Marin Software: Sentiment Remains Strong For Cloud-Based Company

| About: Marin Software (MRIN)

On Friday, Marin Software (NYSE:MRIN) made its public debut. Shares of the provider of internet advertising services ended their first trading day with gains of 16.1% at $16.26 per share. Shares initially rose to highs of $19.95 at the start of the trading day, but gradually lost terrain to end its opening day with much more modest gains.

After a slight correction in Monday, shares have rebounded on Tuesday, currently exchanging around $17 per share.

The Public Offering

Marin Software has developed and provides a cloud-based digital advertising platform which helps advertisers to improve their business revenues by providing optimized solutions. Marin's Revenue Acquisition Management platform measures the effectiveness of advertising campaigns and helps to optimize advertising budgets of its clients.

Marin Software sold 7.5 million shares for $14 apiece. The company raised $105 million in gross proceeds in the offering, valuing the company at $433 million.

The offering has been a great success. The offer price was set above the preliminary $11-$13 price range set by the firm and its bankers. Some 24% of the shares outstanding were offered in the public offering. At Friday's closing price of $16.26, the firm is valued at $502 million. Demand for the shares in the offering was large. As a result, Marin has increased the planned offering size from 7.0 million shares towards 7.5 million shares.

The major banks that brought the company public were Goldman Sachs, Deutsche Bank, UBS, Stifel and Wells Fargo.


Marin Software had 531 active customers at the end of 2012 who used the company's platform to manage their online advertising. Combined, these customers spend $4.7 billion in advertising for the year of 2012. According to a research report from Magna Global (which references can be found in the S-1 filing), the global digital advertising market is expected to almost double from $98 billion in 2012, towards $174 billion in 2017.

Marin believes that the multi-channel and multi-devices environment will grow demand for its services, in an ever complex growing online world. It therefore becomes more important for advertisers to know their online advertising budgets are well spent.

The company reported annual revenues of $59.6 million for the full year of 2012, up 65% compared to the year before. A 76% increase in total operating expenses resulted in widening losses. Net losses widened to $26.5 million.

The company raised $105 million in gross proceeds in the offering process. The company will use the public offering to increase access to capital markets and improve the public awareness of the business. The company has not yet specified a direct purpose for the capital being raised, but will most likely use the proceeds to expand the business and to finance losses in the meantime.

The company operates with $31.5 million in cash and equivalents and total debt of $10.8 million at the end of 2012. Adding to that roughly $95 million in net proceeds from the offering, and Marin will operate with a net cash position of approximately $115 million.

Based on Tuesday's valuation of $523 million, the market values the firm's operating assets around $410 million. This values the firm at 6.9 times 2012's annual revenues.

Investment Thesis

The offering of Marin Software has been a great success. Shares were offered above the preliminary offering range, and after witnessing a first-day return of 16%, are trading some 41% above the midpoint of the preliminary offering range.

Marin reported fourth quarter revenues of $17.1 million, which is still up 50% compared to the year before. The growth momentum continues, but is slowing down as fourth quarter revenues rose 10% compared to the third quarter.

The rapidly growing user base is resulting in a decent diversification of revenue streams among its customers. Yet the company heavily relies on key relationships with publishers include Baidu, Bing, Facebook (NASDAQ:FB), Google (NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO), among others. Some of these competitors even offer competitive solutions for their own services, such as Google's "Adsense" program.

While the company is still reporting growing losses, Marin's public offering has raised enough capital to finance growth in the coming years. The revenue multiples are high, but not extremely high given the still very decent revenue growth rates. Investors will most likely continue to focus on revenue growth rates and improvements in profitability in the short term.

The successful public offering has boosted investor expectations for a strong first quarter of 2013. Yet the overall valuation is not that high in comparison to some recent hot technology public offerings. Given the strong public offering and subsequent returns, I would hold off making an investment at this level.

Opportunistic investors could buy on significant dips in the $13-$15 range as revenue multiples become acceptable at those levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.