Signs are mounting that a long, dull period is over for former glamour stock Future. Between 2017-2021, Future caught the imagination spectacularly. The price went from 352p when I first wrote on them in December ‘17 to a post TMT bubble high of £39 by August 21, a gain of over 1000%, raising the price-earnings ratio to more than 50 as investors discounted years of fast growth to come.
Chief executive Zillah Byng-Thorne, the architect of this growth, had taken office as CEO three years earlier. At the time, Future was a dead tree publisher of paper magazines where circulations were in decline but her great insight was to recognise that these paper magazines all had an authoritative and engaging voice and she could use the content to build large and fast growing specialist websites (without the burden of creating this content from scratch). She was able to monetise this content through digital advertising, live events and increasingly via retailers with commission generated from e-commerce.
She then made a number of acquisitions in the UK and the US, many of which may not be known to UK investors but its portfolio includes the #1 consumer technology titles in both the UK and the US, #6 beauty and fashion title in the US, #4 in the UK, and the #1 Homes title in the UK; eventually she also bought GoCompare, the insurance comparison website.
Since then, like a lot of companies, Future’s price has fallen sharply to just 843p due to various macro environmental factors such as falling ad spend and weak consumer confidence, which has reduced e-commerce volumes. Further investor concerns have stemmed from declining online audience numbers for both FY22 and the first half.
H2 shows the worm is turning
But when the company issued an update on 29 September, Future said audience numbers in the second-half had stabilized and it had seen positive month-on-month momentum in the final quarter. GoCompare has also benefited from more cost conscious consumers wanting to switch insurers. Based on eps forecasts of 141p for the year just ended and 149p this year, the PE drops to 5.6. I think the shares are close to the nadir and so I’ve decided to set the hook early and buy the shares ahead of results on 7 December.
History
Established in 1985 as a single magazine, the company has had three distinct phases. The first phase began when the company was built up during the heyday of the computer gaming boom in the nineties. Its claim to fame was that it had the rights to publish under licence both the official magazine for Sony’s Playstation 2 and Microsoft’s X-box consoles and it went public with great fanfare in June 1999.
But the shares subsequently spectacularly crashed and burned, and by the time ZBT arrived in 2014, initially as finance director before becoming chief executive, the business spanned a variety of areas such as consumer technology, gaming, photography, music, movies, design and country sports but the company had been grappling with a bloated cost base and loss-making US operations.
The second phase then began. ZBT’s first move to stabilise the ship was a sharp reduction in headcount, with the sale of Future’s sport and craft titles for £24m, strengthening the balance sheet. The paper magazines provided both the content and the cash flow to launch a number of specialist websites, which were then leveraged through ecommerce sales and digital advertising.
Ecommerce and digital advertising
A key “prop” to its success was its proprietary technology. All of the group’s websites also underwent a process of being moved to a unified content management system, which has generated big software savings.
There is rarely a paywall in front of Future’s websites (ie. they are free to read); instead, Future’s main revenue stream is digital advertising, which is c.30% of group income and once again, technology plays its part. Future has developed all the stuff it needs for positioning content on search engines (optimising natural search, which is free traffic rather than necessitating the purchase of keywords) and to achieve better click through rates in order to optimise advertising income from its targeted, niche demographics.
Future has also built a proprietary e-commerce platform called Hawk that links through from the branded websites and this looks at a given published article and will then serve up relevant products based on an algorithm.
For instance, Future’s consumer brands, such as TechRadar and PCGamer are typically very close to the point of purchase as people investigate their options. The website for PCGamer, for instance, might have a buying guide on a graphics card or peripheral device and at the bottom of the page, Future’s technology will serve up a set of links to retailers’ websites where you can buy them from. Future then earns commissions on transactions based on the retail value of the product and even better, it earns a percentage of the total basket, so if a customer is looking at a graphic card on John Lewis’ website but instead buys a sofa, Future still earns. The technology runs at scale with literally tens of millions of product offerings per day and is engaged with c.2,600 merchants. Overall, ecommerce income accounts for a further 30% of total group sales.
Acquisitions
Having built all this stuff, Phase 2 also saw Future embark on a number of acquisitions. To many it might appear counterintuitive to say that if print circulation is in decline, you address the problem by buying more print titles but as acquisitions arrived, they instantly benefited from leveraging the same technology platform.
Future was able to move newly acquired titles to its existing platform, cut out much of the top management and deliver buying synergies; for example, a greater share of newsstand gives them greater negotiating power with magazine distributors. A good example of this was the purchase of TI Media in April 2020 for £140m. This was a UK print-led consumer magazine and digital publisher spanning complementary verticals including Wine, Golf, Equestrian, Gardening and Women’s Lifestyle. It had £202m revenue / £29m EBITDA in the year to end May 2019 but within just 18 months of the deal completing, Future was able to extract £20m of synergies.
In FY22, total sales were £825m, split between Magazines £290m (-2% organically but +58% including acquisitions) and Media £535m. Adjusted operating profit was up 39% to £271m of which a third was driven by this “Platform Effect.”
Global platform for specialist media
These days Future is a self-described “global platform for specialist media,” split more or less evenly between the UK and US, offering print and digital content across four special interest verticals:
- Games, Entertainment and Tech;
- Lifestyle Knowledge and News;
- B2B (eg. Broadcasting & Cable; Installation, Smartbrief, Prosound)
- Wealth & Savings.
Overall, there are c.220 brands, which attract millions of consumers to their websites, magazines, events and social spaces, and Future monetises these in three ways: Advertising, Direct-to-consumer and Affiliate revenues. At present, the top 11 titles by audience are Techradar, Tom’s Guide, Games Radar, Cinema Blend, Live Science, PC Gamer, Space.com, MarieClaire.com. iMore, Windows Central and WhoWhatWear, with a combined audience of 307m.
Third phase starting now
The third phase is about to begin. ZBT has been replaced by Jon Steinberg. Net debt is being paid down at a rate of knots and was £391m (1.4x net debt/EBITDA), down £25m on six months earlier. Although Steinberg, a former executive with Altice, Dailymail.com North America and Buzzfeed, has yet to unveil what the M&A strategy will look like going forward, investors can start to look forward to a recovery.
The reason I think this way is that Technology is Future’s most impacted vertical. Techradar, for instance, Future's largest brand, was down significantly, -26% (-c.11.1m visitors) year-on-year. Some of the audience decline can be attributed to “limited new technology products being launched” and also because most people had brought forward their product purchases during the pandemic. Alongside that the cost of living has also reduced ecommerce volumes (eg. management highlighted that outside of peak periods, such as Black Friday and Amazon Prime Day, average basket size was down c10%).
As tech turns (potentially as soon as Q4 given soft Black Friday/ Christmas trading comps), there is potential for growth to recover sharply.
Removal of Cookies increases value per ad
A second reason for being positive on prospects is diversification and premiumisation - even as online audience numbers fell 19% year-on-year in the latest H1, Future has proven adept at protecting yields via increased direct campaigns, which have risen, whilst emerging verticals are seeing growth (e.g. Women’s Lifestyle).
What is also likely to boost short run prospects is the removal of third-party cookies from Google Chrome by H2 24 to create a more private web.
Advertisers presently use such cookies to build up online profiles with this data, which may consist of a user's demographic characteristics, likes, dislikes etc to develop extremely effective targeted ads, which often achieve higher rates of conversion.
Google is offering a new targeting feature, ‘Topics’ but this doesn’t allow accurate profiling and given interest-based ads tend to perform so well, I think this will increase demand for publisher inventory, increasing the demand for contextual digital Ad space with publishers utilising first-party data - and Future’s deep engagement with audiences and unique content proposition means it should be able to drive more value per ad.
Future has already developed an advanced first-party data platform solution, Aperture, to collate and harness user data, across its whole array of specialist topics and will be able to offer premium targeting. Given that this is the largest browser to pull the plug on cookies (represents 85% of search) it could drive ad sales up quite sharply. Don’t forget direct advertising deals can often lead to 10x returns per impression versus open market pricing.
What people don’t appreciate is just how diversified the business has become and what an amazing amount of advertising inventory the group holds. Many of the sub-verticals it serves are very large and international. Three are worth highlighting. Wealth is considered the standout in terms of audience and monetisation growth potential. In 2021, Future entered the space by the £300m purchase of Dennis, which brought the brands, Kiplinger and Money Week and subsequently added Decanter. Kiplinger is a well-known US financial advice brand and the largest brand making up c.80% of the sub-vertical. Also exciting are the sub-brands within the Lifestyle space including womens lifestyle magazines Marie Claire, Women & Home and Whowhatwear where its content reaches something like 1 in 3 women in the US.
Finally, there’s GoCompare (25% of group), which was bought in 2021 for £594m. This is a leading player in the price comparison and consumer saving space through its GoCompare, WeFlip, Look After My Bills and MyVoucherCodes brands and has recently found its second wind as consumers shop around for better deals.
All this for a prospective PE of 5.6 looks compelling. I am a buyer ahead of results on 7 December.
