I read a post on Wexboy about Zamano (DSE:ZMNO), an Irish company that makes money through SMS advertising and that appears cheap. Excluding its cash, it trades at just 2.4x Free Cash Flow, so I immediately started digging into the company.
For details of the activist turnaround and the financial history I suggest reading the Wexboy post. What I will write here is meant to be in addition to that.
Zamano is not an easy company to understand, mainly because its information about business operations is so poor – is there something they are trying to hide? The business is split into 2 segments, Direct to Consumer and Business to Business. It also operates in a number of territories including the UK, Ireland, USA and has plans to expand into Eastern Europe. Unfortunately this is where information starts to get a bit scarce. Its D2C and B2B segments are not split out in the financial results. It has also expanded its services into web marketing but again, doesn’t give any details of its size or profitability. At a guess SMS still accounts for the majority of sales. I would also guess that B2B is still quite small as it was only recently launched in Ireland.
The UK business is the most important to understand because it accounts for the majority of revenue, but again information is scarce. In the UK it states that the majority of the business is in “web and mobile entertainment products”. Most anecdotal evidence on the internet suggests the business provides text competitions that people sign up to, where they receive premium SMS messages that charge them around £5 at a time, until they opt out.
Risk of regulation
In the 2012 Annual Report one sentence says that if a new subscription sign up policy is implemented in the UK it will have an impact on revenues. In Spain new opt in regulations where brought in in 2012, and the 2013 report doesn’t even mention Spain; I can only conclude that the business has essentially gone. It has also had to exit the US business due to regulation. But Ireland was a much better story. Despite having to exit its subscription business due to a double opt-in regulation being introduced, it still generated a gross profit of 1.2m there, compared with 1.8m the previous year.
Still the internet is rife with complaints about the company, like here. It isn’t the worst in this area though, according to this article Comreg receives 68 complaints about Zamano a month compared to the worst culprit NOBO who received 449 complaints a month.
There’s is no doubt this business is cheap and presents a good risk/reward opportunity, but I don’t feel this one is for me. The business model is very dodgy in my opinion and in many countries it has been regulated out of existence, this gives you a big clue as to how ethical it is. If it had genuine customers of its services then double opt-in would not have killed its business model. I can’t say the company sets out to scam people, and from internet testimony they seem to refund customers that request it saying they never subscribed to the services.
But at the end of the day I like investments that I can buy and forget about for a few years, and this clearly isn’t one of them. The new B2B products look promising and the ability to maintain profits in Ireland despite new regulation is also a good sign, but a lot hinges on the UK and whether it is killed there or not. Too risky for me, but I will keep an eye out to see if this ever trades below net cash.