Single Touch Systems
Initiation of coverage
Mobile media group with IP option value
Software & comp services 16 May 2014
Single Touch Systems (SITO) is rolling out new messaging services and has diversified into the fast-growing mobile media market – we forecast strong revenue growth to continue. Furthermore, the strategic value of the Walmart relationship and the IP adds an option value to the share; last
Price
US$0.35
Market cap
US$50m
month’s deal with a major US broadcaster is a strong validation that there is value in its patents and further deals could follow. In our view, this is not fully reflected in the share price.
Net debt March 2014 ($m)
Year end
Revenue ($m)
PBT* ($m)
EBITDA ($m)
EPS (c)
EV/EBITDA (x)
EV/Sales (x)
09/12
6.3
(2.8)
(1.6)
(2.1)
N/A
8.1
09/13
7.8
(3.0)
(1.1)
(2.2)
N/A
6.6
09/14e
9.3
(1.4)
(0.0)
(1.0)
N/A
5.6
09/15e
10.8
(0.4)
0.3
(0.3)
204.7
4.8
1.7
Shares in issue
142.8m
Free float
61%
Code
SITO
Primary exchange
OTCBB
Secondary exchange
N/A
Share price performance
Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.
Mobile media and marketing – widening its reach A mobile notification solution for Walmart’s pharmacies accounted for 87% of revenues in FY13. Management’s strategy is to widen its reach; Walmart recently renewed its contract with channel partner AT&T for another two years and it now offers over 40 different messaging programmes to Walmart customers. Furthermore, it has recently expanded into the fast-growing mobile media market with the launch of a location-based advertising (LBA) service ‘FollowMe’ which is being used by a growing roster of clients.
Patent monetisation – important validation SITO also has a portfolio of 20 patents and pursues a strategy of IP monetisation. It reported its first success against Zoove in November and last month announced a deal with a US broadcaster regarding its streaming media patents. This validation from a high-profile participant in the industry could pave the way for future deals.
Forecasts: Pace of roll-out of new services There is considerable scope for growth from the Walmart relationship; the pharmacy product is used by only 9% of customers and some of the new services, such as e-receipts, look promising. FY14 will also include inaugural media revenues where management reports a strong pipeline of deals plus first patent agreements. The operating division became profitable a year ago, and we forecast the group to become EBITDA positive during FY14 on revenue growth of 19%.
Valuation: Core and strategic value The patents and the database of customers offer significant strategic value and add an option value to the share. We estimate the value of the operating division at 2339c per share, which implies the market is attributing little value to the strategic assets. Catalysts to increase the valuation include news regarding the roll-out of
%
1m
3m
12m
Abs
(22.0)
(23.7)
(47.6)
Rel (local)
(23.2)
(25.0)
(53.6)
52-week high/low
US$0.74
US$0.35
Business description Single Touch Systems (SITO) is a technology driven mobile media marketing company specialising in push notifications, abbreviated dial codes, loyalty rewards and location-based marketing. With 20 patents and 29 in application, it also pursues a strategy of IP exploitation.
Next events Q3 results
August 2014
Analysts Bridie Barrett
+44 (0)20 3077 5700
Fiona Orford-Williams
+44 (0)20 3077 5739
Dan Ridsdale
+44 (0)20 3077 5729
[email protected] Edison profile page
new messaging and media services to new and existing customers, a transition of the Walmart database to enable push marketing, and further patent deals.
Single Touch Systems is a research client of Edison Investment Research Limited
Investment summary Company description: Mobile media and IP monetisation SITO is a mobile media company that also pursues a strategy of IP monetisation. In FY13, 87% of its revenues were derived from its reminder messaging service for Walmart’s chain of pharmacies in the US. Led by advertising veteran James Orsini, the group is striving to deepen its penetration into and beyond Walmart by extending its product range. It now offers over 40 messaging solutions for Walmart, of which a number of services (notably e-receipts and online shopping notifications) offer substantial growth opportunities. Furthermore, it is in early stage discussions with Walmart regarding the transition of its database of 70m mobile phone users to ‘opt in’ for push marketing messages that would significantly increase its addressable market. It has recently launched a range of innovative mobile media solutions, notably a location-based advertising service, which gives it exposure to the rapidly growing media advertising market and is helping it to diversify its client base; it now counts Hibbett Sports, Hy-Vee, Fresh Direct, the New Jersey Lottery, Amazon and Radio Shack as clients. It is one of the few companies in the US to offer a suite of mobile media services on a national basis that can be delivered across all US carriers. SITO reported its first IP monetisation success related to its abbreviated dial code technologies in November 2013, and last month announced a landmark deal with a major US broadcaster in relation to the assertion of its streaming media patents. It has recently bolstered its board with the recruitment of two directors experienced in IP monetisation to lead initiatives in patent monetisation.
Financials: Depend on the speed of roll-out of new services The message notification service provides an organically growing, recurring revenue stream, which (excluding the cost of the IP division) has been profitable since Q213. The platform is scalable, and the business model operationally geared. In the quarter to March 2014, messaging revenues (-3% y-o-y) deviated from the 20% growth delivered over the previous 18 months, affected by mix effects and some one-off factors. However, growth has reportedly recovered in April and May, and we believe there remains considerable room for volume growth from the Walmart relationship. Additionally, management reports a strong pipeline of deals for the new media services, and FY14 will also include $0.75m from its first patent agreement. We initiate revenue forecasts of $9.3m in FY14 and $10.8m in FY15 with EBITDA break-even forecast at group level during FY14.
Valuation: Both core and strategic value should be considered In addition to its operating business, SITO has a number of strategic assets. Its marketing relationship with the US’s largest retailer is in itself an asset, and should it succeed in transitioning its database this could be a transforming business development for SITO. Although there is little visibility on the patent claims being developed, recent deals show there is value in its portfolio. These assets add an option value to the share. Using a range of recent deal values in the sector and peer multiples, we derive a valuation range of 23-39c per share for the core business ($32m$56m). At the higher end of this valuation range, it implies that the market currently assumes no value for the strategic assets. Catalysts to share price performance include evidence of a successful roll-out of the core messaging services, news regarding the transition of the Walmart database and news regarding new patent deals. The company is considering a NASDAQ listing, which would support expansion and the possible refinancing of $3.9m of debentures due to convert or be repaid this year. Sensitivities include high dependency on one customer; the pace of roll-out and pricing structure of services is controlled by Walmart; the timing of licence deals is unpredictable; new services may be more or less successful than forecast; prices could come under pressure as volumes ramp; competition and technological obsolescence in a rapidly evolving market; and regulation.
Single Touch Systems | 16 May 2014
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Company description: Mobile media with IP potential SITO is a mobile media group with two distinct sides to its business. Its operating division provides mobile messaging and media solutions to retailers, advertisers and brands predominantly in the US. In FY13, 93% of its revenues were derived from its “Come here. Be there.” message notification services for Walmart, of which 87% was derived from one product – a prescription notification services for Walmart pharmacies. It is systematically widening its footprint both within Walmart and to other customers. It now offers Walmart over 40 different messaging solutions and serves approximately 20 clients, including Hibbett Sport, Hy-Vee, Fresh Direct, the New Jersey Lottery, Radio Shack, and notably it is rolling out an internal employee communication service for Amazon.com. SITO has also recently launched a location-based advertising (LBA) service. This is a nascent, but rapidly growing advertising niche and its FollowMe service should contribute to revenues from the current year. SITO also pursues a strategy of patent monetisation. It has a portfolio of 20 patents (and a further 29 in application) relating predominantly to mobile communications and streaming media.
Company background The company was founded in 2002 by Anthony Macaluso, an inventor and entrepreneur who developed the company’s mobile messaging platform. By integrating its messaging gateway platform with its customer’s CRM database, SITO is able to send highly targeted mobile marketing messages based on a shopper’s CRM profile. Messages are in the form of either an automated voice message or an SMS (Short Message Service). SITO’s operational breakthrough came in 2009, when, through its distribution relationship with AT&T, it struck a relationship for reminder messaging for Walmart’s chain of pharmacies in the US. For only a few cents per message, the service reduces time-consuming customer calls into the pharmacy and improves its stock management, while also offering a value-enhancing service to its customers. From the modest initial trial in two of Walmart’s stores in 2009, over the last four years this programme has been extended to all of Walmart’s 4,700 US retail locations and walmart.com. SITO is now serving over 800,000 messages per day on behalf of Walmart’s pharmacies, a tenfold increase in three years.
Company strategy For the operating division, management’s strategic priorities are to:
penetrate deeper into Walmart, both for the current services on offer and by introducing new services; and
expand the range of services offered and its client list to share in the forecast rapid growth in the mobile advertising market.
For the non-operating division, management is focusing on the patents it sees as having the largest near-term potential; streaming media.
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Management Anthony Macaluso handed over responsibility for running the company in May 2011 to James Orsini and left the company and the board in December 2013. The management and board has recently been strengthened with the addition of Kurt Streams as FD and Peter Holden whom are experienced in IP monetisation. Collectively, the board and senior management have a very impressive and relevant résumé (a full list is included on the back page). James L Orsini (CEO) has over 25 years’ experience in the media and communications industry. Before joining SITO, he worked for five years in a senior finance and operations capacity at Saatchi and Saatchi New York and before this was COO for Interbrand (North America). Earlier in his career he worked at KPMG and Goldman Sachs. Jerry Hug (EVP Corporate Strategy) joined SITO in 2011 from Wireless Retail Inc (now Radio Shack) where he was chief strategy officer and interim CFO. He has 20 years of capital market experience. Previous roles include managing partner of Redwood Partners, a merchant bank with a TMT focus and director in the Corporate and Executive Services Group at CIBC World Markets. He began his career, and spent eight years, in the Private Client Group at Merrill Lynch. Kurt Streams (CFO) joined SITO in December 2013 with a track record in media and IP management. He has had three previous CFO roles including at Nasdaq-listed Norland Medical, ICIA Inc, where he managed patents and licensing for its branded consumer products, and The Deal, a private equity owned publishing company. Peter D Holden (director) joined SITO in March 2013. He has had a long career in IP investment, acquisitions and monetisation. He founded the IP Investment Group at Coller Capital, a global private equity firm and Invisible Hand LLC, an IP venture fund. He has also held a number of other senior positions in the IP industry, and at US and Japanese universities. He is currently also senior VP of corporate development at IP VALUE Management.
Operating division – mobile media and advertising Mobile media – fastest-growing media market The widespread take-up of smartphones (at December 2013, 156 million people in the US owned smartphones – 65.2% penetration), high-speed internet access and bundled data packages has led to a rapid rise in the use of mobile phones to consume media over the last few years. According to eMarketer, the average US adult spends two hours and 21 minutes per day using their mobiles for non-voice purposes – equal to the time spent online. Exhibit 1: Average time spent consuming media by US adults 5
2010
2011
2012
45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
2013e
Time in hours
4 3 2 1 0
online
mobile (non voice)
other digital
TV
Source: eMarketer
Single Touch Systems | 16 May 2014
Radio
Exhibit 2: The advertising mismatch 2013e
Print
37.4%
38.8%
19.0% 19.8% 10.9% 9.1%
TV
Online
19.2%
19.2% 5.0%
Radio
Mobile (nonvoice) Share of time spent with media Share of advertising spend by media
2.8% Print
Source: eMarketer, Edison Investment Research
4
Where eyeballs go, advertising usually follows and mobile advertising has grown to represent 5.0% of total advertising share in the US in 2013. However, as Exhibit 3 shows, there is still a considerable mismatch between mobile media consumption and its advertising market share. Differences in advertising effectiveness between media can lead to a mismatch in the amount of advertising allocated to different media. However, most surveys suggest that mobile advertising is one of the most effective media available; a recent survey by Fiksu found that cost per engagement of mobile app advertising is 10 times lower than paid search marketing and the second lowest among all advertising media; advertisers are becoming increasingly comfortable with the media. With US smartphone ownership forecast to continue to increase (65% of the population, December 2013), US networks rolling out nationwide 4G plans and advertising tools becoming increasingly sophisticated, mobile advertising is forecast to be the fastest-growing advertising media in the US. eMarketer reports that mobile advertising grew 120% to $9.6bn in 2013 and forecasts it to grow by 56% in 2014. By 2017 it expects mobile advertising will be greater than other online advertising and will be the second-largest advertising category after TV in the US (five-year CAGR to 2017 of 48%). Exhibit 3: Share of mobile advertising by format Other 1% SMS/MMS/P2 P messaging 3%
Displayvideo 38% Display banners, rich media and other 7%
Search 51%
Source: eMarketer 2013 estimate (July)
Exhibit 4: Advertising growth forecasts 2012
2013
2014
2015
2016
-Display
238%
133%
60%
45%
34%
25%
-Search
258%
167%
81%
57%
44%
29%
-SMS/
-11%
3%
2%
1%
1%
1%
-Other (classified, lead gen, email)
87%
231%
59%
70%
77%
68%
Total mobile
178%
120%
56%
42%
33%
26%
Total digital
15%
15%
13%
10%
9%
7%
7%
4%
2%
-2%
-4%
-7% 26%
- online and other - mobile
2017
178%
120%
56%
42%
33%
TV
6%
3%
3%
2%
4%
3%
Print
-5%
-4%
-2%
-2%
-1%
0%
Radio
-9%
-6%
-4%
-3%
-2%
-1%
Total
4%
4%
4%
3%
4%
3%
Source: eMarketer, August 2013. Note: Forecasts do not include reminder or notification messages, as not deemed marketing.
Although Google (41% market share of mobile advertising) and Facebook (16% market share) dominate mobile search and display advertising, the rest of the mobile media ecosystem is still forming and remains very fragmented. Even fairly high-profile companies such as Twitter, Apple and Millennial Media command only small market shares nationally (3%, 3% and 1% respectively). In this fast-evolving market, opportunities remain for smaller companies to make an impact.
Walmart mobile messaging services SITO’s revenues are currently derived predominantly from its reminder messaging services for Walmart. From a standing start, the CAGR in revenues has been 110% over the last three years with growth of 23% in FY13.
messages per year (million)
Exhibit 5: Message volume
Exhibit 6: Key message categories 2013
350.0
Walmart.com 13%
300.0 250.0 200.0 150.0 100.0 50.0 0.0
2010
2011
2012
Pharmacy messages
Source: Single Touch Systems
Single Touch Systems | 16 May 2014
Walmart pharmacy 87%
2013 Other
Source: Single Touch Systems
5
Pharmacy reminder service – headroom for further growth Walmart has the third-largest chain of pharmacies in the US with over 4,500 outlets. SITO is delivering 800,000 reminder messages per day on behalf of Walmart pharmacies, and although it is now integrated into all of Walmarts pharmacies, there remains significant headroom for further growth in messaging volumes from this service. Walmart issues approximately eight million prescriptions each day and take-up has been steadily increasing. SITO is in discussions with Walmart to introduce in-store marketing, which could drive an acceleration in take-up of the service. The current platform has been designed to handle up to two million messages per day, but could be easily scaled beyond this.
New messaging services – roll-out drives volume growth The mobile messaging gateway can be applied to a range of applications, and although the pharmacy service remains the largest service by a margin, over the last three years SITO has launched over 40 new messaging services for Walmart across a range of departments and products and more services are planned for 2014. A complete list is presented in Exhibit 7. Exhibit 7: SITO messaging services by launch year 2009 2010 Pharmacy Sight-to-Store Photo Customer Reviews Earth Day Alerts UPC Ratings & Reviews Product Tips (plants) Remodel Alerts HR-Recruiting Holiday Gift Ideas Benefits Program Responder Resume Responder
2011 Pick-up-Today Family Meals for Less CARS State Fair Community Action Network Presidential Towers SAMS Club Year Beginning Meeting ISD Year Beginning Meeting Click & Pull (PUT – Pick-up Today)
2012 New Releases (Movies) WMT Application Downloads Twitter WMT SMS Email FTP HR Intern eGift Store Locator ADV w/location (DEMO) Privacy Preference Center iFrame Website WMT ISD Diversity Meeting WMT YBM WMT Shareholder’s Meeting
2013 ASDA Layaway Scan & Go Logistics Leadership Meeting Share Holder’s Meeting Logistics Message Platform Pharmacy Scheduler Global Alert Link (GAL)
2014 Automotive deployment Expand layaway initiatives Sustainability initiatives (ereceipts) Labour force initiatives (logistics, work scheduling) Sponsored messaging
Source: Single Touch Systems
Looking in more detail at those that currently offer the most potential:
e-receipts – by entering their mobile number into the check-out key pad and texting an authorising code, the service enables a customer to receive an SMS version of their receipt. Given the enormous volume of daily shoppers to Walmart (approximately 20 million daily), ereceipts represent perhaps one of the largest near opportunities for SITO. It is currently being tested in 13 stores with plans to roll out to 3,500 stores from the spring. Without any marketing, in the test phase take-up has been fairly pedestrian (0.4% of daily footfall), but even at this level it could represent an incremental 15-20% of annual messaging volumes. Assuming takeup improves, this service could in time exceed that of the pharmacy service; a 10% (in line with the pharmacy service), take-up would generate approximately half a billion messages annually.
Walmart.com – customers receive messages when their shopping is ready to be collected. 17.6m ‘site-to-store’ and ‘pick up today’ messages were sent in FY13. Management estimates this represents a mere 10% of customers using these services.
ASDA.com – in the UK, SITO has been testing a notification service in 15 of its 500 stores for customers who order home delivery of groceries. Currently 3,000 messages per day are being sent and a nationwide roll-out of the service is being discussed.
Automotive services – SITO is in the test phase for Walmart’s chain of garages (eg ‘your tyres need changing’, ‘time for a service’). Take-up has been encouraging and a nationwide roll-out is likely (Walmart has 2,700 garages nationwide).
Sponsorship – targeted sponsorship for the pharmacy service is unlikely to materialise due to customer privacy concerns. However, in less sensitive categories (automotive, photo services,
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e-receipts), sponsorship is a logical next step and could more than double the revenue per message sent. SITO is currently in discussions with Castrol regarding sponsorship of the automotive messaging service.
Database transition would increase the addressable market significantly SITO has a database of 70 million mobile phone users (management expects it to reach 100 million by end 2014, 30% of all US mobile subscribers), who have opted in to receive reminder notifications. Following the change in TCPA regulations in October 2013, if Walmart wants to use this database to send push marketing messages (reminder messages are not deemed as marketing), customers will need to re-opt in. SITO is in early stage discussions regarding the transition of its database to enable a push marketing service. This would represent a valuable asset for Walmart, which currently does very little mobile marketing and no direct-to-consumer mobile campaigns as far as we are aware. Walmart represents 10% of the US’s $3.8tn retail industry and spends close to $2.5bn a year on advertising. If SITO succeeds in transitioning this database, it could be transformative for the company (valuation section on page 12 presents a scenario in more detail). SITO has already started operating databases on behalf of other customers that opt in to receive marketing messages – in 2013, it built a database of 500,000 unique users across 875 Hibbett Sports stores, generating a 14% redemption rate on coupons, a 6.1% sponsorship click-through rate and $8.5m in sales.
Mobile Media – extending its reach in a high-growth market Unlike most companies that offer SMS reminder message notifications (eg SITO’s main US competitors – Twilio and Vibes), SITO is one of the few companies that offers a suite of services, nationwide across all carriers. It also has experience servicing a national retail chain and can extend its services to 17 international markets. Importantly, as an independent company, the customer’s data remain the property of the retailer it serves (although it is maintained on SITO’s servers). Location-based advertising – “FollowMe”. SITO has recently launched a promising new location-based advertising (LBA) service which is helping it to widen its client base. LBA uses geofencing technology to enable mobile adverts and coupons to be delivered to customers’ smartphones when they are within a predefined radius of a location at a predefined time, giving advertisers the possibility to send highly targeted adverts to consumers at a time when they are more likely to make a purchase. The contextual relevance of LBA has been shown to lead to much higher mobile advertising effectiveness. ‘Verves’ 2013 study showed that restaurant campaigns that used location-based technology generated an average click-through rate of 1.2% compared to the 0.6 % for campaigns that did not leverage location. BIA/Kelsey expects it to be one of the fastestgrowing segments of mobile marketing. It forecasts spending on LBA to triple in the US to $2.74bn by 2017 ($0.75bn +100% in 2013). SITO’s FollowMe LBA platform, in partnership with The Mobile Audience (a mobile demand side platform) reaches 400 million consumers and can serve 40 billion impressions per month within 15 feet of a specific GPS co-ordinate. It ran its first campaign for Peter Piper Pizza (Texas) in July 2013 and has since done campaigns for the New Jersey Lottery, Radio Shack and GAF (the US’s largest roofing manufacturer) and management reports a strong sales pipeline into 2014. While we consider the FollowMe service to offer the most promise in the near term, other innovative services offered by SITO include:
‘WIN’ – The Workers Information Network is a secure mobile notification network to enable communication with employees; for instance, to distribute pay notifications or notify of shift openings. This service is used within the logistics group at Walmart, and SITO is currently
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rolling out this service for Amazon.com. While the WIN service in itself represents a fairly modest revenue opportunity, other services could follow in time.
Abbreviated Dial Code (ADC) – an ADC is an easy to remember short phone number with a voice interface that can be used for downloading content to mobile phones, or for speed dialling, for instance #WMT. Typically, they are used for improving brand awareness and an improved user interface. Forrester research in Q311 highlighted SITO’s ADC technology as one (of four) to watch for engaging customers with content.
Campaign management and analytics – the ‘Anywhere management platform’ is a web interface that enables clients to directly manage their messaging campaigns.
Sales and marketing is outsourced to AT&T’s Network Integration Division, which currently only markets SITO’s mobile marketing services. In addition, SITO recently built a small direct sales force to help drive the take-up of new services. Adam Meshekow (ex-head of mobile marketing at Toys R Us) and Peter Smith (25 years of advertising experience) joined SITO in February to start to drive direct sales opportunities in these emerging sectors and management reports a solid pipeline of deals.
Patent monetisation The ‘Single Touch Interactive R&D IP Period’ division focuses on the monetisation of its patent portfolio. Through its own development work and acquisition, it has accumulated 20 patents and has 29 in application. $940,000 has been capitalised and approximately $2.4m is expensed each year in relation to efforts in this division, which has recently reported its first successes. In November 2013, it agreed a cross-licensing deal and a $750,000 settlement with Zoove in relation to the use of its ADC technology and last month announced a landmark licence deal with a national broadcaster relating to its streaming media patents worth at least $1.1m in revenues to SITO over three years. Key patents relate to three broad categories:
Digital video and audio streaming, and dynamic ad insertion (eight patents). Management believes that many OTT (over the top) streaming services, such as those used by Netflix, iTunes and Amazon, have been developed using its technologies. Furthermore, it holds patents relating to the dynamic advertising insertion into these streams and the billing and tracking of ad revenues. Management considers this category offers the most near-term opportunity and the recent license deal validates its efforts.
Accessing information on a mobile device (three patents). These patents cover features that offer users improved effectiveness in accessing information on a mobile device. For example abbreviated dial codes for rapid access to services, or providing ads and coupons to these links. This category of patents is core to SITO’s operating business, and it is here that SITO reported its first success with Zoove in November 2013 (refer to our 18 November report for more detail). Zoove and SITO are the only companies in the US offering ADCs, and so further licensing opportunities are unlikely.
Sending information to and between mobile devices (six patents). For example, over-theair provisioning of smartphones and mobile devices to enable customers to retain their data and customised preferences when they switch phones and carriers. These services are increasingly offered as standard by most mobile operators.
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Deal with a national broadcaster – validation of value in patent portfolio Management has been focusing its attention on its streaming media patents, where it sees the most near-term opportunity and last month announced a potentially landmark deal with a significant US broadcaster. SITO and PMC (which also owns a range of patents in the area of streaming media) have jointly granted rights to use streaming media patents to a new joint venture company, Videostar, which will be owned 30% and 70% respectively. For $1.25m pa over the next three years (with an option to renew), Videostar has subsequently granted a US broadcaster a licence to use its patents and the right to assert its patents against infringing companies in relation to its broadcast TV programmes. Should this broadcaster receive favourable judgement, Videostar will be entitled to 20% of the proceeds (after costs). Streaming Media is a vast and growing market. Most of Videostar’s patents were granted before the launch of some now highly successful services (eg YouTube, Netflix). This deal is a strong validation for its patents from a significant participant in the industry and could pave the way for similar deals with other broadcasters. SITO engages with several lawyers to pursue its patents on its behalf and has made two highprofile recruitments (Peter Holden and Jon Sandelman) to drive its initiatives forward. In total 30 claim charts have been developed and letters of notification have been served to a further 10 companies in the US, including some of the world’s largest technology and media companies: HULU, Turner broadcasting, Netflix, VIACOM, Amazon, Google, Yahoo!, Apple, Dish Network, Facebook, brightcove. Given the size of this market, if SITO manages to assert itself, the returns could be significant.
Sensitivities The scale of the mobile value chain and the growth rates predicted have attracted a huge amount of inward investment and the mobile media value chain is still being established. Obsolescence and competition from well-funded global mobile, technology and advertising companies, and small disruptive technologies are ongoing risks. In addition, more specific forecast sensitivities include:
Client concentration. SITO is integrated across Walmart’s US and UK retail network and there would be considerable switching cost. However, should Walmart chose to change suppliers or take the service in house, it would pose a risk to the viability of the business.
Price pressure. Walmart is a cost-focused organisation with enormous buying power. The pharmacy service is paid by Walmart, but is free to the end user (FTEU). For newer programmes it is the consumer who pays. The FTEU rate is more than double that where the consumer pays. Price deflation poses a risk as volumes ramp, or if Walmart decides to transition from the FTEU model for the pharmacy service to the consumer-pays model.
Message volumes will be affected by the rate at which new customers sign up to the services. While the pharmacy product provides a fairly predictable recurring revenue stream, many of the other services are at the trial stage and may be more or less successful than we forecast. The timing of roll-out is largely driven by Walmart and the rate of take-up by customers is uncertain. Furthermore, message volume can be affected by factors affecting prescription volumes such as store openings/closures and seasonal variances in medications (eg a mild winter or a flu epidemic). So far, the services have not been actively marketed. SITO is in discussions with Walmart to introduce in-store marketing, which could accelerate the take-up of the services.
Regulation. New Federal Communication Commission rules under the Telephone and Customer Protection Act (TCPA) became effective on 16 October 2013, requiring the consumer’s express written (or electronic) consent to receive mobile marketing messages.
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SITO’s notification service has been deemed not to be for marketing purposes, so the vast majority of its databases have not been directly affected by this regulation and there has been relatively little impact on message volumes. Should the regulations change in the future, it could have a considerable impact on its business.
Building the ‘opt-in’ marketing database. Management is exploring the possibility of migrating its current database of contacts to one that could be used by Walmart for push marketing notifications. Under the new FCC rules, this will require customers to opt in to the service. While this should not affect the ongoing reminder messaging business, the migration process could cause some volatility in messaging volumes.
Licence deals. There is limited visibility on the claims being developed. The timing and value of any future deals is uncertain.
Financials Business model – recurring revenues, operationally geared The messaging services for Walmart provide a recurring and organically growing revenue stream (+23% in FY13). The Walmart contract with channel partner AT&T has recently been renewed for another two years and provides for two pricing structures; the pharmacy service is based on an FTEU model where Walmart pays on a per message basis. For the new services being rolled out, the customer pays. The FTEU rate is more than double that where the consumer pays. Although prices are fixed for each service, Walmart could chose to migrate services from one pricing structure to the other, although this would require customers to re-opt in to the service. After the cost of message delivery, licence costs and platform costs, gross margins were 57% in FY13, up from 54% in FY12. LBA services are project driven and after media-buying commissions, which vary depending on whether the sale is direct or via AT&T, can deliver gross margins of 6070%. Gross margins will be affected by the pace of take-up of the higher-margin LBA services relative to the messaging services, price pressure and any successes in its IP monetisation strategy. The business is operationally geared. We estimate that for every 1% increase in pharmacy message volume ($70k revenue), EBITDA increases by 15% ($40k).
Operating division became profitable during FY13 At a group level, SITO is not yet profitable. After operating expenses, which relate mainly to SITO’s 20 FTEs, D&A and G&A, it reported an operating loss of $3.9m and EBITDA loss of $1.1m in FY13. However, excluding the funding of the IP-related initiatives, the group reported that the operating division has been EBITDA positive since Q213.
H1 affected by ‘one-offs’, but back to trend growth in Q3 In H1, message volumes have been affected by a number of ‘one-offs’, although messaging volume growth has returned to trend in recent months and the FollowMe service is starting to make a meaningful contribution to growth.
Q1 revenues increased 49% - boosted by the Zoove licence settlement ($0.75m). Excluding this, messaging revenues increased by a below trend 10%. While the vast majority of SITO’s messaging services do not fall within the FCC’s definition of marketing messages, it did feel the impact of the new TCPA regulations in the non-Walmart business and revenue growth of 10% slowed from the 20% average seen in FY13 (Q1 message volumes +13% to 87m). The group has focused on rebuilding its databases where they have been affected and believes that the impact on message volume from the TCPA regulations will be short-lived.
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In Q2, messaging volume increased 15% y-o-y, held back in part by a strong basis of comparison (FY13 was a bad flu season) and Walmart store closures a result of winter storms in the US (which resulted in 2% lower footfall). However, messaging revenues were down 3% y-o-y as a result of mix effects; Q213 included some one-off items such as set up fees and higher prices rich media marketing messaging. Revenues from the new Follow Me service was $60k in Q2, taking total growth in the quarter to 1%.
Forecasts – dependent on the pace of roll-out of new services For the operating division, revenue growth will be determined by the pace at which Walmart rolls out new services and the take-up by its customers, the extent of any pricing pressure and the success of the new media services (LBA, ADC etc). We forecast revenue growth of 19% in FY14 and 17% in FY15, with the operating division contributing 9% and 23% to growth respectively. We forecast the group to become EBITDA positive during the current year. Our forecasts are based on the following core assumptions:
Pharmacy service: We forecast a gradual rise in the penetration of the pharmacy service to reach 12% in FY15. On our forecasts, by the end of FY15 SITO will deliver approximately one million messages per day, which is still only half the two million target set between Walmart and SITO.
Non-pharmacy notification services: We forecast these will increase to 16% of message volume by FY15 and 4% of message revenues.
Media services: With a dedicated sale team in place and a strong pipeline of deals reported, we expect LBA revenues of $0.35m in FY14 and forecast growth of 65% pa thereafter – in line with industry forecasts for this currently niche, but fast-growing sector.
Licensing: Our FY14 forecasts reflect the one-off $750k Zoove settlement and $375m in FY15 from the Videostar licence deal. There is very little visibility on the forward revenue streams from this division and we include only announced deals in our forecasts. However, with the recent recruits, 30 claim charts developed and with the support of a major broadcaster, further settlements or licence deals are probable.
Cash flow and balance sheet Equity – in addition to the debentures, the company has issued approximately 47m warrants and options to pay staff and consultants over the last four years. We estimate the diluted share count at approximately 172m (137m ordinary shares, 17.3m options, 10m warrants and 7.9m convertible debentures with a $0.5 conversion price). Management has announced a share buyback scheme to repurchase up to 20m shares. Net debt – SITO reported net debt of $1.7m at the end of March (Q2) comprising mainly $2.3m of cash and $3.9m of convertible debentures, all of which convert this financial year (at a price of $0.5). With the cash boost from the licence settlements, we forecast a positive operating cash flow for the full year of $1.4m and year-end net cash of $1.8m. Provided growth continues, SITO should be self funding from the current year. We have assumed that the debentures convert. Should the debt holders choose not to covert the debentures, SITO will be required to repay the notes and may have to seek additional funding. Management is considering a NASDAQ listing, which would provide an easier vehicle to raise money should the group decide to step up investment to accelerate growth.
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Exhibit 8: Summary forecasts $’000 Annual message volume (m): Pharmacy Walmart.com e-receipts ASDA Garage Layaway Other Message volume (m) Average price per message (c) Message revenues Media revenues Licensing revenues Total revenues Revenue growth Revenue growth - operating business Gross margins: Messaging Media Licensing Overall gross margin Total gross profit Operating expenses Operating loss - reported Adjusted EBITDA Cash position (Net debt)/ cash
2013e
2014e
2015e
254 37 0 0 0 1 4 297* 2.62 7,785 NA 0 7,785* 22.7%* 22.7%*
285 38 3 1 0 4 4 335 2.44 8,165 35 75 9,265 19.0% 9%
346 38 16 3 0 5 4 412 2.39 9,862 578 375 10,814 16.7% 23%
57%
59% 76% 100% 63% 5,855 (11,790) (2,526) (10) 1,607 1,578
58% 75% 100% 60% 6,528 (12,126) (1,312) 252 1,087 1,076
57% 4,456* (11,763)* (3,979)* (1,073)* 1,147* (2,618)*
Source: Edison Investment Research forecasts. Note: *Single Touch Systems actual reported figures.
Valuation Valuation: Both the core and the strategic value should be considered SITO’s assets offer both core and strategic value.
SITO’s operating division provides an organically growing, profitable, recurring revenue stream that enables it to fund its expansion into other high-growth niches in the rapidly developing mobile media value chain. Catalysts for the valuation will be newsflow regarding the success of the new media services and the pace of roll-out of the messaging services.
The relationship with Walmart can in itself be considered a strategic asset, in particular if it succeeds in transitioning the database of customers to receive marketing messages. This could be transformative for the group. Assuming 25% of the database converts, a ‘typical’ message volume of four per month per mobile customer at 1c per message, we estimate this would add $8m to revenues – the same as FY13 reported levels. Newsflow regarding the Walmart relationship would act as a catalyst for the shares valuation.
The patent portfolio adds an option value to the share. There is very little public information regarding the patent claims in process and it is not possible to assign a value to SITO’s IP division. However, the recent patent deals are evidence that there is value in the portfolio with first licence revenues being recognised in the current year, and the company has an experienced and committed management team to drive the patent claims forward. There are numerous listed companies that focus on IP exploitation. Some of these companies recognise no revenues, yet have market capitalisations in the hundreds of millions of dollars. The patent portfolio provides an option value to the share and news regarding the patent claims would affect the shares value.
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Given the strategic nature of its assets, we consider recent take-out valuations as well as peer multiples to benchmark its valuation.
Take-out valuations – mobile media and advertising technology Investment in the mobile media technology sector has picked up dramatically over the last couple of years. Recent deals have been struck on revenue multiples ranging from 3.5x (Millennial Media’s $225m acquisition of Jumptap) to 27x (Twitter’s $350m acquisition of MoPub). Deals have been getting larger and involving a wider audience – witness Facebook’s February acquisition of messaging platform Whats App for $19bn, Softbank’s acquisition of a 20% stake in InMobee (valuing the company at c $1bn) and Singtels $321m acquisition of Amobee. Some of these valuations are potentially over inflated. Excluding outliers (MoPub and Buongiorno), most deals over the last three years have been executed on revenue multiples of between 2x and 11x sales. Taking an average multiple of 6.5x sales implies a take-out valuation of $56m for the operating division (or 39c per share). Exhibit 9: Mobile advertising deals Date
Acquirer
Target
Feb-14 Nov-13 Oct-13 Sep-12 Sep-12 Apr-12 Feb-12 Jan-12 Nov-11 Oct-11 Jun-11 Apr-11 Apr-11 Jan-10 Jan-10 Nov-09
Facebook Millennial Media Twitter Softbank Corp DOCOMO SingTel Opera Velti Velti Velti Google Motricity Valueclick Apple Opera Google
Whats App JumpTap MoPub InMobi Buongiorno Amobee Mobile Theory CASEE MIG Air 2 Web AD meld Adenyo Greystripe Quattro Wireless AdMarvel AdMob
Consideration ($m) Revenue (actual) 19,000 N/A 225 65 350 13 1,000 (200m for 20%) 100 267 295 321 30 33 15 21 1.5 59 100 19 3 400 30 100 20 70 28 275 21 8-23 750
Multiple Summary descriptions N/A 3.5 x revenue 26.9 x revenue 10 x revenue 0.9 x revenue 10.7 x revenue 2.2 x revenue 14x revenue. 41.4x EBITDA 7.5x EBITDA 6.3x revenue. 19x EBIT 13 x revenue 5x -7.5x revenue 2.5 x revenue 13.1 x revenue 2.6x - 7.6x revenue 18.75 x revenue
Mobile messaging platform Mobile advertising exchange Mobile advertising exchange Mobile advertising network Mobile advertising network Mobile advertising network Mobile advertising network Mobile advertising network Mobile advertising network Mobile CRM Mobile advertising network Mobile advertising network Mobile advertising network Mobile advertising network Mobile advertising network Mobile advertising network
Source: Edison Investment research
Peer multiples Twitter is the most recent company to join the growing sector of listed peers (Millennial Media, Facebook, Pandora). In the small-cap mobile media sector, the most directly comparable company is Hipcricket. However, with limited liquidity and lack of forecasts for many of these stocks, valuations are misleading. Accordingly, we look to SITO’s large-cap peers and to advertising technology companies, which have similar business models and growth drivers as the most relevant peer group reference. SITO trades on an FY14 EV/ Sales of 5.6x. This compares favourably to other large-cap mobile media groups (Twitter 13.7x), but is at a significant premium to other ad tech groups, which trade between 0.7x (Tremor Media) and 4.2x (Criteo). Given SITO is one of the few ad tech companies that has a profitable core business, an element of premium is arguably justified. Assuming a ‘top end’ revenue multiple of 4x implies a valuation of $32m for its operating division (or 23c per share) – suggesting a current market value for the strategic assets and patents at only $18m.
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Exhibit 10: Peer valuation comparison Market cap
Sales last
EBITA EBITA last margin last (4) -51%
Single Touch Systems* 50 8 AD technology companies Tremor Video Inc. 206 132 (14) Criteo SA. 1,852 444 11 Marin Software Inc. 311 77 (34) YuMe Inc. 205 151 1 Rocket Fuel Inc. 775 241 (15) Mobile media and mobile advertising technology Hipcricket Inc. 41 27 (25) Mobile Streams PLC. 7 54 (1) InternetQ PLC. 130 104 7 Snakk Media* 23 4 (1) Pandora Media Inc. 4,853 638 (40) Millennial Media Inc. 408 259 (15) Twitter Inc. 19,379 665 (636) Internet and mobile media Google Inc. 177,611 59,825 13,966 Facebook Inc. 118,089 7,872 2,804 Groupon Inc. 4,113 2,574 76 Yelp Inc. 3,334 233 (8)
EBITA EBITA margin margin current next -27% -12%
Sales Sales EV/ EV/ Sales growth growth Sales next current next current 19.0% 16.7% 5.6x 4.8x
P/E current
P/E next
N/A
N/A
-10% 2% -44% 1% -6%
-13% 8% -30% -2% -7%
-8% 14% -15% 0% -1%
23% -39% 26% 28% 75%
24% 30% 20% 26% 57%
0.7x 4.2x 2.2x 0.7x 1.6x
0.6x 3.2x 1.8x 0.6x 1.0x
N/A 96.8x N/A N/A N/A
N/A 49.2x N/A 55.5x 78.5x
-95% -2% 7% -33% -6% -6% -96%
NA 3% 10% 1% -3% N/A 3%
NA 4% 11% 19% 9% N/A 7%
2% -7% 36% 89% 42% 27% 91%
37% 1% 20% 64% 29% 17% 61%
1.3x 0.1x 1.1x 3.2x 5.0x 0.9x 13.7x
1.0x 0.1x 0.9x 1.9x 3.9x 0.8x 8.5x
NA 740.0x 1000.0x N/A 144.9x N/A 887.8x
NA 596.8x 803.4x 8.7x 48.9x N/A 129.8x
23% 36% 3% -3%
37% 50% 3% -1%
37% 50% 4% 7%
-12% 50% 25% 57%
18% 32% 15% 43%
2.3x 9.0x 0.9x 8.0x
2.0x 6.9x 0.8x 5.6x
19.7x 41.5x 41.7x 106.2x
16.7x 32.5x 24.1x 60.3x
Source: Bloomberg, Edison Investment Research. Note: *Priced at 15 May 2014.
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Exhibit 11: Financial summary 2012 IFRS
2013 IFRS
2014e IFRS
2015e IFRS
6,347 (2,907) 3,440 (1,574) (2,264) 0 0 (503) (2,767) (488) (2,753) (3,255) 0 (2,753) (3,255)
7,785 (3,328) 4,456 (1,073) (1,736) 0 0 (2,243) (3,979) (1,271) (3,007) (5,249) 0 (3,007) (5,249)
9,265 (3,410) 5,855 (10) (660) 0 0 (1,865) (2,526) (750) (1,410) (3,275) 0 (1,410) (3,275)
10,814 (4,286) 6,528 252 (386) 0 0 (925) (1,312) 0 (386) (1,312) 0 (386) (1,312)
Average Number of Shares Outstanding (m) EPS - normalised (c) EPS - normalised and fully diluted (c) EPS - (IFRS) (c) Dividend per share (p)
132.5 (2.1) (2.1) (2.5) 0.0
137.2 (2.2) (2.2) (3.8) 0.0
145.9 (1.0) (1.0) (2.2) 0.0
145.9 (0.3) (0.3) (0.9) 0.0
Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except.) (%)
54.2 -24.8 -35.7
57.2 -13.8 -22.3
63.2 -0.1 -7.1
60.4 2.3 -3.6
BALANCE SHEET Fixed Assets Intangible Assets Tangible Assets Investments Current Assets Stocks Debtors Cash Other Current Liabilities Creditors Short term borrowings Long Term Liabilities Long term borrowings Other long term liabilities Net Assets
1,958 1,729 228 0 3,612 0 1,215 2,158 239 (1,423) (1,129) (294) (3,238) (3,213) (25) 909
2,650 2,411 239 0 3,873 0 2,661 1,147 65 (4,929) (1,634) (3,295) (470) (470) 0 1,124
2,604 2,412 192 0 3,489 0 1,836 1,607 46 (1,655) (1,638) (17) (12) (12) 0 4,426
2,592 2,430 162 0 3,142 0 2,027 1,087 27 (1,682) (1,682) 0 (12) (12) 0 4,040
CASH FLOW Operating Cash Flow Net Interest Tax Capex Acquisitions/disposals Financing Dividends Net Cash Flow Opening net debt/(cash) Convertible debentures Other Closing net debt/(cash)
(2,073) (11) 0 (615) 0 307 0 (2,392) 2,983 0 4,026 1,349
(789) (263) 0 (547) 0 244 0 (1,355) 1,349 0 88 2,618
1,211 0 0 (604) 0 (131) 0 476 2,618 3,720 0 (1,578)
106 0 0 (627) 0 19 0 (502) (1,578)
September PROFIT & LOSS Revenue Cost of Sales Gross Profit EBITDA Operating Profit (before amort. and except.) Intangible Amortisation Exceptionals Share based payments Operating Profit Net Interest Profit Before Tax (norm) Profit Before Tax (FRS 3) Tax Profit After Tax (norm) Profit After Tax (FRS 3)
$'000s
(0) (1,076)
Source: Single Touch Systems (historic), Edison Investment Research (forecasts)
Single Touch Systems | 16 May 2014
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Contact details
Revenue by geography
100 Town Square Place Suite 204 Jersey City, NJ 07310 USA 201-275-0555 www.singletouch.net/
N/A
CAGR metrics EPS YY-YYe EPS YY-YYe EBITDA YY-YYe EBITDA YY-YYe Sales CAGR FY11 - FY 15e Sales CAGR FY13 - FY15
Profitability metrics NA NA NA NA 116% 17.9%
ROCE YY Avg ROCE YY-YYe ROE YY Gross margin YY Operating margin YY Gr mgn / Op mgn YY
Balance sheet metrics N/A N/A N/A 63.2% N/A N/A
Gearing 2014e Interest cover 2014e CA/CL 22014e Stock days 2014e Debtor days 2014e Creditor days 2014e
Sensitivities evaluation N/A N/A 2.1 0.0 72.3 64.5
Litigation/regulatory Pensions Currency Stock overhang Interest rates Oil/commodity prices
Management team CEO (2010): James L Orsini
CFO (Dec 2013): Kurt Streams
Mr Orsini has over 25 years’ experience in the media industry. Before joining SITO, he worked for five years in a senior finance and operations capacity at Saatchi and Saatchi New York and before this was COO for Interbrand (North America). Earlier in his career he worked at KPMG and Goldman Sachs.
Mr Streams joined SITO in December 2013 with a track record in media and IP management. He has had three previous CFO roles including at Nasdaq-listed Norland Medical, ICIA Inc, where he managed patents for its branded consumer products, and The Deal, a private equity owned publishing company.
Director (Dec 2012): Jonathan E Sandelman
Director (March 2013): Peter D Holden Mr Holden has had a long career in IP investment and monetisation. He founded the IP Investment Group at Coller Capital, a global private equity firm and Invisible Hand LLC, an IP venture fund. He has also held a number of other senior positions in the IP industry, and at US and Japanese universities. He is currently also senior VP of corporate development at IP VALUE Management. Director (since 2011) Stephen D Baska
Mr Sandelman is the founder of Sandleman Partners (a consulting group) and has held a number of senior management banking roles, including head of debt and equities at Bank of America and deputy head of global equities at Salomon Brothers. Director (May 2013): James Nelson Mr Nelson has held a large number of board-level positions across a range of industries. He has been an independent director of Icahn Enterprises since 2001, was recently appointed to the board of Herbalife (an Icahn holding) and serves as chairman of the board of another mobile marketing company, Voltari. Director (2011): Stuart R Levine
Mr Baska has over 25 years’ experience in venture capital at partner level (Vertical Group – medical technology), before which he co-founded a special situation fund focused on heathcare equity investments.
Mr Levine has extensive experience in strategy consulting. He is the founder, chairman and CEO of Stuart Levine and Associates LLC, an international management consulting company, and is a three-times published author in the field. He also serves on the board of Broadridge Financial Solutions Inc. and has held other board-level positions including former chairman of Dowling College, as well as being a former member of the New York State Assembly.
Previously, Mr Hug worked as chief strategy officer and interim CFO of wireless services company, Wireless Retail Inc (now Radio Shack). Previously, Mr. Hug was managing partner of merchant bank Redwood Partners, an early stage merchant bank with a TMT focus, and has worked in the Corporate and Executive Services Group (CES) at CIBC World Markets. He began his career and spent eight years in the Private Client Group at Merrill Lynch.
Director of Corporate Development (2011) : Jerry Hug
Principal shareholders
(%)
Macaluso, Nicole 17.1% Mediical provider Fin Corp 8.9% Robert, Mike 4.9% Baksa, Stephen 4.0% Sandleman, Jonathan 3.1% Mitchell Hutchinsintelligence Asset Management Edison, the investment firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment0.4% banks worldwide support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is
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