Dustin Moore's  Instablog

Dustin Moore
Send Message
Dustin Moore is a researcher and analyst focusing on overlooked and undervalued investments. He enjoys analyzing under-the-radar companies with massive upside potential and those with favorable risk/reward ratios. On Twitter! @dustinrmoore https://twitter.com/dustinrmoore
My blog:
My SA Instablog
  • HipCricket: An Emerging Leader In Mobile Marketing 14 comments
    Nov 5, 2013 8:08 AM | about stocks: HIPPQ, MDLZ, GOOG, YHOO

    Mobile devices are increasingly the key medium for businesses to connect with and monetize their customers. Big technology names like Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB) are focusing hard on mobile advertising. The trend toward mobile is clear and there will be many winners. But it is also a highly competitive space. HipCricket (HIPP) is a small company that enables clients to engage their customers with mobile marketing and advertising solutions. Rather than concentrating on one marketing technology, HipCricket separates itself from competitors by offering end-to-end mobile advertising and marketing products in a single, highly integrated platform. Offering a broad array of capabilities with flexibility better equips HipCricket's clients to target consumers and analyze trends.

    Mondelēz/Google/HipCricket Partnership

    HipCricket's most notable recent achievement is inking a partnershipwith Google and Mondelēz International (NASDAQ:MDLZ) (a spinoff of Kraft) to develop mobile websites and engage customers through a mobile experience for multiple brands including Trident, Oreo, and Wheat Thins. Investors largely took this announcement in stride. However, joining the Mondelēz and Google partnership is a key milestone for HipCricket.

    Oddly enough, Mondelēz-the world's largest snack food company-is truly a pioneer in the mobile marketing space. In May, Mondelēz launched a global mobile initiative with the goal to "become one of the top mobile marketers in the world". They are more than just talk. Mondelēz was recently recognized as "Global Marketer of the Year in Mobile" by the Mobile Marketing Association. Further, the $60 billion dollar snack food producer is shifting its marketing dollars away from TV and print. Mondelēz is now devoting 10% of its entire global marketing budget to mobile.

    To bolster this effort, Mondelēz announced a global strategic partnership with Google that goes "beyond a traditional media impressions deal...[and] includes creation of branded mobile websites, training and mobile capability building, analytics and an opportunity to opt in to Google's mobile beta programs."

    Given its ties to Kraft, Mondelēz referred HipCricket as a candidate for building its mobile websites. Google selected HipCricket for the job over about a dozen other companies. The fact that this innovative partnership found HipCricket's mobile marketing solutions superior speaks volumes. But the project is more than building websites. It is part of a larger partnership for delivering a massive, cutting edge mobile marketing campaign, in which HipCricket is now integrated. The deal is truly global, spanning 22 countries and 17 languages, covering 12 Mondelēz brands. Terms of the deal contract were not disclosed but due to the size and breadth, the deal is likely worth several million to HipCricket.

    Google is of course an important player in the mobile advertising space. Management has indicated that Google may be interested in facilitating discussions with HipCricket regarding some of their other clients.

    Indeed, HipCricket already has relationships established with household name companies with deep pockets and a hunger for mobile marketing and advertising solutions. Among the list of rather impressive clients are McDonalds, Kelloggs, Ford, Kraft, Johnson & Johnson, etc. The ability for such a small company to secure high caliber clientele reveals the quality of HipCricket's technology.

    Revenue growth is already growing both from the addition of new clients as well as from expanding existing relationships. HipCricket boasts an impressive 95% renewal rate. Not only this, but the company has been able to increasingly monetize these clients. The average annual revenue per customer continues to climb, most recently increasing 46% on a trailing twelve month basis from $72,000 to $105,000.

    As an example, both Ford and MillerCoors started out as relatively small clients back in 2010, with less than $200,000 a year agreements for SMS text solutions. However, both are now multi-million dollar contracts for broader mobile marketing solutions.

    HipCricket is generating millions in revenues from these big name customers. Second quarter revenue increased year over year 23% to 7.6 million, the highest in company history. HipCricket turned positive EBITDA cash flow in August. Management expects revenues to continue to accelerate in second half of the fiscal year, guiding the next two quarters higher. The company sees increased revenue from holiday mobile advertising. With this, the company expects to be breakeven cash flow by year end.

    Cost Reduction

    Management has shifted strategy away from aggressive IP enforcement to an increased focus on its core business. Legal costs have dropped in response to settling and putting litigation on hold, while the company appeals an adverse ruling with Yahoo (NASDAQ:YHOO).

    The decision to focus on core business and the effective execution by management over the past few quarters has been transformative for HipCricket. Cost reduction completely changes the dynamic of the company's business model as profitability is now obtainable in the near future. The operating cash flow breakeven revenue number per quarter is down to between $9.5 and $10 million. To hit recent management guidance of 30% to 35% year-over-year revenue growth and to adjust for the seasonality of advertising, the next two quarters will generate a minimum $20 million in revenue combined. The math here becomes more favorable for HipCricket to turn a profit.

    (click to enlarge)HipCricket Revenue Growth and Projections

    Risks

    For the past 3 years, HipCricket has posted a net loss from operations. Thus, management has historically relied on issuing shares for funding its operations. The company recently closed a $9.6 million financing with 13 investors. Although this provides HipCricket with plenty of cash for normal operations in the short term, should the company choose to further dilute shares to fund a strategic acquisition or to build cash for aggressive growth, investors would be adversely affected.

    Also, expect expenses such as selling and marketing, technology and development to increase as the company utilizes the newly received cash to further growth. This may somewhat offset higher revenue in the short-term.

    The stock has had a nice run-up the past couple sessions. So it may be a little volatile here.

    The future of marketing and advertising is quickly shifting to mobile in a big way. Recent developments suggest HipCricket is sitting at the epicenter of this revolution. One-quarter of all Fortune 100 companies have taken notice to HipCricket's superior solutions and have begun working with the company in increasingly meaningful ways. HipCricket is generating millions from these clients, effectively executing its business strategy, and rapidly growing revenue. With an improved financial condition and business structure, HipCricket is well positioned to add value for shareholders in this hot sector.

    Disclosure: I am long HIPP.

    Stocks: HIPPQ, MDLZ, GOOG, YHOO
Back To Dustin Moore's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (14)
Track new comments
  • Dustin Moore
    , contributor
    Comments (277) | Send Message
     
    Author’s reply » I should also note, I believe the likelihood of a strategic acquisition is high. Management has indicated this is something they will pursue if they see an opportunity.
    5 Nov 2013, 09:30 AM Reply Like
  • Tom Shaughnessy
    , contributor
    Comments (1144) | Send Message
     
    Thanks for all of the info on HIPP Dustin, the name has been going around and this puts the company in a lot more perspective!
    5 Nov 2013, 12:13 PM Reply Like
  • Dustin Moore
    , contributor
    Comments (277) | Send Message
     
    Author’s reply » Thanks Tom!
    5 Nov 2013, 01:11 PM Reply Like
  • Seth Trembel
    , contributor
    Comments (173) | Send Message
     
    This is a great and informative article Dustin. Why has it not been published by Seeking Alpha versus being here on your instablog? Good work, deserves to be published. Better written than many articles here at SA.
    5 Nov 2013, 12:16 PM Reply Like
  • Dustin Moore
    , contributor
    Comments (277) | Send Message
     
    Author’s reply » Seth-

     

    Your comments are very much appreciated! I'm glad you found it informative.
    SA did not want to publish. I'm probably biased :-) but I agree this work is better than several articles I have seen..
    5 Nov 2013, 01:11 PM Reply Like
  • Mitshu35
    , contributor
    Comments (264) | Send Message
     
    Good, well balanced article. Below is an excerpt from the recent analyst coverage report:

     

    Attractive Valuation – Transactions in the mobile media space in recent years have been completed at Price/Revenue multiples well above 10X (see valuation table on page 9). Based on our fiscal 2015 revenue estimate of $45 million, Hipcricket is currently
    trading at a Price (Market Cap)/Revenue multiple of approximately 2X; a valuation we view as well below fair value.

     

    Currently the company is finalizing IP-related negotiations with Millennial Media (MM, $7.08, Not Rated) and it is expected that a mutually agreeable settlement will be reached by the end of October of 2013.

     

    In our opinion, Hipcricket has two very distinct competitive advantages in the mobile marketing space. First the company has an extremely effective analytical targeting engine that is able to collect and accurately interpret consumer traffic data. This tool incorporates Hipcricket’s internal data as well as consumer targeting data from third parties. As part of this targeting expertise, Hippcricket currently has more than 45 million active mobile phone numbers collected from the many campaigns it has managed for its brand customers. This phone number data base is second only to Facebook in the mobile ad space. Hipcricket’s total mobile marketing service suite reminds us of the platform of products and services that Aquantive built so successfully for online marketers prior to being purchased by Microsoft for more than $6 billion.

     

    In reality, Hipcricket is now a significant participant within the rapidly expanding mobile advertising arena with a unique suite of products specifically geared for connecting major brands with mobile consumers. In our opinion, Hipcricket is well positioned to generate impressive revenue growth through fiscal 2015 and argue that the valuation should move more in line with the Price/Revenues multiples of other successful mobile marketing related enterprises that have been purchased in recent years. As noted in the table above, recent transactions in the mobile media space have (on average) been completed at Price/Revenue multiples of above 10X.
    5 Nov 2013, 12:57 PM Reply Like
  • Tom Shaughnessy
    , contributor
    Comments (1144) | Send Message
     
    Mitshu, when was this report published? I am just trying to see when their 2x market cap/ revenue was taken - at what PPS.
    Thanks!
    15 Nov 2013, 04:58 PM Reply Like
  • Mitshu35
    , contributor
    Comments (264) | Send Message
     
    Report came out on Oct. 30th. Was only released to institutional clients so I have not seen the full version.
    16 Nov 2013, 11:51 AM Reply Like
  • Dustin Moore
    , contributor
    Comments (277) | Send Message
     
    Author’s reply » Thanks Mitshu35. A higher P/R multiple is warranted. Particularly with solid growth projections and profitable business model.
    5 Nov 2013, 01:15 PM Reply Like
  • Tom Shaughnessy
    , contributor
    Comments (1144) | Send Message
     
    Dustin, I am in the game. Bought the dip on HIPP
    15 Nov 2013, 04:56 PM Reply Like
  • Tom Shaughnessy
    , contributor
    Comments (1144) | Send Message
     
    Glad I waited, saved ten cents! Dustin quick question -

     

    HIPP is developing the mobile advertising for Mondelēz and Google is developing the branded websites correct?

     

    Thanks!
    15 Nov 2013, 05:05 PM Reply Like
  • Mitshu35
    , contributor
    Comments (264) | Send Message
     
    No, that is backwards. GOOG is doing the advertising for Mondelez, while HIPP is doing the mobile marketing piece that requires the international branded websites. GOOG is able to handle mass advertising but does not have a platform that handles longer-term marketing campaigns / data analytics like HIPP has. Also, HIPP will be getting some of the advertising work directly from Mondelez, which will be in addition to the marketing piece thru GOOG. GOOG is also sending other business to HIPP unrelated to the Mondelez deal. Good partnership to have!
    16 Nov 2013, 11:57 AM Reply Like
  • Dustin Moore
    , contributor
    Comments (277) | Send Message
     
    Author’s reply » Tom, Mitshu is spot on.
    16 Nov 2013, 12:39 PM Reply Like
  • Josh Ok
    , contributor
    Comments (6) | Send Message
     
    Thanks for the fish
    8 Sep 2014, 10:48 AM Reply Like
Full index of posts »
Latest Followers

StockTalks

  • $GOMO started day down only a bit. Now off -7.9%
    Oct 20, 2014
  • Kudos to the investor who snagged $MARA shares sub $13.
    Oct 9, 2014
  • 21Vianet Exposer's Bogus Exhibits $VNET http://seekingalpha.com/a/1hf2z
    Sep 13, 2014
More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.