compounding EPS and FCFPS at mid-teens CAGR into 2022 from a combination of LSD organic growth, margin expansion from operating leverage, cost synergies and reinvestment of cash to pay down debt.  Yet, the company trades at a 2020 FWD P/E of only 7.5x as if the business is structurally impaired and destined to decline into perpetuity.  Actual past results and our research indicate this is not the case.  We expect topline to expand organically, generating bottom-line earnings growth that will drive PE multiple reversion to 13X. We see an IRR of around 35%by the end of 2021 for an investment today in CISN’s shares.

Background: CISN was previously written in VIC on Feb 27, 2018 when the stock was at $11.8.  Please review that write-up for details on the business and each of its segments.  Before we offer our own summary of what CISN does and how that ties to the risk / reward of the investment, it is important to notice that the previous VIC write-up was put together at a time when CISN traded for $11.8/share and a forward PE multiple of 15Xx (or 11x fwd TEV/EBITDA).  If you examine the stock chart you will see that CISN’s price increased to $18 by the end of Aug 2018, trading at a forward PE multiple 20.5x and 13.5X EBITDA, and since then has mostly steadily declined, hitting bottom at $6.4 about a month ago.  We will label the period of June 30, 2017, when CISN went public through a SPAC (yes, a SPAC…) to Aug 2018 as “Spinning Hopes”. Let’s name the period since then till now as “Disillusion and Fatigue”.

During the Spinning Hope period, CISN was running around describing itself as an improving business on the cusp of accelerated revenue growth towards low-teens rates. Management was promotional and tended to over promise and underdeliver. It floated around the idea that CISN should hit HSD organic growth by 2019 and accelerate from there by collapsing the spend of customers away from competitors through a bundling strategy. It further leaned on the use of new technology that it had developed, called Cision ID, as a game changer for the industry through measurement of a PR campaign in the Earned-Media medium.  Further, management said it had all the required assets under its belt to execute the strategy to fruition.  It promised to reduce leverage on its balance sheet below 4x by 2019 (leverage expanded during 2014 to 2016 when CISN bought up assets in the industry to put together a one-stop package). 

Well surprise, surprise…neither happened. 

CISN grew at only LSD rates organically from 2017 to 2q19, and after saying it needed no more acquisitions, it unexpectedly acquired two competitors in Jan 2019 at full valuations (TrendKite and Bulletin). Consequently, financial leverage went up instead of down.  A classic recipe for disaster.  As CISN kept negatively surprising investors (with acquisitions) and underdelivered (LSD organic growth) it brought about the onset of “Disillusion and Fatigue” – the stock steadily declined from $18 to $10 by Aug 2019. Then CISN reported 2q19 earning and lowered guidance for EBITDA by just 1.5% at the mid-point.  This was the straw that broke the camel’s back - investors dumped shares in a stock with only about $6mm of ADV and the price plummeted almost 40% in three trading days. A month later and here we are. Now the common perception is that CISN is “broken and under structural threat” or “dead money” and a case of “lost confidence in management”.

From here the question is then whether CISN is a “Value Trap” or “Contrarian Opportunity”.

View of the business: To explain why we think CISN is not a value-trap but a decent++ business that is extremely mispriced, let’s start by understanding what the company does: the software that CISN sells takes care of the daily operating process of Communications officers and PR professionals (will tag them as “PR pros”).  We can break down the job of PR Pros into the following rough stages: Monitor the status of my company’s PR image, Define the message they need to push to help manage the PR standing, Identify and target the Audience for the message, Distribute the communication, Measure the impact, Adjust and repeat.  CISN’s products and services facilitate each one of these stages:

Monitoring means tracking the image of a company, its products, services and people across media channels – TV, radio, print, web, mobile, social, outdoors, etc. CISN offers media analysis services across many media formats and geographies, as well as consulting and research insights on broader trends. Defining the message, means understanding what drives PR and Communications for different industries and end markets, what grabs attention and what is the relevant audience and channel that is setting the tone. Together with Monitoring this is where CISN grew up originally in the days before digital and it remains a leader in measuring audience reach across channels (reach is the estimation of how many people were exposed to the PR message by channel/region/type of audience).  Identifying the Audience and Targeting involves finding out who are key opinion makers in the media whose views we need to sway in our favor. CISN has the most robust and reliable database of opinion makers for each industry, product categories and regions and spends a great deal of money to keep that database fresh. Distribute means making sure the target audience and opinion makers know about a company’s message (i.e. new strategy, new entry to region, new leadership, new product entry, reaction to crisis and events).  One distribution channel that receives a great deal of investor attention is the newswire distribution service, where CISN acquired the business of PRN Newswire in 2015.  But that is not the only distribution channel out there as sending out emails to the right opinion makers is equally important as is making sure content providers receive messages and create positive buzz that will cultivate  earned-media generation; picking up the phone and calling newspapers, magazine or blog writers is another example. This is where CISN’s database and software management tools allow the PR pro to manage ongoing distribution during campaigns. Measure the Impact deals with ROI and how PR pros justify their existence and budgets to the CMOs.  CISN helps PR pros measure reach but also helps analyze whether the PR spend led to any buying decisions or positive/negative discussions in social media and earned-media forums.

We could write a great deal more on how CISN helps PR departments manage operations daily, but what is most important to recognize is that we have just described a general work process that is conducted for each media channel.  A PR pro needs to Monitor, Define, Identify, Distribute, Measure and Adjust the development of a company’s images across many media channels.  Think of this as a matrix, with the vertical line as the capabilities we just highlighted and the horizontal line as media channels: Web, Social, Mobile, Desktop, TV, Radio, Print, Newspapers, Outdoor etc.  This means that from the point of view of needing to use software tools, PR pros will continue to bank on CISN’s solutions regardless of where the incremental Ad / PR dollar spend is going.  That is why the discussion around which media channel is in structural decline is of secondary importance to CISN’s relevance.  So long as “legacy” channels exist, a PR pro needs software tools to manage those channels and the PR department will continue to pay for CISN products.  Obviously CISN needs to remain relevant and offer reasonable solutions for the growing media channels of digital, but from CISN’s point of view these channels are additive and don’t replace the need for existing CISN tools.    

We think the above is an important point to consider since many sell-side and buy-side commentators are very focused on whether CISN’s PR Newswire is in structural decline (we don’t think so, but it isn’t that critical either way). Investors are also very focused on whether CISN has the best tools for monitoring social media and earned-media vs upstarts (such as Sprinklr and NetBase) since this is the channel growing the most.  This is where CISN’s investment in CisionID comes into play as well as its acquisition of TrendKite.  But our point is that movement of spend from one media channel to the other does not negate the binary need to use CISN’s existing tools. We think this is the reason why CISN’s results so far indicate it is growing in line with the overall spend of PR departments at large and medium sized businesses (which make up 80% of the company’s EBIT) 

Past results: Here is a table of CISN’s reported organic constant currency growth, as well as our own analysis of the numbers (we took the contribution of each acq. to revenues and calculated our own organic growth figure to sanity check management claims)

As you can tell, CISN is a mature business but is not structurally declining and in fact there is some evidence its organic growth is accelerating (see yearly and LTM trend).

One additional word about CISN’s organic growth outlook in relation to its competitive standing. CISN is the 800-pound gorilla in the market. It has bought its way to number one and has effectively marginalized competition.  We estimate it has 50-60% of Fortune 1000 customers and is the only player able to offer a complete product set. This is important since the second player is Meltwater at less than half the size in revenues. Meltwater lacks the resources to invest in product development to displace CISN at enterprise clients.  The up and coming smaller players that serve social and digital monitoring are focusing on growing in those channels and are not interested nor able to develop tools for “legacy” off-line media.  This means no one is effectively threatening CISN’s core business (which today is 95% of industry spend). But unlike other areas of software where growth into new ways of doing business displaces legacy, in the case for CISN they do not negate the need for CISN tools.  This isn’t to cloud providers what displacement by on-prem apps is as an example, or to distributed databases eating spend away from rational databases. While some customers might pick other solutions for social monitoring, that is not leading to cutting the cord on CISN tools. More so, CISN spent the R&D dollars to develop a good solution on its own for large enterprises (CisionID) for social and earned media monitoring.  It also took out the runner up competitor for the mid-size channel when it acquired TrendKite (midmarket is 20% of ebit).  All in, our research indicates CISN’s competitive standing is strong in its core business and its solutions for social and digital are on par with the competition. However, should upstarts prove to have better monitoring tools for digital, CISN should be able to buy the next shiny technology to fill the gap, as neither of these players are more than point offerings in the foreseeable future (which we define as five year).  The market simply doesn’t appear to be moving towards a winner-take-it-all situation by any stretch of the imagination.

Forecast financials: we expect CISN to hold its own, and likely grow its market share in enterprise where its bundling strategy combined with Cision ID technology should lead to gradual market share gains. However, for modelling purposes in our base case, we assume CISN grows only 3% in the enterprise channel, in line with customer spend.  For midmarket we assume CISN grows at 1% as we bake in some share loss to nimbler players and / or cheaper alternatives, in a segment where point solution offerings resonate better. All in, we see revenues growing at 2.7% over the next five years.  With EBIT margins of 29% and natural inflation of 1.5%, CISN should grow EBIT at 5.5% per year; However, the company still has over $15mm synergies left to pull through from its acquisition of Trendkite and Bulletin.  This leads to EBIT margin reaching 32% by 2022 vs management goal of 35%+.  Together we get ~7.5% of yearly compounding of operating income. 

We expect CISN to use of cashflow to reduce financial leverage.  We very much doubt that management will spend capital elsewhere following the 65% stock price drop since Nov 2018 that was tied to investor discomfort with M&A and additional debt.  Management has felt the wrath of shareholders and likely have learned their lesson. More so, CISN is controlled by GTCR, the PE firm that put together the company’s original acquisition strategy.  We doubt GTCR will let management screw around further. Leverage reduction is therefore the most likely path for cash deployment, which will yield EBT compounding of 16% per year into 2022.  That also implies that CISN will trade at just 6x by 2022 and will hold Debt to EBITDA of 2x by then.  Beyond that time frame, we see CISN growing topline organically at 2.5% and together with use of cash generating mid-teens EPS compounding for the next 5 years.  We apply what we view as a very reasonably exit PE for such value create and use 13x on our 2022 PES, which yields a target price of $15.5/share or >2X from today’s price.

If our projections are roughly correct, buying CISN today and selling towards the end of 2021 for $15 will generate an IRR of ~35% in ~2.5 years.

Risks: we see management as the key risk for the thesis as we find them to be promotional at best…usually we wouldn’t invest in such situations despite the cheap valuation.  However, we are banking on GTCR stewardship as profit driven and logical shareholders.  Eventually GTCR needs to exit this investment and generate a reasonable return on their capital. That means management can’t run the business for their own benefit as often happens with public companies of this nature.  Further, our checks indicate that while management is indeed promotional, they are quite able on the financial front as well as in terms of strategic thinking and sales orientation. They lack operationally as evident by the slower than expected realization of goals.  Still, CISN continues to grow, expand margins and compound earnings and FCF.  Our conclusion is that this risk is limited and we are more than compensated by valuation as we hold an asset that improves with time.

An additional risk is a recession.  While CISN’s products are operationally important to its customers, budgets at PR agencies and at large corporations do suffer during macro downturns. We estimate that during the GFC, CISN’s organic growth shrunk by (9%).  We don’t expect as bad an outcome this time around and point to CISN’s higher base of SaaS sales vs Prep licenses, which yields recurring revenues of $550mm (over 70% of total revenues).  If we envision organic growth falling by (5%) during the next recession, we see EBIT margin hitting 27% and all in see EBIT falling by (15%).  CISN will still generate FCF of $110mm and pay down debt. We expect EPS of $0.69 in our recession scenario.  This implies CISN will trade for 10.5x PE on trough earnings (or 9.5x TEV/EBITDA and 3.1X revenues, making it a prime target for takeout). In other words, the stock is so cheap that it is already pricing in a lot of bad developments.

Catalyst

Compounding of earnings

Potential takeout