Internet Business Share Discussion Threads

[old boy returns] 11/12/2007 11:43

the analyst - the evolution of the online retail industry has been very interesting. If you think back to the dotcom boom days investors were valuing every online retail start-up at crazy prices. I still have a newspaper clipping from 1999 saying one of my then online retail competitors had been valued at £30 million and were about to IPO. They never did but the business has survived as a private company earning a living for its founders but never enough to have rewarded external investors as well. To me that is pretty indicative of the whole sector in that there are lots of privately owned online retail businesses making a living, or in many cases second income, for their founders but very few (ASOS is the only UK example I can think of - and obviously Amazon in the US) which have prospered as public companies and delivered value to external shareholders. It is the large traditional retailers, who were generally slow to move into online retail, have generally now built decent sized online retail divisions.

[the analyst] 11/12/2007 10:15

Cheers OBR - yes you were right on the retail division. I know Maz would like to build it up a little more and sell it. This is the reason it now has it's own management. The plan seems to be to use the cash to expand the media division.

I remember some people saying that the IBG retail division was going to be bigger than ASOS and many people bought in purely for the retail division without knowing about AF at all. I wonder if one day we'll be saying that type of thing about buying IBG shares for AF? Possibly, if Maz has something even bigger on the horizon?

[old boy returns] 11/12/2007 09:27

Hi the analyst - I think Clocktower was the main protagonist back then but when I first took a look at IBG (which was when AF was at start-up stage) I was negative as well (lets call it healthy scepticism) - primarily because their cash was low and I could see no worthwhile potential from an outside investors point of view in their own online retail businesses. Fortunately I was convinced of the potential of AF by the knowledgeable posters on here. IBG's online retail has added no significant value to the business since so I reckon I was part right.

[aleman] 11/12/2007 07:55

Thomas Cook brought results forward to report profits ahead of expectations after strong finish to a poor year in the UK.

[the analyst] 11/12/2007 00:52

Must be old age, it's all a bit of a blur now...

[aleman] 11/12/2007 00:48

Wasn't that clocktower? Or was that later?

[the analyst] 10/12/2007 23:41

By the way OBR, I agree that the growth early on without significant fundraising was a huge bonus. It was for me - I'm still holding from early 2003!

Out of interest, was it you that I remember being very negative about IBG around that time, saying that Maz was useless and the company about to go bust? Seems such a long time ago...

[the analyst] 10/12/2007 23:35

Hi Old Boy

I'm not sure which of my expectations you are referring to as being unrealistic - my hope and expectation of 40p per share at some stage in the next two years? Or that more cash should be generated from operating profit? The later is probably a direct result of the payment terms that merchants dictate to the networks now - it has become a very competive business. I think there are ways to resolve that, though, and I may contact Maz about quite a simple way to address the issue that I don;t think any of the networks have considered.

From the conversation with Maz at the investors meeting, I know that he thinks the affiliate market is maturing very quickly and that the opportunities for organic growth are slowing. I agree with him. He told us that certain areas are now so competitive that he can not even consider some merchants because margins are too small (finance affiliates). So, there is some truth to what you have been told.

He told us in no uncertain terms that he could no longer expect the sort of organic growth that both he and investors were hoping for previously. Hence, he has decided to move more agressively into the media side of things. I definitely support him in this move as it seems like a very good business plan - the synergies are huge and he has a talented staff that can make the media side a real success in my opinion. I am hoping that a lot of what they are working on right now will be released in the next few months and the company will begin to reap benefits soon after.

[old boy returns] 10/12/2007 22:52

the analyst - I am with Stemis on the cash question and think you are being a but unrealistic in your expectations. Personally, as a long term investor from before the time at which IBG started its rapid growth through AF and became profitable and cash generative I take it as a big plus that all that growth has been achieved without the need to resort to significant fundraisings.

As an aside I have seen a few recent posters suggesting that the UK affiliate marketing market is now mature and not growing. In terms of metrics such as merchant and affiliate numbers I think there is some truth in this. I think there are now as many online retail outlets as the market can sustain and churn will be very evident as the weakest fail and others take their place. However, in terms of the value of the market online retail is still growing at 60% per annum and so providing affiliate marketing at least maintains the share of the overall market for which it generates the sales then the value of the UK affiliate marketing industry should still be growing at a similar rate.

[tonyr] 10/12/2007 19:24

niggle, was this using the communication centre functionality of AF's new (beta) release? If so, then particularly as it's beta release, I'm sure AF would welcome feedback about how useful it is, and how it could be improved further.

[hirschnathan] 09/12/2007 16:25

nig

got your email

[the analyst] 06/12/2007 13:58

Cheers stemis

I might be on my own on this one, but I do not see costs to do with bringing in new staff or improving technology as exceptional or one-off. To me, these costs are just part of running a technology company and should be expected every year. I don't see them as 'investments', I see them as a necessary part of the ongoing expenses that should be fully accounted for in any analyst predictions.

I think that many potential investors looking at IBG and are seeing missed profit forecasts, but much worse, are seeing that revenue is increasing at a far lower rate than expected. That makes any future forecasts very difficult to believe. I haven't seen any developments recently that I think are going to get revenue growth rates back to beating forecasts, but maybe I'm looking in the wrong places. Maybe Maz has a lot of new revenue-generating innovation ready to launch? The new software at AF should help, but in many ways that seems to be just to keep up with competition, rather than beating them - any thoughts on that hirsch? Would that be a fair comment?

So, despite spending on business infrastructure, they are having problems achieving the revenue increases the brokers had predicted. Now, is that to do with affiliate marketing in general or is it IBG-specific. I suspect it is the former, which is why I look toward making acquisitions in the media sector and I would rather they did that with cash than shares. The main reason I like acquisitions in internet media is because they should come with both profits and synergies, but more importantly, good staff. Maz has mentioned he has had great difficulty hiring good staff and that the problem just gets worse.

Hopefully, by this time next year we will be beating forecasts again and sentiment will be much improved. We could then see the 40p share price I am hoping for within the next two years.

Now that Maz is able to concentrate on the business again, rather than reviews and the like, I do have high hopes.

[stemis] 06/12/2007 08:32

Cash has increased steadily, albeit not spectacularly:-

31 October 2004: £277,000
31 Octobrt 2005: £1,077,000
31 October 2006: £1,375,000
31 October 2007: £1,500,000 +

Within this of course are a multitude of influences. In 2005 there was a placing for working capital of £360k and in 2006 £510k of cash was spent on a variety of acquisitions. Clearly we don't know what the detailed cashflow movements were in 2007, although £120k was spent on Net Free Stuff. I expect there was additional capitalised investment on software developments and some increase in working capital.

I wasn't at the investors meeting earlier in the year, but why do you want the cash in bank to start increasing? IBG is a growing/developing business not a mature plodder. Strip out cash and IBG's ROCE last year was 50%+. I'd rather they invested their cash at these sorts of levels than it sit on the balance sheet earning 4%. Investors get excited about 'acquisitions' but why is that better than internal investment which is probably low risk and has a higher ROCE? I'd be concerned if they were running the company just to maximize cashflow.

Despite everything IBG have increased profit this year by around 20% and are forecasting 50% next year, so its not like the re-investment of cash is having no impact or that they are in debt or seeing net cash outflows.

[the analyst] 05/12/2007 18:54

Nice to see you have a different read on the cash generation, stemis.

I was looking at the cash in the bank, which hasn't really increased, despite the profitability. The profits don't seem to drop through to the bottom line. However, my accounting skill are not great, so what would the reason be that the good 'cashflow' does not result in equally good increases in 'cash in the bank'?

October 31st 2007 - £1.5m (from trading statement, could be slightly more)
April 30th 2007 - £1.375m
October 31st 2006 - £1.037m (£355k spent on cheapholidaydeals etc. in June 2006)
April 30th 2006 - £1.276m

I'm looking for the cash in the bank to start increasing and I think that quite a few others have the smae opinion (judging by the questions at the investors meeting earlier in the year). Of course, I don't mind cash staying at todays levels if they make some good acquisitions with cash generated, that push the company forward.

[moob] 05/12/2007 18:23

the price is too high. should be 3p.we need a strategic review

[stemis] 05/12/2007 15:53

I guess the interesting question is what IBG are going to do with their cash. Whilst the had a deficit on distributable reserves of £2,123,000 at 30.4.07, I think this will be down to around £1,300,000 at 31.10.07 and in surplus by around £100,000 at 31.10.08 (assuming they meet forecast and pay 30% tax). Thereafter they are able to pay dividends and carry out share buybacks.

Unless the share price is still sub 20p by then I'd rather they invested it in working capital and other assets [as long as they generated a good return].

[stemis] 05/12/2007 15:44

Start to generate cash from AF, rather than increasing debtor days all the time

Bit harsh there, TA

Over the last few years we may have seen 'some' overall increase in working capital, but its been pretty modest for a growing business which has increased turnover from £3.0m to £13.4m; 2004 2005 2006
Underlying operating profit 21 383 1,150
Depreciation 38 38 59

EBITDA 60 421 1,209
Movement in working capital -10 -1 -279

Cashflow from operations 50 420 930Nor can anyone say that the investment in capital hasn't generated a pretty impressive return.

[the analyst] 05/12/2007 14:48

I'd also be interested in peoples view on where the share price should be if the targets are met for next year.

I definitely agree with you stemis, that this is a very difficult question!

For me, I would hope to see IBG make £2m in this current year, then £2.6m next year. If they can meet targets and improve their investor sentiment, especially with institutions (may require new board members? - I don't know) then I don't see why they shouldn't be trading a historic PE of something like 16x earnings and 12x forward earnings.

That would be a market cap of £32m if they bank that £2m in 2008, or about 40p per share based on the number of shares issued at the moment.

It's not going to be easy, though and I think they will need to be successful in all of the following areas to get that sort of rating:

- Increase revenue at AF substantially
- Start to generate cash from AF, rather than increasing debtor days all the time
- Make solid progress with the media division - both revenue and profits
- Work the city, get institutions to understand the business and invest

[baheid101] 05/12/2007 13:42

IBG's new interface for Affiliate Future is an important development as we have seen a real step up in innovation from AF's competitors over the last year (content units etc). Below is a post by Pete from AF explaining some of the improvements. Allowing merchants and affiliates to communicate directly is an interesting feature because most networks don't allow if for fear of disintermediation (large affiliates enter into a direct affiliate relationship with the merchant, taking networks out of the loop)

'There is a new communication centre which will open communications directly between merchants and affiliates.
The reporting has been cleaned up to make it quicker and easier to pull the data you need.
We now process lapse times times so show click to transactions.
Quick links, we made it really 'quick' to grab plain links.
It's also quick to see which merchants your not promoting.

This is only step1 of the interfaces and we'll be introducing lots of things as we move away from the beta stages.'

[omlaysause] 05/12/2007 12:07

Thanks for the info guys, much appreciated.

[stemis] 05/12/2007 11:46

I know Maz is concentrating more on the media side of things because of the slow down in the affiliate market.

The Affiliate Marketing business is very much the core and I don't know that it is 'slowing down'. The Media side is, as Baheid101, an extension of it but capable of generating much higher margins although I don't think Net Free Stuff is particularly material to overall IBG performance. I think we will see further developments in the media space as this is clearly part of IBG's expansion plans.

I'd also be interested in peoples view on where the share price should be if the targets are met for next year.

Hard to say. Currently trading on a cash adjusted fully taxed P/E of 8.7. That pretty much says that the market doesn't believe the strategy will deliver. The brokers have left the forecast PBT next year unchanged at £2.1m. Assuming they make this and some of the profit translates into cash, we could see cash up to £2.5m. A cash adjusted fully taxed P/E of 8.7 equates to a share price of around 20p. Hopefully the market will then give a bit more credibility to the strategy and we could see 25-30p.

[omlaysause] 05/12/2007 10:17

Stemis - How does Net Free Stuff make money for IBG?
Also looking at the media division, the only new thing seems to be Net Free Stuff. I know Maz is concentrating more on the media side of things because of the slow down in the affiliate market. Surely it means more time and investment in things like cheapholidays, henoo rather than just adding something like net free stuff .. any idea?

I'd also be interested in peoples view on where the share price should be if the targets are met for next year.