This is the third in a series of interviews conducted with CEOs of interesting Canadian technology companies. The intent of this project is to provide investors with a unique understanding of what various companies are doing - directly from the top dog. Hopefully, the interviews conducted over the next few weeks will help investors to gain insight into the fundamentals of the companies to which they may not otherwise have access.
After a bit of a hiatus, this interview is conducted with Geoff Rotstein, Chief Executive Officer, Cyberplex (CX.V). The company is headquartered in Toronto, Ontario and is a pioneer in the Cost per Action (CPA) online advertising category.
RES: Geoff, let's start off with a basic question. Can you give investors insight into how Cyberplex makes money?
GR: That's a really good first question because how we make money is fundamental to our success. I would say that our business model allows advertisers to engage with end users online. We have relationships with advertisers, and online publishers like media, social networks, communities, and blogs. We present advertiser campaigns to end-users who interact with the publishers (these are also referred to as affiliates), and we get paid every time an end-user transacts with an advertiser. We share the revenue with the publisher, and keep about 30% give or take a couple of points depending upon the campaign.
RES: So, what is a "transaction"?
GR: Well, its anything from a lead to a sale. A lead is relatively easy, and a sale is relatively complex. For lead generation, we may send out a huge e-mail blast asking end-users to simply provide their email address to the advertiser. For a sale, we have to do a lot more specific targeting, with a lot more feedback, measurement and interactions.So it is amazingly complex.
RES: Your stock has been sagging over the past couple of months after a nice run earlier in the year. What do you think investors are concerned about?
GR: Our current share price is disappointing because I feel like we've built a strong business for now and the future. The opportunities that we are looking at every day are better than they ever have been in the past. That being said, we've asked around and we think we can identify three reasons why our stock has been sagging. First, we had some big moves in 2009, and we had a lot of momentum investors get in and out of the stock. Second, I think that people are worried about our client base because we don't have enough teir 1 advertisers. We are an emerging industry, and early adopters and innovators usually don't come from the top tier. Its kinda like the Home Shopping Network in the 1980s. How many cubit zarconians were sold before the tier 1 and 2 brands started selling on HSN? CPA is in the same spot but we are at an inflection. Third, we have been fairly quiet, but we will be better with IR in 2010, providing announcements of meaningful stuff. You know, we bring on dozens of new clients, affiliates and programs a month, but we don't talk about it enough. We have to have a balance though. We don't want to innundate people with fluffy messages. We are working on this and we will get better at it.
RES: You had a huge bump in revenue and earnings during 2009, how do you maintain the momentum during 2010?
GR: Well, the industry is young and still growing, so we should see organic revenue grow as a result. Some people include Google in CPA even though its a CPC (Cost per Click) company. Including Google, our industry is growing at about twice the rate of CPM. Excluding Google, its growing at 4 or 5 times the rate. So there is a lot of organic growth. There are bunch of other things that we are doing. We are working hard to sign up tier 1 advertisers obviously, and we will make announcements as they occur. We have about 10,000 affiliates in our network, and we add about 25 to 50 new publishers a week. We do some heavy quality screening because about 3 to 4 times that many apply to the network every week. So we are focused on high quality growth. Also, we are looking at expanding our offer to become more full service, so we are adding SEM (Search Engine Management) and SEO (Search Engine Optimization) capabilites, and even some CPM. This will help strengthen our offer with tier 1 advertisers as we sign them up. Also, we could take a leap forward on M&A. We are looking for the right deal that fits strategically, financially, and culturally. We have a number in the pipeline, both small and large. We don't want to put this in a timebox that forces us to make an acquisition that doesn't fit, though.
RES: Other than quarterly financial reports, what are easy ways for investors to track your progress operationally?
GR: We don't want to be one of those companies that only announces financials once a quarter, and our program economics are all over the map. So I think we need to announce major programs so that investors can see the transitions to tier1 and full service. We should begin getting measured on that.
RES: So how much traffic do you handle on a monthly basis?
GR: Actually, we don't measure traffic although we would probably rank up there with some of the ad networks that report traffic. Unlike a CPM (Cost per Thousand) network, that gets paid based on how many eyeballs look at an ad, we get paid when someone does something. So I care about conversion rates. We could sent out millions of offers to generate a lead where someone gives an email, which is an easy thing to ask and we get conversion rates of 10% or 15%. The conversion rate on a sale is low - often in the 1% range, but we may have the same number of interactions as a lead generation. As a result, lead generation, which we do all the time is valued in the 25 cent range per transaction, and a sales transaction could be worth $25 or as high as $50, depending on the campaign. We spend a lot of time getting the right mix of campaigns flowing at the same time.
RES: What is your most proud accomplishment related to the business over the past year?
GR: Defnitely the team that we have built. We have added experienced industry leaders to our team that is really helping us to succeed. We have much more expertise now than we did a year ago. And we are strengthening our management with senior management emerging from within the company.
RES: What is unique about CPA versus CPM and how do you think the future will unfold in the market?
GR: Great question! CPA is different by risk allocation. With CPM, advertisers bear 100% of the risk of whether a campaign works - which they can't really measure anyway. With CPA, the network (us) and the publishers share in 100% of the risk. The advertiser only pays if something works. This is why CPA is growing so much faster than CPM. Avertisers can tie online advertising directly to the bottom line of their P&L. They've never had that before. CPA is also getting better. When we started, advertisers could measure ROI on a monthly basis. We can do it hourly now and soon, advertisers will be able to measure ROI in real-time and make adjustments on the fly. We have to be really good at campaign development, management, and measurement. Because of measurement, CPA will probably become the main way that advertisers run programs, although there will always be room for CPM related to brand management.
RES: Who are your biggest competitors?
GR: We see Epic Advertising and InterMark Media a lot. Also, we compete in some ways with Commission Junction, but the fee structures are so different that we don't see them too often.
RES: What about online direct marketers like Gilt?
GR: These are very specific niches, and they are subscription-based. We are more general and ten to hit huge numbers in comparison. So they don't really compete.
RES: How is your Facebook project coming along?
GR: We think that social media will play a big part in CPA, and we are learning a lot with Facebook, although its not a big money maker for us yet.
RES: Some investors don't see many barriers to the market - what do you think they are, and how are you erecting them?
GR: CPA is hard to do because we handle and interpret so much data. We are very data driven, and its hard to both set up the infrastructure and to manage the reams of data. We actually have more data than we can handle. I think that this is the barrier. CPM providers would need to totally revamp their skillsets and their technology to compete against someone like us. We track huge amounts of data on an hourly basis. We will continue to invest in technology to become better and better at collecting, tracking, and reacting to data feedback as close to real-time as possible, which strengthens our barrier.
RES: What are some of the best performing campaigns to date?
GR: As categories, nutriceuticals and entertainment are still our top performing areas. Dating is also big. We also have big events. This quarter it's the Superbowl and Valentine's Day.
RES: One of the challenges facing the industry is getting tier one advertisers and publishers bought into the industry. You have previously discussed American Express - how is that going, and what other categories seem interested in CPA?
GR: American Express is not big but we are learning a lot from it and making good progress with them. There are a lot of tier one advertisers in the pipeline and we are making the right investments in people and technology to maximize both reporting and our client's brand management. This will be a big year for tier one.
RES: What are some of the businesses that can benefit from CPA?
GR: All sectors. Anyone who sells to consumers. Branding will always be there, so advertisers will need a winning combination of CPA, CPC, and CPM.
RES: You raised aproximately $17 million in a bought deal equity issue last year - how are you planning to deploy the capital?
GR: We are investing in technology, people and geographies. Also, like I said earlier, we have an active M&A pipeline and we are focussing on technology and distribution.
RES: What can we expect to see in 3 years from Cyperplex?
GR: Well we will be much bigger and we will be able to offer everything. CPA will be much more prominent, but we are aiming to be a full service digital agency. Nobody is there yet. We will aim to provide the highest quality online full service advertising solutions to our clients. It should be a totally unique offer combining CPA, CPC, and CPM into a blended campaign.
RES: Final question, what keeps you up at night?
GR: Well, I'm naturally fairly paranoid. I want to make sure that we provide good quality results for our clients. So I worry about procedures, people, tools that drive success and protect the brands of our clients. I am always worried about heading strategically in the right direction without blinders. Basically not getting caught up in a single idea. How do I continuously improve and keep my clients happy? These are the things I think about all the time.
I would like to thank Geoff Rotstein for taking the time to provide his insight into the workings of Cyberplex for the benefit of investors. Cyberplex is one of the RES Free Thinking Top 10 Tech Picks for 10.
Disclosure: I own shares of CX