RNTS Media — Update 6 March 2016

Inneractive runs a mobile supply side platform (SSP) and RTB (real time bidding) based advertising exchange. It has over 630m MAUs across its network of publishers in 180 countries and across a range of verticals. In addition to aggregation via a single software development kit (SDK), the technology includes publisher tools such as analytics and yield optimisation and offers a complete range of ad formats (display, native, rewarded video, interstitials and offer walls) across both its open exchange and private marketplace.

Inneractive was founded in Tel Aviv in 2007 by Ziv Elul and Offer Yehudai, and also has offices in New York, San Francisco and London. It has grown rapidly – doubling revenues during 2015 to reach $43.2m. The company is profitable at the EBITDA level (c 5% margin in FY15) and so far it has continued its strong growth trajectory in 2016 – management is aiming to double revenues again over the next two years – and the earnouts are geared towards reaching this target. Subject to shareholder approval, Mr Elul (CEO of Inneractive) will join the RNTS Media board on completion.

Financed with the proceeds of the first €100m placed from last year’s €150m convertible bond issue, RNTS will pay an initial consideration of $46m. In addition, it will pay up to $26m over the next three years in earnouts (growth-triggered) and retention payments. In our forecasts we have assumed that RNTS is liable for the full earnout (ie revenues are doubled over the next two years). Based on the initial $46m payment, this implies an EV/Sales multiple of approximately 1.1x, and 0.6x sales for the earnout element (or 0.8x combined) – at the bottom end of the deal values achieved in this sector over the last 12 months. The acquisition of Inneractive is expected to complete in Q216 and RNTS has committed to pay a break fee of US$8m.

The acquisition is in line with RNTS Media’s strategy to create a leading mobile advertising technology group. As well as bringing a fast-growing company into the RNTS group, the acquisition has considerable strategic merit:

Reach: Inneractive is used by publishers in a wide range of verticals: entertainment, productivity, news, messaging, social networking and utilities. This takes RNTS’s reach and addressable market beyond the predominantly gaming audiences of Fyber. Similarly on the demand side, Inneractive connects with the DSPs (Demand Side Platforms), while Fyber is stronger with the ad networks, adding additional sources of demand.

Scale: Inneractive will be run as a separate company for the foreseeable future. However, its platform will be connected to Fyber’s. In doing so, the group can offer advertisers reach to over 1bn MAUs (we assume c 10% overlap between Fybers c 500m MAU’s and Inneractive’s c 630m). Exchange liquidity is a key value driver in this industry and this combination should increase the relevancy of both platforms to advertisers, which in turn should help it to improve CPMs1 and fill rates for publishers, promoting important network effects. Given the overlapping technologies between Fyber and Inneractive, we believe a full integration makes sense and could add to the overall synergies of the deal in the future.

Significance: With a combined monthly audience of over 1bn, across its exchanges, RNTS is now one of the largest SSPs in the mobile ecosystem. Direct MAU comparisons with other exchanges are complicated by the fact that the companies do not publish the same KPIs. However, using revenues as a simple benchmark, compared to other listed ad tech groups in Europe and the US, RNTS is now one of the larger groups in the mobile ecosystem, Exhibit 1.

We assume the proposed Inneractive deal completes as of 1 May 2016, with organic revenue growth of 40% this year and 35% in FY17e, slightly ahead of Fyber given the stronger relative performance in FY15. We assume a gross margin of 30% typical of SSPs. Despite the strong top line growth, we have assumed Inneractive’s EBITDA margin remains at 5% as the company continues to invest in building its market share. We also factor in €3.1m of restructuring charges, and we have assumed that RNTS issues the remaining €50m convertible bond during 2016.

We present a summary of our forecasts to EBITDA below (Exhibit 2), with full forecasts on page 5 of this report. Given the strategic review being undertaken at RNTS’s non-core BSG division, we have also taken the opportunity to re-classify this as a discontinued operation, which we believe gives a more accurate impression of the group’s strategic direction. The impact at the EBITDA level is slight positive.

Overall, as Inneractive is profitable, the acquisition means a reduction to our forecast group EBITDA losses of €1.8m in FY16 and €4.4m in FY17. While the notion of improved exchange liquidity should drive top line revenues growth across the platforms, given the volatility in the market over the last year, for now, we are erring on the side of caution and we make no changes to our forecast growth rates at Fyber. However, as outlined above, the network effects that come with a larger MAU base across a wider publisher set should stimulate growth across all three of RNTS’s platforms – this represents upside potential to our revenue estimates.

On the current pro forma cost base, while we forecast EBITDA losses to come down, we do not forecast breakeven within the next two years. However, as well as integrating the platforms, we understand that management views the updating and streamlining of systems and procedures as a priority in order to accelerate the time to breakeven. For instance, RNTS, which to date has focused on building the platform technology, is now also working on the implementation of a strong and scalable back office operations, eg by investing into a new ERP environment. Once fully implemented and integrated into the platform, these measures are expected to significantly increase operational efficiency allowing it to add more business without expanding the cost base further. Again, this represents upside potential to our estimates.

With the proceeds of the €100m capital 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 three platforms: Fyber, Heyzap and Inneractive 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 is also becoming easier to digest: Post this proposed deal (and using forecast net debt in order to capture the earnouts), RNTS is trading on an EV/ Sales of 2.2x and 1.6x in FY16e and FY17e, respectively. On this basis, its valuation no longer looks anomalous when compared to other listed ad tech companies (0.5x to 2.1x FY17 EV/Sales) or recent deal values.

Management’s priorities now are to integrate the platforms and to ensure that it has the appropriate systems and procedures in place to manage the growth. In doing so, it expects to extract both revenue synergies and cost savings in order to move the group towards breakeven. Our forecasts currently do not explicitly forecast for these synergies, and so evidence to their effect would represent upside potential.