The degree to which the adtech business model would appear to be under pressure came with the announcement in mid-March that the UK-listed Crossrider had bought up a cyber security entity as it attempts to broaden its business footprint away from its digital advertising core.
The company is question is CyberGhost, a software-as-a-service (SAAS) online security provider which focuses on the provision of virtual private networks or VPNs. It represents a marked departure for Crossrider, which listed on the London Stock Exchange in September 2014 and which to date has been a wholly digital advertising-based business.
The adtech model is widely viewed as being under pressure, a trend displayed by Cross rider’s annual results which slumped 22 percent in 2016 to $56.5m. In a world where programmatic has come to be distrusted by many, a proprietary marketing technology firm which offers firms optimised mobile ad services was always likely to struggle to prove its worth.
The Tel Aviv-based company – where Playtech’s Teddy Sagi is the major shareholder with almost three-quarters of the shares – has moved to restructure its business in the face of falling revenues, cutting costs and focusing on expanding its digital distribution platform. In the 12 months to December, the app distribution business achieved 20 percent revenue growth while the media division was stable.
However, this stability came at the cost of exiting two contracts which the company said were low margin and cam with high working-capital requirements. Hence, total revenues for the media division fell by a third, although the cutting costs associated with the cancellation of the contracts meant that operating profits for the unit were only down marginally to $3.5m.
The app division – which includes the DriverAgent acquisition form last year – saw total revenues rise slightly to $38.2m while segment operating profit rose to $11.3m from $9.4m. The discontinued web apps and licensing arm saw revenue decline to $4.5m from $13.6m.
The company achieved adjusted EBITDA of $6.4m, down from $10.1m in 2015, while it cut operating losses to $9.7m from $13.8m the year previously.
Speaking to an Israeli newspaper, the new chief executive Ido Erlichman, who joined the business in June last year, said that the adtech space was “like a shark tank: with a huge amount of companies sitting between the publishers and the advertisers. “I have reached the conclusion that the company should climb up the value chain, and instead of offering B2B solutions, we should expand our B2C offerings and be closer to the end user,” he said.
The move to digital distribution – the company currently sells computer repair service under license – will be augmented by the CyberGhost buyout which could be worth up to €9.2m in cash and shares depending on a successful earnout.
The new acquisition generated EBITDA of €1m in the year to December from selling security services to approximately 145,000 customers. CyberGhost's solution focuses on safeguarding personal information when browsing the internet through unsecured mobile hotspot; its customer base growth is mainly due to the growing concerns around data security and safety.
Prior to the CyberGhost deal, Crossrider still had $72.1m on the balance sheet with no debt. It is rare to see a listed entity – and one which has been around for a few years – make such a public effort to effect a pivot. Moreover, the company clearly sees further moves away from the media sector in the future. Erlichman said in the results statement that the company’s reshaped operations were now focused on combining our strong digital media capabilities with our growing digital product platform but with a “particular emphasis on the cyber security arena.” We can almost certainly count on more buyouts to come.