RNTS Media — Update 27 September 2016

Management has reported H116 results on both a reported basis and on a pro forma basis. Pro forma figures are inclusive of Inneractive, which was acquired after the H116 close in July, Heyzap (acquired in January 2016) and Fyber RTB (April 2015) as if they had been purchased from 1 January 2015. We focus our analysis on the pro forma (PF) figures, which are more relevant to the future performance of the group.

Revenues increased by 90% to €94.8m: all the business units performed well, in particular Fyber RTB, which reported €20m of revenues from a near-standing start when it was acquired in April last year. Inneractive (acquired in July 2016) is also performing ahead of plan, with revenues up 158% y-o-y, and Fyber exchange (which now also integrates Heyzap, acquired in January 2016) was up 28%.

Gross margins affected by mix effects: the headline gross margin reduced to 30.3% from 34.4% last year, a function of the relatively stronger performance of the lower-margin Fyber RTB service. However, the underlying margins for each of the exchanges were solid and Fyber RTB reported a significant increase in its margin to 14% from 9% last year as it moves beyond the concept phase and benefits from being integrated into the larger group.

EBITDA losses reflect increased investment: the EBITDA loss of €2.3m was a significant improvement on the €5.8m reported last year, despite an €8.2m increase (36%) in operating expenses as the group put in place the systems and staff (439 at June 2016 from 381 at June 2015) necessary to support the scaling of the business.

Balance sheet: the €7.5m finance charge reflects the issue of the €150m convertible bond (€100m by July 2015 and €50m in July 2016, although interest on the entire €150m has been reflected in PF figures). As of 31 August, inclusive of the initial $46m payment for Inneractive, RNTS had €26.7m of funds available, in addition to which it has a credit facility of $8m ($2.5m drawn). Based on our current forecasts, this should cover operational cash flow needs until early 2017, although additional resources will be required to cover the earn-out payments of up to €25m in FY17 and c €5m in FY18 for the acquisitions and additional working capital needs in FY17. The board is currently reviewing its options for both equity and debt-based financing.

Guidance appears comfortably achievable: management has confirmed its guidance, upgraded in July, of revenues of “over €185m” on a pro forma basis in FY16 and “over €240m” in FY17, with the group moving into an EBITDA break-even position towards the end of 2017. Following such a strong performance in H1, this guidance appears eminently achievable.

Management reshuffle: Ziv Elul, CEO and co-founder of Inneractive, has been appointed as COO and CEO designate, succeeding Andreas Bodczek, who will continue to serve on the management board as group president, focusing on the development of the group’s strategy, the integration of acquisitions and the development of additional strategic relationships and partnerships.

The last 18 months have seen considerable change at RNTS, which decided to fully focus on mobile advertising technology, exited non-core operations and placed €150m convertible bonds to fund its ambitious expansion plan. RNTS now has two complementary mobile advertising technology (ad tech) platforms at its core: Fyber (acquired in October 2014 and subsequently integrated with Heyzap, acquired in January 2016) and Inneractive (acquired in 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.

Together the platforms have an MAU reach of around one billion, 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. 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.

Having expanded its publisher reach over the last two years, both organically and through the acquisitions, RNTS is now focused on monetising an increasing share of its advertising traffic.

As a network effect business, investment has been focused on widening the range of formats that the exchanges can offer, as well as providing a complete technology stack to ensure that the exchanges have broad appeal. Integral to this has been the acquisition of Falk Realtime, which accelerated the group’s capabilities in real-time bidding and programmatic technologies, the launch of RV on the Fyber exchange in H215 and, more recently, the launch of a private programmatic marketplace (ad server) as well as the acquisition of Inneractive, which has widened its footprint beyond the gaming segment.

RNTS Media was early in anticipating the industry’s move towards programmatic trading of ad formats and the popularity of video, and the 90% pro forma growth reflects a strong performance across all of the exchanges, but in particular these areas.

Programmatic accelerates: Fyber RTB (formerly Falk Realtime) was acquired for €10.7m in April 2015 and enables the programmatic real-time trading of ad formats and ad serving. The platform was fully integrated into the Fyber exchange in H116, and has been rebranded as Fyber RTB. It has seen exceptional growth – revenues have increased twelvefold year-on-year and doubled sequentially (on H215), benefiting from integration into a larger group and the ongoing trend towards the programmatic buying of ad formats in the industry. As Fyber RTB has moved past the concept stage, it has also been able to improve its gross margins, which increased from 9% in FY15 to 14%. Inneractive, which also has RTB capabilities, has similarly reported ahead of plan, with y-o-y revenue growth of 158%.

Video off to a strong start: historically, Fyber mainly traded ‘offer wall’ formats, a small part of the overall market (appealing specifically to the games publishers). These formats have seen growth plateau as demand patterns have swung towards more current formats (video, interstitials, native) and technologies (RTB, programmatic). Fyber has invested in widening the range of formats it can offer, and in H215 launched RV, which has had an impressive take-up from a standing start, reporting RV ad impressions up 190% y-o-y and is now making a material contribution to revenues (c 44% of pro forma group revenues).

In July, management raised its full year revenue guidance to pro forma revenues of “over €185m” in FY16 and “over €240m” in FY17, which would leave the group on track to reach EBITDA break-even towards the end of FY17. This target appears eminently achievable. On the strength of H116, H216 growth need only be in the high single-digit range to deliver the FY16 target.

Given the inherent volatility in the digital advertising sector, we applaud management’s caution; Inneractive is a recent addition to the group, the RTB service is still fairly new and there is limited revenue visibility. Nevertheless, given the fact that H2 is typically seasonally much stronger (60:40), the risk to our forecasts is clearly on the upside.

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.

As of June 2016, RNTS reported net debt of €92m. In July it subsequently placed the final €25m tap of the convertible bond (in aggregate it has issued €150m, accruing interest at 5% pa, which 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). These funds have largely been used to fund the acquisitions of Falk, Heyzap and Inneractive and to fund working capital. Liquid funds at the end of August, post the first payment for Inneractive, were €26.7m. In addition, the company holds a credit facility with Bank Leumi of $8.0m, of which $2.5m is drawn.

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 €25m in FY17 and approximately €5m in FY18 for the acquisitions and additional working capital needs in FY17. Management is currently reviewing its options for both equity and debt-based financing. For the purposes of our model, we have assumed this shortfall is debt financed.

Our forecasts are presented in full in Exhibit 3.

As the sector matures, value is increasingly being attributed to overall scale, critical in network effect businesses, and profitability. At the current share price, RNTS’s 2.2x FY16e EV/Sales (pro forma for Inneractive) and 1.7x FY17e EV/Sales are in the mix of private company valuations and towards the top end of public company valuations. RNTS is moving up the ‘league table’ in terms of gross revenues and, with the current momentum in trading, this premium is looking increasingly justified. EBITDA profitability – targeted towards the end of 2017 – and additional funding are the next hurdles for the company. Continued strong trading should ease the path.

For a more detailed report on RNTS Media, please refer to our July outlook report Monetising its widening reach.

A glossary of terms can be found here.