Xlmedia Regulatory News (XLM)

XLMedia PLC

("XLMedia" or the "Group" or the "Company")

Results for the year ended 31 December 2018

Improved profitability in H2 2018 underpins strategic pivot to higher margin publishing activities

XLMedia (AIM: XLM), a leading provider of digital performance marketing services, announces the Company's results for the year ended 31 December 2018.

Financial highlights

· Revenues decreased 14.4% to $117.9 million (2017: $137.6 million)

o Impacted by operational challenges in 2018, with a proactive shift to higher margin activities and sustainable revenue growth going forward

o Publishing revenues grew 4.6%, media revenues decreased 29%, other revenues decreased 41%

· Gross profit decreased 7.1% to $67.9 million (2017: $73.1 million)

o Improved gross profit in H2 2018 versus H1 2018, with gross profit up 2.7% to $34.4 million

o Publishing division profit increased 3% to $51.7 million (2017: $50.3 million),

o Media segment adjusted1 profit, decreased 23% to $15.3 million (2017: $20.0 million)

· Adjusted EBITDA2 decreased 6.9% to $43.9 million (2017: $47.1 million)

o Improved adjusted EBITDA2 in H2 2018 versus H1 2018 - up 9.8% to $23 million, with a greater proportion of revenues generated from higher margin publishing activity

· Adjusted1 profit before tax decreased 10.8% to $35.1 million (2017: $39.3 million)

· Loss of $9.9 million relating to media activity reduction

· Declared final dividend of $8.4 million equivalent to 4.0182 cents per share to be paid in Pound Sterling (3.0419 pence per share), a total of 7.0222 cents per share for the year (2017: 7.7331 cents per share)

· Strong balance sheet with $41.1 million working capital and total equity of $166.8 million, representing 85% of total assets (2017: $33.8 million working capital, $116.4 million equity)

· Cash and short-term investments at 31 December 2018 were $47.6 million (31 December 2017: $43.3 million)

· Adjusted1 earnings per share decreased 9% to $0.13 (2017: $0.15)

Operating highlights

· The Group to increase its focus on higher margin Publishing division, with an emphasis on its core product verticals - gambling and personal finance

· Business continues to recover from adverse impact of gambling regulation uncertainty in specific territories, website ranking issues impacted by spamming and other attacks on key publishing assets, which impacted performance in 2018

· Ongoing investment in technology to strengthen the Company's publishing platform, as well as compliance, data aggregation and analysis

· The Group's nascent personal finance business continues to grow and has increased its presence in the North American markets, with 6% of overall revenues now derived from this vertical (2017: 2%) This is expected to grow in 2019.

2019 Outlook

· Continue to strengthen the Group's publishing assets

o Growth through organic development and acquisition, with internal development plans for personal finance market and gambling networks over the next three years

o Completing the integration of recently acquired assets

o Continue to work on the recovery of rankings for key publishing assets

o Capitalise on the Group's existing footprint across the North American Personal Finance markets

o Ongoing development within the online gambling segment in the US

· Actively reducing certain low margin media activities with a focus on complementing publishing activities with media skillset

· Optimisation of internal processes and systems during 2019, including leveraging remaining media activity across publishing assets

· Focus on regulated markets aligned with the Group's focus on sustainable, high-quality earnings

Ory Weihs, Chief Executive Officer of XLMedia, commented:

"2018 has been a challenging year but our business is built on strong foundations giving us the confidence to cease low margin activities and concentrate on the higher margin Publishing division, returning the business to growth.

"Looking ahead, the Group will be prioritising internal investment across its publishing activity to further build its asset base organically, in particular, in the North American gambling and personal finance verticals. Whist we continue to assess strategic acquisition opportunities, we anticipate the bulk of our mid to long-term asset growth to come from organic asset development.

"Our focus remains firmly on improving operational excellence and further developing assets organically to maximise shareholder value."

A webcast of our results presentation will be available on our website later today: https://www.xlmedia.com/investor-relations/webcasts/ 

XLMedia will be holding a presentation for private and retail investors at 4.00pm on Thursday 28 March 2019. To register for the event, please contact Vigo Communications on xlmedia@vigocomms.com.

1 Excluding loss from media activity planned reduction

2 Earnings Before interest, Taxes, Depreciation, Amortization and impairment loss from media reduction and adjusted to excluding share-based payments

For further information, please contact:

Chairman and Chief Executive Review

Introduction

XLMedia is a performance marketing company operating via two principal marketing methods - publishing and media buying. Within publishing, the Group owns a large portfolio of informational and content rich websites globally which act as a conduit to channel users to its clients, the majority of which address two key verticals - gambling and personal finance.

As announced on 26 February 2019, the Group has proactively elected to reduce certain parts of its Media activities which have lower profit margins, reflecting an increasingly challenging environment driven by heightened compliance and regulatory demands in the gambling and digital marketing sectors. XLMedia's media expertise will continue to support the Group's publishing activities.

In the first half of 2018 our business faced a number of unexpected headwinds, namely the impact of gambling regulation uncertainty in specific territories and SEO performance issues impacted by spamming and other attacks across a number of our key publishing assets, as well as technical issues. While the recovery of these assets has been taking longer than initially anticipated, H2 2018 showed a 3% increase in revenues and 2% increase in profit for our publishing division versus H1 2018. The Group has also invested in improving our defences against future spamming or other attacks on our assets.

The reduction of media activities will provide a greater degree of certainty for the business and enable XLMedia to deliver sustainable and profitable growth. Going forward, the Group's focus will be on regulated markets across the gambling sector globally and personal finance sector, particularly in North America.

As previously announced, these actions will lead to an expected reduction in 2019 adjusted EBITDA2. However, these changes are expected to deliver higher profit margins, more sustainable and ultimately better quality earnings.

Financials

In the year to 31 December 2018, the Company delivered revenues of $117.9 million (2017: $137.6 million) and adjusted EBITDA2 of $43.9 million (2017: $47.1 million), with the implementation of efficiency measures underpinning stronger EBITDA margin in H2 2018 versus H1 2018.

The Company's adjusted1 net profit decreased 3.6% in 2018 to $30.7 million (2017: $31.9 million).

Publishing revenues increased 4.6% to $65.8 million (2017: $62.9 million), with the increase driven by acquisitions. Revenue generated from XLMedia's nascent personal finance sector increased to $7.3 million or 6% of group revenues (2017: 2% $3.3 million).

We expect our Publishing assets to deliver organic growth in 2019.

Media revenues decreased 29% to $47.1 million (2017: $66.4 million). The Company assessed its media activities and, as announced on 26 February 2019, decided to reduce further media activities where appropriate, thereby increasing the overall quality of earnings over time. The reduction of Media activities post period end resulted in a write off of the activities' intangible assets, totalling $9.9 million.

Acquisitions

The Company has undertaken several publishing asset acquisitions in the period totalling $47.3 million and included:

· Leading Finnish gambling comparison assets for $18 million

· A UK Bingo comparison site - WhichBingo.co.uk - for $10.5 million

· A US personal finance website - investorjunkie.com - for $5.8 million

· A network of US and Canadian personal finance assets

· Additional bolt-on gambling assets

The integration of the acquired assets into the Group is progressing as expected.

Going forward, the Company will seek to invest across the business, focussing on the following areas:

· Pursue growth opportunities in North America to both build and develop a more comprehensive portfolio of online assets

· Develop the Group's infrastructure to support the broader portfolio of assets and evolution of the market

· Ongoing expansion of the Group's publishing portfolio in other regulated European gambling markets

· Seek to acquire earnings accretive publishing assets

All new sites developed will help bolster the Group's asset base, expanding and enhance its existing geographical footprint.

Regulations

The gambling sector has been going through a period of regulatory uncertainty in various territories, with some opening up through regulation and taxation and other introducing stricter regulations on advertising of products and enhanced enforcement. Specific changes which have affected the Group are:

United States

XLMedia believes a key future growth vertical will result from the opening of the US online sports betting market. In May 2018, the US Supreme Court struck down a 1992 federal law that prohibited most states from authorising sports betting. Following such decision, various US States introduced, and others are in the process of introducing, legislation that would regulate the market. As such, the Group is building its portfolio of sites in this vertical to fully leverage its expertise and capitalise on the opportunity when the market is more widely active.

In terms of other forms of gambling in the US the position is less clear. In a negative development, a legal opinion from the US Department of Justice's Office of Legal Counsel issued in November 2018 and made public in January 2019 reversed a 2011 Department of Justice opinion which a number of US States relied on to allow the launch of online gambling and lottery operations. The Group continues to monitor the situation closely as it develops while preparing for activity where possible.

Europe - United Kingdom

In the UK, the sports betting market continues to perform strongly while enhanced gambling advertising regulation and policies continue to shape the market. The Group anticipates that the increased regulation in this space will result in higher quality of sustainable earnings going forward.

Effects of the increase of remote gambling duty from 15% to 21%, which is expected to become effective in April 2019, will be monitored by the Company.

Europe - Germany

In Germany, regulatory uncertainty caused by stalemate surrounding the interstate gambling treaty impacted the Group. Following a vote last week to extend the third interstate gambling treaty, the Group will be monitoring the market and plans to invest in growing its asset portfolio in the sports betting sector. The Group believes the German sports market represents a medium-term growth opportunity.

Europe - Sweden and other countries

The Swedish market has recently seen the introduction of enabling regulation, which the Group believes presents a promising blueprint from which to work. XLMedia currently has a number of significant assets serving the Swedish market and will continue to develop and adjust them to the new regulations.

The Group continues to seek opportunities to expand its presence in other European countries which have already undergone regulation, affording the Group greater visibility of market conditions and quality of earnings.

North America - Personal Finance

The Group believes there is a significant market opportunity in the personal finance vertical in the US and Canada where the online marketing of personal finance remains relatively nascent. The Group continues to assess the market's rapid development and evolution, whilst also taking early advantage by establishing a strong footprint of assets.

XLMedia is seeing good growth and traction from its existing assets, which address a broad variety of personal finance interests, including mortgages, credit cards, loans, bank accounts and investments. The Group's activities in the personal finance space are currently proportionally small compared to gambling, but our approach continues to be to grow this offering and leverage our publishing expertise while expanding beyond the gambling vertical.

The Group continues to monitor regulations worldwide, responding to changing regulatory environments and new compliance needs in the gambling advertising sector and digital marketing. The Group aims to build its asset portfolio across regulated markets globally in both the gambling and personal finance sectors, by investing in developing assets organically and acquiring selected targets.

Dividend and Share Buy back

On 18 December 2018, the Company instigated a share buyback programme with repurchased shares being held in treasury. The programme is being funded from the Company's existing cash balances and will not affect XLMedia's existing dividend policy of paying out at least 50 per cent of net profit. During the period from 18 December 2018 until 23 March 2019 the Company has repurchased 7.6 million shares for an aggregate sum of £5.0 million.

The net profit that has been used to calculate the proposed 2018 final dividend was adjusted for non-cash impairments. The Board is declaring a dividend of $8.4 million or 4.0182 cents per share payable in Pound Sterling (3.0419 pence per share) on 3 May 2019 to shareholders on the register at the close of business on 5 April 2019. The ex‐dividend date is 4 April 2019

Outlook

As we move through 2019, the Group will be seeking to invest in existing sites and ensure we have strong base from which to build. XLMedia will also create an even broader base of assets in its key verticals of personal finance and gambling, within regulated markets.

The decision to proactively cease the Group's involvement in much of its Media activity will see the Group concentrate its efforts on the higher margin Publishing business going forward. Whilst there will be a short-term impact, the Board is confident these steps will deliver higher profit margins with a much higher quality of earnings in the medium and long term.

The Board is confident of the opportunity for the business going forward and executing upon its strategy. It is therefore maintaining its dividend policy, to pay out at least 50 per cent of retained earnings by way of dividend, and will continue to undertake its share buyback programme, with a view to reducing the share capital of the Company and returning funds to shareholders.

Financial Review

In 2018, XLMedia revenues totaled $117.9m (2017: $137.6 million), reflecting a decrease of 14% compared to the previous year, mainly driven by weaker media and affiliate activity.

Gross profit for 2018 totaled $67.9 million and gross margin was 58% (2017: $73.1 million, 53% gross margin), representing a 7% decrease, proportionally lower compared to revenues due to an increased in the margin.

Operating expenses for 2018 totaled $32.3 million (2017: $32.4 million), in line with 2017.

The Group has seen an increase in G&A and S&M expenses, primarily attributable salary and share based payments, which has been offset by a decrease in uncapitalized R&D expenses.

Adjusted EBITDA2 for 2018 totaled $43.9 million or 37% of revenues (2017: $47.1 million, 34%), a decrease of 7% to the previous year.

Net finance expenses for 2018 totaled $0.6 million (2017: $1.4 million). Financial expenses recorded for loans interest of $0.5 million and other bank fees for $0.2 million net of finance income of foreign exchange rate, including hedging, of $0.1 million.

Post year end, the Company decided to reduce some of its media activities, resulting in a one-off, non-cash write-off of intangible assets related to these activities, totaling $9.9 million.

Adjusted1 profit before tax in 2018 totaled $35.1 million (2017: $39.3 million), a decrease of 11%.

Net profit for 2018 totaled $20.8 million (2017: $31.9 million), a decrease of 35%.

As at 31 December 2018, the Company had $47.6 million in cash and short-term investments compared to $43.3 million 31 December 2017. The change in cash reflects $31.8 million provided by operating activity, $54.1 million used for investing activity (mainly for websites acquisitions totaling $47.3 million and technology investment of $8.2 million), and $29.4 million provided by financing activities, including $42.6 million capital raised in January 2018. This was offset by dividend payments to shareholders of $14.4 million and a net receipt of $2.0 million long term bank loan.

Current assets as at 31 December 2018 were $69.2 million (31 December 2017: $67.1 million), and non-current assets were $127.3 million (31 December 2017: $87.4 million). The increase in non-current assets is mainly attributable to investments in domains and websites.

Total equity as at 31 December 2018 reached $166.8 million or 85% of total assets (2017: $116.7 or 76% of total assets). At the end of 2018, the Group announced a buyback plan that had a marginal effect in 2018.

Yehuda Dahan

Chief Financial Officer

25 March 2019

1 Excluding loss from media activity planned reduction

2 Earnings Before interest, Taxes, Depreciation, Amortization and loss from media reduction and excluding share-based payments

Consolidated Statements of Financial Position

*) Lower than USD 1 thousand. 

Consolidated statements of profit or loss and other comprehensive income

Consolidated statements of cash flows

Notes to condensed consolidated financial statements

NOTE 1: GENERAL

The Group is an online performance marketing company. The Group attracts paying users from multiple online and mobile channels and directs them to online businesses who, in turn, convert such traffic into paying customers.

Online traffic is attracted by the Group's publications and advertisements and are then directed, by the Group to its customers in return for mainly a share of the revenue generated by such user, a fee generated per user acquired, fixed fees or a hybrid of any of these models.

The Company is incorporated in Jersey and commenced its operations in 2012.

Since March 2014, the Company's shares are traded on the London Stock Exchange's Alternative Investment Market (AIM).

NOTE 2: OPERATING SEGMENTS

(a) General:

The operating segments are identified on the basis of information that is reviewed by the chief operating decision maker to make decisions about resources to be allocated and assess its performance. Accordingly, for management purposes, the Group is organised into operating segments based on the products and services of the business units and has operating segments as follows:

Segment performance (segment profit) is evaluated based on revenues less direct operating costs. Items that were not allocated are managed on a group basis.

(b) Reporting on operating segments:

(c) Geographic information:

Revenues classified by geographical areas based on user location: