Team Internet Investment Case
October 08, 2023
Ticker: TIG LN
Share price: £1.2
Mkt Cap: £326.9mn
EV: £382.8mn
Team Internet is an AIM-listed company formerly known as CentralNic. It has two businesses: domain services and digital marketing. The company is an active consolidator acquiring many small teams in the fragmented industry. Its domain services segment (a fifth of total revenue) has a stable subscription-based revenue model with a low single-digit growth rate. Only 3% of customers switch providers every year. 62% of the segment’s revenue accounts for large domain resellers (e.g. GoDaddy, Newfold Digital etc.), with c. 250,00 SMBs accounting for 24% of revenue. The segment’s gross margin is 30%.
The overall gross margin is not very high (24% in 2022).
The online marketing segment is growing much faster (+120% in 2022). The online marketing segment increases the efficiency of advertising while also maintaining consumer privacy. The company focuses on online search, e-commerce and affiliates (over 3,000 affiliate advertisers use the company’s performance marketing and advertising technology platform). The e-commerce segment provides product reviews in Germany (Vergleich.org) and France (meilleurs.fr) and earns a commission if a consumer decides to buy a product online.
Share price: £1.2
Mkt Cap: £326.9mn
EV: £382.8mn
Team Internet is an AIM-listed company formerly known as CentralNic. It has two businesses: domain services and digital marketing. The company is an active consolidator acquiring many small teams in the fragmented industry. Its domain services segment (a fifth of total revenue) has a stable subscription-based revenue model with a low single-digit growth rate. Only 3% of customers switch providers every year. 62% of the segment’s revenue accounts for large domain resellers (e.g. GoDaddy, Newfold Digital etc.), with c. 250,00 SMBs accounting for 24% of revenue. The segment’s gross margin is 30%.
The overall gross margin is not very high (24% in 2022).
The online marketing segment is growing much faster (+120% in 2022). The online marketing segment increases the efficiency of advertising while also maintaining consumer privacy. The company focuses on online search, e-commerce and affiliates (over 3,000 affiliate advertisers use the company’s performance marketing and advertising technology platform). The e-commerce segment provides product reviews in Germany (Vergleich.org) and France (meilleurs.fr) and earns a commission if a consumer decides to buy a product online.
In some way, Team Internet is also a turnaround case. While revenue has been growing at a mind-blowing rate (+78% CAGR in the past ten years), the share price has only doubled (just over 7% CAGR) as most of the growth was funded through M&A and new share issues. The company went public in September 2013, issuing new shares at 55p (£38.7mn market cap).
Financials and valuation
In 2018, the company went through a transformative deal with a German-based KeyDrive Group. It was a reverse takeover as KeyDrive was much bigger than the existing business of CentralNic. In that year, the company issued 46.2mn shares at 52p. Within the next five years, the shares more than doubled.
KeyDrive management and controlling shareholders became the new driving force of the company.
Financial performance has also improved since then. In 2018-19, TIG generated $56mn and $109mn of revenue. In 2022, revenue reached $728mn (13.0x and 6.7x growth). At the same time, the share count increased by only 60%.
For 2022, the company delivered 77% total revenue growth and 86% growth in EBITDA. Organic growth in revenue and EBITDA in 2022 was 60% and 52%.
The latest equity issue was in early 2022, when the company raised £45mn by issuing 37.4mn shares at £1.2. The funds were used to acquire the leading German product comparison platform, Vergleich.
During its H1 ’23 results presentation, management confirmed that it expects full-year 2023 results to be at least within the consensus expectations ($783-834mn for revenue and $91-98mn for EBITDA). This suggests that the company should grow its revenue and EBITDA by 11% and 10%, respectively.
The company is valued at less than 6x P/E and 14% FCF yield, based on consensus estimates for 2024.
KeyDrive management and controlling shareholders became the new driving force of the company.
Financial performance has also improved since then. In 2018-19, TIG generated $56mn and $109mn of revenue. In 2022, revenue reached $728mn (13.0x and 6.7x growth). At the same time, the share count increased by only 60%.
For 2022, the company delivered 77% total revenue growth and 86% growth in EBITDA. Organic growth in revenue and EBITDA in 2022 was 60% and 52%.
The latest equity issue was in early 2022, when the company raised £45mn by issuing 37.4mn shares at £1.2. The funds were used to acquire the leading German product comparison platform, Vergleich.
During its H1 ’23 results presentation, management confirmed that it expects full-year 2023 results to be at least within the consensus expectations ($783-834mn for revenue and $91-98mn for EBITDA). This suggests that the company should grow its revenue and EBITDA by 11% and 10%, respectively.
The company is valued at less than 6x P/E and 14% FCF yield, based on consensus estimates for 2024.
Capital allocation priorities
1) progressive dividend policy (1p for 2022, which represents just 6% of FCF)
2) Organic growth (+60% in 2022) and operating leverage (costs/revenue dropped from 61% in 2021 to 52% in 2022)
3) Bolt-on acquisitions
4) Buyback
5) Debt repayment and competitive cost of capital (Net Debt decreased by 30% in 2022, with Net Debt/EBITDA falling from 2.2x in 2021 to 0.9x). Leverage increased during H1 ’23 contingent consideration payment in relation to the past M&A transactions.
On 15 May 2023, the company launched its second £4mn buyback programme, which is part of the plan to repurchase up to 28.866 mn shares. So far, it has repurchased 13.7mn shares, reducing its share count by 4.8% in less than five months. The first buyback programme was announced on 30 December 2022 and completed on 18 January (2.57mn shares were repurchased).
2) Organic growth (+60% in 2022) and operating leverage (costs/revenue dropped from 61% in 2021 to 52% in 2022)
3) Bolt-on acquisitions
4) Buyback
5) Debt repayment and competitive cost of capital (Net Debt decreased by 30% in 2022, with Net Debt/EBITDA falling from 2.2x in 2021 to 0.9x). Leverage increased during H1 ’23 contingent consideration payment in relation to the past M&A transactions.
On 15 May 2023, the company launched its second £4mn buyback programme, which is part of the plan to repurchase up to 28.866 mn shares. So far, it has repurchased 13.7mn shares, reducing its share count by 4.8% in less than five months. The first buyback programme was announced on 30 December 2022 and completed on 18 January (2.57mn shares were repurchased).
Key shareholders
The company has a concentrated ownership structure, with only 54% of shares in free float. The rest of the share capital is owned by strategic investors (private equity and family offices) and management. Management does not have high interest, however, with the CEO, Michael Riedl, holding only a 0.94% stake. Insider activity has been mixed. One non-executive director (Max Royde) has been actively buying TIG shares, while one of the co-founders (Horst Siffrin) has been mostly selling. Max Royde is the co-founder of Kestrel Partners, an investment boutique focused on digital businesses. Kestrel is currently the largest shareholder, with a 23.1% stake. The fund has been increasing its interest in TIG consistently for more than a year.
Issues
- The main issue with the business is the fast pace of changes and innovations. I don’t know one brand that has been operating in the digital marketing space for a very long time.
- It also appears to be a people’s business. I would imagine that a digital marketing company could suffer if the key members of its team decide to leave and launch their own business.
- The company is active in M&A. There is always the risk of future integration, culture clash, personnel changes and simply overpaying.
- Finally, the big tech platforms are constantly improving their own capabilities making their platforms more attractive for advertisers.
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