Tremor International | Advertising Revolution
A Particular Spotlight on Connected TV
Name: Tremor International (to soon rebrand as Nexxen)
HQ: Israel (offices throughout the United States, Canada, Europe, Asia-Pacific)
Dual Listed: London Stock Exchange (AIM: TRMR) and NASDAQ: (TRMR)
Market Cap: £230m GBP ($288m USD)
Disclaimer:
Views, information and opinions expressed in this analysis are those of the author. They should neither be construed as investment advice nor as a recommendation to buy or sell any particular security. Security specific information should not be relied upon as the basis for your own investment decisions. You must do your own research, seek independent advice and reach your own conclusions.
The author may have a position in securities named in this article and may change those position at any time
What’s the Investment Opportunity?
Sometimes the best investment opportunities are second or third level derivatives of a pivotal shift in an industry.
During the industrial revolution of the 18th Century, the advent of fossil fuels changed the way businesses operated. While owners of coal mines did exceptionally well in supplying the fuel, secondary beneficiaries did even better. These included the rail-roads that were used to transport the coal, and the factory owners who were able to mechanize manual processes and so increase capacity.
Similarly, during the gold rush of the 19th Century, manufacturers of picks and shovels achieved more commercial success than the average gold prospector. Companies such as Levi Strauss were born and the rest, as they say, is history.
So what can we learn from this?
Most people rush to invest their time and money in the over crowded first line of any pivotal shift, without considering who the secondary beneficiaries will be and where the real opportunity exists.
This brings me to the opportunity that I would like to introduce to you today.
Television broadcasts began life over the airwaves back in the 1920s, cable TV arrived in the 1940s and 1950s, and then satellite TV began in the 1970s. As web based technology has improved we have been able to enjoy the advent of internet based streaming opportunities and television on demand.
So many companies have jumped into this space. Think about Netflix, Disney+, AppleTV, Amazon Prime Video, HBO Max, Discovery+, Hulu, Peacock, Paramount+ … the list goes on.
I think you can see the problem. There isn’t enough meat on the bone to feed so many mouths.
There will be winners and losers. There will almost certainly be consolidation at some point. Margins will be squeezed. These are all very capital intensive companies because they are required to continually produce new content.
The investment required to get streaming services like HBO Max and Discovery+ off the ground with licensing deals and exclusive content has yet to be offset by revenues from subscriptions or advertising.
On the whole, major streaming services have reported total combined losses in excess of $18bn since 2020.
Even the market leader by subscriber numbers, Netflix, has faced commercial challenges requiring it to reduce its work force and to introduce lower priced subscriptions in order to stem the loss of subscribers (it lost almost a million subscribers during the summer of 2022).
So, if not in the streaming services, where should the canny investor put his money? Where is the second level opportunity?
The answer, is CTV advertising. I’ll explain that acronym later, but first you need to understand some background. So let’s dive in.
The Historic Model | Linear TV
Linear TV refers to the traditional broadcasting model where users receive free-view broadcasts or else subscribe to a cable or satellite provider in order to access content.
Advertising on linear TV involves commercials being inserted during commercial breaks within TV programs. It requires the purchasing of a specific time slot, typically 30 or 60 seconds in duration. The most expensive slots are those that occur during prime-time viewing hours and which air within the most popular programs.
Of critical importance to this analysis is that in the linear TV model, all viewers see the same advert and targeting options are very limited, usually only to the geographic location of the viewers. So viewers in one state may see different adverts to viewers in another state. Advertisers are forced to take a scatter-gun approach, aiming generally, relying on the broad demographic profile of the audience of a specific TV program.
Advertising measures in linear TV are primarily based on ratings and viewership data of the program rather than the advert itself. Precise ad-performance metrics are challenging to obtain. As the old advertising saying goes, ‘half of advertising doesn’t work, but we have no idea which half’.
This kind of advertising may be satisfactory for general brand awareness campaigns, but not targetted advertising. This is why Coca-Cola, McDonalds and car brands featured heavily.
OTT TV
With the advent of internet connectivity came digital streaming and this enabled Over-the-Top (OTT) TV. This is where content is pulled directly from the internet and streamed on any devise with a screen, including personal computers and mobile devices.
This has given rise to OTT advertising as an alternative to traditional linear TV advertising. Suddenly advertisers are able to leverage user data, including precise demographics, interests, and viewing behavior, to deliver more relevant targeted adverts.
OTT platforms introduced new ad formats, such as pre-roll, mid-roll, and post-roll video adverts. These were typically not capable of being skipped and so had to be watched if the viewer wanted to see whatever was being streamed. If you’ve ever used YouTube then you’ll be familiar with this kind of advertising.
This facilitates better ad-performance measurement capabilities. Advertisers are able to track impressions, completion rates, click-through rates (CTRs), and other engagement metrics to assess campaign effectiveness.
Now, CTV
Connected TV (CTV) combines the benefits of linear TV and OTT, creating a new advertising ecosystem. It offers all of the benefits of OTT advertising plus advanced targeting capabilities able to deliver highly targeted ads.
Essentially, as the diagram below demonstrates, CTV hardware are a sub-set of OTT devices.
CTV is able to deliver even higher impact interactive adverts and overlays.
Imagine a scene in a movie where a car drives down a highway past an advertising billboard. Imagine if that billboard changed according to the demographic of the viewer! CTV can do that. Or there may be a scene in which the actor is drinking from a can. Imagine if that can appeared with a different brand depending on the geography or age of the viewer! Perhaps it looks like Coca-Cola to a teenage audience, but looks like Budweiser to an adult audience. CTV can do that.
Advertisers can now experiment with different creative approaches to engage viewers.
CTV has seen significant growth, with more households adopting internet-connected smart TVs and streaming devices such as the Amazon Fire Stick.
So the question becomes, if the same scene in a movie appears differently depending on the geographic location or demographic profile of the viewer, how do advertisers compete? And how is advertising bought and sold.
The answer is programmatic advertising which allows for automated buying and selling of ad-inventory, real-time bidding, and advanced audience targeting. This is the perfect segue to the company that I would like to introduce, because this is where Tremor International (the focus of this investment analysis) is a major player.
Who Are Tremor International?
Tremor International has grown through acquisition, targeting both vertical and horizontal integration, and is now able to offer an end-to-end technology advertising platform, operating across three core capabilities - Video, Data and CTV.
Tremor's unique approach is centered on offering a full stack of solutions which provides it with a major competitive advantage within the video advertising ecosystem.
The company has now brought all of its acquired subsidiaries under the umbrella of its rebranded identity, Nexxen (all elements of the Amobee, Tremor Video, Unruly and Spearad tech stack – which will now be known as the Nexxen DSP, Nexxen SSP and Nexxen Ad Server).
The rebranding has simplified and streamlined the value proposition of the Company’s unified data-driven horizontal platform allowing it to cross-sell and to seamlessly package multiple technology solutions for its customers.
This is now one of the most scaled, effective, and efficient enterprise DSP solutions on offer. The high level diagram below shows how it all fits together with a more detailed diagram at the bottom of this section.
Amobee is a DSP (demand side platform) and is Tremor’s most recent acquisition. It’s an intelligent advertising platform that optimizes outcomes for advertisers and media companies, while providing a better consumer experience. Its platform assists customers by furthering their audience development, optimizing their cross-channel performance across all TV, connected TV, and digital media, and driving new customer growth through detailed analytics and reporting. The Company inserts interactive advertisements into various mobile entertainment and communication channels such as videos, music, messages, and games.
Tremor Video is a DSP and helps advertisers deliver impactful brand stories across all screens through the power of innovative video technology combined with advanced audience data and captivating creative content. Tremor Video's video advertising technology has offerings in CTV, in-stream, out-stream and in-app.
Unruly, an SSP (supply side platform), is the media side of Tremor which drives real business outcomes in multi-screen advertising. Its programmatic platform efficiently and effectively delivers performance, quality, plus actionable data to demand and supply-focused clients/partners. Tremor has a meaningful number of direct integrations with premium publishers, unique demand relationships with a variety of advertisers and privileged access to News Corp inventory (more on this later). Unruly connects to the world's largest DSPs and is compatible with most ‘Ad Age’ top 100 brands.
SpearAd has a platform that is built for efficiency in the complex world of addressable TV advertising landscape. Tasks such as manage, plan, buy and measure become easy and much more accurate than just numbers from TV panels. This is a programmatic system with media planning, central campaign Management and real time reporting.
VIDDA: Tremor has also made a $25 million equity investment in VIDAA (shown in the diagram above). This is a subsidiary of Hisense (which continues to rank second in the world for global TV shipments share at circa 14%) is the fastest-growing smart TV operating system among the top Smart TV manufacturers in the world and currently serves as the operating system for over 21 million Connected TVs in approximately 180 countries.
This is something of a symbiotic relationship as Tremor has been able to cement the supply of its services via the VIDAA operating system, while Hisense will utilize the investment monies to support its plan to increase its distribution across additional OEMs with the goal to grow global reach. As VIDAA grows Tremor will benefit both indirectly from greater potential to sell its services, and directly as a shareholder in VIDAA (win/win).
More particularly, Tremor has been able to extend, for multiple years, its exclusive agreement to share VIDAA's automatic content recognition ("ACR") data for global measurement and targeting across the Company's end-to-end platform. VIDAA has also granted exclusivity to Tremor in the US, UK, Canada, and Australia in relation to the Unruly SSP and Spearad ad server, which was already designated as its preferred monetization platform globally.
Amobee Acquisition
Tremor has achieved its goal of efficiently completing the integration of Amobee, which featured a tech-rich platform and much larger employee base than Tremor had at the acquisition’s close. In total, the workforce has now doubled.
It claims to have already met its total annualized operating cost synergy target ($65m) underscoring the efficiency of its horizontal operating model and proven track record of successfully integrating large-scale acquisitions.
Going forward the acquisition is expected to be accretive. However, it is worth noting that Tremor made a big bet on Amobee, acquiring the loss making business for $239 million. The goal was to accelerate Tremor's growth, and at the time of the acquisition, management expected the combined companies to generate $500 million in revenue in FY2023. However, macroeconomic conditions resulted in Tremor lowering its guidance to $400 million by the end of 2022 and then, in its recent Q2 2023 numbers, it revised guidance down again to $320 million. To put things in perspective, back in 2021 prior to the acquisition, Tremor generated $302 million revenue alone.
Unfortunately, the timing has been unfavourable. Macroeconomic uncertainty is impacting major advertisers’ and agencies’ budgets and willingness to spend. As a result the business is currently experiencing longer, and more complex, sales cycles. This has pushed out the expected earnings boost that would have otherwise flowed from the acquisition. It will come as the economy recovers.
Some argue that the Amobee acquisition has added little value, but in reality, Tremor wouldn’t have produced $302 million alone in 2023 due to the macroeconomic climate, so combined, Amobee is certainly adding value.
Will it justify the $239 price tag? Time will tell, but if you invest in Tremor today, it doesn’t matter. The combined business has a market cap of just over $300 million following the recent sell off when guidance was revised down for 2023, so you are acquiring Amobee and the rest of the group for a significant discount. Investing is about what you pay, not what others paid in the past. This is where the opportunity looks attractive and the discount will enhance your future investment returns.
The Future
It now has one of the most comprehensive and scaled CTV and video-focused Ad-Tech platforms on the open internet, boasting differentiated and exclusive data, planning, activation, targeting, and measurement solutions. Its unified technology suite is purpose-built for advertisers, agencies, CTV publishers and broadcasters to significantly optimize returns and effectively meet their goals and KPIs within CTV.
The company has now significantly added scale, and simplified its value proposition, to the extent that it will hold a leadership position in the future CTV advertising ecosystem. As a result it has new capabilities, including holistic linear and CTV cross-planning, and the ability to leverage and organize significant amounts of data which will enable better audience profiling. This in turn facilitates more effective targeted advertising across web, social media, and TV, all of which bodes well for the Company’s future growth prospects.
It is all about the long term. Until now the company has been investing very heavily which has impacted earnings, but it is now very well placed to reap the rewards of that investment going forward. This is a very scalable business and the marginal OPEX on every new deal is nominal, so expect better operating leverage going forward.
It has a strategic focus on driving larger enterprise deals with major advertisers, agencies, and CTV players, with an enhanced focus on driving growth in its core programmatic and enterprise businesses. This has contributed to a changed revenue mix which has impacted margins for the time being.
Advertising is a cyclical business and the sector is in the doldrums at the moment. This will result in an industry shake-out and a Darwinian survival of the fittest. When we emerge from the inflation fueled monetary policy tightening period, Tremor International is well placed to flourish.
By way of example, despite advertising spend being down amongst its customers, Tremor has achieved significant increases in the number of new advertisers and supply partners. It has also seen an uptick in customers adopting multiple technology solutions which evidences the benefits of cross selling from the new enlarged product offering.
Other Big Investors
In August 2021, Tremor International announced that it would acquire Unruly from News Corp International, a media company controlled by the mogul Rupert Murdoch. The deal was part of Murdoch's strategy to focus on his core news businesses. In recent years, Murdoch has sold off a number of assets, including 21st Century Fox's film and TV businesses. However, the Tremor deal to acquire Unrul allowed Murdoch to retain exposure to the growing video advertising market through his 6.9% stake in Tremor International. News Corp have placed Rebecca Brooks on the Tremor Board, which can only be a good thing.
Brooks is a British media executive and former journalist and newspaper editor. She has been CEO of News UK since 2015 and is anticipated to take over Murdoch’s media empire.
Buying Opportunity
The share price of Tremor became vastly over inflated following the post Covid19 tech bubble of 2021 (see chart below), but has since corrected and has arguably swung way too far the other way.
This is a stock that needs to be analyzed properly to be understood.
On the basis of my adjusted numbers, gross margin trends are strong and over the past 8 years on a moving average basis, have doubled from c.30% to nearer c.60% (I am ignoring short term cyclical volatility because I am interested in the long term unit economics of this business). OPEX has been running at c.65% of gross revenue.
Recently the company has invested in growth, both by way of acquisition and also in vastly expanding its workforce, so growth CAPEX has temporarily spiked. Both of these things will result in stronger performance going forward. For me, a company that invests heavily in growth is a company that sees opportunity.
Economic earnings margins have dipped to c.12%, but are expected to expand as the company achieved closer to 17% in two consecutive years prior to the economic downturn and I see no good reason why it can’t return to at least those levels with improved operating leverage and economies of scale.
The company reported a $3.6 million loss in its Q2 numbers compared to a $2.4m profit the year earlier, but this was largely due to the acquisition of rival Amobee.
The company has historically had a clean balance sheet with little or not debt. It borrowed capital to fund the recent acquisitions and investments, but debt isn’t excessive. The company has a leverage ratio of 1.6x.
One assumes that capital will be allocated in future to paying down the debt as the recent investments consolidate into healthy returns.
I would anticipate that return on invested capital will tend back to the high teens and return on net tangible assets to nearer 30%.
If we assume that over the next 5 years:
Revenue growth at 9% CAGR. This is below the moving average and takes no account of the recent investments in growth, so this should be surpassed. Also bear in mind that 9% growth assumes a top line of just over $500m by 2028 and the company originally guided for that in 2023. It won’t be achieved in 2023, but I am confident that it will be reached before 2028.
Share count increase results in annual dilution of 2%
Economic earnings margins expand by 100bp to 12.6% (conservative and well below the moving average - as discussed above I would realistically expect these to be nearer 17%)
We witness multiple expansion such that the business is capitalized at 1.32x sales (0.53x currently) - very likely given the economic earnings margins.
On these assumptions we are looking at a 2028 share price of £5.36 (against £1.56 today) - that’s nearly a 4x return. Net present value this number to find a price today and my calculations imply that this stock is trading at about 39 cents on the dollar today. Said differently, there is a sufficient margin of safety in this stock.
One caveat. I don’t like the management’s remuneration policy. Stock based compensation layered on top of RSUs (restricted stock units with vesting of between 0.5 and 4 years) and PSUs (performance share units). This is a huge red flag. I have tried to raise it with them but their response is simply, “we don’t discuss remuneration policy”. That says to me that the management are self serving. This is to be viewed as a management tax on shareholders and a drag on investment performance. Unfortunately, this is par for the course with lots of tech companies. Silicon Valley has normalized this kind of abhorrent corporate management behaviour which is a terrible shame. Very few CEOs have the moral compass of a Warren Buffett or a Mark Leonard.
If the business was acquired, and at current levels it should become a takeover target, then that is another potential favourable outcome for shareholders or a catalyst for a share price correction at the very least.
Is Tremor International a good investment? I shall leave you to decide for yourself.