SITO Mobile A strong end to a transformational year Forecast change Software & comp services Fiscal 2014 finished on a high note for SITO Mobile with quarterly revenues up 43% y-o-y and all divisions performing well. The re-financing announced in October leaves the group adequately funded during our forecast period, which we extend to 2016. The shares are trading at an EV/sales discount to ad-tech peers despite offering higher gross margins than many, being EBITDA positive and the option value that the patent strategy brings. 17 December 2014 Price US$0.23 Market cap US$35m Net debt ($m) at end 2014 3.7 Shares in issue 153m Free float 69% Year end Revenue ($m) EBITDA ($m) PBT* ($m) EPS* (c) EV/EBITDA (x) EV/sales (x) 09/13 7.8 (1.1) (3.0) (2.2) N/A 5.0 09/14 9.9 0.0 (1.4) (1.0) 894.5 3.9 09/15e 13.5 0.7 (1.5) (1.0) 55.4 2.9 09/16e 16.5 1.6 (0.6) (0.4) 24.4 2.4 Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. Code Primary exchange Secondary exchange Share price performance SITO OTCBB N/A Transformational year ends on a high note SITO Mobile has made considerable progress in developing new product lines during 2014 and this is becoming evident in results, with SITO ending the year on a high note. Q4 revenues increased 43% (or 28% organic growth) with strong growth across all its divisions. New notification programmes drove 12% y-o-y growth in messaging revenues, the new ad-tech platform contributed 27% growth (from nothing the prior year) and a full quarter s contribution from the VideoStar patent licensing deal contributed 4% to growth. Gross margins remained firm, and for the first time SITO was EBITDA positive on a cash basis across the entire group. Pipeline looks promising The outlook is promising going into 2015. Management plans to double the direct sales force, and has already negotiated two new channel partners for its mobile ad platform, which should start to contribute from the next quarter. In messaging there could be some pricing pressure, however we expect to see strong volume growth as new programmes start to contribute. While there is no visibility on progress being made from the IP division, the Fortress deal could add impetus here. Despite the additional headcount, with the strong growth in the mobile platform, we leave our forecast for EBITDA broadly unchanged, but reduce our net profit assumption to reflect the cost of the Fortress re-financing, and initiate forecasts for 2016. Valuation: Out of line with peers Although still very dependent on its largest client, following the re-financing, investment risk has reduced somewhat and the group is starting to have a more balanced divisional structure. The rating does not yet reflect this transformation or the strong revenue growth forecast. SITO trades on an FY15 EV/sales multiple of 2.9x. With its mobile ad-tech exposure (31% 2015e sales), and the option value that its patent strategy could deliver, the share price appears out of line; direct mobile location based ad-tech peers trade on 5-6x sales. % 1m 3m 12m Abs (11.1) (37.3) (56.0) Rel (local) (8.1) (36.4) (60.1) 52-week high/low US$0.695 US$0.23 Business description SITO Mobile is a mobile messaging, marketing and advertising technology company with a focus on location-based services. With 27 patents and several in application, it also pursues a strategy of IP exploitation. Next events Q1 results January 2015 Analysts Bridie Barrett +44 (0)20 3077 5700 Dan Ridsdale +44 (0)20 3077 5729 tmt@edisongroup.com Edison profile page SITO Mobile is a research client of Edison Investment Research Limited
Full year results and outlook SITO ended the year on a high note 2014 has been a transformational year for SITO. The last year has seen a change of executive management: Jerry Hug took over as CEO in August, Kurt Streams joined as CFO in December 2013, and Betsy Bernard was appointed to the board as lead director in July 2014. The group is EBITDA positive (on a cash basis) and the Fortress deal (outlined below) leaves the group in a financially stronger position on our estimates it is fully funded in the forecast period to 2016 (including $8.5m repayment of facilities). The launch of the location-based advertising (LBA) adtech platform (FollowMe) and the subsequent acquisition of DoubleVision in July 2014 has successfully re-oriented the group into the fast-growth mobile advertising segment. In line with its strategy to become a leading mobile marketing and media group, in September the company changed its name to SITO Mobile from Single Touch Systems. This transformation is starting to show in reported results. Q4 revenues increased 43% y-o-y (28% organic growth) with gross margins of 62% (59% last year). Excluding stock-based compensation and executive termination expenses, the group was EBITDA positive. Mobile advertising technology platform: From a standing start early in the year, the advertising technology platform has grown to account for $557k of revenues in Q4 (19% of total Q4 revenues). The DoubleVision acquisition accounted for c 57% of this $557k, contributing 15% of the 43% y-o-y growth, with FollowMe accounting for 11% of y-o-y growth. This implies organic sequential quarterly growth of around 80% for FollowMe. It is conducting campaigns for high-profile brands including Disney, VW, Samsung and UMG and management indicates the repeat campaigns accounts for c 50% of its business, a good signal of the product gaining traction. Messaging: After a subdued preceding six months, the messaging service, which still accounts for the bulk of revenues, also showed a return to growth of 12%, driven by the initiation of new programmes by SITO s largest client, Wal-Mart. The e-receipts programme has now been extended to 4,500 stores and SITO also initiated its first non-messaging marketing support for this customer. Patent monetisation: Q4 was the first full quarter of the VideoStar licence deal with a major US broadcaster (announced in April), which contributed $94k in the quarter and will continue to do so over the next three years. For the full year revenues were $9.9m, up 27% y-o-y, and gross margins of 64% compare favourably to the 57% reported last year, benefiting from the 100% margins on licensing and a higher gross margin for the advertising technology platform. The re-financing was carried out just after the year end period and is not captured in the balance sheet, which reported net debt of $3.7m, although after the completion of the financing, management stated that the current gross cash position is $6m. Outlook: All three divisions start the new year in good shape Operationally the group appears in good shape and the prospects across all three divisions are looking strong going into the new financial year. Messaging (66% FY15 forecast sales): In the messaging business management indicated that pricing has been solid (messaging gross margin of 60% in the year, compared to 57% in 2013). While we see the potential for pricing pressure on the pharmacy service at its largest client, the addition of new programmes in particular e-receipts and marketing messaging services should offset the effect of this. It has started some marketing support for its largest client in the last quarter when it launched a national mobile messaging campaign for the Saving catcher product (minimum SITO Mobile 17 December 2014 2
guarantees). The e-receipts programme has now been expanded to all 4,500 stores, which is generating message volume in the tens of thousands daily. While this is small compared to the pharmacy service (can be a million a day), with a footfall of over 20 million shoppers per day at Walmart, this service has considerable potential. Furthermore, new programmes are being introduced across a number of other national retailers, which are not yet reflected in results but should start to contribute from fiscal Q115 - national grocery retailer Fresh Direct (New Yorkfocused online grocer) and national health and wellness retailer the Vitamin Shoppe with 800 stores. Advertising technology (31% FY15 forecast sales): The DoubleVision and the FollowMe platforms have been integrated and together programmatically deliver video, display and rich media location-based advertising (LBA). SITO is building out both its direct and indirect sales capabilities and deepening the product portfolio. In September it launched a verified walk in product that provides attribution based on foot traffic resulting from a mobile campaign. It is also working on enhancements to its behavioural targeting and analytics for post campaign transparency. It increased the direct sales force by three to seven during the year and management plans to double it again by the end of 2015. Two new channel partners have been added: The Health Media Network (healthcare) and Progressive Grocer (food retail), and it plans to add more partners in different verticals in the coming year. It is also offering a white-label LBA solution to Stagnito Business Information (a provider of retail industry insights and advertising solutions); it has received over 30 sales references from this partner, which should start to contribute from fiscal Q115. Patent monetisation (3% FY15 forecast sales, 100% gross margin): The nature of this business means there is little visibility between deals of progress made behind the scenes. However, SITO has a strong team driving its strategy (Peter Holden and Jon Sandleman joined last year) and the financing provided by Fortress comes from a division in the fund that specialises in IP strategies. Of SITO s patent portfolio, the current emphasis is on the patents that deal with the system and method for streaming media. This is an immense market where SITO reported its first successes during 2014 a one-off $750k from its settlement with Zoove and an ongoing annual $372k for three years from the Videostar deal. Re-financing and revenue share package worth $10m On 3 October, SITO announced it had sold a secure note with a principal amount of $10m to Fortress Investment Group, a global investment management group with c $64bn under management, and significant expertise in IP monetisation. This has enabled it to retire its $4m of convertible debentures (which were due in September and October) and gives the group more financial flexibility to execute its strategy to drive growth through product development and salesforce expansion. It will also enable to group to continue to invest the resources needed to extract value from its patent portfolio. The notes were issued with a $1m discount (amortised over 42 months). In addition, Fortress has taken a $1m equity stake (issue 2.6m shares at $0.38 per share). Net of fees ($150k up front and $350k on termination), SITO has received $9.85m in funding. The $10m notes are repayable in monthly instalments of $333k from October 2015 over the remaining term of the debt. The interest cost comprises a cash element of 7% above Libor plus a PIK element of 2% of accrued in equity. In the event that SITO secures additional patent monetisation revenues, 85% of these revenues must be devoted to the repayment of the interest and debt. In addition to the interest, Fortress will be entitled to receive 50% of new patent monetisation revenues (up to a maximum of $5m prior to 31 March 2018 and $7.5m thereafter). While this is a fairly expensive refinancing package (effective annual interest cost of c 13% all-in ), the strategic nature of the deal should help SITO accelerate its IP monetisation efforts. SITO Mobile 17 December 2014 3
Forecast revisions Following the full year results and refinancing, we are updating our forecasts and initiating forecasts for 2016. For 2015, we broadly retain our revenue and EBITDA forecasts, however at the earnings level the impact of the amortisation of the cash and PIK interest along with the fees leads us to reduce our EPS forecasts despite the cancellation of 7.9m convertible shares. Exhibit 1: Summary forecast changes $000s FY14 FY15e FY16e Forecast Actual Old New New Revenues 9,587 9,872 13,491 13,497 16,462 Gross profit 6,040 6,282 8,388 8,532 10,371 EBITDA (1,349) 43 690 700 1,592 EBITDA excluding one off charges 151 1,081 690 700 1,592 EBIT (2,030) (686) (113) (249) 541 EPS (c) (1.9) (1.0) (0.4) (1.0) (0.4) Source: SITO Mobile accounts, Edison Investment Research estimates Valuation The group now has the financial flexibility to execute its strategy to drive growth through product development and sales-force expansion. It also enables the group to continue to invest the resources needed to extract value from its patent portfolio. Following this refinancing, investment risk has reduced. At the time of the full year results call, management said it had $6m of cash, and on our forecasts it is adequately funded over our twoyear forecast period; we forecast net debt peaking at $5m and gross cash reaching a trough at $0.5m in 2016. All divisions are growing, notably the advertising platform, and it is making progress in reducing dependency on its largest client (although it too is growing organically). The shares trade on a FY15e EV/sales multiple of 2.9x. When compared to other ad-tech companies with similar gross margin profiles, SITO now trades at a significant discount (eg VMob 5.7x, Marketo 6.0x). This is despite being EBITDA positive and the option value that the patent portfolio potentially brings. If we assume a low-end ad tech sales multiple of 2x for the reminder notification business (which we forecast to grow at 9% in 2015) and 5.5x for the ad tech platform (in line with other mobile ad tech companies growing at over 50% and generating similar gross margins), then the current share price implies no value is being attributed to the patents; given the strategic focus on this division following the Fortress investment and recruits, this seems anomalous. SITO Mobile 17 December 2014 4
Exhibit 2: Financial summary $000s 2012 2013 2014 2015e 2016e Year end September IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 6,347 7,785 9,872 13,497 16,462 Cost of Sales (2,907) (3,328) (3,590) (4,966) (6,090) Gross Profit 3,440 4,456 6,282 8,532 10,371 EBITDA (1,574) (1,073) 43 700 1,592 Operating Profit (before amort. and except.) (2,264) (1,736) (686) (249) 541 Intangible Amortisation 0 0 0 0 0 Exceptionals 0 0 0 0 0 Share based payments (503) (2,243) (3,075) (396) (459) Operating Profit (2,767) (3,979) (3,761) (645) 82 Net Interest (488) (1,271) (749) (1,251) (1,097) Profit Before Tax (norm) (2,753) (3,007) (1,435) (1,500) (556) Profit Before Tax (FRS 3) (3,255) (5,249) (4,511) (1,896) (1,015) Tax 0 0 0 0 0 Profit After Tax (norm) (2,753) (3,007) (1,435) (1,500) (556) Profit After Tax (FRS 3) (3,255) (5,249) (4,511) (1,896) (1,015) Average Number of Shares Outstanding (m) 132.5 137.2 150.7 156.3 156.7 EPS - normalised (c) (2.1) (2.2) (1.0) (1.0) (0.4) EPS - normalised and fully diluted (c) (2.1) (2.2) (1.0) (1.0) (0.4) EPS - (IFRS) (c) (2.5) (3.8) (3.0) (1.2) (0.6) Dividend per share (c) 0.0 0.0 0.0 0.0 0.0 Gross Margin (%) 54.2 57.2 63.6 63.2 63.0 EBITDA Margin (%) -24.8-13.8 0.4 5.2 9.7 Operating Margin (before GW and except.) (%) -35.7-22.3-6.9-1.8 3.3 BALANCE SHEET Fixed Assets 1,958 2,650 6,246 7,342 7,383 Intangible Assets 1,729 2,411 6,010 7,117 7,154 Tangible Assets 228 239 237 224 229 Investments 0 0 0 0 0 Current Assets 3,612 3,873 3,860 8,478 5,064 Stocks 0 0 0 0 0 Debtors 1,215 2,661 3,127 3,948 4,482 Cash 2,158 1,147 620 4,426 489 Other 239 65 113 103 93 Current Liabilities (1,423) (4,929) (7,229) (3,008) (3,389) Creditors (1,129) (1,634) (2,921) (3,008) (3,389) Short term borrowings (294) (3,295) (4,308) 0 0 Long Term Liabilities (3,238) (470) (13) (9,279) (5,707) Long term borrowings (3,213) (470) (13) (9,286) (5,571) Other long term liabilities (25) 0 0 7 (136) Net Assets 909 1,124 2,865 3,533 3,351 CASH FLOW Operating Cash Flow (2,073) (789) (970) 165 1,664 Net Interest (11) (263) 0 (640) (520) Tax 0 (0) 0 0 0 Capex (615) (547) (860) (1,045) (1,092) Acquisitions/disposals 0 0 (390) 0 0 Financing 307 244 1,693 997 10 Other 0 0 0 0 0 Net Cash Flow (2,392) (1,356) (527) (522) 62 Opening net debt/(cash) 2,983 1,349 2,618 3,700 4,859 Net debt financing/ Amortisation of interest 0 (556) (637) (286) Other 4,026 88 0 0 0 Closing net debt/(cash) 1,349 2,618 3,700 4,859 5,083 Source: SITO Mobile accounts, Edison Investment Research estimates SITO Mobile 17 December 2014 5
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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 SITO Schumannstrasse Mobile 34b 17 December 280 High 2014 Holborn 245 Park Avenue, 39th Floor Level 25, Aurora Place Level 15, 171 Featherston St 6 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