Description

Investment Thesis

LiveRamp (“RAMP” or the “Company”) is the dominant player in identity resolution through its subscription-based IdentityLink platform that integrates consumer identifiers across channels and devices enabling marketers to programmatically target consumers across channels, close the loop of customer marketing analytics, and provide the means to create a 360-degree profile of consumers. Despite strong fundamental performance, shares are down ~40% over the past year given overblown fears around the potential impact to LiveRamp’s business model from California Consumer Privacy Act (CCPA) regulation and Google’s decision to phase out 3rd-party cookies. We believe the share price declines are unjustified as RAMP is positioned to navigate the complex environment better than other industry participants and could likely see its competitive position increase even further given greater emphasis on privacy-compliance going-forward as well as industry participants potentially coalescing around RAMP’s ATS/IdentityLink solution as the de-facto universal ID for the industry. We view current levels as an attractive entry point with >50% upside to the current share price over the next 12-months through either 1) strong execution amidst a challenging environment leading to multiple re-rate and/or 2) take-out following strategic alts as management recognizes underlying value will not be recognized by public markets given current massive overhang and looks to capitalize on the significant interest from both strategic and financial buyers. We see additional downside protection given ~30% of the current market cap is cash.

Current Capitalization

Shares: 68.2M

Market cap: $2,627M

Cash: $782M

EV: $1,845M

Why Does This Opportunity Exist?

Despite a dominant market position in the ad-tech/mar-tech ecosystem, strong operational results and a favorable runway for future growth, LiveRamp has seen its valuation multiple cut nearly in half from (~7.5x forward revenue to

1. Google’s decision to phase out 3rd-party cookies in Chrome within 2 years

2. CCPA regulation effective 1/1/20 with enforcement slated for 7/1/20

While there is uncertainty around the ultimate impact on RAMP’s business model from these two factors, we believe there is adequate evidence that RAMP can navigate these changes successfully and the current market reaction has been overdone.

In order to further highlight the privacy/regulatory overhang on RAMP shares, we created the annotated share price chart below showing the sequence of events over the past year. Outside of one slightly disappointing quarterly result (1Q20 / August 2019), fundamental results have moved the stock higher, while privacy/regulatory announcements have driven large declines in the share price.

1. 2/11/19 - RAMP reports first quarterly results as standalone company, beating expectations and sending shares up ~15%

2. Late February/Early March 2019 - RAMP's annual user conference (RampUp) drives further momentum in shares with share price peaking at ~$63

3. 3/22/19 - AdWeek article speculates that Google may restrict 3rd-party cookies in Chrome resulting in shares declining ~14% over 4-day period

4. Early May 2019 - WSJ article indicates Google will launch new tools that may limit 3rd-party cookies in Chrome sending shares on a 3-week slide into 4Q19 earnings in late May

5. 5/28/19 - RAMP reports 4Q19 results that beat expectations with initial FY2020 revenue guidance directly bracketing consensus though guidance for greater than expected EBIT loss and 3rd-party cookie concerns result in shares down ~6% before recovering fully the following week

6. 6/24/19 - RAMP announces Data Plus Math deal to strengthen its competitive position in Addressable TV / CTV; shares down ~12% over 2-day period given rich purchase price (~7.5x out-year revenue) before recovering over the ensuing month as the strategic value of the asset is more appreciated

7. 8/5/19 - RAMP reports 1Q20 results that handily beat expectations though do not raise full-year outlook given only 1 quarter into the fiscal year and difficult net retention comps from prior year; shares down ~11% over 2-day period and largely drift lower until 2Q20 earnings in November (the one disappointing fundamental result)

8. 11/7/19 - RAMP reports 2Q20 results that crush expectations with revenue growth accelerating across the board, new disclosure metrics underscoring strength in the business trajectory and full-year guidance raise; stock up ~11% on earnings and ~10% over next month, breaking above 200 DMA and out of the downtrend shares had been in since first mention of Google 3rd-party cookie deprecation in late March

9. 12/13/19 - AdExchanger article indicates Google will limit cross-site cookie sharing in Chrome beginning in February 2020; shares down ~3% halting recent momentum and leading to a further ~10% slide in shares over next month

10. 1/14/2020 - Google officially announces that it will phase out 3rd-party cookies in Chrome within 2 years; shares down ~10% over next 2 weeks

11. 2/6/20 - RAMP reports 3Q20 results that beat expectations including significant upside on gross margins and EBIT margins which resulted in positive GAAP free cash flow, while preliminary indications around FY2021 revenue growth of 25-30% mitigated fears around CCPA/3rd-party cookies impairing the growth outlook; shares up ~7.5%

12. 2/7/20 - Revised CCPA regulations are published with lack of clarity around certain items that could potentially impact ad-tech/mar-tech ecosystem; shares down ~8% and another ~5% over following week

Background

LiveRamp was purchased by Acxiom for $310M in 2014. Over time LiveRamp was paired with Acxiom’s AbiliTec asset (an offline dataset of identifiers with 40 years of historical data) and this basically enabled the creation of RAMP’s IdentityLink product which allows it to tie together online and offline data identifiers to create a universal digital ID for >200M consumers in the US.

Given the significant growth of the business and underlying value of a high-growth, subscription-based software model, management made the decision to sell the legacy Acxiom Marketing Solutions business to Interpublic Group (IPG) for $2,300M in July 2018. This transaction resulted in LiveRamp as well as the AbiliTec asset as the remainco which was officially renamed LiveRamp and began life as a standalone public company in late October 2018. We think it is important to highlight the value created by management here considering they remain in place at RAMP today. CEO/CFO purchased LiveRamp for $310M in 2014 and subsequently turned the asset into >$2,000M EV by October 2018 and $1,600M of after-tax proceeds from the Acxiom sale.

Business Description / Scale

We are not going to detail all the nuts and bolts of the business model as there are a few good sell-side initiations (Evercore, Needham) that provide a comprehensive overview of the business. That said, it is helpful to understand the core LiveRamp solution (onboarding and IdentityLink) and the place that it occupies in the marketing ecosystem. Evercore details it well:

“IdentityLink is LiveRamp’s SaaS identity platform that connects a company’s customers, data, and devices across both 1st, 2nd, and 3rd party data, in a privacy-compliant manner. LiveRamp customers will typically onboard 1st party data (from CRM systems, website cookies, etc.) and through IdentityLink’s deterministic graph, it connects this data with second- and third-party data, creating one, unique identifier for customers, and consolidating both online and offline data into one customer profile. LiveRamp creates this “universal ID” of the customer by leveraging the AbiliTec ID associated with Acxiom’s PII data set, to match various customer identifiers across offline (mail, in-store, etc.) data, with desktop IDs, mobile, and TV. This omnichannel view of the customer can then be delivered to any of the 600+ partners in LiveRamp’s ecosystem, in order to support targeting, personalization, or measurement use cases. LiveRamp does not own its own data, making it a sort of “Switzerland” as it relates to unifying customer data, and the ability to act as the “data middleware” and match multiple disparate data sources into one common user ID makes LiveRamp an important component in the marketing ecosystem.”

Ultimately, RAMP provides the pipeline that enables marketers to target consumers in a comparable fashion to the walled gardens provided by Facebook and Google; marketers extract the same benefits of these ecosystems (omnichannel, simplicity, and accurate targeting) but more importantly extend their applicability to the greater web. Additionally, RAMP’s unmatched identity graph and integration network have created a dominant moat for the business with substantial network effects. RAMP has the majority share of the core onboarding / identity resolution market and is leaps and bounds ahead of any competitor (i.e.- Neustar or Merkle) today. LiveRamp is like a public utility for the ad-tech/mar-tech industry and there is no real #2 player of consequence behind them.

The company operates through two segments:

1. Subscription (~80% of revenue) – SaaS-based model based on tiered pricing tied to data volume

2. Marketplace (~20% of revenue) – Primarily data store where data owners can share data as well as addressable TV with revenue generated through a rev-share agreement

Mitigants to Privacy/Regulatory Headwinds

The largest overhang on LiveRamp shares currently is Google’s decision to phase out 3rd-party cookies and the uncertainty around the potential impact to RAMP’s business. The bear case contends that the deprecation of 3rd-party cookies will reduce the effectiveness of IdentityLink match rates resulting in lower ROI for brands/marketers and lower CPMs for publishers. This will then shift further incremental digital ad dollars to the walled gardens (GOOG/FB/AMZN) minimizing RAMP’s utility across the open internet and leading to less volumes flowing through the LiveRamp platform.

In order for this impact to play out the marketing ecosystem would have to be unsuccessful in finding a substitute for the 3rd-party cookie, which we do not see happening as industry participants are strongly incentivized to develop a sustainable substitute given walled gardens already control >75% of digital ad spend and the industry does not want to be further beholden to them.

Further, Google has given a 2-year window for 3rd-party cookies to be phased out, which actually is a strong positive because it gives the industry and LiveRamp the necessary time to develop a durable alternative.

RAMP’s top 100 brand clients represent a majority of volumes/revenue and are increasingly relying on 1st-party data/1st-party cookies which are not impacted by any of the changes Google is pursuing.

Most importantly, LiveRamp specifically has pivoted its business away from 3rd-party cookies over the past 2 years and officially launched its authenticated traffic solution (ATS) in early 2019 which relies on publisher first-party authentication events (i.e.- you log into the New York Times website with your email and since New York Times is an integration partner with LiveRamp, your email is passed along to RAMP who matches it to your anonymized IdentityLink ID, thereby creating a linkage that can be used for addressability without using a 3rd-party cookie). RAMP’s ATS/IdentityLink solution is now used by nearly 30 DSPs including MediaMath, Amobee, Criteo, dataxu as well as 12 SSPs including Index Exchange, Rubicon and OpenX. There is a strong possibility that the marketing ecosystem coalesces around the LiveRamp ATS/IdentityLink solution as the preferred alternative to enable programmatic advertising across the open internet in a post 3rd-party cookie world.

Additionally, the phasing out of 3rd-party cookies most directly impacts programmatic display advertising. That said, it is important to note that programmatic display has seen a significant decline in growth trends given ad dollars have shifted to mobile and specifically into mobile in-app. This further mitigates the potential impact on LiveRamp and the entire ecosystem given the highest growth areas are not and will not be impacted by the elimination of 3rd-party cookies.

Finally, LiveRamp is a strategic partner of Google who uses RAMP’s IdentityLink to further augment its own identity graph and improve the ROI for brands/advertisers within Google properties. We believe Google will want to preserve the LiveRamp relationship and allow RAMP access to whatever identifier it settles on to replace the 3rd-party cookie.

With respect to CCPA and regulatory headwinds LiveRamp’s entire business model and position in the industry is centered around it being privacy safe haven and a neutral 3rd-party (i.e.- Switzerland) who does not own any data but allows it to pass through its pipes. Many industry participants use LiveRamp as their de-facto privacy manager. We believe CCPA will actually benefit LiveRamp as industry players turn to RAMP for solutions to become CCPA compliant. Our industry checks suggest there has been no pause or slowdown in ad spending related to CCPA since it became effective 1/1/20. Further, there is no immediate enforcement risk as actual enforcement is not slated to begin until 7/1/20, which could likely be pushed back given pushback from companies that they do not have enough time to ensure compliance given the final regulations have not yet been certified.

Other Reasons to be Optimistic

We want to highlight additional potential positives that support our long thesis. We’ve bucketed them under fundamental or strategic:

Fundamental

• CTV growth exploding up >100% y/y in 2020 as linear TV spend shifts to programmatic enabled buying. Linear TV ad spend is $70B and we think 2020 is the year when big chunks of that spend are shifted over to programmatic buying. RAMP is positioned to capture its fair share of this market. There is definitely a non-zero probability that RAMP can be one of the major players in this space going-forward and we don’t believe this is reflected in current valuation.

• Total net retention which RAMP calls platform net retention (includes both subscription and marketplace revenue) steady at 119% the past two quarters.

• RAMP just reported back-to-back quarters of record subscription bookings (+50% higher than previous high).

• RAMP is investing in further growth opportunities both within the marketing industry (B2B, international expansion, 2nd-party data) and in other areas outside of the traditional marketing world such as healthcare, insurance, financial services where unifying disparate data pieces would be greatly beneficial. If one of these opportunities ramps sooner than expected, then this could represent meaningful upside to numbers.

Strategic

• RAMP currently powers the identity offerings at the marketing clouds platforms already, specifically Salesforce’s recently announced Customer 360 product offering.

• RAMP’s fortress balance sheet (~$780M of net cash) allows flexibility to acquire strategic assets that further expand current competitive moat.

• We know from the proxy filed at the time of the Acxiom sale that a prominent software-focused private equity firm was interested in RAMP. Further, we’ve heard from credible sources that multiple private equity firms are currently interested in acquiring the Company.

• Management has substantial change in control payout (CEO $36M / CFO $21M / CCO $13M / Head of Product $13M).

• This is an excellent management team with a tremendous track record who are extremely frustrated with the current share price and want to maximize shareholder value. We would expect a large buyback here at current levels as well as the potential for strategic alts.

Valuation

*Our valuation is based on FY2021 which is comparable to CY2020 given RAMP’s fiscal year-end is 3/31.

We see base case upside of >50% based on FY2021 revenue. We assign a 7.5x EV/S multiple to subscription revenue (growing ~25% y/y) and 4x EV/S multiple to marketplace revenue (growing >40% y/y) (we believe this multiple is conservative given marketplace revenue is highly predictable just not recurring). This implies 6.8x EV/S multiple on total revenue (growing ~29% y/y) and ~1x multiple discount to ad-tech/mar-tech peers at 7.6x EV/S despite very similar Rule of 40 metrics (RAMP 37% vs peer average ~39%). Additionally, our DCF supports a low-$60’s stock.

In an upside case we could see RAMP valued more as a subscription software business (recurring revenue/high-growth/>70% gross margins/high incremental margins) at 8-9x EV/S which would imply a high-$60’s stock price.

In a take-out scenario we believe the likely floor for a private equity bid would be the low-to mid-$50’s, while the more appealing scenario would be a competitive auction among strategics (Adobe, Salesforce, Oracle, Amazon, Google) who would not want the LiveRamp asset in the hands of a competitor. If strategics show up, then it would not surprise us to see RAMP transact in the 8-10x EV/S multiple range given the scarcity value of RAMP.

Conclusion

At current levels we believe potential ramifications from privacy/regulatory factors are unduly discounted in RAMP shares and see substantial upside over the next 12-months as the Company continues to execute leading to positive estimate revisions and multiple expansion and/or management decides to explore strategic alts if shares are not materially higher. We strongly believe RAMP is positioned to navigate the current storm around privacy/regulation and could actually strengthen its already dominant position in the marketing ecosystem over the next few years.

Risks

• CCPA legislation impairs ad-tech/mar-tech industry
• Deprecation of 3rd-party cookies shifts incremental ad dollars to walled gardens minimizing RAMP’s utility for customers
• A competing solution secures the industry’s blessing as the new Universal ID

Catalyst

• RampUp March 2 & 3 (LiveRamp’s annual user event is the premier ad-tech/mar-tech industry conference) and we expect positive newsflow and takeaways from the event

• TV upfronts early May (expect large shift of spend towards addressable TV / CTV)

• 4Q20 earnings end of May (Ramp will provide initial FY21 guidance)

• Announce significant buyback

• Strategic alts process resulting in sale to strategic or private equity

• Clarity around CCPA and/or future programmatic identifier (would remove massive current overhang on shares)