7th Dec 2015 07:00
InternetQ plc - Additional response to recent share price volatilityInternetQ plc - Additional response to recent share price volatility
PR Newswire
London, December 6
7 December 2015
INTERNETQ PLC
('InternetQ' or the 'Group')
Additional response to recent share price volatility
InternetQ plc (LSE-AIM: INTQ), a leading provider of mobile marketing and digital entertainment solutions for mobile network operators and brands, today provides the following additional response to a blog published about InternetQ on 3 December 2015 (the “blog”).
It is not InternetQ’s policy to comment on articles or blogs on the internet. However, given the serious nature of the allegations made and the subsequent substantial drop in the Group’s share price, the Board of InternetQ believes it is important to address the comments made in the blog. Set out below are the Group’s responses to the assertions.
The blog’s author is of the opinion that the Group is ‘misleading’ in capitalizing ‘the majority’ of its operating costs, hence reporting ‘high’ profits:
The Group only capitalizes a minority of its operating costs, that being the portion of the salaries of the personnel involved in the development of individual software platforms, and this only occurs once it can demonstrate the technical feasibility of the platforms; in 2014 the portion of total payroll that was capitalised was 14% (or less than 6% of total operating expenses), or c. €0.7m. The Group’s accounting policies comply fully with IFRS standards and have been regularly reviewed as part of the annual audit process. None of the Group’s intangible assets has been impaired to-date. The costs capitalised predominantly relate to the Group’s investment in core intangible assets (namely the Group’s main software platforms, Minimob and Akazoo), and have resulted in significant competitive differentiation versus the Group’s peers, some of whom rely on third party platforms. Investing in and owning its own technology helps the Group maintain strategic flexibility and protect its margins. The recent launch of a self-service ad tech platform as part of Minimob provides promising evidence of the success of this strategy.
The Group is concluding a major investment cycle in its main platforms, but as it operates in the rapidly changing and developing market environments of ad tech and music technology, it needs to continue investing and enhancing its platforms with new features.
The blog’s author states that the Group has higher DSOs than back in 2010:
The Group’s revenues have grown circa fourfold since 2010 and the Group has successfully expanded operations in a large number of countries. Back in 2010 the Group worked with a handful of telecom operators (clients) in a small number of countries. InternetQ’s current business model mix and globally diversified geographic mix has led to increased DSOs compared to the early days of its operation. Notwithstanding this, the Group is actively taking significant steps to reduce DSOs by, for example, investing in the Minimob business (mobile ad network), which has structurally lower DSOs. The Group anticipates that DSOs will decrease significantly through 2016 and 2017 as these steps are put into practice.
The blog’s author is implying that the Group has spent money on acquisitions of doubtful value:
The four main M&A transactions in the past five years have been based on clear, pre-agreed strategic objectives to broaden the Group’s geographic and technical profile, people and customer base. Most key employees of those acquired businesses are still with the Group in senior management positions. The Group runs impairment tests on all historic acquisitions on an annual basis and no impairment has been required to date.
The blog’s author suggests that the business has rising and high debt levels:
The Group ended the first half of 2015 with €2.8 million net debt, which represents less than 0.2x of the Group’s Adjusted EBITDA for the 12 months to June 2015 (the equivalent ratio for gross debt to Adjusted EBITDA for the same period is 0.7x).
The blog’s author implies that the Group has low cash generation:
InternetQ is a technology company that is investing for the future. The strategic focus is to grow and improve the platform during the current phase of market development in both mobile marketing and music streaming. In the opinion of the Directors, not investing excess cash flow in fuelling growth would be a mistake. The Group has always clearly communicated to the market its strategic priorities, cash generation levels and its plan to increase profits and cash over time.
The blog’s author is questioning a €2.7m financial asset in the Group’s balance sheet:
This investment in a content company (in the field of MMO games) was made in 2012, at a time when the Group’s business focus was slightly different. An internal review concluded that this was no longer a core asset and, as such, the asset was subsequently sold to a third party in February 2015 with the payment to be received in instalments, €600k of which has been received to-date in cash in line with the agreed payment plan. Neither the investee company nor the subsequent purchaser of the asset are related to the Group. The Board sees the fact that the Group has exited this business without significant cost as positive.
The blog’s author points to a high client concentration in InternetQ’s B2B business:
The Group now has over 160 advertising partners in Minimob, many of these being blue chip organizations, a number of which have been disclosed in recent trading update announcements. By signing up and logging in to Minimob.com anyone can access the range of available offers. Most of the Group’s customers are repeat customers placing multiple offers at frequent intervals. No individual app advertiser contributes more than 5% of Minimob’s ad tech platform revenue. The B2B concentration ratio referred to by the author of the blog refers to past data (2014) and largely relates to the Group’s legacy mobile marketing campaigns business in which the billing/collections were often made using a small number of multi-country aggregators, in line with common industry practice. This is not a reflection of the significantly larger number of individual end client relationships (MNOs etc.) at the time, which is the real business driver. As detailed above, the Group’s client concentration ratio in Minimob today is low and is helped by InternetQ’s evolving business model towards in-app advertising.
The blog’s author states that the Group operates in a space that is crowded (mobile advertising):
The Minimob platform is differentiated in that it focuses on the niche, performance-based in-app mobile advertising sector. There is no display advertising, a field which can be negatively impacted by ad blocking and a business model the Group is actively staying away from. Minimob is based on a proprietary software platform which, following recent enhancements, now supports self-service usage. The Group is not aware of many firms with similar capability and aspires to be among the leaders in this space (in-app mobile advertising). As mentioned in the Group’s interim results announcement, this ‘niche’ space is estimated by sector experts to be worth c.US $30bn in 2015 and is due to further triple in the next three years.
The blog’s author states that Millennial Media, a diversified larger business historically focused on a different niche (display ads), never made a profit, and that, by analogy, InternetQ should not be expecting to make any profits:
In the Group’s view the comparison to this particular company is not particularly relevant, as it mainly focuses in a different field of mobile advertising. Furthermore, and in relation to comments about the Group’s cost structure, the Group’s business model is different to certain other players in that it invests in its own technology and as such does not need to pay large sums to third party tech providers, thus maintaining competitive gross margins. The Group’s operating expenses are mainly centred in relatively low cost locations such as Greece, thus ensuring operating costs remain contained. InternetQ, therefore, has a structurally competitive cost profile. Also, where possible, the Group focuses on markets and subsectors where it expects it can yield higher margins than in some other more highly contested markets.
The blog’s author states that the Group’s Akazoo music streaming business does not have enough genuine positive ratings or presence on social media channels (and that in his view this is a sign that its service is not up to scratch or lacks substance):
Akazoo is a paid subscription-based music streaming platform which has received the long-standing recognition and endorsement of blue chip corporate clients, who have chosen to use the service to address their own customer needs. Such blue chip clients offer the service direct to their subscribers and frequently under other brands. Multiple client surveys have shown that the Akazoo service is an attractive and competitive offering in its respective markets. The Directors are confident that the Group’s offering meets the requirements of its corporate clients and that they have a positive end user experience. Given that the focus for Akazoo is mainly on Emerging Markets, in the view of the Board, it would appear reasonable that on the prevalent social channels in, for example, developed markets where the Group does not currently operate, there is little or no reference to Akazoo. Management strongly denies suggestions that the Group is involved in any manipulation of Akazoo’s ratings on social media.
Moreover, in order to maintain its cost advantage and the local appeal of Akazoo, the Group tends to employ mainly local content in certain of its countries of operation; such local content in regions like South East Asia tends to be much more popular than international content. This local content, coupled with the fact that the business model is not based on freemium user interaction (or ‘likes’ generation) and the fact that the Group often agrees to use its respective local partner’s brand instead of the Akazoo brand in promoting the B2C service, may explain why the Akazoo-related ‘liking’ activity of international pop stars in certain social channels may appear to be low. Separately, the Group uses multiple app distribution channels for Akazoo, such as operator downloads, direct from web downloads and various other app stores, including independent ones – Google Play is only one of the channels used. The Group’s existing contracts with all major music labels (for content use in some countries only) and most large independent music labels ones are further stamps of approval of the quality of the service.
Finally, as previously announced, reputable private equity investors recently conducted extensive due diligence on the Akazoo business prior to directly investing c. €17m in cash in July this year.
The blog’s author states that certain other leading music streaming services are ‘not making money’, and hence InternetQ should not be expecting to make profits in Akazoo:
InternetQ believes that the freemium model of certain market leaders has fundamental flaws, as each ‘free’ user is particularly costly to the service, with costs paid to music labels exceeding ad revenue associated with that ‘free’ user. That is why the Group has opted for a pure paying subscriber model. The combination of a paying model, cheaper local content, a proprietary software platform and low operating costs (as well as limited marketing spend) has helped deliver historically positive Adjusted EBITDA for Akazoo. Other business models that the Group employs, including the recently developed and launched Akazoo Radio, should further foster growth and profitability.
The blog’s author is of the view that ‘Akazoo Polska’ has a supposedly ‘terrible brand’ in Poland:
In Poland the service mainly operates using Orange’s own brand (‘Muzyka Tu I Tam’) which is ‘powered by Akazoo’. In recent years the Group has not focused on an own-brand strategy in Poland, given the fact that the Group’s partner’s brands are much stronger. InternetQ respects its partner relationships and avoids competing with them by using its own brand. This strategy saves the Group marketing spend and leads to faster adoption of its service. The Group also applies this strategy in certain other markets, depending on partner arrangements.
The blog’s author is critical of certain mobile messaging practices in relation to the Group’s business and certain legacy products of the Group and alleges that the Group has not provisioned for related fines received in Poland:
The Group’s legacy business model was based on mobile messaging. Regulations regarding that field are subject to frequent change. The Group has over the years been working closely with its local mobile network operator partners to ensure it meets relevant regulatory requirements. In 2012 a regulatory penalty of €202k was imposed on the Group. The Directors can confirm that the Group subsequently provided for Euro €156k in its 2013 results based on legal advice. The Directors can also confirm that the Group was subject to civil court claims of €286k in total in 2012 and 2013 which have not been provided for based on legal advice. The Group makes appropriate provisions based on legal advice at any particular time. The Group has taken the strategic decision to gradually reduce its exposure to these types of business and instead focus on in-app mobile advertising (Minimob) and music streaming (Akazoo) where it perceives the long-term benefits to be larger.
The blog’s author questions the Group having multiple other side products and apps:
Like many companies, the Group has developed and trademarked various products. InternetQ occasionally uses apps, such as the mentioned takatap, an app owned by the Group, to test its Minimob offerings, new features or generate ad inventory.
The blog’s author questions the Group’s partnerships with blue chip clients and alleges that the Group pays those blue chip clients like its Polish mobile operator partner to pre-install the Group’s apps on their users’ phones:
This is incorrect - such blue chip clients typically pay for the benefit of using Akazoo across their user base.
The blog’s author draws attention to a point in time in 2013 when both the Group’s receivables and payables supposedly declined, according to the author’s calculations:
This is incorrect. A significant amount of revenues at the end of 2013 had not yet been invoiced as a result of campaigns which were in progress over the year end and were included in Other Receivables (i.e. total receivables were in aggregate higher than in the previous year). Payables also increased during the period, while total payables including accruals and other current liabilities were also in aggregate higher than the year before. In summary, trade receivables and accrued income increased from c. €31m in 2012 to c. €35m in 2013; similarly trade payables and accrued expenses increased from c. €12m in 2012 to c. €15m in 2013.
The blog’s author is of the view that the Group purchases ‘a lot’ of external software and that ‘intangible assets form too high a percentage of its reported equity, vs. for example Microsoft’:
Any technology company that is focused on cost containment and fast lead times for developing software platforms is likely to use, in part, expert external developers for some of the software development work. Trying to in-source all such development is often not feasible or cost effective. It may be useful to note however that, as disclosed in the Group’s 2014 Annual Report, c. €12.4m out of the Group’s c. €51.4m of net intangible assets result from required purchase price allocation exercises performed by qualified third parties following acquisitions, and relate to non-compete agreements and acquired customer relationships.
Separately, the Group owns minimal fixed tangible assets. The Group’s business mix, funding resources and current size are factors that determine its investment choices and priorities, and they are all radically different to Microsoft’s.
The blog’s author questions the Group’s rationale for having multiple subsidiaries in various countries:
InternetQ is becoming a global company and often needs either a satellite office presence or local company, often for local tax or procurement reasons (for example, some clients require a contract with a local entity). Many of these entities are cost centres and show little revenue, but bear the impact of local personnel salaries and admin costs. The Group uses intercompany loans and charges to fund or charge local subsidiaries. The Group merged its Polish subsidiaries last year to minimize costs and utilize accumulated tax losses. InternetQ was required to set up a new subsidiary, Akazoo Poland, in the summer in order to effect the Akazoo carve out transaction which was completed in July and address the requirements of the Company’s private equity investors in Akazoo and those of the music labels.
The blog’s author is questioning the size of the Group’s revenues in Russia as a proportion of the Group’s total revenues and in comparison to his calculated market size:
Sales in Russia in 2014 were significantly lower than suggested by the blog’s author: they were 31% of European (not Group) revenues, therefore around €16m in total, not €41m. The Group operates various services in Russia, not only mobile advertising, but also music offerings and legacy mobile marketing campaigns, and hence the mobile ad spend market data quoted by the blog’s author does not cover the full extent of the market being addressed. Most of these operations are run remotely, as the Group’s business model does not rely on local execution as its service platform is cloud-based. The Group’s activities in Russia are supported by a registered office that the Group maintains in that territory, however the Group does not employ staff on the ground. Note 9 in the 2014 Annual Report shows that the Group’s 2014 revenue was geographically diverse with over 60% generated outside Europe.
In relation to the Group’s revenues from Russia, the blog’s author alleges that the Group ‘has a relationship with three companies called Twinsbox LLC, Adviator Media and Betta Technology’, using website screenshots as alleged evidence:
The companies mentioned are not related parties to the Group. The appearance of the Group’s office addresses on the websites of these companies appears to be a case of ‘content scraping’. Since the Group became aware of this after reading the blog, it has threatened those third parties with legal action and Adviator Media, which the Group now understands to have been previously known as Twinsbox LLC, has since removed the addresses from its website. The InternetQ website screenshot shown in the blog appears to be from a cached web archive of 2011. At that time five years ago, Twinsbox acted as a trial local agent for InternetQ. However, as Twinsbox was not successful in this capacity (as it did not deliver new business to the Group), this arrangement ended shortly thereafter. Management confirms that the Group has occasionally interacted with Adviator in the context of Adviator's acting as a low value systems technical integration facilitator/contractor on behalf of, for example, Russian mobile networks or mobile aggregators active in the Russian market.
Management confirms that the Group has never made any payments to, or received payments from, any of these companies, whether directly or indirectly.
For further details:
InternetQ Panagiotis Dimitropoulos, CEO and FounderVeronica Nocetti, Chief Financial Officer | Tel: +44 (0) 20 3519 5250Tel: +30 (697) 811 7520Tel: +30 (694) 420 5275 |
FTI Consulting LLP Charles Palmer / Chris Lane / Nicola Krafft / Karen Tang | Tel: +44 (0)20 3727 1000 |
RBC Capital MarketsPierre Schreuder / Ema Jakasovic | Tel: +44 (0)20 7653 4000 |
Canaccord GenuitySimon Bridges / Emma Gabriel | Tel: +44 (0)20 7523 8000 |
About InternetQ plc:
InternetQ is a leading digital content and mobile marketing services company with operations spanning Asia, Europe, Africa and the Americas. It offers proprietary technology platforms to help mobile network operators, brands, and media companies to conduct targeted, interactive and measurable marketing initiatives on mobile devices. Its mobile value added services include Akazoo, which allows consumers to purchase digital music content and Minimob, its smart mobile marketing and advertising platform to conduct effective and measurable campaigns on mobile phones and achieve user engagement and app monetization. All of InternetQ’s products are underpinned by the rapid global growth in smart devices and the thriving app economy.
InternetQ is a publicly traded company listed on the AIM market of the London Stock Exchange, under the symbol INTQ. For investor related queries, please email: [email protected]
ENDS
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