Really thorough anaylsis on Evolution's Q3. The Asia situation is definitely concerning, especially the admission that they overexteded on countermeasures and hurt legitimate users. What really stands out to me is that this cybercrime issue has been going on for over a year now with no clear solution. I agre with your take that at some point you have to question if this is fixable or just the new normal. The comparison to pirated streams is apt. That said, the free cash flow generation is still pretty solid and the balance sheet is strong. I think the shift from growth story to turnaround play is the right frame here. The market cap has come down a lot, so if they can stabilize Asia performance maybe there's value. But yeah, dead money for a while seems like the most likely scenario until we see some tangible proof they can fix these issues.
Nice summary and solid points. It didn’t quite wrap up with your plan, but it sounds like you’re on the fence and holding for now. I’m leaning that way too — smaller position for me
Great summary Wolf, thank you. I had been expecting margins to re-calibrate down as they tackled Asian headwinds and general increased operations in regulated markets, but I had been optimistic this would happen with (some) revenue growth... I worry that capex reductions & cost control to preserve margins points towards lower mgmt confidence that they can get revenue growth going again. I am then concerned this could be a case of short term margin / cash flow preservation but long term weakening of the business model. My personal view on management is that they aren't intentionally misleading, but (more worringly) are in unchartered waters and potentially out of their depth. This is a team who were used to running a growth business and they are now in very different circumstances. If the tide doesn't turn soon, I think they need to take action and bring in a different skillset who are better suited to dealing with these issues. No guarantee of success, of course. But this trend cannot be allowed to continue unabated.
Hey MB, you make some great points there especially around management. It is indeed very true that the skillset required to turn around a business is very different to that of one in high growth mode. Pulling Capex to preserve margins is ultimately a case of sacrificing long-term dominance for short-term profits or worse, they don't believe it's possible to grow. Much to reflect on and think about from this quarter with more questions than answers.
Great article Wolf. Well reasoned out. Management losing integrity is the death knell for me. I am also trying to reduce the number of positions in my portfolio this year. I can also offset the loss against capital gains this year.
Cheers Teddy, very difficult to argue with anyone who is deciding to sell. Each investor has to make their own decision based on their own portfolio and situation. Thesis is not what it was a year or so ago. Investors today are betting on a turnaround or value play.
I'm also really on the fence here with Evolution. On the one hand it seems like a lot of the bad sentiment and news is priced in. On the other hand, management seems to have simply lost control. They guided for a better H2, and this is not it. They struggle on many fronts, and it seems like there is no clear solution for a lot of their problems.
If there's one thing I do not like, is constant negativity and new reasons for bad performance. And then also the lack of guidance and clear solutions.
I think you might be right in the dead money for the next upcoming quarters, and maybe even longer. Tough!
Management has lost a lot of credibility in my view. Issues can arise outside of their control, but their response has not been good enough and their communication has not been transparent about the true state of the situation. Only now, twelve months later, are they admitting they do not know when it will be fully resolved.
It’s hard to see the stock rerating without a clear catalyst, and if anything, the situation could deteriorate further. With the dividend only paid annually, shareholders will not be compensated for waiting, aside from buybacks.
Really thorough anaylsis on Evolution's Q3. The Asia situation is definitely concerning, especially the admission that they overexteded on countermeasures and hurt legitimate users. What really stands out to me is that this cybercrime issue has been going on for over a year now with no clear solution. I agre with your take that at some point you have to question if this is fixable or just the new normal. The comparison to pirated streams is apt. That said, the free cash flow generation is still pretty solid and the balance sheet is strong. I think the shift from growth story to turnaround play is the right frame here. The market cap has come down a lot, so if they can stabilize Asia performance maybe there's value. But yeah, dead money for a while seems like the most likely scenario until we see some tangible proof they can fix these issues.
It is a difficult situation. Valuation remains undemanding but that is assuming the business doesn't deteriorate further.
Are you thinking bout selling your 4% position?
I am reevaluating the new thesis, it’s fundamentally different now.
Nice summary and solid points. It didn’t quite wrap up with your plan, but it sounds like you’re on the fence and holding for now. I’m leaning that way too — smaller position for me
Yes, I try to leave that stuff out of earnings reviews, instead focus on objective analysis and let readers draw their own conclusions.
I have not touched my existing 3.5% position but have no intention to add here either.
Great summary Wolf, thank you. I had been expecting margins to re-calibrate down as they tackled Asian headwinds and general increased operations in regulated markets, but I had been optimistic this would happen with (some) revenue growth... I worry that capex reductions & cost control to preserve margins points towards lower mgmt confidence that they can get revenue growth going again. I am then concerned this could be a case of short term margin / cash flow preservation but long term weakening of the business model. My personal view on management is that they aren't intentionally misleading, but (more worringly) are in unchartered waters and potentially out of their depth. This is a team who were used to running a growth business and they are now in very different circumstances. If the tide doesn't turn soon, I think they need to take action and bring in a different skillset who are better suited to dealing with these issues. No guarantee of success, of course. But this trend cannot be allowed to continue unabated.
Hey MB, you make some great points there especially around management. It is indeed very true that the skillset required to turn around a business is very different to that of one in high growth mode. Pulling Capex to preserve margins is ultimately a case of sacrificing long-term dominance for short-term profits or worse, they don't believe it's possible to grow. Much to reflect on and think about from this quarter with more questions than answers.
Great article Wolf. Well reasoned out. Management losing integrity is the death knell for me. I am also trying to reduce the number of positions in my portfolio this year. I can also offset the loss against capital gains this year.
Cheers Teddy, very difficult to argue with anyone who is deciding to sell. Each investor has to make their own decision based on their own portfolio and situation. Thesis is not what it was a year or so ago. Investors today are betting on a turnaround or value play.
Great summary!
I'm also really on the fence here with Evolution. On the one hand it seems like a lot of the bad sentiment and news is priced in. On the other hand, management seems to have simply lost control. They guided for a better H2, and this is not it. They struggle on many fronts, and it seems like there is no clear solution for a lot of their problems.
If there's one thing I do not like, is constant negativity and new reasons for bad performance. And then also the lack of guidance and clear solutions.
I think you might be right in the dead money for the next upcoming quarters, and maybe even longer. Tough!
Management has lost a lot of credibility in my view. Issues can arise outside of their control, but their response has not been good enough and their communication has not been transparent about the true state of the situation. Only now, twelve months later, are they admitting they do not know when it will be fully resolved.
It’s hard to see the stock rerating without a clear catalyst, and if anything, the situation could deteriorate further. With the dividend only paid annually, shareholders will not be compensated for waiting, aside from buybacks.