Snakk Media — Update 8 October 2015

Snakk Media is a New Zealand-based facilitator for mobile advertising on smartphones and tablets. The company listed on the NZX Alternative Market in March 2013, before going on to raise NZ$6.5m in a substantially over-subscribed share placement in May 2013. Shares were placed at 12c/share against a price at that time of 15c/share.

The company has offices in Sydney, Melbourne, Brisbane, Auckland and Singapore. The New Zealand office, which Snakk opened in 2013, has been growing at a rapid rate; revenues increased by 75% in FY15 over the previous corresponding period and accounted for 15% of group revenues. The Singapore office, which Snakk opened in June 2014, contributed 7% of group revenues in its first year of operations.

As well as running the smart screen advertising technology business, Snakk is starting to build an investment portfolio of relevant technology opportunities including technology that delivers ads to smartphones and other mobile devices in a defined geographic area and a cloud-based ad technology platform that enables brands to reach audiences via their apps, mobile websites and social media sites.

Snakk is raising up to NZ$2.3m, including NZ$0.8m in oversubscriptions, in additional equity at 4.5c/share and intends to move from the NZX Alternative Market to the NXT in early November. Snakk intends to use the proceeds accelerate its growth by:

Media agencies and brands engage and pay Snakk to develop their mobile advertising strategies, creative and technology, that allows them to connect with mobile users. Snakk is paid every time it successfully targets and delivers a brand’s ad across networks of mobile websites, apps and games. At the heart of Snakk’s business is the development and placement of highly targeted advertising within apps. More than 80% of group revenues are generated in apps. It makes money each time a targeted ad is served across its networks of mobile websites, apps and games. There are several key elements to the business model:

The core business, Snakk Media offers agencies and brand companies a portfolio of mobile audience targeting, geolocation and native advertising technologies. Snakk has developed strategic distribution relationships with key technology partners, predominantly from the US. Snakk has integrated the technologies to develop new or unique mobile advertising products for its markets. While it does not own the intellectual property rights to the technologies it uses, it does hold them on an exclusive or preferred distribution basis for its target markets: Australia; New Zealand; and South-East Asia. The majority of these deals are 12-month contracts with 90-day termination clauses. Snakk uses these technologies to the following effects:

Exhibit 1 demonstrates the depth of the campaigns developed using Snakk’s smart technologies. In the case of the Cancer Council 2014 Daffodil Day mobile campaign, viewers of the ad could click to make a call to the Daffodil Day team, make a donation via their smartphone, and view a map showing the stall closest to them to buy merchandise and/or donate in person.

As Snakk has grown, its business has evolved into several segments offering specific expertise and services to its client base, which ultimately enhance and expand its client relationships.

Snakk launched a new division, Represent Media, in September 2014, to sell advertising space for premium-publisher titles appearing on mobile apps and websites. The division has secured media publishing giant CBS Interactive (CBSi) to sell the premium ad inventory available on their Asian mobile titles across 12 countries, inked a deal with global music player TuneIn and signed one of Australia’s largest independent publishers Conversant Media to sell its mobile ad inventory.

Snakk’s mobile creative division, Touch Create, develops campaigns and strategies for brand advertisers and premium publishers to engage and convert customers. The team’s work has been highly awarded over the past 12 months. Its Next Taste Challenge campaign was named by the global Mobile Marketing Association (MMA) as an APAC finalist in its 2014 awards while the launch of the latest release of video game Assassin’s Creed Unity was awarded a prestigious 2015 Official Webby Honoree.

Haptic Generation was created to provide support to Snakk’s sales teams, agency partners and brand advertisers by providing insights, news, trends and facts and figures about how Australians, New Zealanders, and the rest of the world engage with smartphones and tablets.

Snakk has built an impressive client list, including global and local brands, with campaigns recently run for Disney, Google, McDonalds, Visa, Lion Nathan, Fonterra and Airbnb. On the publishing side, the company is also winning share with popular publishers such as Australia’s Carsguide, Rdio Music Service, and Concrete Playground signing Represent Media as their mobile advertising sales agency.

The company has a strong record of building its revenues organically, but may pursue acquisition opportunities if that assists in enhancing its market presence in Australia and New Zealand and establishes its presence in South-East Asia.

Growth will be targeted through a combination of strategies:

Key competitors in the Australian market are InMobi, Big Mobile and Mobile Embrace (MBE.AX). InMobi and Big Mobile are privately owned while Mobile Embrace is listed on the ASX.

InMobi is the biggest player in the Australian market in terms of its mobile advertising network and ad volumes. It is India-based and backed by Soft Bank and VC group Kleiner Perkins, Caulfield & Byers.

Big Mobile is a privately-owned Australian company that offers mobile advertising solutions, including a technology platform to deliver data intelligence and audience targeting techniques. It has also built out geographically along the same lines as Snakk with operations in Australia, New Zealand, Singapore and Indonesia.

Mobile Embrace is a listed mobile payments (m-payments) and mobile marketing company, which offers both m-payments infrastructure and a local and global publisher advertising network and media trading desk. It has recently expanded into the UK market, with the acquisition of one of the largest online performance marketing groups, Marketing Punch, which has an opted-in database of more than five million consumers.

The pace of take-up of smart devices shows little sign of slowing, with industry forecaster eMarketer predicting compound annual growth of 9% a year for both smartphones and tablets until 2018. As Exhibit 2 shows, eMarketer is forecasting that the number of smartphones will rise to 2.73bn by 2018, with tablets increasing to 1.43bn in the same period.

Mobile advertising is forecast to grow at an even faster pace; at a CAGR of 30% in the six years to 2019, according to eMarketer. Up until now, mobile advertising had not been fully reflected in the allocation of advertising dollars. As Exhibit 3 demonstrates, in 2014, mobile advertising accounted for just 8% of total global advertising expenditure. eMarketer is forecasting mobile advertising to secure 12% of total ad spend this year, but is predicting 2016 will be a breakthrough year, with mobile advertising snaring 51%, or more than US$100b, of digital advertising budgets. By 2019, mobile advertising is forecast to almost double to US$196bn, which at that time eMarketer estimates will equate to 70% of digital ad spend and almost one-third of total advertising expenditure.

For Snakk Media, it is crucial where the mobile ad dollars are spent. It is unlikely to enter the crowded US or UK markets, focusing instead on Asia Pacific. Australia is forecast to be one of the faster-growing markets globally, and from the perspective of dollars spent, one of the largest markets. By 2018, eMarketer is predicting Australia will rank sixth in mobile advertising expenditure, (Exhibit 4).

It is worth noting that Indonesia, a target market for Snakk, is expected to experience the highest compound growth rate over the next five years. eMarketer is forecasting Indonesia’s mobile advertising spend to jump from US$43m in 2014 to US$1.49bn in 2018; a CAGR of more than 100%.

The rapid growth predicted in mobile ad spend in Indonesia is due to the rapid penetration forecast for smartphones there. As Exhibit 5 illustrates, eMarketer is expecting smartphone penetration in Indonesia to double from 21.3% in 2014 to 42.6% of the population by 2018. Only India is forecast to experience the same sort of growth in the next five years, although off of a lower base.

eMarketer is not alone in its forecasts for rapid growth for the region. However, it is more bullish on mobile ad spend in Australia than some of its research peers. PwC is predicting that digital ad spend will account for more than half Australia’s A$16.4bn in ad spend by 2019. According to the Interactive Advertising Bureau, mobile advertising currently makes up 20% of the A$4.1bn spent on internet advertising today.

Snakk has published key operating milestones, which it intends to provide quarterly to the market as part of its proposed NXT listing. Exhibit 8 outlines these operating milestones both on an historical basis and the targets that Snakk has set itself over the next two years.

The key milestones are defined as follows:

Snakk Media is a young company with ambitions to expand beyond its current boundaries. The degree to which it succeeds in its ambitions and the speed with which it does so, will have a bearing on the company’s financial performance.

The company has been very much in a growth phase since its inception in 2010, and as a consequence, revenues have grown rapidly each quarter and cash burn has been high, as Snakk invested in both its platform and talent to realise its ambitions. As Exhibit 9 highlights, quarterly revenues have increased almost each concurrent quarter and certainly year on year.

The expansion into New Zealand and Singapore accelerated revenue growth, with New Zealand in particular, delivering spectacular growth in FY15 over FY14, as Exhibit 10 illustrates.

However, the investment in the offshore expansion, together with increased investment in talent did boost the cash burn, particularly in the first half of 2015. Management has focused on cash burn, with a NZ$1.0m reduction in operating cash outflow in the second half of 2015, assisted by increased revenue growth in the same period. This appears to have continued into 2016 with an operating loss of just NZ$114,000 in Q116 and total cash burn of NZ$147.000 for the same period.

Snakk’s operating performance has improved over the past two years, with gross margins rising to 42% in FY15, boosted by a second half gross margin of 48%. The company reported a Q116 gross margin of 58%, which is ahead of the full-year target of 55%. As we have highlighted in Exhibit 12 and in the previous exhibit, net cash losses from operating activities rose in 2015 but have been reducing since the first half of that year, as management has focused on cash outlays.

Net assets have reduced since 2014, when Snakk last raised capital, as the company has invested its cash in working capital. This is typical of this type of business and at its stage in life. At the last balance date, Snakk had NZ$2.5m in cash and had secured a NZ$1.3m revolving credit facility on which it had not drawn. Based on past performance and the current business plan, these cash resources together with the NZ$2m equity raising should provide sufficient cash for the company’s working capital needs for at least the next 12 months.

Snakk reported its Q116 performance in early September, demonstrating a significant decline in EBITDA losses on the back of a 13.4% lift in revenues. We have undertaken a scenario analysis to consider what the FY16 result might look like if Snakk was able to maintain its Q1 revenue growth through the course of the year and if it were to meet its target of a gross margin of 55%.

As Exhibit 13 illustrates, if the Q1 result is extrapolated into the full year, Snakk could potentially deliver a significantly reduced operating loss for FY16. It should be noted that this is simply a scenario analysis and not to be taken as our forecast.

Snakk has announced it is seeking to raise up to NZ$2.3m in equity and that it intends to move to the NXT board of the New Zealand Stock Exchange. The equity offer will be available to all New Zealand investors, with a priority allocation available to existing shareholders.

If Snakk is successful in raising the full NZ$2.3m at the indicative price of 4.5c/share, we estimate that the total number of shares will rise to 316.2m from 265.1m pre-capital raise (Exhibit 14).

Snakk Media is still at an early stage of its corporate development, and as a consequence is still refining its business plan. It is also operating in a rapidly evolving market, which didn’t exist a decade ago.

The company has published key milestones it wishes to achieve over the next two years. In our view the company’s ability to deliver these milestones will be affected by the following:

Additionally, the company’s ambitions and health will depend on, but is not limited to:

It is also worth looking at Snakk Media from the perspective of its strengths, weaknesses, opportunities and risks as the following table highlights.

The four person board comprises an independent chair, an independent director, a non-executive director and an executive director:

Independent chair, Peter James, became chair in June 2015. Mr James has a solid track record of joining early-stage listed companies, steering them toward significantly increased revenues and value. He brings 30 years’ experience in the technology, telecommunications and media sectors, is currently chair of Macquarie Telecom, and until recently was a non-executive director of iiNet. Mr James has more than 16 years’ experience in CEO roles, including ASX-listed media and communications company AdCorp Australia, Ainsworth Game Technology and Computer Power Group.

Non-executive director, Derek Handley, co-founded Snakk Media and was its inaugural chair. He brings a wealth of experience in forming and driving technology companies, having founded The Hyperfactory, helping Fortune 500 companies navigate the mobile world and was the inaugural CEO of The B Team, a global leadership collective aimed at driving businesses to work better as they face the challenges of the 21st century. Mr Handley is also a board member of Sky Television. He has flagged that he will retire at the end of calendar 2015 once a suitable replacement is found.

Independent director, Martin Riegel, is principal at Broadfield Advisory, working with a range of New Zealand companies and government entities, including as CEO/director of UbiquiOS Technology, chairman of Aeronavics, director of Cemplicity, chairman of Mixquake, director of Broadbell Technologies and director of Vizzybell.

Executive director and acting CFO, Malcolm Lindeque, brings more than 23 years’ public and private company experience in accounting and corporate governance. Through his consulting business, The Virtual CFO, Mr Lindeque works with a range of listed and private businesses, assisting finance teams in delivering governance and in financial reporting to the relevant stakeholders.

CEO, Mark Ryan, has extensive business management experience in private and public IT, digital services, advertising agencies and new media companies, both in Australia and internationally. He was the first COO for Ogilvy Australia, then Australia’s largest advertising agency and prior to this was responsible for the agency restructure of Havas Australia.

As at June 23, just over 47% of the company was held by the top 20 shareholders. Non-executive director Derek Handley is the company’s largest shareholder through his association with Far East Associated Traders. At the company’s annual general meeting in September, Mr Handley told shareholders that he would personally commit that Far East Traders Company would not dispose of any of the Snakk Media shares it holds until 2017.

We have looked at Snakk’s peer group to provide a guide as to what the market will pay for companies in this sector. However, in doing so, it is worth noting that listed peers are few and far between. Most operators in the mobile marketing sector are venture-capital backed, unlisted entities. Some of the listed peers of recent years have been mopped up by the dominant players in the space: Google; Facebook; AOL; and Twitter. One of the most comparable companies to Snakk, Millennial Media, has just been acquired by AOL at an historical EV/Sales multiple of 0.7x. It is worth noting that listed Australian peer, Mobile Embrace is trading at the median EV/TTM sale of 2.3x.

Taking the median EV/Sales multiple of this peer group, we have applied the median EV/TTM sales multiple of the peer group to Snakk’s 2015 sales revenue of NZ$9.8m (pre rebates). We have assumed NZ$2.5m cash as per the March 2015 reported figure.

For ease of comparison, we have also used the expected number of shares on issue post the capital raising and included the NZ$2.3m cash from the capital raise.

The implied valuation using the median peer multiple is NZ$0.09 a share as the following table illustrates.