Can XLMedia weather the “perfect storm”?

With its fingers firmly planted in many pies, including gambling, mobile games, cybersecurity and personal finance (credit cards, loans and mortgages), XLMedia’s bulging portfolio helped drive revenues up 33% year-on-year to $137.6m in 2017. Yet it hasn’t been completely smooth sailing in 2018. On 11 June the AIM-listed business, which sits third in the EGR Power Affiliates rankings and owns more than 2,300 websites in 18 languages under its publishing arm, issued a profit warning, triggering the share price to plummet by over 30%.

XLMedia said it expects to report lower than anticipated revenues of circa $130m. However, CEO Ory Weihs is keen to stress that a variety of factors were to blame, including regulatory changes (the Australian market closing and “nervousness” around Germany and the UK), as well as scraping attacks and Black Hat SEO techniques used against the company’s sites. Moreover, Weihs, who founded the business in the early 2000s after three years of military service in his homeland of Israel, says XLMedia is equipped with the necessary tools and expertise to overcome these challenges.

In fact, he believes this latest chapter in XLMedia’s history should be put into context and will ultimately be remembered “more as a speed bump than anything else”. EGR Marketing catches up with Weihs in the Czech capital Prague, to hear about the recent travails, the purchase of award-winning bingo portal WhichBingo in April, and why he’s so bullish on XLMedia’s future (backed up by the fact he bought more than £300,000 of shares in the business following the profit warning).

EGR Marketing: What were the key factors behind XLMedia issuing a profit warning on 11 June?

Ory Weihs (OW): A lot of it revolved around regulatory changes, but not regulation that prohibited activity in the market; we always exit markets the minute there is any issue with them. This was mainly around advertising guidelines and a lack of clarity about what we can advertise where. All the confusion around guidelines and the potential increase in gross gaming revenue tax caused some sort of stress on the operator level in the sense that they were less inclined to do more CPA deals and fixed-rate deals. From our side, that’s absolutely fine and we always say that we want to increase the amount of rev share [deals] in the business, but it happened kind of fast.

It’s also important to say that none of the factors that we mentioned would each individually reach a point where we would put out a profit downgrade. It’s a variety of different things that bundled up together into a perfect storm. Most of them are manageable and we believe they will get the business back to growth. There is nothing that is systematically flawed in the business – all the machines are working, the people know what they have to do and we have mitigated a lot of the issues.

In Germany there was a period of uncertainty at the beginning of the year as to where the market is going and around VAT charges. That affects the general nervousness in the market and an unwillingness to engage in larger deals from the operator’s side. And we had some SEO issues on the publishing side; mainly things like scraping attacks and Black Hat techniques used against us.
We are not the only [affiliate] in the sector affected by this, but we have upgraded the technology on our side of the business to deal with this and we are at a point where we have stopped the negative effects of it. We are not seeing any more drops in ranking and we are seeing mainly increases in rankings, so we believe, midterm, we will definitely gain positions back and get the division back to growth.

EGR Marketing: How has the business been affected by this “perfect storm”?

OW: I think all these things have to be remembered in context. We started 2017 with a forecast of $36m EBITDA and we ended up at $47m after two profit upgrades. The bar was set relatively high going into 2018 and with things like Australia closing and nervousness in the UK and Germany, it created challenging marketing conditions. But we believe that we can mitigate the risks and believe in the business going forward. We have a positive future in the longer run and this will be remembered more as a speed bump than anything else.

The business has seen tremendous growth in the past two years… if you zoom out and see the growth trajectory, this will not have a significant effect on it. I have been buying lots of shares in XLMedia myself, including more than £300,000 on Monday [when the profit warning was issued], which comes on top of quite a lot of investment I’ve done into the business in the past year on a personal level. I’m committed in the long run.

EGR Marketing: In April, you acquired WhichBingo for an undisclosed sum. What does this bingo portal, which has been around since 2000, add to XLMedia’s portfolio?

OW: WhichBingo is an established, solid, well-known name in the gambling sector and the UK in general. The sellers and the staff who worked on WhichBingo have done a fantastic job positioning it and definitely feel that it benefits from the scale of being part of XL. We have a lot of interesting opportunities and things we want to do with it. We have done upwards of 20 M&A deals since the listing, so this sits as a solid asset that we have bought and we will put it together with the rest of our portfolio and keep optimising it. We are always looking for assets that weren’t built to sell, and WhichBingo was definitely not built to sell – it was built to be a good comparison site.

XLMedia says there is still an opportunity for large bingo affiliates like WhichBingo

EGR Marketing: How much potential is there still in bingo?

OW: I think there is still opportunity for a few larger players, and WhichBingo is the largest of them. It [bingo] is mainly a UK-centric product and with a certain demographic but it is very stable. [Online] bingo is one of those products that has been around 18 years and it doesn’t seem to be going anywhere. I see it as an interesting one and something that we should have, but in terms of M&A going forward you’ll probably see us do more deals in other verticals.

EGR Marketing: Leading Finnish gambling information company Good Game was acquired for €15m earlier this year. What was the strategy behind this purchase?

OW: The strategy was to continue expanding our portfolio in a market that we have been in for a very long time: Scandinavia. We know how to run these assets, we have the teams and we have the volumes. To take over solid quality assets like the ones we’ve bought, it is quite simple for us in terms of integration. We and our investors love it, and the integration risk is quite low. I’m convinced that the assets we have bought are very high quality and, so far, we are very happy with the performance.

EGR Marketing: Despite all the consolidation in the sector over the past few years, why has XLMedia largely refrained from going on an aggressive shopping spree?

OW: We have been around since 2002/2003 and we have a large stable of assets that we are developing internally as well, so we are not reliant upon acquisitions for growth. And when we guide analysts and the market we don’t really forecast acquisitions – our focus has always been organic growth. Of course, there is an opportunity in the last five or six years with the consolidation in affiliate marketing, but I completely agree that we haven’t been doing it as fast as others.

We have taken a safe and diligent approach, and our leverage level is close to none. Catena [Media] has a €150m debt out there. And they would admit that most of their growth came from acquisitions. I don’t say that as a negative; it is their strategy. When they came to market they were a business that is a fraction of what they are today, and they have acquired their way to big growth. Generally, it is a riskier approach, with the different back-end systems and people working in different locations and different mentalities. We generally consolidate acquisitions into our team and platform – we don’t leave them running on their own platforms. And most of the acquisitions we have done out of our cash flow.

“Even though everyone is talking about the backlash, the UK is still one of our fastest-growing markets” – Ory Weihs

But we see acquisitions as a complementary tool for growth and a way to get into sectors that we are interested in. We did this in 2014 with mobile games and we did this last year with both personal finance and cybersecurity. And we’ve done it with gambling. So it’s not like it is a way to replace organic growth in our core divisions. We passed on many acquisitions that others have bought because we didn’t feel them to be a value that fits our strategy. Our M&A strategy isn’t to just buy everything – we want to buy things that are proven to us, are valuable assets or unique product offerings.

EGR Marketing: What are your key markets and product verticals right now?

OW: Even though everyone is talking about the UK backlash, the UK is still one of our fastest growing markets. We still see plenty of growth in Scandinavia: in Denmark and in Sweden we are looking forward to regulation, which is very positive. 2017 was definitely the year of financial services for us, and we really have started to invest more in the sector. When I say financial services, I mean plain vanilla banking services like credit cards, bank deposits, loans and mortgages rather than CFDs or Forex.

We have especially focused on the North America region and we see this as a very strategic sector in the long run that we are very bullish about. Having said that, we’re definitely not leaving the gambling sector and I’m confident that in the next three to five years it will definitely be our largest sector. Gaming is still the core business for us, and other things like personal finance, games, apps and cybersecurity are more on the perimeter. Of those, personal finance is the one I’m most bullish about and should become a more substantial part of our business.

EGR Marketing: You’ve said in the past that XLMedia was one of the early adopters of an omni-channel approach to online performance marketing. What did you mean by that?

OW: Historically, affiliates were good at one thing. They knew how to do SEO, or they knew how to do some paid search or Facebook advertising. These days, especially in regulated markets when everything is open, it creates an opportunity on one hand, but it also makes it difficult because if everyone is allowed to do paid search it is obviously more expensive, more competitive and the margins are lower. But the scale is big. So, affiliates really need to become multi-disciplinary – they need to develop know-how and, ideally, tech as well to run lots of different kinds of user acquisition methods if they want to stay competitive.

We are about 45% and 45% between our traditional SEO business and our media division, which runs anything from paid search to Facebook to Instagram to Twitter and video. We are a Facebook and Instagram marketing partner, which took quite a lot of effort to get, and we have a significant amount of volume coming from any different methods and products.

As a result, we wanted to maintain a large tech team in the back-end and we have close to 100 developers in house who develop both our optimisation tools for our publishing division and media-
buying tools for our media division. In regulated markets where everything will theoretically be allowed, it would be very challenging to remain an affiliate with a single methodology. And it would also be leaving money on the table because not all users search for the best casinos or the best odds. There are other ways to reach them and I think if you are not practising that then you are missing out.