It happens frequently with internet companies. They identify a problem and their solution creates a new industry. But because they are not the only company with a solution to the problem, the industry very quickly becomes competitive and less attractive. The internet company is then compelled to develop in a new direction.
This was the case with Crossrider plc (AIM:CROS) from the stable of Israeli high-tech billionaire Teddy Sagi. This relatively young company has been through a lot in a relatively short time. Crossrider was founded in 2011 as a platform for developing an internet browser (Explorer and the like) extension. The extension, lives up to its name, “Crossrider”, and expands the capabilities of a browser or website. For example, let's suppose you've hit the "Globes" website and you've read about some analyst who has recommended a certain stock. An add-on adapted to this content will then automatically open a window through which you can receive information on previous recommendations by the same analyst, or the shares performance.
Late in 2012, when the entire equity investment barely stood at $2 million, the company was acquired by Teddy Sagi for $37 million. Eighteen months later, Crossrider acquired three companies: Ajillion for $2.2 million in cash, Definitimedia for $12 million in cash, and Reimage, not for cash, but in exchange for Crossrider assuming loans worth $10.3 million.
These acquisitions positioned Crossrider as an effective platform for managing mobile ads, just as this market was surging in popularity. The platform was designed for ad networks and advertising agencies. An ad Network is like the broker, in other words matching up supply of advertising space (publishers like the Globes website) with demand from those wanting to market themselves (advertisers such as investment houses etc.).
The soaring popularity of this market helped Crossrider launch a successful initial public offering (IPO) on the London Stock Exchange's AIM. In September 2014, the company raised $75 million at £1.03 per share at a post money valuation of $250 million.
But very soon after the IPO, the share began to lose ground. Shares connected to the digital advertising industry were falling out of favor. At its low point, in September 2016, the share was traded at a price of £0.24. However, following its financial results for the first half of 2016, appointment of new management and presentation of the company's new strategy, the share has recovered by 41% and is now traded at a company value of $62 million. This is less than the value of the cash at its disposal - which says that the market is encouraged by the company's new strategy but is still not pricing its full potential.
From Cambridge University to the Sagi Group
Crossrider’s new strategy is being led by Crossrider's new CEO, Ido Erlichman, who assumed the position in June following the resignation of Menachemi. Erlichman (36) came to Crossrider after working with the Teddy Sagi Group on turning around successfully another technology company.
Erlichman said, "Crossrider was at a crossroads following the decision to leave the web browser extension market. And so the challenge that arose was to identify the company's new growth engine. I saw a once in a life time opportunity to take a public company that is profitable, has strong cash balance and many talented people, up to the next level."
When Erlichman speaks about generous cash reserves, he means the $70 million that the company has on the balance sheet and which at the moment reflects its entire company value on the stock market. "When I joined the company, some of the investors asked me, 'Well. What will you buy?' And I said to myself, 'What a privileged position, all I’m expected to do is acquisitions, but I decided that before I go out on a shopping spree I need to understand what are the underlying assets of the company and what can be achieved with them.'"
Erlichman claims that after winding down operations on the web browser extensions (which will happen at the end of 2016), he understood that Crossrider has a strategic advantage in two activities: "The first is presenting the right advert to the right user at the right time and thus improving return on investment (ROI) of whoever is doing the advertising. The second is distribution of digital apps/products."
In the wake of this new approach, the company has changed its method of reporting and beginning with the second half of 2016 reports its results divided into three divisions: App Distribution, Media and Web Apps and License, which are the browser extension operations slated for shut down.
Erlichman says that his analysis found that app distribution was actually the main revenue generating activity for the company and it was also the most profitable. In the first half of the year, the company's revenue from app distribution was $18.2 million, 63% of the total revenue, and the operational profit of this activity was 32.3% compared with 23.2% from media activities. "I understood that this is the company’s most underpriced asset and that this is where Crossrider needs to focus."
As for its Media activities, Erlichman says, "The Ad-Tech industry is a young industry that has a new trend every year. Between the advertiser and the publisher there are many companies and each one of them is doing something different. It is like a shark tank, which Crossrider was trying to navigate through. 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."
Virtual technician as a source of revenue
But as already mentioned, Crossrider’s plan is focusing on leveraging its digital apps/products distribution activities. "Crossrider has always known how to distribute digital assets. It doesn't know how to distribute a shirt, that is to say physical products, but we can say that the Company is an attractive marketplace where Crossrider knows how to create demand, in other words to bring in buyers."
Crossrider’s first and currently leading digital product is PC Repair Reimage computer repair software. "Let us assume that the computer is stuck. This software knows how to compare ideal performance of a computer with its actual performance, to identify the gaps and repair the problems. It is a virtual technician. “PC Repair Reimage is a product Crossrider has developed entirely in-house," Erlichman explains and proudly adds that this software is considered the most popular among all of its rivals.
This product has generated all of the Distribution Division’s revenue in the first half of the year. It is therefore no surprise that it has been joined by a matching product called DriverAgent, which also repairs the computer remotely. "But this time it is a product that has been developed by a third party and not by us. We have a revenue share agreement in place. For the first time we’ve tested our digital distribution capabilities and so far we have passed the test successfully.
Erlichman says that his idea of a successful online business model is to combine a distribution platform with development of portfolio of digital products. "Each one can be a decent standalone company but the combination makes a great company and that's the direction in which I want to take Crossrider. To strengthen its distribution operations and to build a portfolio of digital products, either third party or our own." In this way, he claims, Crossrider has in fact ceased being an AdTech company.
"And yes there is competition, but I see this as an opportunity and I don’t fear the competition. We have a very strong distribution platform and we need to find the right digital product mix to distribute through it." He adds sharpening his point, "My challenge as the CEO is to strengthen Crossrider's competitive advantage, and its distribution capabilities."
Erlichman won't have a problem in financing acquisitions with the $70 million he has in his coffers. "There are three types of acquisitions we are looking to make; digital products, distribution technologies that can enhance our capabilities, and user base acquisitions”
Erlichman says that the Company is already looking at an acquisition of a digital product which is currently being tested on their platform. "I think we can say that the Company is undergoing a 180 degree shift. There is crazy value here! And I feel extremely confident in our future."
Published by Globes [online], Israel business news - www.globes-online.com - on December 11, 2016
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