Description

Worth ~$11-$15. Severely broken IPO priced at <2x TBV, 0.5x Sales, 1.2x GP and 5.4x U.S. EBITDA (2014E) with 30% growth, high margins, heavy recent insider buying, low float/high short interest, a strong board and high potential for strategic sale to bevy of potential buyers in dynamic, rapidly consolidating industry. 

YuMe, Inc. (NYSE: YUME), based in Redwood City, CA, is a fast-growing, leading multi-screen video advertising company whose IPO occurred less than 1 year ago on August 7, 2013.  The company’s platform and services, driven by its proprietary, non-cookie based software developer kit (“SDK”) powers its placement quality index which finds the best placement for advertisements to drive attention and campaign performance for clients, whose goal is to reach targeted, TV-sized audiences online.  YUME’s technology allows for deep data measurement and analytics, providing its advertisers with a “brand-safe environment” and targeted demographic viewership.  YUME also offers a programmatic buying solution called Video Reach, which launched earlier this year to complement the company’s core services.

YUME’s CEO and co-founder Jayant Kadambi describes the company in a nutshell here:

“We go to TV brand advertisers and tell them we can help get their audiences as they’re migrating online. The video infrastructure is very different than the display infrastructure. It’s not just about websites. It’s about mobile, tablets, connected televisions and we believe that it’s a software problem you can solve with data sciences that can really add value to TV brand advertisers.

A buyer might say, for example “I want to buy ‘Glee’ and I’m reaching 10 million people and I want to reach 3 million more.” So we say, “we’ll find you the ‘Glee’ audience online” if you want more frequency, or we’ll find people who haven’t seen “Glee” if you want additional reach. We use data and our survey capabilities to build an audience segment that are or aren’t “Glee” watchers. Our goal here is to make it very simple for TV people.

I’ll give you an analogy. If you think about the TV advertising business today, it’s about advertising on NBC, CBS, ABC, FOX and cable. That’s how they get their audience – through reach, the number of people who saw the ad and frequency, the number of times they see the ad. If we do our jobs well, you’ll see in five years, in addition to how brand advertisers advertise on TV, they’ll advertise on O&O properties: Facebook, Google, Twitter. And they’ll need an equivalent to cable – the run of network, aggregation is far more necessary in the future because of the thousands and thousands of content owners. And we want to be the equivalent of cable – so people will advertise on Google, Yahoo, Facebook and then YuMe as sort of the cable equivalent.”

Why Opportunity Exists

• Broken IPO abandoned by momentum investors, not yet found by value investors.
• Screens poorly on EBITDA and EPS basis as investments in international growth obscure substantial U.S. profitability (likely 10-15% current U.S. EBITDA margin).
• High cash and net working capital balance ignored by investors.
• Short sellers don’t realize how small the true float is here.
• Erroneously lumped in with cookie-based Tremor Video, a very poor comp as that company uses a cookie-based solution, has to buy inventory speculatively in bulk, targets only premium publishers who have the volumes to insource and disintermediate Tremor.  YUME is not comparable in its business model, technology, and market.
• Accel distributed a portion of its shares to LPs, causing technical pressure.
• Company mis-modeled Q4 2013 revenue due to political ad spend (2H14 political ad spend should be large with online taking share).

Keys to Thesis

• Fast-Growing Industry Leader
  • Leading advertising technology services firm growing at 30% annual rate that we believe to have several important advantages over its competitors.
  • Ability to analyze data and measure results (via proprietary SDK, or software developer kit) without using cookies.
  • Multi-screen access and measurement:  Online, Smartphone/Tablet (iOS/Android/HTML5), Connected TV
  • Reputation for outstanding client service.
  • Connection with high quality publishers that provide “brand-safe” environment for advertisers.
  • YUME’s placement quality index (PQI) delivers high ROI for brands by optimizing brand placement across devices with most relevant content to targeted consumers.
• Large & Rapidly-Growing Market
  
  • MAGNA GLOBAL estimates that brands will increase their spending on digital video advertising globally from $8.3 billion in 2013 to $22.5 billion in 2017, representing a CAGR rate of 28%.
  • While TV advertising represents the largest single portion of today’s advertising spend, consumers are shifting their consumption of media content from analog mediums, such as TV, print and radio, to digital mediums such as websites and mobile applications. Recognizing this trend, brands are increasingly shifting their advertising spend to digital mediums such as digital video.
  • Company should comfortably be able to grow at 20%+ annually for the foreseeable future.
• Broken IPO
  
  • Company priced its August 2013 IPO at $9.00, 30% below the midpoint of the expected $12-14 range.
  • Since the IPO, the stock has since traded down an additional 33%, leaving the stock 55% below its initially expected IPO price and 51% below its September high.
  • No major shareholders sold stock in IPO.
• Small Float, High Short Interest
  
  • Of 32.4mm basic shares, 11.7mm owned by VC/PE firms, 4.9mm by Insiders (including Khosla trusts), leaving only 15.8mm shares in the (supposed) float. 
  • I suspect of these 15.8mm shares, many are in strong hands.
  • 1.1mm shares sold short (near peak for YUME) represents 7% of float.
  • 22 days to cover at 20% of average daily volume of 250k shares.
• Off-the-Radar
  
  • Stock abandoned by growth investors, not yet on the radar screens of value investors due to the company’s recent IPO.
• Heavy Recent Insider Buying
  
  • Large open market stock purchases in last 4 months by two highly sophisticated directors, totaling over $1 million.
  • Director Dan Springer, former CEO of Responsys, which was sold to ORCL earlier this year for $1.5bn, bought $934k worth since March:  $670k in early March at $6.71 plus $264k in late May at ~$5.30.
  • Director Chris Paisley (lead director of EQIX and director of FTNT) bought $67k worth in early March at $6.72.
• Strong, Motivated Board
  
  • Top-tier venture capital firms (Khosla, DAG Ventures, Accel, Menlo, e.ventures) own 36% of the company.
  • Stock presently trading below the 2010 Series D round valuation of >$6 when the company was 70% smaller (Accel, Khosla and Menlo participated).
• Aligned Management
  
  • The company’s highly-regarded CEO is its co-founder, and neither co-founder has sold stock in the IPO or thereafter.
• Fortress Balance Sheet
  
  • Company is debt-free.
  • Cash and NWC represent 43% of the current market capitalization.
• Extremely Cheap on Variety of Metrics
  
  • <2.0x tangible book value, 0.5x TEV/2014E revenue, 1.2x TEV/2014E gross profit.
  • Assuming 12% EBITDA margin for the U.S. business (~85% of total), estimate 2014 U.S. EBITDA of $20.6mm, implying TEV/U.S. EBITDA of only 5.4x. (2012 EBITDA margin of 8.3% when company was far smaller and entirely U.S.)
• Strong Gross Margins
  
  • With gross margin consistently in high 40s, estimate long-term EBITDA margin of 15-20% (company says target EBITDA margin expected 18-22%).
• Quickly Consolidating Industry
  
  • YUME would likely be highly attractive acquisition target for 10+ different strategic buyers:
  • Hulu, AOL, Yahoo, Microsoft, Twitter, Time Warner, Cox, Charter, Conversant and possibly Millennial Media and large global ad firms.
• Recent industry private M&A has occurred at (rumored) high valuation multiples.
  • Freewheel (Comcast):  $320mm for ~$35mm of 2013 sales
  • Adap.tv (AOL):  $450mm, ~3.5x forward revenues
  • LiveRail (Facebook):  $500mm for ~60mm trailing revenues
• Interestingly, the CFO recently left to go to a new startup and it doesn’t sound like YUME is in a hurry to replace him.
  • Director Dan Springer’s CFO resigned from Responsys in November 2013, company sale to Oracle announced in December 2013.
• Highly Attractive Risk/Reward
• Strong downside protection at <2.0x TBV.
• Potential upside of 100%+ amidst sentiment improvement and/or M&A activity.

Valuation

Interesting Links

• YUME Investor Presentation
• YUME LinkedIn Jobs Listings (27 of them, no CFO listing)
• Yahoo Gets Video Distribution With Rayv; Is A Video Ad Platform Next?
• Publishers Must Sell Audiences, Not Inventory
• Interview with Jayant Kadambi

Primary Risks

• Evolving industry with variety of competitors; mitigated by YUME’s strong technology, brand and customer service, and huge addressable market.
• Programmatic (RTB) growth, although there have been numerous reports of fraud relating to such exchanges, including this WSJ article. YUME’s solution has strong reputation and trust from clients, and total addressable market is huge.
• Mismanagement, poor acquisitions.  Unlikely due to stock valuation driven board and management.

Catalysts

• Investor awareness of situation, YUME differentiation
• Improvement of sentiment, election year strength
• Reporting of Q2 earnings (est. 8/12/14 by CapitalIQ)
• Sale of company to strategic buyer
• TubeMogul IPO indicated at 2x LTM sales (AFTER a 37% price cut yesterday), existing VC firms indicated to take down $25mm of the ~$47mm offering, making this an equity sliver IPO with high potential for huge valuation, reigniting interest and improving comp set.

Disclaimer:  The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice.  The data contained herein are prepared by the author from publicly available sources and the author's independent research and estimates.  No representation or warranty is made as to the accuracy of the data or opinions contained herein.

Catalyst