ironSource Ltd.: A Growth Software Stock Surpassing Revenue Expectations
Summary
- Total equity of ironSource by year-end 2021 stood at $1.103 billion, up almost 600% from 2019.
- ironSource targets mobile internet users in both gaming and the non-gaming world with its customer base running into tens of thousands.
- Through Dynamic Segmentation, ironSource aims to attract more developers by introducing real-time update features.
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ironSource Ltd. (IS) is trading more than 50% below its 52-week high amid a late technology sell-off that is affecting both mid- and small-sized tech companies. Similarly, despite the over 100% gain in gross profit (in 2021), AppLovin Corporation (APP) was down 39.41% YTD. Earnings were reportedly lower than estimates as competition continues to rock the developer-platform model.
Thesis
After reporting a 46% increase in its Q4 2021 revenue, ironSource updated its mediation solution LevelPlay to attract the attention of more app developers. The company also expects to augment its penetration beyond gaming apps to boost profitability. At the moment, more publishers are looking to use the monetization and marketing tools adopted by mobile games to increase their revenues. In this article, I will explain why this stock is a buy while trading at the current discounted rate.
Stable Fundamentals
After being ranked the hottest pre-IPO ad tech company back in 2015, ironSource has grown its fundamentals a hundredfold, catching the eyes of investors. Total equity by year-end 2021 stood at $1.103 billion, up almost 600% from 2019. In the one-year revenue analysis, ironSource still trails industry leader, AppLovin, which posted a record $2.79 billion in 2021.
Seeking Alpha
The company has managed to put a lid on total liabilities that currently stand at $348.3 million. Of this amount, current liabilities are $308.8 million (as of 2021) with long-term liabilities at $39.5 million and total debt at $37.60 million. The company’s total debt/Equity (MRQ) and current ratio are similar at 3.41, indicating a stable liquidity level.
It gets better when we consider that the company has grown total assets by more than 250% from $408.8 million in 2019 to $1.451 billion in 2021. For the full-year 2021, net cash attributed to ironSource stood at $782 million with its adjusted EBITDA at $194 million (+87% YoY).
ironSource is a growth tech giant that is characteristic of most high-level Israel-born companies. As of 2017, Israeli companies with revenues below $100 million have registered an absolute growth rate above 17,000% against a CAGR of 460%.
Globes
In fact, from a private investment standpoint, Israeli tech companies raised $25.6 billion in 2021. It registered a 146% growth rate from the $10.3 billion raised in funding from 2020. The last quarter of 2021 was phenomenal, as it saw up to $8 billion raised by start-ups alone.
This understanding is essential since as we know, ironSource - an AdTech firm went public on the NYSE via an $11 billion SPAC merger with Thoma Bravo. It received $1.3 billion in private investment and $2.15 billion in cash proceeds. With time, the company will prove that it is worth the $11 billion valuation.
Mode of Operation
ironSource targets mobile internet users mainly with gaming apps with its customer base running into tens of thousands. It offers a platform for targeted advertising for both gaming and non-gaming products. The two primary service products offered by ironSource are Sonic and Aura. App developers use Sonic to launch and help generate revenues while offering growth mechanisms. On the other hand, telco operators use Aura to help smartphone buyers select their apps.
In the fiscal year 2021, customers using both Sonic and Aura contributed 30% of the company’s revenue. The company is optimistic that this number will continue to grow. In Q4 2021, up to 88% of the total revenue was attributed to the Sonic platform while Aura contributed the remaining 12%.
Customers that generated more than 100,000 in the trailing 12 months (within the quarter) rose 23% YoY from 291 in Q4 2020 to 358 in Q4 2021. Even more interesting is the fact that 10% of Sonic’s revenue and almost all of the sales attributed to Aura were generated from non-gaming apps.
Dynamic Segmentation
That said, ironSource announced that its mediation solution LevelPlay platform now supports Dynamic Segmentation. App developers in the gaming and non-gaming world will use this feature to increase their user engagement, augment revenues, and optimize their monetization strategy. The main component of this feature is that it allows the real-time adjustment of ad strategies based on changes in user segments during app sessions.
For instance, a game app developer, using Dynamic Segmentation will configure the settings of the application to give more relevant ad experiences. When users progress or convert mid-session into paying users, they are immediately moved to another waterfall and pick up new adaptions in real-time.
Mobile ad networks in essence operate by collecting data of mobile users and constructing their profiles. Based on these, the tech companies will then narrow their campaigns on an audience segment tied to their particular interests.
ironSource is working well to wrest control of the mobile ad network space that is controlled by tech giants such as Google (GOOGL), Meta (FB), and Twitter (TWTR). Undisputedly, these companies have many registered users through which they can leverage data for targeted ad campaigns.
New entrants to the market, Reddit (REDDIT) and TikTok have proven to be diverse online communities looking to monetize based on an increase in social media/entertainment consumption. For TikTok, it uses Conversions Destination which helps advertisers send segment events and reports. Sharing of this data helps the company provide solutions such as dynamic product ads, custom (client) targeting, optimization, and attribution of online campaigns.
Like ironSource, other companies that have survived competition include AppLovin, Vungle, and UnityAds. They are limited by the fact that they cannot target mobile ads as precisely as Meta (Facebook) or Google. Common to these companies is their command of fewer data points for mobile user profiles. However, the companies are now giving account managers options to handle management services for low-level ad campaigns.
In a way, Dynamic Segmentation will continue the trend of advertisement automation. New aspects such as artificial intelligence algorithms will help to tackle digital advertising barriers for both top- and mid-tier app distribution companies.
Custom products and new acquisitions
After its first $85 million initial investment back in 2014, ironSource has grown to accommodate more than 5 million daily installations. Its software development kit (SDK) runs more than 50,000 applications. By the end of Q4 2021, ironSource announced the closure of the Tapjoy and Bidalgo acquisitions. These two non-gaming projects will not only provide increased scale but added SDK footprint as well.
The company also launched the App Analytics program to help centralize business functions. From a corporate front, this system will expand ironSource's app-based business roles, including monetization and marketing, game design, and product management.
To cover up for the low Aura revenue rankings that contributed 12% to the company’s revenue in Q4 2021, ironSource signed a partnership with two new tier 1 telecom operators. The companies namely Samsung (OTCPK:SSNLF) and Vodafone (VOD) agreed to integrate the Aura solution package on their devices.
To put it into perspective, Samsung’s active smartphone market share in Q3 2021 stood at 19%. By end of 2020, the company had shipped more than 267 million smartphones globally. It claims close to 30% of the global smartphone market. Vodafone on its part has over 136 million IoT connected devices in more than 182 countries. The company is arguably the largest global IoT service provider with its customer play growing daily. An integration of ironSource with these companies will prove pivotal in augmenting revenues and global exposure in the long run.
These contributions are important for the business since the company has already beat revenue estimates set at 37% in June 2021 after it started the IPO process. With the revenue growth now up by 67%, ironSource is looking to continue validating its business strength in the App Economy world.
To add to the list of strategic partnerships, ironSource announced its support of the Custom Product Pages. This iOS 15 update by Apple (AAPL) is the latest feature that helps developers create multiple versions of every App Store product page. These versions are targeted to various user segments meant to reach particular users. Through the ironSource platform, developers will be able to send or direct users to relevant customized product pages.
This Apple-ironSource relationship will see developers increase the number of installs, and scale the growth of their apps.
Risks
ironSource is susceptible to industry challenges caused by alterations in iOS and IDFA. In 2021, Apple changed access to its Identifier for Advertisers (IDFA) and decided to take up user privacy over targeted ads. In a feature analysis, iOS advertisers were experiencing a 15% to 20% drop in revenues due to irregular organic traffic.
However, ironSource stated that it was a net beneficiary from IDFA as it proved pivotal in its revenue growth in FY 2021. Factors such as in-app bidding capacities and customer adopters helped users within the company’s mediation to cover demand sources. ironSource also provided tools for developers to distribute on iOS after the deprecation of the IDFA. Lack of management of these industry changes may see IS drop its revenue in 2022.
Bottom Line
ironSource beat the revenue estimate at $553 million in 2021, representing an increase of 67% from the forecast of 37% made in June 2021 (after its IPO). The company intends to incorporate growth by partnering with industry leaders such as Samsung, Apple, and Vodafone to increase the number of installs. It faces industry-related challenges such as changes in iOS and IDFA that may affect future revenues. IS expects to increase acquisitions and software product releases in the future to promote growth and capacity building. For these reasons, we propose a buy rating for this stock.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of IS either through stock ownership, options, or other derivatives. 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.
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