|Shares Out. (in M):||48||P/E||21.5x||20.2x|
|Market Cap (in $M):||1,315||P/FCF||12.5x||10.5x|
|Net Debt (in $M):||-50||EBIT||145||160|
Ancestry.com (ACOM) is the world's largest online family history resource, with just over 1.7 million paying subscribers around the world as of December 2011. The company has experienced significant growth in recent years and has enjoyed tremendous operating leverage. However, the market has been brutal to the stock over the last six months, sending it down by 40% to the current $27.50. As a result, ACOM trades for just over 10X 2012 FCF on a one-year forward basis, which we think is way too cheap given what we consider to be very strong growth opportunities. We expect the company's wide moat will allow it to remain the industry leader for years to come, while its inherent leverage will allow the company to grow profitability much faster than revenue.
While the company has only been public since 2010, ACOM has been a leader in the family history market for over 20 years and has helped pioneer the market for online family history research. While genealogical research is not new, Ancestry.com has revolutionized how this research is performed: what use to be a very slow and laborious process involving a lot of travel and snail-mail has now been replaced with a very user-friendly website that can be accessed from the comfort of home.
The foundation of Ancestry.com's service is an extensive collection of billions of historical records that it has acquired, digitized, indexed and put online over the past 14 years. The company has developed and acquired efficient and proprietary systems for digitizing handwritten historical documents, and has established relationships with national, state and local government archives, historical societies, religious institutions and private collectors of historical content around the world. Ancestry.com has invested nearly $100 million over the years acquiring, digitizing, and indexing over 6 billion records such that the company now boasts a document collection that spans US, UK and Canadian censuses, Immigration records, WWI and WWII draft records, casualty reports, family and local histories, slave narratives, newspapers, maps, city directories, state birth/marriage/death records, country, church/court/land/probate records, obituaries, and yearbooks. Further, there is a substantial amount of internal user-generated content (e.g., family trees database) on the Ancestry platform that is not easily replicable. Additionally, the company has invested heavily in its technology platform, developing a proprietary vertical search engine for historical content as well as a record-hinting technology that helps accelerate research.
Ancestry.com is primarily a subscription-based business. ACOM offers two packages on its website, U.S. Deluxe and World Deluxe, and subscribers can choose among various subscription periods such as monthly or semi-annually to each. Subscribers to the U.S. Deluxe package gain unlimited access to the complete United States collection of records, including the ability to view images of original records. They also can communicate and collaborate with other members of the subscriber network. The World Deluxe plan includes unlimited access to all of the content on Ancestry.com Web sites, including the content from the U.S. Deluxe plan plus the global collection of records.
The company also offers a number of ancillary products and services, although the overall sales mix from these ancillary segments has declined from 10.1% in '05 to 7.6% in '09 as Ancestry.com has taken off. Some of these are quite interesting but because the core subscription service is the key value driver, we will not delve into them in further detail here.
We have come to the conclusion that ACOM’s genealogical subscription service is a natural network-effect business similar to search, whereby the owner of the most sophisticated technology with access to the majority of content is able to provide the most effective solutions to its end-users. This generally creates significant competitive hurdles and tends to result in dominant market share.
Specifically, as of December 31, 2010, Ancestry.com registered users have created over 20 million family trees containing over two billion profiles. Members have uploaded and attached to their trees a combination of more than 50 million photographs, scanned documents and written stories. ACOM’s registered users also have attached to their trees more than 800 million records, a process that is helping further organize this collection by associating specific records with people in family trees. This growing pool of user-generated content adds color and context to the family histories assembled from the digitized historical documents found on Ancestry.com Web sites. It also would seem to cement Ancestry.com as the destination of choice for anyone with serious interest in their genealogical history. Because of this, Ancestry.com benefits from the network effect: Ancestry.com has the most unique content, which drives users to the website, and these new users create more unique content, which then drives even more users to the website, and so on.
In short, Ancestry.com has established significant competitive advantages that will not be easily eroded, though there are of course competitors. ACOM competes with a variety of online and offline genealogy services providers around the world, spanning non-profit and commercial entities, with free, ad-supported, fee- or subscription-based offerings. In the US market, Ancestry.com is the dominant player in online genealogy. The closest domestic competitor is FamilySearch.org, owned by The Church of Jesus Christ of Latter-day Saints. Although FamilySearch has a large collection of data (over 2.3M rolls of microfilm and 180K sets of microfiche), a large quantity of it is still not digitized and essentially offline, with the online data made available online and across its 4,500 family history centers in 70 countries free of charge. As mentioned before, Ancestry.com has developed a proprietary vertical search engine for historical content as well as a record-hinting technology that helps accelerate research. This search engine is presented in an extremely user-friendly and attractive format that provides a vastly superior experience versus FamilySearch.org, in my opinion. Additionally, a variety of sites offer family tree building services free of charge such as MyHeritage.com, but without a foundation of underlying institutional content; as a result other services have five to seven people connected to a family tree on average, versus 100 people on Ancestry.com properties. In short, ACOM doesn’t face an aggressive, well-capitalized competitor in the U.S. market currently that we can find. Of course, there are potential competitors. One could see Google or Facebook making an effort to compete in this business. On that front, Ancestry.com recently named a Facebook executive to its Board of Directors and we expect that there will be many opportunities for the two companies to collaborate over time given the highly social nature of ACOM’s services. As far as Google, it would seem to us that given ACOM’s very modest valuation, it would be easier to buy ACOM than start from scratch.
One of the more interesting marketing angles ACOM has utilized has been the TV show "Who Do You Think You Are?” on NBC which is sponsored by ACOM and which analyzes the family history of celebrities. After two successful seasons, the show has been renewed for a third season and will run 11 episodes, versus the 8 which were run in the second season and the 7 which were run in the first season. An additional catalyst that should drive interest to Ancestry.com is the release of the 1940 US Census data, which is expected to occur on April 2, 2012. This is big news in the genealogy world because the last such release was a decade ago with the 1930 US Census data. We believe this release may lead to a surge of activity for Ancestry.com in early 2012 and we wouldn't be surprised to see analysts upgrading the stock in anticipation of this potential catalyst in early 2012.
In looking at the stock, the company has only been public for less than two years. Spectrum Equity Investors, a private equity firm, purchased majority ownership in the company for $300 million back in 2007. Spectrum took Ancestry.com public in 2010, and sold a significant amount of its shares in a secondary offering in May 2011 at a price of $42.
In looking at the financials of the business, ACOM is an asset-light, cash flow heavy business with very high and growing margins. In 2010, ACOM produced $300 million in revenue, but produced $62 million in operating income and $79 million in FCF, though reported GAAP profits were only $36.8 million, or $0.76 per share. ACOM generates considerably higher cash flow than its reports in GAAP earnings due to the depreciation and amortization of historical acquisitions as well as previously capitalized content and software costs, though the company expenses much of its R&D. The company has been spending $15-20 million per year of cap-ex (which includes content acquisitions) such that FCF is just about 25% of revenue. As the business has grown, Ancestry.com has experienced tremendous operating leverage such that the company's OCF margin has nearly doubled over the past five years. We expect that ACOM produced something close to $145 million in EBITDA in 2011, with $100 million in FCF on about $400 million in revenue. As far as the balance sheet goes, the company had no debt and $46 million in cash as of September 30, 2011. We expect the company to use its excess cash to repurchase shares, and the company began buying back stock in earnest in the second half of 2011. In early January ACOM reported that it ended 2011 with 1.7 million subscribers, and guided for 15-18% revenue growth in 2012 along with EBITDA margin expansion. Given this guidance, we think that Ancestry.com should produce $160-170 million in 2012 EBITDA, and are looking for a 10-15% jump in FCF as well to roughly $115 million.
At the current $27.50, ACOM has a market cap of $1.2 billion and an EV of about $1.15 billion. Assuming our EBITDA and FCF estimates above are close, the stock is valued at a forward EV/EBITDA multiple of about 7 times, and an EV/FCF multiple of about 10X. This seems pretty attractive for a company that appears to have a very strong competitive advantage in its niche, is growing sales at a double-digit rate and has tremendous operating leverage in the business model. Using pretty conservative assumptions, we come up with a range of values starting at $35 and going to nearly $50 depending on how long one believes double-digit FCF growth is possible. We therefore think there is a good chance the stock will see $35 or better in 2012.
|Entry||01/18/2012 04:20 PM|
In addition to the questions that have already been asked, could you address:
- LTM churn has increased in 6 of the last 7 quarters. How do you think about existing customer value?
- Subscriber acquisition costs have been increasing yoy at high-single to low-double digit prices for the past several quarters. What is your expectation of future SACs? How much value does a new customer add?
- I believe ACOM has had around 4.9MM unique (former and current) customers at one time over the last five years. What do you think the addressable market is here? Given 1.7MM existing customers churning at +50%/yr, how does your addressable market view impact growth runway?
- Is it possible that Who Do You Think You Are? has pulled forward customers in the first two seasons?
- What do you think of the fact that management used $50MM of company funds to participate in the secondary at $40.22/share?
|Entry||01/18/2012 07:32 PM|
What is the incentive for people to continue subscribing to this service once their tree is built? Sure, there are likely fanatics who are in love with the service, but my guess would be the vast majority of the subscribers use the service to build their tree and then quit the service (evidenced by the high churn rate)... I feel like the market has been treating this like a social networking company because of a few years of hyper growth (my guess is driven by increasing marketing spend and then an added boost by the TV show, which is equivalent to a free 1 hour commercial), but at the end of the day, there is very little to nothing "social" about this company and there are little to no "network" effects inherent in this business model...
My guess is that management will give robust 2012 guidance and talk up the upcoming release of Season 3 of the show so they have another 3-6 months of runway to sell more shares... their buyback earlier this year was a joke, given that they executed a majority of it by buying back shares from the CEO and Spectrum, instead of just going out and buying it in the open market... my guess is Season 3 will have diminishing returns on # of new subscribers that it generates even with modestly up ratings... the low hanging fruit customers (easily marketed to population) have largely been harvested during Season 1 and 2, and you are increasingly left w/ a less gullible population...
I also question their strategy of changing their pricing packages (which happened numerous times throughout the 2h of 2011)... if you are a company that is comfortably growing at 20-30% w/ operating margins in the 30-40% range, why risk tinkering with the model? Why introduce a lower priced US Only Access tier (unless you are Pocohontas, most people won't get very far in their family tree)? Why are they now offering the same effective monthly price for the 6 month package that they were previously offering for a 1 year package? If it's sticky, you should only offer the lowest price for a 1 year commitment...
I think this was a great niche investment opportunity for the founders and VC firms that yielded a great return, particularly buy selling at the heigh of their growth... however, I don't think this makes for a very good going concern... I think this is similar to Rosetta Stone... I'm looking to short this again after their earnings call where I expect rosy 2012 guidance and lots of hype around the upcoming Season 3...
|Subject||RE: respectfully disagree|
|Entry||01/19/2012 06:11 PM|
Here are my responses to the questions and comments posted so far:
As far as how many people would be interested in using this product, it's tough to really know. Management has indicated that it believes the subscriber base could be able to grow to at least 5-10 million, noting that it expects the subscriber base to grow 'multiples' larger than it currently is. This doesn't strike us as terribly unreasonable, but it doesn't need to grow to that size to be a good investment given the asset light model as long as the business is operated intelligently.
Churn is an interesting metric and one that can easily lead people to a bad conclusion. We think a meaningful portion of Ancestry.com subscribers sign up for a handful of months, research as much as possible during that time, take a break from the service, and then come back months or years later to digest all of the new information, records, and updated family trees.
A recent article in the Wall Street Journal illustrates this dynamic :http://online.wsj.com/article/SB10001424052970204124204577152811119518468.html
While churn rate is always something to keep an eye on, we believe that a meaningful portion of the churn rate is simply the same members canceling their account when they get busy or have searched through the new information and then re-activating their account when they have more free time or new information has been released, such as the upcoming 1940 US Census. We also think high churn is usually correlated with periods of strong subscriber growth with a slight delay. ACOM has some seasonality, and added a lot of new subs in Q1 '10 and again in Q1 '11, which caused an uptick in churn in Q2 '10 and Q2 '11.
We think of this business as a lot like Netflix circa 2005-2006 (though with a much smaller total addressable market) where there was huge short interest due to high churn but where the stock was very cheap on cash flow metrics and where subs were growing rapidly. Subscribing to Ancestry.com is not like subscribing to a cable company where churn represents customers permanently lost, just as was the case with NFLX. As with Netflix, we believe the critical things to watch are 1) total subs, and 2) cash flow. If these two metrics keep growing, so will ACOM's investment value. We think that is a strong take-away from the NFLX case study, and we would have been way better off by staying with our NFLX thesis much longer than we did.
We think that the TV series Who Do You Think You Are was very helpful in increasing the awareness of Ancestry.com; we don't believe current subscribers would cancel their ACOM subscriptions if the show got canceled or that the showed "pulled forward" subscribers in some way. Additionally, while the show's ratings aren't stellar, they were good enough to merit an expanded third season. While the first season had 7 episodes and the second season had 8 episodes, the soon-to-begin third season will have 12 episodes. Furthermore, the show typically comes in #2 in its timeslot rankings and had over 26 million unique viewers last season. We think its a good marketing tool for ACOM and to get people interested in their family history.
As far as what incentivizes people to keep using the service, building out a fully-researched family tree is not as easy as it might seem. For example, just going back eight generations would require researching several hundred people. Learning about their jobs, friends, hobbies, places they lived, causes of death, etc, would certainly take more than just a couple of weekends or even a couple of months, and then trying to attach stories, pictures of houses or tombstones, etc would take even longer. And even if you think you'd completed that, every year there is new information that has been digitized and added as well as more user-generated content to search through such as personal stories, pictures, etc. There are a lot of people who enjoy this kind of thing. We also believe that ACOM has become an important resource for historians, academicians, and others interested in tracing personal and family histories. While we've never argued this is a 'social networking' company, it is being integrated with Facebook (see previously referenced WSJ article) which will allow users to temporarily share content and should provide ACOM with a lot of free advertising.
Regarding the change in pricing, we believe the company's goal was to incentivize new subscribers to sign up for longer-term plans instead of the month-to-month plan. Management ran its pricing test during its seasonally weak period, tinkering with the plans until it was satisfied with the results. We are hopeful the new changes will likely result in more long-term subscriptions, which should help mollify the Street's concerns about churn.
In considering the Rosetta Stone comparison, we just don't think the two businesses are comparable in terms of business model, competition, or really anything else. Anyone who is serious about learning a language has an infinite number of choices on how to do so. On the other hand, Ancestry.com strikes us as almost a compulsory (and very reasonably priced) resource for anyone who is serious about researching a family history. ACOM's competitive advantages appear much stronger to us.
The last item we'll address is the company repurchasing $50 million of shares from the CEO and affiliates of the PE firm that took it public. We won't defend this; it was bad form, and it certainly won't burnish the reputation of private equity guys. But it's not so bad that it will keep us from investing at this juncture, though we will certainly be looking out for Strike 2. We hope some of the damage will be reversed by more recent repurchases when the stock was trading at depressed prices.
|Subject||RE: RE: respectfully disagree|
|Entry||02/16/2012 10:40 AM|
I'd give it close to a 0% chance that management will be able to hit the low end of their 2012 revenue, subs, and EBITDA guidance... one or the other will have to give... their customer acquisition costs are now running at 5.9 months worth of revenue... hard to imagine this is a good ROI at this point... and the trend is likely higher, particularly if the show is not renewed... I am curious to see their upcoming proxy filing to see what metrics the board is basing 2012 incentive compensation on and how that compares to the guidance that they just gave... still think there is a lot more downside here
|Subject||Trying to sell themselves. Any buyers?|
|Entry||06/06/2012 11:04 AM|
I'm sure many of you saw the report that ACOM may be trying to sell themselves. I'd be curious to see if anyone has thoughts. My impression is that the asset is not particularly strategic to a GOOG/FB buyer (1.8MM subs is nothing and researching family history is not particularly social). With WDYTYA cancelled, the growth rate is going to slow considerably. Does this make sense to a PE buyer who would lever it up? Revenue visibility is pretty strong, but at +14x earnings it's not outwardly cheap.