YOC — Improving the AdTech experience

YOC has established itself as a leading European adtech company delivering software and products for the digital advertising industry, which has been building its expertise as an SSP since its incorporation in 2001. The company operates in Germany (60% of group revenue), Austria (33%) and Poland (7%), where management still sees scope for significant growth in all three markets. Fully capturing the opportunity in these geographies is key to YOC’s strategy, as historically it has discontinued operations in France (2015), the UK (2019) and Spain (2020) due to a lack of regional expertise and refocusing of cash resources on VIS.X.

In 2006, YOC listed on the Prime Segment of the Deutsche Börse raising gross proceeds of €10.4m. Since then, it has built its own proprietary technology in programmatic advertising and developed high-impact advertising formats. Over this period, the company has carried out several equity and debt raisings, including loans from CEO Dirk-Hilmar Kraus, to fund development. In 2018, YOC created its programmatic supply-side platform VIS.X, enhancing its ability to deliver efficient media trade at scale by facilitating the automated delivery of YOC’s high-impact advertising formats within a single programmatic environment. This is unique to YOC and could provide the company with first mover advantage, supporting VIS.X’s growth.

SSPs that offer programmatic trading are typically only able to offer standard advertising formats, such as classic banners, and companies that offer high-impact ad formats are unlikely able to offer a programmatic exchange environment. YOC’s ability to provide premium products that command higher than average prices in a scalable environment heightens the monetisation potential of publisher inventory. Clearly this is an attractive proposition, enabling YOC to build strong relationships with both tier one and two publishers throughout Europe.

VIS.X is now the company’s primary revenue driver, with management aiming for it to comprise 80% of total revenues on a run-rate basis at the end FY21 (50% at H121). Other sources of revenue derive from standard insertion order contracts run on Google’s ad server, which should gradually fall following the creation of its VIS.X Ad Server on 3 August 2021. Moreover, the platform’s operating costs are largely fixed, providing scope for margin expansion as revenues build.

YOC has developed a portfolio of high-impact ad products, designed to improve the user experience through interactive elements and lower disturbance to the flow of reading. A clear example is its Mystery Ad, shown in Exhibit 2, which has won several industry awards, including an iab webAD and a Golden Cannes Mobile Lion.

As shown by a Nielsen study in October 2020, the use of YOC’s high-impact formats in place of standard designs leads to an increase in the effectiveness of a campaign, shown by several digital advertising metrics including:

Advertisers are therefore willing to pay higher prices than they would for standard formats and are encouraged to do so by the high-quality inventory available on the platform. YOC’s Ad Engine enables the automated and real-time transformation of standard advertising designs into one of YOC’s high-impact formats with no adjustments of existing creatives needed from the advertiser, as illustrated by Exhibit 3. Due to this technological advancement, the platform’s trading volume can be scaled without manual interaction.

On 3 August 2021, YOC announced the integration of its self-developed ad server to VIS.X for standard insertion orders, increasing the number of sales channels available on the platform and replacing the need to use Google’s ad server. Previously only programmatic trading (described below) was available via VIS.X, so this is another step in developing it as a full stack platform, allowing for more automation and therefore greater scalability.

Programmatic advertising automates the buying and selling of advertising units, where artificial intelligence (AI) powered software ensures that each impression fits within both agencies’ and advertisers’ target markets, budgets and goals, all in real-time. The ability to optimise a campaign instantaneously offers a significant advantage over traditional media buying, where campaigns can only be analysed and adjusted once they are finished. Programmatic trading also eliminates the advertiser’s risk of overpayment by using real-time bidding (RTB), improving their return-on-investment potential versus traditional methods of pre-paying for a bulk of impressions. Programmatic advertising could allow for less costly and more efficient campaigns than negotiating direct deals with customers. YOC’s experience in this area has enabled management to integrate this technology into VIS.X upon launch, giving its platform a competitive advantage over traditional SSPs.

VIS.X connects publishers and advertisers through a programmatic exchange environment, enabling advertisers to bid for inventory1 in realtime. Advertisers place their orders through demand side platforms (DSPs), such as The Trade Desk, MediaMath and Xandr, which plug in to the VIS.X delivery stack.

VIS.X SSP offers three variants of trading, including:

Revenue generated from trading is split between the publisher and YOC, where YOC’s share is higher when trading is carried out via VIS.X. Publishers can sell their inventory on the platform via two methods:

Advertisers are offered a range of pricing models that provide flexibility. In addition to the standard cost per mille2 (CPM) and cost per click models, buyers can also choose advanced methods such as viewable CPM (vCPM), where the advertisers are only billed if the advert is seen by the user, and cost per completed video for fully viewed video adverts. Advanced methods prevent past fraudulent activities from reoccurring, such as click fraud where bots artificially inflate the popularity of an ad. Depending on the selected pricing model, VIS.X automatically optimises the ideal quantity and timing based on the buyer’s specific targeting options. Additionally, advertisers only pay for inventory when the success of their campaigns have exceeded certain benchmarks, such as number of impressions.

In 2021, YOC introduced its software development kit (SDK) for the VIS.X platform, allowing for the placement of its high-impact advertisements into a mobile app. Previously, VIS.X was tailored to the web, so the introduction of the SDK provides a new revenue source for its publishers and further enhances the scalability potential of the platform.

YOC Hub is the company’s proprietary business intelligence tool, which is used for internal process managementandis also made available to publishers on VIS.X as standard. The tool uses transactional data from all available demand channels, including direct sales, programmatic selling and classical mediation, enabling publishers to manage, analyse and optimise their marketing activities within a single dashboard, as shown by Exhibits 4 and 5. This is enhanced by forecasting capabilities that are powered by machine learning technologies.

Global digital advertising spend has grown robustly since 2012, with the negative impact of the pandemic on overall advertising spend having lesser influence. YOC’s main market of mobile advertising has been the primary driver of this growth, underpinned by increasing mobile web usage and penetration. The significant consolidation seen in the space since 2009 highlights the potential for mobile advertising. Further, YOC is well prepared for the upcoming changes to user data collection, namely the planned withdrawal of cookies set for 2023.

From 2014, mobile devices have been the primary way for people to access the internet and this trend has continued in 2021, with Statista estimating that people will spend 155 minutes on the internet using mobile versus 37 minutes on a desktop. Daily estimated time spent on mobile in 2021 represents a 17% CAGR from 2011. Smartphone penetration is growing at a faster rate than global population growth, increasing from 49% of the population in 2016 to over 78% in 2020, equating to 6.1bn smartphone subscriptions worldwide from a global population of c 7.8bn (Statista).

Not only do these factors increase a campaign’s viewability potential, but it also expands the amount of data accessible to advertisers. Data enables advertisers to create more targeted campaigns, particularly when using technologies such as AI, which drives programmatic trading and its ability to make real-time adjustments.

The data landscape for advertisers is evolving, driven by changes in the accessibility of third-party data. Data regulation addressing consumer concerns over privacy has to date been the primary factor, namely the EU’s General Data Protection Regulation (GDPR) and California’s Consumer Privacy Act. Increasing use of adblockers is also a factor. We have identified two further elements to consider that could impact the targeting effectiveness of an advert:

Several programmatic advertisers, including YOC, have integrated advanced tracking techniques in response to help mitigate any impact these headwinds may have on revenues, which include:

On 27 October, YOC announced the integration of Oracle Contextual Intelligence into VIS.X, increasing both its contextual targeting capabilities and brand safety.

YOC operates in the space that connects marketers to end users, however there is little demarcation between the companies that YOC competes with. Companies that act solely as SSPs are often private and private equity backed, particularly when looking at European players that focus only on mobile advertising. Teads and JustPremium are the two most prominent, both offering their own proprietary advertising formats and programmatic exchange environment. Teads has delayed its planned H221 IPO on Nasdaq, but was expected to reach a valuation of $5bn, equating to 9.3x FY20 sales (source: Refinitiv). Additionally, US contextual intelligence technology leader GumGum announced its planned acquisition of JustPremium in August 2021 for an undisclosed amount as key part of its growth strategy

Magnite is the world’s largest independent SSP, specialising in the programmatic trade of both publisher inventory and connected TV advertising3 across all devices, with the latter highlighting the difference to YOC’s high-impact formats for mobile advertising. Other notable examples include Digital Turbine and Criteo as they have both SSP and DSP capabilities on their platforms, operating at a much larger scale to YOC.

Digital advertising revenues and valuations seemingly reached their peak in 2013/14 but following y-o-y declines, M&A and IPO activity accelerated from early 2020. High valuations and the low cost of debt have given companies a time-limited opportunity to broaden their capabilities more easily. The focus has been around vertical integration to create end-to-end platforms or acquiring technology that can provide user insight once access to third-party data becomes more limited (as highlighted above).

Notable examples include:

A key issue and area of uncertainty is that many of these companies detailed are still largely loss making, often despite high double-digit revenue growth.

As a German stock corporation, YOC is subject to the German Stock Corporate Act, so it must have a dual management system by law.

The management board is appointed by the supervisory board and the term of office served must not exceed five years; however, members can be appointed more than once. Since October 2016, Dirk-Hilmar Kraus has been the sole member of YOC’s management board, with his responsibilities including preparing the company’s financial reports and consulting with second-level members of management.

Dirk is the CEO and founded YOC in 2001, establishing one of the world’s first mobile advertising companies. Before starting YOC, Dirk gained several years of experience in strategy development at Roland Berger Strategy Consultants upon completing his studies at WHU Otto Beisheim School of Management.

Notably, as of 31 December 2020, Dirk has provided YOC with all of its shareholder loans of €480k to finance further growth, with details including:

The supervisory board consists of three people:

Dirk-Hilmar Kraus has been the main shareholder in YOC since 2008 and holds 18.9% of the company’s issued share capital. In 2021, Eiffel Investment Group became the group’s fourth largest shareholder at 5.4% following the conversion of its €1.5m bond holding into 187,500 no-par value shares. This has been the most significant change in its shareholder register since 2018, which is when Dr Kyra Heiss inherited shares from Dr Bernhard Heiss, a previous member of YOC’s supervisory board.

YOC sees VIS.X as its primary revenue driver, given its potential to scale revenues without the need to grow operating costs proportionately. Revenue recognised in the income statement is gross of the publisher’s share, which is deducted at the cost of materials line. As at the end of FY20, Germany delivered 60% of group revenue, with Austria at 33% and Poland at 7%. Poland is its newest market, established in 2016, and management believes that its share of total revenue should grow, underpinned by its expectations for the market opportunity and current revenue trends in the region.

YOC relies on its existing relationships with European publishers, coupled with growing demand for its product offering, when selling inventory to advertisers via VIS.X. Continued growth in traffic highlights that this strategy has worked well so far, although uncertainty remains over the robustness of long-term demand, particularly if management decides to enter new markets.

Revenue growth from 2018 to 2020 has been robust considering both YOC’s change in strategy to its VIS.X platform and the impact of the pandemic on total advertising spend. This strategy change is now gaining traction, with YOC reporting 22% y-o-y revenue growth in H121 to €7.7m (+13% on H119) and 42% y-o-y growth in Q221 to €4.2m. At the half year, management reiterated guidance for FY21 revenue of between €17–18m but expects this to be at the higher end, representing at least double-digit growth and 15% higher than FY20 when using an estimate of €17.8m. We believe this is achievable given advertising revenues are typically H2 weighted, particularly in Q4.

At the end of the half year, 50% of revenue on a run-rate basis was generated via VIS.X, up from 30% at the end of FY20. The remaining 50% relates to standard insertion order contracts using Google’s ad server, which should decline gradually as these orders are moved over to VIS.X’s newly launched ad server. Management believes that current run rates and the addition of its ad server, should see VIS.X make up 80% of group revenues based on run-rates at the end of FY21.

As shown in Exhibit 9, the introduction of VIS.X as the main revenue driver offers the opportunity for signficant margin expansion, given that the operating leverage of the platform is far higher than traditional selling methods.The graph shows that traffic grew steadily between Q119 and Q221, leading to robust growth in revenue run rates. Lower bid prices due to COVID-19 related uncertainity drove the temporary fall in revenue at the start of 2020, despite traffic continuing to build. Gross margin in FY20 was 40.6%, c 11pp higher than in 2013, which is when the company used more traditional forms of selling rather than programmatic.

Operating costs have reduced as VIS.X requires lower sales and marketing requirements than standard insertion orders and is reflected in the 9.3pp increase in EBITDA margin to 11.9% from 2018 to 2020and a decline in other operating costs from €1.9m in FY18 to €1.4m in FY20. EBITDA margins have remained robust at 9.5% in H121 (+0.7pp y-o-y) and we believe this should increase given the expected H2 revenue weighting due to seasonal impacts, namely Christmas. This is in line with management’s FY21 guidance for EBITDA of €1.75–2.25m, whichequates to a margin of c 12.4% on an EBITDA estimate of €2.2m based on the company’s belief that results will be at the higher end of guidance.

YOC’s net income line benefits from low corporation taxes, which look set to continue in the short to medium term. Most of its tax is generated through its Austrian business, as its German business has high tax carry forwards from 2015 and its Polish operations are currently low profit generating. These low tax levels should allow YOC to build on the postive net income profitability achieved in FY20 and is reflected in management’s FY21 guidance of €0.75–1.25m, which would represent 285% y-o-y growth based on our assumption of €1.2m, underpinned by management’s belief that results will be at the upper end of its guidance.

Notably, FY19 and FY20 net income were both negatively affected by YOC’s discontinued operations in the UK and Spain respectivley. However, discontinued operations should not be an ongoing factor, given that management sees and forecasts growth in its three core operating markets of Germany, Austria and Poland due to its strong relationships with publishers and advertisers in these regions.

YOC’s balance sheet has changed significantly in 2021, mainly due to the conversion of its 2018–2022 convertible bond, which led to a fall in both its net liabilities and debt position. The bond was issued at a nominal value of €1.56m, convertible into a maximum of 193,825 shares and was used to support investment in its VIS.X platform. Most of the conversion occurred in H121, with Eiffel Investment Group converting €1.5m of its bonds on 30 March; the remaining €53k was converted after the period end, on 31 July.

The group‘s other debt at the half year includes financial leases of €737k, shareholder loans of €480k and a fully drawn credit line of €500k. Using our FY21 EBITDA estimate of €2.2m, YOC has a comfortable net debt to EBITDA position of 0.8x based on net debt of €1.8m. We note that debt could currently be lower given the expected July 2021 repayment of Dirk-Hilmar Kraus’s 2019 €100k loan, however its net position should not have changed.

The group is still in a net liabilities position, despite this figure almost halving to €2.2m at the end of H121 from its FY20 position of €4.0m. This is primarily due to its high levels of current liabilities relative to current assets (H121 current ratio: 0.52, FY20: 0.59), with both periods mainly comprising significant trade payables and liabilities from invoices not yet received. The group’s negative H121 equity position was driven by negative retained earnings of €27.8m, which we expect to reduce due to management’s change to a more scalable, profitable strategy underpinned by VIS.X.

We believe YOC could move to a positive equity position in the near future, underpinned by current levels of free cash flow and expected growth in profitability driven by VIS.X. That said, uncertainty remains if cash burn is greater than management anticipates or if sales from VIS.X do not grow as quickly as expected. Additional funding may also be required for any unplanned M&A or substantive capital projects.

YOC capitalises some of its development costs, where own work capitalised was €510k (3.3% of sales) in FY20, up from €314k (1.7% of sales) in FY19. Since the introduction of VIS.X, greater movements in the company’s working capital are explained by its increasing proportion of revenue generated by programmatic trading, which have comparatively longer payment terms.

YOC is currently not in a position to pay dividends and we expect any profits generated to be reinvested back into the business for the foreseeable future.

As shown in Exhibit 14, YOC’s valuation on an EV/sales basis softened in 2018, in line with revenue growth slowing from 20% in the prior year to 1%, primarily due to the introduction of GDPR. The company’s valuation showed signs of recovery in 2020, corresponding with a 205% increase in share price from a low of €2.6 on 31 July to a high of €8.0 on 30 December. This is reflected in the growth of the high-level in FY20 EV/sales as a result of an increased market capitalisation. YOC’s share price has continued grow and is up 26% ytd to €10.1.

As consensus forecasts are not yet available, we compare management’s FY21 guidance to the consensus forecasts of a basket of global SSPs, DSPs and other technology companies focusing on programmatic advertising. We note there is no exact peer given the uniqueness of VIS.X with its ability to programmatically trade YOC’s high-impact advertising formats and the limited presence of companies that operate solely as SSPs. We have also included various valuation metrics based on financial performance.

Despite YOC expecting an acceleration in sales growth in FY21, it is still 25% lower than the peer group median forecast of 40%. EBITDA margin was 13% lower than peers in FY20 and 17% lower than FY21 forecasts, but we believe YOC’s EBITDA margin should expand as programmatic trading’s share of revenue continues to build.

On FY20 and FY21e sales, YOC trades at EV multiples of 2x for both years, representing a discount of 84% and 71% respectively to our peer group average. On EBITDA, YOC trades on 21x for FY20 and 17x for FY21e, indicating a smaller discount of 73% and 29% respectively. We believe this can be explained by YOC’s comparatively small size, with its market cap at $41m versus the peer group average of $5.9bn (median: $1.8bn). Its geographical location is another factor, with US-listed companies having the highest valuations at an average of 11x FY21e EV/sales and 35x FY21e EV/EBITDA. We believe that management’s ability to grow a robust track record for its VIS.X strategy and moving to a positive equity position could be key for closing this discount.

We believe both YOC’s financial performance and share price will be sensitive to the following factors:

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