Redefining its growth channels
Crowd Mobile (CM8) is a global technology company that monetizes products including infotainment, music, games and videos by leveraging digital influencers and social media channels through its proprietary technology platforms. The company was backdoor listed in January 2015 through Q Limited at a market capitalisation of $15m. CM8 has since raised $23.1m through several rights issues and institutional placements. Our DCF valuation, which is based our forecasts for cashflows from the core operations, is $0.24/share using a WACC of 13.9%, beta of 1.7, and terminal growth rate of 2.0%. The current share price implies a negative CAGR of 18.6% in free cashflows from FY18 to FY27 versus the CAGR of 2.8% in our base case DCF valuation. If CM8 were to match growth expectations for digital media, the DCF valuation would rise to $0.54/share, implying a CAGR in free cashflows of 11.4%.
Scope
This report has been commissioned by Crowd Mobile Ltd to present an explanation of the business model and to explore the value created from a range of possible outcomes.
FY18 Earnings Update and Outlook
CM8 has announced that its FY18 revenues will be around $38.5m (versus $44.2m in FY17), underlying EBITDA will be $3.6m (vs $11.0m in the pcp) and operating cashflows of $2.9m. The downgrade to FY18 earnings is due to unforeseen regulatory changes in the Subscription business and heavy investment into the recently established Crowd Media division of ~$2.5m. Some of Crowd Mobile’s telecommunication partners, including Telstra in Australia, have ceased to operate their Premium Direct Billing services for games and ringtones after regulatory changes. This directly impacted CM8’s subscription business, resulting in 2H18 revenues declining to $5.4m from $8.4m in 1H18 and down 33% on the previous corresponding period. Crowd Mobile has sought to address this by cutting costs, including 50% of subscription employment costs. Partly offsetting the decline in the subscription business is the rapid growth being experienced by Crowd Media, albeit from a very small base. The influencer marketing arm is expected to post revenues of $0.4m in FY18 and has a strong sales pipeline with more than $2m in forward sales at June 30. The company has flagged FY19 will be a year of transition for the business with more focus on developing new revenue opportunities, continued growth expected from Crowd Media and improving margins in Q&A from the use of Artificial Intelligence (AI) technology.
Valuation
Our base-case DCF valuation of $0.24 per share implies a 10 year CAGR in free cashflows to FY27e of 2.8%. We have conducted an upside case DCF valuation which reflects a CAGR of 11.4% over the same period, and which more closely maps the rate at which digital media is expected to grow. This upside case valuation is $0.54/share. The current share price of $0.046/share suggests a negative CAGR of 18.6% in cashflows for the next 10 years. Our analysis of the company’s peer group shows that CM8 is trading at a significant discount to companies with similar business models. In our view, demonstration of sustainable growth in free cashflows will result in CM8’s share price closing the gap from current levels. We acknowledge however that this may take some time while the company redefines its earnings growth profile and regains investor confidence.
