Cupid is a sexy stock with a great growth story. In 2010 the company had revenues of £25.7m which they have grown to an estimated £78.2m for the year ending 31 December 2012. They are anticipated to grow their revenues to £111m for 2013 according to Numis’s forecasts.

The company has recently begun a share buyback program to extend to about 10% of issued capital; this is something that would normally make me very bullish about a company. However this is a stock that I just can’t bring myself to fall in love with. It is overpriced, has a poor business model, and it fails on the “sniff-test”.

 

Tables and Charts

 5 and 3 Year Charts

Company Summary

Cupid PLC operates several online dating websites many of which cater to a “niche” audience. Their subscription base is global and they claim to have 54 million ‘members’ in 58 different countries.

Their main brands are Cupid.com; Flirt.com; benaughty.com; and GirlsDateForFree.com.  From the names alone it is clear that these are sites not aiming for a more romantic clientele.

Their niche sites tend to target specialist markets such as Indian dating, mature dating, lesbian dating, single parent dating, and even “uniform dating”.

The company was founded, under the name of EasyDate, in 2005 by Bill Dobbie and Max Polyakov and listed on the AIM Market in 2010. The listing provided the company with the capital to make many acquisitions do drive growth forward. The company changed its name to Cupid PLC due to pressure applied by, EasyGroup founder, Stelios Haji-Ioannou.

In early 2012 Max Polyakov left the company to pursue other ambitions. He still holds circa 15% of the share capital. He cannot sell those shares until June 2013.

The company segments their revenue between established markets, developed markets, and emerging markets. For the year to December 2011 the breakdown was as follows:

• Established Markets – UK, Australia, New Zealand, and Ireland
• New Markets – USA, Canada, France, Italy, Spain, Germany, & any new country
• Emerging Markets – Brazil and India

The company has, however, changed geographic segmentation of their revenues. This will be more thoroughly investigated later.

Overvalued or Priced for Growth

At a share price of 197 the company trades on Price/Earnings of 27.6 and a Price/Book of 6.8;The forward Price/Earnings is only 13.6 for the estimated year to 31 Dec 2012.

Considering that that date has passed without any profit warnings then it is unlikely that the actual results will differ too much from the estimates.

However a price multiple of 13.6 is still demands earnings growth which Cupid may well fail to deliver.

Considering that there are no net tangible assets, as the majority of the company’s book value is in the form of goodwill, a failure to deliver said growth could have a significant impact on the price. Furthermore should the business model be as faulty as this analysis suggests then the true value of this business could be a fraction of the market price.

Web Analytics show worrying trends

Rank and Engagement

The success of a website can, from a high-level, be measured by the volume of traffic, and the user engagement with the website. It is often important to view both together as alone they can be misleading.

From Google trends we can see a worrying decline in the search interest for Cupid’s main sites:

However this data is based on Google searches alone. A more useful and sophisticated tool is Alexa.com as this can go into far greater depth and help us establish engagement with the website as well.

From the ‘Daily Reach Chart’ two things may be assumed. Firstly that the traffic has been decreasing since last year, but secondly that a recovery would appear to be happening (as seen from the recent spike starting in 2013). It would be not be correct to assume that there is a recovery, however, when factoring in the other charts.

The bounce rate describes the percentage of visitors who only viewed one page before leaving the site. With a bounce of circa 60% we can calculate that whilst the daily traffic might be estimated at circa 500k the actual numbers of visitors actually using the site may actually be no more that 200k.

We can then factor in the number of pages viewed (on average) by each visitor (and extracting bounced visits) establish that only 4.7 pages were viewed per visitor. We can also estimate that they spent circa 5 minutes on the site.

This is not a significant number for a dating website. POF.com has, on average 30 page views and 23mins per visitor.

These trends are repeated across all the main cupid sites. This indicates that they are significantly underperforming their peer group and have not yet achieved sufficient scale. Their competitors have significant advantages over them in terms of subscription base. This can clearly be seen in the table below:

Site	Visits	Pages / Visit	Avg. Visit Duration	Bounce Rate	Bounces
Cupid.com	530,000	2.8	00:03:12	51.7%	274,010
BeNaughty.com	1,900,000	1.9	00:02:29	71.9%	1,366,100
Flirt.com	750,000	1.8	00:01:51	75.3%	564,750
Girlsdateforfree.com	180,000	5.2	00:04:30	37.5%	67,500
UniformDating.com	19,000	3.2	00:06:07	30.2%	5,738
POF.com	3,600,000	28.6	00:22:16	6.5%	234,000
Match.com	3,500,000	14.4	00:10:01	24.0%	840,000
eHarmony.com	470,000	7.6	00:08:13	20.3%	95,410
Adultfriendfinder.com	5,500,000	5.3	00:05:29	40.5%	2,227,500
Site	Real Visits	Real Page Views	Est Time Per Real Vist	I.F.	IFV
Cupid.com	255,990	4.7	0:05:24	7.2	1,837,105
BeNaughty.com	533,900	4.3	0:05:32	7.0	3,732,913
Flirt.com	185,250	4.3	0:04:22	6.1	1,132,613
Girlsdateforfree.com	112,500	7.7	0:06:41	10.2	1,148,742
UniformDating.com	13,262	4.2	0:07:56	9.0	118,749
POF.com	3,366,000	30.5	0:23:46	38.7	130,201,410
Match.com	2,660,000	18.6	0:12:58	22.7	60,380,839
eHarmony.com	374,590	9.3	0:10:02	13.7	5,119,780
Adultfriendfinder.com	3,272,500	8.2	0:08:31	11.8	38,750,510

 

IF – Impact Factor  == Sqrt(Pages Per Visitor ^2 + Time on Site ^ 2)

IFV – IF * Total Views

The above two formulae are an attempt to condense engagement into a single formula. From the table it is clear that due to the high bounce rate and low page views that Cupid sites have that most visitors are not actually engaging with the site.

This is an important consideration when factored in with the success that other sites have as it suggests that Cupid will have a lesser success rate at converting its many members into paying subscribers, and also keeping them so as to reduce churn.

Gender Imbalance

 

The above charts from Alexa.com show that this is a site more visited by men than women, and the chart below shows this disparity in comparison with Cupid’s competitors.

The significance of the Gender imbalance will be fully discussed later, though it is obvious that a dating site that only attracts men will not be as successful as a more balanced site.

Other Webtrends

It is also interesting to note that visitors to Cupid.com seem to have a lower income than those that visit competitor’s websites. This is concerning as it could suggest further difficulties in signing up subscribers to premium services; and thus increases the vulnerability of a subscription based service with so high a churn.

We can also use Alexa to see where visitors on Cupid go. It would seem (from below) that 15% of visitors go to the affiliate section. Obviously these are not paying customers, and are unlikely so to be.

From the above it is clear that Cupid does not have the market penetration that it would first appear that it might from its claim that it has 54million members. It is not the number of people who have signed up, but those that are actively using the site that is important. Cupid has many less members like these than first imagined.

Poor Margins, High Marketing Requirement

Affiliate Marketing

On the Cupid PLC website there is a link that takes you to offers to affiliates, which is very generous.

Affiliate Marketing is the payment to ‘affiliates’ for the generation of clients. Companies will pay affiliates a percentage of sales for every referral that becomes a paying client.

Cupid are currently offering up to 90% of sales to affiliates.  This is more generous than that of their competitors as can be seen in this web article by ‘Lammo’ on dating affiliate marketing.

The effect of this is to significantly lower gross margins; Thus making the company have to work harder for every percentage of growth on the bottom line.

Low Margins

The average customer subscription period is 3-4 months; the average price paid per month is about £33pcm and it costs on average £25 to sign up a client leaving an average revenue per user of £11 (according to Edison Investment Research).

The requirement to continually sign up new clients drives the need for these generous affiliate marketing offers and makes growth an uphill struggle. The company also seem to require traditional advertising, as anyone who watches the TV channel ‘Dave’ will have seen the adverts for UniformDating.com.

The low quality margins would not necessarily be so problematic. The further difficulty that Cupid faces is that it owns so many different brands. The advertising spend on UniformDating.com does not benefit BeNaughty.com; the affiliate marketing spend to drive women onto the Flirt.com website does not assist Cupid.com in anyway either.

Thus the company will continually have a very high marketing requirement and cost, and will thus also suffer from poor margins. Therefore it will not take much fall in revenue to have a significant impact on the bottom line.

Competitors Margins

Cupid has two main competitors that are listed: Meetic and Friendfinder.  Meetic is the owner of Match.com and is more focussed on ‘romantic’ dating as opposed to FriendFinder.

Cupid has noticeably worse gross margins than its competition. This is due to the proportion of revenues that the company pays away to affiliates. Cupid also has a higher churn than its competitors. Thus Cupid receives less profit for more work than its competitors. This could well be because the model of smaller fragmented sites is not as effective as Friendfinder where they have concentrated their customers on the FriendFinder brand.

 Strategy for Growth

A Two Sided Platform

For an interesting view on two-sided platforms and the initial critical mass hurdle required please see THIS PAPER by my old economics professor David S Evans & Richard Schmalensee.

A dating website is a classic two-sided-platform. It relies on two different types of customer. Without one it will fail to attract the other. A dating site will only work if there are sufficient numbers of men and women actively using the service (with the exception of the company’s site planetsappho.com).

As highlighted by the web-analytics from Alexa.com most of Cupid’s sites have significantly more traffic from men than women. Without sufficient women using the site then it becomes less attractive for men to use. Should this problem persist for too long then the number of male customers will start to wane and there will be even less attraction for women to use the site.

As a result of this Cupid has virtually no pricing power when it comes to female subscribers. This is effectively demonstrated by the existence of one of their main sites girlsdateforfree.com.

Volume, Traffic, Subscribers, and Scale

In a note by Numis it was claimed that volume is the key. This needs to be more clearly defined. Whilst Cupid are proud to boast about the many millions of members that they have this does not equate to traffic; many members may not have used the website for over a year.

From the web-analytics it is clear that Cupid does not have traffic that anywhere nearly resembles their supposed number of members. Furthermore, of that traffic, many are not engaging much with the website.

Whilst Cupid may have 54 million members however that only translates to 490,000 paying subscribers. Because of the means by which Cupid operates this is not enough. Even though a subscriber pays for access they require their ‘target’ to also be a subscriber in order to receive a response.

Thus without sufficient scale this business will not gain the critical mass required to become sustainable.

Fragmented Sites

The issue with the fragmented nature of the Cupid network is that it hinders the company from achieving the scale required. Whilst the company does have many paying subscribers they are diffused across the various different brands and geographies. This means that they all risk failing to gain the critical mass.

When subscribing to any form of dating sites the customer will be thinking of two (or three) factors. 1. How expensive is the service, 2. What is the chance of finding someone ‘compatible’, and possibly also 3. Are there lots of ‘interesting’ pictures to make using the site a ‘pleasure’?

The chance of finding someone on a site who is compatible is very much determined by the number of users on the site. This gives the site scale and ability to reduce prices thus attracting more customers. One dating site POF.com now does not operate on a subscription model.

Cupid has driven much of its growth through acquisition of many smaller sites. This, however, is a risky strategy due to the fact that the average customer subscribes for only 3 months.

This also means that it is very difficult to establish whether an acquisition will enhance shareholder value or not. More importantly it is difficult to establish whether a website will show visitor volume trends similar to Cupid’s site BeCoquin.com

The threat of significant drop-offs are much more likely to happen to sites that fail to achieve sufficient scale to make them compelling propositions to customers.

Acquisitions

It is interesting that the £7m acquisition of Uniform Dating was funded in part by a £3.6m equity raise. Only a few months after raising equity at 200p per share the company started buying back shares at around the same price. At the same time the company is supposedly cash generative and had a net cash balance of 7.7m in July 2012; not to mention the fact that the company now has the net cash to buy shares back.

Of the £7m paid for UniformDating.com £3.4m will be paid in earnouts in the first half of 2013 subject to certain conditions. Whilst this might be a sensible method of acquisition it also will place cashflow constraints on the group for 2013.

Cupid has paid an EV/EBITDA of 10 and an EV/Sales of 2.8 for UniformDating.com. This compares to their EV/EBITDA if 12 and EV/Sales of 2.9 at time of acquisition. Despite being slightly less expensive than Cupid this is certainly not a cheap acquisition and a price that demands growth.

Considering that the site has a 20k of average daily visitors (78% being UK) a considerable amount of growth will be needed to justify this purchase.

Cash Flow

For the year to 2011 the company generated £5.6m in net profit; however only £3.4m in cash from operations. This is due to an increase in trade receivables, and a higher amount of tax paid that charged on the income statement; although there appear to be no deferred tax assets on the balance sheet. Cupid has also somehow reduced its payables on the balance sheet which seems counterintuitive to a business growing be acquisitions.

This is should be a cash generative business as subscriptions are paid in advance on a monthly basis. However their accounts receivable days are approximately 60 which means that it is taking 2 months to receive payment from their customers and yet accounts payable are 50 days.

Thus it would appear that affiliates are getting paid out before the customer has paid their subscription. Furthermore it would appear that there is a sudden increase in aging receivables. Debts passed 120 days have increased from £235k to £1,645k. This is again strange for what should be a very cash generative business.

Does not pass the sniff test…

Whilst the restating of accounts does not in itself mean anything, it can be used as a means of obfuscating ‘red-flags’ that would otherwise alarm investors. It would appear that this seems to be the case with Cupid.

Revenue Discrepancies

As previously mentioned the company segregates its revenue geographically:

• Established Markets – UK, Australia, New Zealand, and Ireland
• New Markets – USA, Canada, France, Italy, Spain, Germany, & any new country
• Emerging Markets – Brazil and India

However for the year to 2010 the company had reported them differently.

• UK
• North America
• Australia, New Zealand ,Asia and Africa
• Europe

Thus we have the 2011 accounts reporting on 2010 according to the new method, and the 2010 reporting on 2010 according to the old method. When picking these numbers apart we find something interesting – or more accurately what we fail to find is very interesting.

In the 2011 (recent) report revenues of 3,466k were reported for ‘New Territories’ in 2010. This includes USA, Canada, France, Germany, Italy, Spain and any new country that Cupid is currently entering into. Thus if we were to strip away USA (which we have reported in the old 2010 report for 2010) we should get a figure somewhere close to 736k as that is what was reported for Europe in 2010 in the old report. The disparity is 599k.

Furthermore looking at Australia, New Zealand and Ireland also seems strange. If we strip away the UK revenues from the Established Revenues we get 3812. This will give us revenues of Australia, New Zealand and Ireland. Looking at the old reporting for Australia, New Zealand, Asia, and Africa again leaves us with a discrepancy.

Furthermore when we look at visitors by country we see that the vast bulk of the traffic to Cupid.com comes from India, and the UK only represents a small percentage of traffic.

These points are especially concerning when the cash from operations (for the recent year) is significantly less than the net profits.

Related Party Transactions

The directors may not seem to take excessive salaries and their interests certainly appear to be aligned with that of shareholders (considering the large stakes that they hold). However upon closer inspection management are profiting from Cupid PLC to a far greater extent than it would initially appear.

Towards the end of the annual reports there is a section labelled Related Party Transactions.

Here there are two companies which Cupid PLC deal with at “Arms Length”: Amorix Ltd and Biebod Properties. These are companies which are solely owned by management.

Upon further inspection we can see that Amorix (now IDE Ltd) is in fact a competitor of Cupid and carve-outs were implemented in the Aim listing document.

CEO Bill Dobbie’s directorships at time of launch were extensive and listed below:

Those in bold are either competitors of cupid and/or engaged in dealings with Cupid. Biebod for instance are property companies from whom Cupid rent office space.

Amorix is a slightly more interesting company as it is now IDE Group. This company, aside from owing Cupid circa £1m is also engaged in the white labelling of dating sites; many of which are in direct competition with Cupid.

Shareprice Overhang

On 24^th October 2012 Mark Doughty (finance Director) exercised and sold 600,000 share options at 202.8p retaining a stake of 0.03% of the company. The share price subsequently dropped to under 170 over the course of the following month before rebounding on the news of the buyback.

Both Bill Dobbie and Max Polyakov have lock-in arrangements on their shares that last until 30^th June 2013. From that period they are restricted for a period to sell under an “orderly market agreement”.

Considering that between the two they own approximately 30% of the company it is likely that this will produce significant downward pressure on the share price.

Conclusion

I can understand why many fund managers and investment writers have fallen in love with this stock. However after

The fact that the revenue reporting and related party transactions make this business (and its management) highly suspicious (purely in my own opinion – I make no allegations of wrongdoing!); and thus not a business I would want to own.

However it is not just a company I would not wish to own but one which looks like a strong shorting opportunity. Despite the buyback and the positive sentiment in Investors Chronicle, Daily Mail, et alia… I do not see the share price reaching £3.

The core of my short thesis is that the business model is fundamentally flawed and that is being proven by the webtrend analysis. Thus the earnings will fall and the price will follow.

Considering that the business is priced for growth and has no tangible balance sheet it will not take much for the share price to fall a long way very quickly.

Appendix

Aubrey Brocklebank

I started my career in finance at Rathbone Brothers where I was an analyst on the Venture Capital Desk Subsequently I worked at James Brearley and Sons as an investment manager. Recently I have left specialist turnaround firm Verdes Management PLC where I worked as a Research Analyst. I intend to use this forum to contribute towards the analysis of UK companies that interest me.

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