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Why the iSentia Group Ltd share price is getting crushed today

This morning media monitoring business iSentia Group Ltd (ASX: ISD) reported a net loss of $4 million on revenues of $70.8 million for the six-month period ending December 31 2017. This time last year the group posted a half-year profit of $18.74 million and the stock has dropped 10% to $1.08 in response to today’s disappointing update.

Total revenues for the period fell 7.1% (excluding the impact of the closed content marketing business), with revenue across its core Australian business dropping 11.1% in a result the group blamed on the changing media landscape, “pricing pressure” and “churn”, which is a euphemism for clients leaving.

This is a worrying result with the group forecasting flat revenue growth in the second half, with a full year forecast of revenues between $133 million to $136 million for the core media intelligence business.

The group is also forecasting full year operating income (EBITDA) of $32 million to $36 million, which will rely on a stronger second half given first-half EBITDA landed at $15.7 million. Unfortunately, iSentia has a consistent track record of downgrading profit forecasts since it listed and as such investors should take its forecasts with a pinch of salt.

The interim dividend has also been slashed to just 0.647 cents per share, which represents total payments of $1.294 million. This compares to an interim dividend of 3.1cps this time last year.

The mediocre operating performance pales in comparison to the disastrous after effects of the failed King Content acquisition.

As a result of wasting around $48 million on the acquisition of a business now valued as worthless the group now carries net debt of $50.46 million on a leverage ratio around 1.5x forecast underlying EBITDA. It has plenty of headroom against debt covenants around 3x EBITDA, which are unlikely to prove a problem unless EBITDA unexpectedly collapses in half over the years ahead.

Today the group announced the CEO responsible for agreeing the deal would be leaving with the stock down around 70% in the last two years for good measure.

The good news is that the group delivered a positive operating cash flow of $15.4 million over the half, up from $14 million in the prior corresponding half as it looks to reign in staff and other costs.

It also has a decent business model as a software-as-service operation that generates recurring revenues. It should now also be able to concentrate on growing its core media intelligence business in Asia and Australia. The group claims its value-add-services (VAS) and Asia businesses in particular offer growth potential and help it derive a moat.

Outlook

I’m not too keen on shares in this private equity spin-off myself as its problems may be structural as the media landscape changes and the falling revenues suggest it does not have much of a moat. Still, I may be wrong and at $1.09 the stock price is now starting to reflect greatly reduced expectations.

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has recommended iSentia Group Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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