RetailMeNot: Low Risk, High Return And Attractively Priced

| About: RetailMeNot, Inc. (SALE)
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Company: RetailMeNot, Inc.

Exchange: NASDAQ

Symbol: (NASDAQ:SALE)

Industry: Digital coupons (E-commerce)

Expected date of listing: 19 July, 2013. here

Data source: IPO prospectus.

The Offer:

RetailMeNot is offering 4,545,454 shares of its common stock, and the selling stockholders are offering an additional 4,545,454 shares of the common stock. The anticipated initial public offering price per share will be between $20 and $22. The selling stockholders have granted the underwriters the right to purchase up to an additional 1,363,636 shares of the common stock.

The company is an "emerging growth company" as per the JOBS Act, and, as such, will be subject to the reduced public company reporting requirements.

Valuations after current offering:

Shares to be outstanding after offering

50,206,974 shares

Offer price (mid range) per share

$21*

Valuations at $21* per share

$1.05 billion

*The mid-point of the estimated range of the initial public offering price.

Term to know:

Digital coupons: "Digital coupons are coupons, coupon codes and brand or category specific discounts made available online or through mobile applications that are used by consumers to make online or in-store purchases directly from retailers." (source: IPO prospectus, page 97)

Summary:

The company operates the world's largest digital coupon marketplace. It provides the various online platforms (websites and mobile applications) where retailers can offer the coupons that carry various types of offers like: cash discount, free gifts, cash back, etc.

The company serves over 60,000 retailers and brands by offering digital coupons through websites, mobile applications, email newsletters and alerts, and social media.

It has direct relationships with over 10,000 retailers/brands, for the rest it deals mainly through the performance marketing networks. Its visitors/users visit its websites for the sole purpose of finding the digital coupons that are beneficial for them.

The table below shows the details of its main online business properties.

Financials:

Source of revenue:

The company generates revenues from two sources:

Commissions: The company earns commission whenever the digital coupons offered by the company is utilized by a consumer/user and the concerned retailer/brand (the retailer/brand who issues that coupon) gets business.

Advertising placements: The company earns advertisement revenues by placing ads on its websites.

The table below shows the revenue distribution by the source.

Revenue by geography:

The company earns a major part of its revenue from the U.S. market. However, the contribution from other geographic regions is rising steadily.

The table below shows the revenue distribution by the geography.

Income statement analysis:

Key points from the income statement:

  • Its revenues grew at a compounded annual growth rate ("CAGR") of about 193%, from $16.8 million in FY 2010 to $144.6 million in FY 2012.
  • Its operating profit grew at a CAGR of about 301%, from $2.8 million in FY 2010 to $45.5 million in FY 2012.
  • During the last few years, its operating margins are fluctuating widely: 16.7% in FY 2010, 47.9% in FY 2011 and 35.6% in FY 2012. (Excluding charges of about $6 million in FY 2012, related to Impairment of purchased intangible assets and deferred compensation.)
  • In Q1, FY 13 its operating margins showed a decline, from 37.6% in Q1, FY 12 to 30% in Q1, FY 13.

Balance sheet analysis:

Key points from the balance sheet:

  • Its balance sheet is healthy.
  • Balance sheet is showing a stockholders' deficit of about $41 million due to the dividends paid on the preferred shares in the past, which often surpassed the net profit of the company. (Upon the closing of this offering, all outstanding preferred stock of the company will be converted into common stock.)

Other key statistics:

  • In 2012, over 22.0 million transactions have been done through the digital coupons offered by the company.
  • In 2013, its marketplace featured more than 500,000 digital coupons in each month.

Industry Outlook: (positive)

The industry outlook is positive due to reasons like:

1. Rising penetration of internet and mobile access:

With the rising penetration of internet and mobile access, the E-commerce industry is also expected to see rapid growth.

2. Value for money:

Digital coupons offer value for money, which attracts the consumers. So, more and more retailers are expected to adopt the digital coupons to market and sell their products.

3. Growing adoption of digital coupons:

"In a January 2013 article, eMarketer, a provider of digital marketing and media research, estimates that, in 2013, 32.0% of adult smartphone users in the U.S. will redeem a coupon obtained from a mobile device, up from 13.0% in 2010." (Source: IPO prospectus, page 99.)

Key positives:

1. Exceptional operational growth (Key operational metrics):

For the last few years, the company is performing exceptionally well on all operational parameters (see the table below).

  • No. of visits: The number of visits that the company's websites received grew at a CAGR of about 106%, in last two years, from 108.5 million in FY 2010 to 464.2 million in FY 2012.
  • Revenue per visit: The revenue per visit grew at a CAGR of about 39%, in last two years, from $0.16 per visit in FY 2010 to $0.31 per visit in FY 2012.
  • Revenues generated by retailers/brands: This is the most important parameter to judge how well the company performs for its customers (coupon providers). The revenues generated by the retailers/brands through the digital coupons offered by the company grew at a CAGR of about 246% in last two years from $0.2 billion in FY 2010 to $2.4 billion in FY 2012.

2. Growing presence in mobile segment:

During the first quarter of 2013, the company had 28.3 million visits to its websites originating from smartphones and tablets. Further the company also experienced 20.3 million sessions of its mobile applications. Unlike the most other websites, whose revenues get affected negatively, due to the rising popularity of mobile access, the company is not expected to see any significant negative effect because it generates most of its revenues from commission, not from ads. In fact the rising popularity of its mobile platform will help the company in user retention.

3. Consumer retention:

The company uses various methods to reach and retain consumers and also to enhance the consumer experience.

To reach consumers:

  • Email newsletters: In 2012, the company sent consumers an average of approximately 1.9 million newsletters per week.
  • Alerts: These alerts provide consumers with new digital coupons from their favorite retailers. In 2012, the company sent an average of approximately 91,000 aggregate alerts per day to its consumers.
  • Social Media. The consumers can receive promotional messages from retailers and brands by engaging with the company on social media channels, such as Facebook (NASDAQ:FB), Google+ (NASDAQ:GOOG), Pinterest and Twitter. The company had over 2.7 million Facebook fans and 170,000 Twitter followers (as of March 31, 2013).

To enhance user experience:

  • Sharing of coupons: The consumers can share the digital coupons socially via Facebook, Google+, Twitter, Pinterest, email or text message, or save or print them for later use.
  • Location-based information: The RetailMeNot iPhone application notifies its consumers of savings opportunities when they are shopping near one of 575 geo-fenced shopping malls by sending alerts for digital coupons that can be used in these malls.

4. Global reach:

The company is constantly expanding its reach by expanding into attractive new geographies, including the U.K., France, Germany, the Netherlands and Canada. This expanding global reach will allow the company to tap every available growth opportunity and will also, to some extent, save it from any country/region-specific slowdown or from any adverse changes in the regulations.

5. Largest player in the industry.

6. Positive industry outlook (explained above).

7. Management focus:

The company is not only focusing on its revenue growth, but it is also focusing on keeping its business profitable. The company has been giving high attention to enhance its user experience, both in the website access/use and in the coupon offerings.

8. Successful integration of the acquired online properties and companies:

The company possesses strong acquisition capabilities. It acquired the businesses of:

  • RetailMeNot.com in November 2010;
  • VoucherCodes.co.uk in August 2011;
  • Web.Bons-de-Reduction.com and Poulpeo.com in May 2012;
  • Actiepagina.nl in March 2013.

Key negatives:

1. Low conversion ratio:

In FY 2012, the company received nearly 464 million visits on its websites and over 22.0 million transactions had been done through the digital coupons offered by the company. So, only 1 out of 21 visits to the company's websites is actually converted into the business/revenue.

2. Seasonal:

Its business is subject to seasonal fluctuations. The third and fourth quarters of each year are the best quarters due to an increase in holiday shopping.

3. Normal business risks like emergence of new competitors with the better services, any adverse change in the Govt. regulations, economic slowdown etc.

Future assumptions: (These are just the assumptions, and the company may perform totally different from these assumptions.)

The financial and the operational assumptions: (assuming that the company performs reasonably well in the future.)

The assumptions are based on the company's performance of Q1 FY 13, Q1 FY 12 and FY 12.

Assuming that:

  • The number of visits to the company's websites rise to 556.5 million in FY 2013 and further to 639 million in FY 2014.
  • The revenue per visit rise to $.35 in FY 2013 and further to $.39 in FY 2014.
  • Operating margins are assumed to be at 30% in FY 13 and FY 14.
  • Its debt levels are considered as nil.
  • Applicable tax rate is considered as 35%.

The table below shows the basis of assumptions:

The table below shows the financial assumptions:

Offer evaluation: (Barring any unforeseen facts, and circumstances.)

  • Low risk high return.
  • Attractively priced.

Reasons:

The high future growth potential:

  • The company had shown a tremendous growth in the recent past and had already scaled up its revenues multiple times. Still, there are immense future opportunities for the company to grow in the U.S. and also internationally.
  • In FY 2012, the company experienced nearly 24 million unique monthly visitors; this is just about 10% of total U.S. unique monthly Internet visitors. This means there are still lots and lots of opportunities for the company to grow in the U.S. market.

Growth potential from existing visitors/users:

As explained above its conversion ratio is low and any improvement will certainly help the company to improve its revenues and margins.

The future readiness:

The company is already scaling up its infrastructure for the future growth opportunities and to establish itself in the mobile segment (the fastest-growing segment). In fact the rapid scale up of infrastructure is the main reason behind the recent fall in operating margins.

Excellent business model:

The company's business model is a self-accelerating business model: More deals it offers, more consumers will come. As more consumers come, the company will get more deals to offer.

Net proceeds:

The company estimates that the proceeds to it from this offering, after deducting estimated underwriting discounts and commissions and offering expenses payable by the company, will be approximately $85.5 million, assuming the shares offered by the company are sold for $21 per share, the midpoint of the price range.

Use of proceeds

The company intends to use approximately $52.5 million of the net proceeds from this offering to pay unpaid dividends accumulated through the closing of this offering on its outstanding shares of the preferred stock.

The company also intends to use some part of the net proceeds from this offering for working capital and other general corporate purposes.

Disclaimer: Investments in stock markets carry significant risk, stock prices can rise or fall without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.

This article reflects the personal views of the author about the company and one must read the prospectus and consult a financial advisor before making any decision.

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.