Description

Long RAMP

This has run up in the past few days, but I believe the thesis is still worth sharing; there is upside from here and more so if the price happens to retreat.

LiveRamp (NYSE: RAMP) is a cloud-based, SaaS platform used for identity resolution and enabling data collaboration. In today’s ambiguous macro, RAMP provides a solid base hit that is especially compelling because of its risk-reward skew. It trades at <2X NTM Sales (~80% of sales are recurring), has ~30% of its market cap in net cash and can realistically re-accelerate topline growth to a low teens clip in the medium-term. Finally, I view its Marketplace segment as an in-the-money call option that cushions against potential downside.

Dman976’s write-up in 2020 provides a nice overview/history of RAMP and the initiation reports from Needham and Evercore are also good to reference.

RAMP’s IdentityLink creates a 360-degree profile of its end customers. This is the core, underlying technology. Clients are typically F1000 companies that have their own first party data that is authenticated and permissioned. Examples include retailers with loyalty programs and manufacturers with websites that offer discounts. RAMP’s Identity Graph solution reconciles this data (multiple emails, phone numbers, etc. for each user), anonymizes it through RampID and allows for clients to share that data. This offering is valuable given the laws around data regulation that prohibit the sharing of personally identifiable information (CCPA, etc.).

Through this core capability, RAMP powers its enterprise-focused Data Collaboration Platform (fka Safe Haven). Clients can then leverage data from RAMP’s many partners to perform deeper analytics, all while adhering to required privacy standards and being in a permissioned environment. This is called a “clean room” – a neutral platform where two sides can input their data and have control over what they want to share and who they share it with. For example, a retail client may only want to share select datasets with its various CPG partners.

RAMP wins against the many tech giants that offer their own clean rooms by offering neutrality and bundling it with its identity solution. Clients are weary of clean room solutions from GOOGL and AMZN because they own their data (whereas RAMP does not) and often try to cross-sell their various solutions. Competitors like SNOW, CRM and ADBE offer neutrality but lack the identity solution that RAMP offers. This is why even though these players technically compete against RAMP, they have all agreed to partnerships with RAMP as building out that identity solution is time consuming and costly. It is a win-win dynamic: if customers use RampID to execute advertising campaigns, it increases the amount of data being stored/computed with SNOW for example. Since its launch in 2020, Safe Haven has seen rapid adoption among RAMP’s enterprise clients and now comprises ~30% of total ARR.

RAMP grew topline 16% in FY21 and 19% in FY22, all while drastically improving its operating margins by over 2000bps in the process. Note that RAMP’s FY ends in March; as of this post, they are in Q1FY24. Then the macro proceeded to fall apart: advertising budgets shrank, a meaningful number of their sales reps quit during the Great Resignation, and sales cycles remain elongated. There is also the annoying backdrop for AdTech, which is obviously cyclical and prone to regulatory scares. In the most recent quarter, topline shrank sequentially, Subscription NRR dropped below 100% for the first time in years (vs. its peak of 111% in Q4FY22) and they guided to MSD topline growth for the coming year. This is the state I found RAMP in.

I find several things about RAMP interesting going forward. First, the number of sales reps is now >50% higher than the past twelve months and well above their headcount in FY22. 90% of their reps generated ACV in the most recent quarter, the average ACV per rep being ~$2mm. All this is to say we think both sales capacity and productivity have recovered nicely.

Then, you have the macro which has been gutted in the LTM. I believe the contraction in ad spend will bottom for Enterprise names in the NTM. While I am not in the profession of timing quarters, there is a clear floor on downside at today’s valuation. RAMP’s identity resolution technology is strategically valuable and the inherent margins of their SaaS business make this a good buyout candidate. This gives me comfort in holding as the macro bottoms/rebounds from here.

The key growth driver here is Safe Haven, which I believe can grow at a 20%+ CAGR over the next three years. RAMP now leads most conversations with Safe Haven, which they market as a bundled platform for Enterprise clients and as the natural extension of its core identity technology. This lands at a higher ACV, has higher price point upgrades, and drives net retention upwards given its various add-on solutions. Management has stated that Safe Haven customers generate >2X the ARR of non-Safe Haven clients. This past quarter, Safe Haven grew 30% YoY. As this mix shift continues, Safe Haven’s growth will have more of a pronounced impact on the consolidated CAGR.

Valuation:

Considering the 1) refreshed sales team, 2) the variable component of the subscription revenue recovering from its ex-growth state, and 3) Safe Haven as a growth engine, I think RAMP returns to a low teens growth rate by FY26. Keep in mind FY26 is basically CY25. On its subscription segment alone, RAMP trades at ~1.8X FY26 Sales and ~2X FY25 Sales.

Then you have the Marketplace segment, which comprises about ~20% of today’s topline. This segment has gone ex-growth in the most recent quarter. That said, this is by no means a melting ice cube: it’s just tethered to broader ad spend. The beauty here is the Marketplace is built on top of RAMP’s existing tech stack. Management has stated the Marketplace is actually margin accretive. The contribution margin per incremental transaction is close to 100%. My view is this can return to a HSD growth rate by FY26.

It’s also worth noting RAMP stripped out ~$30mm in annual OpEx and simplified their go-to market motion, which should help with operating leverage going forward. 

My view is that the subscription segment can reach 20% Adj. EBITDA margins by FY26. Unlike management, I am only adding back SBC. Obviously it comes down to how you allocate the corporate overhead, but my view is that Marketplace is an add-on and can thus reach 30% Adj. EBITDA margins in that timeline. 

How would you value a SaaS business with the following characteristics: Enterprise-focused, best-in-class identity resolution technology, low-teens normalized growth, and profitable? I’ll acknowledge that this is AdTech and say 15X is reasonable. That gets us to ~40% in upside over three years. Then you have the Marketplace which can revert to HSD growth in the medium-term and with even higher margins. I’d say 12X is reasonable for this one. That gets us an additional ~25% in upside, or a high-teens IRR all in. Meanwhile management continues to buy back significant amounts of the shares outstanding with the cash generated. As for Street expectations, my impression from talking to management was they deliberately lowballed guidance. 

Again, at <2X Sales for just the SaaS segment, the downside protection is what makes this one worthwhile. Even if growth fails to pan out, the strategic value of its identity resolution tech, Marketplace and net cash position should cushion against any meaningful capital impairment.

Catalyst

Earnings