Final Project (Security Analysis Class)
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Millennial Media, a mobile advertising network, faces increasing competitive threats from publishers, making a sell recommendation prudent as ambitious growth targets are already reflected in its stock price. The company has shown significant international revenue growth but struggles with high operational expenses, leading to a negative outlook for profitability improvements. Current market conditions and management focus on revenue growth, rather than operational efficiency, raise concerns about future financial stability, with a target price set at $3.14.
Final Project (Security Analysis Class)
- 1. 1 Millennial Media (MM) Security Analysis 04/09/2014 Ivan Titkov, Sucharita Sridhar, Pavel Fadeev, Ekaterina Kosheleva
- 2. 2 Recommendation: SELL Rising threat from publishers who are increasingly competing in network business and will likely steal market share Ambitious operating margin expansion of 20% is already priced into the current stock price Combination of management’s track record and formal incentives does not support the operational efficiency turnaround scenario $6.61 Current price $3.14 (-53%) Target price
- 3. 3 Millennial Media is #2 Mobile Advertising Network with Holistic Value Proposition Across the Value Chain Brief history • Established in 2006, receiving total funding of USD 65 mln in 2006-2011 • Went public in March 2012, selling 14% of shares for USD 132.6 mln ($13 per share), which implied total company valuation of ~$1 bln • Changed CEO in 2014, as the founder/ex-CEO has left the company Operations • Millennial Media sells advertising space within mobile websites and applications to advertising companies: • Value proposition: – Serves customers on cross-platform basis (iOS and Android) – Tailors ad content to user profiles – Provides plug-n-play development kits • # 2 player globally, with 14% of the display mobile ad market • Serves 90 out of Top-100 advertisers1 • Revenue from international operations increased 2.5x in 2013, up from 15% to 24% of total sales 1 As defined by Ad Age Source: Company’s 10-K, team analysis Advertisers Mobile app developers % of advertising fee Aggr. data for targeting Users’ response Ads Ads Advertising fee Ownership & Capital structure 12% Insiders 31% VC58% Institutions + free float • MCap: $705 • All-equity financed
- 4. 4 40%40%39% 34% 29% Revenue Growth is Offset by High Operating Expenses Millennial Media’s financials in 2009-2013 Net income reconciliation from 2012 to 2013 Revenueand GrossProfit Operating expenses CFfrom operations 259 178 104 48 16 -15 -5 -1 -7-7 -21 -3-3 -11 -6 201320122009 20112010 49 15 5 -15 -5 Cost of revenue Revenue NI 2013 Other 1 NI 2012 82 G&A 23 T&D S&M Operating expenses Source: Company’s 10K, team analysis USD mln Revenue Gross Profit Margin EBIT EBIT margin -1% -46% -15% -6% -3%
- 5. 5 Stock is Up on Strategic Moves, Down on Financial Results Source: Bloomberg, press search, team analysis 27 24 21 0 18 9 12 15 MA M J J A S O N D J F A M J J A S O N MD J F 2012 2013 2014 March 28 2012: MM sells 10.2M stocks at IPO at $13 per share, above the price range of $10-11 Price doubles in the first trading day Quarterly/annual report published missing investors’ aspirations Oct 2012: Yahoo rumored to have interest in MM Feb 2013: Metaresolver acquisition announced Jun 2013: Expansion to Japan Aug 2013: Announced expansion to LatAm, partnering with local partner (AdMovil) Aug 2013: Agreement on Jumptap acquisition announced Jan 2014: New CEO appointed
- 6. 6 Fragmented and Very Crowded Market Source: “U.S. Digital Advertising” by Coady Diemar Partners, October 2012
- 7. 7 Mobile Advertising Industry is Attractive 13% Online 5% Mobile 12% 3% 21% 9% 20% PrintRadio 25% TV 39%40% Time Spent Share Ad Spend Share Source: eMarketer, Gartner 42 31 25 19 13 9 4 +34% 2017E2016E2015E2014E201320122011 +73% CAGR US Time Spent vs. Ad Spend Share, 2013 Global Market Advertising Spend CAGR
- 8. 8 Competition – Mobile Ad Networks • Compete on technology platform and data analytics • Increasingly publishers are competing in this space • Industry consolidation Barriers to Entry • Low capital intensity business • Network effects make achieving scale challenging Buyers – Advertisers • Want access to a large base of developers and end users. • Strong network effects Suppliers – App Developers • Driven primarily by access to large advertiser base Substitutes • Other forms of advertising, especially online advertising • Mobile advertising still not as effective as other forms, does not command as high prices Competition and Consolidation Intensify as Publishers Increasingly Compete with Networks
- 9. 9 OpEx Efficiency is Major Value Driver Source: SEC filings 60 24 15 -6 100 Revenue Cost of Revenue EBITSales & Marketing Technology & Development G&A 7 Factors of change Millennial Media Cost Structure, as of 2013 % of revenue Both, revenue and COR are market-implied, influenced by other segments as well. No real levers to pull on Fee paid to publisher (app developer) Back office efficiency Programmatic ads and exchange - based sales Integrated value chain implies development costs to stay constant
- 10. 10 Our Valuation Approach • What has to happen in order for the current share price to makes sense fundamentally? • DCF analysis – assumptions: • Market grows 35% until 2017, stabilizes by 2022 • Stable gross margin • MM’s market share and EBIT margins – scenarios • WACC – 12% (all equity financed), TGR – 2%
- 11. 11 What Has to Happen? Annual market share gain/(loss), p.p. Implied operating 0.25% 0.00% -0.25% -0.75% -1.25% -1.75% margin by 2022 Annual margin improvement >> 4.5% $13.3 $12.1 $10.9 $8.5 $6.1 $3.7 21% 4.0% $10.9 $10.0 $9.0 $7.0 $5.1 $3.1 18% 3.2% $7.2 $6.6 $6.0 $4.7 $3.5 $2.2 13.4% 3.0% $6.3 $5.7 $5.2 $4.1 $3.1 $2.0 12% 2.0% $1.7 $1.6 $1.5 $1.3 $1.1 $0.9 6% 1.0% ($2.7) ($2.4) ($2.0) ($1.4) ($0.8) ($0.1) 0% Implied MM market share by 2022 15.3% 13.8% 12.3% 9.3% 6.3% 3.3% • Status quo: 13.8% market share, -5.8% operating margin in FY2013 • Market share stabilizes by 2019 • Margins improve gradually and stabilize by 2019 Can we achieve a ~19% improvement in operating margin? > Current price (upside) < Current price (downside)
- 12. 12 MM Has to Become Better Than Google! % of revenue Operational improvements required for EBIT to justify current price level 13 -6 R&DG&A -16 Sales & Marketing -3 0 EBIT margin as of 2013 EBIT margin for current price to be true• From: 24% in 2013 • To: 8% achieved by Google Source: Capital IQ, team analysis • From: 15% in 2013 • To: 12% achieved by Google • Stays on current 7% industry-low level (Google has 13%) • Operating efficiency in IT is rather a function of company culture than of scale • While cost cutting by several p.p. is ambitious goal itself, it also carries certain risk for growth maintenance • Is company’s management skillful enough and properly incentivized to lead the change?
- 13. 13 Management Focused on Growth, Not on Profit MM brought in an experienced team of executives and the Board… …though not incentivized for long- term efficiency improvements • The founder has recently left the firm and insiders are selling • Six executives were previously responsible for ad segment at Yahoo, with no significant success • Strategic objectives are targeting new markets and technologies, but not internal efficiency • Incentive plan is growth-oriented: Source: Company’s data, team analysis 60% Revenue 20% EBITDA 20% Discretionary CEO, M. Barrett. Ex-Chief Revenue Officer of Yahoo, appointed in Jan 2014 CFO, M. Avon. Ex-Principal at Columbia Capital LLC VP of S&M, M. Spilman, ex-CFO of Yahoo Chairman, P. Kerins. General Partner at New Enterprise Associates VC fund There is a high probability of further focus on revenue growth at expense of shareholder’s value
- 14. 14 Risk-Reward Asymmetry – Supports SELL Case Bull case $7.74 (+17%) Current price $6.61 Base case $2.96 (-55%) Bear case $1.47 (-78%) • MM maintains market share • Operating margin → 15% (better than Google) • MM maintains market share • Operating margin → 8% (~Yahoo + 2% from S&M and R&D) • Market share → 10.8% in the long run • Operating margin → 8% (~Yahoo) +21% +14% +12% Bull case assumptions (Probability – 0.1)Bull case assumptions (Probability – 0.1) Bear case assumptions (Probability – 0.2)Bear case assumptions (Probability – 0.2) Base case assumptions (Probability – 0.7)Base case assumptions (Probability – 0.7) ∆ margin ∆ margin Prob. weighted target price $3.14 (-53%)
- 15. 15 Key Risks to the SELL Case • Potential acquisition by a large newcomer / competitor − Yahoo, Microsoft, AOL… • Share price may be driven by topline growth despite weak fundamentals • Gross margin improvement
- 16. 16 THANK YOU
- 17. 17 APPENDIX
- 18. 18 Publishers / Developers Advertisers Supply-Side Platforms (SSP) Real Time Bidding Exchange (RTB) Demand-Side Platforms (DSP) Mobile Ad Network (Mediation) (AdMob acquired by Google in 2009) (rumored to be acquired by Perion) (acquired in 2010) (acquired in 2010) (acquired by Twitter in 2013) Other Lay of the Land (mobile version WIP)
- 19. 19 OpEx Efficiency is the Main Value Driver 1 Based on MM, MRIN, GOOGL, YHOO, LNKD, FB, YUME,VELT 2 Google’s level, not adjusted for expenses attributed to the cost of revenue Source: company 10K, Capital IQ, team analysis 15 -6 24 100 60 Revenue Cost of Revenue EBITSales & Marketing Technology & Development G&A 7 Factors of change Industry average1 Best practice Millennial Media Cost structure, as of 2013 % of revenue Both, revenue and COR are market-implied, influenced by other segments as well. No real levers to pull on Fee paid to publisher (app developer) Back office efficiency Programmatic ads and exchange - based sales Integrated value chain implies development costs to stay constant 38 16 26 15 3 22 82 12 7 24
- 20. 20 OpEx Comparable with Peers Operating expenses, % of revenue As of 2013 SG&A1 Marketing Revenue per employee, USD mln 46,2 46,0 29,6 74,9 105,2 0,4 2,1 1,0 1,0 4,3 Total 0,5 0,7 1,4 0,7 3,9 0,2 0,3 0,4 0,3 1,3 1 Adjusted: all operation-related employees included in SG&A Source: Company’s 10K, team analysis
- 21. 21 -10 7,50,0 5,02,5 10,0 10 20 45,025,0 47,5 -20 50 20,0 42,5 40 17,5 60 -240 40,0 60,0 30 27,5 0 Revenue, USD bln EBIT margin, % MM Yahoo Google LinkedIn Twitter Facebook What a Buy Rating Would Imply? Safe BUY case assumes company reaches EBIT margin of ~14% by 2022 IT companies were able to reach EBIT margin of 15% and higher only after gaining a scale of ~$1 bln in revenues Source: Capital IQ, team analysis BUY zone Companies tend to stay on the same level of operating efficiency regardless of the size they achieve
- 22. 22 80 60 40 20 100 200 110 5 10 2520 30 35 190 210 50 70 30 10 90 60 0 0 Revenue, USD bln Opex, % of Revenue Twitter Yahoo Facebook Google LinkedIn Operating Efficiency is a Company-Specific Attribute Source: Capital IQ, team analysis Evidence suggest that companies tend to stay on the same level of operating efficiency regardless of the size they achieve
- 23. 23 Stock Performance: Worse Than Stars, in Line With Peers 1.4 0.6 0.8 1.0 1.2 1 YUME MMMRIN MobileAd companies’ stock performance in August 2013-March 2014 0.4 0.6 0.2 0.8 1.0 1.2 1 MM (Mar 2012-Mar 2013) LinkedIn (May 2011-May 2012) FB (May 2012-May 2013) Tech companies’ stock performance in their first post-IPO year Source: Bloomberg, team analysis
- 24. 24 Recent M&A Activity in the Space Acquirer Target Date Rationale Purchase price Revenue Acquisition multiple August 2013 Jumptap's focus on performance advertising and ad exchange capabilities enhanced MM's integrated offering. Access to Jumptap's 3rd party data. Cost synergies (~$25mm) $187 $63.6mm / $53.0mm (excl. portal revenue) 2.9x October 2013 Gain foothold in the mobile advertising market $350 $100 3.5x November 2009 Access mobile web and app display ad market $750 $100 7.5x January 2010 Enter mobile ad market Increase iPhone's attractiveness for app developers $275 $21 13.1x April 2011 Step into mobile advertising market; revenue synergies with ValueClick's existing online ad business $70 $25-$30mm 2.3x-2.8x March 2012 Push into mobile ad market as traditional voice revenues decline (SingTel is a leading mobile career in the Asia- Pacific region) $321 $30 10.7x April 2011 Enhance Motricity's product offering in the mobile Internet space $100 $20 5.0x Average 6.5x
- 25. 25 Unit Economics – Online Advertising Example 100% 90% 10% 0% 20% 40% 60% 80% 100% Advertiser Agency Publisher 100% 35% 10% 35% 20% 0% 20% 40% 60% 80% 100% Advertiser Agency Network SSP Publisher 100% 40% 10% 10% 20% 20% 0% 20% 40% 60% 80% 100% Advertiser Agency DSP Exchange SSP Publisher Direct Sales Channel Indirect: Network Model Indirect: Exchange Model Source: “Tectonic Shifts in Online Display Advertising” by Credit Suisse, 2/21/2012 55% 50% vs. ~40% in mobile The industry standard has evolved towards roughly 60% developer share… Goldman Sachs, 5/8/12 Google’s AdSense is currently experiencing take rates on desktop of 32% on content ads and 49% (owing to Google’s search dominance) on partner search ads… Conaccord Genuity, 6/25/2012 no empirical evidence of rising “take rates”
- 26. 26 Consolidated Statement of Cash Flows Consolidated Statements of Cash Flows (USD $) 12 Months Ended In Thousands, unless otherwise specified 31-Dec-13 31-Dec-12 31-Dec-11 31-Dec-10 31-Dec-09 Cash flows from operating activities Net loss (15,113) (5,430) (287) (7,121) (7,550) Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: Stock-based compensation expense 8,953 7,474 1,832 412 212 Non-cash change in fair value of Series B warrant 834 78 79 - Non-cash acquisition related costs 111 Bad debt expense 1,766 1,639 345 870 161 Deferred income taxes (481) - - Depreciation and amortization 5,913 2,365 759 223 146 Amortization of discount on long-term debt 12 13 Amortization of deferred financing fees 61 28 12 13 13 Unrealized foreign currency (gain) loss (84) (98) 38 Changes in assets and liabilities, net of acquired balances: Accounts receivable (28,117) (25,733) (15,379) (14,370) (4,366) Prepaid expenses and other current assets (1,299) (542) (1,027) (294) 4 Other assets 363 (249) (399) (84) - Accounts payable and accrued expenses (4,740) 2,884 1,817 716 64 Accrued cost of revenue 11,455 13,467 7,942 7,436 3,879 Accrued payroll and payroll related expenses (1,096) 869 2,005 1,276 1,171 Other long-term liabilities 292 (57) 181 20 93 Deferred revenue 116 12 (194) 329 (13) Net cash and cash equivalents used in operating activities (21,419) (2,537) (2,758) (10,483) (6,173) Cash flows from investing activities Net cash from acquisitions 1,968 (2,060) (72) - Purchases of property and equipment (5,080) (5,260) (3,528) (640) (79) Net cash and cash equivalents used in investing activities (3,112) (5,260) (5,588) (712) (79) Cash flows from financing activities Repayment of credit line (4,003) Repayment of long-term debt (10,353) (2,250) (750) Repurchase and retirement of common shares (827) (5,505) - Proceeds from issuance of common stock, net of offering costs 127,030 Payment of deferred offering costs (1,985) - - Payment of deferred financing fees (57) - - Proceeds from exercises of stock options 1,462 1,496 166 127 53 Share issuance costs (116) Withholding payments for vesting of restricted stock units (518) Issuance of Series C preferred shares, less offering costs - 15,920 Issuance of Series D preferred shares, less offering costs 27,459 - Net cash and cash equivalents provided by (used in) financing activities (13,528) 128,526 (2,703) 19,831 15,223 Effect of exchange rates on cash and cash equivalents (143) 3 (47) (4) - Net (decrease) increase in cash and cash equivalents (38,202) 120,732 (11,096) 8,632 8,971 Cash and cash equivalents, beginning of the period 137,439 16,707 27,803 19,171 10,200 Cash and cash equivalents, end of the period 99,237 137,439 16,707 27,803 19,171
- 27. 27 Consolidated Balance Sheet Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified 31-Dec-13 31-Dec-12 31-Dec-11 31-Dec-10 Current assets: Cash and cash equivalents 99,237 137,439 16,707 27,803 Restricted cash 320 Accounts receivable, net of allowances 109,056 59,179 34,986 19,978 Prepaid expenses and other current assets 4,243 1,966 1,417 352 3% 2% 2% 1% Total current assets 212,856 198,584 53,110 48,133 Long-term assets: Property and equipment, net 12,663 6,850 3,688 741 Restricted cash 515 Goodwill 135,489 1,348 1,348 Intangible assets, net 57,706 913 1,179 66 Deferred offering costs 1,985 Other assets 375 754 575 175 Total long-term assets 206,748 9,865 8,775 982 Total assets 419,604 208,449 61,885 49,115 Current liabilities: Accounts payable and accrued expenses 7,617 3,788 2,883 1,020 Accrued cost of revenue 65,053 34,430 20,963 13,054 Accrued payroll and payroll related expenses 8,767 6,038 5,153 3,137 Deferred revenue 868 169 157 351 Total current liabilities 82,305 44,425 29,156 17,562 Long-term liabilities Series B warrant outstanding 183 105 Other long-term liabilities 1,829 243 299 140 Total liabilities 84,134 44,668 29,638 17,807 Redeemable convertible preferred stock: Total redeemable convertible preferred stock 76,668 71,622 Stockholders' (deficit) equity: Common stock, $0.001par value 106 79 17 16 Additional paid-in capital 400,716 213,823 Accumulated other comprehensive loss (196) (78) (25) (11) Accumulated deficit (65,156) (50,043) (44,413) (40,319) Total stockholders' (deficit) equity 335,470 163,781 (44,421) (40,314) Total liabilities, redeemable convertible preferred stock and stockholders' (deficit) equity419,604 208,449 61,885 49,115
- 28. 28 Consolidated Statement of Operations Consolidated Statements of Operations (USD $) 12 Months Ended In Thousands, except Per Share data, unless otherwise specified 31-Dec-13 31-Dec-12 31-Dec-11 31-Dec-10 31-Dec-09 Revenue 259,171 177,667 103,678 47,828 16,220 Cost of revenue 154,774 105,739 63,595 31,602 11,596 Gross profit 104,397 71,928 40,083 16,226 4,624 Operating expenses: Sales and marketing 38,682 23,816 14,255 8,508 4,609 Technology and development 18,966 13,620 5,181 2,175 1,095 General and administrative 61,891 38,954 21,321 12,535 6,326 Total operating expenses 119,539 76,390 40,757 23,218 12,030 Loss from operations (15,142) (4,462) (674) (6,992) (7,406) Interest and other income (expense): Interest expense, net (95) (64) (21) (28) (144) Other income (expense) 77 (834) (78) (79) Total interest and other income (expense) (18) (898) (99) (107) (144) Loss before income taxes (15,160) (5,360) (773) (7,099) (7,550) Income tax benefit (expense) 47 (70) 486 (22) Net loss (15,113) (5,430) (287) (7,121) (7,550) Accretion of dividends on redeemable convertible preferred stock (1,328) (5,022) (2,933) (1,793) Net loss attributable to common stockholders (15,113) (6,758) (5,309) (10,054) (9,343) Net loss per share: Basic and diluted (in dollars per share) (0.18) (0.11) (0.32) (0.56) (0.56) Weighted average common shares outstanding: Basic and diluted (in shares) 84,029 60,951 16,363 17,966 16,783 Stock-based compensation expense included above: Stock-based compensation expense 8,953 7,474 1,832 412 212