Cyberplex exceeds analyst expectations again while fundamentals solidify

From an operational perspective, Cyberplex beat consensus forecasts, extending the Google/Cyberplex trend to seven quarters.

Yesterday Cyberplex (CX.TO) reported Q3 sales of $28.2 million, a 158% increase over Q3 2008 sales of $11.2 million and a 10% sequential increase over Q2 2009 sales of $25.7 million. Analysts were expecting a sequential decline in sales due to historically weak Q3 related to seasonality in media spending. Seasonality trends were broken for this quarter, and revenue was reported approximately 28% ahead of consensus forecasts. The Company reported net income of $0.7 million, or $0.01 EPS for the quarter, which was a  12.5% year-over-year increase from Q3 2008 net income of $0.6 million. Because a vast majority of its revenue is recognized in U.S. dollars, and it reports in Canadian dollars, the company continues to struggle with currency volatility related to the relationship between the U.S. dollar and the Canadian dollar. The company reported $1.6 million in foreign exchange losses for the quarter despite attempting to apply FX hedging programs this quarter. Management still needs to get a handle on this issue. The company reported $2.7 million in EBITDA ahead of FX adjustments, which was a 390% improvement over Q3 2008 EBITDA before FX of $0.6 million. This was also ahead of consensus. The Company is demonstrating earnings leverage from operations, although due to currency risk, it is not necessarily being reflected in net income for this quarter.

This was a cash flow neutral quarter, and the company exited Q3 with $21.4 million of cash.

Seasonality Trends Broken
On the conference call, Management explained that historical seasonality trends are being broken by new behavior among advertisers and publishers. Essentially, instead of running 2 week to 1 month tactical online programs that support larger integrated terrestrial campaigns, its clients are now running larger, more extensive multi-quarter online campaigns. According to management 99% of revenue generated during Q3 was from anchor campaigns. The data supports the notion of multi-quarter campaigns, which implies that the online advertising campaigns being managed by Cyberplex are becoming more strategic. This increases the recurring revenue potential for Cyberplex going forward, and increases potential client stickiness. This trend cuts both ways. Traditionally, Q4 has been the strongest quarter for Cyberplex due to seasonality. With less seasonality, will Q4 be another blow-out quarter like Q4 2008? During the analyst call, Management stated that the Q4 pipeline is solid with a more robust recurring revenue base, so it should be strong Q4, but with better underlying fundamentals than Q4 of the previous year.

International Diversification Continues

During Q3, approximately 23% of revenue generated was from international markets, up from 10% sequentially from Q2, 2009. Management anticipates that international campaigns could represent a greater portion of future quarterly sales results. International sales hedge revenue streams against potential future market weakness in the US, and provide a potential natural foreign exchange hedge based on sales being recorded in local currencies. As well, international sales recorded during Q3 2009 are a lead indicator that Cyberplex has a "world market" opportunity that it can exploit.

Tier 1 Advertisers Appearing
This quarter, Cyberplex partnered with OgilvyOne to deliver a significant Canadian campaign for American Express. The company believes that tier 1 agency partnerships and advertising clients are becoming more comfortable with Cost-Per-Action (CPA) performance-based online campaigns. Based on response by the market, Management believes that more tier 1 players in its pipeline are likely to convert over the next few quarters. With larger available budgets, this trend could enhance future revenue growth and expand recurring revenue.

Slight Margin Compression Temporary

The company reported gross margins of 28%, or $7.9 million on $28.2 million of revenue. Although gross margin rates are at the low-end of Management's target range, the better than expected sales number generates a higher than anticipated gross revenue total. Management stated that the gross margins were impacted by more agressive pricing as it continues to enter international markets, and that it does not anticipate increased margin compression in the near-term.

Year-to-Date Performance is Strong
YTD, the company has reported $86.0 million in sales versus 2008 YTD of $28.4 million, a 202% increase.
Total Gross Margin YTD is reported at $25.5 million versus 2008 YTD of $9.5 million, a 168% increase.
YTD EBITDA is reported at $6.6 million or $0.09 per share versus 2008 YTD of $1.3 million, a 407% improvement.
Net Income YTD is reported at $5.8 million or $0.08 EPS versus 2008 YTD of $0.9 million of $0.01 EPS, a 570% improvement.

Client-Base is Becoming De-Risked
Earlier in the year, the company generated more than 30% of its revenue from a single client. As of Q3, 2009 the largest client represented less than 10% of total revenue. The top 10 clients currently represent 70% of total revenue.

What Will Analysts Think?
Analysts will be encouraged by the continued strong progress made in international markets, and among tier 1 advertisers. Most will be surprised by the quarterly sales performance because it is ahead of consensus. More importantly, the underlying reason for the broken seasonality trend should be seen by analysts as positive. Cyberplex customers are designing longer, more strategic CPA campaigns, which should help to strengthen future revenue stream growth, increase earnings predictability, and improve Cyberplex brand recognition within the advertising industry. In what has been described as one of the worst recessions in recent memory, Cyberplex has managed to grow revenue YTD by over 200% while increasing earnings by 5x over YTD 2008. What will happen to Cyberplex performance during an improving economy? Analysts are likely to be bullish about recent growth trends intersecting with an improving economy.

Investors should expect that analysts will re-iterate BUY and STRONG BUY ratings with a small possibility of target upgrades, although the consensus targets are already more than double current share price levels.

Cyberplex remains an emerging player in the CPA market, which itself is an emerging market. As a result, the company should continue to demonstrate solid, and sometime spectacular growth over the coming quarters. The stock is trading at 9.0x TTM earnings with significant forcasted earnings growth. The stock appears to be trading at the multiples of a low-growth industrial stock. Analysts are likely to view Cyberplex stock as an inexpensive entry into the high-growth performance-based advertising market.If there are any Canadian technology investors remaining in Canada, they should be all over this stock.

Disclosure: I own shares of CX

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