CX Q2 results: Did it beat consensus?

Well, kinda mostly.

Cyberplex reported $26.0 in revenue for the quarter, a 172% improvement over Q2, 2009, and a 18.8% sequential decline from the $32 million reported for Q1, 2009. Due to historical seasonality in performance, the consensus forecast implied a 29.3% sequential decline, or $22.6 million. So, CX beat this estimate.(and the Google correlation seems to hold)

EBITDA was reported at $2.5 million or $0.03 per fully diluted share, ahead of $2.2 million consensus forecast, implying a 10% margin on revenue. CX beat this estimate.

Management stated during the investor conference call that margins were inline with expectations, and that EBITDA margins going forward should be maintained at around the 10% level for the next few quarters.

Net Income was reported at $1.0 million or $0.01 EPS, versus $0.02 EPS consensus estimate. This was a miss.

Foreign currency translation losses were high for the quarter at $1.3 million or $0.02 per share due to the surging loonie versus the U.S. dollar. During the conference call, management admitted that currency hedging strategies for the quarter did not work. For Q3, the company has hedged currency translation for the month of July and plans to continue to implement more aggressive "layered" hedging strategies for currency going forward, which should benefit earnings for Q3 and Q4.

Notwithstanding the FX-driven EPS miss, according to management, the company generated $3.4 million in free cashflow, or $0.05 per fully diluted share for the second quarter.

Gross Margins were reported at 30% for the quarter, a 13% decline from 34% reported during Q2, 2008, and a small sequential decline from 31% reported for Q1, 2009. Management is targeting 30% GM +/- 2% going forward and Q2 GM was in range. Gross Margins were inline with expectations. However, Gross Margin is a measurement that analysts need to monitor for further erosion going forward. Increasing competition could result in price erosion. Executionally, the company could offset pricing pressure through new categories (eg. social networking platforms), and both leveraging and building out its analytical capabilities to provide advertisers and publishers more value-added services. As well, management hinted at the possibility of increasing the scale of its own ad inventory, thus reducing its reliance on affiliates and third-party publishers.

As for H2 outlook, to reflect historical patterns, revenue should be forecast by analysts to decline sequentially again in Q3 from Q2, with a surge in Q4. Upside performance surprises could come in the form of deals with top 50 publishers, or more likely, significant national and multi-national advertisers. As well, the Company continues to expand its sales force with digital ad sales specialists (there is probably quite a bit of talent hanging around after all of the recent media cuts). More sales horsepower should increase revenue momentum for Q4 and Q1 2010, although analysts should be watching operating margins closely over the next few quarters to measure sales effectiveness.

Fundamentally, this story remains intact for H2 2009 as one of the more intriguing success stories during this recession. It is unlikely that we will see another major "gap up" in H2 performance this year like we did for Q4 2008. However, with a solid balance sheet, an improving world economy, a bullish outlook by management, and increasing interest in CPA advertising, H2 looks to be very solid. Analysts are likely to overlook the FX issues for now, and they should be pleased that the company beat forecasts for sales and EBITDA. Analysts are likely to scrutinize margin risk in future quarters.

With respect to potential acquisitions, the Burst Media opportunity is probably over for now. However, there are a lot of potentially accretive substitute opportunities around.

Disclosure: I own CX.