RNTS Media — Update 19 January 2016

In June last year, RNTS announced its goal to make acquisitions to bring its revenue run rate to €150m. In July 2015 it issued €100m of convertible bonds, earmarked in part for this. The acquisition of Heyzap on 8 January 2016, a mobile SSP based in San Francisco, is the first major step in this direction. Founded in 2009, Heyzap has grown very quickly; it generated $13m of ad revenue last year (according to mobyaffiliates), with the incoming team targeting $20m in FY16. RNTS will pay an initial $20m in cash and up to $45m in earn-out payments (mainly cash) contingent on very ambitious targets by 2017. Heyzap’s previous owners can trigger the earn-out after 12 or 18 months. The ultimate size will be determined based on the level of Heyzap’s total advertising revenue under management and the growth in exchange revenues, with RNTS paying a reducing multiple for incremental revenues above a certain base. We assume a revenue growth rate of c 60% in FY16 for Heyzap and factor in half of the potential earn-out in our cash flow. Based on the initial $20m payment, this suggests a historic EV/Sales multiple of 1.5x, at the low end of recent acquisition multiples paid and below Fyber’s own EV/Sales rating 2.5x. In our forecasts we assume RNTS pays approximately 1.0x sales for revenues in the earn-out.

Heyzap’s services to a large extent mirror those of Fyber’s (mediation, ad serving and ad exchange) and, in acquiring Heyzap, Fyber is consolidating a fast-growing competitor, adding market share in a sector where scale and exchange liquidity are important revenue drivers. It should also accelerate the introduction of some key advertising formats on the Fyber ad exchange:

We view this last point as key – over the last 12-18 months, Fyber has succeeded in developing a leading mediation solution, although revenues (generated by converting this mediated traffic to its ad exchange) have stagnated as the market moved increasingly towards newer formats such as video, interstitial and native advertising and away from offer wall products, where Fyber was strong historically.

The acquisition of RTB technology with Falk Realtime last year, together with the launch of rewarded video on its exchange, were the first steps in increasing the monetisation of its MAUs (and judging by the Q3 results, these are starting to deliver good results, with conversion rates increasing) and Fyber has also been investing in the development of other formats such as interstitial with a view to launch during 2016. This acquisition should accelerate this time line and we hope to see a greater conversion of ‘mediated revenues’ to reported revenues in 2016.

In October 2014 RNTS acquired Fyber, which accounts for c 92% of pro forma revenues. Consequently, we analyse results on a pro forma basis, which excludes the discontinued divisions (over the last six months, management has wound down loss-making mobile and online games publishing businesses) and assumes 12 months’ contribution from its core operating divisions: Fyber, a global mobile app-centric, supply-side advertising technology platform; and BSG, a Korea-based provider of educational content.

In Q315, overall revenue increased 20% y-o-y, an acceleration from that seen in Q2 (+9%) and, with a similar currency benefit in each quarter, it seems that RNTS has returned to underlying growth (we estimate that currency accounts for c 14pp of revenue growth in Q2 and Q3).

Gross margin decreased by five percentage points to 30% (from 35% in Q2) due mainly to business mix effects and a generally highly competitive environment. Adjusted EBITDA loss (before restructuring and one-off costs) of €5.6m in the quarter was higher than in Q2 (€3.7m) despite the stronger top line as the group continued to invest in group structure, sales capacity and platform investment; FTEs at the end of the quarter stood at 292 from 235 at December 2014. For the nine months, the revenue run rate is €56.6m (+17% y-o-y), with cumulative adjusted EBITDA losses of €11.4m, or €23.0m including non-recurring and exceptional items.

Exceptional items of €6.0m in the quarter include a €4.5m impairment charge against BSG in light of its ongoing trading losses, €0.7m amortisation on acquired intangibles, €0.2m of stock option awards and €0.6m of costs relating to the listing upgrade on 27 July 2015. Year to date, non-recurring charges total €10.0m.

Reported net debt at the end of September reduced to €5.4m (from €8.3m at June 2015), as the €100m convertible is accounted in part as debt (€88m) and the balance as equity. Post the convertible, RNTS reported cash and equivalents of €84.8m, approximately €18m of which has been used for the initial Heyzap consideration. Depending on the scale of any planned acquisitions, this should provide adequate funding for several years. However, the company is authorised to issue a further €50m in convertible bonds if necessary. It also has a credit line in place with Silicon Valley Bank (SVB) for up to €10m.

Fyber’s mediation solution is offered free of charge to app developers, publishers, advertisers and their intermediaries, enabling these parties to link to key trading platforms and exchanges (including Fyber’s) from a single interface, together with its own algorithm to help maximise ROI and an analytics interface. By increasing its reach to publishers, Fyber is securing a supply of inventory for its ad exchange where it takes a c 30% commission.

Historically strong in offer wall and app distribution, over the course of the last year management has been investing to ensure that the Fyber exchange also captures its share of the market in emerging advertising formats, notably in the launch of the Mobile Video product on its exchange over the summer. Further enhancements have been made, including the launch of Mobile Video on Android, an optimised video player and pre-caching improvements, and the Falk Realtime RTB technology (which will be fully integrated into the Fyber platform in the coming quarters).

The benefit of this investment is not yet evident in headline figures – on an underlying basis, growth at Fyber has remained weak as the market sees an accelerated shift away from offer wall to newer formats, notably rewarded video where Fyber only recently launched its product. Q3 revenues were up 21% (15% ytd) but, as highlighted earlier, there is a strong currency benefit in reported figures. However, there are some positive trends emerging, which should ensure that Fyber returns to strong growth during 2016:

Revenues at BSG increased by 5% to €1.4m in the quarter, although year to date growth remains impressive: +60% for the nine months on the back of the distribution of the LG KidsPad II in Korea, and contract wins with Korea’s largest English school (Chung Dham) and the leading Chinese online language school (Moon Junga Institute). However, gross margins on bundled hardware products are fairly low and despite the impressive revenue growth the division remains loss-making at the EBITDA level (€0.5m for the nine months to September 2015). Management is reviewing its strategic options and in light of the trading losses has written down its value by €4.5m.

We update forecasts for both Heyzap and Q3 results. Overall, we are increasing our forecast adjusted EBITDA losses from €9.4m to €16.7m in FY15 and from €5.5m to €16.6m in FY16. In FY15, the downgrade is driven by our expectation of a lower gross margin (as a result of Falk’s strong growth) and the step-up in product and market investment in Q3. In FY16, we also factor in approximately €2.3m of EBITDA losses relating to Heyzap.

2015 has been a period of transition and investment as Fyber builds out its product suite and platform. The video product was only recently launched, Falk’s RTB technology is being integrated and the Heyzap acquisition may help to accelerate the introduction of interstitials to the exchange. These additional services are key to increasing the monetisation of Fyber’s significant MAU base via its mediation solution. Initial results from its video product are very encouraging, but in a group context remain small. To grow into its premium FY16e EV/Sales multiple of 2.5x, investors will need to see a steady increase in the conversion rate of traffic and evidence that recent product launches and improvements to the technology stack are set to have a meaningful impact on revenues.

RNTS has further acquisitions in its sights, and with the valuation of ad tech companies pared back over the last 12 months, further successful acquisitions may also help support the current rating.