Description

1. Investment Thesis

Amidst the eighth year of the bull market, good companies with reasonable valuations are difficult to come by. Finding companies that can weather a potential recession, should one happen in the next few years, is even more difficult. Against this backdrop, we are proposing a long investment in the shares of Cision (NYSE: CISN), an underfollowed, undervalued market-leading SaaS platform provider for Public Relations (PR) professionals that became public last June following a merger with the Special Purpose Acquisition Company (SPAC), Capital Acquisition Corp. III (CLAC). Our investment thesis rests on 5 key prongs:

1. As the only provider of a comprehensive, end-to-end integrated platform, Cision is well-positioned to capture incremental spend from competitors by collapsing PR spend onto their integrated platform
2. With its game-changing attribution offering, Cision Impact, garnering very positive reviews thus far, Cision is at the forefront of the shift of marketing dollars to earned media and stands to gain a lion’s share of this growth
3. Cision’s highly cash generative profile and low capital intensity (est. 2017 FCF conversion of ~85%) should enable it to continue deleveraging, which further transfers value to equity holders
4. With a retention rate of 88% excluding SMBs in 2016, Cision enjoys very sticky customer relationships and is well-positioned to weather a recession, with combined business revenue estimated to only have contracted 3 - 4% in 2008/2009
5. Management has deep experience and a stellar track record, while GTCR’s significant equity stake post-transaction implies both a strong vote of confidence and highly aligned incentives

Despite this, at $11.83 (as of 2/22/2018), Cision currently trades at 10.5x EV/2018E EBITDA and 10.0x Price/2018E LFCF. This is a significant discount to Information Services and Enterprise Software peers, who trade at a median forward multiple of 15.3x and 16.7x respectively, despite superior revenue growth and cash flow yields. We expect that over time, as Cision executes its strategy of capturing competitors’ spend on its platform and deleverages, the company will win over its skeptics and its share price should appreciate.

Assuming a 3-year investment horizon, should everything go according to plan, we project returns of 77% in the Base case. Should management outperform our expectations, we project returns of 106% in the Bull case. In the worst case scenario, should a severe recession occur in the next two years, we see our downside as being relatively protected, with returns of -12% in the Bear case.

2. Reasons for Mispricing – Why Does This Opportunity Exist?

We believe there are several reasons Cision is currently trading at a discount:

1. It’s a SPAC: Cision came to the market through a merger with Capital Acquisition Corp. III, a SPAC, in June 2017. SPACs have had a bad reputation in the investor community due to their troubled history, with many buy-side investors refusing to even look at SPACs in the past. However, the past few years have seen a number of successful SPACs, including Hostess Brands/Gores, and Playa/Pace Holdings. Moreover, given the involvement of a high-quality sponsor, CLAC, which has previously completed two successful SPAC transactions, and GTCR’s illustrious track record as a growth-oriented private equity investor, this prejudice is unwarranted.
2. Lack of Awareness: With no formal roadshow, unlike a traditional IPO process, and a different set of filings (S-4 proxy statement instead of an S-1 filing), listing via SPAC does not generate much awareness among the public. Limited sell-side coverage does not help either, with only Deutsche Bank and Credit Suisse covering the stock. Meanwhile, there is a lack of relevant public comparables, with no other pure-play PR software provider publicly listed in the US. Cision’s largest competitor, Meltwater, is privately owned; Kantar, a company that specializes in media monitoring and analysis, is a subsidiary of advertising giant WPP; iSentia is listed in Australia; and Business Wire, PR Newswire’s closest competitor is owned by Berkshire Hathaway.
3. Low Float and High Leverage: With a market capitalization of ~$1.5B and a public float of ~$450M, Cision may not be accessible to larger funds. In addition, Cision’s high leverage (net leverage of 5.3x as of FYE2017) is likely to have turned away some investors. We recognize the risks associated with this sort of levered equity play, but we think that Cision should not have issues deleveraging, given its strong cash generation profile (est. UFCF conversion of 85% in 2017) and recession-resistant offerings. We spoke to someone formerly on the GTCR side who corroborated their comfort level with levering up this company. We believe that Cision offers a rare opportunity to participate in a public-LBO type investment, with the company continuing to transfer value to equity holders as they pay down debt and saving on interest expense in the process.
4. Weak Organic Growth: Cision announced weaker than expected organic growth on its Q3’17 earnings call, with the Americas posting organic revenue decline of 1.8% yoy and management revised down its revenue guidance for FY2017 by $10M to $627 – 631M. This move likely caused investor skittishness, with the stock price falling ~15% by the end of the month. As one sell-side analyst wrote, “investors may take a bit of a ‘show-me’ approach until tangible acceleration materializes to become more constructive on the story”. We think this was an overreaction and presents an attractive entry point into the stock due to 2 key reasons:

• One-off Transactional Weakness: Part of the weakness was due to certain PR Newswire-related transactional products, where Cision helps produce multimedia videos and press tours for large corporations. Given the trend towards more multimedia away from text, we think this weakness is one-off in nature.
• Cross-Selling Headwinds Temporary in Nature: More importantly, we see the weaker-than-anticipated cross-selling of software and distribution on the same subscription contract as a near-term headwind that should be resolved in 2018. Management states much of this weakness was due to customers who currently utilize multiple vendors for their database, monitoring and distribution. These customers want to switch to Cision’s integrated platform but have to deal with various existing contracts expiring on different dates, which in turn caused a material number of deals to be delayed. Having talked to end-users and monitored industry opinions, we believe the shift to the integrated platforms is very real (as described under Industry Overview) and think that management’s words are credible. Already, Q4’17 overall organic revenue growth rates have come in stronger at 2.6%, a tangible acceleration from previous quarters (Q2: 1.8%, Q3: 1.0%). While full details on the organic growth rates for the various segments will only be available on March 8th, we think this supports our belief that the long-term thesis is still intact. Since then, the stock has recovered slightly on this news, though still off its highs. As Cision continues to execute in 2018, we believe the stock will re-rate accordingly.

3. Company Overview

Cision was formed from a combination of various companies acquired by GTCR in the past few years. GTCR acquired Cision AB, the legacy Swedish company from which Cision takes its name, in Feb 2014, successfully beating Meltwater in a heated bidding war despite a lower offer price (we think due to old rivalries). GTCR acquired Vocus, another US PR software company, and combined it with Cision. Later that year, the combined company (Cision) acquired Visible Technologies, a social media monitoring software provider, and Gorkana Group, a top UK-based provider. Notable acquisitions since then include the acquisition of PR Newswire from parent company UBM plc in Jun 2016 and top media monitoring and analysis consultancy PRIME Research in Dec 2017. As of 2017FYE, we estimate that Cision has a ~19% share of total Media Intelligence and PR spend of ~$3.4B in 2017, which is about 3x the size of its closest competitor.

Cision’s business mix is highly diversified, with top 25 customers accounting for only 3% of revenue. The customer base consists of 75,000+ customers, spanning a global reach and include Enterprise, Mid-Market and SMB customers. Cision counts 91 of top 100 worldwide brands, 96 of top 100 PR companies in the US, and 47 of top 50 PR companies in the UK as customers, including brands such as Google, Amazon, Coca Cola and BMW. Overall customer retention rate was 82% in 2016 (88% excluding SMBs). Cision’s customers also span across a wide range of industries, including many large PR agencies. This low customer concentration and diversity insulates Cision from fluctuations in any one specific customer segment/end-user industry. Average ACV ranges from $2K for SMBs, $10K for Mid-Market and $52K for Enterprise customers, with Deutsche Bank estimating Enterprise customers to account for 20 – 25% of total revenue, Mid-Market accounting for 50 – 55% and SMB for the remaining 20 – 30%. As of 2016, 63.0% of revenue was subscription revenue (traditional SaaS model where revenue is contractually obligated and recurring), 19.5% was recurring revenue (recurring but not contractually obligated), and 17.5% was transactional revenue, referring mainly to the PR Newswire business where companies can pay for individual press releases. Because of this, the Transaction segment is seasonal and typically sees an uptick in volume due to increased activity from PR and Investor Relations teams during Q2 and Q4. While this segment consists of long-standing customers, we expect this seasonality to smooth out as Cision incentivizes more of its transaction customers to switch to a subscription contract.

4. Business Model Review

The PR Software industry is somewhat bifurcated, with the low-end SMB segment characterized by low barriers to entry and the higher-end Mid-Market and Enterprise segment having much higher barriers to entry. SMBs are more price-sensitive and not willing to pay as much for quality, and thus are characterized by higher churn rates. There are many smaller players looking to target SMBs with more affordable offerings. This has allowed the PR Software market to remain relatively fragmented, with the top 7 companies making up only 43% of the market in 2016.

On the contrary, the Mid-Market and Enterprise segments are highly sticky customers, who are less price-sensitive and willing to pay for quality offerings. The stickiness of these customers arises from the workflow nature of Cision’s tool for PR functions, with switching costs associated with switching software providers, including the time for PR professionals to familiarize themselves with the new software. We conducted primary due diligence to corroborate our observation and spoke with various end users. According to a former Account Executive at Marina Maher Communications who previously worked with Procter & Gamble, Cision is “an industry standard, every single firm would use it … I used Cision everyday … our client (P&G) wasn’t comfortable with other products, so we used Cision”. Many also regard Cision’s media contacts database offering as the most comprehensive and up-to-date, and that alone is a major reason why many continue to stick with Cision. According to the Newsroom Coordinator at our organization's communications department, the organization started using Vocus, and then continued with Cision after they combined – “a lot of company reps like Meltwater etc. call us every year to see if our contracts are expiring and if we want to do demos, but in the end we always end up sticking with Cision as it’s the most comprehensive... other competitors end up missing certain functionalities here and there… even though Cision is quite expensive”. Given these switching costs, Cision has historically had high retention rates, with 2016’s retention rate excluding SMBs at 88%. This was affirmed in our conversation with someone formerly at GTCR, who mentioned that due to Cision’s superior depth of tools, few, if any, large customers ever defect permanently – “customers who left would come back to us after a year or two” .

Meanwhile, PR Newswire is widely recognized as part of the top echelon of newswire distribution services (alongside Business Wire and Nasdaq’s GlobeNewswire), with numerous journalists listing Business Wire and PR Newswire as services they subscribe to. While many view these two services to be very similar, we note that many companies typically stick with a newswire distribution service for a very long time once they have chosen it (as Metzger Albee PR Agency puts it, “it is the one we have always used”) and have little incentive to switch providers.

We think that management is well-aware of this bifurcation and observe that Cision has made a strategic decision to focus on the Mid-Market and Enterprise customer segments. Following GTCR’s takeover, Cision’s push towards more expensive bundled solutions and increased focus on larger Enterprise customers has led to the loss of price-sensitive SMB customers. As a result, Cision experienced organic revenue declines between 2014 and 2016. With organic revenue growth inflecting to positive territory again in 2017, we think that most, if not all, of the price-sensitive SMB customers unhappy with the more expensive pricing have already left, and the remaining SMB customers care less about price and more about quality. We think that this is the right decision, as Cision cannot possibly attempt to cater to all segments and would do better to focus on the higher price point segment – we note that the same dynamic has played out in the Marketing Software space, with Oracle/Adobe/IBM/Salesforce all focusing their efforts on the Enterprise/Mid-Market segments, leaving HubSpot to dominate the SMB space. We expect that as SMBs become a smaller part of Cision’s business, the issue of churn among SMBs should become less significant over time.

5. SPAC Deal Dynamics and Management Team

Cision became publicly listed following the merger with CLAC in June 2017. As part of the transaction, GTCR agreed to roll over a significant portion of its equity, and continues to own 57% of equity post-transaction, with management owning another 11%. We view GTCR’s decision to remain a large equity shareholder in Cision going forward as a vote of confidence in the company’s prospects and Cision will continue to benefit from GTCR’s expertise in acquiring and integrating companies. Allowing Cision to list via a SPAC allows GTCR to take some money off the table, while the sizable equity stake post-transaction and earn-out structure (with GTCR receiving up to 6M shares in 2M increments when the stock price reaches $13, $16 and $19) allows GTCR to participate in further upside as Cision continues to develop and execute.

While the past does not predict the future, we think that the successful history and track record of both GTCR and Cision’s management team raise the odds of the successful execution of Cision’s strategic goals. GTCR has had a history of successful buy-and-build investments, supported by its unique Leaders Strategy. This involves conducting detailed due diligence around a macro theme before identifying the right executive to execute GTCR’s vision. Here, we believe GTCR identified PR as an industry not taking advantage of technology, then hired CEO Kevin Akeroyd to execute the strategy. We see this as GTCR having done all the hard work of assembling a top-rated management team, executing the core acquisitions that built Cision into a dominant player, and now, the time has come for the pieces to fall into place.

Cision’s management team has been described as either the “best of the best” from the acquired companies, or those that have “been there, done that” in leading transformations to integrated solutions. CEO Kevin Akeroyd was most recently GM and SVP at Oracle Marketing Cloud, where he built the business from a smaller player into the second largest in the market, largely through M&A. Prior to that, he had also done the same playbook at Salesforce.com, and then at Data.com. Meanwhile, CFO Jack Pearlstein served as CFO for four GTCR-backed companies, three of which completed IPOs. We acknowledge that the management team has had some slip-ups in the past, namely when they lowered FY2017 revenue guidance on the Q3’17 earnings call after raising it in Q2 (not exactly confidence-inspiring). Nevertheless, we think this could in part be due to CEO Kevin Akeroyd’s lack of experience as a public company CEO; as he gains experience over time, we think such issues are unlikely to recur. Ultimately, their deep operational and financial expertise give us confidence that if anyone were to make Cision succeed, it would be this team.

6. Industry Background

Traditionally, the role of PR professionals has been to manage companies’ external communications and relationships with the media, consumers, and the government. Primary roles include creating and communicating news, distributing information to target audiences, developing and monitoring traditional and social media campaigns, as well as implementing strategies to generate interest and influence brand reputation and sentiment. According to Burton-Taylor International Consulting LLC, the global PR software market was ~$3.2B in 2016, and can be split into the following 5 segments:

PR falls under the broader umbrella industry of Digital Media Marketing, which is expected to grow to a $195B+ industry by 2020, and is comprised of Paid, Owned, and Earned Media. Paid Media is advertising by the company itself, for instance, a company’s TV / Radio ads, as well as Facebook advertisements, with company-created content. Owned Media is company’s website as well as social media accounts, such as a company’s Instagram account. Earned Media is where PR comes in - it is a form of marketing through key influencers, online reviewers, and press and social media posters who have garnered trust from the wider audience. We see two overarching secular trends within the PR software industry today which are benefitting Cision.

i) Shift Away from Point Solutions to Integrated Platforms: According to Gartner, there is a noticeable shift in CMO preferences away from point solutions to platform offerings, with CMOs looking to consolidate spending to key technology partners able to provide end-to-end functionality. This has manifested itself clearly in the marketing automation world, with Adobe, Salesforce, and Oracle, all rolling up point solutions into broader marketing platforms, and gaining share at the expense of other players such as SAP and Teradata.

We see the same dynamic playing out in the PR software world. As Roxanne Papagiannopoulos, Managing Director at CARMA, commented, “a solution that offers an integrated response to public relations and marketing business needs, with an eye towards allowing major third party plug-ins, is what will have long-term staying power and profit” . As recognition of this dynamic, the PR software industry has been undergoing a wave of acquisitions in the past few years, as companies attempt to boost their depth and breadth of offerings. As such, the market has consolidated significantly, with the top 12 players in 2012 consolidating into 7 main players as of 2016.

This trend of industry consolidation naturally raises the question of whether this is a winner-takes-all market – we think not. In the marketing cloud space, we see the four main players (IBM, Salesforce, Oracle and Adobe) co-existing given the breadth of the market. We expect the same dynamic in the PR software industry, though we think that given the smaller market size ($3.2B vs $32B in 2016), the #1 player will likely take more market share compared to the #1 in the marketing cloud market. Given Cision’s dominance and comprehensive offering, we think that Cision is well-positioned to be this #1 player in the next few years.

ii) Shift Towards Earned Media: The shift away from paid media to earned media in marketing is being driven by several factors including the declining efficacy of paid media, as customers increasingly try to avoid advertisements, and growing recognition of higher consumer trust in earned media. According to eMarketer, $192B+ was spent on paid media in 2016, despite consumers actively trying to reduce their paid media exposure, with 60% of desktop users having used ad-blockers according to GlobalWebIndex. Instead, consumers appear to be gravitating towards key influencers in making their purchase decisions. Launchmetrics research indicates that 75% of marketers believe earned media is effective in generating sales leads. Another factor is that earned media has lower cost, as distribution is assisted by the content author, thus earned media has higher ROI than paid media. Despite this, earned media still receives a smaller allocation of budget than owned and paid media, according to Nielsen. As of 2016, according to Burton-Taylor, PR Software spend is projected to be at $3.2B, while IDC estimates that the Marketing Software market will reach $32B by 2018. This implies that PR Software spend makes up a mere ~10% of total Software spend.

Why does the earned media category receive such a small proportion of total marketing spend? The key reason has been the lack of attribution capabilities in the past, which made it hard to track earned media’s impact on the bottom line, which in turn makes it difficult for the Chief Marketing Officer (CMO) to justify a greater budget. Earned media has historically relied on vanity metrics like impressions and social likes, whereas paid and owned media show up with hard numbers, conversion rates and revenue impact. This is in part because showing such quantitative bottom line metrics is much more complicated for earned media, given that a PR campaign has to travel an indirect path to the consumer, passing through channels like an influencer, a blog or a press release. As such, standard tracking capabilities do not scale.

Due to the limitations of software in attributing true economic value to earned media, companies who want such analysis have relied mostly on PR agencies and niche firms who work on a consultative basis to gauge economic impact of PR campaigns. We think that there is a lot of pent-up demand in the industry for a more robust automated measurement and analysis software that can gauge impact in the form of ROI and business insights. The former PR Account Executive who worked with P&G we talked to mentioned that “better monitoring and attribution would be huge … valuable and helps with budgeting …” . We also observed interest among industry participants for such automated software, as shown in the exchange below between Jens Hamborg, an author at VOCAST, a brand management platform, and Roxanne Papagiannopoulos, Managing Director at CARMA and former President of RMP Analysis, a niche firm specializing in strategic monitoring and analysis of media and communications campaigns:

7. Growth Drivers

i. C3 Platform to Drive ASP Growth and Reduce Revenue Churn

The Cision Communications Cloud (C3) platform was launched in Oct 2016, allowing PR professionals to identify influencers, craft campaigns, and attribute value to these campaigns all in one place. Unlike legacy point solutions from Gorkana, Vocus, Cision AB etc., C3 is a fully integrated PR campaign platform which aids in closing the loop of execution and analysis of campaigns. (Appendix A & C).

Cision has been trying to get customers to convert from legacy point solutions to the C3 platform, though this has taken a while as more features are added to C3. As of Q3’17, ~13% of total subscription customers had made the shift (~5,000 out of 39,300 subscription customers). In speaking with customers, Deutsche Bank found that C3 platform was not completely ready as of mid-2017, and customers were waiting for C3 to add features previously found on legacy point solutions, but that they were eager to adopt the C3 as soon as it is available. The latest version of C3, C3 2.0, was launched in Q4’17 and a critical mass of C3 features goes live in 2018, which should drive more legacy customers to switch to C3 (Appendix B). Our confidence is based on Deutsche Bank’s customer diligence, historical trends and general industry commentary about the shift to integrated platforms, but with more resources and connections, we would have liked to speak with more Cision customers to further verify this trend.

As more legacy customers only using a subset of Cision’s offerings switch to C3, Cision can more easily drive cross-selling and up-selling at little extra cost. With an integrated end-to-end offering, Cision is well-positioned to collapse the exact same spend that a client might have been spending on three different vendors into one vendor, i.e. Cision, increasing Cision’s subscription ASP at no extra cost to the client. For instance, our source who worked with P&G at a PR agency mentioned that while they used Cision for its media database and monitoring capabilities, they used a separate tool, Sprinklr, for social media monitoring, because Cision was weak in social media back then. Now with C3, coupled with Cision’s enhanced social media capabilities (after acquiring Visible Technologies and Viralheat), Cision can more easily convince these customers to stop using Sprinklr and use C3 as a one-stop solution for all PR needs. Cision is also making progress with cross-selling PR Newswire and Cision, with $9.3M of new subscription bookings ACV in the first 12 months of cross-sell activity, and $10.7M as of Q3’17.

In addition to the shift of legacy customers onto the C3 platform, transactional customers are also shifting to subscription-based contracts. Already, ~5,000 of the 40,000 transactional customers have already converted to subscription contracts, and 300 – 400 customers are making the shift each month. This is reflected in Cision’s subscription customer counts, with average number of subscription customers increasing from 35,392 in Q1’17 to 39,300 in Q3’17 (an 11% increase). We think this trend will reasonably continue into 2018, implying another ~10% of transactional customers making the shift to subscription contracts.

The shift of transactional customers to subscription contracts and improved upselling/cross-selling, coupled with to a lesser extent, new customer wins, should drive growth in the number of subscription customers. Having more customers on C3 would also help to improve churn, as its integrated platform increases product stickiness. Management expects retention rates excluding SMB customers to continue improving to 92 – 93% in the long term and we think that this should be achievable.

ii. Cision Impact to Drive C3 Adoption and Accelerate Marketing Dollars into Earned Media

We believe Cision Impact can be the catalyst to accelerate the flow of marketing dollars into the earned media category. Comprised of Cision Impact Reports, Cision Audiences, and Cision Intelligence Analysis, Cision has developed a proprietary tracking technology that tags earned media content to profit generation numbers. Cision Impact allows PR professionals to move beyond measuring vanity metrics to business insights for the first time, by allowing the tracking of a single press release / influencer blog post view all the way through to a lead / shopping cart conversion, as well as providing detailed demographic and firmographic data about the audience (Appendix D).

Cision Impact is currently being beta-tested with 15 large Fortune 1000 clients in the early adopter program, as of Sep 2017. These include large companies spanning across various industries as well as B2B and B2C. Management has stated that early demand for Cision Impact has been strong and initial feedback positive - “something that the industry has been waiting for a very long time”. Following a roll-out to on-boarded early adopter customers in Q1’18, there will be an ongoing maturation period where Cision makes further tweaks to the software, following which Cision plans to sell Impact as general availability from Q3’18 onwards, with revenue trickling in by 2018FYE. Importantly, Cision Impact is currently only being offered as part of the C3 platform, so customers cannot use Cision Impact unless they are on the C3 platform. This should help to drive adoption of the C3 and further aid churn reduction.

While we have to acknowledge that we have no direct way of validating management’s comments on Cision Impact’s game-changing nature, our indirect research has pointed us to several signs that even if not game-changing, Cision Impact is at the very least a major industry player, and that there is indeed demand for such capability.

Our source who worked with P&G said that she would have liked to see better attribution to judge ROI when she was using Cision at the PR agency. At the same time, we saw industry participants, including Paul Dyler, current President of Lippe Taylor (a New York PR agency) state “This industry NEEDS Cision to compete. We need you to come up with something new… We expect big dog innovation from the big dog” with regards to social media monitoring and earned media attribution. Hence, we are confident that Cision Impact is an answer to what the industry has long been waiting for and will help drive incremental marketing spend into the earned media category. While this will benefit everyone in the earned media space, we expect that given Cision’s dominant position and Impact offering, Cision will get the lion’s share of the incremental spend in the near future. We also note that by acquiring Visible Technologies (one of the largest social media monitoring and analytics vendors), Viralheat (a leading social media monitoring/engagement platform), as well as PRIME Research (a company offering consultative services to help companies translate data into insights), Cision has consistently been boosting its social media capabilities and is well-positioned to be an industry leader in this category.

iii. Geographic Expansion in APAC and EMEA

We expect that Cision will continue its expansion in the APAC and EMEA regions as it continues to roll out its C3 platform in these markets, especially given the significant white space in these regions relative to the Americas, a more mature market. While Q3’17 EMEA organic revenue growth fell to 0.3%, this was largely due to a temporary leadership void in the UK, leading to lower newswire distribution volumes and should be resolved with the hiring of Abe Smith (President of Cision EMEAI) in Q3’17. While APAC is still a small proportion of total revenue (2.5% in 2016), we expect that with its current organic growth rates of >20%, it should grow to a more meaningful contribution in the next few years.

8. Valuation Analysis

i. Scenario Analysis

We think there are three scenarios that can play out in the next few years. In the Base case, we see Cision continuing to execute on its strategy with near-term headwinds clearing up in 2018 and SMBs gradually being phased out, with Cision maintaining its current market share. In the Bull case, we see the Cision Impact offering being very well-received and driving incremental dollars into the earned media category, resulting in greater than expected industry growth. At the same time, Cision gains market share as it receives a large share of the incremental spend given its Impact tool, which is reflected in higher ASPs. In the Bear case, we see a severe recession happening sometime in the next two years, slowing down progress on getting customers to shift to C3 and lowered ASPs. The table below offers greater detail on the key assumptions:

*Note that we have taken into account potential dilution from 24.5M outstanding warrants with a strike price of $11.50, as well as GTCR’s earn-out shares (2M shares if share price hits $13, 4M at $16 and 6M at $19) in our calculation of fully diluted shares outstanding.

We have assumed no acquisitions going forward given that management has indicated that the number one priority for Cision is bringing leverage down. Though management did not rule out acquisitions entirely, they indicated that the bar for M&A is high and we expect disciplined behavior, such that any acquisitions would be highly accretive to the company. We think that management will stick to their words given their track record. While exact terms of past transactions are not disclosed, we note that following the acquisitions of Cision AB, Vocus and Gorkana, EBITDA margins have expanded from the last reported numbers of 13% for Vocus (FY2013) and 9% for Cision AB (1H 2014) to 35% for combined Cision. Following the acquisitions of PR Newswire, Visible Technologies and Viralheat, there were ~$106M of cost synergies of which ~$80M has been achieved as of Q3’17. We note that given Cision’s current valuation of EV/LTM EBITDA of 11.7x, an acquisition at a multiple lower than this would be immediately accretive - PR Newswire was acquired at ~7x EV/LTM EBITDA after accounting for $57M of cost synergies.

While we have assumed a constant EV/LTM EBITDA multiple of 11.7x in the Base case to be conservative, we think that it is unfair to compare Cision to companies such as WPP, Nasdaq and iSentia, and that Cision should instead be compared to other Information Services peers. Kantar comprises ~21% of WPP’s total revenue and WPP is weighed down by an increasingly difficult outlook for advertising agencies, as companies look to rationalize advertising spend. Meanwhile, with ~$110M in revenues in 2016, iSentia is ~1/6th the size of Cision and operates only in Asia. Its smaller scale also results in lower EBITDA and EBIT margins compared to Cision. We also note that Nasdaq operates primarily as an exchange business, and its PR services business represents a small portion of revenue, and thus is not the most comparable. Instead, we think the Information Services peers are more representative of Cision’s offerings. While we do not expect Cision to re-rate immediately, we think that the market will give Cision greater credit as its organic growth profile improves with the roll-out of C3 2.0 and Impact, as it continues to deleverage and as it establishes a longer history as a public company. To be conservative, we have assumed that Cision will re-rate to a 13.0x multiple, should organic growth strengthen to a 4 - 5% range. This is in line with Nielsen’s 5-year historical average of 9.1x - 13.1x. Nielsen’s current multiple is being weighed down by its problems with its Buy segment continuing to disappoint the market. We note that this is still a substantial discount to FactSet and S&P, which trade at 17.8x and 15.7x respectively.

ii. What is our margin of safety?

While we are not truly protected, we believe that there is limited probability of permanent capital impairment owning shares at current prices. Should a recession happen in the next two years, we think that the impact on Cision should be limited, given its sticky customer relationships, especially within the Enterprise and Mid-Market customer segments. Cision’s workflow nature means that companies are unlikely to cancel their subscriptions just because the economy goes into recession, just like how financial services firms will not cancel their subscriptions to Capital IQ (or Bloomberg) during a recession. Moreover, we note that management estimates that the combined business would have contracted 3 – 4% in the 2008/2009 recession. We spoke to someone formerly at GTCR who corroborated this observation, calling out PR Newswire in particular as a very steady business, with volume declines being offset by price increases in the past recession. These factors, coupled with high free cash flow generation profile and low capital intensity, have allowed us to be comfortable with Cision’s ability to withstand an impending recession.

Given these data points, we came up with conservative Bear case estimates, assuming that both subscriber counts and subscriber ASPs decline by 2% in 2018 and 2019, resulting in revenue contracting by 4% in 2018 and 3% in 2019. We note that relative to back in 2008/2009, Cision is in a much stronger position today with a superior product offering able to take advantage of the secular shift towards earned media. While Cision AB’s customer count information was not available, Vocus’ historical financial statements showed that it continued growing subscriber counts at a rate in excess of 20% in 2008 and 2009 without acquisitions, despite a tough macro environment, on account of the strength of its product. While Vocus’ organic growth slowed to 5% in 2009 during the height of the recession, it quickly rebounded in the next two years. Organic growth rates recovered to 12% in 2010 and 14% in 2012, as pent-up demand for its then-newly launched marketing suite was reflected in new billings growth. We think a similar rebound is reasonable for Cision given the roll-out of C3 2.0 and Cision Impact - a very similar dynamic to what Vocus was facing during the 2008 recession.

Additionally, we note that our Bear case is likely overly pessimistic given that it is highly probable that Cision will take advantage of the downturn to acquire smaller players at valuations cheaper than usual, allowing for some highly accretive deals that would further strengthen Cision’s position when the economy recovers. While our holding period might lengthen, we think that we can still make a decent return 4 – 5 years out. We have not modeled in any such acquisitions to be conservative and note that should these acquisitions play out, our returns are likely to end up higher than current projections.

iii. What is the asymmetry of opportunity?

We think that this has the potential to generate significant returns for relatively low risk. Cision provides an opportunity to buy into a strong business with recession-resistant offerings and strong cash generation profile at a reasonable valuation. This allows us to achieve ~70% returns by deleveraging from existing business operations, while providing further upside from the expanding earned media space (through C3 2.0 and Cision Impact) that is not priced into the stock.

A successful execution of the roll-out of C3 2.0 and Cision Impact would both grow the TAM and position Cision to take market share, enabling greater deleveraging and generating significant returns for shareholders. Should management execute in a mediocre fashion, but have no missteps, the downside appears modest at worst given its sticky customer base, with customers simply continuing on their existing legacy contracts and migration to C3 2.0/Impact adoption chugging along. Should a recession occur, we believe that the impact on Cision would be limited, as explained above. We are confident that management will execute successfully, given their experience rolling up point solutions into integrated platforms.

All in all, we think Cision has a compelling risk/reward profile, fitting of Mohnish Pabrai’s Dhando philosophy, where “heads I win, tails I don’t lose much”. We see the potential for significant price appreciation should things go right and limited downside if things do not go as planned, though we think it is unlikely to see a case where our investment is materially impaired.

9. Risks

1. Execution Risk: Cision may face difficulties getting customers to shift to their C3 2.0 platform, resulting in weaker-than-expected cross-selling. We think management is aware of the challenges and is well-positioned to execute this strategy given their past experience rolling up point solutions into integrated platforms as well as deep familiarity with the PR industry.
2. Integration Risk: Cision may face challenges integrating recent acquisitions into their broader platform. We view the past integration of Cision, Vocus and Gorkana as relatively successful, with Cision taking pains to ensure continuity of offerings. The Newsroom Coordinator at our university that we spoke to mentioned a smooth transition from Vocus, to Cision’s current platform post-merger. Given this, we think future integrations should proceed smoothly.
3. Competition From Marketing Cloud Giants: Marketing Cloud giants, such as Adobe and Oracle, who are mostly within paid and owned media, might enter the PR software space and compete with Cision. We think this is unlikely given the fact that companies like Cision and Meltwater already have a significant head start in this space. Without an established PR offering, Marketing Cloud companies would have to invest significant resources to start something as basic as a Media Contacts database from scratch. That a comprehensive Media Contacts database requires the participation of influencers to regularly update their contact information and profiles gives rise to a network effect and makes it more difficult for new entrants. For instance, Gorkana is so dominant in the UK that influencers rely on it to get PR gigs, such that it is imperative for influencers to update their contact information should they switch jobs. Without an established user base, few influencers would pay attention to an upstart offering, which in turn makes the database less useful for clients using it.
4. Competition From Tribe Dynamics: Tribe Dynamics provides Enterprise customers in the Beauty/Fashion space, such as LVMH and Urban Decay, with software for influencer identification, relationship management, and Earned Media Value analysis. Tribe Dynamics competes with Cision in the media analysis space, particularly with the Cision Impact offering. Nevertheless, with distribution and journalist/reporter database offerings, Cision provides a more holistic suite for Enterprise and Mid-market customers, unlike Tribe Dynamics’ narrow focus in the beauty industry, allowing it a broader customer base. Moreover, while Earned Media Value is a convenient metric to gauge ROI, we think that Cision Impact is able to provide deeper insights about downstream conversion events such as online orders and completed subscriptions, allowing for a more holistic understanding of the ROI of different influencers and events. We believe this the reason why J&J chose to utilize both Tribe Dynamics and Cision when launching its Neutrogena Light Therapy Mask social media campaign.

10. Conclusion and Catalysts

All in all, we believe that Cision represents an attractive opportunity to invest in a market leader poised to dominate an industry still littered with point solutions. With customers continuing to switch to C3 as new features are rolled out, coupled with the upcoming roll-out of Cision Impact, we view Cision as well-positioned to gain share in this market. Cision’s subscription-based offering, sticky customer relationships, and strong cash flow generation profile give us additional comfort that a recession would have limited impact. At the same time, sustained cash generation would allow Cision to deleverage, which further accretes to equity holders. As we continue to gain greater visibility, we think that Cision will eventually re-rate to a multiple more in line with peers. We have identified several catalysts that could potentially cause this re-rating:

i. Strengthening of Organic Growth in 2018

We think the skepticism that investors harbor over Cision’s organic growth profile will clear up as management continues to execute and deliver stronger organic growth in 2018. With new features being rolled out as part of C3 2.0 in late 2017 and Cision Impact coming onto market in Q3’17 as part of C3, we think organic growth will continue to improve in 2018, allowing the stock to re-rate.

ii. Continued De-Levering

At today’s Net Debt/EBITDA ratio of 5.3x, we think there are some investors uncomfortable with such high leverage who might have stayed away from the stock. As the company continues to pay down its debt and eventually lower its leverage to a more comfortable level, we believe this would attract renewed interest from a broader set of investors.

iii. Platform Extensions and Big Data Monetization in the Near Future

With abilities to extend its platform into adjacent Earned Media categories through bolt-on transactions and its existing access to digital distribution network data, Cision can, and has stated plans to, expand the market opportunity and monetize on big data. Not only can Cision use its access to data to improve audience targeting and measure impact of campaigns, but it can also demonstrate to brands the effectiveness of advertising on various media networks and help drive ad spend. We think new organic growth initiatives and successful platform extensions will be reflected in ASP growth and lower churn rates, helping the stock re-rate going forward.

Ultimately, we think this is a classic case of what Mohnish Pabrai calls “low risk, high uncertainty” investing – while there might be uncertainty over how Cision performs in the coming years, there is little risk of permanent capital loss, and it is this dynamic that presents long-term value investors like ourselves with a favorable, asymmetric risk-reward opportunity.

Appendix A.

Appendix B.

Appendix C.

Appendix D.

Catalyst

• Strengthening of organic growth in 2018
• Continued deleveraging
• Platform extensions and big data monetization in the near future