Small Caps | Feb 24 2017
Competitive pressures are mounting on media intelligence service iSentia and growth has slowed to a crawl in its core business.
-Asia the bright spot with evidence the company is gaining traction
-Australasian competition intensifies with Meltwater's entry
-Australasian market considered by many to be ex growth
By Eva Brocklehurst
Has media intelligence service, iSentia ((ISD)), hit a road block? Brokers observe competitive pressures are mounting and growth has slowed to a crawl in its core business. Deutsche Bank suspects the business has reached a limit in terms of its ability to harvest returns through price increases.
The company's first half results highlight higher client churn and an inability to recover publishing costs, which resulted in lower margins. The King Content business also disappointed the broker, reinforcing concerns around the quality and execution of this segment.
Management's expectations for the second half and beyond assume price growth continues at historical levels and there is a turnaround in King Content. Yet Deutsche Bank suggests recent trends may make this difficult to achieve. The bright spot is in Asia, with revenue and margin improvements signalling the company has gained traction there.
First half underlying earnings were down -13% and missed broker forecasts. Margins decline to 25.4%, which mainly reflected the loss in King Content as well as higher publishing costs. Software-as-a-service revenue grew 3%, supported by price increases, although the company acknowledged an inability to hold onto the majority of the increases, citing increased competition and client resistance.
Full year guidance has been downgraded and the company now expects both its core Australasian and Asian businesses to post growth in the low single digit range, while content marketing is expected to report an FY17 loss of -$3m.
Macquarie believes there is inherent value in the stock but appreciates that two earnings downgrades in three months means it will take some time for the value to be realised. There are no immediate catalysts outside of the company achieving on its FY17 guidance.
The broker retains an Outperform rating which takes a 12-month view. The main negative surprise for Macquarie was the intensifying of competition in Australasia. The enhanced pricing power that is materialising from Meltwater has proved greater than the broker anticipated.
Macquarie believes new product development is the way to reduce customer churn and to be able to justify price increases going forward. The broker observes the most recent price increase back in May-June was not accompanied by any new product releases. That said, the new product pipeline is considered promising. A new version of Mediaportal is being released and Story View is slated for the fourth quarter.
Churn Factored In
Customer churn is now factored into guidance at around -2% of revenue, versus the previous -1%. This is in line with the churn that was realised in the first half, but Macquarie observes this does not leave head room for a worsening competitive situation. King Content has proved difficult to forecast and the broker believes no value is being ascribed to this business, which means it is less of an issue if it misses guidance.
Moelis flags the savage sell-off in the stock and suspects many investors believe the Australasian market is ex growth, with volumes falling and driven by pricing pressure from Meltwater. The broker asserts that should the new features fail to arrest the churn over the next 6-12 months, the company risks price deflation and a further decline in margins. King Content has 6-12 months to prove itself or, the broker suspects, parts of it may be shuttered.
Moelis assumes flat prices and minimal volume growth in its forecasts. The broker also believes the risk of predators potentially assessing the stock as a takeover target may mean short positions close in the near term. The broker's price target of $1.94 does not incorporate a control premium. Moelis, not one of the eight stockbrokers monitored daily on the FNArena database, retains a Hold rating.
Shaw and Partners assumes the Australasian marketplace will be extremely competitive in the next 12 months and that Meltwater will take revenue share. The broker believes Meltwater will build a presence and apply pressure on iSentia's premium prices and high margins relative to global peers. The broker suspects the impacts of churn will continue to have increasing negative revenue impact on iSentia as Meltwater penetrates larger clients.
Client churn back to iSentia is high, too, and the broker expects this will decline as Meltwater beefs up its accounts management and business development. While management is very confident it will obtain pricing leverage in FY18 from Story View, Shaw and Partners is sceptical. The broker assumes further growth in Asia but remains concerned about the core business. Shaw and Partners, not one of the eight monitored daily on the database, downgrades to Sell from Buy. Target is $1.50.
There is one Buy rating on the database (Macquarie) and two Hold. The consensus target is $2.34, suggesting 38.7% upside to the last share price. This compares with $2.78 ahead of the results. Targets range from $2.10 (Deutsche Bank) to $2.50 (UBS, yet to update on the results). The dividend yield on FY17 and FY18 forecast is 4.3% and 5.3% respectively.
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