INTERNETQ PLC
InternetQ plc (LSE-AIM: INTQ), a leading provider of mobile marketing and
digital entertainment solutions for mobile network operators and brands, today
provides the following additional response to a blog published about InternetQ
on 3 December 2015 (the 'blog').
It is not InternetQ's policy to comment on articles or blogs on the internet.
However, given the serious nature of the allegations made and the subsequent
substantial drop in the Group's share price, the Board of InternetQ believes it
is important to address the comments made in the blog. Set out below are the
Group's responses to the assertions.
The blog's author is of the opinion that the Group is 'misleading' in
capitalizing 'the majority' of its operating costs, hence reporting 'high'
profits:
The Group only capitalizes a minority of its operating costs, that being the
portion of the salaries of the personnel involved in the development of
individual software platforms, and this only occurs once it can demonstrate the
technical feasibility of the platforms; in 2014 the portion of total payroll
that was capitalised was 14% (or less than 6% of total operating expenses), or
c. €0.7m. The Group's accounting policies comply fully with IFRS standards and
have been regularly reviewed as part of the annual audit process. None of the
Group's intangible assets has been impaired to-date. The costs capitalised
predominantly relate to the Group's investment in core intangible assets
(namely the Group's main software platforms, Minimob and Akazoo), and have
resulted in significant competitive differentiation versus the Group's peers,
some of whom rely on third party platforms. Investing in and owning its own
technology helps the Group maintain strategic flexibility and protect its
margins. The recent launch of a self-service ad tech platform as part of
Minimob provides promising evidence of the success of this strategy.
The Group is concluding a major investment cycle in its main platforms, but as
it operates in the rapidly changing and developing market environments of ad
tech and music technology, it needs to continue investing and enhancing its
platforms with new features.
The blog's author states that the Group has higher DSOs than back in 2010:
The Group's revenues have grown circa fourfold since 2010 and the Group has
successfully expanded operations in a large number of countries. Back in 2010
the Group worked with a handful of telecom operators (clients) in a small
number of countries. InternetQ's current business model mix and globally
diversified geographic mix has led to increased DSOs compared to the early days
of its operation. Notwithstanding this, the Group is actively taking
significant steps to reduce DSOs by, for example, investing in the Minimob
business (mobile ad network), which has structurally lower DSOs. The Group
anticipates that DSOs will decrease significantly through 2016 and 2017 as
these steps are put into practice.
The blog's author is implying that the Group has spent money on acquisitions of
doubtful value:
The four main M&A transactions in the past five years have been based on clear,
pre-agreed strategic objectives to broaden the Group's geographic and technical
profile, people and customer base. Most key employees of those acquired
businesses are still with the Group in senior management positions. The Group
runs impairment tests on all historic acquisitions on an annual basis and no
impairment has been required to date.
The blog's author suggests that the business has rising and high debt levels:
The Group ended the first half of 2015 with €2.8 million net debt, which
represents less than 0.2x of the Group's Adjusted EBITDA for the 12 months to
June 2015 (the equivalent ratio for gross debt to Adjusted EBITDA for the same
period is 0.7x).
The blog's author implies that the Group has low cash generation:
InternetQ is a technology company that is investing for the future. The
strategic focus is to grow and improve the platform during the current phase of
market development in both mobile marketing and music streaming. In the opinion
of the Directors, not investing excess cash flow in fuelling growth would be a
mistake. The Group has always clearly communicated to the market its strategic
priorities, cash generation levels and its plan to increase profits and cash
over time.
The blog's author is questioning a €2.7m financial asset in the Group's balance
sheet:
This investment in a content company (in the field of MMO games) was made in
2012, at a time when the Group's business focus was slightly different. An
internal review concluded that this was no longer a core asset and, as such,
the asset was subsequently sold to a third party in February 2015 with the
payment to be received in instalments, €600k of which has been received to-date
in cash in line with the agreed payment plan. Neither the investee company nor
the subsequent purchaser of the asset are related to the Group. The Board sees
the fact that the Group has exited this business without significant cost as
positive.
The blog's author points to a high client concentration in InternetQ's B2B
business:
The Group now has over 160 advertising partners in Minimob, many of these being
blue chip organizations, a number of which have been disclosed in recent
trading update announcements. By signing up and logging in to Minimob.com
anyone can access the range of available offers. Most of the Group's customers
are repeat customers placing multiple offers at frequent intervals. No
individual app advertiser contributes more than 5% of Minimob's ad tech
platform revenue. The B2B concentration ratio referred to by the author of the
blog refers to past data (2014) and largely relates to the Group's legacy
mobile marketing campaigns business in which the billing/collections were often
made using a small number of multi-country aggregators, in line with common
industry practice. This is not a reflection of the significantly larger number
of individual end client relationships (MNOs etc.) at the time, which is the
real business driver. As detailed above, the Group's client concentration ratio
in Minimob today is low and is helped by InternetQ's evolving business model
towards in-app advertising.
The blog's author states that the Group operates in a space that is crowded
(mobile advertising):
The Minimob platform is differentiated in that it focuses on the niche,
performance-based in-app mobile advertising sector. There is no display
advertising, a field which can be negatively impacted by ad blocking and a
business model the Group is actively staying away from. Minimob is based on a
proprietary software platform which, following recent enhancements, now
supports self-service usage. The Group is not aware of many firms with similar
capability and aspires to be among the leaders in this space (in-app mobile
advertising). As mentioned in the Group's interim results announcement, this
'niche' space is estimated by sector experts to be worth c.US $30bn in 2015
and is due to further triple in the next three years.
The blog's author states that Millennial Media, a diversified larger business
historically focused on a different niche (display ads), never made a profit,
and that, by analogy, InternetQ should not be expecting to make any profits:
In the Group's view the comparison to this particular company is not
particularly relevant, as it mainly focuses in a different field of mobile
advertising. Furthermore, and in relation to comments about the Group's cost
structure, the Group's business model is different to certain other players in
that it invests in its own technology and as such does not need to pay large
sums to third party tech providers, thus maintaining competitive gross margins.
The Group's operating expenses are mainly centred in relatively low cost
locations such as Greece, thus ensuring operating costs remain contained.
InternetQ, therefore, has a structurally competitive cost profile. Also, where
possible, the Group focuses on markets and subsectors where it expects it can
yield higher margins than in some other more highly contested markets.
The blog's author states that the Group's Akazoo music streaming business does
not have enough genuine positive ratings or presence on social media channels
(and that in his view this is a sign that its service is not up to scratch or
lacks substance):
Akazoo is a paid subscription-based music streaming platform which has received
the long-standing recognition and endorsement of blue chip corporate clients,
who have chosen to use the service to address their own customer needs. Such
blue chip clients offer the service direct to their subscribers and frequently
under other brands. Multiple client surveys have shown that the Akazoo service
is an attractive and competitive offering in its respective markets. The
Directors are confident that the Group's offering meets the requirements of its
corporate clients and that they have a positive end user experience. Given that
the focus for Akazoo is mainly on Emerging Markets, in the view of the Board,
it would appear reasonable that on the prevalent social channels in, for
example, developed markets where the Group does not currently operate, there is
little or no reference to Akazoo. Management strongly denies suggestions that
the Group is involved in any manipulation of Akazoo's ratings on social media.
Moreover, in order to maintain its cost advantage and the local appeal of
Akazoo, the Group tends to employ mainly local content in certain of its
countries of operation; such local content in regions like South East Asia
tends to be much more popular than international content. This local content,
coupled with the fact that the business model is not based on freemium user
interaction (or 'likes' generation) and the fact that the Group often agrees to
use its respective local partner's brand instead of the Akazoo brand in
promoting the B2C service, may explain why the Akazoo-related 'liking' activity
of international pop stars in certain social channels may appear to be low.
Separately, the Group uses multiple app distribution channels for Akazoo, such
as operator downloads, direct from web downloads and various other app stores,
including independent ones - Google Play is only one of the channels used. The
Group's existing contracts with all major music labels (for content use in some
countries only) and most large independent music labels ones are further stamps
of approval of the quality of the service.
Finally, as previously announced, reputable private equity investors recently
conducted extensive due diligence on the Akazoo business prior to directly
investing c. €17m in cash in July this year.
The blog's author states that certain other leading music streaming services
are 'not making money', and hence InternetQ should not be expecting to make
profits in Akazoo:
InternetQ believes that the freemium model of certain market leaders has
fundamental flaws, as each 'free' user is particularly costly to the service,
with costs paid to music labels exceeding ad revenue associated with that
'free' user. That is why the Group has opted for a pure paying subscriber
model. The combination of a paying model, cheaper local content, a proprietary
software platform and low operating costs (as well as limited marketing spend)
has helped deliver historically positive Adjusted EBITDA for Akazoo. Other
business models that the Group employs, including the recently developed and
launched Akazoo Radio, should further foster growth and profitability.
The blog's author is of the view that 'Akazoo Polska' has a supposedly
'terrible brand' in Poland:
In Poland the service mainly operates using Orange's own brand ('Muzyka Tu I
Tam') which is 'powered by Akazoo'. In recent years the Group has not focused
on an own-brand strategy in Poland, given the fact that the Group's partner's
brands are much stronger. InternetQ respects its partner relationships and
avoids competing with them by using its own brand. This strategy saves the
Group marketing spend and leads to faster adoption of its service. The Group
also applies this strategy in certain other markets, depending on partner
arrangements.
The blog's author is critical of certain mobile messaging practices in relation
to the Group's business and certain legacy products of the Group and alleges
that the Group has not provisioned for related fines received in Poland:
The Group's legacy business model was based on mobile messaging. Regulations
regarding that field are subject to frequent change. The Group has over the
years been working closely with its local mobile network operator partners to
ensure it meets relevant regulatory requirements. In 2012 a regulatory penalty
of €202k was imposed on the Group. The Directors can confirm that the Group
subsequently provided for Euro €156k in its 2013 results based on legal advice.
The Directors can also confirm that the Group was subject to civil court claims
of €286k in total in 2012 and 2013 which have not been provided for based on
legal advice. The Group makes appropriate provisions based on legal advice at
any particular time. The Group has taken the strategic decision to gradually
reduce its exposure to these types of business and instead focus on in-app
mobile advertising (Minimob) and music streaming (Akazoo) where it perceives
the long-term benefits to be larger.
The blog's author questions the Group having multiple other side products and
apps:
Like many companies, the Group has developed and trademarked various products.
InternetQ occasionally uses apps, such as the mentioned takatap, an app owned
by the Group, to test its Minimob offerings, new features or generate ad
inventory.
The blog's author questions the Group's partnerships with blue chip clients and
alleges that the Group pays those blue chip clients like its Polish mobile
operator partner to pre-install the Group's apps on their users' phones:
This is incorrect - such blue chip clients typically pay for the benefit of
using Akazoo across their user base.
The blog's author draws attention to a point in time in 2013 when both the
Group's receivables and payables supposedly declined, according to the author's
calculations:
This is incorrect. A significant amount of revenues at the end of 2013 had not
yet been invoiced as a result of campaigns which were in progress over the year
end and were included in Other Receivables (i.e. total receivables were in
aggregate higher than in the previous year). Payables also increased during the
period, while total payables including accruals and other current liabilities
were also in aggregate higher than the year before. In summary, trade
receivables and accrued income increased from c. €31m in 2012 to c. €35m in
2013; similarly trade payables and accrued expenses increased from c. €12m in
2012 to c. €15m in 2013.
The blog's author is of the view that the Group purchases 'a lot' of external
software and that 'intangible assets form too high a percentage of its reported
equity, vs. for example Microsoft':
Any technology company that is focused on cost containment and fast lead times
for developing software platforms is likely to use, in part, expert external
developers for some of the software development work. Trying to in-source all
such development is often not feasible or cost effective. It may be useful to
note however that, as disclosed in the Group's 2014 Annual Report, c. €12.4m
out of the Group's c. €51.4m of net intangible assets result from required
purchase price allocation exercises performed by qualified third parties
following acquisitions, and relate to non-compete agreements and acquired
customer relationships.
Separately, the Group owns minimal fixed tangible assets. The Group's business
mix, funding resources and current size are factors that determine its
investment choices and priorities, and they are all radically different to
Microsoft's.
The blog's author questions the Group's rationale for having multiple
subsidiaries in various countries:
InternetQ is becoming a global company and often needs either a satellite
office presence or local company, often for local tax or procurement reasons
(for example, some clients require a contract with a local entity). Many of
these entities are cost centres and show little revenue, but bear the impact of
local personnel salaries and admin costs. The Group uses intercompany loans and
charges to fund or charge local subsidiaries. The Group merged its Polish
subsidiaries last year to minimize costs and utilize accumulated tax losses.
InternetQ was required to set up a new subsidiary, Akazoo Poland, in the summer
in order to effect the Akazoo carve out transaction which was completed in July
and address the requirements of the Company's private equity investors in
Akazoo and those of the music labels.
The blog's author is questioning the size of the Group's revenues in Russia as
a proportion of the Group's total revenues and in comparison to his calculated
market size:
Sales in Russia in 2014 were significantly lower than suggested by the blog's
author: they were 31% of European (not Group) revenues, therefore around €16m
in total, not €41m. The Group operates various services in Russia, not only
mobile advertising, but also music offerings and legacy mobile marketing
campaigns, and hence the mobile ad spend market data quoted by the blog's
author does not cover the full extent of the market being addressed. Most of
these operations are run remotely, as the Group's business model does not rely
on local execution as its service platform is cloud-based. The Group's
activities in Russia are supported by a registered office that the Group
maintains in that territory, however the Group does not employ staff on the
ground. Note 9 in the 2014 Annual Report shows that the Group's 2014 revenue
was geographically diverse with over 60% generated outside Europe.
In relation to the Group's revenues from Russia, the blog's author alleges that
the Group 'has a relationship with three companies called Twinsbox LLC,
Adviator Media and Betta Technology', using website screenshots as alleged
evidence:
The companies mentioned are not related parties to the Group. The appearance of
the Group's office addresses on the websites of these companies appears to be a
case of 'content scraping'. Since the Group became aware of this after reading
the blog, it has threatened those third parties with legal action and Adviator
Media, which the Group now understands to have been previously known as
Twinsbox LLC, has since removed the addresses from its website. The InternetQ
website screenshot shown in the blog appears to be from a cached web archive of
2011. At that time five years ago, Twinsbox acted as a trial local agent for
InternetQ. However, as Twinsbox was not successful in this capacity (as it did
not deliver new business to the Group), this arrangement ended shortly
thereafter. Management confirms that the Group has occasionally interacted with
Adviator in the context of Adviator's acting as a low value systems technical
integration facilitator/contractor on behalf of, for example, Russian mobile
networks or mobile aggregators active in the Russian market.
Management confirms that the Group has never made any payments to, or received
payments from, any of these companies, whether directly or indirectly.
For further details:
InternetQ Tel: +44 (0) 20 3519 5250
Panagiotis Dimitropoulos, CEO and Founder Tel: +30 (697) 811 7520
Veronica Nocetti, Chief Financial Tel: +30 (694) 420 5275
Officer
FTI Consulting LLP Tel: +44 (0)20 3727 1000
Charles Palmer / Chris Lane / Nicola
Krafft / Karen Tang
RBC Capital Markets Tel: +44 (0)20 7653 4000
Pierre Schreuder / Ema Jakasovic
Canaccord Genuity Tel: +44 (0)20 7523 8000
Simon Bridges / Emma Gabriel
About InternetQ plc:
InternetQ is a leading digital content and mobile marketing services company
with operations spanning Asia, Europe, Africa and the Americas. It offers
proprietary technology platforms to help mobile network operators, brands, and
media companies to conduct targeted, interactive and measurable marketing
initiatives on mobile devices. Its mobile value added services include Akazoo,
which allows consumers to purchase digital music content and Minimob, its smart
mobile marketing and advertising platform to conduct effective and measurable
campaigns on mobile phones and achieve user engagement and app
monetization. All of InternetQ's products are underpinned by the rapid global
growth in smart devices and the thriving app economy.
InternetQ is a publicly traded company listed on the AIM market of the London
Stock Exchange, under the symbol INTQ. For investor related queries, please
email: ir@internetq.com
ENDS
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