RNTS Media Scaling up with acquisitions Forecast change Software & comp services FY14 revenue growth of 55% for RNTS Media softened in Q1 to 23% as the market moved towards rewarded video. Having built out the leading mediation platform for RV during FY14, the relaunch of this format on its ad exchange over the summer and the integration of the recent Falk Realtime acquisition should re-ignite growth from H215. RNTS plan a 150m convertible bond issue to finance acquisitions and scale its platform, which should prove a support to the current EV/Sales rating. 18 June 2015 Price 3.70 Market cap 426m Net cash ( m) at end March 2015 9 Shares in issue 115m Free float 28% Year end Revenue ( m) EBITDA continuing ( m) PBT continuing* ( m) PBT reported ( m) EV/ sales ( x) EV/ EBITDA(x) 12/13** 43.3 0.1 (1.2) (1.6) 9.6 N/A 12/14** 67.0 (0.5) (3.9) (17.5) 6.2 N/A 12/15e 90.1 (7.1) (9.9) (15.7) 4.6 N/A 12/16e 125.4 (3.5) (6.7) (10.3) 3.3 N/A Note: *PBT is normalised, excluding intangible amortisation, exceptional items and sharebased payments. **Pro forma. Code Primary exchange Secondary exchange Share price performance RNTS LUX N/A Mediation platform very well received Fyber (95% of revenues) grew by 58% FY14 as its ad exchange benefited from the network effects of its mediation solution, which it launched in FY13, and the addition of interstitials to its ad exchange. With the focus in FY14 on the expansion of the publisher network and the mediation platform, the timetable for the roll-out of product enhancements to the ad exchange (in particular rewarded video RV) has slipped. Given the market movement towards video, this delay, together with a very strong basis of comparison, resulted in a slower Q115 growth rate 16%. Product launches - growth should pick up in H2 The mediation platform has been very well received and the focus now is on monetising this extended network of publishers. The RV format will be relaunched this summer and with over 320m monthly users, it is in a strong position to capture its share of the growing market for RV, which should lead to an uptick in growth. The acquisition of Falk Realtime for 10.65m in April should also enable it to offer RTB and ad-serving capabilities on an accelerated timetable. We update estimates to reflect a softer H1, but forecast a return to market rates of growth of c 40% from H215. This may come at the expense of gross margin, which is above peers. FY14 EBITDA was above our estimate and this offsets our changes at the EBITDA level in FY15e, but we defer our forecast for EBITDA break-even from FY16e to FY17e. Valuation: Acquiring scale and technology RNTS aims to be a driving force in the consolidation of this sector and plans a 150m convertible bond issue over the coming months to finance acquisitions and working capital to bring the group s revenue run rate to 150m by year end (ie acquiring c 60m of revenues). If this can be achieved, this would imply an EV/sales multiple considerably below where RNTS currently trades, and should provide a support to its current rating, which is towards to top end of its peer group. % 1m 3m 12m Abs (2.6) 5.7 52.5 Rel (local) 1.0 10.9 40.6 52-week high/low 3.85 2.40 Business description RNTS Media s core operating division, accounting for c 95% of gross revenues, is Fyber, a mobile advertising technology company. It is mainly operational in the US and Europe and provides app developers with platform services and solutions to help them more effectively monetise audiences. Next events Convertible Summer 2015 Q2 results August 2015 Analysts Bridie Barrett +44 (0)20 3077 5700 Tom Grady +44 (0)20 3077 5767 tmt@edisongroup.com Edison profile page RNTS Media is a research client of Edison Investment Research Limited
Full-year and Q1 results Strong growth in FY14 softens in Q1 2014 was a year of transition for RNTS Media, which acquired Fyber in October 2014 and which has, over the last six months, wound down its loss-making mobile and online games publishing businesses. Given the transformational nature of this acquisition, which puts Fyber at the core of the group s strategy, we analyse results on a pro forma basis, which excludes the discontinued divisions and assumes 12 months contribution from its core operating divisions: Fyber, a global mobile appcentric supply-side advertising technology platform; and BSG, a Korea-based provider of educational content for apps. FY14 group revenues of 67m were up 55% y-o-y, slightly behind our forecast 68m, with Fyber growing by 58% (as forecast) and BSG 8% (behind forecast). On a continuing basis, EBITDA loss of 0.5m was better than our (restated) forecast loss of 1.7m mainly due to a higher gross margin from Fyber group gross margin of 40.5% was almost 5pp higher than our forecast, as a result of some one-off sales contracts (which management does not expect to repeat). Reported EBITDA losses of 7.0m included 6.5m of charges relating mainly to the acquisition of Fyber ( 3.8m) and share-based payments ( 3m). A further 10.0m of charges were incurred at the reported net profit level reflecting the losses from discontinued operations, ( 7.4m) and the amortisation of acquisition intangibles ( 2.6m). In total, therefore, reported net loss was 20.2m including this 16.5m of separately disclosed items. Against a strong basis of comparison, in Q115, y-o-y revenue growth softened to 23%, with Fyber growing by 17% and BSG by 125%. BSG tends to have lower gross margin to Fyber and consequently with its strong growth in the quarter, the gross margin fell to 34% (vs 39% in Q114). Underlying gross margins at Fyber were stable at 35%. Continuing EBITDA loss was 2.0m, with reported EBITDA loss of 3.2m. Fyber s mediation platform has been well received Fyber launched its mediation solution 1 in FY13, and in FY14 the emphasis of investment has been on enhancing and improving this platform. Version 2 includes an overhauled publisher dashboard and self-service tool, which enables user segmentation (for better targeting) and various improvements to the optimisation algorithm. The mediation solution has been very well received during 2014 it increased its publishing partners by 70% and its advertising network by 22%, taking monthly users to 295 million in December (320 million at end-march 2015). The mediation solution is a key pillar of Fyber s strategy. While it does not charge for it, by growing users and inventory, it increases liquidity on the connected ad exchanges and networks (its own and third-party), where it takes a 20-40% commission (if the transaction is via its ad exchange). The ad exchange also benefited from the introduction of new advertising formats mainly interstitials and strong growth from Asian partners. This strong revenue growth came without sacrificing gross margin, which increased temporarily as a result of some one-off sales deals from its consulting division, and was stable on an underlying basis. At the EBITDA level, investment in the platform and product set muted the operational gearing effects of this strong top line divisional EBITDA was 2.3m (from 0.7m in FY13). 1 A mediation solution enables a publisher using only one SDK integration to access a variety of different advertising partners (both Fyber and third-party). RNTS Media 18 June 2015 2
New formats should reignite growth in H215 Fyber has made considerable operational progress during FY14, particularly with respect to its mediation software. However, in Q1, Fyber s revenue growth slowed to 17%. This is attributable in part to the very strong basis of comparison (Q1 revenues increased by c80-90% y-o-y in FY14), but also slower growth for offer wall products 2 (which account for the majority of Fybers Ad exchange revenues) as the market moves towards rewarded video formats. While Fyber is considered one of the leading mediation solutions for RV, it has only recently introduced this format on its ad exchanges (which is how it monetises the mediation traffic), consequently it is not yet capturing its share of RV revenues. To put this in context - while the volume of ad impressions on Fyber s mediation platform grew by 157% between December and March 2015, the volume of ad impressions on its ad exchange increased by only 12%. The conversion rate for RV between the mediation solution and ad exchange should improve considerably in the second half of the year: RV strategy: having successfully launched its mediation solution the groups focus has now shifted to introducing new ad formats (notably RV) on its exchange to leverage this expanded network. If management can increase the conversion rate from its mediation platform to its ad exchange by even a small amount, the opportunity for revenue enhancement would be considerable. Work is underway to improve the technical play out of its RV product and to enhance the user interface which is on target for release over the summer. For cost and logistical reasons, publishers prefer to work with just one partner, as such, with the mediation solution already in place, and a solid track record with regards to launching new formats, Fyber is in a privileged position to capture its share of RV traffic on its ad exchange once the product its RV solution is relaunched. Other platform and products development: with the recent acquisition of mobile SSP Falk Realtime it has been able to accelerate, by c 18 months, the introduction of RTB, private market places, programmatic direct and ad serving capabilities, which should enable it to approach a wider customer base, and cross-sell new feature sets to existing clients. RNTS paid 10.65m for Falk with 4.75m satisfied in shares from its largest shareholder Sapinda and 5.9m in cash. Expanding its network of publishers on a global basis: in addition to building out its network in its current strongholds (the US and Europe), Fyber is pursuing the currently relatively untapped markets in Asia where it has recruited a small dedicated sales team. Since the year end, Fyber has added a further 10-15 publishers with key additions including Viggle, Geewa, Yodo1 and Miniclip. BSG (5% of group revenues) back on track in Q1 BSG revenues in FY14 fell short of expectations due to the delayed distribution of the LG Kids Pad, which missed much of the pre-christmas sales period. Revenues at 3.0m were behind our forecast 5m and, with the upfront investment in content development and the development of new B2B channels such as public schools and government-sponsored education centres (on a lower margin), EBITDA loss was reported at 1.2m. Management are striving to make good on this delay revenue growth in Q1 has picked up considerably to 125% (to 2m), having secured contracts to distribute its learning tables with Korea s largest English school, the Chung Dahm Institute. 2 Offer walls are in-app shops where publishers showcase premium offers and cross-promote other apps developed by a publisher. It is one of the key methods for getting new apps discovered (along with app stores). RNTS Media 18 June 2015 3
150m convertible planned to finance acquisitions RNTS Media s goal is to become one of the leading independent company s in the mobile advertising market, offering a complete SSP product and technology suite. As a network effect business, exchange liquidity and scale are key and in addition to the initiatives outlined above, management is actively seeking acquisition opportunities to bolster its market position (with respect to technology, reach and scale). It is targeting a 150m revenue run-rate by the year end, which suggests acquisitions representing 50-60m of new revenues. To finance these acquisitions, and to provide sufficient working capital for the group s investment phase, it plans to issue up to 150m convertible bonds with a conversion price between 3.75 and 4.2 per share representing no more than 40m new shares (34.9% of new equity). RNTS reported 8.9m in net cash at the end of Q115, which we forecast to move to a 19m net debt position by end-fy15. Ahead of the issue of the 150m convertible, it has secured two bridging facilities from its largest shareholder Sapinda: a loan (8%, June 2016 maturity) for 4.75m to finance the share component of the Falk acquisition and a 35m revolving credit facility (higher of 8% and Euribor plus 5% March 2017 maturity). Forecast changes We update our forecasts to reflect 2014 results, current trading, the recent Falk acquisition and the launch of the company s employee option scheme. We also initiate forecasts for 2017. Fyber: we reduce FY15e revenue growth to 30% (from 42%), on the assumption that Fyber s growth rate can recover from c 15% in H1 to a market rate from H2 (c 40%) following the relaunch of rewarded video and the integration of the ad-serving and RTB services from Falk. Within our forecasts, we also take account of the fact that an element of volatility in growth in the mobile advertising industry is fairly typical, particularly when delivered against a strong basis of comparison (H1 growth in FY14 was c 80% vs c 35% in H2). With the industry becoming increasingly programmatic, and a swathe of new entrants jostling for share, we are factoring in a more aggressive fall in Fyber s gross margins to bring it more rapidly into line with industry norms. In FY15e we assume a 2pp decrease in gross margin (previously we had factored in a 1pp decrease) and a further 2pp fall in FY16e and FY17e. While this should support stronger volume growth, until we see evidence of a pick-up in growth in H2, we retain our trend forecast growth rate of 40%. ESOS: the board has approved an employee share option scheme representing up to 15% of the number of shares in issue at the end of FY14 over three years. In our forecasts we assume 8% in FY15, 4% in FY16 and the balance in FY17. So far 5.2m options, representing 4.5% of the shares of RNTS Media, have been issued at an average strike price of 3.20 per share. Reporting basis: we have updated our model to be consistent with the company s disclosure of results on a continuing and discontinued basis. Whereas we previously forecast continuing EBITDA before plc costs, going forwards we will include an estimate for these costs to reflect the group s continuing EBITDA. At the reported level, we include 1.5m of costs related to the probable transfer of RNTS s listing to Frankfurt, and we also include a charge to reflect the ESOS. With the swift progress the group has made in rationalising its holding company structure and closing noncore operations, we expect losses from discontinued activities at 0.2m rather than the 1m previously forecast. The higher base effect from FY14 EBITDA means that in FY15 there is little change to our EBITDA forecast. However, with the steeper decline in gross margin in the subsequent forecast years, we now forecast EBITDA break-even in FY17 rather than FY16. RNTS Media 18 June 2015 4
Exhibit 1: Summary FY 14 results and changes to forecasts ( 000s) 2014 PF (forecast) 2014 PF (actual) Difference 2015e (previous) 2015e (current) Change to forecast 2016e (previous) 2016e (current) Change to forecast Revenues Fyber 63,886 63,900 14 90,540 82,112 (8,429) 126,756 114,956 (11,800) Revenues BSG 5,000 3,106 (1,894) 8,000 8,000 0 10,800 10,400 (400) Revenues total 68,886 67,006 (1,880) 98,540 90,112 (8,429) 137,556 125,356 (12,200) Gross profit 23,852 26,961 3,109 32,904 31,000 (1,904) 45,190 40,957 (4,233) Gross margin 34.6% 40.2% 33.4% 34.4% 32.9% 32.7% EBITDA core divisions 283 1,100 817 (5,192) (5,491) (299) 1,101 (1,937) (3,038) Estimated continuing plc costs (2,000) (1,611) 389 (2,000) (1,611) 389 (2,000) (1,611) 389 EBITDA continuing (1,717) (511) 1,206 (7,192) (7,102) 90 (899) (3,548) (2,649) D&A (425) (2,865) (2,440) (738) (2,150) (1,412) (722) (2,431) (1,709) EBIT continuing (2,142) (3,376) (1,234) (7,930) (9,252) (1,322) (1,621) (5,979) (4,358) Interest (225) (549) (324) (380) (600) (220) (177) (673) (496) Tax 0 225 225 0 0 0 PAT continuing (2,367) (3,700) (1,333) (8,310) (9,852) (1,542) (1,798) (6,652) (4,854) Total one-off charges and share-based payment (5,711) (16,473) (10,762) (1,000) (5,800) (4,800) 0 (3,600) (3,600) PAT reported (8,078) (20,173) (16,400) (9,309) (15,652) (6,344) (1,798) (10,252) (8,454) Source: Actual RNTS Media, forecasts Edison Investment Research Valuation: Corporate activity should support premium valuation Our reverse DCF suggests that the current share price discounts forecasts, followed by growth of approximately 40% pa for a further five years (followed by perpetuity growth of 2%) at a WACC of 12.5%. In discounting this premium growth rate, the share price may already be reflecting some of the synergies and scale benefits that could come from corporate activity. At scale (ie revenues over 600m), we estimate Fyber could reach EBIT margins of c 15%. We estimate that an acquisition of the size set aside by management could accelerate Fyber s trajectory to reach peak EBIT margins by two to three years. Recent deals in this sector have been carried out at EV/sales multiples of around 2x (eg Verizon s $4.4bn proposed acquisition of AOL on 1.9x FY14 gross revenues, and Millennial Media s $108m acquisition of Nexage on 1.8x revenues), although listed ad tech companies trade around 1x revenues (with the exception of Criteo on 4.2x net revenues). While trying to predict the impact of corporate activity is notoriously inaccurate, we see the successful execution of acquisitions as key to supporting RNTS s premium EV/sales rating: if, for example, RNTS can acquire 50m to 60m of revenues for 90-110m (assuming some of the funds raised would be used for working capital purposes and to refinance existing facilities), this implies an EV/sales rating of between 1.5x and 2.2x sales for the acquisitions, vs RNTS s current rating of 4.6x. On a combined basis, this would then suggest an overall group rating of 3.7x FY15 pro forma revenues. Taking a different, DCF-based approach, if we assume that management can achieve its goal of acquiring 60m of revenues at a cost of 150m, and that as a result, peak EBIT margins can be achieved three years earlier, the current share price would imply medium-term revenue growth of 20% (rather than 40% implied in our DCF model for the current shape of the group). RNTS Media 18 June 2015 5
Exhibit 2: Financial summary '000s 2013 2013 2014 2014 2015e 2016e 2017e Dec IFRS Pro-forma IFRS Pro-forma IFRS IFRS IFRS PROFIT & LOSS Revenue 780 43,308 17,907 67,006 90,112 125,356 172,379 Cost of Sales (1,147) (26,209) (9,449) (40,045) (59,111) (84,399) (118,819) Gross Profit (367) 17,099 8,458 26,961 31,000 40,957 53,560 EBITDA - continuing (717) 124 (1,771) (511) (7,102) (3,548) 2,139 Operating Profit (before amort. and except.) (718) (820) (2,812) (3,376) (9,252) (5,979) (615) Intangible Amortisation (25) (2,617) (796) (2,617) (2,600) (2,600) (2,600) Exceptionals (634) (634) (5,839) (3,439) (1,500) 0 0 Other 0 0 (7,396) (10,417) (1,700) (1,000) (500) Operating Profit (1,377) (4,071) (16,843) (19,849) (15,052) (9,579) (3,715) Net Interest (236) (342) (690) (549) (600) (673) (1,601) Profit Before Tax (norm) (954) (1,162) (3,502) (3,925) (9,852) (6,652) (2,216) Profit Before Tax (FRS 3) (1,613) (4,413) (17,533) (20,398) (15,652) (10,252) (5,316) Tax (71) (62) 715 225 0 0 0 Profit After Tax (norm) (1,025) (1,224) (2,787) (3,358) (9,852) (6,652) (2,216) Profit After Tax (FRS 3) (1,684) (4,475) (16,818) (20,173) (15,652) (10,252) (5,316) Average Number of Shares Outstanding (m) 56.5 114.5 114.5 114.5 114.5 114.5 114.5 EPS - normalised (c) (1.8) (1.1) (4.0) (2.9) (8.6) (5.8) (1.9) EPS - normalised fully diluted (c) (1.8) (1.0) (4.0) (2.8) (8.0) (5.1) (1.6) EPS - (IFRS) (c) (13.0) (8.3) (25.0) (17.6) (13.7) (9.0) (4.6) Dividend per share (p) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Gross Margin (%) -47.1 39.5 47.2 40.2 34.4 32.7 31.1 EBITDA Margin (%) -91.9 0.3-9.9-0.8-7.9-2.8 1.2 Operating Margin (before GW and except.) (%) -92.1-1.9-15.7-5.0-10.3-4.8-0.4 BALANCE SHEET Fixed Assets 16,990 162,014 173,152 173,152 179,648 179,971 180,299 Intangible Assets 16,483 157,422 159,729 159,729 166,641 166,924 167,242 Tangible Assets 180 300 674 674 258 298 308 Investments 327 4,292 12,749 12,749 12,749 12,749 12,749 Current Assets 2,518 39,727 51,423 51,423 31,615 35,423 41,435 Stocks 223 0 556 556 556 556 556 Debtors 1,360 11,742 17,246 17,246 18,516 22,324 28,336 Cash 763 26,410 21,078 21,078 0 0 0 Other 172 1,575 12,543 12,543 12,543 12,543 12,543 Current Liabilities (3,751) (19,741) (33,518) (33,518) (41,712) (57,095) (69,251) Creditors (3,366) (19,741) (24,606) (24,606) (25,316) (30,859) (38,910) Short term borrowings (385) 0 (8,912) (8,912) (16,397) (26,236) (30,342) Long Term Liabilities (3,563) (987) (19,042) (19,042) (19,042) (19,042) (19,042) Long term borrowings (2,931) (987) (2,869) (2,869) (2,869) (2,869) (2,869) Other long term liabilities (632) 0 (16,173) (16,173) (16,173) (16,173) (16,173) Net Assets 12,194 181,013 172,015 172,015 150,509 139,256 133,441 CASH FLOW Operating Cash Flow (4,716) 0 (12,985) (12,844) (14,763) (6,412) 577 Net Interest (246) N/A (355) 509 (600) (673) (1,601) Tax 74 N/A 415 (168) 0 0 0 Capex (1,776) N/A (2,308) (2,754) (2,450) (2,753) (3,082) Acquisitions/disposals (2,332) N/A (8,234) (7,606) (10,750) 0 0 Financing 10,242 N/A 34,737 34,666 0 0 0 Dividends 0 N/A 0 0 0 0 0 Net Cash Flow 1,246 N/A 11,270 11,803 (28,563) (9,839) (4,106) Opening net debt/(cash) 3,043 0 2,553 0 (9,297) 19,266 29,105 HP finance leases initiated 0 0 0 0 0 0 0 Other (756) 0 580 (11,803) 0 0 (0) Closing net debt/(cash) 2,553 2,553 (9,297) (9,297) 19,266 29,105 33,211 Source: Edison Investment Research, company reports. Note: *Pro forma reflects continuing operations only. RNTS Media 18 June 2015 6
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Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE s express written consent. Frankfurt +49 (0)69 78 8076 960 RNTS Schumannstrasse Media 34b 18 June 2015 280 High Holborn 245 Park Avenue, 39th Floor Level 25, Aurora Place Level 15, 171 Featherston St 7 60325 Frankfurt Germany London +44 (0)20 3077 5700 London, WC1V 7EE United Kingdom New York +1 646 653 7026 10167, New York US Sydney +61 (0)2 9258 1161 88 Phillip St, Sydney NSW 2000, Australia Wellington +64 (0)48 948 555 Wellington 6011 New Zealand