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XLMedia: Overcoming challenges but remains reliant on gambling market

Publication Date: 14 Nov 2018 - By Samuel Smith By Samuel Smith
Actionable
Differentiated

Equity Fundamental Equity EU ex-UK UK Technology

London-listed digital performance marketing services provider XLMedia (LON:XLM) overcame regulatory pressures and challenging market conditions in the online gambling sector to deliver a solid and profitable performance in the first half of 2018. 

The company is now seeing a reversal in the business environment that should enable them to meet the year’s profit expectations. Despite the improved outlook, the share price remains depressed, creating an opportunity for investors to capitalise on the price-performance disconnect.

In the first half, revenues declined ~13% year-over-year, but gross profit only declined by 4.8% year-over-year, reflecting improved efficiency in the business. In addition, management maintained a strong balance sheet, with $51.3m in cash and short-term investments available to reignite the company’s growth engine through acquisitions. 

This is a significant amount of cash for a business with a market cap of only ~$231m and comes on top of the $45.8m in acquisitions executed during the period, including some of the leading Finnish gambling-related websites, one of the leading informational portals and comparison sites for online bingo games in the UK, and several US personal finance informational websites.

To start off the second half, management showed they planned to continue the acquisition spree by acquiring Investorjunkie – a leading US personal finance website. 

They also continued to prepare the groundwork for aggressively launching into the future US gambling market, if/when regulatory issues are cleared while simultaneously enhancing the Asia Pacific presence via investments in mobile apps and gaining new clients in the region.

Looking ahead, the key drivers of the company’s performance will be:

(1) the regulatory environment in key markets such as the UK, Germany, and the potential US marketplace;
(2) management’s ability to successfully execute on its growth/diversification/scaling strategy via acquisitions;
and (3) sustain profitability/achieve solid growth in its current assets. 

All acquisitions undergo a rigorous due diligence process that focus on ensuring acquired assets are complementary, add diversity in geographies, customers and sectors, active in additional sub-sectors, and demonstrate solid growth potential and benefits of scale.

Geographically, XLMedia has executed pretty well on its diversification efforts, with North America generating 19% of revenues, Scandinavia generating 35% of revenues, the UK generating 11% of revenues, and mainland Europe generating 17% of revenues. 

Meanwhile, the strong growth market - Asia – currently generates 7% of revenues. Sector-wise, however, the company is not as well diversified since the gambling sector accounts for 70% of revenues, putting the company at high exposure risk to a rather fickle and regulation-sensitive business.

Conclusion: XLMedia’s stock is very cheap right now and the company has numerous avenues to drive growth. However, it remains high risk due to their heavy reliance on gambling and the uncertainty of that sector’s outlook in key markets. Investors who choose to speculate in these shares should keep it to a small allocation in their portfolios.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Samuel Smith

 

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