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Troubled business aims to move from ad tech to app distribution

Technology business Crossrider (CROS:AIM) trades at a discount to its net cash position as it begins a planned transition from advertising technology play to app distributor.

The $70m on the balance sheet provides downside protection for now but investors still need to determine if this cash will be frittered away or if the shift in strategy can put the company on a sustainable growth path.

The shares have advanced 46% to 37.25p since new chief executive Ido Erlichman outlined his plans in detail alongside half year results on 20 September 2016, yet they still trade just below net cash.


Gear shift

It is fair to say Crossrider is by the far the least successful of the stock market ventures backed by Israeli billionaire Teddy Sagi. He is best known as the founder of gambling technology giant Playtech (PTEC).

Crossrider’s core activity upon joining AIM in September 2014 was a platform for the development of add-on applications for internet browsers like Chrome, Internet Explorer and Firefox and helping developers monetise these apps through targeted advertising.

It was one of a flurry of Israel-based ad tech plays to be floated in London in a short space of time. Serious concerns over the quality of these businesses emerged after a string of profit warnings, most notably from the last of the ventures to float, Adgorithms (ADGO:AIM) which issued a major warning (9 Oct 2015) a little over two months after posting seemingly robust maiden financial results.

Sentiment towards this niche space collapsed amid a clamour for ad blocking and concerns over the effectiveness and transparency of online advertising, and with it the share prices of its constituents.

The sector is now in recovery mode. Matomy Media (MTMY) is up by nearly three quarters in the past three months while Taptica (TAP:AIM) (formerly known as Marimedia) has gained nearly 150% since the end of June 2016 and reported a very strong set of half year results on 31 August.

Elsewhere, private equity firm Vector Capital recently agreed to buy US ad tech firm Sizmek for $122m.

UTB table

Value chain

Erlichman tells Shares that Crossrider’s plan is to ‘move up the value chain’ and focus on the distribution of digital applications.

A restructuring process was launched in June 2016, already achieving annualised cost savings of $2m, and the ‘new’ Crossrider is organised into three divisions.

The first division is App Distribution will generate revenue from end users purchasing software online. The second division is Media which encompasses the marketing technology and ad network platforms. The third division is Web App & Licensing, the browser extensions business which is deemed ‘non-core’.

The plan is for the App Distribution business to ink revenue sharing agreements with third parties and, according to Erlichman, potentially develop its own applications. ‘We already have a great distribution platform and we have the skill-set to market apps to targeted users,’ he says.

At present the company is testing the strategy with one unnamed third party. It reports the third party product in question achieved a 125% increase in revenue and doubling of its previous monthly gross profit after being included on its platform.

Analyst at house broker Shore Capital Peter McNally says Crossrider’s own product, Re-image, a virus repair programme, ‘has done well’ and he notes the company could make a ‘higher margin on products it actually owns’.

He adds: ‘We think it can attract many third party products given its success with Re-image that has recently been ranked by Alexa in the top 300 websites globally’.

under the bonnet

M&A plans

Revenue from App Distribution was up 45% in the first half of 2016 to $5.9m with Web Apps seeing revenue decline nearly 30% as the group pulled investment from the business.

Although the company is loss making in accounting terms, it remains cash generative with operating cash flow of $4.1m in the first half. Shore Capital forecasts $1.4m free cash flow for 2016 as a whole, so investors can have some confidence the company’s cash pile will not be lost to management salaries and day-to-day operational costs.

McNally reckons instead these funds will be used ‘to build out the distribution business, whether by buying technologies or individual products’.

Erlichman says he will consider deals ‘which help us move faster with the new organic project’, adding he will adopt a balanced approach by ‘growing and developing the business organically, supported by acquisitions’. (TS)

Although the success or failure of Crossrider’s planned transition is still very much in question, this looks priced in at the current valuation and the initial signs are promising.

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