RNTS Media — Update 22 November 2016

Management has reported results for the nine months to September 2016 on both a reported and on a pro forma basis. Pro forma figures are inclusive of Inneractive, which was acquired in July 2016, 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.

PF revenues +83% for the nine months : After 90% PF revenue growth in the first half, momentum was maintained in Q3, which saw PF revenues increase by 71% y-o-y. Sequentially, compared to Q216, which benefited from Euro 2016, Q3 revenues were broadly flat. While revenues at Inneractive (which increased 158% in H1) continued to grow strongly during the period (up 10% sequentially on Q2), those at Fyber and Heyzap were a little softer than Q2, affected in part by some technical upgrades (now complete) and some short-term challenges by customers related to recent mobile phone software upgrades. These upgrades were deliberately brought forward into Q3 to avoid any disruption in the seasonally more significant Q4 period.

Gross margins were down slightly at 28.7% in Q3 (29.8% 9 months to September), as a result of ongoing business mix effects with Fyber RTB (which has lower margins than the rest of the group) continuing to deliver exceptional growth. The underlying margins for the Fyber exchange remain solid, and those at Fyber RTB continue to trend upwards (at 15.1% across the nine months, they are double the level in the equivalent period in FY15), however, those at Inneractive reduced slightly as a consequence of some adjustments in the customer portfolio post acquisition.

Q3 PF EBITDA loss of €3m brings the year to September loss to €5.3m (vs €11.1m for the same period last year). The group is putting in place the systems and staff necessary to support the scaling of the business and consequently the operational gearing effects from strong growth in gross profits are being tempered in the current year. Furthermore, in Q3, expenses were higher than the typical run rate, affected by a number of one-off costs. These include the above-mentioned platform upgrades, higher one-off personnel costs as well as increased server costs reflecting the continued strong growth of mediation traffic and programmatic bid requests, which while indicative of good future growth opportunities are not yet being monetised.

Non-recurring items for the nine months of €15.6m relate largely to the group’s legacy and recent acquisitions. €12.3m of this is non-cash and includes share-based payments (€2.5m) and amortisation of acquired intangibles (€5.8m) along with the revaluation of loans at Inneractive during the acquisition (€4m). The balance relates to acquisition and restructuring costs associated with the exit of legacy non-core operations (Big Star Global).

Balance sheet – seeking additional funding to satisfy earn-outs: The €10.3m 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). The bonds have a 5% coupon although for accounting purposes, IFRS requires a higher interest calculation to reflect the discount. As of 30 September and inclusive of the initial $71m payment for Inneractive and Heyzap, RNTS reported a net debt of €111m and had €28m of liquid funds available, in addition to a credit facility of $8m ($2.5m drawn). Although the group is now forecast to break even on an adjusted EBITDA basis in Q416, additional resources will be required from early 2017 to cover the earn-out payments of up to €28m in FY17 and c €5m in FY18 for the acquisitions, as well as to provide additional working capital flexibility. Discussions with a number of banks are underway, with results expected in Q416 and equity financing should also not be ruled out.

FY16 revenue guidance was recently upgraded by 10%, to ‘over €205m’. This is the second increase in revenue guidance this year. The strong trading means the company should break even on an adjusted EBITDA basis in Q416 rather than during 2017 as previously targeted. The company’s guidance for 2017, currently for pro-forma revenues of ‘over €240m’, will be updated once it has finalised its budgeting.

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 of 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 a monthly active user (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 acquisitions, RNTS is now focused on monetising an increasing share of its advertising traffic.

Investment has been focused on widening the range of formats that the exchanges can offer, providing a complete technology stack to ensure that the exchanges have broad appeal, which in turn enables RNTS to service a wide range of industry verticals. 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 video 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 can now address all the app verticals outside the major owner and operated (O&O) apps such as Facebook.

RNTS Media is now well positioned in the most rapidly evolving segments of advertising technology sector: mobile, programmatic and video. Underpinning the exceptional revenue growth in the first nine months of 2016 has been the uptake of programmatic trading and video across the exchanges.

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 (a twelve fold increase in H116), 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% in H116. Together with the RTB capabilities at Inneractive, programmatic and RTB trading across all ad formats increased by 200% during Q3, accounting for 60% of revenues.

Video is now making a material contribution to revenues: Historically, Fyber mainly traded ‘offer wall’ formats, a small part of the overall market (appealing specifically to games publishers). These formats have seen growth plateau as demand patterns have swung towards newer formats (video, interstitials, native) and technologies (RTB, programmatic). Fyber has invested in widening the range of formats it can offer, and in H215 launched rewarded video (RV), which has had an impressive take-up from a standing start, reporting revenue growth of 150% in Q316. Video (both rewarded and non-rewarded) represented 40% of ad formats traded in Q3.

We are increasing our forecasts to reflect the ongoing strong momentum and management’s recent increase in guidance. These changes are summarised in Exhibit 3 and our new forecasts presented in full at the back of this report.

Our new forecasts assume PF revenue growth of approximately 67% in FY16, reducing to 28% in FY17 – this puts our forecast PF revenue in FY16 at €215m, consistent with management’s guidance of ‘over €205m’. We do not consider this target overly aggressive; to reach our forecast, Q4 revenue growth will need to be approximately 40%, down on the 80% delivered for the first nine months of the year.

For FY17, we have left our forecast growth rates broadly unchanged (28%), but the higher base effect from FY16 results in a 9% increase to our revenue expectation at €275m.

With the group expected to break even on an EBITDA basis in Q4, and having seen the step up in investment during the course of FY16 to support a rapidly growing company, in FY17 we forecast the pace of operating expense growth to moderate to c 7%. Consequently, much of the strong revenue growth we forecast should convert to profit and we now expect an adjusted EBITDA profit of €3.9m in FY17, whereas we previously forecast a loss of €4.2m.

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 1.9x FY16e EV/sales (pro forma) and 1.3x FY17e EV/sales are in the mix of private company valuations and towards the top end of public company valuations. This premium valuation is looking increasingly justified; with its focus on mobile, programmatic and video, RNTS Media operates in the fastest growing areas of the advertising ecosystem and as a result of its current momentum, is moving up the ‘league table’ in terms of gross revenues. EBITDA profitability is expected to be reached in Q416, which should help ease the path to securing additional funding.

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.