Yoc: Large Upside In A Hypergrowth Market

Includes: HIPPQ, MM, VELTF
by: Edward Schneider, CFA

In August, I wrote an article on Mobile Advertising (see here) that was well viewed with a lot of commentary. So, I thought it would be worthwhile to provide an updated version of this article, but focusing more on the most attractive stock in the group - Yoc (YOC.DE).

Mobile advertising is expected to jump six-fold from $3.3B last year to $20.6B in 2015, according to Gartner. The proliferation of smart phones, with Internet browsing and a multitude of applications, have created fertile ground for mobile media to spawn. Prior to the smart phone era, mobile advertising was limited to more rudimentary text messaging. The advent of the smart phone enables advertisers to target consumers at the point of purchase in real time. Furthermore, the immense amount of data provided by smart phone users enables highly targeted ad campaigns.

Mobile Advertising Revenues 2010-2015 ($, M)
Region 2010 2011 2015
North America 304.3 701.7 5,791.4
Western Europe 257.1 569.3 5,131.9
Asia/Pacific and Japan 868.8 1,628.5 6,925.0
Rest of the World 196.9 410.4 2,761.7
Total 1,627.1 3,309.9 20,610.0
Source: Gartner

Mobile advertising, however, needs to go through some growing pains. The ability to track customers using mobile apps is complex. The current limits to purchase items via smart phones, small screen size issues, etc. have led to lower conversion rates and lower pricing for mobile ads versus their desktop peers. Despite these temporary inconveniences, mobile advertising demand is exploding.

This opportunity has not escaped professional investors. In 2011, venture capital investments in mobile marketing and advertising were $592M, almost a five-fold increase from $128M in 2010. InMobi alone secured $200M in financing last year. It is a real land-grab right now. Venture capital firms are pouring money into these companies to expand market share, even at a loss.

While there will be many losers, mobile advertising winners will have enormous gains. The largest beneficiaries are the advertising network vendors without legacy SMS revenues or too much exposure to less-scalable consulting income. In 2010, Google (NASDAQ:GOOG) paid $750M or 24x 2009 revenues for AdMob, and Apple (NASDAQ:AAPL) paid $275M or 13.5x revenues for Quattro Wireless, according to mobile ad network revenue data from IDC. Today, Millennial Media (NYSE:MM), the second-largest US ad network after Google/AdMob, is currently valued at 9x LTM revenues. Thus, the strategic value of these pure-play first-movers is substantial. Going forward, the less-developed mobile ad markets outside of the US and Japan hold the most untapped potential, notably Europe with its advanced cellular networks and large per capita incomes.

Pure-Play Quoted Mobile Advertising Vendors

Name Ticker/Price (11/01/2012) Mkt Cap Revs MV/Revs Net Inc
Millennial Media MM / $15.42 $1188M $132M 9.0x -$6.3M
Velti VELT / $7.44 $482M $236M 2.0x -$0.9M
Augme Technologies AUGT / $0.69 $77M $21M 3.7x -$32.4M
Mobile Networks ALMNG.PA / €2.45 ($3.16) $18M $9M 2.1x -$1.8M
Mobile Ad Peer Avg 4.2X
Yoc YOC.DE / €7.65 ($9.87) $25M $44M 0.6x -$12.0M

Most investors who want exposure to this mobile advertising theme must choose among the narrow list of publicly-quoted pure-play ad network stocks. Millennial Media is the leading pure-play without any legacy SMS messaging business. Millennial's mobile advertising network has the robustness and scale to compete in the U.S. market. At the end of the day, Millennial and other ad networks are intermediaries between advertisers and publishers. For Millennial and its peers to break the low-margin intermediary business model and realize their potential, they will have to 1) become the independent mobile ad network of choice and 2) maximize data aggregation opportunities.

Velti (VELT) is transitioning, and now less than half of revenues come from the old SMS messaging business. Velti also acquired a leading Chinese mobile advertising network. Augme Technologies' (AUGT.OB) valuation doubles that of Velti, and Augme is losing the most money. Mobile Networks Group (ALMNG.PA) is the smallest of the bunch, and is only in the French market.

Yoc has the most upside potential, providing the double-whammy of a large multiple step-up and having revenues ride the mobile media wave. Yoc is in the midst of selling its technology agency business (approximately 38% of estimated total 2012 revenues of €37M or $48M). Assuming the transaction is completed, Yoc will be a pure ad network company with 2012 revenues of around €23M or $31M, and growing at least 30% to €30M or $39M in 2013. In terms of profitability, the bulk of the €9M ($12M) LTM net loss was a restructuring charge in Q3 2011. Yoc has nearly completed the automation of its advertising network, which will increase turnaround times and conversion rates for its clients, and profitability and scalability for Yoc. We expect positive ad network operating margins in 2013, with a longer-term operating margin target of 10%.

Today, Yoc is one of the leading advertising networks in Europe with operations in six countries: UK, Germany, France, Spain, Austria and Switzerland. The automation of its processes and technology platform will not only improve the efficiency of its existing country operations, but provide a low-cost, scalable way to plug-in future acquisitions from other European markets.

Assuming the anticipated sale of the technology agency business as early as December 2012, Yoc should have at least €10M ($13M) in net cash post-spin-off. Yoc's adjusted EV would be under €10M or 0.3x 2013 revenues and MV/Revs of 0.65x. Public peers trade at 4.2x current revenues, and about 3x 2013 revenues. Strategic acquisitions, for which Yoc will be a prime candidate, will carry even higher multiples. Yoc has very interesting upside potential.

Yoc's major risk is execution. Management has not yet completed the sale of its technology agency business, nor has the ad network automation process been fully set up, so 2012 Q3 ad network results will be sub-optimal (but still growing). Also,Yoc's CEO and founder resigned last quarter, although he remains a large minority shareholder. A longer-term risk are social networks like Facebook (NASDAQ:FB) and Twitter could control a disproportionately large number of mobile consumers within their own mobile ad networks, to the disadvantage of independent ad networks.

The risk-reward tradeoff, however, is quite attractive. Yoc appears to be a misunderstood company today. When the smoke clears, Yoc shares are likely to be multiples higher than the current stock price of €7.65 ($9.87), in my opinion.

Disclosure: I am long YOC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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