Has a solid business relationship with Yahoo!
Has quarterly revenues that exceeds its entire market cap and has a positive EBITDA that saw strong quarter over quarter growth
Is deeply discounted from its share price early in the year thanks to depressed revenue guidance that was greatly exaggerated at the time yet the stock price remains cheap while revenues are stronger than expected.
Has a price to cash flow of 1.2x and an EV/EBITDA of 3.9x and it is NOT a dying, debt-laden oil company like Compton Petroleum, Connacher O&G or OPTI Canada.
And finally, it recently came to a resolution with its subsidiary's lenders at extremely favourable terms that ensures the company's prosperity going forward
After correctly calling a buyout of Afexa in my last blog post, I have decided to move on after selling out at over 70 cents. I'm also glad I moved out of Sino-Forest. I bought TRE in the 2's and sold in the 5's, both before and after its move over $8. So you could say I sold too early AND a bit late. But at least I'm rid of my shares before the thing got halted. Like Afexa, I believe Sino-Forest will get bought out at some point, but I don't wish to wait around for months for the dust to settle on it when there are so many great opportunities out there, particularly the one I'll speak about below.
The company that has caught my eye is Cyberplex Inc, symbol CX on the TSX or CYPXF on the pinksheets in the US. In the simplest terms it's a company with over 300 popular websites over a range of interests which has advertising revenue on those websites as a primary source of income. For all the Intertainment Media lovers reading this, it's more or less the same kind of business plan as INT except the websites have been running for a lot longer and aren't nearly as faddish as what INT appeared to be over the first half of this year. And they actually have tens of millions in revenue.
If you think about it, CX would be a prime target for INT. CX has a ton of revenue and websites (that primarily run in English). INT has a lot of cash from their $1.20 PP a few months ago and are looking for acquisitions. There's a lot of synergies to be had if a business combination took place between these two and this acquisition would immediately give INT credibility as they would have substantial social media and other online revenue. From Cyberplex's news release updating its strategic focus for 2011:
""Following recent meetings with Yahoo!, we are very encouraged that our partnership with Yahoo! remains strong," said Geoffrey Rotstein, CEO. "As we continue to adapt to this new marketplace, we have a partner who is both willing and able to work with us to get us back on track to execute on our strategy and deliver great results for Yahoo!'s advertiser base."
As a result of the issues raised by the integration and the changes to the marketplace, the Company will focus its efforts in 2011 on enhancing its traffic acquisition strategies, with less concentration on creating new websites."
While the business relationship with Yahoo! is getting back on track, the focus on traffic acquisition is right up the alley of INT.
On Friday CX broke out of its chart doldrums, increasing 10% on heavy volume and for very good reason. It came to an agreement between its subsidiary Tsavo Media, and its lenders at extremely favourable terms for the company.
The highlights of the agreement is as follows:
"1. Payment structure for the remaining Principal will be based on a variable repayment program linked to Tsavo Media's earnings over the remaining term, mitigating risks associated with possible volatility in the search marketplace;
2. Principal amount owing under the Credit Agreement has been reduced by $2.5 million;
3. Interest rate on the remaining Principal has been reduced by 100 basis points;
4. Maturity date under the Credit Agreement has been extended by over 20 months; and
5. Financial covenants have been reset to conservative levels with additional cure rights to protect against any potential future disruptions."
All 5 of these points are incredibly positive for the company. Based on 134M shares outstanding, the $2.5M reduction in the debt alone would intrinsically mean the stock should rise nearly 2 cents. The extension on the date that the debt is due and the reduction in interest payments sees tremendous improvement on the company's balance sheet and income statement going forward. Even with the strong rise, the company's stock price is a mere 10.5 cents, leading to a market cap of $14M while the 52-week high and low is 56 cents and 8.5 cents respectively.
To understand why the stock price is where it is, we have to look at the news that landed it there in the first place. On January 11, 2011, the stock price dropped from 48 cents to 23 cents based on the Fourth Quarter Update released the previous day. From the Cyberplex Fourth Quarter Update:
"Following the second quarter of 2010, the Company provided second half of 2010 guidance, wherein revenues were expected to be in the range of $75 to $85 million, with adjusted EBITDA expected within the range of $10 to $12 million. This guidance was subsequently affirmed upon the release of third quarter of 2010 financial results, when the Company expected to either meet or exceed this guidance, depending on the impacts of Yahoo!'s transition to the Bing search platform during the month of December 2010.
"Although the Yahoo-Bing integration has been ongoing for several months, during which time we were able to adapt well to the volatile environment, in mid-December we began to experience average revenue per click decreases and the strategies we customarily deploy for responding to such decreases were not as effective," said Geoffrey Rotstein, CEO.
The Company is still in the process of finalizing its annual financial information, but expects second half revenues to come in at the lower end of the guidance range previously provided. The lower end of the range is the direct result of the declining revenue per click experienced since mid-December. In addition, the Company expects that adjusted EBITDA for the second half of 2010 similarly would be at the lower end of the range and may be further impacted by one-time adjustments currently being evaluated.
With respect to the impact on financial performance for 2011, no additional information can be provided until the situation has been clarified. The Company remains in discussions with Yahoo! and expects to issue further releases and updates to the market as it gains better visibility into the issues and the results of its ongoing efforts."
Now let's see, before this news release, the company was trading at 48 cents, or a $64M market cap. They were expected to have revenues of $85M and an EBITDA of $12M for the second half of the year, with total year revenue and EBITDA being $115M and $13M respectively. The price to sales ratio was therefore around 0.56, already extremely cheap. The company has around $51M in debt and liabilities and $9M in cash so the total enterprise value at the time was ($64M+$51M-$9M) $106M. Divide that by $13M and you get an EV/EBITDA ratio of 8.2x, a very decent ratio for a small and growing tech company.
The company didn't provide any guidance for 2011 because of the issues they faced, but its fair to assume investors expected at least a 50% drop in revenues and EBITDA thanks to the average revenue per click decrease. Based on this fact you would have thought that the quarterly results for the company would be somewhere between a comedy and a horror show, but if we review the Second Quarter Results:
"Total revenue for the quarter was $14.4 million, a decrease from the $18.2 million recorded in the same quarter of 2010, and adjusted EBITDA for the quarter was approximately $812,000 as compared to $523,000 in the same period of 2010
- Completed the integration of the EQ Ads platform into other leading advertising networks providing the capacity to reach over 8 billion daily impressions;
- Secured engagements with a Canadian financial institution and a leading Canadian university to develop online marketing and audience development programs;
- Continued to optimize technical algorithims and bidding strategies to address changes in the Yahoo!-Bing systems and revenue per click calculations;
- Transitioned campaigns away from historical health and wellness clients and secured campaigns in the more established finance, education, group buying and online dating categories;
- Developed mobile distribution capabilities to further enhance targeted search and customer acquisition initiatives into new distribution channels;
- Continued to implement measures to ensure cost structure is aligned to the Company's current organization and requirements.
The CEO stating that the quarter was a rebound is an understatement in my opinion. While revenue was down from Q2 2010, they actually beat EBITDA by 55%. That's quite a rebound. That shows prudent cost decreases and a successful focus on higher margin ventures. If we take a look at their SEDAR financial statement filing on August 12th, we see that January to June 2011 revenue was $29M vs $30.5M for the same period in 2010 so while revenue was down vs Q2 2010, it's still about flat for the first half of 2011 vs 2010. Hardly a disastrous position to be in as implied by the pummelled stock price.
When viewing their financial statements, don't be worried by their negative earnings over the last few quarters. Their net loss is overstated thanks to the depreciation of intangible assets from decreasing the value of their various recent acquisitions. For instance their loss for Q2 2011 was $2M but their depreciation was $2.2M. If we look at full year 2010, both those lines run into the $60 million range. The fairest way to look at their earnings potential other than their EBITDA is the cash flow from operating activities. This was $2.3M for the first half of 2011 vs a cash outflow of $1M for the first half of last year.
Consider that last year's full year EBITDA ultimately landed at $13.3M (above guidance) and that cash flow from operations was $7.2M. If we look at a trailing 12-month view of the company, their cash flow from operations is $11.5M and their EBITDA is $13.5M. Their price to cash flow at current market price is only 1.2x. Their total debt and liabilities were $46M and cash $7.4M as of June 30th, so adding the liabilities and subtracting the cash from their market cap gives them an enterprise value of $52.6M. $52.6M/$13.5M is a trailing EV/EBITDA of merely 3.9. If we were to value the company at a 8.2x EV/EBITDA as they were at the start of the year, the enterprise value would be $110.7M. Less the $38.6M in net liabilities and you come up with a market cap of $72.1M. With 6.8M in options the fully diluted share count is 140.6M, meaning the price per share with a market cap of $72.1M would be 51 cents a share, right back near its 52-week high range.
Let's compare Cyberplex to a major internet player and their biggest source of revenue, Yahoo!. Review Yahoo's key statistics here. Yahoo! has an EV/EBITDA of 11.5 and a price to sales of 3.4. If we were to take a very conservative full year outlook of $60M in revenue for Cyberplex (basically a double of their first half revenue when they are seasonally skewed to the back half of the year), that would lead to a P/S of just 0.23. Applying the Yahoo! ratio of 3.4 to Cyberplex would assume a stock price of $1.53. This is from the most conservative revenue figure possible and applying a P/S from a mature company that does not have the growth prospects of Cyberplex. Even if you hated that argument, you cannot deny that the 0.56 P/S ratio at the start of the year is still more than 2 times greater than the 0.23. Even under the most pessimistic scenario for the company, it still should have a value that is nearly triple its current stock price.
If we were to use the Yahoo! EV/EBITDA number of 11.5x as a fair comparison, enterprise value for Cyberplex would be (11.5 x 13.5M) $155.3M. Subtract the net liabilities and you get a $116.7M market cap, or 83 cents a share.
If we were to value Cyberplex at an EV/EBITDA of 8.2x, similar to what they had at the start of 2011, the stock price would be 51 cents.
If we were to value Cyberplex at a P/S of 0.56, similar to what they had at the start of 2011, the stock price would be 25.5 cents.
If we were to value Cyberplex at an EV/EBITDA of 11.5x, similarly to Yahoo!, the stock price would be 83 cents.
If we were to value Cyberplex at a P/S of 3.4, similar to the P/S of Yahoo!, the stock price would be $1.53.
Under the most conservative scenario, the price of CX is still due for a 150% increase from its current price of 10.5 cents as the company successfully and favourably renegotiated its debt and has quickly evolved its business plan while maintaining revenues today and improving revenue growth prospects down the road.
On the upper end, Cyberplex would be a 1400% or more gainer for investors who bought at these depressed levels.It's a truly undervalued gem with a coherent business plan that results in significant revenues.
