Who is Coupons.com?
Coupons.com (NASDAQ:COUP) provides digital coupons. It offers printable, social, mobile, and loyalty card promotions. The company provides a collection of money saving printable or save to card coupons on the Web; coupon codes for saving on online purchases from online merchants; and daily deals for discounts on products and services from local businesses, a well as offers Grocery iQ, a shopping-list application that allows users to create, organize, and share shopping lists, and find and use coupons. It provides DFSI, a digital free standing insert; online marketing campaigns, email, and social media programs; and print and mail, clearing, and advertising solutions to brand marketers. The company also offers solutions for publishers to monetize Website traffic, including custom-branded microsites; and Brandcaster, a self-service coupon syndication platform. In addition, it offers APIs for developers to integrate Coupons.com coupons into their products. Further, the company provides family codes on coupons, customer care solutions, customer support, and coupon processing services. It serves consumer goods manufacturers, advertisers, retailers, promotional marketing firms, pharmaceutical, and other companies.
So are they an advertiser? Does anybody even use coupons?
Not really an advertiser, but they do let the advertisers do all the heavy lifting for them in a traditional sense, and YES people DO use coupons. We'll get to THAT later in the article. For now, lets take a look at the coupon business in general.
The coupon business has been around since 1887 when the Coca-Cola Company first introduced a coupon for a free drink. They placed their coupon in the hands of one in every nine Americans between 1887 and 1913 and this promotion helped them become the global force that they are today. Of course their story isn't that simple, but it all started with their initial dip into the coupon market.
The coupon business has gone through some very dramatic changes since inception and has evolved (devolved) into the modern day mess that it is. We'll get to THAT later in the article as well.
Currently, 305 billion paper coupons are distributed annually, representing an aggregate discount value of $467 billion, with 2.9 billion being redeemed, representing an aggregate discount value of $3.7 billion saved, according to an annual industry report by NCH Marketing Services, Inc., a provider of coupon audit and settlement services. It's hard to quantify the amount of digital coupons being distributed but based on what we are able to put numbers behind, a recent report from Juniper Research suggests that the mobile coupon market will be worth $46 billion by 2015, "Mobile coupons are going mainstream, cost effective mobile coupon campaigns are now within the reach of smaller retailers providing them with an easy way to drive profitable footfall and build customer loyalty. To ignore the potential of mobile coupons would be to ignore the future of mobile commerce". This is just an outline description of the coupon market, not the primary focus of this article, but I do think it's important to understand the potential that is available to a company who can bring together a portion of the opportunity.
I happen to agree with the study findings at Juniper. The coupon market is huge and as time goes on I think the trend will continue towards mobile. Companies that can form recognized platforms with reputations of excellence should stand to make a lot of money. Even currently in the paper coupon dominated world the problem isn't potential, its execution.
How can COUP improve the numbers mentioned above?
The goal of any advertiser always has been and always will be to gather as many eyeballs and ears as possible and direct them to their product. The problem is the current methods present as many problems as they do potential. Currently, the most widely used methods of distributing coupons (a form of advertising) are: direct mailers, advertisements in sector exclusive channels (meaning per client advertisements to a particular grocery chain, or furniture store, etc), product specific coupons for loyalty programs (no "hard" coupon but a secondary price tag on the product that gives the coupon price for the loyal customer), brand specific coupons not advertised but presented on the particular brands website (printable at the consumers discretion), and television and radio ads that inform the customer of the "sales" available based on the above mentioned product specific coupons. You can see how the current methods put the majority of the workload on the advertisers and muddy the waters between brand building and trying to move discounted inventory.
Some of the challenges created by the current methods of distributing coupons are listed below and are also mentioned in the COUP S-1 filing:
Challenges for CPGs and Brands:
-difficulty engaging consumers at scale
-difficulty coordinating promotional channels that are optimized to their retail distribution channels
-complexity of reaching consumers at the moments critical to influencing their purchase decisions
-difficulty of integrating with retailer promotion efforts
-inability to measure and improve the effectiveness of promotions
- lack of security
Challenges for Retailers:
-coordinating CPG promotional spending to drive benefits to the retailer
-difficulty in engaging digitally savvy consumers with retailer promotions
-improving the efficiency of redeeming all forms of coupons
Challenges for Consumers:
-traditional and digital coupons may not be available in the form that a consumer finds easiest to use
-difficulty in finding coupons for preferred brands and retailers
-lack of personalization
This is where COUP steps in and provides the much needed solution. COUP provides a comprehensive, all inclusive, 100% online and mobile platform for all parties involved. They have found a solution to presenting products to buyers, on a personalized, tailored, and timed basis. What's even better is that COUP has found a way to get the consumer to actively engage with the brands and consumers packaged goods companies that makes the consumer immediately aware of the savings and "opportunity" the companies are presenting them with. What this has shown, based on data collected by COUP in regards to touchpoint activations (the customer downloading a coupon to their personal "coupon bank" within the COUP platform to use at the particular retailer - think grocery stores), is an increased loyalty to retailers within their group of preferred vendors and even to the CPG companies on a brand specific level. Brand loyalty is the desired result of any advertisement or coupon campaign. COUP can build this. Lets take a look at why each participant in the sales process would look to use COUP (also mentioned in the S-1 filing):
Consumer Packaged Goods Companies and Brands:
-COUP can cast a wide net - in the first nine months of 2013, COUP generated revenues from over 940 million transactions
-Engagement with the consumer - "Our platform allows CPGs to better engage with consumers by enabling multiple touchpoints during a consumer's shopping experience. For example, a consumer can use our mobile app while they are walking through the aisle of a retailer, find a coupon for their favorite detergent ,save the coupon directly to the retailers loyalty program and receive the discount automatically at the point of sale without the need to present a physical coupon"
-COUP can blend fresh advertisements with coupon promotions within the same platform and same screen
-SPEED - "Our ability to deploy promotions in days rather than weeks or months provides brands the ability to strategically allocate promotion spending to drive increased sales of their products." Taking advantage of quick shifts in shopping behavior can be the difference in selling a product and furthering a markdown (hurting margins).
-Help with optimization of promotions using proprietary analytical tools
-Security - counterfeiting and fraudulent usage of digital coupons is one of the major barriers to adoption for those new to the technology, COUP's platform securely manages promotions and helps alleviate these concerns
-Leverage CPG promotion content to increase sales - "Retailers can integrate promotions from our platform into their point of sale systems, retailer-branded websites, retailer loyalty/rewards programs, mobile applications and social media programs. By offering CPG promotions from our platform through their own digital channels, retailers are able to increase sales of the CPG promoted product at their locations and increase consumer loyalty." Absolute no brainer.
-Recurring income from COUP not ordinary to coupon usage - "Retailers receive a distribution fee from us when we generate revenues from a digital promotion transaction on the retailer's website or through its loyalty reward program. Retailers benefit from an additional source of revenues not available with traditional coupons, in addition to driving purchases of the CPG products at their stores.
-Integration with retailer point of sale systems - customer is no longer required to present a paper coupon (less work for the consumer has shown to equal more usage), cuts down on check-out time, improves the customers experience in store, builds loyalty via "savings", and simplifies the processing of coupons.
- Broad network or CPG's, retailers, and specific brands that use COUP
-Easy to use - customers can build personalized lists of coupons, store coupons for printing at home if they prefer, use the digital coupons at point of sale, and download coupons directly to their retailer specific loyalty cards
-Personalized promotions - "Our point of sale solutions and mobile applications help consumers save time and money by optimizing and personalizing the presentation of promotions.A consumer using these products will be presented with a set of optimized promotions based on their prior coupon selections, geography and other demographic and behavioral attributes." The search engine of coupons, only this search engine makes relevant suggestions.
COUP takes advantage of an obvious need in a way that presents a clear value add to all parties involved in the sales process. Lets take a look at COUP's growth strategy going forward.
The road ahead and a look at COUP's numbers
COUP's business model has been slowly developing into what they hope is an unstoppable force. They already have over 2000 brands and a network of over 30,000 publishers committed to what amounts to a joint venture. The significant reach of their ability to promote to consumers increases their value to other CPG's and retailers, which in turn increases their network and increases their value to consumers. So as they develop one train of their business the other train naturally develops as well. They've built an incredible amount of momentum and made a focus of putting in place the infrastructure to operate at a much larger scale, always focusing on the next level of capabilities. Revenues at COUP grew from $27.2 million in the quarter ended September 30, 2012 to $39.7 million in the quarter ended September 30, 2013 while operating expenses declined from $33.1 million to $29.0 million and net loss declined from $16.6 million to $1.6 million over the same period. This is an incredible set of numbers from a company this size. If they continue to develop at the same pace, I don't think it's out of the question to imply that they stand a good chance at developing at a faster pace (based on network exponentiation), they could become a household name and Wall Street darling by the end of 2014. The aggregate of all CPGs that used COUP's platform during the nine months ended September 30, 2011 increased their promotion spending with COUP two years later during the nine months ended September 30, 2013 by 44% over the amount spent during the nine months ended September 30, 2011.This is because what COUP is doing, is working. The company will continue to deepen existing relationships, develop new relationships, further their saturation across secondary and tertiary circles of influence, and expand on the 940 million transactions they did in the first nine months of 2013. They'll continue to take advantage of the disappearing stigma of using coupons and hopefully capture a large portion of the market that is moving to entirely digital usage. The consumer, especially those who have come of age during the last five years, has become incredibly cost conscious and sensitive. COUP helps brands create value and loyalty with this new wave of shoppers and helps the brands move volumes of inventory that otherwise would be at risk of further markdowns.
In 2012, COUP generated revenues of $112.1 million, representing 23% growth over 2011, a net loss of $59.2 million, representing an increase of 158% over 2011, and an Adjusted EBITDA loss of $47.3 million, representing an increase of 233% over 2011. During the nine months ended September 30, 2013, COUP generated revenues of $115.3 million, representing 51% growth over the same period in 2012, a net loss of $12.8 million, representing a decrease of 75% over the same period in 2012, and an Adjusted EBITDA loss of $3.5 million, representing a decrease of 91% over the same period in 2012.Numbers like these suggest that COUP is on the front end of what should be an incredible run as they develop into the industry leader for this new, now necessary, player in the sales process.
I like COUP for a long term hold or for somebody looking for a beta sensitive, growth oriented company in the short term. Currently, COUP is trading in the middle of a range that is has traded in since IPO which leaves a bit of room to the upside in the very short term but what I am most interested in is the mid to long term growth potential of the stock. The stock is grossly undervalued, in my opinion, based on the low levels of CAPEX needed to expand the existing model (the CAPEX required to build the infrastructure has already been priced into the IPO pricing, the growth mentioned above has not), the ability to generate revenues based on whether a customer actually uses a coupon or simply downloads the coupon to the platform ("Each time a consumer selects a digital coupon on our platform by either printing it for physical redemption at a retailer or saving it to a retailer online account for automatic digital redemption, we are paid a fee which is not dependent on the digital coupon being redeemed"), the ability for the company to generate advertising revenues when they advertise in correlation to coupon placements on the COUP platform, and the many secondary services COUP can provide as value adds for existing and new business ( Grocery iQ, DFSI, custom-branded microsites, etc). The company has shown the ability to cut adjusted EBITDA losses by 91% over the last two years and that was taking into account the above higher run rate of CAPEX. I happen to believe that as COUP further entrenches themselves as the industry leader and can further demonstrate the ability of their network that they will be able to negotiate larger concessions from customers when it comes to the splits in revenue generations (pay per click, fee paid to retailers or CPG companies for third party coupon usage generation, etc). The company, during their IPO roadshow, announced being adjusted EBITDA positive and this will most likely lead them to carry through with the expressed desire to begin looking for strategic acquisition targets that can allow expansion or deeper penetration into the target markets. They have had over 7 million downloads of their mobile application and this is without heavy spending on advertising the actual services of the company. The overwhelming large percentage of CAPEX to this point has been on infrastructure development as mentioned above. A switch to a focused spending on advertising or the acquisition of a company that can expand integration of their app to more mobile devices will do nothing but accelerate overall revenues and profitability. COUP is currently trading at around 15X trailing sales and growth/tech oriented stocks have been known to trade between 30x-60x sales depending on the hype and prevailing macro environments. With management expressed models calling for 30-32% adjusted EBITDA on 66% to 68% gross margins, this stock has a lot of room to run to the upside. I think once the stock settles into a more established range and can display a lowered volatility that bank upgrades will quickly follow, which will move the stock as well. I like the valuation at just under 2 billion and think that this company will be doing at least 750 million in sales ANNUALLY in five years or less. That would put the stock trading in the $100-105 range, the bottom of the range pricing in room for any necessary expansion of the share float.
IF COUP can continue along the path of predictable results, one that they have had great success is following, I could see their stock rapidly increasing in price based on the projected organic growth and the growth that they would be acquiring.
Disclosure: I am long COUP. 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.