January 27, 2015 Vahan Ajamian, CPA, CA, CFA€¦ · 27-01-2015 · Shares Outstanding Initiating...

Beacon Securities Ltd.| 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H1 |416.643.3830|www.beaconsecurities.ca

Frankly, Inc. (TLK-V) Talk is Cheap

January 27, 2015

Vahan Ajamian, CPA, CA, CFA (416) 643-3879

[email protected]

Speculative Buy C$5.50C$2.95

C$5.50

86%

$0.61-$5.90

YE: Dec 31 FY15E FY16E

Install Base YE (MM) 40 128

Revenue ($MM) - $13.7

FD EPS -$0.54 -$0.19

FY15E FY16E

P/Sales nmf 3.8x

P/E nmf nmf

Basic 22.1

FD 24.8

Market Cap

Basic C$65.1

FD C$73.1

Net Debt (Cash) -US$28.6

Enterprise Value C$29.5

About the Company

Frankly Inc. offers Frankly Chat, a free mobile messageing

application focused on user priv acy by offering ephemeral

messages and unsend capabilites. Also the company offers an

SDK which allows its technology to be inserted into a website or

mobile application prov iding a customizable v ersion of Frankly's

messaging technology. The company is based in San Francisco.

All figures in US$ unless otherwise indicated.

Stock Performance

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We are initiating coverage of Frankly with a

Speculative Buy rating and a target price of C$5.50.

In summary, our recommendation is based on the

following:

Mobile messaging is a very fast growing market

and we believe Frankly is well positioned to

benefit from the following industry trends:

heightened privacy concerns; a desire by

brands to communicate with their customers on

their own platform; increased intentions to

monetize apps; and higher mobile advertising

budgets.

While still a relatively young company, we are

impressed by the success management has

already had in attracting people to its flagship

Frankly app, and launching a white-label

version of its chat with a top-tier brand as a

partner (Victoria’s Secret Pink).

We expect the bulk of the value for

shareholders will be created by the company

signing up more such partners (starting in the

near-term) and beginning to monetize them in

FY16. Specifically, we are forecasting the

company to grow its current installed user base

of 7.5MM to 40MM by the end of FY15 and

reach 128MM by the end of FY16.

Admittedly, given the early stage of the

company and the nature of the industry there is

a heightened level of risk presently in our view.

However, even after applying significant

discounts to key factors relating to our financial

model and valuation methodology, we see an

attractive opportunity at current levels.

mailto:[email protected]

January 27, 2015 | Vahan Ajamian| 416.643.3879 | [email protected]

theScore, Inc. Frankly, Inc.

Table of Contents

Investment Thesis ........................................................................................................................................................... 3

Industry Overview ........................................................................................................................................................... 5

Company Overview ........................................................................................................................................................ 8

Revenue Model and Forecast ................................................................................................................................... 14

Competitive Landscape............................................................................................................................................... 17

Valuation: What’s It Worth? ...................................................................................................................................... 19

Key Risks ........................................................................................................................................................................... 23

Initiating Coverage with a Speculative Buy Rating and a C$5.50 Target Price ...................................... 24

Appendix A: Shareholder Holdings and Select Management & Director Biographies ...................... 25

Appendix B: Highlights from MeetMe Case Study – Demonstrates Willingness of North

Americans to Use Stickers Within Chat Apps ..................................................................................................... 28




Investment Thesis

Chat apps are becoming increasingly popular. They are among the most

used and stickiest apps on users’ smartphones. However, given the

permanence typically associated with digital conversations, comments

by users can be followed by feelings of regret and result in adverse

consequences.

Frankly alleviates these problems by always allowing the sender to be in

control of their messages. Messages sent are ephemeral (permanently

disappear after 10 seconds – unless the sender selects otherwise), and

can be unsent by the sender at any time. As a result, similar to an

unrecorded verbal conversation, the app allows users to speak frankly –

without the fear that every word said is being recorded and logged

forever.

We believe users have become more privacy conscious and that Frankly

has already participated in this growing trend. The company’s flagship

ephemeral chat app was launched on September 24, 2013. A year later

over 1.5MM people had installed the app on their devices, and this figure

has since risen to over 2.0MM.

In addition to its own chat app, Frankly also offers its chat Software

Development Kit (SDK), which essentially allows a customized white-label

version of its chat to be plugged into other companies’ apps. We see this

offering of “chat as a service” as having even more value potential than

the company’s flagship Frankly app. Frankly has already secured two SDK

partners – including the Victoria’s Secret Pink Nation app, the rollout of

which, in our view, has gone well.

While larger social media players generally operate their own closed

ecosystems and encourage brands to set up their own pages in them, via

its SDK, Frankly allows brands to directly host and control the conversation

with their fans – which they have spent years and millions of dollars

cultivating. We point to comments made by American Eagle’s (AEO-US,

not covered) Chief Digital Officer (CDO), that “we put chat in the app,

and it’s working” although “it was a ton of work” (we believe it was

implemented in house) as supportive of our view that major brands can

reap significant benefits from offering chat within their app, but it can be a

challenge to do it themselves. Frankly’s objective is to act as a Grand

Central Station uniting people with various interests and allowing them to

communicate – and, of course, monetize this network in the future.

Ultimately, we believe Frankly’s SDK efforts benefit from the intersection of

three trends: brands looking to engage directly with their fans on their own

platform as opposed to external ones; apps increasingly looking to

monetize their user bases; and brands spending considerably more on

mobile advertising to reach their customers.




We expect 2015 to be a foundation year for Frankly, with the company’s

efforts focused on growing its install base of users and experimenting with

various monetization approaches. Our model incorporates no revenue

for FY15 and a steady ramp up through FY16.

Having recently closed a financing, Frankly has a very healthy balance

sheet consisting of C$1.61/share of cash and no debt. While we believe

an investment in the company’s shares at this stage is somewhat

speculative, even after applying a number of significant discounts to key

benchmarks in our model/valuation methodology, we see the potential

for very meaningful upside for investors. Further, we point to a number of

recent instances where the model of “grow your user base quickly now –

monetize them later” has proven to be quite lucrative for shareholders.

We are initiating coverage of Frankly with a Speculative Buy rating and a

C$5.50 target price based on a 7.0x Price/Forward Sales multiple to our

FY16 revenue forecast. Easing some of the aforementioned

financial/valuation discounts, we could see a scenario where the

company’s shares trade at C$16.00.




Industry Overview

Chat Apps Have Been Growing in Popularity

Usage of chat apps has exploded in recent years. According to data

provided by Flurry, mobile messaging apps were the fastest growing app

category in 2013, with user sessions up 316% y/y, well above growth for all

apps of 115%. In 2014 messaging app usage doubled again, up 103% y/y,

once more outperforming all apps which posted a 76% increase in

sessions.

We believe messaging apps are poised to continue to show remarkable

growth going forward, supported by eMarketer’s forecast calling for a

56.1MM increase in the number of smartphones in the U.S. (34%) between

2014 and 2018.

While mobile devices have significantly improved people’s ability to

communicate on demand, these benefits have not been without adverse

consequences with disclosure of messages coming back to haunt senders

– think Sony hack, ill-advised Facebook posts or tweets which have cost

people their jobs, a message accidentally sent to the wrong recipient,

users losing control of the distribution of personal photos, old text

messages being brought up in court cases etc. As more and more of

such examples have arisen, both in people’s personal lives and within the

broader public realm, the popularity of ephemeral messaging services,

where messages disappear after being viewed, such as Snapchat, have

exploded. In particular, this growth has largely been fuelled by teens and

twenty-somethings, which have frequently proven to be trend-setters and

have largely only ever known a post-internet world.

Frankly’s SDK Is Well Positioned to Capitalize on the

Intersection of Key Trends

We see three trends within the fast growing mobile app landscape which

we believe all play into Frankly’s SDK strategy.

First, brands are looking to engage directly with their fans on their own

platform. After spending years and millions of dollars cultivating followers,

we believe it can be a cumbersome and sometimes ineffective process

for these brands to establish and maintain a presence on numerous

external platforms to communicate with them (on Facebook, Instagram,

Twitter, Pinterest etc.) In our view, offering the ability to chat within their

own app increases user engagement and prevents them from leaving the

company’s own ecosystem. Additionally, such chat rooms provide the




potential for a more open and intimate conversation as opposed to mass

broadcasts. However, developing their own chat functionality in house

can be quite difficult. In support of this thesis, we point to comments by

the Chief Digital Officer (CDO) of American Eagle, a large fashion brand

focused on the 15-25 year old market, which recently added review

capabilities and live chat options into its app (we believe this was done

internally). The company found that the most effective way to drive sales

was to go to the consumer. Specifically, comments from the CDO

included “We put chat in the app, and it’s working … Customers are

engaging with us through mobile chat … It was a ton of work, but we’ve

seen significant growth ... Conversion is off the charts.” (emphasis ours)

Supported by this assessment, we believe there is a large appetite among

leading brands to outsource chat functionality in their apps and see their

benefits without a “ton of work”.

Second, apps are increasingly looking to monetize their user bases.

Millennial Media’s (MM-US, not covered) State of the Apps 2015 Industry

Snapshot report found that:

85% of app developers and publishers monetize their apps and

sites in some way. This was up 12 percentage points from the

previous year.

Of these respondents, the proportion using in-app advertising rose

to 82% in 2014 from 73% in 2013. 52% of developers expect an

increase in advertising revenue in 2015.

Of those monetizing their app, the proportion doing so via in-

app/virtual goods purchases rose to 40% from 33%.

84% of app developers which do not currently monetize their apps

plan to do so next year, which is almost double the rate per its

findings in the prior year of 43%.

Third, brands are spending considerably more on mobile advertising.

While consumers are spending more and more of their time on mobile,

advertisers are struggling to catch up. Specifically, KPCB’s Internet Trends

2014 report found that while consumers were spending 20% of their time

on mobile devices, advertisers were only spending 4% of their budgets on

this medium. With usage increasing faster than dollars spent, this 16% gap

actually widened significantly from 9% in the prior year.




Exhibit 1. % of Time Spent in Media Vs. % of Advertising Spending in the U.S.

Source: KPCB.

eMarketer is forecasting mobile ad spending to increase 50% in the U.S.

this year (65% in Canada), with substantial growth thereafter. As shown in

Exhibit 2 below, eMarketer has regularly increased its expectations over

time.

Exhibit 2. Mobile Advertising Spending Forecasts for the U.S. (left), and Canada (right)

U.S. (in USD) Canada (in CAD) U.S. (in USD)

$0

$10

$20

$30

$40

$50

$60

$70

2012 2013F 2014F 2015F 2016F 2017F 2018F

As at March 2013 As at December 2013

As at July 2014 As At December 2014

Total Forecast Spending in 2015-2017

As at March 2013: $65B

As at December 2013: $85B

As at July 2014: $112B

As at December 2014: $117B

CAGR (2014-2018): 32.8%

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

2012 2013 2014F 2015F 2016F 2017F 2018F

As at September 2014 As at December 2014

Total Forecast Spending in 2015-2018

As at September 2014: $7.3B

As at December 2014: $11.3B

CAGR (2014-2018): 43.6%

Source: eMarketer, Beacon Securities.




Company Overview

The company operates its flagship Frankly app, which allows users to

communicate without traditional digital consequences. The primary

component supporting the app’s ephemerality is the fact that messages

are passed through Random Access Memory (RAM) as opposed to hard

drives which, in addition to being able to process them much faster,

allows them to be permanently deleted from both the company’s servers

and the sender’s/receiver’s phones once they are read – and is generally

not recoverable. Even Frankly’s staff is not able to read or recover private

messages once they have been read by the recipient. Frankly currently

has 25 full time equivalent employees (looking to ramp up to over 40 this

year) and is based in San Francisco.

App History & Highlights

In February 2013, SK Planet, a subsidiary of SK Telecom (SKM-US, not rated),

the largest wireless carrier in South Korea, recruited Mr. Steve Chung to

lead its North American push into mobile messaging. Following focus

groups which concluded that its “off the record” feature was its most

popular aspect, the company decided to make this the hallmark of their

app. On September 24, 2013, Frankly was officially launched. A year

later, over 1.5MM people had installed the app on their devices, and this

figure has since risen to over 2.0MM.

According to a survey conducted in April 2014, 80% of Frankly’s active

users are teens and 80% of them are females. We believe that the

ephemerality of Frankly likely attracted this group to the app, noting a

study by Pew Research which found that 55% of female teens avoided

the use of certain apps due to privacy concerns. In our view, this is an

attractive demographic to start from, under the premise that males are

likely to follow to the platform the females are on. Approximately two-

thirds of Frankly’s users are based in the U.S., with the remainder dispersed

around the globe.

In its standard operation, a recipient is alerted that they have received a

message from a sender, however, the message is blurred out (Exhibit 3

left). Once a user taps on the message, it becomes legible and a bar

portraying a 10 second countdown appears beneath the message.

Once the 10 seconds are up, the message disappears. Should the sender

decide, they can “pin” the message to the recipient’s screen where it

would remain indefinitely (which we see as useful for sending messages

that will likely need to be viewed again – phone numbers, addresses etc.)

Frankly also offers an “unsend” feature, which allows the sender of a

message to recall it either before it has been read by the recipient (which

we see as relevant where a sender has changed their mind or

accidentally sent the message to the wrong person) or after it has been

read to eliminate its digital trail (even pinned messages can be unsent).




With such features, the sender is always in control of what happens to the

messages they send on the platform.

Exhibit 3. Frankly Screenshots – When a Message is Received (left), Visible Once Pressed (center)

and a Response (right)

Source: Beacon Securities.

Using a feature dubbed “Frankly Links”, a Frankly app user can send

ephemeral messages (fully featured i.e., customized text, video, picture

etc.) to an email address or a phone number via a personalized link if the

recipient does not have the app installed. The recipient is notified through

an email/text message containing a web link that allows him/her to

communicate only with that specific sender. The feature is Frankly’s

attempt to mass market its app as a truly cross-platform capable

technology (i.e., mobile and desktop).

In addition to being able to send emoticons, pictures, videos and voice

notes (all of which disappear after 10 seconds by default), Frankly also

offers other features which we believe help differentiate it from other

apps. Specifically, it allows the users to change the background colour of

their messages, as well as change the font size to portray greater

emphasis. The Frankly app also offers users the ability to join

“Supergroups”, which are chat rooms each dedicated to a certain theme

(teen singles, music, anime, celebrity gossip, video games, One Direction,

Taylor Swift, football etc.). We believe offering the ability to chat with

people that have a common interest helps add to the stickiness of the

app.




Frankly has three patents pending, relating to: the ability to directly

manipulate font size; the background colour palette allowing the

customization of the background in messages sent; and the unsend

feature.

We See More Potential Value in Frankly’s SDK

As the number of Frankly users grew over the course of 2014, the

company approached a number of brands relevant to its main

demographic to see if they would be willing to set up pages or chatrooms

within its app. The feedback Frankly received was that major brands are

often overwhelmed by having to set up and maintain information on

multiple external platforms (Facebook, Twitter, Instagram etc.) trying to

connect with the followers they have spent years and millions of dollars

creating.

Accordingly, Frankly decided to turn the tables and created an SDK,

offering the ability to essentially white-label Frankly’s chat technology

within a company’s own app. This way, brands can engage directly with

their customers within their own platform. The concept was well received.

Within a handful of months of conception, on October 31, 2014, Frankly

entered into an agreement with Victoria’s Secret to provide its SDK chat

product into the latter’s Pink Nation app. Pink is Victoria’s Secret’s

clothing line (sub-brand) targeting females aged 15 to 22, selling clothing,

beauty products and accessories.

Overall, we believe the rollout of the Frankly Chat SDK in the Pink Nation

app has been well received for both parties. While the company can not

release too many details (for competitive reasons), here is what we know:

The total install base of the Pink Nation app is approximately 4.5MM

users.

The Frankly-integrated version of the Pink Nation app launched on

November 17, 2014.

The Pink Nation app recorded its most downloads ever during the

month of December 2014. Frankly was integrated into the much-

anticipated Victoria’s Secret Fashion Show in December 2014 allowing

users to communicate with each other and share the experience

“live”.

As a sponsor, Frankly was “plugged” during the Victoria’s Secret

Fashion Show in various ways (note the company’s logo on the wall of

the red carpet behind Taylor Swift – Exhibit 4, right). Also the Pink

Nation app makes it clear that it is powered by Frankly (Exhibit 4, left

and centre).

We note that one of the Frankly app’s Supergroups is a “Pink Nation

Group Chat”.




Besides the Victoria’s Secret Fashion Show, chat rooms on the Pink

Nation app from time to time have been titled: Exclusive Black Friday;

Back to School; New Year, New Pink!; and Pink Spring Preview.

Victoria’s Secret brand ambassadors and campus reps are in the

chatrooms to actively facilitate conversation.

Exhibit 4. Screenshots of Frankly Being Featured Within the Pink Nation App (left, centre) and at

the Victoria’s Secret Fashion Show (right)

Source: Frankly.

We expect chat activity to post natural ebbs and flows based on the

timing of major company initiatives. Specifically, we believe the Pink

Nation chat activity likely peaks in November/December given the

congruence of the Victoria’s Secret Fashion Show and the generic

retail/advertising big push around the holidays (Black Friday, Cyber

Monday etc.). That said, we believe Victoria’s Secret is likely to continue

engaging in regular promotions in its app as appropriate (Valentine’s Day

etc.)




Exhibit 5 below highlights key statistics from Victoria’s Secret’s two flagship

apps, Pink Nation and Victoria’s Secret since the Frankly SDK was

incorporated into Pink Nation. While the two apps offer somewhat

different functionality and likely have varying user demographics, we

point out the following:

The latest version of Pink Nation features the Frankly Chat SDK, while

the Victoria’s Secret app does not offer any chatting capability.

Pink Nation users have posted significantly more reviews since the

latest update – which we believe can serve as proxy for higher

usage/engagement overall.

Pink Nation users have awarded the app a significantly higher

average rating than Victoria’s Secret’s users. Pink Nation had an

average rating of 4.5 stars on Google Play, 0.5 stars ahead of

Victoria’s Secret. The difference in average rating was even wider in

the Apple App Store (4.8 stars versus 3.8 stars).

The proportion of 5-star reviews were significantly higher among Pink

Nation users compared with Victoria’s Secret users. With the number

of apps on a typical user’s phone likely increasing, we believe this

metric is the best indicator of the degree to which he/she will make it

one of their main “go to” ones.

Exhibit 5. Key Statistics for Victoria’s Secret’s Two Flagship Apps Since the Frankly SDK Was

Incorporated in Pink Nation

Embedded Chat? Number of

Reviews

Average Rating

(Out of 5)

% of 5-Star

Ratings

Number of

Reviews

Average Rating

(Out of 5)

% of 5-Star

Ratings

Pink Nation Yes, Frankly SDK 2,333 4.5 75% 3,352 4.8 89%

Victoria's Secret No 327 4.0 62% 167 3.8 51%

Apple App Store Google Play Store

Source: Company website, App Annie, Google Play. Data extracted from App Annie covering the period November 17,

2014 to January 12, 2015.

Frankly’s agreement with Victoria’s Secret expires on April 1, 2015. While

we do not purport to be aware of all considerations Victoria’s Secret

executives have regarding their brand strategy, given the points above,

we believe the implementation of the Frankly SDK into the Pink Nation app

will likely be considered a success by both parties and renewed with an

eye towards increased user monetization – which the companies can

share. Further, given the data in Exhibit 5 above, we believe the

company would at least have to consider also adding the Frankly SDK to

its Victoria’s Secret app. Additionally, Victoria’s Secret is part of L Brands,

Inc. (LB-US, not covered), which also owns the Bath & Body Works, La

Senza and Henri Bendel brands.




Pipeline for More SDK Partnerships Appears Very Strong

In addition to Pink Nation, earlier this month Frankly announced an

agreement to integrate its chat SDK into the TRACE Live Network. The

agreement will allow users to chat with each other in real time while

viewing TRACE’s live streaming content. With TRACE’s 1MM estimated

user base, Frankly’s SDK reaches 5.5MM users for a total install base of

7.5MM, including the Frankly app.

Management has identified 19 additional potential partners for its SDK

(outlined in Exhibit 6 below) with a combined install base of 320.6MM. We

believe the company’s focus will be on establishing dominance in various

verticals by signing up industry leaders in each. While this may take some

time to materialize given the size/nature of the accounts, if successful, we

believe other players in these verticals would then likely more easily flock

to the company’s SDK solution. Once the company has amassed a

critical mass of installed users, it plans to serve as a portal connecting all its

SDK clients so that a user can exit one and easily be aware of and enter

another. We believe this will help enhance Frankly’s value add, as not

only will it be able to serve an SDK partner’s existing user base, but it may

be able to help attract new ones from its other partners. The Frankly SDK

can be customized to suit the needs of the brand partner (for example,

whether it will be ephemeral in nature). The sales cycle to sign a new SDK

partner can vary from less than a month to over three months, following

which the product can be launched in a handful of weeks.

Exhibit 6. Listing of Frankly’s Signed & Potential Identified SDK Partners

Partner # Company / IndustryEstimated User

Base (MM)Partner # Company / Industry

Estimated User

Base (MM)

Signed Partners Potential Partners Identified by Management

1 Victoria's Secret PINK (Fashion) 4.5 1 Top teen media outlet 1.2

2 Trace (Content/High Tech) 1.0 2 Top teen media outlet 3.4

5.5 3 Mobile game development studio 1.0

4 Hollywood studio 1.0

5 Music related app 30.0

6 Social media star talent agency 5.0

7 Social photo sharing app 30.0

8 Social photo sharing app 25.0

9 Location based local search app 25.0

10 Photo based app 20.0

11 U.S. pro sports team 1.0

12 Branded content & event provider 2.0

13 Social music service 30.0

14 Non-profit 1.0

15 Social photo sharing site 100.0

16 U.S. major media 20.0

17 Productivity software giant 10.0

18 Sports app 5.0

19 Alternative sports league 10.0

Total 320.6

Note: In addition to those listed above, management has identified 30 other potential partners ranging from an install

base of 1MM to 5MM.




Source: Company reports, Beacon Securities.

Revenue Model and Forecast

Exhibit 7. Highlights of Our Model

Q1/FY15E Q2/FY15E Q3/FY15E Q4/FY15E FY15E Q1/FY16E Q2/FY16E Q3/FY16E Q4/FY16E FY16E

Total Install Base (MM of Users)

SDK - Opening Balance 4.5 6.5 11.5 21.5 4.5 36.5 51.5 71.5 96.5 36.5

Net Additions 2.0 5.0 10.0 15.0 32.0 15.0 20.0 25.0 25.0 85.0

SDK - Ending Balance 6.5 11.5 21.5 36.5 36.5 51.5 71.5 96.5 121.5 121.5

Frankly App 2.3 2.6 2.9 3.5 3.5 4.1 4.7 5.6 6.5 6.5

Total Install Base 8.8 14.1 24.4 40.0 40.0 55.6 76.2 102.1 128.0 128.0

Average Install Base 7.7 11.5 19.3 32.2 18.8 47.8 65.9 89.2 115.1 80.4

Annual Rate of Monetization

($/User)$0.00 $0.00 $0.00 $0.00 $0.00 $0.12 $0.15 $0.18 $0.20 $0.17

Revenue ('000s) $0 $0 $0 $0 $0 $1,434 $2,471 $4,012 $5,753 $13,670

Operating Expenses ('000s) $3,000 $3,300 $3,600 $3,900 $13,800 $4,500 $4,500 $4,800 $4,800 $18,600

Net Income ('000s) -$2,904 -$3,219 -$3,530 -$3,843 -$13,495 -$3,011 -$1,983 -$747 $995 -$4,746

EPS (f.d.) -$0.12 -$0.13 -$0.14 -$0.16 -$0.54 -$0.12 -$0.08 -$0.03 $0.04 -$0.19

Cash Balance ('000s) $25,696 $22,477 $18,947 $15,105 $17,697 $14,686 $12,703 $11,956 $12,951 $12,951

Source: Beacon Securities estimates.

Frankly has identified three revenue streams it is looking to capitalize on

starting in FY16: advertising and premium sponsorships; digital & virtual

goods; and content distribution.

Advertising and Premium Sponsorships

We believe user engagement is likely to be highest within the chat

portion of a brand’s app. Under this approach brands can sponsor

certain parts of or advertise in the chat part of an app.

Potential examples of this we envision: a pizza company offering a

special offer during the first intermission of a game within the chat

section of a team’s app; a brand such as Victoria’s Secret offering a

coupon to cheer up its users on the first day back to school; or a

brand offering a prize to whichever user in a chat room can correctly

answer a question relevant to the company/industry.

Digital & Virtual Goods

Under this model, the brand would offer stickers/emoticons to be

purchased and used within its chat. Other items such as digital gift

cards and coupons would also be sold.

We believe that usage of in-app stickers for purchase has been

successfully proved in Asia, particularly given the experience of Kakao

Talk and Line. In a survey 54% of female users (and 42% of all users)

named the sticker store as a leading feature provided by Line from a

list of 10 (Stickers was ranked fourth). However, we believe some may

make the argument that, due to cultural differences, this concept of

stickers may not take off in North America. We point to the recent




experience of MeetMe, Inc. (MEET-US, not covered) as offering

tangible evidence countering this theory. For more information please

refer to the case study outlined in Appendix B.

Content Distribution

Under this model, the company’s reach (within SDKs and the Frankly

app) can be leveraged to distribute digital content.

Potential examples of this we envision: promoting a link users can click

on to watch a trailer for a movie relating to the industry of the app

they are chatting in; promoting a new basketball mobile game and

allowing it to be downloaded onto a user’s device from within the

chat portion of an NBA team’s app; and the ability to sell mobile

music or video.

We believe that offering chat makes users more engaged in the app, and

that there is an appetite for brands to bring their fans to their platform as

users and look to monetize them. Each potential SDK partner Frankly signs

will find a different subset of the above (or other) avenues for

monetization, and revenue generated from in-chat purchases may not

always be shared the same way (for instance, based on who owns the IP

for stickers created). As an example of another potential avenue, Frankly

may also be able to provide advanced analytics to brands regarding

what their users are saying in the chat for a fee. Frankly’s goal is to spend

FY15 tinkering with various successful monetization models for different

partners/circumstances such that it is ready to reap the rewards of

monetization in FY16. Given the lack of a specific one size fits all model,

we believe our FY16 revenue forecasts incorporate an appropriate level

of conservatism versus the levels management actually aims to achieve.

Highlights of Our Forecasts

We are forecasting Frankly to reach a total installed base of 40MM users

by the end of FY15, below the 50MM users management is targeting. This

translates to a 10% hit rate among the 320.6MM users from potential SDK

partners identified by management in Exhibit 6. We expect the growth in

users to be back-end loaded during the year as it may take some time to

land industry-leading names. Our forecast also includes much more

modest growth in installs of the Frankly app. For FY16, we expect

continued growth in the company’s total installed base to 128MM by the

end of the year – again well below management’s target of 160MM.

As we do not expect meaningful revenue in FY15, we have elected to

simply forecast zero for the revenue for the year (not counting interest

earned on cash). In FY16, we forecast the company to generate revenue

at an annual rate of $0.12/installed user in Q1/FY16, with the rate of

monetization rising throughout the year as the company continues to

learn from successful initiatives, reaching $0.20/installed user by Q4/FY16.




For the full year, this translates to $13.7MM of revenue (average of

$0.17/installed user times 80.4MM users). For reference, in 2013 Line

generated ~$68MM of net revenue from selling stickers to be used in its

chat app. Line had 100MM registered users on January 18, 2013, and

surpassed the 300MM mark on November 23, 2013. Using an average of

200MM, we calculate that Line was able to generate $0.35 of revenue per

registered user from sticker sales alone.

In terms of operating expenses, we are expecting a burn of

$1.0MM/month for Q1/FY15 (consistent with management’s guidance)

and for this to gradually rise to $1.6MM/month by Q3/FY16. Based on

these assumptions, Frankly first posts a marginal pre-tax profit in Q4/FY16.

Strong Balance Sheet to Fund Future Growth

Frankly currently has US$28.6MM of net cash on hand (which has been

consistently denominated in USD) – representing 55% of its market cap.

Based on the expected burn rates noted above, we believe the

company has enough cash to cover about two years of expenses.

Additionally, we believe there may be opportunities for Frankly to use this

war chest to make acquisitions – potentially of firms already generating

revenue/EBITDA.




Competitive Landscape

Exhibit 8. Notable Mobile Messaging Apps

App Users (MM) App Users (MM)

Tradional Chat/Messaging Ephemeral Chat

Whatsapp 700 Snapchat 100

Facebook Messenger 500 Frankly 2

WeChat 468 Wickr N/A

Viber 209 Confide N/A

Kik 185 Cyber Dust N/A

Line 170

Kakao Talk 100

BBM 90

Tango 70

Telegram 50

Source: Company reports, Beacon Securities.

As shown in Exhibit 8 above the traditional mobile messaging space is

crowded with several large players, some of which are concentrated in

certain geographies.

Most messaging apps keep logs of chats on their servers. Driven by recent

events, such as the WikiLeaks / NSA saga, in our view, the rise in privacy-

focused messaging apps comes as no surprise. This has led to the rise of

the ephemeral chat apps, which is Frankly’s niche. However, even within

this subset of messaging apps, there are other players, the most high

profile of which is Snapchat, which has amassed 100MM users, and Cyber

Dust, which is notably backed by Mark Cuban.

Given the explosive growth in the mobile messaging industry noted

above, we are not surprised by the number of platforms which have

become successful. We believe that the average smartphone user has

multiple chat/messaging/social networking apps on their device, with

each app serving a different group of contacts or purpose. A typical

such scenario may include using Facebook to contact former school

friends versus BBM for chatting with work colleagues, or using Snapchat to

send pictures versus Whatsapp for group chats. Ultimately, we believe

users will continue to utilize multiple platforms, albeit at varying

frequencies.

We believe that one of the advantages of Frankly’s flagship app is the

fact that text messages sent via its platform never reach a hard drive,

residing on the RAM at all times, virtually eliminating any possibility of

retrieving any read messages.




Further, we believe the main value proposition for the company, and its

primary differentiating factor within the mobile chat space is in the Frankly

SDK. Far from just a concept, Frankly has already successfully

implemented this white-label product with a top-tier brand (Victoria’s

Secret Pink). We believe the focus for competing firms is to attract users

and brands to their platform, while Frankly is essentially the only company

with an SDK going to where the brands and users already are. To the best

of our knowledge, there are only one or two other firms (such as Layer)

which have earlier beta versions of an SDK for chat, and none have

signed customers of the caliber of Victoria’s Secret. In our view, Frankly

has a substantial first mover advantage and is well positioned to capitalize

on signing more partners from its pipeline and winning the current “land

grab”.




Valuation: What’s It Worth?

Exhibit 9. Market Comparables

Frankly TLK-TSX $2.95 $65 $30 - $14 -$0.54 -$0.19 - 3.8x

theScore SCR-TSX $0.52 $133 $116 $11 $18 -$0.04 -$0.03 10.0x 7.6x

Facebook FB-USA $77.50 $216,044 $202,002 $17,072 $22,580 $1.93 $2.58 13.8x 9.6x

Twitter TWTR-USA $40.10 $25,444 $23,090 $2,292 $3,423 $0.34 $0.76 12.6x 7.4x

TripAdvisor TRIP-USA $69.32 $9,907 $9,677 $1,562 $1,917 $2.55 $3.24 6.6x 5.2x

Yahoo! YHOO-USA $49.44 $46,837 $36,798 $4,502 $4,545 $1.10 $1.21 10.4x 10.3x

Pandora P-USA $17.72 $3,687 $3,371 $1,208 $1,552 $0.50 $0.88 3.3x 2.4x

Yelp YELP-USA $55.41 $4,018 $3,654 $538 $734 $0.40 $0.90 8.1x 5.5x

Google GOOG-USA $535.21 $363,068 $306,150 $62,463 $72,613 $29.89 $34.73 6.1x 5.0x

Group Average 8.9x 6.6x

MeetMe MEET-USA $1.83 $82 $80 $52 $64 -$0.01 $0.13 1.7x 1.3x

Online Advertising Comparables

Mobile Ad-Revenue Companies

Other Companies of Interest

Sales (MM) EPS (F.D.)

2015E 2016E 2015E 2016E NTM 2016E

Price/Sales

Company Ticker Last Price

Market

Cap.

(MM)

EV

(MM)

Note: Frankly's stock price, market cap and EV are in CAD, Frankly's financials are in reporting currency (USD). Financial

information is in CAD for theScore and in USD for all other companies. theScore has an August year end. All other

companies above have December year ends.

Source: Company reports, FactSet, Beacon Securities estimates.

A group of larger mobile ad-revenue companies currently trade at an

average Price/Forward Sales multiple of 8.9x. These firms also trade at an

average Price/2016E Sales multiple of 6.6x – well above Frankly which

currently trades at 3.8x our FY16 revenue estimate.

There have also been recent high profile transactions among chat apps.

In February 2014 Facebook announced that it was acquiring WhatsApp,

which at the time had 450MM unique monthly users, for $16B and $3B in

restricted stock units. In July 2014 reports indicated that Snapchat was

entering into a transaction valuing the company at $10B. Snapchat has

an estimated user base of 100MM.

Our C$5.50 target price is derived by applying a Price/Forward Sales

multiple of 7.0x to our revenue forecast for the four quarters ending

December 2016. We note that this translates to an EV/Installed User of

$2.00 on our forecast installed user base in a year.




Exhibit 10. Calculation of Target Price

Four Quarter Revenue Estimate (ending December 2016, MM, USD) $13.7

Target Valuation Multiple 7.0x

Market Cap (MM, USD) $95.7

USD to CAD $1.24

Market Cap (MM, CAD) $119.0

Shares Outstanding (ending December 2015, MM) 22.1

Target Price (C$, Rounded) $5.50

Implied Return 86%


Potential Catalysts

In our view, FY15 represents a foundation year where Frankly focuses on

laying the groundwork to take its business to the next level – namely

attempt to generate a 5-fold increase in its installed user base.

Accordingly, in our view, the main catalysts for the stock this year will be

based on the extent the company announces meaningful new SDK

partners, and the degree to which these partners are pleased with their

implementation/results.

After experimenting with various levers/models this year, FY16 is expected

to be the year Frankly monetizes its install base. Therefore, in our view, a

key driver to the stock price in FY16 will be the degree to which the

company demonstrates it can generate meaningful revenue, with further

growth in its install base likely acting as a secondary factor.

With $28.6MM of cash on hand, we also see potential acquisitions as a

possible catalyst for Frankly. Additionally, should the acquired firms be

revenue generating (and ideally EBITDA positive), we believe it could help

reduce the company’s overall risk profile.

We also see a takeout as a possibility given: the company’s positioning as

a North American pure play messaging app, with what we are

forecasting to be a formidable user base; management’s connections

with key players among the Silicon Valley and Stanford University

communities, and within the larger SK Group (and Asia in general); and

the marquee brands the company has signed / plans on signing.

Quantifying Applied Discounts in Our Model & Valuation

With a current install base of only 7.5MM, imprecise visibility at this point

regarding the specifics of future monetization and a lack of meaningful

revenue expected this year, in our view, Frankly is the most speculative

name in our coverage universe. Accordingly, we believe we have

applied very meaningful discounts to relevant benchmarks in our model




and valuation methodology to reflect what we view as a heightened

level of risk associated with forecasting and valuing a company in such an

early stage.

Exhibit 11. Highlights of Applied Discounts to Relevant Benchmarks

Metric

Beacon Securities

Estimate

Relevant

Benchmark Discount

Total Install Base (FY16E Avg., MM) 80.4 105.0 -23%

Annual Rate of Monetization (FY16E Avg., $/User) $0.17 $0.35 -51%

FY16E Revenue (000's) $13,670

Target Valuation Multiple 7.0x 8.9x -21%

Source: Company reports, FactSet, Beacon Securities estimates.

Rationale for Relevant Benchmarks

Total install base – Management’s target is to reach 50MM users by the

end of the FY15 and 160MM by the end of FY16. Therefore, our

80.4MM average user install base for FY16 represents a 23% discount to

the simple average of management’s goalposts for the year (105MM).

Annual rate of monetization – Line was able to generate $0.35 of

revenue per registered user from sticker sales alone in 2013. While

stickers only represent one of the three revenue streams Frankly plans

to pursue, we note that our all-in $0.17/installed user rate represents a

51% discount to this benchmark.

Target valuation multiple – Our assumed target valuation multiple of

7.0x represents a 21% discount to Frankly’s comps’ current

Price/Forward Sales multiple of 8.9x.




Potential “Blue Sky” Run Rate and Valuation

While our official 12-month target price is C$5.50, in terms of quantifying

further potential upside we provide a “blue sky” analysis to try to illustrate

the company’s potential revenue generation capabilities and value by

relaxing some of the aforementioned discounts we have applied.

Exhibit 12. Potential Blue Sky Run Rate & Valuation

Total Install Base 160.0

Annual Rate of Monetization ($/User) $0.20

Annual Revenue (MM) $32.0

Potential Valuation Multiple 8.9x

Market Capitalization (USD) $284.1

USD to CAD $1.24

Market Cap (MM, CAD) $353.3

Shares Outstanding 22.1

Potential Value (C$, Rounded) $16.00

Implied Return 442%


This blue sky analysis yields a potential value of C$16.00 per share and is

predicated upon the following input assumptions:

1) Total install base of 160MM – equal to management’s target for the

end of FY16.

2) Annual rate of monetization of $0.20 per installed user – equal to what

our actual model incorporates for an FY16 exit rate (i.e, still

considerably below the benchmark of $0.35).

3) Price/Forward Sales multiple of 8.9x – equal to the multiple at which

the company’s comps currently trade on average.

We note that the above analysis translates to an EV/Installed User of $1.69,

which is actually 15% below the $2.00 per our official forecasts.




Key Risks

Assumed User Growth Assumptions. We are forecasting Frankly to sign a

number of SDK partners resulting in significant growth in its installed user

base over the next two years. This growth may not materialize.

Inability to Adequately Monetize. We are forecasting Frankly to generate

revenue at an increasing rate starting in Q1/FY16. The company’s

financial position and share price may be adversely affected should it be

unable to adequately monetize its installed user base.

Renewal of Agreement with Victoria’s Secret. Frankly’s SDK agreement

with Victoria’s Secret relating to the Pink Nation app expires on April 1,

2015. The outlook for the company may be diminished should the

agreement not be renewed.

Competition and Changes in Technology Or Consumer Tastes. Frankly

operates in a fast paced competitive industry with several established

and well capitalized players. The company’s prospects may be adversely

affected by competition, particularly if others begin offering apps the

ability to outsource a chat function. Additionally, the company may not

be able to keep up with technological advances, or what consumers

consider “cool”.

Government / App Store Shutdown. While the company has noted no

such issues, we believe there is a risk that governments may prevent

access to the company’s flagship app and/or that it may be pulled from

app stores if its ephemeral nature were to cause meaningful concern.

Key Individuals. We believe Frankly has a strong management team led

by Mr. Steve Chung. The company may not be able to live up to its

potential should it lose the services of key individuals.

Foreign Exchange. While Frankly reports its financials in U.S. dollars, which

is its operating currency, the company’s share price trades in Canadian

dollars. As a result, the company’s share price may be adversely affected

if the Canadian dollar strengthens versus the U.S. dollar.

In Search of a Permanent CFO. Elena Masters is currently serving as the

company’s Interim CFO. There is a risk that the company may not be

able to secure the services of a qualified permanent CFO for some time.




Initiating Coverage with a Speculative

Buy Rating and a C$5.50 Target Price

We are initiating coverage of Frankly with a Speculative Buy rating and a

C$5.50 target price, representing a projected total return of 86%. In

summary, our recommendation is based on the following:

We believe Frankly has a strong management team, Board of

Directors and some high-profile shareholders (SK Planet, Stanford

University, JJR Private Capital).

We believe Frankly has demonstrated an ability to produce a high-

quality product and successfully have it be adopted in a short period

of time – regarding both its flagship Frankly app and chat SDK.

In our view, the company is well situated in the fast growing

messaging space, with its flagship app poised to benefit from

increasing concerns regarding digital privacy, and its SDK offering

likely to benefit from the intersection of three trends (brands desiring to

host chat in their own app to communicate directly with fans,

developers increasingly looking to monetize their apps, and brands

spending more on mobile advertising).

We expect the company to significantly grow its installed user base

over the next two years and begin monetizing them in FY16. We note

that the company has enough cash on hand to cover approximately

two years of expenses (currently representing C$1.61/share).

While we believe there is a heightened level of risk investing in a

company in this early stage, we see a favourable risk/reward

proposition at current levels. Specifically, even after applying

significant discounts to what we view as benchmarks relating to the

growth in the company’s installed user base, monetization rate and

valuation multiple, we still see attractive upside.




Appendix A: Shareholder Holdings and

Select Management & Director

Biographies

Exhibit 13. Notable Holders

Name Title/Role Other (Previous) Affliations

Common

Shares

Restricted

Voting Shares

(Non-Listed)

% Of Total

Outstanding

Options

(000's)SKP America, LLC Subsidiary of SK Telecom 9,269,917 - 42% -

Private Placement - Canada Purchasers of subscription receipts (Q4/FY14) 8,436,700 - 38% -

JJR Frankly Holdco Limited Partnership JJR Private Capital 2,092,050 - 9% -

Pre-Private Placement Holders Former holders of the "shell" (WB III) 737,715 - 3% 98,360

Stanford-StartX Fund, LLC Stanford University 528,451 - 2% -

Private Placement - USA Purchasers of subscription receipts (Q4/FY14) 160,000 - 1% -

Private Placements - Agents Beacon & Cormark - - 0% 515,802

Jungsoo Park Vice President, Operations LG Electronics, Naver - 32,170 0% 15,000

Steve Chung CEO and Corporate Secretary, Director We Heart It, Goldman Sachs - - 0% 215,980

Sung Pa (Brad) Park Chief Technology Officer mySimon, Cnet/CBS Interactive - - 0% 44,532

Harrison Shih Vice President, Product Google, GREE, Fitstar - - 0% -

Elena Masters Interim CFO Stans Energy Corp. - - 0% -

Anthony Lacavera Director Chairman, Wind Mobile - - 0% -

Jonghyeok Lim Director Head of Corporate Planning & Strategy, SK Planet - - 0% -

Michael Lunsford Director CEO, SK Planet, Inc. - - 0% -

Ronald D. Schmeichel Director Chairman, Concordia Healthcare & JJR Private Capital - - 0% -

Jung Woo Sung Director Head of Corporate Development / M&A, SK Planet - - 0% -

Subtotal 21,224,833 32,170 96% 889,674

Total Outstanding 21,695,321 362,401 2,709,924

Source: SEDI.

Select Management and Board of Director Biographies (source: company

reports, Beacon Securities)

Steve Chung, Director, Chief Executive Officer and Corporate Secretary

(Age 36) – Mr. Chung has been with the company (via its predecessor)

since February 2013. Over the past 10 years he has held senior leadership

roles in the technology sector, including Chief Operating Officer of Pan

Media Corporation from July 2003 until June 2005, Chief Strategy Officer of

CDNetworks Inc. from December 2007 until October 2010, Executive Vice

President of KIT Digital, Inc. from October 2010 until January 2012, and

Chief Operating Officer of We Heart It (WHI, Inc.) from February 2012 until

February 2013. His experience with both start-up and large enterprises has

led to his expertise in helping companies grow globally. Mr. Chung began

his career at Goldman Sachs as an analyst in New York, and has a passion

for connecting U.S. and Asian markets through mobile, media, and

Internet technology. Mr. Chung holds a Bachelor of Arts degree from

Harvard University, and a Master of Business Administration from Stanford

University.

Jungsoo Park, Vice President, Operations (Age 35) - Mr. Park is the Vice

President of Operations and a founding officer and investor of the

company’s predecessor and has been with it since March 2013. He has

held leadership positions in the operations, corporate and business

development, and strategy areas over the past four years. Mr. Park was a

director at Madsmart, Ltd. from December 2011 until March 2013

overseeing its product strategy. In this role he managed Madsmart, Ltd.’s

sale to SK Planet, Inc. Mr. Park also has more than 10 years of experience

in various functions in the technology industry, previously working for




Naver Corporation the current parent company of Line (formerly NHN

Corporation) from August 2003 until May 2008, and LG Electronics Inc.

from February 2011 until December 2012. Mr. Park holds a Bachelor of Arts

degree in Anthropology and a Bachelor of Business Administration degree

from Seoul National University, and a Master of Business Administration

from the Kellogg School of Management at Northwestern University.

Anthony Lacavera, Director (Age 40) - Mr. Lacavera is the Chairman of

the Board of WIND Mobile and serves as the Chairman and Chief

Executive Officer of Globalive Capital and Globalive Holdings. Mr.

Lacavera has also served as the Chief Executive Officer of WIND Mobile, a

division of Globalive Wireless Management Corp., from January 2012 until

October 2014, the Chief Executive Officer of Yak Communications

(Canada) Corp. from January 2008 until December 2011, and the Chief

Executive Officer of Globalive Communications Corp. from November

1997 until December 2007. He was named Canada’s Chief Executive

Officer of the Year in 2010 by the Globe and Mail’s Report on Business

Magazine, Canada’s Top 40 Under 40 in 2006 and one of the 50 Most

Influential Torontonians by Toronto Life Magazine in 2013. Mr. Lacavera

holds a Bachelor of Science degree from the University of Toronto. Mr.

Lacavera was named an Honorary Fellow of St. Michael’s College at the

University of Toronto in 2012, and named to the University of Toronto’s

Engineering Hall of Distinction in 2013.

Jonghyeok Lim, Director (Age 50) - Mr. Lim has served as the Head of the

Strategy and Planning Office of SK Planet Co., Ltd. since October 2011.

He has held leadership roles in the strategy and planning area for the past

11 years working for SK Telecom Co., Ltd. (from May 1996 until September

2011) and SK Planet Co., Ltd. Mr. Lim holds a Bachelor of Arts degree and

a Master of Business Administration from Seoul National University.

Michael Lunsford, Director (Age 46) - Mr. Lunsford is the Chief Executive

Officer of SK Planet Inc. and a Director of shopkick, Inc. He has an

extensive senior leadership background in mobile, broadband, digital

media, software, and services. Mr. Lunsford has notably served as the

Interim Chief Executive Officer of EarthLink, Inc., Chief Executive Officer of

Rhapsody International Inc., and the Interim Chief Executive Officer of

RealNetworks Inc. Mr. Lunsford worked for EarthLink Inc. from March 1999

until December 2007 and RealNetworks Inc. from January 2008 until May

2013. He has extensive experience in corporate development, having

bought and sold companies, overseen a complex merger, sold assets,

structured large joint ventures, and developed partnerships with large

corporations. Mr. Lunsford holds a Bachelor of Arts degree in Economics

and a Master of Business Administration from the University of North

Carolina.

Ronald D. Schmeichel, Director (Age 47) – Mr. Schmeichel has over 18

years of experience in high-yield credit, leveraged loans, buy-outs and

equity capital markets in Canada and the United States. He has




specialized in providing credit and equity lines for management buy-outs,

recapitalizations, bridge and mezzanine loans and minority equity

ownership to small/midmarket companies in Canada. Mr. Schmeichel

was one of the founders and partners of JJR Private Capital in 2003. Mr.

Schmeichel also served as a President and CEO of Windsor Private Capital

from 2010 to 2014. Mr. Schmeichel currently serves as the Chairman of the

board of directors of the Concordia Healthcare Corp., and since

Concordia’s inception was an M&A advisor on six

pharmaceutical/healthcare transactions, including two foundational

acquisitions. Mr. Schmeichel has been on the board of 15 TSX and TSXV

public companies. For the past 12 years, Mr. Schmeichel has been a

guest lecturer at the University of Western Ontario, Faculty of Law, as well

as a guest lecturer at the Ivey School of Business. He currently serves as a

member of the Ontario Local Area Committee to the Toronto Stock

Exchange-Venture Group. Mr. Schmeichel received a BA degree, with

Merit, from York University in 1992 and a Juris Doctorate degree from the

University of Western Ontario in 1995.

Jung Woo Sung, Director (Age 43) - Mr. Sung is a Vice President & Head of

Corporate Development at SK Planet, Inc. since February 2014. He

originated and led the execution of SK Planet, Inc.’s acquisition of

shopkick, Inc., a leading Silicon Valley-based mobile commerce and

shopping service. Mr. Sung has held leadership positions related to

venture capital, private equity and corporate development over the past

13 years. Notably, he was the Head of the Corporate Development

Office of SK Planet Co., Ltd. from July 2012 until February 2014, Head of

Private Equity Investments at Ilshin Investment Co., Ltd. from January 2012

until June 2012, Vice President of Asia Growth Capital at The Carlyle

Group from February 2006 until December 2011, and a Principal at SAIF

Partners (formerly Softbank Asia Infrastructure Fund) from January 2004

until January 2006. Mr. Sung was formerly a member of the Board of

Directors of npnf, Inc., a mobile game developer and publisher, Viki, Inc.

(acquired by Rakuten, Inc.) and WiderThan Co., Ltd. (acquired by

RealNetworks Inc.). Mr. Sung holds a Bachelor of Arts degree in

Economics from The University of Chicago.




Appendix B: Highlights from MeetMe

Case Study – Demonstrates Willingness of

North Americans to Use Stickers Within

Chat Apps

MeetMe dubs itself a “social network for meeting new people in the

U.S.” which “makes it easy to discover new people to chat with on

mobile devices”.

MeetMe has over 5MM monthly active users, and over 1MM mobile

daily active users. 80% of the company’s total traffic is from mobile.

The company’s demographics are very similar to that of Frankly and

Pink Nation – with an average age of 26, and 80% residing in the U.S.

Historically, the vast majority of MeetMe’s revenue arose from

advertising, with 10% from credits to purchase virtual goods.

The company indicated that increasing the rate at which they

monetize mobile traffic is a key priority. In December 2014, the

company launched a new “Stickers” feature for Android – emoticons,

expressions such as “lol”, virtual gifts (flowers, stuffed animals etc.) that

users can use inside a chat.

The first two sticker packs are free, and users can buy additional packs

for 150 credits (US$3.00). Stickers will be updated with new content

periodically. The company predicted at the time that stickers would

drive both increased monetization and user engagement.

On January 20, 2015, the company provided an update. Android

users, which represent 51% of the company’s base, have been

sending out over 300,000 stickers a day – suggesting that ~60% of

Andriod users sent out a sticker every day on average. As part of the

update, MeetMe announced that it rolled out its Stickers for the

iPhone and iPad as well, and indicated they are preparing to launch

more sticker packs in time for Valentine’s Day.

While we do not know how many of the stickers sent on MeetMe were

free versus paid, we believe this case study clearly shows that North

American users are willing to use stickers within chat apps. Other

apps, such as Candy Crush and Clash of Clans have also

demonstrated users’ appetite to pay real money for virtual goods in

general.

Bango, a provider for Google Play, Amazon, Samsung, Blackberry

World and Firefox Marketplace recently indicated that the average in-

app purchase has risen to $4.50.


Beacon Securities Ltd.| 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H1 |416.643.3830|www.beaconsecurities.ca

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