i-design’s entry barrier advantage

Reeling from the worsening impact of the global credit crunch and forced to focus on the bottom line like never before, major banks are examining ways of running more efficiently. This throws up opportunities aplenty for Fife-based media group i-design, whose technology enables banks and building societies to sell advertising space on their cash machines. Fast growing and an expert early mover in a market with high entry barriers, i-design is forecast to deliver healthy profitability next year.

Banks’ large networks of automated teller machines (ATMs) are expensive to run and, as consumers are loath to pay for the privilege of withdrawing cash, i-design’s unique ‘ATM:ad’ advertising solution offers a new revenue stream that can help networks pay their own way.

Designed in-house over a number of years, ATM:ad enables advertisements to be displayed while customers are ‘captive’, since they aren’t going to run away while waiting for cash. It is also a measurable solution, allowing advertisers to see how many customers they have reached. Significantly, the transaction is not delayed in any way by running the advertisement, plus an array of vouchers and offers can be added to the bottom of a receipt.

ATM:ad is offered to banks on a licence per ATM machine, with lucrative maintenance fees charged on top. Since banks are not otherwise engaged in third-party advertising, i-design also drives revenues by acting as their advertising agency, finding and booking a broad spectrum of blue-chip advertisers wishing to market their wares via cash machines. In return, i-design charges commission to the banks, while receiving a cut of the fees from the advertisers.

At the time of last July’s AIM float, which raised £3.5 million of new money, i-design already had Nationwide and HSBC on board as its first software licensees, giving it an ‘installed base’ of cash machines using its services numbering 2,100. Since then, it has signed up Alliance & Leicester in a deal adding 2,000 ATMs and, in a move signalling that a tipping point has been reached, Royal Bank of Scotland (RBS). RBS has the biggest ATM network in the UK (6,879 machines) including those of the NatWest and Ulster banks, as well as 2,500 cash points located at Tesco supermarkets. In total, ATM:ad has now been sold for 14,800 ATMs, representing 44 per cent of the UK banking sector estate.

Chief executive Ana Stewart says, ‘The Tesco machines offer a very attractive opportunity for consumer goods advertisers and we have exclusive rights to sell advertising for this.’ British Airways was the first third-party advertising client and it has been joined by the likes of Vodafone, Warner Bros and Thomson Holidays. Media buyers love ATM:ad as it is able to offer targeted advertising to a national audience – hence the likes of Nivea and Orange have recently signed repeat bookings.

For the year to September (pre-Alliance & Leicester and RBS), sales grew by 53 per cent to just over £1 million, with pre-tax losses stable at £622,000. Media sales made up the bulk of revenue at £563,000, with software and production and design sales accounting for £245,000 and £221,000 respectively.

Production and design services are of vital strategic importance, giving diminutive i-design an important edge over any prospective larger rivals.

However, competitors cannot match i-design’s ten-year history as a designer of ATM screens for most of the UK banks and building societies, which gives it advantages in terms of expertise, technology and relationships. ATM:ad’s platform independence adds yet another significant barrier to entry, as ATM manufacturers only focus
on their own machines.

With a number of banks on side and more to follow, analysts expect advertising revenues to increase significantly, while opportunities overseas add excitement. This year, house broker Arbuthnot forecasts a meaningful reduction in losses to £1.8 million from £3 million sales, ahead of profits of £800,000 from £8 million sales the following year.

On those estimates, the shares trade on a 2009 price-to-earnings multiple of less than ten times, much lower if net cash of £2.7 million is stripped out. This is undemanding given i-design’s proven ability to win over major banks and advertisers.

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