RNTS Media — Update 29 July 2016

RNTS Media — Update 29 July 2016

RNTS Media

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RNTS Media

Monetising its widening reach

Trading update & forecast change

Media

29 July 2016

Price

€3.03

Market cap

€347m

Net debt (€m) at 31 December 2015

9.5

Shares in issue

114.5m

Free float

61%

Code

RNM

Primary exchange

FRA

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

58.6

44.1

14.2

Rel (local)

45.8

44.8

24.2

52-week high/low

€3.8

€1.8

Business description

RNTS Media has two complementary mobile ad tech platforms at its core: Fyber and Inneractive. Their supply-side platforms help app developers and publishers overcome the challenges of a fragmented ecosystem by consolidating a wide range of advertising demand onto one platform. It is one of the world’s largest independent groups in this space.

Next event

Interims

21 September 2016

Q3 results

23 November 2016

Analysts

Bridie Barrett

+44 (0)20 3077 5700

Fiona Orford-Williams

+44 (0)20 3077 5739

RNTS Media is a research client of Edison Investment Research Limited

RNTS Media (RNTS) has acquired four mobile ad tech companies over the last two years, creating one of Europe’s leading groups. With the platforms, systems and people now in place, the focus is now on integrating and monetising its much expanded network.

Year
end

Revenue
(€m)

EBITDA
cont (€m)

EBIT
cont (€m)

PBT
cont* (€m)

PBT
reported (€m)

EV/sales
(x)

12/14 (PF)

64.0

0.7

(1.5)

(2.0)

(10.8)

5.3

12/15

81.1

(13.7)

(15.2)

(18.6)

(40.3)

4.4

12/16e

158.8 (189**)

(13.4)

(18.6)

(24.6)

(33.2)

2.8 (2.3**)

12/17e

252.3

(4.2)

(9.8)

(17.3)

(22.5)

1.9

Note: *PBT is normalised, excluding amortisation of acquired intangibles, exceptional items, BSG and share-based payments. **Pro forma basis including 12 months of Inneractive.

Transformation into a leading mobile ad tech group

The last year has been one of considerable change at RNTS, which decided to fully focus on mobile advertising technology, exited non-core operations, and placed €150m convertible bonds to fund its ambitious expansion plan. Following the acquisition of Inneractive, which completed in July 2016, RNTS now has two complementary mobile advertising technology (ad tech) platforms at its core: Fyber and Inneractive. Together, its platforms reach approximately one billion monthly active users (MAUs) across many industry verticals. In a fragmented market, RNTS is now clearly on the map as one of Europe’s leading mobile ad tech groups.

Forecasts: Monetising its expanded reach

Having expanded its publisher reach over the last two years, RNTS is now focused on monetising an increasing share of its advertising traffic. Historically, Fyber mainly traded ‘offer wall’ formats, a small part of the overall market. However, by the end of FY16 it expects to have a near complete product range: ‘rewarded video’ was added in Q315 and additional formats are being rolled out, as is a private programmatic market place. This marks a step change in the addressable market. Management’s confidence was signalled in its 29 July trading update, where it increased pro forma revenue targets for FY16 to “over €185m” and introduced a target for FY17 revenues of “over €240m”. This growth is not yet sufficient to offset the elevated cost base as the group invests in both front and back office systems and support to enable the scaling of the exchange. However, it is now moving in the right direction. Based on current momentum, we view management’s targeted EBITDA break-even by the end of FY17 as achievable and trim our forecast EBITDA losses.

Valuation: Moving towards break-even

The EV/sales multiples of 2.3x in FY16e (12-month pro forma basis including Inneractive) and 1.9x in FY17e are in the middle of the range of recent deal multiples and listed peers. However, on EV/gross profit multiples, RNTS trades at a considerable premium to peers. Evidence that sales momentum can be maintained while managing the cost base is key to demonstrating the group’s ability to accelerate its path towards break-even and drive the equity value. The interims on 21 September should give greater insight.

Investment summary

Company description: In app mobile-centric ad tech group

RNTS’s core divisions, Fyber and Inneractive, offer mobile monetisation services to app developers and publishers, enabling them to overcome the issues presented by a very fragmented market for mobile audiences and display advertising. Fyber’s and Inneractive’s supply-side platforms (SSPs) comprise advertising mediation, an ad exchange and an ad server. The platforms give customers access to a wide range of advertising sources, yield optimisation tools and analytics to provide a real-time consolidated view of an app’s performance. Mediation is offered free of charge. In doing so, Fyber and Inneractive are securing access to publishers’ inventory, which they can then offer to advertisers on their exchange, where they charge a commission if they capture the trade. Following the acquisition of Inneractive in July 2016, the group has approximately 400 employees. RNTS’s headquarters are in Berlin and it has offices in San Francisco, New York, London and Tel Aviv.

Financials: Doubling revenues in FY16e

The mediation solutions have been very well received, and the group now reaches one billion MAUs. However, until Q315, it traded mainly offer wall formats and was consequently monetising only a fraction of this ‘mediated traffic’. By adding platform functionality, such as a private exchange (ad server), management plans to continue to widen its network of publishers, while in parallel launching additional ad formats and trading capabilities on its own exchanges in order to increase its monetisation rates. Rewarded video was launched in Q315, and early results are encouraging; Fyber’s revenue growth picked up to 56% y-o-y in Q415 and momentum was maintained in Q116 (+47%). Interstitials have been added since the year end and banner is planned for H216 with native to follow in FY17; this will give it a near complete product range, significantly expanding its addressable market. We forecast revenues to double in FY16, but with increased investment in the platform, staff and systems to support the group’s expansion, we expect an EBITDA loss similar to that reported in FY15. The placing in July of the final €50m of the company’s €150m convertible bond should provide sufficient resources to settle initial payments for acquisitions in FY16 and working capital to early 2017. However, additional funding will be required to settle potential earn-out payments and short-term working capital requirements through 2017 as the group moves towards break-even, expected by year end FY17.

Valuation: Overall scale and profitability as important as growth

Private market valuations for advertising technology companies, which average 2.1x gross sales, are higher than those of RNTS’s listed peers (c 0.9x FY16). At the current share price, RNTS’s 2.3x FY16e sales (pro forma for Inneractive) and 1.9x FY17e are in the mix. However, as the sector matures, value is increasingly being attributed to overall scale, critical in network effect businesses, and profitability. RNTS trades at a premium to peers on an EV/gross profit basis and will need to show investors ongoing evidence as to the success of new product launches, alongside tight cost control in order to drive the shares’ value.

Sensitivities: Funding, product mix, competition

RNTS is in the process of integrating acquisitions and launching an expanded product range; these initiatives may be more or less successful than we forecast. The ad tech market is growing rapidly, yet it also faces a number of unpredictable headwinds such as advertising fraud and ad blocking technologies. RNTS’s competitors include some of the largest companies in the world, with new entrants from a wide spectrum of industries. Competitive pressures may affect growth and margin assumptions. The scale and terms of any re-financing may differ from forecasts.

Company description: Mobile monetisation services

Overview: Independent mobile supply-side platforms

Over the last two years, RNTS has transformed itself, through the acquisition of four companies, into a mobile ad tech group of considerable scale. At its core are Fyber (acquired in October 2014) and Inneractive (July 2016). Their mobile supply-side platforms (SSPs) enable app developers and publishers to overcome demand and audience fragmentation challenges by providing a single platform that unifies a fragmented value chain, supporting the discoverability of content by audiences and advertising monetisation. Fyber is targeted more towards larger companies and is strong in the gaming verticals, while Inneractive, with its self-serve platform, is stronger with SMEs in non-gaming industries. Across the group, it has over 2,000 active publisher clients (eg Wooga, Glu, Social Point, DeNA) supporting the monetisation of approximately 8,000 apps via its integration with a wide range of demand sources. Together Fyber and Inneractive have an MAU reach of c 1bn, which we believe makes RNTS one of the top five SSPs in Europe and one of the top 10 in the US in terms of audience reach.

Background: Business transformation

RNTS was formed in 2012 with the remit to build a portfolio of mobile media assets. It acquired RNTS Co in 2012 (a South Korean mobile app developer, for €3m) and BSG in August 2013 (a Korean-based provider of educational content for apps for €11.8m). However, it was the acquisition of mobile ad tech platform Fyber for €150m in October 2014 that transformed the group. RNTS has since discontinued these earlier activities and is now entirely focused on developing its mobile advertising platform and services.

Over the last year, the group has aggressively embarked upon a strategy to increase its market share in the rapidly growing, but very fragmented mobile advertising market. It has placed €150m of convertible bonds (€100m in July 2015 and €50m in July 2016), the proceeds of which have been used for acquisitions and, in parallel, it has invested heavily in its platform to extend and enhance its product suite and technical capabilities.

Fyber (c €70m revenues FY15) was acquired in October 2014 for €150m. Fyber runs one of the largest mobile market places for ‘offer wall’ ad formats and has a strong position in the games vertical, for medium to large size app developers. In February 2016, it supported the monetisation of four out of the top six games in the Apple App Store with clients such as Glu (with Kendal and Kylie), Duello (with iSlash) and Fortafy Games (with Color Switch). Over the last two years, it has been developing its strategy to build market share in other fast-emerging mobile ad formats and industry verticals. Central to this has been the 2013 launch of its mediation solution, which has been very well received by publishers. It reported 411m MAUs in December 2015. Its platform was recently given a strong accolade by Facebook when it was selected as one of only three preferred mediation partners for Facebook’s native advertising. It is now in the process of launching additional ad formats and products (eg video exchange launched in H215) on its ad exchange in order to monetise this widening publisher network.

Falk Realtime (c €11m revenues FY15) was acquired in May 2015 for €10.7m. The Falk platform enables programmatic trading of advertising with real-time bidding (RTB) and ad serving capabilities. A fast-growing business in its own right (it had virtually no revenues in 2014), the acquisition has also strengthened the programmatic trading functions of Fyber as well as its ad serving capabilities. Following full platform integration in H116, it has been rebranded as Fyber RTB.

Heyzap (€12m revenues FY15) was acquired in January 2016 for an initial payment of $20m and up to $45m in total subject to some aggressive growth hurdles for the 12 months following the acquisition. Heyzap is based in San Francisco and, like Fyber, is a rapidly growing SSP. Heyzap’s 130m MAUs are being fully integrated into Fyber; its publisher clients are being migrated onto Fyber’s platform, and its entire team retained to support Fyber’s growth.

Inneractive (€43.2m revenues FY15) was acquired in July 2016 for an initial $46m in cash and up to $72m in total inclusive of potential retention payments and earn-outs over three years. It is a rapidly growing mobile SSP. Its self-serve platform has proved very popular among the SME market in a wide range of verticals (entertainment, productivity, news, messaging, social and utilities). It has built a leading RTB programmatic exchange for mobile video and native advertising, with c 630m MAUs. Inneractive will initially be run as a separate division although, by connecting its exchanges, management believes there is a considerable opportunity to generate revenue synergies. Founded in Tel Aviv in 2007, it has offices in New York, San Francisco, Beijing and London.

Mobile display advertising: A huge but complex market

Unlike mobile search or social media advertising, which are dominated by Google and Facebook respectively, the mobile display advertising market is still very fragmented. While Google and Facebook are very active in the mobile display ecosystem (Google’s AdMob, Facebook’s Audience Network and LiveRail), their platforms are part of the mix, rather than the clear leader. In this large and growing segment, the opportunity for an independent company to develop a comprehensive scaled offering is significant.

Very large and growing market for ‘in-app’ mobile advertising

Media has gone mobile; approximately half of global phone subscriptions (c 3.3bn) are now smartphones and this is forecast to almost double over the next five years. In the US, the average smartphone user spends over three hours a day on their phones, overtaking television, which until now was the most popular media channel. The vast majority of this time (90%, up from 86% in FY14) is spent in-app, rather than on the mobile web, and as advertisers shift their spend to follow audiences, for most apps, advertising has become a key source of revenues. In 2015 the share of advertising budgets devoted to mobile increased to 12% in the US. However, with c 25% of all media now consumed on a mobile, advertisers are still playing catch up, and mobile display advertising is forecast to continue to grow strongly. eMarketer estimates global mobile advertising at c $68bn in 2015 and expects this to increase to $100bn in 2016 (US c 40%, China c 20%, Europe c 25%), forecasting a 28% CAGR in mobile ad spend in the US over the next five years. Of this, mobile display, which already accounts for 50% of US mobile advertising, is the fastest-growing segment.

A complex ecosystem with many intermediaries

Mobile audiences are highly individual, using different apps at different times, on different handsets, with different data bundles and operating systems, and with different advertising preferences. This individuality is one of the key attractions of a mobile audience to advertisers, providing the possibility to run highly targeted campaigns. However, unlike mobile search, the mobile display advertising ecosystem is fragmented and complex. Only the largest brands and publishers have the resources and skills to run campaigns and connect directly. For the vast majority of companies, advertising space (‘inventory’) is bought and sold via a layer of intermediaries (Exhibit 1), which consolidate inventory (supply-side platforms, SSP), advertising demand (demand-side platforms, DSP) and data (data management platforms, DMP), which is then bought or sold via advertising networks or advertising exchanges. However, at each stage, there can be hundreds of different vendors, each specialising in certain parts of the market, or types of advertising.

Exhibit 1: Mobile display advertising value chain

Exhibit 2: App use by vertical (US)

Source: Fyber

Source: Flurry Analytics

Exhibit 1: Mobile display advertising value chain

Source: Fyber

Exhibit 2: App use by vertical (US)

Source: Flurry Analytics

Programmatic trading doubled last year and continues to take share

In the past, the process of executing a campaign was relatively manual: RFPs (requests for proposals), negotiations and manual insertion orders. However, brands and publishers are increasingly turning to software companies to help them improve ROIs, fill rates and yields. Programmatic advertising is the automated buying and selling of advertising inventory. It uses a combination of machine-based transactions, data and algorithmic matching and learning to make decisions and serve advertising in microseconds to the ‘right user’ at the ‘right time’ and at the ‘right price’. Programmatic trading of mobile advertising impressions accounted for 35% of total mobile advertising spend in the US in 2015, up from 23% in 2014, and eMarketer forecasts that it will grow 60% in 2016. Real-time bidding, a category of programmatic trading whereby ads are put up for auction one impression at a time, accounts for approximately half of all mobile programmatic spend. Programmatic trading is a leap forward in monetising audiences more efficiently. Nevertheless, fragmentation remains one of the biggest issues for the monetisation of mobile content.

Fragmentation remains a key issue for publishers and advertisers

The challenges for app developers and publishers is to first get their content noticed by consumers (discoverability), and then to find ways to efficiently monetise this audience (demand optimisation).

Discoverability: There are over three million apps available in the Apple and Google app stores, and there were over 100bn app downloads in 2015 alone (+33% y-o-y).

Monetisation: There are thousands of demand sources (brands’ own advertising teams, agencies and their trading desks, advertising networks, DSPs), each with their own campaign strategy. In order to effectively monetise its inventory, a publisher needs to be connected to as wide a pool of demand as possible. Only the largest publishers have the resources to manage their own monetisation strategies:

Multiple demand partners needed: publishers need to work with many demand partners to effectively monetise an app. Commercial terms will need to be negotiated with each contact point, for each campaign.

High levels of technical integration and maintenance costs: each demand source and intermediary has its own SDK (software development kit) requiring technical integration and ongoing maintenance.

Lack of consistent reporting tools and analytics: different demand partners will use different analytics tools and provide differing data points to publishers, making analysis of audiences across an app cumbersome.

Sub-par yield optimisation: a publisher’s goal is to sell as many impressions as possible (fill rate) at the highest price (yield optimisation). When working with several demand sources, optimising yield for each source becomes increasingly complicated.

Fyber and Inneractive: Mobile app centric SSPs

Supply-side platforms address fragmentation issues by providing a single platform to app developers and publishers, allowing them to effectively optimise and manage all their demand sources with one platform integration. Both the Fyber and Inneractive platforms comprise a mediation layer, an advertising exchange and an ad server.

Key components of the mediation monetisation platform are:

Easy access to a wide range of demand sources: The mediation layer is pre-integrated into a wide range of potential demand partners including most of the major ad networks (eg Opera Mediaworks, AppLovin, Yahoo, AdMob, FAN, Unity Ads), exchanges (eg Nexage, Flurry, Inneractive, Smaato, MoPub, as well as Fyber’s and Inneractive’s on a non-discriminatory basis), DSPs (eg Manage, Lifestreet, TubeMogul, The Trade Desk, AppNexus, Brightroll, Applovin), agencies and an increasing number of direct advertiser relationships. Through a single SDK integration, developers can quickly add demand sources from a drag and drop menu and can chose to either transact directly (private exchange) or in an open exchange.

A comprehensive range of formats and pricing models: All major ad formats are available (video, banner, interstitial, native), both rewarded and non-rewarded. All advertising pricing models are supported (CPI, CPV, CPCV, CPM, CPE).

Yield optimisation: Customers can select which demand source to work with and prioritise and use demand tools to set key criteria (eg user segmentation, ad formats, genres, geographies, CPM ad fill rate boundaries) enabling them to choose those that best align with their business. Alternatively, they can run ‘Autopilot’, a predictive algorithm that uses statistical modelling to project campaign performance based on data from each partner, optimising yield for each impression. A unified auction is run for every ad request, comparing all the integrated demand sources; the highest paying campaigns are identified and delivered to maximise yield.

Analytics: From a central dashboard, analytics tools give the developer a consolidated view of how an app is ‘performing’ across all demand sources (eg inventory fill rates, the best performing exchanges, geographies etc).

Support: Fyber’s solution engineering team (of 17) are available for troubleshooting and strategic advice.

There is no charge for the mediation solution, and while not directly revenue generating, it is strategically very important. By widening publisher reach it both secures a supply of inventory for its exchange (which it then monetises) and adds valuable audience data, which can be used to improve its exchanges targeting. The integration of the mediation layer also provides a strong technological lock in.

Ad exchange (open exchange): The ad exchange is a market place where an advert is ‘matched’ to an app’s user based on pre-defined criteria (eg user profile and a publisher’s pricing thresholds). The exchange will then serve the advert and process the respective payments. The Fyber and Inneractive exchanges are integrated into their respective mediation layers, alongside other demand sources, on a non-discriminatory basis. If the mediation layer directs traffic to their exchanges, they take a share of the value of transactions executed over the exchange, averaging approximately 30%.

Ad serving (private exchange): The ad serving offer enables publishers to directly sell inventory to an advertiser (cutting out the open exchanges) and to cross-promote to their own audiences. While lower-margin than the ad exchange, it widens Fyber’s addressable market to enterprise-scale publishers that may have in-house solutions and sales teams and have less use for a mediated solution. Fyber takes a share (c 8-9%) of transactions executed via its ad server (except for cross-promotional campaigns).

Exhibit 3: Schematic of Fyber’s monetisation platform

Source: Fyber

Strategy: Extending reach, converting traffic

Exchanges are network effect businesses; the larger the MAU base (and inventory), the more attractive the platform becomes for demand partners, and vice versa. The leading exchanges will be those that offer the most liquidity: a large supply of quality inventory paired against a wide and active pool of demand in order to support the publisher goals of maximising yield and fill rates.

Management’s strategy is to offer mediation free of charge. In doing so, it locks in a publisher’s inventory (‘mediated traffic’), which it can then try to monetise on its exchange. Mediated traffic will be offered to all of the publisher’s selected demand sources, and so Fyber or Inneractive will only be able to monetise it if they can demonstrate to the publisher that they have access to the best deals across a range of ad formats. This strategy is fairly common among SSPs. Management seeks to differentiate its platforms by ensuring the most liquidity, itself a function of publisher reach, depth of demand and diversity of format and technology. The fact that Fyber and Inneractive are among the few remaining independent mobile SSPs of scale is also a key differentiator. To remain competitive, RNTS continues to take steps to strengthen its competitive advantages in the following aspects:

Widening publisher reach: From a standing start in 2013, Fyber has scaled its mediation solution to reach 411 million MAUs at the end of December 2015. Heyzap adds a further 130m and Inneractive 630m. Assuming some overlap, the combined solutions reach over 1bn MAUs, split roughly 50-50 between games and non-games verticals. The Heyzap integration is already underway, and management plans to connect the Inneractive and Fyber exchanges during H216. The launch of the Fyber Ad Server in Q116 is a significant step forward for Fyber, enabling it to target the traffic of larger publishers not otherwise in the market for a mediation solution.

Deepen the pool of demand: From the demand side, by connecting the Inneractive exchange (which has strong ties to the DSPs) and the Fyber exchange (which is strong with the ad networks), customers on either mediation solution will be able to access an even wider demand pool. In addition, Fyber has recently launched an ‘open’ mediation platform, a self-serve function to enable smaller ad networks to connect themselves directly (monitored and approved by Fyber). The group employs 105 sales managers and during 2015 reorganised the sales teams to have a stronger geographic focus, with a greater emphasis on earning a larger share of wallet from existing clients and on winning new clients.

Comprehensive range of ad formats: so far, the increase in mediated traffic (+300% y-o-y in December 2015) has had a limited impact on revenues as the Fyber exchange, until H215, was trading mainly ‘offer wall’ formats (a more mature format that is generally not mediated). Over the course of the last year, management has been working to ensure that the Fyber exchange captures its share of other fast-emerging advertising formats. Video is seeing the fastest growth (+81% in FY15: eMarketer), and in Q315, rewarded video was launched on the Fyber exchange. From a small base, the results are encouraging; monthly revenues from video were €1m in December 2015. However, video only accounts for c 25% of all mobile advertising traded. To fully monetise its mediated traffic, Fyber is adding additional formats on its exchange. Since the year-end interstitial formats (c 35% of the market) have been added, while banner (c 20%) is planned for H216 and native (c 10%) will be launched next year.

Platform – complete technology stack, scalable platform: Through Falk Realtime, Fyber acquired real time bidding (RTB) and ad serving (sometimes referred to as private exchange) capabilities. Falk is being integrated into Fyber’s platform, which marks another step change in its addressable market; half of all mobile programmatic trading is done on an RTB basis, and half of deals are done in private, rather than open exchanges. The addition of these capabilities, as well as ‘self-serve’ should also support the overall scalability of the platform.

Independent and agnostic: Consistent MAU data is not available across the sector. However, Fyber and Inneractive see themselves as direct competitors to Google’s AdMob, Twitter’s MoPub, Facebook’s LiveRail, Yahoo’s Flurry, Supersonic and Tapjoy. Fyber and Inneractive are among the few remaining independent mobile SSPs of any scale. Agnostic to the inventory they source, their interests are fully aligned with the publishers. This can be particularly sensitive when it comes to the use of publisher data and the balance of power with regard to some of the owner-operated SSPs.

Support: Fyber’s solution engineering team are available for troubleshooting and strategic advice. While this adds to the cost base when compared to self-serve exchanges, it is an important feature for companies wishing to access larger publishers.

Exhibit 4 presents a roadmap of RNTS’s strategic priorities.

Exhibit 4: Three dimensions driving growth

Source: RNTS

Management team strengthened

RNTS’s executive board comprises the original co-founders of Fyber: Andreas Bodczek (CEO) and Janis Zech (now COO of Fyber). During 2015, additional management experience was added with the appointment of Heiner Luntz as CFO in October 2015, Henrik Basten (previously Falk) as CTO of Fyber, Jim Schinella (SVP partnerships and development at Yahoo) as head of sales and Michael Bullion as chief product officer. Luntz and Ziv Elul (CEO of Inneractive) were both appointed to the executive board at the recent AGM.

The supervisory board consists of Dirk van Daele (chairman), also CEO of Anoa Capital; Guy Dubois, acting CEO and member of the executive committee of Track Group; and Ryan Kavanaugh, CEO of Relativity Media. The board was also recently expanded with the appointment of three new independent directors. Thorsten Grenz (president of Financial Experts Association e.V), Jens Schumann (deputy chairman of the supervisory board of LOTTO24 AG), and Crid Yu (who has a wide range of executive ad tech experience).

The management team now has extensive ad tech industry experience as well as the necessary management and governance skills for a growing, publically listed group; biographies are included at the back of this report.

Forecasts: Revenues on track to double in 2016

FY15 – a year of investment and transition

FY15 results reflect both the re-positioning of the group, which took the decision to exit its early activities to focus on mobile ad technology, and Fyber’s investment as it positioned the group to scale, rolled out its mediation solution and invested in developing a more complete exchange solution.

Continuing operations (Fyber and Falk): FY15 revenues increased by 27% to €81.1m with Falk (acquired in May 2015) making a strong contribution (accounting for 66% of this growth), whereas Fyber’s growth slowed to 9% (from 50% + in FY14).

Fyber’s efforts to widen its reach into publishers are yielding clear results. Mediated traffic increased 300% between December 2014 and 2015. However, without some of the key formats on its exchange, it could not monetise most of this traffic. Meanwhile, growth in offer wall trading (the largest format on its exchange) subsided. After 50% + growth in FY14, H115 revenue growth slowed to 11% and with the majority of revenues transacted in dollars, much of this growth was currency gains. However, the launch of rewarded video on the exchange in Q315 and the phenomenal performance of Falk’s ad server reignited growth in H215, with a particularly strong end to the year; growth in Q415 was 56% (Exhibit 5 and 6). This pick up can in part be attributed to typical seasonality patterns, and while revenues declined in Q116 compared to Q415, year-on-year growth remained strong (+47% pro forma y-o-y).

Gross margins declined to 30.0% from 38.2% mainly due to mix effects with the lower-margin Falk (c 9% margin) now contributing 16% of revenues, but also due to a more competitive market for offer wall formats on the Fyber exchange. Operating expenses increased 64.3% to €43.0m as Fyber expanded its service and development teams, added managerial experience at all levels of the group and invested in ERP and support systems to enable it to more effectively scale. As a consequence, RNTS reported an EBITDA loss of €13.7m, after a small positive in FY14.

Non-recurring and discontinued items: The decision to focus on mobile advertising technology is also evident in the significant exceptional and non-recurring charges, which amounted to €8.1m in total, along with a €13.7m charge for discontinued operations resulting in a reported net loss of €38m for FY15.

Exhibit 5: Quarterly gross revenue – Fyber

Exhibit 6: Monthly gross revenue by source €m – Fyber

Source: RNTS Media

Source: RNTS Media

Exhibit 5: Quarterly gross revenue – Fyber

Source: RNTS Media

Exhibit 6: Monthly gross revenue by source €m – Fyber

Source: RNTS Media

Outlook: Positioned for a significant acceleration in growth in FY16

Q415 revenues were considerably ahead of our forecast, and Q1 momentum remained strong (+47% pro forma revenue growth). While seasonality may have had a hand in the strong pick-up in growth, it also gives a clear signal that the strategy is starting to deliver and by adding more formats and capabilities (ad serving, RTB), RNTS should be able to continue to capture a greater share of its mediated traffic. Management’s confidence in the improving revenue outlook for the group, particularly from the Fyber RTB solution, was reflected in its 29 July trading update, where it increased its FY16 revenue guidance from “over €160m” to “over €185m” on a pro forma basis and has introduced an inaugural FY17 revenue target of “more than €240m”, as well as a target of reaching EBITDA break-even by the end of FY17.

The completion date of the Inneractive acquisition was two months later than we forecast in our last note (Inneractive Acquisition Puts RNTS on the map) and we adjust our estimates to reflect this.

Net of these two effects, we increase our overall revenue forecasts in FY16 and FY17 to reflect the strong year end momentum, and clearer product road map. At the EBITDA level, the impact of our upgrade is softened due to product mix effects. Nevertheless we reduce our EBITDA loss forecast in FY16 slightly and in FY17 more considerably.

Exhibit 7: Summary forecast changes

€000s

2015e (forecast)

2015 (actual)

Difference to forecast

2016e (previous)

2016e (current)

Change to forecast

2017e (previous)

2017e (current)

Change to forecast

Revenues – total

73,485

81,076

10%

151,508

158,803

4.8%

228,654

252,325

10.4%

Gross profit

24,250

24,337

0%

45,783

43,012

(6.1%)

65,508

67,274

2.7%

Gross margin

33.0%

30.0%

30.2%

27.1%

28.6%

26.7%

EBITDA – continuing

(16,255)

(13,740)

15%*

(14,084)

(13,418)

4.7%

(7,353)

(4,177)

43.2%

Source: Edison Investment Research. Note: *Difference mainly due to FX movements.

Overall, we forecast 25% revenue growth from Fyber, 175% at Falk (400% last year from a very small base), 40% at Inneractive (100% last year) and Heyzap, driving an overall 97% rise in group revenues to €159m in FY16. On a 12-month pro forma basis, this equates to approximately €189m revenues in FY16, consistent with management’s revised targets. While gross margins at Fyber’s exchange should stabilise as it trades a larger share of higher-margin formats, we expect the strong growth of the lower-margin ad serving and RTB technology to more than offset this in the near term.

Fyber to date has focused on building a scalable platform. It is now also working on the implementation of scalable back office operations by investing in a new ERP environment. Once fully implemented, these measures are expected to significantly increase operational efficiency, and the operating cost base should not continue to grow in line with revenues. Based on the elevated Fyber cost base and the current revenue dynamic, management’s target of EBITDA break-even by the end of FY17 appears achievable; we forecast an EBITDA loss of €13.4m in FY16 and €4.2m in FY17.

Exhibit 8: Breakdown of FY15 results and forecasts

€000s

2014 PF*

2015

2016e

2017e

Fyber gross revenues

64,024

69,776

87,220

109,025

Falk gross revenues

0

11,300

31,075

46,800

Heyzap gross revenues

15,300

25,000

Inneractive gross revenues

25,208

71,500

Total gross revenues

64,024

81,076

158,803

252,325

Total revenue growth

48%

27%

96%

50%

Gross profit - Fyber

24,444

23,320

27,038

32,708

Gross profit - Falk

1,017

3,263

5,616

Gross profit - Heyzap

4,896

7,500

Gross profit - Inneractive

7,815

21,450

Total gross profit

24,444

24,337

43,012

67,274

Gross margin

38.2%

30.0%

27.1%

26.7%

Total operating expense

(23,759)

(38,077)

(56,429)

(71,450)

EBITDA – continuing operations

685

(13,740)

(13,418)

(4,177)

Depreciation and amortisation

(2,231)

(1,456)

(5,175)

(5,641)

EBIT – continuing operations

(1,546)

(15,196)

(18,592)

(9,818)

Impairment

(2,292)

(2,469)

(2,700)

(2,700)

Non recurring expenses impacting EBITDA

(6,460)

(5,550)

(5,818)

(2,500)

EBIT – reported

(10,298)

(23,215)

(27,110)

(15,018)

Interest

(495)

(3,397)

(6,042)

(7,500)

PBT – continuing

(2,041)

(18,593)

(24,634)

(17,318)

PBT – reported

(10,793)

(26,612)

(33,152)

(22,518)

Tax

215

2,348

0

0

Discontinued operations **

(9,595)

(13,670)

0

0

FX / other

342

0

0

0

Net profit – reported

(20,173)

(37,934)

(33,152)

(17,318)

Source: RNTS Media (historical data), Edison Investment Research estimates. Note: *Assumes a full 12-month contribution from Fyber. **Includes the activities of BSG (divested).

Cash flow and balance sheet: Re-financing required

In July 2015, the group placed €100m of convertible bonds. At the year end RNTS reported net debt of €9.5m, comprising €79.1m cash, net the debt element of this convertible. In July it subsequently placed the final €50m tap of the convertible bond (the €150m bonds accrue interest at 5% pa and in aggregate can be converted at €4.20 into 35.7m new shares from their date of issue - c 31% of the share capital following full conversion until their maturity in 2020). RNTS also has an $8m Silicon Valley Bank working capital facility (until September 2016).

These funds have largely been used to fund the acquisitions of Falk, Heyzap and Inneractive and to fund working capital. We forecast a free cash outflow of €27m in FY16 and €23m in FY17. The current funding should cover operational cash flow needs until early 2017, but additional resources will be required to cover the earn-out payments of up to €20m in FY17 and €10m in FY18 for the acquisitions and additional working capital needs in FY17. Negotiations to this end have started.

Shareholder structure

RNTS moved its listing to the Frankfurt Stock Exchange in 2015 from the Euro MTF (Luxembourg). The shares are in bearer form, which limits visibility on the shareholder structure of the group. However, according to the company’s annual report, 44.1% are owned indirectly by a pooling arrangement (‘Sapinda’) comprising Sapinda Holding BV, SYSK, Sapinda Invest S.a.r.l, Sapinda Asia Ltd, Centrics Holdings and Lars Windhorst – owner of all the aforementioned vehicles. Sapinda Asia also has the right to acquire a further 30.7m (26%) of the shares from the former shareholders of Fyber. Furthermore, the majority of the €150m convertible bond was taken up by Sapinda, which if converted would extend Sapinda’s majority.

Valuation

Much of the DCF value is in the terminal value, making it very sensitive to fairly small changes in assumptions. We prefer to use a revenue multiples approach to benchmark RNTS’s valuation. There is a wide listed peer set, and advertising technology has been among the most active segments of M&A in the media and technology universes over the last couple of years.

Private market valuations higher than public market valuations

According to research by Results International, there were 411 ad tech transactions globally in 2015 (2014: 477; 2013: 223), and activity remains high in Q116 (108 deals). The mobile advertising and data management segments have been particularly active with a range of new buyers entering the market; the largest deal was the $1.2bn acquisition of Opera by a Chinese consortium backed by the Golden Brick Silk Road private equity fund, a mobile games firm and an internet security company. Many of these companies remain loss making (or do not disclose profits), so revenues are the only viable valuation benchmarks. Multiples remain high (Exhibit 9), although there is a very wide range, 0.8x to 5.3x revenues, with ad networks at the lower end of the range (0.8x to 1.3x), exchanges mid-range (1.4x to 3.9x) and higher-margin DMPs at the upper end (5.0x to 5.3x).

Exhibit 9: Relevant ad tech deals over the last 12 months

Date

Acquirer

Target

Consideration ($m)

FY15 revenue
(unless stated)

Revenue multiple (x)

Summary description

May 2016

RNTS

Inneractive

$43m-$72m

$43m

1.0 to 1.7

Mobile ad exchange – SSP

Mar 2016

Yellow Pages

Juice Mobile

$35m

$25m

1.4

Mobile ad exchange – SSP

Feb 2016

Golden Brick PE fund*

Opera

$1.2bn

$616m (rev) $108m EBITDA

1.9

Ad exchange, mobile search engine

Feb 2016

Time

Viant

$26m

NA

Cross device ad network

Jan 2016

Telenor

Tapad

$360m

$57m, EBITDA loss $12m

5.3

Cross device marketing (DMP)

Jan 2016

RNTS

Heyzap

$20m-$45m

$11.8m

1.7 to 3.9

Mobile ad exchange – SSP

Dec 2015

Matomy

Optimatic

$25m + earn-out

$60m

0.4+

Mobile ad exchange (video)

Dec 2015

Naustar

Marketshare

$450m

$90m**

5.0

Cross channel DMP/analytics

Dec 2015

Perion

Undertone

$180m

$139m

1.3

Ad network/DSP

Oct 2015

Publicis

Matomy

24.9% for £51m

$271m

0.8

Cross channel ad network (DSP - SSP)

Sep 2015

Taptica

AreaOne

$17m

$9m

1.8

Facebook marketing partner

Sep 2015

AOL

Millenial

$238m

$296m***

0.8

Mobile ad network

May 2015

RNTS

Falk Realtime

$10.7m

$11m

1.0

Ad server/ RTB technology

May 2015

Verizon

AOL

$4.4bn

$2.3bn

1.9

Ad exchange (DSP/SSP)

Source: Company announcements, press, Edison Investment Research. Note: *Golden Brick/Silk Road (PE funds)/Kunlun (mobile games firm) and Qihoo (internet security). **No 2015 data – 2016 guidance. ***Edison Investment Research estimate.

Public markets valuations appear lower. The average FY16e EV/sales multiple across a group of 12 small-cap ad tech peers is 0.9x, ranging from zero to 1.9x. Interestingly, public ad tech companies’ valuations, on the whole, seem to be aligned with their current level profitability (Exhibit 10, A), sales growth (B) and overall scale (C) more than the underlying technology.

Exhibit 10: Peer multiple comparison (FY16e)

Source: Bloomberg, Edison Investment Research. Note: Prices as at 28 July 2016. Peers include: blinkx, Criteo, Crossrider, Matomy Media, Marin Software, Perion Network, Rocket Fuel, Rubicon Project, Taptica, Tremor Media, Tube Mogul, YuMe.

Product traction and cost governance key catalysts

Using gross revenues (the value of transactions over the platform) as a simple benchmark, compared to other listed ad tech groups in Europe and the US, on a pro forma basis, RNTS is now one of the larger groups in the mobile ecosystem (Exhibit 11).

Exhibit 11: RNTS is now among the larger listed ad tech groups in the US and Europe

Source: Bloomberg, Edison Investment Research estimates. Note: *Criteo approximately $1.6bn.

With the proceeds of the bond placing now deployed, management has executed on its strategy to increase its revenue run rate to over €150m, and the group now has a better overall structure and growth profile. The platforms are growing strongly and, once integrated, will have a more powerful offering for both publishers and advertisers. The group’s valuation, in terms of EV/sales multiples, has also become easier to digest. Post the Inneractive deal (and using forecast net debt in order to capture the earn-outs), RNTS is trading on EV/sales multiples of 2.3x in FY16e (12-month pro forma including Inneractive) and 1.9x in FY17e. On this basis, its valuation no longer looks anomalous when compared to other listed ad tech companies or recent deal values.

However, in terms of profitability, compared to listed peers, its rating looks exposed; RNTS’s valuation is at the top end of its peer group on an EV/gross profit basis (chart C, Exhibit 10) and is a notable outlier in light of forecast EBITDA losses (chart A, Exhibit 10). In our view, evidence that the group is moving towards profitability is key to supporting its rating. We consider the main catalysts to share price performance as:

Ongoing strong organic revenue growth across all of RNTS’s platforms. Central to this is Fyber’s ability to drive more traffic to its exchange by successfully launching new formats and services. This will also be an important factor in RNTS’s ability to protect or grow gross margins.

Successful integration of acquisitions: Linking Fyber’s and Inneractive’s exchanges could stimulate network effects; we have not explicitly forecast any revenue synergies that could flow as a result of linking the exchanges.

Slowing of growth in operating expenses: With the appropriate back office and support systems now being implemented, we expect a slowing in the increase of operating costs and more efficient use of resources. The next quarterly results will give a good indication of management’s vigilance in converting gross profits to EBITDA.

Putting in place an appropriate financing structure to fund the group to break-even.


Sensitivities

The major sensitivities for the group’s forecasts and valuation include:

Fyber, Heyzap, Falk and Inneractive are all at a fairly early stage in their development, operating in a fast-growing and rapidly changing market where they compete against companies with significant resources at their disposal. This is likely to contribute to margin pressure, but could also make it hard for Fyber to maintain a competitive level of investment.

Further cash may be needed to fund growth. The size and terms of any fund-raising or refinancing may differ from our assumptions.

Fyber is in the process of launching a private exchange, which it believes will widen its reach into larger publisher segments. However, the fees received for transactions over these exchanges are considerably lower than for open exchanges; depending on the speed of take up of this private exchange, gross margins may differ to forecast.

As well as the general competitive backdrop, gross margin is a function of the mix of advertising format traded on its exchange. Gross margins may be higher or lower than we forecast, depending on the success of particular formats.

Advertising is a cyclical and seasonal industry.

Client concentration: while RNTS has hundreds of developers and over 1,900 advertiser relationships, it is likely that a significant share of revenues comes from some key relationships.

Free float is limited and the shareholder base concentrated. The shares are in bearer form, which limits visibility on the shareholder structure of the group.

Advertising fraud: The Interactive Advertising Bureau (IAB) has estimated (February 2014) that over one-third of internet traffic was fraudulent, resulting in advertisers paying for fake impressions rather than actual views. These issues are affecting some brands’ confidence in mobile advertising, and growth rates in the industry have been affected by exchanges seeking to ‘clean up’. It has also resulted in a higher cost base as exchanges have invested in their own and third-party verification software to provide more accountability over their advertising inventory; Fyber employs three engineers dedicated to validating the quality of its inventory, however no solution is invincible.

Ad-blocking technologies can prevent the display of advertising on webpages. More than 140 million people, or 5% of the world’s online population, are estimated to use software (such as Adblock Edge and Disconnect) to prevent advertising from appearing on webpages. Previously considered mainly an issue for browsers, ad-blocking technology is now also available for in app advertising. For now the mobile industry continues to thrive. However, should ad blocking become a bigger issue, it may become a headwind to industry growth.


Exhibit 12: Financial summary

 

 

€'000s

2014

2015

2016e

2017e

Dec

 

 

Pro forma

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

64,024

81,076

158,803

252,325

Cost of Sales

(39,641)

(56,739)

(115,792)

(185,052)

Gross Profit

24,383

24,337

43,012

67,274

EBITDA - continuing

 

685

(13,740)

(13,418)

(4,177)

Operating Profit (before amort. and except.)

(1,546)

(15,196)

(18,592)

(9,818)

Intangible Amortisation

(2,292)

(2,469)

(2,700)

(2,700)

Exceptionals

(3,439)

(2,915)

(3,318)

0

Other

(3,021)

(16,305)

(2,500)

(2,500)

Operating Profit

(10,298)

(36,885)

(27,110)

(15,018)

Net Interest

(495)

(3,397)

(6,042)

(7,500)

Profit Before Tax (norm)

(2,041)

(18,593)

(24,634)

(17,318)

Profit Before Tax (FRS 3)

(10,793)

(40,282)

(33,152)

(22,518)

Tax

215

2,348

0

0

Profit After Tax (norm)

(1,484)

(16,245)

(24,634)

(17,318)

Profit After Tax (FRS 3)

(20,173)

(37,934)

(33,152)

(22,518)

Average Number of Shares Outstanding (m)

114.5

114.5

114.5

114.8

EPS - normalised (c)

 

(1.3)

(14.2)

(21.5)

(15.1)

EPS - normalised fully diluted (c)

(1.2)

(13.6)

(18.8)

(12.8)

EPS - (IFRS) (c)

 

(17.6)

(33.1)

(28.9)

(19.6)

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

38.1

30.0

27.1

26.7

EBITDA Margin (%)

1.1

-16.9

-8.4

-1.7

Operating Margin (before GW and except.) (%)

-2.4

-18.7

-11.7

-3.9

BALANCE SHEET

Fixed Assets

 

173,152

160,814

214,706

232,339

Intangible Assets

159,729

157,929

211,196

229,170

Tangible Assets

674

2,195

2,820

2,479

Investments

12,749

690

690

690

Current Assets

 

51,423

119,737

108,556

96,144

Stocks

556

408

408

408

Debtors

17,246

25,214

50,817

80,744

Cash

21,078

79,123

42,339

0

Other

12,543

14,992

14,992

14,992

Current Liabilities

 

(33,518)

(47,067)

(70,112)

(94,214)

Creditors

(24,606)

(47,067)

(70,112)

(93,308)

Short term borrowings

(8,912)

0

0

(906)

Long Term Liabilities

 

(19,042)

(89,253)

(139,253)

(139,253)

Long term borrowings

(2,869)

(88,572)

(138,572)

(138,572)

Other long term liabilities

(16,173)

(681)

(681)

(681)

Net Assets

 

 

172,015

144,231

113,897

95,016

CASH FLOW

Operating Cash Flow

 

(13,723)

(10,884)

(15,975)

(10,908)

Net Interest

N/A

(1,041)

(6,042)

(7,500)

Tax

N/A

(690)

0

0

Capex

N/A

(6,321)

(4,600)

(4,610)

Acquisitions/disposals

N/A

(10,455)

(60,167)

(20,227)

Financing

N/A

0

0

0

Dividends

N/A

0

0

0

Net Cash Flow

N/A

(29,391)

(86,784)

(43,246)

Opening net debt/(cash)

2,553

(9,297)

9,449

96,233

HP finance leases initiated

0

0

0

0

Other

(11,803)

10,645

0

0

Closing net debt/(cash)

 

(9,297)

9,449

96,233

139,478

Source: RNTS Media accounts, Edison Investment Research

Contact details

Revenue by geography

RNTS Media N.V
Johannisstrasse 20
D-10117 Berlin
Germany
+49 30 300 148 100

www.rntsmedia.com/

Contact details

RNTS Media N.V
Johannisstrasse 20
D-10117 Berlin
Germany
+49 30 300 148 100

www.rntsmedia.com/

Revenue by geography

Management team

CEO: Andreas Bodczek

COO Fyber: Janis Zech

Andreas is a co-founder of Fyber. Prior to Fyber he spent six years at Telefonica Deutschland and two years with German media group Bertelsmann. He has an MBA from Ludwig Maximilian University in Munich.

Janis was chief revenue officer and co-founder of Fyber. Prior to starting Fyber, he was an analyst with Team Europe, an incubator group that invested in Fyber along with other seed stage start-ups. He holds a degree in business administration economics from the University of Witten/Herdecke.

CEO of Inneractive: Ziv Elul

CFO: Heiner Luntz

Ziv co-founded Inneractive in 2007 and has been its CEO since. He also serves as a lieutenant colonel in Israel’s Reserves Corps and sits on the management of Israel’s branch of the Young Presidents’ Organization (YPO), a global network of young chief executives. He holds an MBA.

Heiner Luntz joined on 1 October 2015 as CFO. He has 20 years’ experience in technology companies and for the last five years was CFO of NTT Com Security, a listed company controlled by Japanese group NTT. Before this he was CFO of ND SatCom (an SES Global company) and First Data International.

Management team

CEO: Andreas Bodczek

Andreas is a co-founder of Fyber. Prior to Fyber he spent six years at Telefonica Deutschland and two years with German media group Bertelsmann. He has an MBA from Ludwig Maximilian University in Munich.

COO Fyber: Janis Zech

Janis was chief revenue officer and co-founder of Fyber. Prior to starting Fyber, he was an analyst with Team Europe, an incubator group that invested in Fyber along with other seed stage start-ups. He holds a degree in business administration economics from the University of Witten/Herdecke.

CEO of Inneractive: Ziv Elul

Ziv co-founded Inneractive in 2007 and has been its CEO since. He also serves as a lieutenant colonel in Israel’s Reserves Corps and sits on the management of Israel’s branch of the Young Presidents’ Organization (YPO), a global network of young chief executives. He holds an MBA.

CFO: Heiner Luntz

Heiner Luntz joined on 1 October 2015 as CFO. He has 20 years’ experience in technology companies and for the last five years was CFO of NTT Com Security, a listed company controlled by Japanese group NTT. Before this he was CFO of ND SatCom (an SES Global company) and First Data International.

Principal shareholders

(%)

Pooling arrangement (Sapinda Holding BV, SYSK Ltd. Sapinda Invest S.a.r.l. Sapinda Asia Ltd. Lars Windhorst, Centrics Holding S.a.r.l.)

44%

Adetra Capital

2.8%

FIL Limited

3.9%

Ryan Kavanaugh

2.4%

Companies named in this report

Twitter (TWTR), Google (GOOG), Yahoo (YHOO), Facebook (FB NSQ), blinkx (BLNX LN), Criteo (CRTO US), Crossrider (CROS LN), Matomy Media (MTMY LN), Marin Software (MRIN US), Perion Network (PERI US), Rocket Fuel (FUEL US), Rubicon Project (RUBI US), Taptica (TAP LN), Tremor Media (TRMR US), Tube Mogul (TUBE US), YuMe (YUME US)

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Marlborough Wine Estates — Update 29 July 2016

Marlborough Wine Estates

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