YUME - YuMe Corporation

[usdtor05]

Hi all,

 

Wondered if anyone had spent any time on YUME. We came across it on VIC (not sure if we are allowed to post those here after they have gone "public").

 

We are new to this space but have spent a fair amount of time looking into it. The general case for a long is as follows:

 

The Business

 

Brings together publishers of video ad inventory (digital video estimated around a $5B business in the US with Google about $1B or 20% through Youtube) and its large corporate clients (72 out of the top 100). Its publishers are primarily smaller that lack the scale to be able to sell to a McDonalds or a Toyota. This is opposed to a Tremor Video which brings together larger publishers with the advertisers. YuMe adds value to the publishers by bringing them advertisers they could never reach and therefore it would appear they have more pricing power (GM of upper 40s vs Tremor GM of 33% or so although we believe the margins are also higher due to the higher quality impressions discussed below).

 

The value they are bringing to the advertisers is access to high quality impressions (Bud Light ads to a 21 year old male, not a 60 year old female). The advertisers use YuMe for "brand advertising" which is still primarily done over the TV/Print/Radio these days (this is more of embedding Coke in your mind vs. go buy a Coke right now which would be direct response advertising). However; the advertisers are moving online as well as we all spend more time on phones/tablets. YuMe claims the better impressions are being driven by their software development kit (SDK). YuMe embeds the SDK into their publishers web sites/applications, etc. and they generate data about the users including first person data. I understand first person data to be something like the SDK generating surveys that you and I have to answer around ourselves, the brand, etc.. That might be wrong however and would love to be corrected.

 

Since YuMe has a better idea of who is watching what videos, they have better impressions and therefore the advertisers are willing to pay more (guessing the increase in advertising spend for a McDonalds would be much less than the value created through better impressions). There is a lot around the machine learning, analytics, etc. that drives this but candidly that is somewhat over my head.

 

What is it worth?

 

YuMe has been able to grow quite remarkably over the past 4 years (I/S attached here). In 2014 YuMe Management has guided towards revenue of $180M-$190M and Adjusted EBITDA of $0-$4M in Adjusted EBITDA . This would be revenue growth of approximately 20-26% over the prior year which is down form 29% the previous year but still a healthy clip. Adjusted EBITDA is going to be down from around $9M in FY13. The VIC guys make the point that they are confident the US margins are around 10%-15% and the international expansion is hiding this (income not broken out by geography or region, just revenues).

 

TTM US revenue was 87% of the total revenue so to be conservative (given foreign growth rate is higher), we can estimate FY14 US revenues at 80% of the $180M guidance. That gets us to Adjusted EBITDA is the US (using 80% of revenue and 10% margins) of $14.4M or over $20M at 15% margin.

 

Backing out net cash ($61M) from the MC ($175M) puts us at an EV of $110M. Assuming they can get the foreign operations to even break even, 7.5x EBITDA for a growing company (FCF has been much lower due to some working capital build and capex) starts to look cheap. In some ways, you need to buy the digital ad video story that is out there with pretty unbelievable growth rates (http://www.emarketer.com/Article/US-TV-Ad-Market-Still-Growing-More-than-Digital-Video/1010923) but even without it, it doesn't seem all that richly priced.

 

We also going to throw it out there that we hink management is sandbagging those revenue numbers, You are coming off a year (2013) without any material political spend in which they grew 29%. Certainly it gets harder as you grow but if we had to guess they are keeping it low on purpose to guide down expectations.

 

Other notes:

 

1. The VCs kept their shares except Accel which distributed some to the LPs potentially leading to some of the price deterioration in the stock. This has kept the float quite low.

2. Directors bought up $1M recently

3. Competitors (are they really tho?) are being bought out for what appear to be pretty pricey multiples

 

Risks/things we need to understand

 

1. Google is coming in with an ad exchange. The argument against Google coming to dominate the digital video ad landscape is that Google tends to have a hard time selling advertising when it requires a human element. Their programmatic buying and selling dominates search and has about 20% from what I can see of banner ad sales. So, is YuMe more of a relationship business (Omnicom is their largest customer) or is it a technology play with their SDK driving better impressions. If technology, I would think someone would be able to do as well or better (although might be cheaper to buy them) or the smaller players that YuMe serves so well could move onto Google or another ad exchange's platform thereby removing some of YuMe's advantage. YuMe themselves opened up a programmatic video ad exchange earlier this year but have not reported anything on it yet.

 

2. Apparently programmatic buying for video also does not work that well due to the different formats (HTML 5, Flash, etc.). So if you want to push out an ad to a wide audience you need to be able to deliver it in a format that works for each publisher. We would think this is something that could be addressed but maybe YuMe helps with this as well.

 

3. Any impressions on the black box here and how important it is vs. the relationships they have with the advertisers and the amount of inventory they bring together from the smaller players/their ability to deliver it in the right format (flash vs. html5, etc.)?

 

Anything else we are missing here would love to know and thank you in advance.

 

Disclosure - We purchased a small position for our accounts as we performed additional market research.

 

YUME_income_statement.xlsx

[LC]

I don't see what they do differently from any other company selling ad inventory online. There are tons of companies selling video ad space. If the draw is the small niche websites which provide higher quality impressions, there is an issue of diminishing returns as they can only handle so much volume without campaign performance significantly dropping off.

 

Also. I don't buy the proprietary SDK = higher quality impression argument. I think ad targeting is becoming increasingly efficient online and this will only continue. I have to do a bit more research but I'm not sure what their differentiator is.