Description

XLMedia (XLM.LN) is an affiliate marketing company that operates a network of websites which serve as lead generation portals for the company’s gambling, social gaming, and financial clients.  Founded in 2008, the company has grown revenue from $11 million in 2010 to $137 million in 2017.  The company operates worldwide with the revenue split in 2017 being 28% from Scandinavia (where the business started), 30% from other European countries, 22% from North America, and 8% from APAC. 

The company generates sales through revenue sharing and success fees with its customers.  For example, a player searching for online poker tips may end up on one of XLMedia’s websites that contains relevant content and also offers a link with a bonus incentive to sign up and play poker on Caesars’ online casino.  When the player signs up, XLMedia will be recognized as the source of Caesars’ new lead and will receive a lifetime revenue share (normally around half) of that player’s future value to the casino.  XLMedia has been very successful over time, growing revenue at a 30%+ CAGR and generating very high margins.  This network of websites is called XLMedia’s Publishing business, and contains over 2,000 individual websites.  These sites are developed over a number of years to become relevant to the major search engines, which have become very discerning and will only direct users to quality sites.  The company has a deep pipeline of sites that it is developing that will start producing revenue for it over the next few years.  This is why the majority of XLM’s publishing revenue is organic (publishing grew 37% in 2017, the majority of which was organic).  XLMedia’s websites are mostly off-balance sheet assets as they are only listed at nominal values on the company’s balance sheet. 

XLMedia also conducts media campaigns on other company’s websites in order to gather additional users for is clients.  This is called the Media business and operates at much lower margins than the publishing business (80% for Publishing vs. 30% for Media).  Media still contributes to operating profit which is why the company pursues it as a business line.  XLMedia is an expert in its ability to hone in on profitable marketing channels for its customers.  It has developed a platform that allows it to evaluate ROI of different media possibilities and only pursue the best options.  In addition to advertising on desktop and mobile screens, the company also does social media campaigns and in-game advertising on mobile games.  This is a business where the company chooses its targets by what is economic at the moment.  They are not tied to one form of media, one geography, etc.

The company had an excellent year in 2017, growing the top line 32% and expanding its EBITDA margin to 34%.  The company has been profitable since inception generating EBITDA margins between 25% and 40% over that time span.  XLMedia's valuation at the beginning of 2017 was ludicrous with the stock trading at only 5x EBITDA – an unheard of multiple for a company with its growth trajectory.  The reason behind the low multiple was that the company generated the majority of its revenue from online gambling sites, which are exposed to regulation risk.  What the market did not understand was that XLMedia only works with clients in already regulated markets, so this risk factor was much lower than commonly believed.  The company is also listed on London’s AIM market, where many market participants believe that only shady companies trade.  We have had the good fortune of being able to dispel this myth over the years by finding legitimate businesses whose only crime was that they were small and underappreciated.

Another factor that the market began to absorb in 2017 is that XLMedia has been diligently working to lower its exposure to gambling by diversifying its revenue stream into other markets, mainly through small acquisitions.  64% of the company’s revenue in 2017 came from the gambling vertical, which is down from nearly 100% five years ago.  The company’s core skill set, the ability to direct relevant, high-value traffic to client websites, is applicable to many end markets.  The company purchased two small financial websites during the year and has already improved performance of both.  One, Greedyrates.ca in Canada, helps consumers choose the best credit cards to apply for given their spending habits, rewards points usage, and other factors.  The other, Money Under 30, has similar functionality in the US.  XLMedia is already bringing more relevant visitors to these sites and has improved the hit rate of consumers actually signing up for cards.

Shares of XLMedia more than doubled in 2017, but the stock has hit a rougher patch over the past few months as the UK technology stock market has soured.  In addition, analysts have taken a very conservative view of 2018 revenues, currently predicted as growing at just 8%.  We feel that full year inclusion of GreedyRates and Money Under 30 will boost revenue and that there should be significant organic revenue growth, as well.  We see revenue growth at least in the mid-teens.  Currently the stock is trading at 7.7x EBITDA and 12.9x earnings, a discount multiple for a very good business.  We believe that as the company continues to execute well on both its core business and its diversification strategy, the business will continue to grow and will be rewarded with further multiple expansion in 2018.  Finally, there is also an embedded growth option, as Pennsylvania just legalized online betting and there is some hope that it will become legalized in other states in the US as well.  XLMedia is well positioned to pick up this business if and when it becomes available.

The affiliate marketing business is very fragmented and XLMedia is one of the largest players out there.  The only other listed competitor is Catena Media (CTM.SS) in Sweden that has been growing rapidly through a roll-up strategy.  Catena trades at a premium to XLMedia with multiples of 13x EBITDA and 17x earnings, even though much more of XLM’s growth has been organic.  There are a number of Swedish institutional funds that must only invest in Swedish stocks, pushing up multiples in that country.  As a large player, XLMedia has an advantage as it has a fully staffed compliance department that can react to changing regulations very quickly.  Its smaller peers often cannot adapt in a timely fashion and their business suffers as a result.

The risks to the story are 1) regulation risk.  If one of XLM’s major markets get hits with irrational regulation, then this could harm its business.  2) If Google changes its search algorithms in an illogical way, this could hurt the company’s publishing business.  3) Finally, if the company makes a large imprudent acquisition this could hurt its business, as well.

Our price target assumes that XLMedia grows revenue at 15% in 2018 and 2019 and expands operating margins to 37% through SG&A leverage.  That would lead to $70 million of EBITDA in 2019 and placing a 14x multiple on this results in a 340Gbp stock price or about 100% upside from current levels.

Catalyst

As XLM reports earnings its stock should rerate.  Good acqusitions will also act as catalysts for the stock.