XLMedia – I’m Sceptical

12th Oct '15 by Mark Carter

6 comments 9031 reads

XLMedia: “The Company operates through three segments: Publishing, Media and Partners Network. Its Publishing segment owns over 2,000 informational Websites in 17 languages. These Websites refer customers to online businesses. The sites’ content, written by professional writers, is designed to attract online traffic which it then directs to its customers online businesses. Its Media segment buys advertising space on search engines, Websites, mobile and social networks and places adverts referring potential users to its customers’ Websites or to its own Websites. Its Partners Network segment manages marketing partners, whose role is to direct online traffic to its customers. It is responsible for paying its partners. Its partner program enables affiliates to have a single point of contact to direct traffic to, and receive monies from, rather than engaging in multilateral negotiation, administration and collection of revenues.”

It basically seems to be about SEO (search engine optimisation), which drives traffic to gambling websites. Something like that, anyway.

The shares fell 11.3% on Friday to 67p. Paul Scott did an audiocast with Leon Boros yesterday (http://is.gd/hBj9wN). Leon seems bullish on the stock, whilst Paul is sceptical. No doubt Leon is much cannier than me, so bear in mind that I KNOW NOTHING.

Its margins are around 29%, over twice that its sub-sector of “media agencies”, which is around 12% (source: Sharelock Holmes). Its average ROCE is 56.2% according to Stockopedia. Its revenues went from $11m in 2010, and is expected to be $113m in 2016. It seems too good to be true, to be honest.

It appears to have issued issued equity of $14m in 2013, and $49m in 2014. $38m was spent on “investing activities”. I’m not a fan of companies that grow like that.

It’s on AIM, its registered office is in Jersey, and from what I can glean from the ADVFN boards, it is actually an Israeli company. It was floated in March 2014. Stockopedia puts its Earnings Manipulation Risk as High.

FWIW, I would rate this company as “a disaster waiting to happen”, it’s just a question of time. No doubt the Market will prove me wrong in the short term, medium term, and possibly even in the long term. To my mind, though, this company simply reeks, and I won’t touch it with a bargepole.

As ever, we’ll see.

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Ramridge

12th Oct '15

Hi Mark
I have commented before about XLM that this is one unethical company too far for me ( I can tolerate most...). Here is an extract from the company's IPO document:
"
The Group attracts players through online marketing techniques and subsequently seeks to channel high value ‘‘traffic’’ (i.e. players) to gambling operators who, in turn, convert such traffic into paying customers. Online gamblers are attracted by the Group’s publications and advertisements and are then directed, by the Group, to online gambling operators in return for a share of the revenue generated by such players, a fee generated per player acquired, fixed fees or a hybrid of any of these three models.

To put it plainly the more a customer gambles and becomes a long term gambling addict, the better it is for XLM. Hmmm, not for me as an investment.

Regards, Ram

Monty9

The fall on Friday was the result of a major profit warning (commented by Paul on the day) by Adgorithmics, an Israeli AIM digital marketing company that had just issued record results.... , which fell 60% on an outlook of reduced business levels.

It might not be a cuddley operation but I doubt XLM are suffering the same problem.

Mark Carter

My track record on holding dodgy company is abysmal. I agree with you that XLM is dodgy. They always have a habit of exploding in my face.

So now I just avoid them. Jon Rosier, whi I acknowledge is a much better investor than me, expressed his bullishness on the company, I believe. Leon Boros also seems highly respected and bullish.

A couple of things I didn't mention is that I think the PE ratio is too low for such a supposedly high-growth company. I tend to get antsy about this, as it often means that the market has some scepticism. I also notice that the company's ROCE has been declining, from 64.0% in 2010 to 17.9% for 2014.

Its growth from $11.2m to $50.7m also seems too good to be true, and I noticed that they have issued a lot of equity the last couple of years.

To my mind, this all adds up to a standard AIM recipe for disaster. All the signs are there. The markets are disagreeing with me, though.

jjis

13th Oct '15

Hi Mark,
I looked at this one a while ago as it looked cheap and came up on some screens. But as it had a short history, was Israeli based and after the PLUS500 debacle, which shared some similarities in terms of wanting to benefit from gamblers I decided to forget it. So I'd be in your camp on this one, but as ever you pay your money and take your choice and time will tell.

Regards,
Jamie

Compound Income

It's possible that the XLM share price was just spooked by Adgorithms (LON:ADGO), and it'll be "business as usual". So the market might decide that the reaction is all a fuss over nothing, and continue going northwards. If people are buying into the story, then, naturally, the price will continue to rise and I will look wrong. So I would never try to short this share.

I still maintain that this is a low quality share, though, and that it's just a question of time before the wheels come off the wagon. If anyone feels they must go long, then I think stop-losses are a good idea.

There did seem to be some high volume on the day XLMedia (LON:XLM) declined, so I'm wondering what that's actually about.

PeterW

26th Oct '15

Hi Mark,
One other point, it appears that XLM get a lot of business as a foreign operator in the scandie countries and it is noted in their website that if the laws regarding marketing were applied to offshore companies it could have a material effect on the company. The extract from the admission document is below and supports your 'dodgy' meter reading.
I mentioned this on the iii discussion board but got thoroughly slagged off!!
Peter

Following is an extract from the AIM admission document:
" Finland
There are laws in place in Finland that restrict gambling activities and limit marketing of
gambling within Finland. While it is the case that these laws have not been enforced against
service providers outside Finland, there is no certainty that status quo will remain. Any
change of approach by the Finnish government could have a material adverse effect on the
financial position of the Group.
(b) Sweden
There are laws in place in Sweden that restrict gambling activities and limit marketing of
gambling within Sweden. While it is the case that these laws have not been enforced against
service providers outside Sweden, there is no certainty that status quo will remain. Any
change of approach by the Swedish government could have a material adverse effect on the
financial position of the Group.
(c) Norway
There are laws in place that prohibit foreign operated gambling and/or marketing of
gambling activities. While it is the case that these laws have not been enforced against
service providers outside Norway, there is no certainty that status quo will remain. Any
change of approach by the Norwegian government could have a material adverse effect on
the financial position of the Group."

XLMedia – I’m sceptical

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Mark Carter

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