thescore, Inc. (SCR-V)

Transcription

1 (SCR-V) KPCB s Internet Trends 2014 Report Highlights Tremendous Opportunity May 29, 2014 Vahan Ajamian, CPA, CA, CFA (416) vajamian@beaconsecurities.ca Margaux Berry, MSF, Associate (416) mberry@beaconsecurities.ca KPCB s Internet Trends 2014 report was released yesterday. The author, Mary Meeker, is largely regarded as a guru in the space and we view this as a comprehensive and influential report. We see two main highlights which we believe are very positive for thescore. First, mobile usage in North America continues to gain market share currently representing 19% of web usage vs. 11% a year ago. Internet Trends 2014 Highlights BUY (Unch) Previous Close 12-month Target Price Potential Return 52 W eek Price Range $0.65 (Unch) $0.32 $ % $0.15-$0.49 Estimates YE: Aug 31 FY13A FY14E FY15E Revenue ($MM) $5.3 $8.2 $13.4 EBITDA ($MM) -$8.2 -$7.6 -$5.6 FD EPS -$0.11 -$0.05 -$0.03 Valuation FY13A FY14E FY15E P/Sales 15.1x 9.7x 5.9x EV/User (Current) $10.59 Stock Data (MM) Shares Outstanding Basic FD Market Cap Basic $79.6 FD $79.6 Second, and more importantly in our view, is that despite increases in mobile advertising spending, the gap between the percentage of mobile usage by consumers and mobile advertising spending continues to widen. Specifically, consumers spent 20% of their time on mobile media in 2013 while advertisers only spent 4% of their budgets on mobile representing a gap of 16%. This is significantly larger than the 9% gap per the 2012 data. We believe advertisers will essentially have no choice but to significantly increase their mobile advertising budgets to try to catch up to where their consumers are and with its growing user base of young North American males, thescore represents the best way in Canada to profit from this long-term secular and positive trend. We have made no changes to our estimates. We maintain our Buy rating and $0.65 target price. Net Debt -$26.6 Enterprise Value $52.9 About the Company Through its flagship thescore mobile application, thescore Inc. deliv ers real-time news, scores, fantasy information and alerts to sports fans. The company earns the v ast majority of its rev enue by displaying banner ads on its mobile application. The company is headquartered in Toronto, Canada. 5,000 4,000 3,000 2,000 1,000 0 All figures in C$ unless otherwise indicated. Stock Performance Volume (Thousands) Price (CAD) Jun Aug Oct Dec Feb Apr Beacon Securities Ltd. 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H

2 Report Highlights KPCB s Internet Trends 2014 report was released yesterday. The author, Mary Meeker, is viewed as a guru in the space and has been referred to as the Queen of the Net. This is the updated version to the 2013 report which has been referred to by several key industry participants over the past 12 months. The full 164-slide presentation can be viewed here: _-_05_28_14-_PDF.pdf? We identify two main data points from the report, which we believe are positive for thescore. 1) Mobile usage continues to gain market share in North America. In May 2014 mobile usage represented 19% of North American web usage, up substantially from 11% during May While North Americans are increasing their relative usage of mobile devices, there likely still is significant room for further expansion, considering the current global average of mobile usage / web usage is 25%. Exhibit 1. Mobile Usage as a % of Web Usage, by Region Source: KPCB. May 29, 2014 Page 2

3 2) The gap between the relative amount of time consumers are spending on mobile and where advertisers are allocating their budgets is widening. As a reminder, KPCB s 2013 report (based on 2012 data) showed a gap of 9% as consumers spent 12% of their time on mobile, yet mobile only represented 3% of advertising spending. We had previously crunched some preliminary numbers using proxies for data and had speculated that the gap may have widened to 13% in However, the actual data now shows an even larger gap. According to the 2014 report, consumers spent 20% of their time on mobile during 2013, while mobile barely budged to just 4% of advertising spending driving the gap wider to 16%. KPCB now refers to the opportunity available due to the underpenetration by advertisers for both mobile and internet platforms together as a US$30+ billion opportunity, while as per the 2012 data is was a US$20+ billion opportunity. Exhibit 2. % of Time Spent in Media Vs. % of Advertising Spending in the U.S.: 2013 Data Per 2014 Report (top) and 2012 Data Per 2013 Report (bottom) May 29, 2014 Page 3

4 Source: KPCB. Implications for thescore KPCB s Internet Trends 2014 report illustrates the tremendous growth in mobile usage in North America. We believe advertisers will essentially have no choice but to significantly increase their mobile advertising budgets to try to catch up to where their consumers are and with its growing user base of young North American males, thescore represents the best way in Canada to profit from this long-term secular and positive trend. We expect this trend to show up most directly in thescore s average revenue per user (ARPU). The company s Q3/FY14 ends this Saturday and Q3 is seasonally its strongest quarter. Our forecasts call for ARPU of $0.40 for the quarter. We note that this represents a 25.5% sequential increase from the $0.32 earned in Q2/FY14, whereas the jump from Q2 to Q3 last year was higher, at 32.2%. Similarly, our Q3/FY14 average monthly mobile user estimate of 5.6MM represents a 12.0% sequential increase, whereas the sequential increase in users from Q2 to Q3 last year was also much higher, at 19.2%. May 29, 2014 Page 4

5 Exhibit 3. Q3/FY14 Preview Quarter Q3/FY14E Q3/FY13 Q2/FY14 % Change Ended May-14 May-13 Feb-14 Y/Y Q/Q Revenue (000's) Advertising - Mobile $2,223 $993 $1, % 40.5% Total Revenue $2,553 $1,368 $1, % 33.4% Monthly Active Mobile Users (Average, millions) % 12.0% ARPU $0.40 $0.22 $ % 25.5% EBITDA (000's) -$1,808 -$2,350 -$689 nmf (pos) nmf (neg) EPS (f.d.) -$0.01 -$0.03 $0.00 nmf (pos) nmf (neg) Cash Flow From Operations (000's) Before Changes in Non-Cash Working Capital -$1,677 -$2,287 -$533 nmf (pos) nmf (neg) From Changes in Non-Cash Working Capial -$116 $399 -$1,441 nmf (neg) nmf (pos) Cash Flow From Operations - Total -$1,793 -$1,888 -$1,974 nmf (pos) nmf (pos) Cash, Ending Balance $24,324 $17,584 $10, % 131.3% 1 Note that Q3/FY13 monthly active mobile users figure reflects thescore's revised reporting method, which now excludes its secondary mobile sports app, SportsTap, which was retired on September 30, However, the calculation of ARPU in Q3/FY13 includes the SportsTap users. Exhibit 4. Average Monthly Mobile Active Users CAGRs Q2/F11 to Q2/F14: 46% Q2/F14 to Q2/F16E: 32% May 29, 2014 Page 5

6 EBITDA (MM) Growth in Revenue / Growth in Operating Expenses (D&A) thescore, Inc. Exhibit 5. Average Revenue Per User (ARPU) $0.70 Annual Averages 2012: $0.14 $ : $ E: $0.34 $ E: $ E: $0.55 $0.40 $0.30 $0.20 $0.10 $0.00 Exhibit 6. EBITDA (MM), and Growth in Revenue / Growth in Operating Expenses (excluding D&A) $1 $0 -$1 -$2 -$3 -$4 -$5 -$6 -$7 -$8 -$9 9x 8x 7x 6x 5x 4x 3x 2x 1x 0x EBITDA Growth in Revenue / Growth in Operating Expenses (excluding D&A) May 29, 2014 Page 6

7 Maintaining Buy and $0.65 Target Price We have made no changes to our estimates or target price. Our target price is derived by applying a Price/Forward Sales multiple in a range of 9.5x 10.0x to our revenue estimate for the four quarters ending February Our implied target EV/User is also unchanged at $ Exhibit 7. Calculation of Target Price Four Quarter Revenue Estimate (ending Feb 2016, MM) $16.6 Target Valuation Multiple 9.8x Market Cap (MM) $161.4 Shares Outstanding (ending Feb 2015, MM) Target Price (Rounded) $0.65 Implied Return 103% Source: Beacon Securities estimates. Exhibit 8. Expected Changes in thescore s Key Metrics Over the Next 12 Months Valuation Metrics Price/ Price/ Forward Sales Trailing Sales Users (MM) Operational Metrics Forward Sales (MM) LTM Revenue/ LTM Average User EV/User Current 7.4x 11.9x $ $10.8 $1.52 Target 9.9x 15.3x $ $16.6 $1.84 Implied Increase 34.1% 28.5% 106.7% 35.0% 53.9% 20.8% Current represents the last reported quarter. Target incorporates our user and balance sheet expectations as at the quarter ending Q2/FY15. We continue to believe investors in thescore will benefit from the following four key levers: May 29, 2014 Page 7 1) User Growth. We expect thescore to significantly add to its user base given the continued macro shift towards mobile smartphones as well as heightened brand awareness. 2) Better Monetization of Its User Base. We believe thescore is still scratching the surface of its ability to improve ARPU and benefit from the influx of advertising dollars towards mobile. We also see room for growth on the volume side of ARPU (i.e., higher user engagement). 3) Operating Leverage. We believe that thescore has essentially built out its required infrastructure to serve its customers. We therefore expect revenue to increase significantly faster than operating expenses resulting in dramatic improvements in EBITDA margins going forward. 4) Multiple Expansion. We expect thescore s trading multiples to expand over the next 12 months as the company executes on our growth forecasts, attracts more investor attention and moves closer to profitability.

8 Exhibit 9. Market Comparables EV/User - Group Average / thescore 6.9x LTM Sales/User - Group Average / thescore 4.2x NTM Sales/User - Group Average / thescore 3.8x Online Advertising Comparables Price/Sales Monthly Sales/User 1 Company Ticker Last Price Market Active EV/ EV Cap. LTM NTM Users User (MM) (MM) (MM) LTM NTM thescore SCR-TSX $0.32 $80 $ x 7.4x 5.0 $10.6 $1.3 $2.2 Large Mobile Ad-Revenue Companies Facebook FB-USA $64.04 $164,341 $152, x 13.0x 1,276 $119.8 $7.0 $9.9 Twitter TWTR-USA $34.75 $20,502 $18, x 14.3x 255 $71.9 $3.1 $5.6 TripAdvisor TRIP-USA $96.66 $13,789 $13, x 10.5x 368 $37.2 $2.7 $3.6 Yahoo! YHOO-USA $35.03 $35,268 $33, x 7.8x 430 $76.8 $10.9 $10.5 Pandora P-USA $25.84 $5,309 $4, x 5.5x 75 $66.2 $5.6 $12.8 Yelp YELP-USA $64.43 $4,719 $4, x 11.8x 132 $32.8 $2.0 $3.0 Google GOOG-USA $ $379,133 $325, x 6.9x n/a Group Average $89,009 $78, x 10.0x 423 $67.4 $5.2 $7.6 Other Companies of Interest MeetMe, Inc. MEET-USA $2.06 $80 $78 1.9x 1.7x 4.76 $16.3 $8.8 $10.0 Perform Group PER-LON x 2.7x n/a Online Advertising Comparables Sales (MM) Sales Growth EBITDA EPS FD Company 2013A 2014E 2015E 2016E 2014E 2015E 2016E 2013A 2014E 2015E 2016E 2013A 2014E 2015E 2016E thescore $5.3 $8.2 $13.4 $ % 63.5% 53.9% -$8 -$8 -$6 $0 -$0.11 -$0.05 -$0.03 -$0.01 Large Mobile Ad-Revenue Companies Facebook $7,872 $11,839 $15,554 $20, % 31.4% 28.7% $3,932 $7,362 $9,701 $12,581 $0.59 $1.42 $1.82 $2.43 Twitter $665 $1,268 $2,051 $3, % 61.8% 48.9% -$525 $206 $457 $903 -$3.41 $0.04 $0.25 $0.69 TripAdvisor $945 $1,238 $1,541 $1, % 24.5% 23.8% $331 $495 $637 $813 $1.41 $2.19 $2.82 $3.65 Yahoo! $4,677 $4,502 $4,641 $4, % 3.1% 2.8% $1,203 $1,364 $1,467 $1,562 $1.26 $1.63 $1.88 $2.12 Pandora $655 $899 $1,173 $1, % 30.4% 30.9% -$18 $56 $128 $261 -$0.16 $0.17 $0.49 $0.94 Yelp $233 $366 $524 $ % 43.2% 35.1% $4 $59 $110 $193 -$0.15 -$0.03 $0.34 $0.97 Google $59,730 $52,677 $62,428 $71, % 18.5% 15.0% $17,933 $25,909 $30,849 $36,158 $17.97 $26.79 $31.57 $37.27 Group Average 35.8% 30.4% 26.5% Other Companies of Interest MeetMe, Inc. $40 $46 $ % 18.5% - -$1.96 $3.02 $ $0.29 -$0.17 $ Perform Group % 8.3% 8.3% Based on the number of users. Note: thescore has an August year end. All other companies have December year ends. Financial information is in CAD for thescore, GBP for Perform, and USD for all other companies. May 29, 2014 Page 8

9 Disclosure Requirements Does Beacon, or its affiliates or analysts collectively, beneficially own 1% or more of any class of the issuer's equity securities? Yes No Does the analyst who prepared this research report have a position, either long or short, in any of the issuer s securities? Yes No Does Beacon Securities beneficially own more than 1% of equity securities of the issuer? Yes No Has any director, partner, or officer of Beacon Securities, or the analyst involved in the preparation of the research report, received remuneration for any services provided to the securities issuer during the preceding 12 months? Yes No Has Beacon Securities performed investment banking services in the past 12 months and received compensation for investment banking services for this issuer in the past 12 months? Yes No Was the analyst who prepared this research report compensated from revenues generated solely by the Beacon Securities Investment Banking Department? Yes No Does any director, officer, or employee of Beacon Securities serve as a director, officer, or in any advisory capacity to the issuer? Yes No Are there any material conflicts of interest with Beacon Securities or the analyst who prepared the report and the issuer? Yes No Is Beacon Securities a market maker in the equity of the issuer? Yes No Has the analyst visited the head office of the issuer and viewed its operations in a limited context? Yes No Did the issuer pay for or reimburse the analyst for the travel expenses? Yes No Beacon analysts are not permitted to own the securities they cover, but are permitted to have a position, either long or short, in securities covered by other members of the research team, subject to blackout conditions. All information contained herein has been collected and compiled by Beacon Securities Limited, an independently owned and operated member of the IIROC. All facts and statistical data have been obtained or ascertained from sources, which we believe to be reliable, but are not warranted as accurate or complete. All projections and estimates are the expressed opinion of Beacon Securities Limited, and are subject to change without notice. Beacon Securities Limited takes no responsibility for any errors or omissions contained herein, and accepts no legal responsibility from any losses resulting from investment decisions based on the content of this report. This report is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell securities discussed herein. Based on their volatility, income structure, or eligibility for sale, the securities mentioned herein may not be suitable or available for all investors in all countries. Dissemination Beacon Securities distributes its research products simultaneously, via , to its authorized client base. All research is then available on via login and password. Analyst Certification The Beacon Securities Analyst named on the report hereby certifies that the recommendations and/or opinions expressed herein accurately reflect such research analyst s personal views about the company and securities that are the subject of the report; or any other companies mentioned in the report that are also covered by the named analyst. In addition, no part of the research analyst s compensation is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report. Beacon Securities Ltd. 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H