When you think of your list of the best places to do business, how close is Iraq to the top?
How about Greece? Would you have considered starting a new company there during the depths of the financial crisis?
Greece comes in at number 72 in the World Bank’s rankings for “ease of doing business”, a poor showing for an EU member under pressure to raise its economic game.
But Iraq is ranked 151st in the world; a couple of places below Sudan and a couple above Burkina Faso!
Not exactly the best conditions to do business, then – but there’s at least one company taking them on. It’s a mobile marketing specialist, born in Athens in 2011, that makes its money in one of the most troubled countries in the world.
It’s just listed on Aim, it’s already profitable and I think it could be an interesting long-term prospect; especially for investors who like frontier markets.
Let me introduce you.
The big problem in emerging markets
The company is C/dialogues (CDOG), and I recently met its CFO, George Karakovounis, to find out how it makes money.
The first thing he told me is that in emerging and frontier markets the mobile phone industry is mostly pre-pay only. There’s simply no option to take out a 24-month contract in return for a cheap phone. Instead customers buy a phone and a Sim card, which they load with credit.
But there’s a big problem with this system. The mobile network operators (MNOs) don’t build much of a relationship with customers, who can easily switch network by inserting a different Sim into their phones.
So how do networks build loyalty and raise the amount customers spend with them? Well, it’s a task they typically outsource to specialist marketing companies – which is where C/dialogues comes in.
So what does it do?
C/dialogues comes up with marketing campaigns on behalf of the mobile network operators.
It uses TV and print advertising, often using local celebrities, to build awareness of competitions and mobile content being offered by the network. In doing so it aims to turn pre-paid customers into longer-term subscribers, increasing both loyalty and the amount spent.
By responding to a text message, subscribers pay a few pence a day to receive things like competitions, ring tones, information – known as ‘value-added services’ – and keep in with a chance of winning this week’s star prize.
C/dialogues has developed a software platform that draws on information held by the network operator’s database. By understanding phone users’ habits and spending patterns it is able to build a profile of them and devise tailored marketing campaigns.
There’s no downside for the network. C/dialogues is responsible for funding the costs associated with the campaign, and in return it keeps about half of the revenues generated.
Let’s take a look at one of its earliest campaigns to see the impact.
With three million users, getting paid is easier than you’d think
So far, over three million users have participated in a campaign that started in late 2012. During the first quarter of this year there were over 700,000 daily paid subscriptions to this campaign on average, and daily gross revenues of $75,000.
The vast majority of sales so far have come from contracts in Iraq and Kuwait with network operator Zain.
Getting paid is much easier than you might expect operating in this part of the world. Zain and other MNOs are reliable clients who receive cash up front from their own customers; so C/dialogues doesn’t have to wait longer than a month or so to collect the money it’s owed.
Iraq might be troubled, but it’s also a big mobile phone market with 33 million connections at the end of last year. The rate of growth is strong at 15% per year in recent years. And even though Sim penetration is now close to 100% of the population, the number of connections can carry on growing as people use multiple cards.
Virtually all these users are pre-paid – and C/dialogues proves that there is a big opportunity for network operators who are able to market effectively to these customers.
The big priority now is to diversify the customer base and the countries in which C/dialogues operates.
George told me he has a strong pipeline of potential new contracts, so we should look out for announcements. The focus will remain on the Arab world of the Middle East and North Africa.
As mentioned earlier, the business is already profitable. Costs are low, with only a handful of employees, and pre-tax profits of €1.4m last year.
The company’s broker forecasts these to rise to €2.6m this year and €4.2m in 2015, putting the shares on a modest price/earnings (p/e) ratio of around five.
Some risks to consider
The risks are the obvious ones of geography, a young company and a concentrated customer base, but I also wonder why the company has come to the market.
George said it will help them to have a higher profile, which may well be the case. But only £0.55m of new cash was raised in the placing, and the free float is just under 10% of the issued equity; so the shares will be very illiquid.
I assume there is a longer-term plan to raise new money, or maybe do a deal to accelerate the rate of growth once the company is more established.
Meanwhile I’ll be interested to see if C/dialogues can prosper in this difficult part of the world.