RNTS Media — Update 29 July 2016

RNTS’s core divisions, Fyber and Inneractive, offer mobile monetisation services to app developers and publishers, enabling them to overcome the issues presented by a very fragmented market for mobile audiences and display advertising. Fyber’s and Inneractive’s supply-side platforms (SSPs) comprise advertising mediation, an ad exchange and an ad server. The platforms give customers access to a wide range of advertising sources, yield optimisation tools and analytics to provide a real-time consolidated view of an app’s performance. Mediation is offered free of charge. In doing so, Fyber and Inneractive are securing access to publishers’ inventory, which they can then offer to advertisers on their exchange, where they charge a commission if they capture the trade. Following the acquisition of Inneractive in July 2016, the group has approximately 400 employees. RNTS’s headquarters are in Berlin and it has offices in San Francisco, New York, London and Tel Aviv.

The mediation solutions have been very well received, and the group now reaches one billion MAUs. However, until Q315, it traded mainly offer wall formats and was consequently monetising only a fraction of this ‘mediated traffic’. By adding platform functionality, such as a private exchange (ad server), management plans to continue to widen its network of publishers, while in parallel launching additional ad formats and trading capabilities on its own exchanges in order to increase its monetisation rates. Rewarded video was launched in Q315, and early results are encouraging; Fyber’s revenue growth picked up to 56% y-o-y in Q415 and momentum was maintained in Q116 (+47%). Interstitials have been added since the year end and banner is planned for H216 with native to follow in FY17; this will give it a near complete product range, significantly expanding its addressable market. We forecast revenues to double in FY16, but with increased investment in the platform, staff and systems to support the group’s expansion, we expect an EBITDA loss similar to that reported in FY15. The placing in July of the final €50m of the company’s €150m convertible bond should provide sufficient resources to settle initial payments for acquisitions in FY16 and working capital to early 2017. However, additional funding will be required to settle potential earn-out payments and short-term working capital requirements through 2017 as the group moves towards break-even, expected by year end FY17.

Private market valuations for advertising technology companies, which average 2.1x gross sales, are higher than those of RNTS’s listed peers (c 0.9x FY16). At the current share price, RNTS’s 2.3x FY16e sales (pro forma for Inneractive) and 1.9x FY17e are in the mix. However, as the sector matures, value is increasingly being attributed to overall scale, critical in network effect businesses, and profitability. RNTS trades at a premium to peers on an EV/gross profit basis and will need to show investors ongoing evidence as to the success of new product launches, alongside tight cost control in order to drive the shares’ value.

RNTS is in the process of integrating acquisitions and launching an expanded product range; these initiatives may be more or less successful than we forecast. The ad tech market is growing rapidly, yet it also faces a number of unpredictable headwinds such as advertising fraud and ad blocking technologies. RNTS’s competitors include some of the largest companies in the world, with new entrants from a wide spectrum of industries. Competitive pressures may affect growth and margin assumptions. The scale and terms of any re-financing may differ from forecasts.

Over the last two years, RNTS has transformed itself, through the acquisition of four companies, into a mobile ad tech group of considerable scale. At its core are Fyber (acquired in October 2014) and Inneractive (July 2016). Their mobile supply-side platforms (SSPs) enable app developers and publishers to overcome demand and audience fragmentation challenges by providing a single platform that unifies a fragmented value chain, supporting the discoverability of content by audiences and advertising monetisation. Fyber is targeted more towards larger companies and is strong in the gaming verticals, while Inneractive, with its self-serve platform, is stronger with SMEs in non-gaming industries. Across the group, it has over 2,000 active publisher clients (eg Wooga, Glu, Social Point, DeNA) supporting the monetisation of approximately 8,000 apps via its integration with a wide range of demand sources. Together Fyber and Inneractive have an MAU reach of c 1bn, which we believe makes RNTS one of the top five SSPs in Europe and one of the top 10 in the US in terms of audience reach.

RNTS was formed in 2012 with the remit to build a portfolio of mobile media assets. It acquired RNTS Co in 2012 (a South Korean mobile app developer, for €3m) and BSG in August 2013 (a Korean-based provider of educational content for apps for €11.8m). However, it was the acquisition of mobile ad tech platform Fyber for €150m in October 2014 that transformed the group. RNTS has since discontinued these earlier activities and is now entirely focused on developing its mobile advertising platform and services.

Over the last year, the group has aggressively embarked upon a strategy to increase its market share in the rapidly growing, but very fragmented mobile advertising market. It has placed €150m of convertible bonds (€100m in July 2015 and €50m in July 2016), the proceeds of which have been used for acquisitions and, in parallel, it has invested heavily in its platform to extend and enhance its product suite and technical capabilities.

Unlike mobile search or social media advertising, which are dominated by Google and Facebook respectively, the mobile display advertising market is still very fragmented. While Google and Facebook are very active in the mobile display ecosystem (Google’s AdMob, Facebook’s Audience Network and LiveRail), their platforms are part of the mix, rather than the clear leader. In this large and growing segment, the opportunity for an independent company to develop a comprehensive scaled offering is significant.

Media has gone mobile; approximately half of global phone subscriptions (c 3.3bn) are now smartphones and this is forecast to almost double over the next five years. In the US, the average smartphone user spends over three hours a day on their phones, overtaking television, which until now was the most popular media channel. The vast majority of this time (90%, up from 86% in FY14) is spent in-app, rather than on the mobile web, and as advertisers shift their spend to follow audiences, for most apps, advertising has become a key source of revenues. In 2015 the share of advertising budgets devoted to mobile increased to 12% in the US. However, with c 25% of all media now consumed on a mobile, advertisers are still playing catch up, and mobile display advertising is forecast to continue to grow strongly. eMarketer estimates global mobile advertising at c $68bn in 2015 and expects this to increase to $100bn in 2016 (US c 40%, China c 20%, Europe c 25%), forecasting a 28% CAGR in mobile ad spend in the US over the next five years. Of this, mobile display, which already accounts for 50% of US mobile advertising, is the fastest-growing segment.

Mobile audiences are highly individual, using different apps at different times, on different handsets, with different data bundles and operating systems, and with different advertising preferences. This individuality is one of the key attractions of a mobile audience to advertisers, providing the possibility to run highly targeted campaigns. However, unlike mobile search, the mobile display advertising ecosystem is fragmented and complex. Only the largest brands and publishers have the resources and skills to run campaigns and connect directly. For the vast majority of companies, advertising space (‘inventory’) is bought and sold via a layer of intermediaries (Exhibit 1), which consolidate inventory (supply-side platforms, SSP), advertising demand (demand-side platforms, DSP) and data (data management platforms, DMP), which is then bought or sold via advertising networks or advertising exchanges. However, at each stage, there can be hundreds of different vendors, each specialising in certain parts of the market, or types of advertising.

In the past, the process of executing a campaign was relatively manual: RFPs (requests for proposals), negotiations and manual insertion orders. However, brands and publishers are increasingly turning to software companies to help them improve ROIs, fill rates and yields. Programmatic advertising is the automated buying and selling of advertising inventory. It uses a combination of machine-based transactions, data and algorithmic matching and learning to make decisions and serve advertising in microseconds to the ‘right user’ at the ‘right time’ and at the ‘right price’. Programmatic trading of mobile advertising impressions accounted for 35% of total mobile advertising spend in the US in 2015, up from 23% in 2014, and eMarketer forecasts that it will grow 60% in 2016. Real-time bidding, a category of programmatic trading whereby ads are put up for auction one impression at a time, accounts for approximately half of all mobile programmatic spend. Programmatic trading is a leap forward in monetising audiences more efficiently. Nevertheless, fragmentation remains one of the biggest issues for the monetisation of mobile content.

The challenges for app developers and publishers is to first get their content noticed by consumers (discoverability), and then to find ways to efficiently monetise this audience (demand optimisation).

Discoverability: There are over three million apps available in the Apple and Google app stores, and there were over 100bn app downloads in 2015 alone (+33% y-o-y).

Monetisation: There are thousands of demand sources (brands’ own advertising teams, agencies and their trading desks, advertising networks, DSPs), each with their own campaign strategy. In order to effectively monetise its inventory, a publisher needs to be connected to as wide a pool of demand as possible. Only the largest publishers have the resources to manage their own monetisation strategies:

Supply-side platforms address fragmentation issues by providing a single platform to app developers and publishers, allowing them to effectively optimise and manage all their demand sources with one platform integration. Both the Fyber and Inneractive platforms comprise a mediation layer, an advertising exchange and an ad server.

Key components of the mediation monetisation platform are:

There is no charge for the mediation solution, and while not directly revenue generating, it is strategically very important. By widening publisher reach it both secures a supply of inventory for its exchange (which it then monetises) and adds valuable audience data, which can be used to improve its exchanges targeting. The integration of the mediation layer also provides a strong technological lock in.

Ad exchange (open exchange): The ad exchange is a market place where an advert is ‘matched’ to an app’s user based on pre-defined criteria (eg user profile and a publisher’s pricing thresholds). The exchange will then serve the advert and process the respective payments. The Fyber and Inneractive exchanges are integrated into their respective mediation layers, alongside other demand sources, on a non-discriminatory basis. If the mediation layer directs traffic to their exchanges, they take a share of the value of transactions executed over the exchange, averaging approximately 30%.

Ad serving (private exchange): The ad serving offer enables publishers to directly sell inventory to an advertiser (cutting out the open exchanges) and to cross-promote to their own audiences. While lower-margin than the ad exchange, it widens Fyber’s addressable market to enterprise-scale publishers that may have in-house solutions and sales teams and have less use for a mediated solution. Fyber takes a share (c 8-9%) of transactions executed via its ad server (except for cross-promotional campaigns).

Exchanges are network effect businesses; the larger the MAU base (and inventory), the more attractive the platform becomes for demand partners, and vice versa. The leading exchanges will be those that offer the most liquidity: a large supply of quality inventory paired against a wide and active pool of demand in order to support the publisher goals of maximising yield and fill rates.

Management’s strategy is to offer mediation free of charge. In doing so, it locks in a publisher’s inventory (‘mediated traffic’), which it can then try to monetise on its exchange. Mediated traffic will be offered to all of the publisher’s selected demand sources, and so Fyber or Inneractive will only be able to monetise it if they can demonstrate to the publisher that they have access to the best deals across a range of ad formats. This strategy is fairly common among SSPs. Management seeks to differentiate its platforms by ensuring the most liquidity, itself a function of publisher reach, depth of demand and diversity of format and technology. The fact that Fyber and Inneractive are among the few remaining independent mobile SSPs of scale is also a key differentiator. To remain competitive, RNTS continues to take steps to strengthen its competitive advantages in the following aspects:

Exhibit 4 presents a roadmap of RNTS’s strategic priorities.

RNTS’s executive board comprises the original co-founders of Fyber: Andreas Bodczek (CEO) and Janis Zech (now COO of Fyber). During 2015, additional management experience was added with the appointment of Heiner Luntz as CFO in October 2015, Henrik Basten (previously Falk) as CTO of Fyber, Jim Schinella (SVP partnerships and development at Yahoo) as head of sales and Michael Bullion as chief product officer. Luntz and Ziv Elul (CEO of Inneractive) were both appointed to the executive board at the recent AGM.

The supervisory board consists of Dirk van Daele (chairman), also CEO of Anoa Capital; Guy Dubois, acting CEO and member of the executive committee of Track Group; and Ryan Kavanaugh, CEO of Relativity Media. The board was also recently expanded with the appointment of three new independent directors. Thorsten Grenz (president of Financial Experts Association e.V), Jens Schumann (deputy chairman of the supervisory board of LOTTO24 AG), and Crid Yu (who has a wide range of executive ad tech experience).

The management team now has extensive ad tech industry experience as well as the necessary management and governance skills for a growing, publically listed group; biographies are included at the back of this report.

FY15 results reflect both the re-positioning of the group, which took the decision to exit its early activities to focus on mobile ad technology, and Fyber’s investment as it positioned the group to scale, rolled out its mediation solution and invested in developing a more complete exchange solution.

Continuing operations (Fyber and Falk): FY15 revenues increased by 27% to €81.1m with Falk (acquired in May 2015) making a strong contribution (accounting for 66% of this growth), whereas Fyber’s growth slowed to 9% (from 50% + in FY14).

Fyber’s efforts to widen its reach into publishers are yielding clear results. Mediated traffic increased 300% between December 2014 and 2015. However, without some of the key formats on its exchange, it could not monetise most of this traffic. Meanwhile, growth in offer wall trading (the largest format on its exchange) subsided. After 50% + growth in FY14, H115 revenue growth slowed to 11% and with the majority of revenues transacted in dollars, much of this growth was currency gains. However, the launch of rewarded video on the exchange in Q315 and the phenomenal performance of Falk’s ad server reignited growth in H215, with a particularly strong end to the year; growth in Q415 was 56% (Exhibit 5 and 6). This pick up can in part be attributed to typical seasonality patterns, and while revenues declined in Q116 compared to Q415, year-on-year growth remained strong (+47% pro forma y-o-y).

Gross margins declined to 30.0% from 38.2% mainly due to mix effects with the lower-margin Falk (c 9% margin) now contributing 16% of revenues, but also due to a more competitive market for offer wall formats on the Fyber exchange. Operating expenses increased 64.3% to €43.0m as Fyber expanded its service and development teams, added managerial experience at all levels of the group and invested in ERP and support systems to enable it to more effectively scale. As a consequence, RNTS reported an EBITDA loss of €13.7m, after a small positive in FY14.

Non-recurring and discontinued items: The decision to focus on mobile advertising technology is also evident in the significant exceptional and non-recurring charges, which amounted to €8.1m in total, along with a €13.7m charge for discontinued operations resulting in a reported net loss of €38m for FY15.

Q415 revenues were considerably ahead of our forecast, and Q1 momentum remained strong (+47% pro forma revenue growth). While seasonality may have had a hand in the strong pick-up in growth, it also gives a clear signal that the strategy is starting to deliver and by adding more formats and capabilities (ad serving, RTB), RNTS should be able to continue to capture a greater share of its mediated traffic. Management’s confidence in the improving revenue outlook for the group, particularly from the Fyber RTB solution, was reflected in its 29 July trading update, where it increased its FY16 revenue guidance from “over €160m” to “over €185m” on a pro forma basis and has introduced an inaugural FY17 revenue target of “more than €240m”, as well as a target of reaching EBITDA break-even by the end of FY17.

The completion date of the Inneractive acquisition was two months later than we forecast in our last note (Inneractive Acquisition Puts RNTS on the map) and we adjust our estimates to reflect this.

Net of these two effects, we increase our overall revenue forecasts in FY16 and FY17 to reflect the strong year end momentum, and clearer product road map. At the EBITDA level, the impact of our upgrade is softened due to product mix effects. Nevertheless we reduce our EBITDA loss forecast in FY16 slightly and in FY17 more considerably.

Overall, we forecast 25% revenue growth from Fyber, 175% at Falk (400% last year from a very small base), 40% at Inneractive (100% last year) and Heyzap, driving an overall 97% rise in group revenues to €159m in FY16. On a 12-month pro forma basis, this equates to approximately €189m revenues in FY16, consistent with management’s revised targets. While gross margins at Fyber’s exchange should stabilise as it trades a larger share of higher-margin formats, we expect the strong growth of the lower-margin ad serving and RTB technology to more than offset this in the near term.

Fyber to date has focused on building a scalable platform. It is now also working on the implementation of scalable back office operations by investing in a new ERP environment. Once fully implemented, these measures are expected to significantly increase operational efficiency, and the operating cost base should not continue to grow in line with revenues. Based on the elevated Fyber cost base and the current revenue dynamic, management’s target of EBITDA break-even by the end of FY17 appears achievable; we forecast an EBITDA loss of €13.4m in FY16 and €4.2m in FY17.

In July 2015, the group placed €100m of convertible bonds. At the year end RNTS reported net debt of €9.5m, comprising €79.1m cash, net the debt element of this convertible. In July it subsequently placed the final €50m tap of the convertible bond (the €150m bonds accrue interest at 5% pa and in aggregate can be converted at €4.20 into 35.7m new shares from their date of issue - c 31% of the share capital following full conversion until their maturity in 2020). RNTS also has an $8m Silicon Valley Bank working capital facility (until September 2016).

These funds have largely been used to fund the acquisitions of Falk, Heyzap and Inneractive and to fund working capital. We forecast a free cash outflow of €27m in FY16 and €23m in FY17. The current funding should cover operational cash flow needs until early 2017, but additional resources will be required to cover the earn-out payments of up to €20m in FY17 and €10m in FY18 for the acquisitions and additional working capital needs in FY17. Negotiations to this end have started.

RNTS moved its listing to the Frankfurt Stock Exchange in 2015 from the Euro MTF (Luxembourg). The shares are in bearer form, which limits visibility on the shareholder structure of the group. However, according to the company’s annual report, 44.1% are owned indirectly by a pooling arrangement (‘Sapinda’) comprising Sapinda Holding BV, SYSK, Sapinda Invest S.a.r.l, Sapinda Asia Ltd, Centrics Holdings and Lars Windhorst – owner of all the aforementioned vehicles. Sapinda Asia also has the right to acquire a further 30.7m (26%) of the shares from the former shareholders of Fyber. Furthermore, the majority of the €150m convertible bond was taken up by Sapinda, which if converted would extend Sapinda’s majority.

Much of the DCF value is in the terminal value, making it very sensitive to fairly small changes in assumptions. We prefer to use a revenue multiples approach to benchmark RNTS’s valuation. There is a wide listed peer set, and advertising technology has been among the most active segments of M&A in the media and technology universes over the last couple of years.

According to research by Results International, there were 411 ad tech transactions globally in 2015 (2014: 477; 2013: 223), and activity remains high in Q116 (108 deals). The mobile advertising and data management segments have been particularly active with a range of new buyers entering the market; the largest deal was the $1.2bn acquisition of Opera by a Chinese consortium backed by the Golden Brick Silk Road private equity fund, a mobile games firm and an internet security company. Many of these companies remain loss making (or do not disclose profits), so revenues are the only viable valuation benchmarks. Multiples remain high (Exhibit 9), although there is a very wide range, 0.8x to 5.3x revenues, with ad networks at the lower end of the range (0.8x to 1.3x), exchanges mid-range (1.4x to 3.9x) and higher-margin DMPs at the upper end (5.0x to 5.3x).

Public markets valuations appear lower. The average FY16e EV/sales multiple across a group of 12 small-cap ad tech peers is 0.9x, ranging from zero to 1.9x. Interestingly, public ad tech companies’ valuations, on the whole, seem to be aligned with their current level profitability (Exhibit 10, A), sales growth (B) and overall scale (C) more than the underlying technology.

Using gross revenues (the value of transactions over the platform) as a simple benchmark, compared to other listed ad tech groups in Europe and the US, on a pro forma basis, RNTS is now one of the larger groups in the mobile ecosystem (Exhibit 11).

With the proceeds of the bond placing 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 platforms 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, has also become easier to digest. Post the Inneractive deal (and using forecast net debt in order to capture the earn-outs), RNTS is trading on EV/sales multiples of 2.3x in FY16e (12-month pro forma including Inneractive) and 1.9x in FY17e. On this basis, its valuation no longer looks anomalous when compared to other listed ad tech companies or recent deal values.

However, in terms of profitability, compared to listed peers, its rating looks exposed; RNTS’s valuation is at the top end of its peer group on an EV/gross profit basis (chart C, Exhibit 10) and is a notable outlier in light of forecast EBITDA losses (chart A, Exhibit 10). In our view, evidence that the group is moving towards profitability is key to supporting its rating. We consider the main catalysts to share price performance as:

The major sensitivities for the group’s forecasts and valuation include: