Consulting » The year long love affair

The year long love affair

Martin Turner is FD at 365 Corporation, an Internet and telecoms company that emphasises its year round commitment to surfers' passions in its name. At £400m market cap, that's a whole lot of love.

For a company that calls itself ‘365’ in order to emphasise its all-year-round ability to supply news and comment on sports and music over the Internet, the year 2000 could have been somewhat tricky. The fact that this leap year contains 366 days, however, was seen as a great opportunity by the marketing folks at 365 Corporation, who came up with the slogan ‘No ordinary day @ 365’ to capitalise on the extra 24 hours.

For finance director Martin Turner, however, the extraordinary day came not in 2000, but in 1999. That day was 2 December, when 365 shares first traded on the London Stock Exchange after moving up from Ofex. ‘People didn’t think we could do it – we only made the decision to go public in August, and we got the thing off before Christmas despite the millennium when the City shut down pretty early,’ he says. ‘We effectively did the thing in three months.’

Now that IPOs are ten-a-penny (that phrase may end up being taken literally, if the doomsayers are right about Internet companies), it doesn’t seem so remarkable to float a company with revenues in the single millions of pounds for about £400m. But even a few short months ago, the UK market environment was somewhat more conservative on the subject of Net listings.

‘The problem at the moment is that there’s a huge amount of money in the system,’ Turner explains. ‘With fund managers in the UK, there was a sense that some of them felt they missed the boat and unless they had adequate exposure to stocks that they couldn’t qualify to be in the sector. Before Christmas you had the floats of Freeserve, QXL and eXchange Holdings, but that is changing rapidly, there are a lot more people coming to the market.’

That has extra resonance in the wake of some of the more flaky IPOs of recent weeks, both in the US and the UK, and Turner, despite being something of an Internet FD himself, isn’t afraid to pull his punches when it comes to mania. ‘Many of these companies are managing to attract money, but it’s fair to say that some of the business plans are just speculative at the very best,’ he claims. ‘I don’t sense that there is a broad acceptance of a high market cap just because you’re a stock. People in the UK are naturally conservative and tend to look beyond the hype of some of these stocks, look at who the management are – have they got the experience of taking ideas through to a viable business that actually works? – and I think one of the reasons we were successful in raising the money and attracting investor interest is that all the guys involved have had experience running businesses in the media sector and have been relatively successful.’

The 365 management team are far from being the ‘one brilliant idea’ Net-heads currently garnering attention in the markets. The creative titan (physically and figuratively) of the group is Danny Kelly, former editor of NME, Q and Total Sport; chief executive Dan Thompson was deputy managing director of Time Warner Interactive International; and marketing director Simon Morris held the same post at Sega UK – where he helped Sonic the Hedgehog claim star status.

The flotation was also backed by Durlacher, the investment company-turned-Net hothouse, which backed 365 from its Ofex days and through onto the main market. The Lex column in the FT called 365 ‘Durlacher’s one glorious home run’, and their help, and that of broker Cazenove (which belied its ultra-old school image – no slip-on shoes there – with the 365 placing), was crucial to the success of the float.

In fact, 365 Corporation as a whole tries to play down the Internet side of the business. Its self-description underlines Turner’s view that there has to be more to a business than a good World Wide Web address and a bullish flotation prospectus. The company says: ‘365 is a leading multi-platform digital media company, providing an offering of content, community and communication services to consumers and small and medium sized businesses in a number of different languages.’

In other words, it doesn’t even mention the Internet. Turner himself joined 365 when it merged with Symphony Group (where he was co-founder and FD), the above-mentioned provider of ‘communications services’ (mostly telecoms consultancy, installations and services to SMEs). If the float was tricky, the merger between the telecoms business and 365 (then known as Direct Network Publishing) a year ago was even harder. ‘365 was a chance meeting,’ the FD recalls. ‘We had some discussions with them, and Barry Minton at Schroders [which had financed the Symphony start-up, but was looking for an exit after six years in the business] believed that whereas we might have more fun at 365, we certainly wouldn’t make as much money – I think he was right on one count anyway!’

That twin-track strategy was bolstered the day before Financial Director met Turner with the acquisition of Fenfones, another supplier of telecoms services. In 365’s latest quarterly results, the telephony revenues are a crucial: sales for the period totalled £5.6m, only £460,000 of which was generated through Internet-related activity. But in true Internet style, the company still lost £8.3m.

Turner balks at the suggestion, however, that 365 is just another cash burning Net business – at least, that’s not the aim. ‘There is a movement towards looking at revenue streams, and our business model isn’t just predicated on going out there and blowing a load of money, getting a large number of users and saying, ‘Isn’t that great,” he says. ‘We’re primarily focused on revenues, we’re looking for more profitability and some of what we do is [already] profitable. We have a balanced model.’

The outflows are partly thanks to the high marketing costs associated with building an on-line community for 365’s most visible businesses, the Web sites. 365’s highest profile Web presence is, but through acquisitions the company has built a roster of sites branded to the 365 name, covering rugby, cricket, music, overseas football sites and, a week after we spoke to the 365 finance chief, gardening. 365 calls these special interest sites ‘passion centres’.

365 has also started to move its content creation skills onto that other major medium, television. A fairly low-key documentary on Mike Tyson’s recent visit to Manchester is soon to be complemented by a series that the BBC has commissioned following celebrity football fans around the European Championships in Holland and Belgium.

‘The brand is the focus of the company,’ Turner stresses. ‘Twelve months ago we were regarded just as a football site; some people still regard us as that. But there’s a lot more to us than that. Every site that we produce has to have the capacity to be the world’s best or the world’s biggest, because if you’re number six or number seven it does not attract the same level of interest from advertisers, it doesn’t have the same revenue generating capacity. You have to be right in there as a market leader.’

It’s that sort of comment that underlines the need to be a winner in the great Internet land-grab currently underway. So, while a £400m valuation looks heady on the current figures, being the owner of the number one content-provider for news, opinion and community on the world’s number one sport could turn out to be very lucrative.

That’s not to say Turner is fixed in his views on revenue generation. While he stresses the need to pile on the users as a means of attracting advertisers, he later says that advertising in the conventional forms is likely to be a less important profit centre for the company. And while he’s keen to be able to offer advertisers targeted viewers (‘as we learn more about our customers, that in itself will turn into an extremely valuable marketing tool, where advertisers will specifically target users with particular interests in particular geographical locations’), the FD accepts subtlety is going to be the way of the future.

‘I think it’s fair to say that people don’t click through [from an advert to the advertiser’s own Web site] as much as people originally thought they would,’ Turner admits. ‘People are a bit tired of banner advertising, and if anything, the big increase in the revenue we’re seeing is from sponsorship. The nature of Internet advertising is getting more sophisticated. Banner ads have their place, but they’re getting a bit tired already.’

365’s content guru, Danny Kelly, has been quoted as saying that the real Internet profit generators are probably things no-one has even thought of yet, but there are existing Internet revenue models that 365 can exploit. ‘Everyone and his brother wants to talk to us about putting together a betting deal,’ Turner explains, and it would certainly make sense that a network of sites focused on sports would attract a partner from the gambling world. E-commerce is also a potential goldmine, except that Turner is unwilling to go into specifics – like what, apart from 365-branded clothing, the company could sell – and in fact is quite scathing about the financial viability of many of the e-tailers.

‘There are real distribution issues, and Amazon is seeing that already – its distribution costs are proving to be difficult to manage, and it’s quite expensive physically getting books into people’s houses,’ Turner points out. ‘They’ve had to build warehouses and stock them full of books – a fact which the traditional bricks and mortar companies find rather funny. Having a January sale to clear inventory is just a traditional problem that businesses have. Some people believe that simply by being a stock, these problems don’t happen.’

Probably the most charitable way to describe this dichotomy – Turner says he can see the flaws in many Internet business models, but he still includes them as possible revenue streams for his own business – is that on the Web, it pays to be open minded.

‘If we sell another half-million pounds of revenue or get £10.5m betting sponsorship, or whatever, it just falls straight to the bottom line, just pure profit,’ explains Turner. ‘We effectively don’t have any cost of sales once the content sites have been built. And sponsorship, commission-type revenue is all pure profit. The thing about the Internet is not just the sheer scalability of it, but it’s the margin potential if you’re in the right business centre. But it’s true to say that some e-commerce business models don’t make any sense, and we’ll steer clear of them.’

As a finance director, Turner clearly recognises that the Internet bubble isn’t going to last forever on its constituents’ current practices. ‘All businesses will ultimately end up being measured in traditional ways – the ability to generate cash flow,’ he says. ‘But the Internet is so new now, people are trying to build market share, and we’re seeing big valuations going towards those companies that have been able to build customer bases.’

As FD at one of the few (so far) quoted Internet businesses, however, Turner has seen at first hand how companies that seem to defy conventional business logic can get a listing. ‘It has to be a proper business plan, you have to get the deal sponsored, you have to satisfy all the LSE requirements, a properly constituted board of directors – those are the sorts of things that a strong management team can bring together,’ he insists. ‘And it doesn’t stop there: there’s the reporting requirements – dot.coms, without the standard three-year track-record, have been forced to report quarterly, in most cases. That’s a big undertaking. You have to have the proper systems and procedures in place which a lot of dot.coms just don’t have.’

Turner reckons that the conservatism usually so evident in the City has had to be abandoned, since if the Internet means anything, it means that we really are living in a global marketplace. ‘Clearly the LSE didn’t want Nasdaq to scoop up all the UK dot.coms coming onto the market, so it was forced to change,’ he points out. ‘Freeserve was the first major listing, and they relaxed the rules for that; but in its place, it put strict reporting guidelines in there, and much more transparency. It’s good inasmuch as it forces you to be extremely disciplined about your internal reporting requirements, which is extremely important for the business anyway because it moves so fast.’

Again, Turner is dubious about some rival Internet companies, many without this level of management and reporting expertise, that are seeking a float: ‘I’m sceptical that many will pull it off. Right now, there is just a glut of dot.coms coming to the market. Everybody who’s in the Internet sector believes they can IPO. I wouldn’t be surprised if a lot succeed, but whether they’ll be around in two years’ time is another matter.’

The 365 model – combining the revenues and profits from an existing telecoms business with the need for cash of an Internet start-up building a loyal reader-base – actually has strong foundations. The key word here is convergence, and Turner is eager for the Internet to be seen as simply another communications medium – hence the sense of combining content delivery through the Web and over the phone.

Having come from the telecoms side, it’s easy to see how he’s developed a more holistic approach. ‘If you look at the revenue stream approach, we have a very viable telecoms company,’ he says. ‘We will generate something of the order of £8m or £9m this year in revenue, and we expect that to more than double next year. If you look at other companies in the telecoms sector with the same profile as our business services division, there are companies such as Redstone trading at values of £600m to £700m with sales not dissimilar to ourselves. So, if we look at the telecoms business as well as the Internet business, even if there is a downturn in sentiment on the Internet side, we feel there are other aspects of the business which support the valuation.’

This does ring true: Turner is highly realistic and, for the most part, avoids the hyperbole usually associated with over-excitable American Internet-watchers. ‘There is an absolute commitment here to not looking at this business in any different way to any other business anyone on the board has run in the past,’ he stresses. ‘It has to be capable of generating revenue and generating profitability. But at the moment, we have to focus in on getting market share, using the money we’ve raised to develop the products.’

That said, Turner does seem to exhibit a mild schizophrenia on these issues. 365 shuns the outright cash burn of other Internet companies, and he clearly thinks many of their valuations are on the toppy side; but when asked about the upside for 365’s shares, he’s predictably bullish. ‘I’d like to think that people will look at Freeserve’s valuation [around £5bn] and take a look at ours and start to make some comparisons,’ he says. 365’s near million-and-a-half users is comparable to Freeserve’s – although the market capitalisations are quite some way apart.

Turner claims that he avoids paying too much attention to 365’s share price movements – he points out that the stock, even though it’s not listed in the US, tends to move in line with the tech-heavy Nasdaq index; and that since a fair chunk of the company is in play (unlike Freeserve, for example, which is still 80% owned by Dixons), movements can be somewhat volatile.

But at the end of our meeting, he lets himself down: ‘I couldn’t resist checking out our share price today. There is a certain amount of appetite for news on the stock. And it’s up 23p. That’s not bad,’ he beams.

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