While the outlook for iSentia is vastly different today from 2 years ago, the core of the investment case remains the same. The compelling reasons that were initially there to buy it remain:
High quality top line stemming from durable recurring domestic software as a service (“SaaS“) revenue
Diversified customer base
Pricing growth from upselling
Monitoring requirements for organisations in a more complex and disparate media environment are growing rather than shrinking, entrenching the product need to end users. iSentia continues its pivot to add social media capability while the continuous investment into R&D is critical, allowing for the roll out of new products that enable pricing increases and ensuring a product edge ahead of competitors.
Durability
While its cloud capable platform analysing a multitude of media sources is difficult to replicate, global competitors have similar offerings that may be portable to APAC clientele. The threat to iSentia’s moat moving forward is unlikely to materialise from a superior product offering from current competitors but instead from increased churn of larger multinational clients to a holistic solution from a global player. MNCs may prefer a single provider for worldwide media coverage, rather than the regional offering currently promoted by iSentia. Given iSentia’s average revenue per user (“ARPU”) the ability to move down-market to mid-market and smaller firms is limited due to prohibitive costs for end users, hence defence of their core large cap clients is critical.
Short-term churn will likely drive price action as the market is sensitive to the threat of Meltwater eating into ISD’s client base, but it will prove difficult for Meltwater to meaningfully alter the long term market structure given iSentia’s 90% penetration. Pricing differential alone is unlikely to induce switching; only offering an advantage when pitching to end users without any current external media analytics. Rather a product edge is required – Meltwater’s core competency is social analytics, while iSentia is (perhaps late to the game) substantively beefing up their social analytics. This has been fleshed out via the addition of sentiment analysis within their core Mediaportal platform as well as completely new products focused on social such as Storyboard. A full product suite serves as the best ongoing defense to their moat, mitigating the risk of ANZ churn.
The market appears to be pricing in a negative forward view of ANZ churn, as the Macquarie Australia Conference presentation catalysed a 15% jump in the stock price. The important new information to come out in that deck? Not much… apart from a line on p. 18 that “Q3 client churn returned to historic norms”. A short term stabilising of customers was enough to drive a 15% recovery in SP, hence once the overhang of Meltwater’s initial impact clears and iSentia’s market share retention is clearer to the market we can potentially expect a further recovery. Barring a multi period large scale hemorrhaging of customers, it is fair to ascribe a value to the ANZ business on a standalone basis similar to current trading levels as management continue to drive steady ARPU growth via upselling.
Growth option
The true upside to iSentia and potential for share price appreciation lies within the option value of new markets. The growth strategy communicated by management has been focused on markets with no established player and initial roll out was within Philippines, Malaysia, Thailand, Singapore and Vietnam. iSentia is well placed to capture a leading share in these nascent markets, with no incumbent as a roadblock to establishing client relationships in the region. Management estimate they only serve c. 25% of their target clients in S.E Asia, therefore there is substantial runway left for growth.
Localised players such as Wisers and Hottolink that operate in China and Japan respectively make entry more difficult in other Asian markets; however, this can be treated as a free option with even small penetration into such large addressable markets likely to move the needle. Asia is a key plank of the investment case moving forward, and iSentia have made promising early strides as well as placing the right people in the driving seat with the hire of David Liu (long time media exec, with regional experience as Aegis AsiaPac head) indicative of their appetite for growth.
ISD Price at posting:
$1.91 Sentiment: Buy Disclosure: Held
