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Elevator Pitch

Mandalay Digital Group (MNDL) is a unique company that has the potential to help the carriers reclaim the content revenue usurped by Apple (AAPL) and Google (GOOG). This company's offering is a vertically integrated platform more elegant than the current versions of iOS or Android, providing a consumer experience second to none. It is a global company with key partnerships in the United States, Asia, and Europe including Intel, Sun Cellular and Telefonica.

Company Description

Mandalay Digital owns a mobile services platform that works with operators and third-party publishers to provide portal management, a unique user experience, content development, and billing technology. The company delivers the most effective distribution of entertainment content over mobile devices. Mandalay Digital's solution enables the carriers to regain ownership of their customers from Apple and Android, a huge investment theme as "mobile destroys the Internet" The company's platform includes a user interface, content store, platform, billing and device integration. Mandalay Digital is headquartered in Los Angeles and has offices in Europe and Israel to support global sales and marketing. The company operates in 28 countries with 78 operators worldwide.

Digital Turbine, an operating division of Mandalay Digital, is an innovative platform that enables a distinctive user experience and content management system for OEMs sitting atop each of the various operating systems. Designed to optimize users and connected devices truly "working together", Digital Turbine extends traditional smart phone UI design by enhancing all interaction aspects of products and services as perceived by users. Digital Turbine provides users with access to content and enhanced device functionality via the senses of Sight, Sound and Touch providing a unique and compelling, yet familiar, experience.

IQ is a component of Digital Turbine platform that intelligently unscrambles the myriad of available content offerings to deliver a redefined and personalized user experience. This experience is seamlessly integrated across the complete mobile eco-system including web, device deck, carrier deck, apps and contacts. Based upon the user's keyword selection, available content subjects appear. Content type can be anything from streaming or downloadable digital content to merchandise, concert tickets, and more. The IQ intelligent search function inspires the user to make more content purchases on-deck rather than off-deck. Once an active subject keyword is selected via IQ, the user is directed to a specific brand, or "results page" featuring multiple content access options.

Ignite (f.k.a. LogiaDeck) is a second component of the Digital Turbine platform. Ignite enables the handset vendors or operators to install their chosen apps on Android devices. It is a unique, carrier grade, technology for monetization and payment. Mandalay Digital currently provides these services to more than 50 mobile operators on a global basis. The company works with 1,000+ publishers including Facebook (FB), Konami, Rovio, Conduit and pPartners as well as industry leaders including Amdocs, Ericsson, and Alcatel-Lucent.

In the past few months, Mandalay increased its carrier footprint by securing international partnerships with Spain's Telefonica, Philippines' Sun Cellular, Indonesia AXIS and Israel's Cellcom (CEL). These carriers plug Mandalay's Digital Turbine into a network of over 300 million cellular users and into a multi-billion-dollar mobile content market. The company could potentially secure a domestic Tier 1 carrier deal within the U.S. in the months ahead.

Mandalay's recent partnership with chip behemoth, Intel (INTC) further validates its product portfolio since the chip maker is looking for ways to further monetize the cellular sector. Mandalay could enable Intel to accelerate its new mobile strategy.

Industry Trends

The cycle changing for wireless carriers is changing. Major carriers are fed up with subsidizing Apple equipment while enabling Apple to gain all of the profit from content purchases. In January, AT&T (T) CEO Randall Stephenson stated that the telecom giant is looking at ways to cut down on the hefty subsidies it pays Apple for every iPhone it sells to a customer. He was observing T-Mobile's strategy of allowing customers to pay off their iPhones during the length of their contracts (T-Mobile hopes they will be swayed by lower-cost monthly plans that can save them money over the long haul). AT&T reported 8.6 million iPhone activations in the fourth quarter of 2012 costing AT&T an average of $450 per device to lock customers into two-year contracts ($3.7 billion in subsidies). Verizon in January also chafed at its $2.8 billion Apple bill when it released earning results, along with its record 6.2 million iPhone sales. Sprint had to pony up billions to guarantee an exclusive sales period for Apple iPhone 5 devices.

This subsidization issue has been magnified by the loss of content revenue for the carriers. The carrier storefronts used to be huge revenue generators for wireless carriers. With the iTunes and Android stores emerging as the primary consumer destinations, carrier stores have been bypassed. The revenue share is solely between the publisher and Apple/Google. Thus, the carriers retain a zero percentage revenue share in these off-deck purchases whereas once they retained up to fifty percent of the purchases made on-deck.

Thesis & Catalyst For Mandalay Digital Group, Inc (MNDL)

Currently, there is no clear competitor to iTunes who has reached revenue estimated at $12 billion revenue per annum (Analyst Horace Dediu of Asymco). The industry is highly fragmented as evidenced by a global mobile content market of $150+ billion (Global Mobile Media Forecast from Strategy Analytics). Thus, Apple's market share is less than 10% of the overall market. Operators must choose whether they want to compete directly with proprietary storefronts or turn customer experience and analytics over to others with specific expertise. On the one hand, they are disappointed with the performance of their own storefronts. However, they are also concerned about having to "turn the keys" over to the likes of Google, Apple, Facebook, and Amazon (AMZN) for the customer experience.

Digital Turbine has cracked the code on driving traffic and downloads. In fact, SingTel's Optus Network in Australia realized 100% increases in content ARPU on devices featuring Digital Turbine in comparison to devices without the DT platform. With the recent Logia acquisition, Digital Turbine currently has the capability to deliver an end-to-end white-labeled offering for operators.

Valuation

The company should be valued as a full end-to-end platform alternative for carriers as well as an acquisition vehicle. For example, the pending acquisition of Australian mobile solutions provider, mia, could increase Mandalay's top-line by $12-$18 million annually while opening up additional carrier opportunities in the Asian-Pacific Rim. Based on the aforementioned $0.20 projected earnings per share and triple digit growth rate, a 15x P/E or $3.00 12-month target price is warranted. This would translate to a potential 3.3x return on investment for shareholders entering at current levels.

Smart institutional investors: The largest owner who paid .70 for shares a year ago is Adage Capital. Adage is comprised of the former investment managers of the top performing Harvard Endowment fund and is the most successful of the "crimson cubs". They currently own about 11%. Also investing at the same terms with over 6% is William Powers, former senior investment manager at PIMCO. Lastly with about 4.6% is Trinad, who has had several large successes in the small cap space.

Company Management

The management team and board of directors of Mandalay Digital Group include industry luminaries with vast experience within the mobile and media ecosystems. The company is led by Peter Adderton, founder of Boost Mobile, the first prepaid wireless operator in the world. Bill Stone, CEO of Digital Turbine, has senior executive experience at Qualcomm (QCOM) and Verizon (VZ) and was CEO of Handango (one of the first application storefront providers). The board is led by Peter Guber whose background includes running a major film studio, writing a bestselling book, an owner of the NBA Golden State Warriors and Los Angeles Dodgers, a frequent guest on CNBC and Fox Business. also includes Nextel founder, Chris Rodgers. This team has the credentials to build and scale a mobile platform company.

Variant View

Risk Factors

  • Timing of carrier rollout: Should the current carriers rollout take longer, this could affect cash flow and potentially require additional capital. This would adversely affect the price of the stock.

Pricing

  • Changes to the current project pricing of the Digital Turbine interface would lower margins and adversely change the valuation.

Micro Cap Market

  • While the company has applied for a NASDAQ listing, there is no assurance that this will transpire. The microcap market entails more risk due to lack of liquidity and general lack of participation of institutional investors and major brokerage firms providing research. This requires a deeper level of diligence for the investor.
Source: The Long Case For Mandalay Digital Group