Could Easydate have a stormy affair with investors?
"What's in a name? That which we call a rose by any other name would smell as sweet."
The quotation from Romeo and Juliet is particularly apt for online dating website operator Easydate (LSE: EZD), which is on the receiving end of legal threats over alleged trademark infringement by EasyJet owner easyGroup.
Whatever the outcome, it would not seem to be too threatening to the prospects for Easydate, which is best known to its customers through websites which have a decidedly what-you-see-is-what-you-get flavour, including BeNaughty.com, cupid.com, girlsdateforfree.com and datetheuk.com.
More importantly, perhaps, it demonstrates that Easydate, which floated on AIM in June 2010 after five years of operation, has raised its profile and deserves to be taken seriously.
I looked at Easydate when it floated and the shares were trading a few pence above its listing price of 60p. I decided against investing for reasons I will come on to later.
After the company posted strong interim results and announced a significant acquisition this month the shares raced up to 111p before falling back to their current 100p. That's another fortune I haven't made. So what now?
The Dating Game
Online dating is serious business. Easydate estimates that the global market is growing 20% pa and is worth $1bn, with Europe accounting for half. The US is more mature but Europe and emerging markets are growing fast.
A major driver is the increased acceptability of online dating. Online research agency Jupiter reckons that 8 million active singles went on first dates in Britain in 2008 of which 69% were arranged online.
The market is fragmented with one or two big operators in each region, and many smaller players. Match.com, part of Nasdaq-listed InterActiveCorp, is the biggest US player with revenues around $300m, followed by eHarmony. Meetic, listed in Paris is the biggest European player and has recently acquired Match.com's European operations.
The second tier consists of niche players, often using "white-label" website operators, marketing to specific demographics or segments of the population with common interests. TMF Singles, anybody? Easydate itself offers white-labelling, but Whitelabeldating.com claims market leadership in the UK with revenues of £20m.
Strategy
Easydate's strategy is to operate a portfolio of sites with growth coming from launching new niche sites itself, or as a white label site provider. Net flotation proceeds of £8.8m provide a war-chest for growth by acquisition.
The purchase of the Daily Mail Group's dating websites in March demonstrates one way the growth might develop. Previously Easydate was its white-label provider. Easydate acquired the UK operations of cupid.com in September.
International growth is targeted at English and Spanish speaking countries, with 20% of revenues coming from outside the UK, including Australia, India, Ireland and the US.
Results
| | Half year
2010 | Full year
2009 |
|---|
| Revenues (£'000) | 8,821 | 8,499 |
| Operating profit (£'000) | 1,986 | 988 |
| Operating margin | 22.5% | 11.6% |
| EPS (p per share) | 2.30p | 1.07p |
| Net cash from operations (£'000) | 2,071 | 2,836 |
| Net assets (£'000) | 11,311 | 1,551 |
The company substantially improved operating margins and earnings, whilst strengthening the balance sheet with flotation proceeds. It generates cash and plans to commence paying dividends.
Doubts
I am sure there is a lot of money to be made in online dating. But I had some doubts when I first looked at this business.
Revenues are driven by members' subscriptions, but the history of the Internet has been one of progression to subscription-free services paid for by advertising and sale of personal information, and the deep pockets of the Googles, Apples and Microsofts.
If social networking sites such as Facebook moved into the dating arena, the whole game could change. The rise and fall of Friends Reunited is a case in point.
Even Easydate's CEO and largest shareholder says that "the database [of customers] is the only barrier to entry" and so aggregating subscribers is the key to growth. But how, then, does being a white-label operator fit? There doesn't seem to be much to protect this business from outsiders.
Certainly consolidation is the way the industry will go. It will be cheaper to grow customers and add new niches by acquisition rather than organically. So it becomes a race to grow fastest, with losers cashing out earlier and winners getting bigger and bigger valuations -- but with the risk of the rules changing mid-game.
Easydate might just have taken an early lead by floating.
Conclusion
At 100p the shares are trading on an historic PE of 21.7. That looks expensive, but a year or two's growth at current rates would make it look good value.
If I had bought at 65p I would happily take profits now. On the fundamentals I remain uncertain. This is an Internet share which could grow rapidly, but the risks are significant.
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