Key Operating Metrics Indicate That The Marin Software Sell-Off Is Incredibly Unwarranted

Aug. 8.14 | About: Marin Software (MRIN)


Marin reports record Q2 revenues beating on the top and bottom lines and adding a near record number of new customers for the quarter.

Despite a $1.5M full-year revenue guide down, all operating metrics have improved considerably including a YOY gross margin increase to 66% from 61%.

The small guide down is an isolated event caused by a key staffing change and acquisition integration which allows investors the opportunity to buy in at historic lows.

On Wednesday after the bell, Marin Software (NYSE:MRIN) posted its Q2 report which nailed almost everything other than a slight $1.5M revenue guide down of the core business for FY2014, when taking in to account the expected $2M 2H14 contribution in sales from the recent Perfect Audience acquisition. While this is a little disappointing, it really does not warrant a sell-off, especially one of epic proportions. This is especially true given the extremely strong operational metrics that were illustrated in the report.

There really was so much happening behind the scenes at Marin during Q2. Starting with the departure of the sales manager during the quarter to the new CEO taking over the reins, and finishing with the acquisition and integration of Perfect Audience. It was really the perfect storm of events that led to the company effectively dropping the ball on sales execution. As the CEO explained on the call, the deals are still in the channel, just extended out due to poor sales execution. However, this softness is not likely to repeat and ultimately with rapidly growing ad tech companies it is the metrics that matter and these prove that the business fundamentals are as strong as ever.

The most important metric that I look at when evaluating an opportunity in this space is gross margin. Marin grew gross margin from 61% to 66% YOY in the quarter. Also, the number of advertisers ballooned up 33% over the same period last year. Revenue was up 31% YOY and 5% sequentially and the net loss came in less than expected. The CFO reiterated that the company expects to be break even by 2H15 and has sufficient cash to meet this goal. Nothing in the long-term plan has changed. In fact, the projected net loss for FY2014 is less than what was originally anticipated. Most importantly, Marin saw a small uptick in its effective take rate in Q2. Metrics like this are vital when evaluating these companies. Strong key metrics is the reason you won't likely see the analysts rushing to downgrade Marin. In fact, I can only find one analyst note on the earnings and it was a reiterated Buy from Stifel Nicolaus. The analyst lowered the price target on the stock from $16 to $14, which still represents a nearly 100% gain from current oversold levels.

Furthermore, the key revenue retention metric remained over 100%. This tracks the YOY revenues derived from previous period advertisers and includes growth of spending net of churn. A reading over 100% is phenomenal any way you slice it and is indicative of a very strong and sustainable business model. As the Goldman Sachs analyst on the call pointed out, excluding the net advertisers from the Perfect Audience acquisition, the company added 59 new additions. This represents the second best quarter in company history in relation to this very key metric. Clearly, this $1.5M in the full-year core business guidance is an anomaly. I'm not discounting it completely as it represents about 1.5% of the projected FY2014 revenues, but considering that all the key operating metrics have significantly improved both YOY and sequentially and the net loss is better than expectations, I have to concur with the CEO that it is an isolated incident relating to one-time sales execution and acquisition integration issues that are not likely to repeat.

So let's look at what this sell-off does for the value proposition. It is hard to think of any tech company, let alone an SaaS, as a value play. But suddenly this unwarranted sell-off has offered investors an unprecedented opportunity to buy this company for nearly the same valuation as the original venture capital partners paid several years ago. Marin raised $79.5M in 6 rounds of venture capital dating back to 2006. The company further raised an additional $105M just over a year ago in an IPO at a valuation nearly double the current market cap. Adding these numbers together and you are not too far off from the current market value of the company. And remember that this company is not only growing at 25%-30% per year, but firing on all key operational metrics and still on track to become cash flow positive by 2H15.

Really this slight FY2014 revenue guide down is simply a small blip on an otherwise impeccable quarter. With all of the recent consolidation in the ad tech space, I believe that Marin is a distinct acquisition target. Companies like Oracle (NASDAQ:ORCL) and Salesforce (NYSE:CRM) can plug Marin's industry leading Saas platform in to existing marketing suites and Marin would benefit from the increased operating leverage that an acquisition by a more established entity would provide. Lets not forget that Marin is at the top of the technology pyramid. It is an industry pure play on the fundamental shift to programmatic. That is why the margins are so high and the customer growth and retention is so robust.

Like my recent article on Jive Software (NASDAQ:JIVE), which has since moved off the lows, I believe that investment today in Marin stock can represent a 50% short-term gain once the panic dies down. Medium-to-longer term, Marin can very well double or triple in value. Given the strong cash balance and only moderate losses with a clear path to profitability, I'd predict that the bottom is likely in. For this reason the downside risk is negligible from these levels. Marin Software is now my top investment idea. I intend to follow up with a more detailed report that will include a specific acquisition theory that I believe has a very good chance of playing out.

Disclosure: The author is long MRIN. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.