AI And JourneyLab Will Redefine Future Subscription Services

Key Takeaways

• Significant investment in AI and new capabilities could drive future revenue growth and stabilize revenue streams through a subscription-based model.
  
• Strategic simplification and expansion into U.S. and European markets aim to enhance efficiency, reduce costs, and capture market share, boosting margins and revenues.
  
• Heavy reliance on major contracts and macroeconomic uncertainties threaten revenue and profitability, compounded by operational restructuring risks affecting margins and client satisfaction.

Catalysts

Provides communications services in the United Kingdom, Europe, Africa, the United States, and the Asia Pacific.

• Next 15 Group is investing significantly in artificial intelligence (AI) and new capabilities, which could drive future revenue growth as these technologies become more integrated into their offerings, especially with products like the newly developed JourneyLab. This shift towards a subscription-based model could increase earnings and stabilize revenue streams.
  
• The strategic simplification of operations, such as Project Goose, aiming to merge overlapping services and streamline agency structures, is expected to enhance operational efficiency and reduce costs, potentially leading to improved net margins.
  
• Expansion efforts into the U.S. and European markets, particularly by leveraging strong business segments like SMG, could drive increased revenues as Next 15 Group captures more market share in these regions.
  
• A focused approach on capital allocation, including potential strategic acquisitions and a more disciplined management of cash flow, is likely to enhance the financial stability of the company and possibly increase earnings per share (EPS).
  
• The ongoing review and potential overhaul of incentive structures aim to better align with client needs, which could unlock additional revenue opportunities and foster stronger client relationships, likely benefiting both revenue and net margins in the long term.

Next 15 Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Next 15 Group's revenue will decrease by 10.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.4% today to 9.9% in 3 years time.
• Analysts expect earnings to reach £51.8 million (and earnings per share of £0.47) by about April 2028, up from £39.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £61.1 million in earnings, and the most bearish expecting £40 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, up from 6.3x today. This future PE is greater than the current PE for the GB Media industry at 11.4x.
• Analysts expect the number of shares outstanding to grow by 1.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.58%, as per the Simply Wall St company report.

Next 15 Group Future Earnings Per Share Growth

Risks

• The loss of a large contract (Mach49) significantly impacted revenue, which declined by 1.4%, highlighting risks in customer dependence that could further affect future revenues if similar losses occur.
  
• Operating profit saw an 11% decline, with a decrease in operating margins to 18.9%. This suggests challenges in profit optimization, particularly within B2B tech sectors, which could influence earnings negatively if not addressed.
  
• Currency fluctuations negatively impacted financial results, indicative of potential future volatility in net revenues and profitability, due to exposure in international markets.
  
• The company faces macroeconomic uncertainties, particularly the influence of external factors like U.S. government actions, which could create unpredictability affecting revenue forecasts and overall financial stability.
  
• Restructuring efforts, including significant headcount reductions, indicate operational cost pressures that, while aiming for efficiency, also introduce short-term risks to net margins and employee morale, potentially impacting service delivery and client satisfaction.

Valuation

• The analysts have a consensus price target of £5.402 for Next 15 Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £6.6, and the most bearish reporting a price target of just £3.82.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £524.9 million, earnings will come to £51.8 million, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of £2.5, the analyst price target of £5.4 is 53.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.