Whilst the markets remain decidedly choppy, it is perhaps best at present to keep the powder dry for some inevitable bargains that are likely to emerge.
That said, having made an initial purchase in DigitalBox (DBOX), I am now very much tempted to add and build a more meaningful stake in this AIM minnow, where it is apparent management have serious aspirations to significantly grow the business.
Having recently previously touched upon the company here, I’ve subsequently been fortunate enough for the opportunity to speak with management which always helps with firming up a story.
As a result of that, now seems like an opportune time to add something more concrete on the business and why I believe it could provide me with some significant medium to longer term upside.
I had previously referenced digital media success story Future (FUTR) in relation to the potential at DBOX and it would appear that I’m not alone in making the comparison, as it is a description that both CEO James Carter and Chairman Marcus Rich are clearly comfortable with.
Carter says that also like Future, DBOX was founded in Bath which is where it remains, having originally been set up as an Ad tech business which had been running a platform called Content Click.
This was subsequently sold in 2016 to another industry player, leaving some dormant assets that effectively had nothing in the way of audience.
The CEO explains, “I then got involved along with my colleague Jim Douglas who was also an ex- Future editorial director with the brief quite simply being, could we build a media business out of what was here”.
The start point - he explains - was to look at the potential around the user journey where there were already a number of players beginning to make money out of the likes of Facebook, with LADbible already proving a highly successful example of what could be achieved.
“We were looking around at major news operators and seeing where they were profitable and making money, which led us to figure that if we doubled down on mobile distribution, we would effectively get ahead of the game”.
That was the starting point for DBOX, where Carter says that they believed if they could break into profit within the first six months by engaging with their audience through mobile first and monetising that audience, then they would be on their way.
At this very early stage, the CEO says that they had started to build a few brands, but the one that they got traction with first of all was Entertainment Daily.
With what Carter describes as a micro focus, they very quickly identified a target audience which was in part guided by their understanding of what Facebook was doing and how its demographic was also shifting.
This led to Entertainment Daily quickly identifying the thirty plus female audience for high levels of engagement with a heavy focus on the area of TV soap’s, which quickly saw them achieving around thirty million sessions within the first month.
They also, at this embryonic stage, quickly realised that the increasing numbers were organic followers which resulted in their taking the important step of switching from what was then an arbitrage advertising pay model to a purely organic business.
With an advertising arbitrage system, there is a negotiation on price around inventory with traffic effectively being bought before being redistributed to your own site for monetization.
The organic strategy by contrast does what it says on the label, which in DBOX’s case, sees it generating and retaining its own traffic naturally which not surprisingly is more lucrative as advertisers buy up space direct from your site.
“This saw core customers becoming heavily engaged” says Carter “and we were then able to grow quite quickly through broader audience segments looking outside of the core soaps to other areas such as ‘Dancing On Ice’ or the main TV shows across the UK.
From there we got ourselves into a very profitable position which led us to consider just where we should then go, as we had done a lot of optimisation around the user journey across mobile from a user perspective”.
This included making sure that content could be put into the user’s hands as quickly as possible which was achieved as the team was already successfully using an advertising model that didn’t require sales staff.
Rather, this was based on algorithms to perform the transactions where an evolving strategy was to refine and make it even more efficient, thus leading to greater monetisation.
With an emphasis on engaging and connecting across the mobile space the company progressed with its own platform which Carter says was given the name graphene as it best reflected the aspects of performance such as efficient audience engagement.
That platform has now grown and the CEO says that it really has two aspects to it, part being focused on the audience, the other concentrated on the commercial side.
This delivers, by ensuring that content is produced and presented extremely quickly supporting the commercial aspect of letting as many advertisers as possible view and bid for that advertising inventory as quickly as possible.
Within its platform there is proprietary tech and specific code which optimises the overall performance for those being engaged, along with advertising transactions, with speed playing a key part, which in turn drives up rankings across the likes of Google and Facebook.
“Overtime this has created a lot of respect and demand for our inventory and that has driven up our prices fairly significantly over the last couple of years”, says the CEO.
Clearly, the business appears to be in excellent shape as can be seen by the recent positive newsflow emanating from the company and although the shares have moved northwards from previous lows, it remains well below the investor radar and could have a long way to go as the journey looks set to accelerate.
As mentioned in my previous piece on the company, there are two other aspects of the business aside Entertainment Daily, these being the The Tab and Daily Mash.
Regarding The Tab, which is focused on the student/university user base, Carter says that having only been acquired last year they have already seen the advertising prices achieved double in that time which has been driven by digital and particularly mobile growth which is a real positive for them.
However, he adds that it is also in part due to just how the business is set up and how they are managing the advertising process which will see ongoing improvement and delivery ahead.
Importantly, Carter says that The Tab has already paid for itself and that has been achieved within the first year of ownership which demonstrates the ability of the team to identify and bed in a new acquisition effectively for an immediate positive return.
The Daily Mash has also proven popular and now has in place an early stage paid content offering that has been well received and looks to have further potential going forward.
Although last year the BBC took the decision not to recommission the Mash Report for TV despite it having enjoyed excellent ratings, it was subsequently commissioned by UKTV/Dave which has been running under the name of the Late Night Mash.
The CEO adds that they are currently in discussions for the brand in relation to this year and although things here are looking pretty positive, he is understandably unable to divulge anything at this stage.
From the investment perspective, the story is looking well set, revenue growing along with profits on the back of strong margins, going hand in glove with excellent levels of return in what is an extremely lean business.
The trends for future growth look exciting too, as Carter explains that forecasts for global digital advertising spend is set to increase from the last year at $397bn to over $500bn in the next two years.
“I can’t see that trajectory not continuing, as people are placing more and more ads for digital delivery, so it seems like a certainty.
If you look at global ad spend, 50% of that is through Google, Facebook and Amazon, so I think the general trend will continue or accelerate as the economy improves.
The benefit what we have is that the segment we are playing into hasn’t fully realised its value yet, as mobile is still a sub segment of general digital inventory and its more dominant in terms of eyeballs, so it looks like that should continue to grow ahead of the market”.
With things firmly in place and seemingly coming together impressively, Carter tells me that another major move was the bringing on board last year of Chairman Marcus Rich who has a wealth of experience at the very top of the industry.
It certainly looks like a top notch addition to the board with Rich having most recently been CEO at TI Media, one of the UK’s largest and respected media groups.
Rich is as positive about DBOX as one could be about a business and says that he already knew Carter and Douglas prior to joining the company. Whilst that may have played a part in his coming on board he stresses that there were three things that particularly impressed him with DBOX, which are very similar to Future plc.
“The first is they run a very lean operating model as opposed to the majority of corporates and publishers who try and do too much and chase too many revenue streams. Secondly, they have a really good nose for content and Entertainment Daily is significantly bigger than a lot heavier funded entertainment sites”.
Last, but certainly not least, he says that the platform Graphene is highly impressive as it services the inventory which maximises and monetises their content.
Rich also adds that these three models are very close to those of Future, but singles out DBOX’s eye for content as being a stand out.
Looking forward the Chairman comments, “this is a business that has an opportunity to open up new revenue streams and has a really small central cost to the business with no direct sales people.
It also has an operating model that is agile and lean which is why you get such high margins across the business. So, you can look to buy corporate businesses and you have immediately got upside as you can strip out the costs”.
Rich also believes digital advertising will continue to grow where he says mobile is the primary platform which should provide for ample opportunities for DBOX going forward.
And looking ahead, whilst organic growth looks set to accelerate Carter speaks of acquisitions and having an appetite to move more quickly than they have been.
“We aren’t going to sit back and say we have got two million of cash, how can we deploy that, as its really not going to take us very far and not quickly enough”.
That suggests that they are very serious about seizing the obvious opportunity and expanding their footprint, where the CEO adds that last year, they built a strong relationship with Institutional investor Downing which has in excess of 21% of the company.
Additionally, he tells me that another big name has recently taken a position and is looking to go on a bigger journey with DBOX which arguably suggests that 2022 could prove to be a catalyst for greater things.
A placing at some point obviously springs to mind given the tone and ambitions, but Carter says that they wouldn’t want to do a raise without having a specific reason for doing so.
Equally, he says they don’t want to raise a war chest to go on a spending spree, rather, that they would look to align specific equity funded deals.
Organic growth is also certainly very much there whilst he says that so too, is some of the smaller stuff to target, but bigger deals will clearly have to be funded with what could prove an amalgam of options.
The aim is very much to go well beyond the current £13m market cap with £50m-£100m very much a goal in the next few years, which would no doubt see new Institutions coming on board as the profile would be raised considerably.
Interestingly, Rich refers to Future once more and how acquisitions that were made increased by multiples along the way, which in turn drove up that companies own valuation.
Looking at the industry EBIT multiples, DBOX trades on around 10x against peers that typically stand on 20 plus, suggesting that it is very much overlooked and undervalued at this point in time.
Given the recent positive tone from the company in its recent trading update the business already looks set fair for the year now in progress and no doubt investors will hear more when the full year 2021 results are unveiled at the end of March.
The current rating which sees a PEG of 0.7, and a PER of 13 falling to below 11 for full year 2023 along with its increasing cash situation suggests to me that the shares are worthy of my acquiring more, particularly withy the prospect of further bolt-on buys to come.
Any news relating to that this year could also really set the shares on their way, particularly as the model would see increased revenue dropping straight to the bottom line and thus boosting cash generation.
No doubt it could be argued that if a placing is on the cards, it is perhaps better for now to sit on the sidelines, which is a fair comment.
But, it can also be the case that in such situations the shares quickly motor on any such news and given the progress currently being made by DBOX my adding at this time is something I am happy to run with.
Others may conclude that DBOX with a market cap of just £12.5m and a share price at 10.75p is a micro cap that is just too small to invest in. However, some of my most significant returns in recent years have been achieved in just such situations.
SDI Group is the classic example of this, which sported a market cap of just £7m when I first invested at 8.75p some eight years ago.
Today, even after the current market carnage across the small cap landscape SDI’s shares stand at £1.73p and enjoys a market cap of a £177m. This has been achieved by executing on a successful buy-build strategy delivering strong levels of cash generation.
DBOX appears to have the same attractions as SDI, in that there is also a clear strategy to acquire other brands and grow the business along with attractive levels of organic growth.
The real positives here though are an already proven ability to generate both revenue and profits which are supported by what looks to be an extremely strong board.
Time will no doubt tell, but the risk/reward ratio looks skewed to the latter for this particular scribe and it is one I’m hoping will deliver in the coming years.