This is a good deal.
It delivers $2 million revenue in calendar 2108 at close to break-even, and an additional circa $5 million within the first 12 months of closure/integration.
It also delivers 6,000 new exclusive apps, significant scope for increased client integrations, economies of scale, cost reductions and synergistic cross-fertilisation sales opportunities across both customer platform platforms resulting in a projected $30 million revenue to EN1 within the first 12 months of closure. All for a current MC of $25 million.
I can't see all parties to the deal being anything other than highly motiovated to see this work and get the SP above and beyond the 22 cents deal threshold.
That's broad-brush.
That Ted drilled into AdCel in the DD, removed the cash element and got it for scrip-only escrowed for 6-12 months is an added bonus.
IMO the SP performance is not due to market perceptions of the AdCel deal, rather the 2Q on 30 April. AdCel was announced 3 days later and the slide began.
Why?
Costs blew out by almost double from $4.576 million in 1Q to $8.730 in 2Q. Cash receipts "only" increased from $2.246 in 1Q to $3.064in 2Q. This result, combined with a potential US1 million cash "liability" for AdCel, spooked the market.
Ted explained the 2Q costs in detail:
As noted above, cash outflows for the quarter were mainly due to the payment of pre IPO liabilities (AUD $3 million), upfront media spend (AUD $1.1 million), staff costs (AUD $1.9 million) and administration and corporate costs (AUD $2 million).
The Company anticipates that these costs will reduce significantly in Q2 and Q3 while there is a corresponding increase in revenues and customer receipts.
As the Company continues its transformation from comparatively inefficient traditional digital advertising to more efficient and higher margin programmatic advertising, we should see the significant financial impact of this transformation. engage:BDR expects rapid growth in programmatic advertising revenue as new and existing customers are integrated on to the programmatic platform.
In addition the newly launched IconicReach division is expecting to continue its rapid growth trajectory.
Gross margins should improve significantly across all divisions as engage:BDR realises the benefits of its automated platforms. With a largely fixed cost structure, engage:BDR is now ideally placed to grow its revenues without significantly increasing its cost base…”
Gross margins have previously been stated as circa 40%.
Strip out the $3 million pre-IPO costs, plus the additional $1 million or so in additional one-off IPO related admin costs, and the books start to look a lot healthier. Also the $1.1 mllion media spend was upfront investment for this quarter.
In conclusion, if the Quarterly shows significant cost reduction as forecast, in conjunction with growing revenues off a largely fixed cost structure, the market will, or should, react favourably, especially as we head into the business-end of the year where the vast majority of revenue will be earned.
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