Next Fifteen on a winning streak

  • Earnout liability hits statutory profits

This time last year, organic growth at Next Fifteen Communications (NFC) had stalled, and a £10mn impairment charge had hit profits. However, its latest 12-month returns show that the data-driven marketing consultant is firing on all cylinders again.

Organic ‘net revenue’ – one of the group’s key metrics, which refers to sales minus direct costs – is up by 26 per cent, while total net revenue has increased by 36 per cent. Underlying profit figures are also strong: the group’s adjusted profit margin has widened by three percentage points to 22 per cent, while adjusted profit before tax has risen by almost two thirds to £79mn.

What’s striking about Next Fifteen is its ability to expand the high-margin areas of its business. The company has four main divisions: customer insight, customer engagement, customer delivery and business transformation. Of these, customer delivery and business transformation generate the largest adjusted operating profit margins (36 per cent and 29 per cent, respectively.)

These two divisions have also grown the fastest year on year. Customer delivery achieved organic net revenue growth of 40 per cent in 2021, while business transformation almost doubled its sales.

The same pattern can be seen regionally. The United States generates Next Fifteen’s biggest profit margins, and also delivered by far the best net revenue growth in 2021, up by a third.

It is important to note that Next Fifteen makes a number of adjustments in its annual results. As seen in the table below, its performance does not translate into great statutory figures. This is mainly due to an increase in an earnout liability, following an acquisition in 2020.

Mach49 – a Silicon Valley growth incubator – is a wholly owned subsidiary of Next Fifteen. The company has recently struck a lucrative five-year deal with a technology company, expected to generate fees of over $400mn. This has resulted in a hefty increase in the earnout payable by Next Fifteen to Mach49’s equity holders over the next five years.

The full increase of £107mn is included in Next Fifteen’s profit and loss account as a finance expense, and has resulted in a statutory loss before tax of £80mn. It has also significantly reduced the group’s net assets.

However, the deal has a number of positive implications as well: first and foremost, it resulted in better than expected annual performance across the group. Elsewhere, client wins are also plentiful, with Next Fifteen now advising Aston Martin (AML), Boots and Duolingo, as well as older clients such as Google and Amazon (US:AMZN). Buy.

Last IC View: Buy, 1,127p, 28 Sep 2021

NEXT FIFTEEN COMMUNICATIONS (NFC)
ORD PRICE: 1,450p MARKET VALUE: £1.4bn
TOUCH: 1,448-1,452p 12-MONTH HIGH: 1,476p LOW: 662p
DIVIDEND YIELD: 0.8% PE RATIO: NA
NET ASSET VALUE: 62p* NET CASH: £2.76mn
Year to 31 Jan Turnover (£mn) Pre-tax profit (£mn) Earnings per share (p) Dividend per share (p)
2018 197 13.3 11.6 6.30
2019 224 18.8 17.5 7.56
2020 301 5.56 2.70 2.50
2021 324 -1.30 -5.50 7.00
2022 470 -80.1 -74.9 12.0
% change +45 +71
Ex-div: 07 Jul
Payment: 12 Aug
*Includes intangible assets of £183mn, or 188p a share

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