Description

This is not a great business, but it trades at a 15% cash yield (including net cash) and 21% cash yield (excluding net cash). The CEO is the founder and owns 2.5% of the shares and bought more shares last month. The company is also buying back shares and issuing dividends (10% dividend yield). We think this business will be flat / growing slightly over the next 5 or so years.

XL Media is a European online gambling affiliate. Online gambling affiliates operate in much the same way that online travel agents work (TripAdvisor, Expedia, etc.); they are an outsourced customer acquisition channel for online gambling websites. Therefore, the quality of the affiliate model depends on the fragmentation of their client base. Online casino gambling in Europe is highly fragmented (not talking about sports) with thousands of operators. The entry costs are minimal to set up a website; most of the site functionality is outsourced; operators lack scale benefits; customers will hop to whichever sites offer the best deals; and there is unlimited supply of gambling operators (versus hotels where the supply is restricted by real estate available, the rooms are limited based on what days people want, and it takes a lot longer to get a hotel up and running).

There are a couple of different economic models for the online gambling affiliates: (1) revenue share and (2) CPA. Under revenue share agreements, the affiliate will forever get a percentage of the gross gambling yield that a referred customer spends. CPA is a one-time payment. Although revenue share is a recurring revenue stream, customers will switch to whichever new operator offers the best deals; therefore, an affiliate can generate revenue on a customer multiple times by sending to multiple websites even under CPA.

Affiliate businesses are just price comparison sites (some will have other helpful content regarding which gambling websites are scammers, etc.) and so the costs of setting up and running affiliate websites is fairly low. However, this is a market that tends to concentrate to a few players because of Google. The first few search results capture a disproportionate share of the organic traffic. Organic rankings are based on the age of the website and popularity with Google users. Organic traffic is the goal here because the traffic is free. Affiliates can also pay other websites to get traffic and XL Media is starting to wind down the “publishing” business (more on this later, has been a source of confusion). It tends to be more opportunistic and obviously has a lower margin.

XL Media has thousands of websites, about 160 that matter. These sites tend to be near the bottom of the first page / on the second page. They are not nearly as valuable as the sites in the top of the rankings but they are not worth 0. XL Media’s sites might not be the best sites in the space, but the company has optimized new site development and already has relationships with the casino operators. Therefore, it does have a slight advantage over new entrants in the affiliate space in setting up a site and monetizing it.

We can only speculate as to why this opportunity exists, but this is a small cap European name with no major sell side coverage and limited liquidity. Also XL Media announced that it is winding down the publishing business in February 2019, recording an impairment of $9.9mm impairment and revising FY 2019 revenue down by $30mm and EBITDA down by $6-7mm. This was a margin dilutive segment so the cash flow impact was not that bad and the rest of the business should be flat. The name is covered by Berenberg, Panmure Gordon & Co, and Cenkos Securities. The consensus estimates have $30mm+ of CFO less Capex each year over the next 3 years.

See below for our estimates of cash flow:

Catalyst

Share repurchases and dividends