Marin Software: Successful IPO Inside The Numbers

| About: Marin Software (MRIN)

On Friday, Marin Software (NYSE:MRIN) completed its oversubscribed IPO at a much higher valuation than expected and with great enthusiasm from the market. Originally planning to sell 7M shares at $11-13, it ended up selling 7.5M shares around $14 and closed at $16 for the day after hitting an intraday high of $19.95. The $16 closing price gives the company a market cap of around $450M and an 8-10X ttm revenue valuation versus market cap.

From the Marin Software S1:

We provide a leading cloud-based digital advertising management platform that enables advertisers and agencies to improve financial performance, realize efficiencies and time savings, and make better business decisions. Our Revenue Acquisition Management platform is an analytics, workflow, and optimization solution for marketing professionals, enabling them to effectively manage their digital advertising spend across search, display, social and mobile advertising channels.

Mobile advertising is expected to be one of the largest growth segments as noted by this information provided in the S1.

Mobile. Smartphones, tablets and other mobile devices are rapidly transforming how and where people consume media, conduct business, interact with brands and make purchase decisions. Adoption of mobile devices is also providing advertisers with the unique ability to target users based on real-time location data. As a result, digital advertisers are adapting their advertising strategies across search, display and social channels to mobile devices. According to Magna Global, the mobile advertising market is expected to grow from $6 billion in 2012 to $16 billion in 2017, representing a 23% CAGR.

Marin Software has been a development stage company since 2006. Revenues have grown from $7.5M in 2009 to $36M in 2011. Revenues for the first 9 months of FY12 were $42M vs. $24M in 2011. Current growth rates were 152% from 2009 to 2010, 90% from 2010 to 2011 and currently 72% in the first 9 months of FY12 compared to FY11. Using 72% as the growth rate for all of FY12 would put revenue estimates at $62M. While this growth is impressive, it does show a slowing trend, and what should really be looked at is how the company is doing to get to a positive bottom line. Looking at earnings, the company has only delivered losses to the bottom line. In fact losses have been increasing as revenues have ramped upward. In FY10 losses amounted to $11.9M on revenue of $19M; in FY11 losses totaled $17.4M on $36M in revenue and it has already lost $19M on $42M in revenue for the first 9 months of FY12. From a recent interview on Techcrunch, breakeven operations are hoped to be reached in 2015.

We spoke to Marin CEO Chris Lien after the market closed, and he said the goal of the IPO was to "raise our profile and raise the profile of our category." He added that as a public company, it will be "more of the same" - Marin has been steadily improving its gross margins by 10 percent annually, and he has "an aggressive plan for growth," with hopes of bringing the company to the breakeven point in 2015.

Another area to possibly be concerned with is Intellectual Property. Currently, the company has one patent issued and one patent pending and as mentioned in the S1. IP generation has not been a priority for the company. As has been seen in recent years, Intellectual Property can be very important for a young company. Augme Technologies (AUGT.OB) has sued and successfully settled with AOL (NYSE:AOL) and Pandora Media (NYSE:P) and is working to settle outstanding cases with Millennial Media (NYSE:MM) and Velti (VELT).

Two other companies in the digital advertising space are Augme Technologies and Millennial Media. Both of these companies have shown exactly the same growth trajectory as Marin Software and are also planning for robust growth in this year, but the big difference is both plan to be profitable in their current fiscal year. Augme Technologies believes it will break even by the end of its second quarter and Millennial Media is predicting a profitable year.

As has been seen in IPOs over the last several years, investors are initially excited by huge revenue growth in explosive growth areas but eventually the focus returns to the bottom line. Growing revenues at the expense of larger losses will only be tolerated for so long before the market decides it has had enough. Marin Software is already selling at a trailing twelve month figure of revenue versus market cap of around 8-10. It is not expecting to break even for at least another 2 years. Augme Technologies is selling at approximately 1.5 ttm revenues and Millennial Media at 3 ttm. Given these facts it would seem like more established companies that are close to making money might be a better bet for stock appreciation.

Disclosure: I am long AUGT.OB, MM, VELT. 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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