Ottawa-based Ackroo reaping the rewards of recent M&A play

Loyalty card

It’s been a record first half for Ottawa’s Ackroo (TSX-V:AKR).

The loyalty program provider, which develops both an in-store point-of-sale and online management solution, has raised revenues to $2.2 million in the first six months of the year, an increase of 70 per cent over the same period a year earlier. It’s also the first time the firm has seen positive EBITDA in its history.

The secret to the firm’s recent success has been an acquisition in late 2017. Ackroo acquired M3 Rebel’s gift card and loyalty processing solution, KESM/LoyalMark, for an undisclosed amount, a move that immediately extended the Ottawa-based firm’s reach into more than 2,400 locations.

“It instantly made the business profitable,” says CEO Steve Levely, who took on the role in 2014.

While sizeable acquisitions can multiply both a firm’s revenues and expenses, gross margins have also never been better. Job cuts in the third quarter of 2017 drove down Ackroo’s operating loss that period by more than 80 per cent.

Rewarding market

Ackroo’s tech is found in more than 4,000 locations today, with well-known customers such as Husky Energy, Landmark Cinemas and Moxie’s Bar and Grill. It hopes to hit the 10,000 mark by 2022.

The company estimates North America’s gift card and loyalty market to be worth roughly $180 billion today. Comparing its own performance to competitors, Ackroo believes it will surpass the likes of Versapay and Mobi724 in annual revenues this year – both firms currently have a higher market cap on the TSX Venture Exchange.

“You’ll drive that extra block to go to a gas station with your rewards program.”

Ackroo has acquired six companies in the past four years. The firm’s M&A strategy has allowed it to specialize in four key segments: automotive, petroleum, hospitality and retail. Ackroo added the automotive channel with an acquisition three years ago; Levely says it was during negotiations for that deal that it met the owners behind its most recent acquisition, which opened up those valuable petroleum channels.

“You’ll drive that extra block to go to a gas station with your rewards program,” he says, a testament to that segment’s strength in the loyalty market.

While retail might come to the average consumer’s mind when thinking about rewards programs, Levely says it’s currently the company’s smallest segment. He notes that there’s room for expansion in this space, highlighting subsectors such as health and wellness as future targets for the firm.

“There’s a lot of pieces in retail ... so there’s probably legs to go into retail in the future,” he says.

Analytic opportunities

Adding enterprise clients in the petroleum and automotive spaces widens the reach of what Ackroo can do, which in turn drives more revenue. While the segmented business model and M&A strategy are paying dividends, Levely is most excited about what the firm is doing in software.

“The real meat on the bone is our platform,” Levely says.

Ackroo’s tech has accrued a wealth of merchant data over the years. Now, the firm has a chance to make those insights work for its customers.

Rather than just report on the success or failure of promotional campaigns, machine learning algorithms can provide clients with suggestions on how or when to roll out an email marketing push to optimize returns.

On top of these opportunities in analytics, the open nature of Ackroo’s platform makes it attractive to enterprise clients that often have entrenched solutions. Rather than requiring a costly overhaul of a client’s existing loyalty programs, many of the tools already on the market plug in to Ackroo’s solution.

The higher cost to switch also makes customers here “stickier,” Levely says – Ackroo has a customer attrition rate of roughly four per cent today, which he assigns to the mom-and-pop shops that have a higher chance to go out of business.

Ackroo is aiming for revenues of $5 million in fiscal 2018, roughly double what it took home in 2017. Within the next five years, it’s hoping to get that figure up to $10 million.

Acquisitions will continue to play a key part of that, with one or two more expected each year, a slightly reduced pace than before. Levely expects the division between organic and inorganic growth to be around 50-50 in the coming years.

While it may not be anticipating the same level of deal-making in the short-term, the company feels its M&A strategy is paying off. Like stamps on a loyalty card, each of Ackroo’s acquisitions to-date have set it up to cash in on a sizeable market.