Tech Mpire Limited - TMP,Buy - Adveritas · 12/6/2016 · The technology underpinning the TMP...

Research Note

RESEARCH NOTE – PATERSONS SECURITIES LIMITED 1

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this firm or any member or employee thereof.

TECH MPIRE LIMITED

GROWTH TO COME FROM THE SELF-SERVICE OFFERING

Investment Highlights

Tech Mpire Limited (TMP) has reached revenue and profitability targets well ahead of schedule. This has prompted the Company to focus more on its low-touch self-service advertising offering, leveraging off it nxus® Platform. This opens up a significantly larger portion of the advertiser market for TMP, which should increase revenue and margins in the medium term. Given the Company’s healthy Balance Sheet; its positive cash flow generating core business; the upside evident in advertising technology automation and innovation and; the recent pull back in its share price; we believe TMP is trading at a significant discount to fair value and reiterate our BUY rating and target price of $0.65/sh

nxus® Platform: TMP is now leveraging its nxus® platform to commercially position its low-touch point performance marketing service, which would work in a similar manner to advertising on Facebook or Google (Adwords). This provides an additional significant growth opportunity for TMP which should complement its existing revenue generating business and pivot TMP from a technology-based marketing company to a digital technology company.

Seasonality: Observation of US quarterly internet ad revenue (TMP’s largest market) exhibits clear seasonal trends that are particularly apparent in the December and March quarters. This is mirrored in TMP’s quarterly revenue in FY16, with the December quarter by far the biggest contributor (32%) while the March quarter being the weakest (20%). The June and September quarters are more moderate and stable (c.24%). We expect this revenue trend to continue as the US remains TMP’s key market.

Financial Update: We have lowered our revenue estimates in FY17 ($34.4m, down 5.8%) and FY18 ($40.7m, down 3.7%) before increasing from FY19 onward ($46.8m, up 1.5%). We also note that EBITDA and NPAT is forecast to be lower than our previous estimates in FY17 and FY18 before increasing substantially from FY18 onward, as margins increase as TMP transitions from a technology-based marketing company to a digital technology company.

Balance Sheet: As at 30 September 2016, TMP had $5.5m in cash. The Company also has a $1.3m debt factoring facility, which could be used to buffer any working capital deficit. The facility will terminate in March 2017. We expect December quarter 2016 revenue to be c.$9.6m, which is lower than the record $10.1m reported in the December quarter 2015.

Valuation: Using the discounted cash flow method at a 14.1% WACC and terminal growth rate of 3.0%, we value TMP at $60.0m or $0.65/sh, which is a 260% premium to the current share price. We have also illustrated our forecast EBITDA multiples, using 15.0x EBITDA as the industry standard, which suggest strong valuation upside in FY18 ($0.65/sh) and beyond

6 December 2016

12mth Rating Buy

Price A$ 0.18

Target Price A$ 0.65

12mth Total Return % 262.3

RIC: TMP.AX BBG: TMP AU

Shares o/s m 65.8

Free Float % 70.0

Market Cap. A$m 11.8

Net Debt (Cash) A$m -5.6

Net Debt/Equity % na

3mth Av. D. T’over A$m 0.03

52wk High/Low A$ 0.81/0.14

2yr adj. beta 0.33

Valuation:

Methodology DCF

Value per share A$ 0.65

Analyst: Jon Scholtz

Phone: ( +61) 8 9225 2836

Email: [email protected]

Disclosure: Patersons Securities acted as Lead Manager to the Offer that raised $6.0 million at $0.25 per share in June 2015 for Tech Mpire. It was paid a fee for this service.

12 Month Share Price Performance

Performance % 1mth 3mth 12mth

Absolute -20.0

-42.0

-73.2 Rel. S&P/ASX 300 -14.9 -39.4

-73.8

6 December 2016 Tech Mpire Limited



OVERVIEW

Tech Mpire (TMP) has created a platform where advertisers can efficiently reach prospective customers via leveraging off its extensive affiliate base, while enhancing the return on investment via its Cost per Action model. The advertisers gain access to a network of supply partners that display ads on websites, mobile apps and other digital channels.

Advertisers traditionally purchased online ad space on a per click or impression basis, regardless of whether the ad yielded the desired result. However, Cost per Action means the advertiser only pays when a pre-defined outcome occurs from the ad, such as a download of an app, a purchase, a sign-up or customer referral. This is known as Performance Marketing.

Figure 1: TMP Performance Marketing Model

Source: Tech Mpire Limited

TMP has historically serviced larger advertisers, with internal campaign and business managers working with and directly assisting these advertisers. This approach was successful in proving up TMP’s Performance Marketing model, gaining a larger share of advertisers’ marketing budgets and growing TMP’s revenue. However, having a campaign manager remains expensive and limits the Company’s ability to scale, which has led to TMP investing extensively in its central technology suite, called nxus®.

nxus® automates a significant portion of the campaign management tasks on larger campaigns and can fully automate tasks related to smaller campaigns. This opens up a new market segment of advertisers for TMP to target, via a low-touch service offering. The advertiser self-serve portal, which is expected to be launched in the first half of FY17, should allow TMP to serve advertisers with smaller volumes of activity. Automation should enable significant revenue generation potential, while simultaneously increasing the scalability, and margins, of the entire platform. The improvements to the nxus® platform may also bolster partner performance and in turn, the attractiveness of the platform to new advertising partners.




NXUS PLATFORM

The technology underpinning the TMP model is the internally developed proprietary cloud-based software platform, nxus®, which provides real time attribution tracking analytics, reporting data and task/campaign automation. The nxus® software has proven to be an effective tool for managing the life-cycle of TMP affiliate network and sales process, with approximately 2 billion clicks delivered in over 200 countries. The software has also allowed TMP to run at low overheads by effectively replacing the need for multiple external tech solutions and increase the ability to make revenue with limited staff as it leverages on its automation technology.

TMP is now leveraging its nxus® platform and commercially positioning its low-touch point performance marketing service, which would work in a similar manner to advertising on Facebook or Google (Adwords). For example: advertisers would prepay for the campaign; state objectives or actions and the amount it would pay of each action (eg $1 per app download); identify key target customers; and upload campaign material (banners, ads or video with call to actions). The platform would then assign the advertising campaign to the most appropriate affiliates, who would then place these ads on their respective digital real-estate (eg websites, blogs, email lists). Actionable outcomes by customers would then cause the advertisers’ preloads account balance to be debited until all funds are exhausted and/or the campaign ends.

The example above highlights that the nxus® technology facilitates most of the heavy lifting in terms of administration and logistics in the campaign cycle with little to no human interaction on TMP’s end. Thus, nxus® allows TMP to service all levels of advertising. This provides an additional significant growth opportunity for TMP which should complement its existing revenue generating business and pivot TMP from a technology-based marketing company to a digital technology company

The launch of the portal is expected to be in the December quarter 2016.

Figure 2: nxus® Platform (Campaign Performance) Figure 3: nxus® Platform (Dashboard)

Source: Tech Mpire Limited

Throughout FY16, the TMP technology team has released over 70 product updates, highlighting the extent of the investment into automation and R&D. Moving into FY17, TMP’s nxus® technology strategy will continue to focus on:

• Development of traffic quality monitoring and controls – demonstrated with the launch of TrafficGuard™ earlier in Q2

• Collecting and analysing data from a larger number of raw data points to enhance understanding of the consumer journey, before and after conversion (Big Data)

• Implementing machine learning to automate analysis and optimisation • Enhancement of self-service tools to appeal to new markets and increase margins • Increasing the scalability of network operations through automation • Providing advertisers with increasing transparency and actionable audience data




TRAFFICGUARD™

Fake traffic and fraudulent activity is an issue for online advertisers, and is increasingly becoming a focal point for advertisers who are keen to increase their return on investment. Currently, most marketing budgets account for “spillage”, which means up to 15% of the marketing spend is on fraudulent traffic and thus of no value to the advertiser.

TMP has thus made improvements to the way in which it identifies threats to network quality, and has put in place automated procedures to block fraudulent network activity. These improvements formed the basis for its proprietary, anti-fraud solution, TrafficGuard. Officially launched in October 2016, TrafficGuard uses machine learning to detect and intercept fraudulent traffic in real time, before it impacts the advertiser.

For TMP’s advertiser clients, TrafficGuard should deliver higher quality traffic and conversions from their target audiences. Fraudulent conversions are difficult to detect and its impact is often compounded when its presence skews performance data used by advertisers for campaign optimisation and decision making. TrafficGuard is able to impede this traffic and improve the accuracy of performance reporting which in turn, should drive performance through more informed, optimisation decisions.

Global online advertising fraud is expected to cost advertisers in excess of US$50 billion over the next decade, thus representing a significant industry concern. With the addition of TrafficGuard to its suite of quality-control measures, TMP is demonstrating its proactive plan for improving quality through transparency and communication. This should differentiate TMP from competitors and thus increase the platform’s appeal to advertisers, resulting in growth of the client base and revenue.

SEASONALITY

Contributing almost half of global internet advertising revenue, North America has the highest internet ad revenue globally and remains TMPs largest geographic market. Observation of US quarterly internet ad revenue exhibits clear seasonal trends that are particularly apparent in the December and March quarters.

The December quarter is the strongest each year for online advertising spend, with high levels of investment accompanying the holiday period. The strength of the December quarter tends to bolster revenue leading to higher revenues for the first half of the financial year. In the March quarter ad spend tends to contract after the surge that accompanies North America’s holiday period in the December quarter.

This is mirrored in TMP’s quarterly revenue in FY16, with the December quarter by far the biggest contributor (32%) while the March quarter being the weakest (20%). The June and September quarters are more moderate and stable (c.24%). We expect this revenue trend to continue as North America remains TMP’s key market.

Figure 4: Advertising Revenue Seasonality

Source: Patersons Securities Limited

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FINANCIALS

We have reassessed our financial estimates as TMP looks to increase its transition from a technology-based marketing company to a digital technology company. This means that TMP would employ less campaign management staff and thus not generate significantly more revenue in the near-term, however as its self-service portal is rolled out, revenue should increase with larger margins in the medium-term. This is shown in our reassessed financials below, which highlight lower revenue estimates in FY17 ($34.4m, down 5.8%) and FY18 ($40.7m, down 3.7%) before increasing from FY19 onward ($46.8m, up 1.5%). We also note that EBITDA and NPAT is forecast to be lower than our previous estimates in FY17 and FY18 before increasing substantially from FY19 onward, as margins increase.

Figure 5: TMP Financial Forecasts

2016A 2017 (Current)

2017 (Previous)

Change (%)

2018 (Current)

2018 (Previous)

Change (%)

2019 (Current)

2019 (Previous)

Change (%)

Revenue 32.12 34.40 36.51 -5.8% 40.66 42.22 -3.7% 46.76 46.11 1.4%

EBITDA 1.08 1.88 2.25 -16.4% 3.18 3.20 -0.1% 4.76 4.62 3.1%

NPAT 0.67 1.61 1.95 -17.4% 2.91 3.00 -3.0% 3.77 3.20 17.8%


BALANCE SHEET

As at 30 September 2016, TMP had $5.5m in cash. The Company also has a $1.3m debt factoring facility, which could be used to buffer any working capital deficit. The facility will terminate in March 2017. We expect December quarter 2016 revenue to be c$9.6m, which is lower than the record $10.1m reported in the December quarter 2015.

We expect TMP to generate healthy levels of free-cash flow in FY17 thus increasing its cash balance further. In addition, we believe that the introduction of the low-touch point offering should reduce the working capital drag which TMP currently faces as it grows revenue. This is due to the prepaid nature of the nxus® self-service offering which reduces the relative level of receivables on TMPs books.

TMP’s balance sheet and cashflow positive operating model should have it in a unique position in the media and technology space, as most of its ASX listed competitors have not yet reached the critical cashflow break-even point.

Figure 6: TMP Free Cash Flow and Balance Sheet position


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VALUATION

Using the discounted cash flow method at a 14.1% WACC and terminal growth rate of 3.0%, we value TMP at $60.0m or $0.65/sh, which is a 260% premium to the current share price. We have also illustrated our forecast EBITDA multiples, using 15.0x EBITDA as the industry standard, which suggest strong valuation upside in FY18 ($0.65/sh) and beyond.

Figure 7: TMP Valuation

Valuation $m $/sh

Present value of free cash flows 53.1 0.58

Unpaid Capital 1.4 0.01

Net cash/(debt) 5.6 0.06

DCF valuation 60.0 0.65

WACC 14.1%

Terminal growth 3.0%

2017F 2018F

EBITDA ($m) 1.9 3.3

EBITDA multiple 15.0x 15.0x

Net Debt (Cash) ($m) (7.7) (10.3)

Implied Valuation ($m) 36.0 59.5

Implied Value per share $0.39 $0.65


Our valuation has decreased as we have flattened the revenue growth in the near-term, as TMP focusses on automation and leveraging its technology to grow the self-service platform. In the longer-term this should grow the affiliates and advertising network, in addition to increasing margins. Our valuation does not account for the potential of TMP to leverage off its nxus® platform as a Software as a Service (SaaS) platform, which may be a viable pivot should there be significant interest from peers.




Recommendation History

Stock recommendations: Investment ratings are a function of Patersons expectation of total return (forecast price appreciation plus dividend yield) within the next 12 months. The investment ratings are Buy (expected total return of 10% or more), Hold (-10% to +10% total return) and Sell (> 10% negative total return). In addition we have a Speculative Buy rating covering higher risk stocks that may not be of investment grade due to low market capitalisation, high debt levels, or significant risks in the business model. Investment ratings are determined at the time of initiation of coverage, or a change in target price. At other times the expected total return may fall outside of these ranges because of price movements and/or volatility. Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management. This Document is not to be passed on to any third party without our prior written consent.

Tech Mpire Limited - TMP,Buy - Adveritas · 12/6/2016 · The technology underpinning the TMP...

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