Meltwater (MWTR:Oslo) - Global Media Monitoring

[kettunen]

Meltwater sparked discussion on the forum and is a company I’m partially familiar with from its previous operations, alongside the Esmerk and M-Brain services at the time. I had already been thinking about researching these more thoroughly as investment targets, and now I got the necessary motivational push when the company’s name came up in the Buy/Sell thread.

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Meltwater is originally Norwegian, with its current headquarters in San Francisco. Some sources, however, list the HQ location as the Netherlands
It’s listed on the Oslo Stock Exchange, with a possible dual listing coming to the US market.
The IPO was on 02.12.2020, after which the stock price has fallen sharply.

IPO Prospectus, contains significant essential information about companies at the time of listing:

55d90b6a-9386-46ab-a3d9-7eaf44304dbb_Meltwater+Listing+Prospectus.PDF

Figures, source Yahoo Finance. Got it into a neat concise format there. More detailed info from the annual report:

So, in terms of profitability, losses are being made, but development costs and acquisitions partly distort the figures. The gross margin for a SaaS service is naturally at a good level. Scalability will at some point bring positives to the bottom line as well.

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2021 Annual Report

75806698-c5cf-44c9-b4a9-81af8c9664a8_Meltwater+-+Annual+Report+2021.pdf

Sources monitored, e.g.

The number of searches is quite staggering

Inorganic growth sought through acquisitions, integrated into service offerings

Expansion via Acquisition and Integration
Meltwater has a proven track record of integrating technology and functionality from newly acquired companies into our flagship media intelligence product, having done this with Sysomos, Infomart, Encore Alert and many more acquisitions over the years.

After the acquisitions of Linkfluence, Klear, Owler and DeepReason.ai in 2021, Meltwater’s product offering now spans far beyond the use cases we have primarily served, and through deeper integration, will give our customers a wider lens and more detailed insights to help them inform and execute on their strategies

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CEO in Nordnet’s interview 08/2021

Selskapspresentasjon og Q&A med Meltwater

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Media monitoring in general covers collecting information from various sources, screening and summarizing material for the end-user for different purposes. Typically, its use supports management decisions, monitors the effectiveness of marketing and advertising, gathers leads for sales, or provides summarized industry monitoring information to company employees.

In my previous work life, Meltwater was a newer player in Finland, and material was collected by scraping various online sources. There was a significant amount of “junk,” which in many cases made the service of poor quality. For other users, the amount of extra clutter was more limited, and the service mostly worked well. Correspondingly, the price level was more affordable than domestic competitors.

Among competitors, Esmerk was then clearly the most comprehensive and functional service, especially in domestic industry monitoring. The service was produced by summarizing articles, and through that, users gained significant added value in the form of a better and more tailored service.

M-Brain Oy acquired Esmerk from Sanoma Oyj and still operates in the market today. M-Brain Insight is a subsidiary and apparently produces more tailored Business Intelligence services.

M-Brain has been a company long awaited to be listed on the domestic stock exchange. However, profitability should be improved before listing – or rather, capital should be obtained specifically to finance growth and pay off potential debts.

M-Brain Oy

M-Brain Insight Oy

So, the industry is not necessarily a goldmine, even if the services are functional. However, news and various monitoring services are available in abundance. A good service can still be truly valuable in the right use when the essential can be filtered for the end-user to utilize.

Currently, the level of services is likely very different, and Meltwater has, for example, acquired an AI services company through an acquisition. Analytics and data screening have advanced tremendously in the last few years, so the situation is likely very different now. Meltwater, at least, is growing globally, while M-Brain’s revenue has decreased year after year.

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@Timo_Huhtamaki commendably supplemented the thread’s opening in the 4th message

[kettunen]

The Q1 report published on May 25, 2022, exceeded previous guidance. An adjusted EBITDA of 8% gives an indication of future profitability levels.

NewsWeb

Meltwater reports first quarter 2022 above revenue guidance with $109m, up 16%, and adjusted EBITDA margin of 8%

Oslo, 25 May 2022: Meltwater (ticker: MWTR) started the year with a strong first quarter. Revenue for the first quarter of 2022 was just over $109m, corresponding to a growth of 16% from the same period last year, and exceeding the guidance provided in February of $105-107m. Adjusted EBITDA for the period was $8.4m, corresponding to a margin of 8%, which positions the Company well to achieve full year guidance.

The positive developments in the first quarter were primarily driven by continued growth in the strategic focus areas of Premium accounts and Social products, in which ARR grew by 35% and 56%, respectively.

Strong customer growth and retention

From Q1 2021 to Q1 2022 Meltwater added 870 Premium Customers to this strategically important segment, including +152 in Q1 2022 alone. Meltwater finished the quarter with 3,961 Premium Customers in total, with an average ARR of over $58k per customer. The Premium Client segment now represents more than 50% of all ARR, up from 45% in Q1 2021.

Reiterates full year 2022 guidance

The Company expects to deliver revenue of $109-110m in Q2 2022 and $450-460m for the full year 2022, driven by targeted ARR of ~$510m. The Company expects an adjusted EBITDA margin of 6-7% for 2022.

Q1 report

NewsWeb

and investor presentation

NewsWeb

[Yoda]

The company is a mutant in terms of location: HQ in the US, parent company in the Netherlands, and listed in Norway. Figures, i.e., reporting currency, are in $.

[Timo_Huhtamaki]

Thank you for starting this thread. I have to comment, as this is on my top-3 list.

I’ve been interested in Meltwater for a long time, as the product is familiar from my career, making it a traditional circle of competence investment for me. I started buying around the 20 kronor mark and have continuously added more.

Meltwater, as a SaaS company, can be best understood if one is familiar with the operations of large companies’ marketing, communications, IR, product management, business development, and/or strategy teams. These organizations have a strong need to maintain situational awareness of what is happening in the market, with competitors, competing products, and consumer trends. Sources range from traditional media to social media, discussion forums, YouTube videos, social media influencers, or even job advertisements posted by competitors to indicate future moves and emphases. The larger the organization, the more muddled the understanding without proper tools to combine data clutter and digitized and automated processes for information sharing. The game was a bit simpler in the early 2000s when social media didn’t exist, and traditional media monitoring was sufficient to meet the need (e.g., in Finland, Cision and Esmerk were strong then, and as a service, read all Finnish newspapers, clipped, pasted, and sent newspaper clippings via mail to companies’ PR departments, where they were filed in red folders, which many communication directors still have in their oak cabinets today). With the explosion of social media and data over the last decade, there is a dire need for a tool that combines situational awareness. The image below illustrates Meltwater’s position in this market, providing the entire situational awareness and tools from a single vendor, whereas traditional media monitoring companies focus on news hits and their distribution to various organizations.

Technology has developed rapidly in recent years, and the system now includes image recognition and all sorts of AI solutions. For example, if someone publishes a YouTube video, Meltwater’s tools hear the brand name or detect the brand logo in the video. At the same time, information about the publisher is gathered: who, what kind of profile, what themes they publish, etc. This shows a long way forward from traditional scraping tools-type keyword farms. The fact that Google, among others, is a Meltwater customer says something.

A FEW REASONS WHY I HAVE INVESTED:

1. The core of this investment case is high retention among large customers, which Meltwater reports as “Premium Accounts”. These include world-class brands with operations in dozens, even hundreds, of countries. High customer retention is due to the fact that launching the system, for example, in a marketing organization of hundreds of people, local teams in different countries, the strategy department, and corporate communications, is quite a training project and often includes IT integrations, defining information needs, and other one-off work, so it is not changed to another system for fun without an extremely compelling reason. This also enables upselling, and in the case of many customers, Meltwater is only used in some countries, which means there are still significant growth opportunities within existing customer relationships.

Here’s a small list of customers:

2. Investment in the Social product, which has significant organic and inorganic growth opportunities. This practically means “listening” & “sniffing” different social media channels and gathering information into a single dashboard for intelligent distribution to those who need it. Below is a visualization of cross-selling potential, taken from a recent earnings report, if Social products can be sold to existing customers over time.

3. Its attractiveness is further enhanced by Meltwater’s expansion into social media management tools used by the same marketing and communications departments, allowing information to be fed to many different channels with a single subscription. This is an absolutely essential tool in large companies with many channels and high content management volumes. The right bubble in the image below shows, among others, Hootsuite, which is precisely such an independent tool. For example, acquiring it and cross-selling it to Meltwater’s current 27,000 corporate customer base would offer significant synergies. Klear, a tool for finding and contacting influencers, was acquired by the group last year: if you want to find food-themed social media influencers in a specific area, for example, the tool offers solutions for this. It’s also valuable for large brands. And there are many more such opportunities, which is surely why the strategy has placed a strong emphasis on this fragmented Social segment.

4. Very attractive valuation. This year’s recurring revenue, ARR, will be approximately 510 million dollars, and the market capitalization after yesterday’s share price increase is 460 million euros. Sales costs have been rising, and one can clearly sense on LinkedIn, for example, that salesforce is being hired in large numbers, and people are very excited, which is a good sign of the right kind of sales culture.

5. Share buybacks and insider purchases have been substantial for the past six months. This certainly doesn’t weaken confidence. The lock-up after the IPO expired, which also led to sales, but top management and the board were on the buying side, which is a good sign. I also have a strong intuition that during the buybacks, the share price was deliberately kept low so that they could be bought cheaply and used as currency in future acquisitions.

6. There is no rational basis for the share price decline. The gloomy market sentiment in growth stocks and being listed in the Nordics has certainly added downward pressure. This is also an industry that most investors practically don’t understand, so it doesn’t easily attract a large investor audience to the buying side.

7. Meltwater’s headquarters are in San Francisco, and it has country organizations in 50 countries, so geopolitical risk (read Russia & China) is very low.

8. The cyclical sensitivity of these services is very low. Crises have not been reflected in the figures during 20 years of operation.

9. The CEO stated in the Q&A section of the last CMD that a dual listing in the United States is possible. This is also Meltwater’s largest market, so increased visibility in a large investor market is very likely to bring buying pressure and raise the valuation.

P.S. Meltwater’s competitor Cision, mentioned above, was sold to Platinum Equity in January 2020 for 2.7 billion dollars. Adjusted EBITDA was 8.4% (Meltwater’s Q1/2021 was at the same 8.4% level). Cision’s sale price at that time was approximately 3.5 times revenue, meaning by this formula, Meltwater would already be worth over 1.6 billion euros based on this year’s figures, which is more than 3 times the current valuation (NOTE! The IPO also happened at the 45 euro level, which is 3x higher than the current price). If the company achieves the long-term goals presented below, i.e., raises adj. EBITDA to >20%, one can only imagine the valuation. Meltwater is also better positioned than Cision and has better growth prospects due to the opportunities in the Social segment. I personally believe that this is one of those stocks in the Nordic exchanges where a genuine tenbagger opportunity is present with relatively small risk and quite credible steps. And if for some reason a downturn were to begin, Altor, as one of the main owners since 2012, would certainly negotiate a good exit price.

[kettunen]

Thank you for the comprehensive overview of the service from both a user and investment perspective.

The sales strategy has continued to be aggressive in both Finland and Norway. This is from a Suomi24 forum, but a similar view was already seen in earlier feedback:

Varoitus: Meltwater on

The same from Norway, run through Google Translate:

I think the company has a terrible sales pressure. It would probably not suit so well for Norwegian sellers. Some customers find it annoying. You can also read about it online. There are also comments that smaller customers do not find the platform as useful, but the largest customers seem to be relatively satisfied. It is of course quite natural - the large customers will be able to benefit more from good analyzes and all the information Meltwater can offer.

The comment also mentions better retention for larger customers and certainly better customer service offered. This is repeated in the Q1 report, where Premium customers are in focus. Understandably, the focus is on these customers, as the price obtained from the service is significantly higher.

The basic service is probably something in the range of 2-3000€/$ per year for a small company, with not many services included. That is, search engine and filtering operations done by oneself. Or does @Timo_Huhtamaki have better indicative information about the price and service level?

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Pareto’s comments after Q1/22:

Valuations of growth/tech stocks have been reined in, which is also reflected in Meltwater’s share price. Pareto’s comment is along the same lines, meaning guidance will likely be lowered. As Timo mentioned in the previous message, the valuation is no longer impossible, although profitability isn’t much better yet. The focus is on growth and market consolidation.

[Juippi]

How can making these searches be so inefficient that 50,000 searches are needed for every dollar of revenue? Oh, excuse me, that was per day. 18.25 million searches to get one dollar of revenue. Has the environmental impact of this operation been calculated?

Scalability. If a company does not grow organically but through acquisitions, it is not scalable. Asset turnover (1.07 in 2021) has been decreasing in recent years.

Future profitability. The company states it is a market leader. It has been in existence for 20 years. Losses can be excused for a small growth company, but at what point must the “benefit of the doubt” be earned? Last year’s cash flow was positive only because expenses were paid with shares. Employee productivity of 202k is quite low (= investment is not profitable). For example, Microsoft has one million / employee. Even FedEx has 316k. So, it’s a narrative stock that unfortunately isn’t supported by the numbers.

[Timo_Huhtamaki]

This is surely true for small customers. These are likely the self-service segment customers mentioned in reports, who have lower retention as stated in the reports, and are sold through the telesales channel. Personally, I have been using these for almost 12 years and I think that selling a traditional media monitoring tool in a telesales fashion to a small business carries a big risk that the service won’t be utilized effectively, and the 60-day contract clause surely upsets many. These are services that need to be implemented carefully, preferably with expert assistance, so that searches work well (and then usually the first few months involve refining it to address shortcomings, i.e., proper expert onboarding is required). So, in my opinion, it’s not yet the best possible self-service product. The active sales work is indeed intense, which from an investor’s perspective can also be seen as a strength, as sales culture (or its absence) is a big challenge in many companies. This small customer segment challenge (especially regarding traditional media monitoring) is certainly also why Meltwater’s focus is on large companies and the Social product. In traditional media monitoring, all providers have had challenges for a long time (for example, with content behind login credentials, etc.).

I don’t know the pricing precisely, especially for large customers (they usually have customized offers depending on user numbers, etc.), but a typical package for an SME, which includes monitoring of their own industry and competitors of a certain size, monitoring of their own media and social media mentions, and a tool for sending press and influencer releases (including updated contact lists of thousands of media contacts), costs about 4000-5000 euros annually. I personally think that if this helps you stay updated every morning on what’s happening in your field and gets a few press releases turned into media articles annually, it easily pays for itself. But this assumes that the organization knows how to use the tool and also sends out releases with news potential (i.e., the tool itself doesn’t bring visibility to anyone). I also understand that communications agencies use these when monitoring their clients and sending out media releases as a service (there are also other sending tools, e.g., ePressi and STT have their own lists). Perhaps a communications agency consultant would be best to broadly assess customer satisfaction across different sized clients.

But for me, at least, this investment case relies entirely on the service offered to Premium customers and especially on the increasing penetration of the Social product family among existing customers and potential synergistic acquisitions that would boost this growth. For these, the organic and inorganic growth figures in the latest report were both developing well.

[kettunen]

@Juippi

Scalability. If a company does not grow organically, but through acquisitions, it is not scalable. Asset turnover (1.07 in 2021) has been declining in recent years.

Organic revenue growth has been 7-8% per quarter, at least if the Q1 report graphs are to be believed. ARR has grown faster in recent quarters, so revenue will follow.

Acquisitions have been clearly defined as a strategy to accelerate growth. These expand the service portfolio and enable better cross-selling. Invoicing per customer can be increased. Of course, assuming that the acquisitions and integrations are successful and customers receive added value from them, which they are willing to pay for.

It seems to be working, at least according to the graphs.

[kettunen]

Debt has accumulated

And with acquisitions, goodwill has also accumulated. This is quite significant in relation to the market value, 79.5M USD.

When write-downs start from this, unpleasant surprises will follow for shareholders.

[Juippi]

There’s an old saying: “Money buys everything, a horse gets you there.” So, when looking at revenue, one shouldn’t just focus on its growth, but rather analyze it in relation to something that measures the efficiency of the input. Revenue in relation to invested capital or revenue in relation to the number of employees. Of course, revenue grows when new companies with some business operations are constantly consolidated into the group.

The fundamental problem with this company, and tech companies in general, is that the fees charged to customers do not cover the company’s costs. From economics class, we remember that when the price of a good decreases, its demand increases. Therefore, if a service is priced too low, it’s easier to acquire new customers and maintain a good retention rate. For the same reason, these metrics are not very interesting to me. “Recurring billing” bypasses the question of whether the good is critical to the customer’s business or more discretionary, in which case it can be cut from costs when difficult times arise. “Recurring billing” sounds like the contract is open-ended.

If too little is charged for a product, it’s scalable, very useful to the customer, and there isn’t much competition in the industry, then demand and revenue should explode. So, something in this story doesn’t hold true. The profit should turn positive, at which point we could start examining what the return on invested capital is and whether the company creates shareholder value through its existence. That always seems to be 5 years away.

[kettunen]

Gross margin was now 70.8%.

If ARR is forecast to be $510M at the end of the year and the margin is 70%, then we reach $357M. Divided by quarter, this is $89M. This is roughly the same as Q1/22 operating expenses.

Then about those costs:
Q1 losses $12.4M

Of this, €12.9M is share-based compensation And yes, this is an essential part of compensation for a listed company, but the amount is quite large in relation to other costs.

However, according to the report, $8.9M of these are one-off costs, as the redemption of restricted stock units (RSU) was changed.

However, throughout 2021, share-based compensation was $60.4M. That is, proportionally the same value as in Q1/22.
How one-off are these compensations on this scale?

From the annual report, 2021 vs 2020

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More people are constantly joining the company, which is expected with acquisitions and growth. Thus, it can also be assumed that operating costs will increase further.

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Edit: let’s also add information about share repurchases and employee share purchases in December

Ongoing share buyback program January 17 - May 31, 2022

NewsWeb

The repurchases hereunder will be conducted in the period from 17 January 2022 until and including 31 May 2022. The repurchases will be up to a maximum of 11,960,000 shares, and an aggregate maximum amount of USD 25 million.

Any shares acquired as part of the buyback will be used as consideration in future acquisitions by the company or, absent this, be cancelled. Any shares purchased will be held in treasury until used for the above purposes.

May 23, 2022 update on repurchases

Under the program, Meltwater has in the period from 16 May to 20 May 2022 repurchased 499,356 own shares on Oslo Børs at an average price of NOK 12.41 per share. Following the repurchases, Meltwater owns 13,839,755 own shares.

The duration of the buyback program is 31 May 2022. Following the repurchases made since 17 January 2022, 1,331,263 shares remain under this part of the buy back program

And the previous one, which started on December 1, 2021, and ended on January 11, 2022, was mainly related to compensation arrangements.
It is likely related to the RSU arrangement.

NewsWeb

Additionally the company intends, in connection with the expiry of agreed lock-ups, to facilitate an opportunity for employee holders to sell up to 25% of their total holdings through an employee offer. The employees who participate will then be subject to a further 3-month lock-up. The price per share to be paid in the offer, to be carried out in December 2021, will be equal to the volume weighted average trading price in a 5-trading day period starting 10 trading days after launch. The buyback offer to employees will be capped at 25m USD.

[kettunen]

Let’s throw this in here, since M-Brain was mentioned at the beginning.

Yrityskauppa: M-Brain partneroituu pohjoismaisen sijoitusyhtiön Monterron...

So Monterra is buying M-Brain.

M-Brain Insight had apparently already moved elsewhere, which is also reflected in the drop in revenue.

[kettunen]

Meltwater Trading Update Q2 2022

7cbc67d9-22ec-435e-891b-c459cac09875_Meltwater+Trading+Update+Q2+2022.pdf

Growth continues despite a challenging operating environment. This is just an interim update on sales progress. The Q2 report is due at the end of August.

The Q2 2022 report is scheduled for release on August 30th, 2022. Revenue guidance for Q3 2022 will be provided as part of this release; the report will include development in both actual currency and using 2021 FX rates for YoY comparison. The full Income Statement will be shared as part of the Q2 2022 report.

Pareto’s comments

[Timo_Huhtamaki]

No wonder there have been indications. Market capitalization around 230 million and largely recurring revenue-based revenue this year 440-445 million dollars: “Meltwater announces review of strategic alternatives and reiterates third quarter and full year 2022 guidance”

NewsWeb

[kettunen]

There goes Meltwater from the stock exchange. People on the other board have been speculating about a takeover bid for a good while now, and it’s finally happening at a price of 18 NOK – or at least if no better offer comes along.

I had it on my watchlist and was thinking about taking a speculative position, but I had too much capital tied up elsewhere

NewsWeb

THE BOARD OF DIRECTORS OF MELTWATER CONCLUDES STRATEGIC REVIEW AND UNANIMOUSLY RECOMMENDS AN INTENDED VOLUNTARY OFFER FROM MW INVESTMENT B.V. TO ACQUIRE ALL SHARES OF MELTWATER

• Meltwater shareholders to receive NOK 18 per share, to be settled in cash, shares in the Offeror or a combination thereof.
• The Offer Price represents a premium of 36% to the last traded price of NOK 13.25 as per 18 January 2023 and 135% to the last traded price of NOK 7.67 as per 14 September 2022, the day immediately preceding announcement of the strategic review.
• The Offeror is controlled by Altor and Marlin.
• The Board supports and unanimously recommends the Offer.
• The Offer and the launch thereof are subject to certain terms and conditions of a transaction agreement between Meltwater and the Offeror, which includes a minimum acceptance level of 95% of the shares, which will be lowered to 80% if Meltwater’s shareholders vote in favour of certain post completion restructuring measures (as described below). The Offer is expected to be launched at the end of Q1 2023.
• The Offeror has received an irrevocable pre-acceptance to accept the Offer from shareholders representing 29% of the issued and outstanding Meltwater shares as at the date hereof. Together with Altor’s holding in Meltwater through its portfolio company Big Data Holding Ltd, the Offer is supported by shareholders representing 41% of the Meltwater’s issued and outstanding shares as at the date hereof.
• Meltwater to become a private company upon completion of the transaction.
• Meltwater provides a preliminary update on Q4 2022 financial results.

[DayTraderXL]

Sigh – bad news. I hold a position myself and I’m certainly nowhere near that 18 NOK price. I’ve been waiting for those sales to turn profitable as well and for the share price to skyrocket as a result.
The offer seemed to include an option to roll over ownership into this newly formed private company, provided the offeror maintains a majority stake. I’m definitely going to play this card. I suspect this will be re-listed on the exchange later on.

[kettunen]

I was also waiting for some signal of Meltwater’s operations turning green. But in the current market situation, various marketing and monitoring services are easily cut in the name of savings. And the direction didn’t seem any better in this regard, at least for now. In the long run, of course, the situation could potentially be different.

Among domestic peers, M-Brain and M-Brain Insight, which are more familiar to me, continue along the same lines. Operations simply aren’t being made profitable and revenue is in a clear decline year after year.
2021 figures from Finder

Group

And Insight

Well, that’s one less company to follow