Getting with the program
The digital age has meant that a growing number of industries are subject to increasing disruption.
None more so than the media sector where traditional players have had to move with the times to survive. This has also had profound implications for the advertising industry, with many participants having to change their modus operandi, and evolve to maintain profitability and survive. This is highlighted by a graph showing the current drivers of US ad revenue growth.
Source: Investor Presentation
engage:BDR (ASX:EN1) is one company that has certainly moved with the times. The company provides programmatic ad buying which has changed the face of online advertising. engage:BDR (ASX:EN1) has “developed proprietary technology that manages internet video and display advertising for advertisers, advertising agencies and the websites what display those advertisements”.
The company integrates client platforms into its own programmatic platform enabling the buying and selling of advertising inventory through an online marketplace.
The company is based in the US, but listed on the ASX late last year. We recently met with the company, and believe it is an interesting opportunity (albeit speculative and high risk) to present to Members.
The company completed an IPO (significantly oversubscribed) in September 2017, raising A$10m through the issue of 50,000,000 shares at A$0.20 each (with a 1 for 2 free attaching option exercisable for 3 years at A$0.25) and listed on the ASX in late December 2017. Encouragingly, the founders (who own 58% of the company) did not sell down and have entered into voluntary escrow arrangements for 100% of their shares for 12 months and 50% of their shares for 24 months.
The Company has a short listed life, but has been in operation for 9 years.
engage:BDR (ASX:EN1) has chosen to list in Australia given a mandate to ‘acquire’ strategic growth through regional expansion in Asia. The company has two main business divisions; programmatic advertising and influencer marketing.
Source: Investor Presentation
What is Programmatic advertising?
Programmatic advertising effectively means the use of technology to replace tasks that were traditionally performed manually by ad buyers and publishers (sellers).
This is a move away from face to face presentations, price negotiations, the signing of physical order forms and contracts. Programmatic advertising involves trading digital ads in an automated manner in real-time. The highest bidder in this highly automated online action is determined in milliseconds.
The clear advantage of programmatic advertising is less manual intervention, greater efficiencies and lower costs. Inventory is also purchased and sold when needed. Not surprisingly the space is growing strongly, and media research group, Zenith estimate that around two-thirds of all display advertising will be traded programmatically by 2019. Other views are that virtually 100% of digital media will be transacted programmatically within 5-10 years.
engage:BDR has been involved in both traditional digital advertising and programmatic advertising, but last year made the decision to transition entirely to the latter. This has seen the company eliminate almost of its sales team (and 60% of total headcount) and thereby reduce costs dramatically and bolster operating margins significantly.
Source: engage:BDR (ASX:EN1) Investor Presentation
It also means that the level of operating leverage the company has is rising significantly, with a now relatively fixed cost structure.
The Company has completed 82 client integrations to date and has a further 65 in its business development pipeline. Integrations are where engage:BDR connects an online ad agency’s technology to directly interface with its programmatic market place. Gross margins are around 50% per integration. FY18 revenues for the unit are forecast at A$24 to $24.5 million.
The company claims that its ‘secret sauce’ and barriers to competitors include a heavy investment in technology, along with entrenched relationships with publishers.
The overall reach is also impressive, with 97% internet penetration in the US, reaching as many as 505 million monthly global unique users, by conducting 30-40 billion dynamic online auctions per day.
The company has such a reach and position for a reason. Engage:BDR has been ranked as high as No.1 on comScore’s U.S. Display Ad ratings and No.9 on comScore’s U.S. Video Ad Panel rankings. Engage was ranked 12th for video and 20th for display in January 2017 (Source: comScore)
Publisher Relationships
Source: Investor Presentation
The company’s influencer marketing unit comprises the IconicReach platform. This is an Instagram influencer marketing programme which allows advertising buyers to browse, research and contact Instagram influencers concerning a proposed influencer marketing campaign.
The rise of influencers has also occurred on the back of ‘Ad-Shy’ Millennials. As the company notes ‘Younger generations are increasingly sensitive to more traditional forms of advertising, often engaging tools like ad blockers. Brands can change the way they communicate with this group by partnering with content creators to present their products in a genuine, accessible way.”
Adweek estimates the size of the market to surpass $10 billion by 2020.
IconicReach was set up last year and was officially launched at the Sundance Film Festival in late January 2018. The unit is a smaller part of the pie (at this stage), but very profitable with margins of around 70%. Projected full year revenues for 2018 of A$2 million have been achieved in the first two months of the year and the business is expected to achieve A$3 million in revenues for FY18.
Source: Investor Presentation
Management meeting
We recently had a meeting with the company’s founder and CEO Ted Dhanik. He certainly has had an interesting history in the technology sector, having been worked alongside the founders at MySpace in 2003 to 2008, where he helped launch the brand and developed strategic marketing initiatives.
MySpace was the largest social networking site in the world up until 2010. It was acquired by NewsCorp for $580 million in 2005, but subsequently sold for $35 million in 2011 as the company’s brand faded. He also worked in business development at LowerMyBills.com from its early days until its acquisition by Experian.
Trading update
Last week the company released a market update along with 2018 revenue and earnings guidance.
engage:BDR (ASX:EN1) expects annual revenues to grow to between A$24 and $24.5 million in 2018, with EBITDA (earnings before interest, tax, depreciation and amortisation) for the full financial year forecast to be between A$1.25 and A$1.5 million. engage:BDR (ASX:EN1) is therefore potentially at a strong business inflection point as it moves to being earnings and cash flow positive.
The Company itself up until last year has grown largely organically, with cumulative revenues since inception of around A$170 million.
Source: Investor Presentation
The company reported a robust start to the year with January 2018 programmatic revenue 280% higher than for the previous corresponding month while February 2018 programmatic revenue was some 310% higher than the same period last year.
Management expect further strong growth in the programmatic advertising business during 2018.
It is worth highlighting that the company did see a decline in revenue in 2017 and suffered from what looked to be a ‘cash crunch’.
Delays in the IPO meant that the company could not reserve and pay for media in the fourth quarter, historically the largest revenue month for the media sector. Such liquidity issues will however have been addressed post the capital raising, but nonetheless highlights what can go wrong when funding runs out.
The Company’s influencer marketing business “IconicReach” is also expected to exceed earlier forecasts for the 2018 calendar year of A$1.2 million in revenues with a 50% gross margin. The company has gone close to achieving this in the first two months of 2018, and is forecasting revenues in its influencer marketing business in the vicinity of AUD $3m for the 2018 year.
Costs are also heading in the right direction, with management having achieved an impressive overall monthly cost reduction of A$516,000 (A$234,000 in monthly payroll and A$282,000 in general and administrative expenses). This follows a winding back of the traditional non programmatic digital advertising business and the significant growth of programmatic which is higher margin. Margin strength has also been underpinned by the migration of digital advertising from display to video.
This transition is continuing to underpin margin strength for the company.
In the 2015 financial year gross trading margins were 26.6%. These improved to 40.6% in 2016, and in the year ended 31 December 2017 had increased to 48.2%.This also stands the company in good stead for sustained earnings growth given a robust outlook for digital ad spending in the US and worldwide.
Source: Investor Presentation
In the context of a company currently capitalised at around the A$40 million mark these forecasts are encouraging to say the least. The proof will be in the pudding, although it is worth highlighting again that while the company has only been listed for a short space of time on the ASX, the business history extends to almost a decade.
A point to note though are management’s comments on the balance sheet. They state that while the 2017 balance sheet shows trade and other payables of approximately A$11.3 million, an investigation is underway with respect to ad fraud amongst a number of the Company’s suppliers. Management believe that once this is resolved there is expected to be significantly less than the trade payables amount shown in the 2017 financial balance sheet. This is slightly alarming in the first instance for a relatively newly listed company, but we will also be following the situation closely.
Summary
The company is clearly an interesting, albeit risky proposition. engage:BDR (ASX:EN1) is valued at around 3 times trailing revenues, and investor appetite has clearly been piqued over the past week by a number of investor presentations.
We will be monitoring the shares closely and following the company’s progress in what is clearly a high growth sector, with engage:BDR (ASX:EN1) seemingly well positioned within it. We are putting engage:BDR (ASX:EN1) on a traffic light alert, and will advise Members if and when a buy recommendation is in order.
