The year to November 2001, the first full year as a
public company, has been a successful one for Electric Word plc. Strong
increases in subscription sales, particularly in the fourth quarter, ensured
that the group achieved cash stability in the second half of the year and has
laid a firm foundation for continued growth in the future.
Electric Word plc is a provider of professional
development information, particularly for public sector managers. It operates
in three key sectors: education management, National Lottery funding and sports
health, publishing 13 specialist newsletters, as well as conferences and books.
The business model is based around the three key
principles of building renewable revenues, creating valuable content for niche
markets that can be employed across different publishing formats, and
maximising database value through cross-selling and intelligent direct
marketing. This approach typically involves building a body of subscribers
around a newsletter, which creates long-term stable revenue, and then offering
those customers additional related products and services to increase the
average spend. As a result of the focus on subscription customers, only 2% of
revenues were derived from advertising and sponsorship, as opposed to 74% from
subscriptions, 14% from conference delegate fees and 10% from consulting and
publishing services.
Whereas the previous year to November 2000 saw a
dramatic expansion of products and market sectors, through two acquisitions and
five newsletter launches, the focus of this last year has been in building
revenues and concentrating the marketing investment in the areas of greatest
return. Nevertheless, three new conferences were developed, one newsletter
launched and one acquisition completed.
The result of this activity has been a 122% increase
in turnover to £1,416,609 (this follows last year’s 67% increase to
£639,057). Strong performances in both the third and fourth quarters ensured
that the pre-tax loss for the year of £892,361 (£762,536 before
amortisation and goodwill) was ahead of market expectations and that the group
was cash-positive during the second half of the year.
Strong growth brings cash stability
Without any question, the most important achievement
of 2001 has been the concentration of resources on high-return sectors to
produce that second-half performance which delivered positive cashflows while
maintaining and accelerating the investment in growing subscription customers.
The cash receipts from new business in the fourth quarter represented a 308%
increase over the same period last year. As a result, we are pleased to report
that Electric Word has reached the critical mass of subscribers necessary for
cash stability many months earlier than planned.
There is a substantial and telling difference
between the operating loss of £762,536 (before amortisation of goodwill) and
the operating cash deficit for the year of just £189,173. This
demonstrates the extent to which cash leads profits in subscription publishing
– a function mainly of the conservative subscription revenue recognition
policy, typical for the sector, which has deferred over £700,000 of
subscription revenue to future years.
The position is accentuated by the fact that the
business is growing quickly. During the year the company invested £730,000 in
acquiring 10,000 new subscription customers: that marketing investment is fully
expensed in the year that the cash for those orders (all paid in advance) is
received, whereas the earnings are spread over the full period of the
subscription.
In future years, these new customers will still pay
for their subscriptions in advance, but without the same initial marketing
cost. The board estimates that the existing subscriptions alone will generate
cash receipts of £2.4m over the next three years.
Of the £1.2m raised in the flotation in March 2000,
£500,000 has been invested in acquisitions, and £340,000 used as working
capital, leaving £360,000 at the end of November 2001. It is estimated that the
cash low-point for the existing business has already been reached, some nine
months ahead of forecast, in August 2001. This means that the remaining cash
can be invested, at the company’s discretion, in creating new business for the
future.
The engine of this growth has been the strength of demand
for the company’s public sector management information products. Education
management in particular, and also local authority funding, have been good
sectors to be in over the past year and will continue to grow in the future.
Improvement in the provision of public sector services has become one of the
Government’s top investment priorities, and raising management and professional
standards is a key component of that change. Electric Word’s newsletters,
conferences and books provide practical support to public sector managers and
other professionals who need to develop their understanding of a fast-changing
regulatory environment while improving the efficiency of their own performance.
Electric Word’s markets have been good defensive
sectors in the recent period of economic uncertainty, but the company has also
been insulated against the knock-on effect of weakness in other markets by the
strength of the subscriptions-based business model.
Subscriptions generate high-quality, stable
earnings. Average retention rates exceed 70% across the whole business,
reaching 80% in nine of the education management titles. As a result, the
marketing investment necessary to acquire new customers brings returns over
many years at a high marginal profit. One title now boasts an average
subscription life of 5 ½ years.
As subscription revenue is spread over the full term
of the subscription, on average only half of the cash for an annual
subscription is recognised in the year in which it is received. So Electric
Word entered 2002 with over £700,000 of subscription revenue already assured
for future years. Along with expected renewal revenue, this creates a
subscription revenue base for 2002 of £1.1m before any growth from new
subscriptions – compared to total subscription revenue in 2001 of £1m.
Peak Performance publishes professional education
newsletters for sports doctors, therapists, coaches and athletes themselves.
The long-established Peak Performance newsletter was followed in the
second half of 2000 by Sports Injury Bulletin (SIB), which has been
built to a circulation of over 2,400.
The key to success in the Peak Performance division
has been the fact that 85% of subscribers pay by a continuous payment method.
This improves the reliability of renewal revenue and has meant that, following
many years of strong growth, the mature Peak Performance newsletter has
this year been used to generate cash to fund the marketing investment in newer
products (such as SIB) that generate a higher return on that investment.
The new financial year has started well for both
products, with a strong increase in new subscription orders from the internet
which has lowered the cost of acquiring new customers and broadened their
geographical base.
The most important engine of the company’s growth
this year has been the strength of demand for the company’s Optimus brand of
education management newsletters. Optimus was acquired with four titles in May
2000 on an all-share performance-based deal completed in March 2001. The two
Optimus principals joined the Electric Word team and have built the division by
launching five further education management newsletters (four in 2000) and
acquiring one (also in 2000). Since then three further titles have been
acquired as part of The Stationery Office books acquisition and merged into
similar existing Optimus titles.
The priority over the last year has been to build
subscription numbers, and this has been achieved both in the new titles (all
except one of which have now reached break-even) and, equally, in the original,
more mature titles, for which new markets have been found and prices increased.
The result has been an outstanding year, with new subscriber acquisitions
increasing tenfold between the second and fourth quarters. The first quarter of
2002 has seen this aggressive marketing investment successfully continue at the
high levels achieved in the last quarter of 2001.
The next stage of development for this division is
to increase average customer values further by cross-selling other products.
The year has already seen two significant steps in this direction: firstly, the
books acquired from The Stationery Office at the end of 2001 have generated an
immediate cash return at a high margin from Optimus’ newsletter customers and,
secondly, the Electric Word conference division was launched into the Optimus
education management sector. The result was that the PSHE & Citizenship
Update newsletter provided the foundation of a sell-out audience of 400
delegates for January’s conference on managing the implementation of the new
Citizenship curriculum although the majority of the delegates were
non-subscribers and an excellent source of further subscription sales.
Lottery Monitor, the leading authority on the distribution
of Lottery funding, is aimed primarily at Local Authority external funding
officers. Along with its sister title for schools funding and two established
conferences, Lottery Monitor was acquired in July 2000.
The division’s key objectives in 2001 were to build
the subscription base and expand the conferences. Both have been achieved: paid
subscriber numbers for this niche title have increased by 46% in 18 months, and
the conferences have expanded in both scope and type. The 5th annual
UK Lottery conference was marked by a record attendance and the fact that it
provided one of the first platforms for the new Secretary of State for Culture,
Media and Sport following the general election earlier that month. In addition,
four other conferences were successfully produced: a Scottish national event
and three new regional events.
In the current year the conference division is
planned to expand from five to 12 events, driven partly by the move in January
2002 into Optimus-branded education management conferences.
The achievement of critical mass in the last quarter
of 2001 means that the existing businesses can themselves generate the cash
required to fuel further growth in their current markets. Electric Word’s
remaining cash can therefore be invested in developing new products, both
within existing and adjacent sectors, to accelerate growth in future years.
Electric Word’s track record in growing acquired
businesses has been very encouraging. Optimus Publishing (acquired in May 2000)
has been pushed from revenues of £65,000 in 1999 to £315,000 in 2001. Turnover
in Lottery Monitor (acquired in August 2000) has grown by 23% in its first
year. The marketing, infrastructure and publishing management expertise that
the company is able to bring to acquired businesses make niche, targeted
acquisitions that fit easily within the existing product portfolio very
attractive - if they can be financed at a reasonable cost and without
excessively diluting shareholders. At the same time, the high returns on
marketing money invested in the existing business in the last year make organic
growth the first priority for Electric Word’s existing resources. Acquisitions
will become particularly important in future years when they can be financed
from the significant cashflows that are expected to result from the current
products reaching maturity.
The last year has been very good to Electric Word,
particularly because of the strength of our market sectors. But just as
important has been the hard work of our excellent staff, editors and
writers. I have great pleasure in announcing the appointment of Dominic Jacquesson
to the Board as Chief Operating Officer.
This strong team, combined with a proven, subscription-based business
model provides a solid foundation for growth and we look forward to the future
with confidence.
28 February 2002