Pinned straw:
OBM basically uses an arbitrage business model to make money...
Something like this as I understand. Assume they have a client with a blog about mould issues who wants to monetise the blog.
- They buy ads on a cheap ad network for some sort of search term that is quite niche (ie specific) like "how do I fix mould in my backyard shed"
- With enough of those cheap search terms they get delivered a bunch of traffic (a lot of it is bots) to their client's blog about fixing mould in backyard sheds. On that blog they place high value Google ads for search terms that have high cents per click (CPC) rates. I guess you could think of stuff like diet pills, "investments" that sort of stuff.
- The cheaply acquired traffic, including the bots, click through on to the high value ads and the blog owner and OBM split the revenue from Google.
The difference between what they paid for the traffic and what they get for the CPC is how they make money.
The bots are a bit of a dirty secret. OBM obviously don't want Google to think they are pushing through bot traffic, but OTOH, they are OK with as much of it as they can get away with. So the issue they had that "reset" the revenue of OBM was, almost surely, that too much bot traffic started getting through undetected by OBM. This slide from April shows where the bot problem sits.
Anyway, that's about as best as I understand it. Hopefully I'm not totally wrong!
That’s a great explanation @UlladullaDaveand it has certainly helped me understand how OBM monetises traffic, and why bots and poor quality traffic are such a problem for the business.
Moving to the FY23 Results presentation and slides 10 and 11.
Slide 10 shows the incredible growth achieved by the OBM businesses over 4 years.
Revenue: 90% CAGR from 2020 to 2023, and
EBITDA: 108% CAGR from 2020 to 2023
EBITDA Margins: 58% (2020), 74% (2021), 76% (2022), 73% (2024).
This is eye watering performance to say the least, and the reason why it has been the Jewel in the Crown. It’s easy to get excited when you think this trend might continue into the future. This was my thesis for investing in Enero in the first place.
Then comes Slide 11 where management burst our bubble!
This slide shows that after the poor quality traffic from several publishers was identified, paused and eventually halted, the annualised net revenue fell from 60 USD (FY23) to 36 USD (based on the June 23 monthly data). That’s a huge drop!
Management pointed out that July 23 monthly data showed improved annualised revenue of 39 USD. However, they were noncommittal when asked if monthly annualised revenue was likely to continue improving throughout FY24, leaving investors to draw their own conclusions. I expect FY24 revenue to be less that FY23, but possibly similar to FY22. This wouldn’t be a bad outcome if the revenue continued to grow after the reset.
As an investor I am obviously disappointed. However, it is possible that OBM’s revenue growth could return quickly after the reset. I have decided to lighten our holding at opportune times to reduce risk. However, if annualised monthly revenue showed marked improvements in the H124 report, I’d be an excited investor once again!
Disc: Held IRL and SM
@Summer12 from memory there was a SM meeting on the 30th August earlier this year. There is also a brief discussion on the company in the Baby Giants podcast dated 6th October if your interested.