internet (v.1.0); a primer the future of online video ...1...the future of online video advertising...
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USA | Technology
Internet August 7, 2013
InternetThe Future of Online Video Advertising(v.1.0); A Primer
EQU
ITY R
ESEARC
H A
MERIC
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Jefferies US Internet Team *Jefferies Equity Research
[email protected] Pitz *
Equity Analyst(212) 336-7413 [email protected]
Brian Fitzgerald *Equity Analyst
(212) 284-2491 [email protected] O'Shea *
Equity Associate(212) 284-3415 [email protected]
Sachin Khattar, CFA *Equity Associate
(212) 323-3381 [email protected] Velikov, CFA *
Equity Associate(212) 284-2140 [email protected]
* Jefferies LLC
Key TakeawayOnline Video is one of the fastest growing advertising markets with largeupside potential. We estimate there is ~$60B in US TV advertising, yet to bedisrupted. This primer explains the various players in the digital video valuechain and highlights which ones we believe are the most likely to benefit.
We regard Google's YouTube and Tremor Video as quality names that arewell positioned in terms of focus, scale, reach, and breadth of content. YouTubeprovides integration, reach, an enormous database of content and established advertiserrelationships, while Tremor provides scale across premium content with a differentiated,integrated platform. However, AOL may now also have one of the best collection ofvideo assets -- combining Aol On's (5min Media) rich content syndication withAdap.tv's robust programmatic platform.
The Digital Video ecosystem continues to evolve and take shape and we expectthe landscape to look very different even a year or two from now. Furthermore, we expectfurther consolidation in the digital video sector; and look for more public players to figureout ways to capitalize on the substantial growth in online video advertising.
Secular Shift Driving one of the Fastest Growing Ad Markets with the highestupside. Emerging players such as online publishers, networks, exchanges, and DSPs areincreasingly better positioned to meaningfully impact the ecosystem.
Digital Video Advertising Combines Sight, Sound, and Motion of TV withEngagement, 1:1 targeting, measurement, and attribution of online — and assuch, many hybrid ad formats and pricing models that try to better inform advertisers areemerging.
Audience is King — whether achieved through original content or distribution. Expectcontinued investment in original content outside or adjacent to the traditional studio modeland more attempts (through social, authentication, and other) to vie for digital videodistribution market share, all with potential winners.
Effective / Efficient, but Digital Video Advertising is Inherently Complex — Pureplay networks such as Tremor and YuMe have early advantages. However, we believestrategy, management bench, and relationships are key to long-term success in this evolvingmarket. Additionally, the move to programmatic buying and Real Time Bidding (RTB)-- using software to buy / sell ad inventory -- will have profound impacts (efficiency,liquidity, advertising, effectiveness) while disrupting and potentially disintermediating someplayers.
There are Multiple Connected Devices. Smartphones, tablets and connected TVs,as well as emerging formats (wearable computing, connected cars, etc.) will deliver analways-on digital video audience. Increasing fragmentation and diversity in terms of O/S,hardware, capabilities, screen sizes, use cases, etc are problems that need to be solved beforeadvertisers can reach audiences in a targeted and meaningful way. Emerging players areattempting to solve this by taking unique approaches. The winners are going to be the onesthat provide an integrated, multi-device ability for brand advertisers to buy measurable,engaging, highly targeted inventory with complete ease.
Investors Face the Challenge of Finding Winners in an Evolving Market where thecurrent high-volume “Wal-Mart” play is YouTube (a part of Google), and the current high-price play, Hulu is a JV of three media conglomerates. We believe that finding potential pure-play winners is also important, though, given the market dynamics.
Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflictof interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 67 to 70 of this report.
Table of Contents
Executive Summary 3
Online Video Advertising is a Big Opportunity 5
Online Video Industry Overview – Participants, 9 Drivers, Pricing Models…
Online Video Competitive Landscape 25
Future Trends in Online Video 34
Nuts & Bolts of Digital Video Advertising 39
Techniques for Managing Publisher Deals 41
Appendix A – Global Internet Users & 44 Bandwidth Usage
Tremor Video Model (TRMR, Buy, PT $12) 50
Google Model (GOOG, Buy, PT $1000) 55
Facebook Model (FB, Buy, PT $37) 59
AOL Model (AOL, Buy, PT $50) 62
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Executive Summary
Video is a fast growing segment of the digital advertising ecosystem.
According to our estimates, online video advertising spend is expected to
reach $8B+ in spend by 2015 (and greater than $10B by 2016) in the U.S
alone, or a 3 year CAGR of 38% (’12-’15) vs. 20% (’12-’15) for overall online
advertising spend, not counting growth in mobile, tablet, and connected TVs. While
digital video is a large opportunity, it is characterized by several challenges for both
companies and as such, investors.
We believe that the ecosystem is rapidly evolving (thus creating opportunity)
to overcome the near-term pain points of platform complexity, audience
fragmentation, brand safety issues, complex agency dynamics, and
marketplace confusion, compared to the relative ease of buying and selling standard
30-second ads on television.
Even as audiences are increasingly watching video online, on mobile, or on connected
TVs, brand advertisers are not easily able to reach audiences online across brand
appropriate content.
Investors face the challenge of finding winners in an evolving market where the largest /
high-volume play is Google’s YouTube and the current high-price play, Hulu, is a JV of
three media conglomerates. We believe that finding / focusing potential pure-play
winners is important, though, given the market dynamics. We continue to highlight
Google (GOOG, BUY, Price Target $1000), Facebook (FB, BUY, Price Target
$37), Tremor Video (TRMR, BUY, Price Target $12) and AOL (AOL, BUY, Price
Target $50) as key public investable ideas, while also focusing on progress at
Twitter with its Vine video format, as well as names including Adapt.tv, BrightRoll,
TubeMogul, Collective, Rhythm, Simulmedia, Videology and others.
Other Key Takeaways
Huge, Growing Market – Digital video is one of the fastest growing
advertising markets with the HIGHEST UPSIDE — $60 billion in US TV
advertising yet to be disrupted.
Best Platform for Brand Advertisers – Digital video advertising is a
platform for brand advertisers — it combines sight, sound, motion of TV
with engagement, 1:1 targeting, measurement, and attribution of online—and
as such, many hybrid ad formats and pricing models will develop.
Inherent Technology and Business Model Complexity – Digital video
advertising is inherently complex — market leaders such as Tremor and
YuMe have built a first-to-market advantage, but investors should look to
strategy, management bench, and relationships as key to long-term advantage
in evolving market.
"...video is the enduring, long-lasting
form factor of content...
…pictures are worth a thousand
words, and video is worth a million
words. You can say more in six
seconds on Vine than you could say in
140 characters or a blog post many
times..."
~Michael Lazerow
Chief Marketing Officer
Salesforce.com
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Continued Disruption of Content and Distribution – Audience is King
— whether achieved through original content or distribution. Expect continued
massive investment in original content outside or adjacent to the traditional
studio model and more attempts (through social, authentication, and other) to
unseat YouTube as current king of digital video distribution.
Connected Devices Accelerate All Other Video Trends – Online is but
one platform — mobile, tablet, connected TVs, even auto represent
incremental areas for growth and an always-on digital video audience.
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Online Video Advertising is a Big
Opportunity
The Online Advertising Industry is one of the fastest growing subsections of the
advertising ecosystem. According to our estimates, online video advertising spend is
expected to reach $8B+ in spend by 2015 (surpassing $10B by 2016) in the U.S
alone, or a 3 year CAGR of 38% (’12-’15) vs. 20% (’12-’15) for overall online
advertising spend.
Chart 1: Expected Mobile and Online Ad Spend (in $B)
Source: Jefferies, Magna, IAB
Chart 2: US Advertising Spending
0
50,000
100,000
150,000
200,000
2011 2012 2013 2014 2015 2016
Search (Digital) Display ex-video (Digital) Television Radio Print Other Video (Digital)
Source: Jefferies
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Table 1: Jefferies US Online Advertising Model
Source: Jefferies
According to a survey conducted by AOL Networks, about 75% of marketing
professionals globally planned to increase their spending on branded video content or
video ads in the next year, while 50% said that the added investment would come from
TV and display budgets. Approximately 58% of marketers thought digital video ads
performed better than TV ads for audience engagement, compared with 15% who said
engagement was worse for digital video ads. Roughly 47% of the marketing professionals
thought digital video ads were better at driving awareness than TV ads.
US Online Advertising(US$ in Millions)
2010A 2011A 2012A 2013E 2014E 2015E 2016E 11-16 CAGR
Search 11,934 14,729 17,021 20,483 24,075 27,311 31,236
growth Y/Y 11.8% 23.4% 15.6% 20.3% 17.5% 13.4% 14.4% 16.2%
% of Total Spend 45.8% 46.4% 46.5% 46.2% 45.7% 45.2% 45.2%
Classified (& auctions) 2,624 2,603 2,867 3,218 3,243 3,357 3,840
growth Y/Y 12.2% -0.8% 10.2% 12.2% 0.8% 3.5% 14.4% 8.1%
% of Total Spend 10.1% 8.2% 7.8% 7.3% 6.2% 5.6% 5.6%
Banner+RM +Sponsorship 8,232 9,745 11,351 13,648 16,164 18,359 20,997
growth Y/Y 19.2% 18.4% 16.5% 20.2% 18.4% 13.6% 14.4% 16.6%
% of Total Spend 31.6% 30.7% 31.0% 30.8% 30.7% 30.4% 30.4%
Banner 5,962 6,904 7,954 9,520 11,260 12,794 14,632
growth Y/Y 22.5% 15.8% 15.2% 19.7% 18.3% 13.6% 14.4% 16.2%
% of Total Spend 22.9% 21.8% 21.7% 21.5% 21.4% 21.2% 21.2%
Rich Media 1,553 1,712 1,847 2,042 2,162 2,208 2,525
growth Y/Y -2.1% 10.3% 7.9% 10.6% 5.9% 2.1% 14.4% 8.1%
% of Total Spend 6.0% 5.4% 5.0% 4.6% 4.1% 3.7% 3.7%
Sponsorship 718 1,129 1,551 2,086 2,742 3,357 3,840
growth Y/Y 58.3% 57.4% 37.3% 34.5% 31.5% 22.4% 14.4% 27.7%
% of Total Spend 2.8% 3.6% 4.2% 4.7% 5.2% 5.6% 5.6%
Video 1,635 1,974 3,163 4,749 6,698 8,227 10,516
growth Y/Y 68.7% 20.7% 60.3% 50.1% 41.0% 22.8% 27.8% 39.7%
% of Total Spend 6.3% 6.2% 8.7% 10.7% 12.7% 13.6% 15.2%
Email 295 289 307 355 422 393 450
growth Y/Y -24.3% -1.9% 6.3% 15.6% 18.8% -6.8% 14.4% 9.3%
% of Total Spend 1.1% 0.9% 0.8% 0.8% 0.8% 0.7% 0.7%
Referrals/Lead Generation 1,321 2,397 1,862 1,931 2,136 2,843 2,145
growth Y/Y -4.1% 81.5% -22.3% 3.7% 10.6% 33.1% -24.6% -2.2%
% of Total Spend 5.1% 7.6% 5.1% 4.4% 4.1% 4.7% 3.1%
Total Online Spend ($MM) 26,041 31,736 36,572 44,383 52,738 60,490 69,182
growth Y/Y 14.9% 21.9% 15.2% 21.4% 18.8% 14.7% 14.4% 18.4%
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Chart 3: Ability of Marketing Professionals Worldwide to Achieve Better
Share of Awareness and Engagement with Digital Video than TV* - April 2013
Source: eMarketer, AOL Networks
The most important goals for marketing professionals from digital video campaigns were
targeting, reach and content.
The highest percentage of marketers (87%) said targeting was an important factor when
planning a branded digital video campaign, just ahead of those who cited reach (85%)
and content (81%).
Chart 4: Factors That Will Affect the Increase in Digital Video Spending
According to Marketing Professionals Worldwide -- April 2013
% of Respondents
Source: eMarketer, AOL Networks
However, marketers must consider consumer resistance to online video ads when
compared with TV ads, as consumer attitudes tend to be much more negative when
compared to TV ads.
eMarketer conducted a study in which participants in the US were shown a controlled
series of clips and told that they were either traditional TV programming or original
streaming content. The study found that consumers remained more resistant to
commercials in digital formats; 45% had a negative attitude to such ads vs. 39% who had
negative opinions of ads shown on TV. It is likely, however, that as digital video ads
become more ubiquitous, consumers will get used to seeing video ads alongside digital
video content.
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Chart 5: Attitude Toward Ads During Traditional TV vs. Original Streaming
Content According to US Internet Users, Jan 2013, % of Respondents
Source: eMarketer, Starcom, AOL Networks
Chart 6: Rise of Audience Targeting
Source: Forrester Media Buyer Survey, June 2011, Jefferies
According to Forrester, 43% of digital media buyers plan on focusing their display ad
spending on audience targeted buys. Additionally, 30% of buyers plan on implementing
interactive ad campaigns, including in stream video ads, screen takeovers and
sponsorships. These ‚high-impact‛ placements feature a high level of viewer interactivity
when compared to traditional placements.
Note: n=4,800 ages 18-55 *professionally produced for online viewing Source: Starcom, "Streaming Original Content: The Source-Agnostic Viewer is Here," May 22, 2013
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Online Video Industry Overview –
Participants, Drivers, Pricing Models…
In a simplistic view -- the digital video advertising industry essentially exists in order to
serve the interests of two major groups, Advertisers & Publishers. Networks / Market-
makers and other video advertising technology companies sit in between them
providing fundamental buying and selling markets, operational infrastructure, data,
analytics, creative services, etc. The fundamental premise is that great content with large
audiences engaged by immersive experiences will always provide the most valuable
brand advertising experiences for marketers. And vice versa—the most valuable brand
advertising experiences are crucial for funding the creation of great content and allowing
it to be seen by the widest possible audience. Looking broadly at the participants in the
online video advertising market, we arrange them into 4 groups – 1) Advertisers, 2)
Publishers, 3) Networks, and 4) Video Advertising Technology Platforms such as SSPs
(Supply Side Platforms), DSPs (Demand Side Platforms) and Exchanges.
1. Brand Advertisers and Advertising Agencies (Advertisers)
With few industry exceptions such as entertainment, video advertisers are brand
advertisers, typically Fortune 500 companies with concentrated ad spend
represented by a concentrated group of holding companies. The top 100 TV
advertisers represent at least 50% of the market, and the top 20 represent 25 Major
brand advertisers and their agencies seek to buy media placements from a large,
diverse group of content creators and publishers in order to establish reach and
frequency. Through unbundling and lower barriers to entry, digital video content
creators and publishers are of greater number and less than television, creating a
need for re-aggregation of audience and simplification of buys. This trend is
accelerating, and there is a greater amount of independent, brand-friendly,
monetizable video content sitting in the torso between the premium channels (such
as HBO) at the head and User Generated Content (UGC) creators at the tail. Even so,
very few properties online have the reach on their own to satisfy advertiser demands.
Table 2: Top 10 Advertisers by Spend According to AdAge
2012 Rank Advertiser Headquarters 2012 U.S Ad Spending (MM) 2011 % Change
1 Procter & Gamble Co. Cincinnati $4,829.70 $4,903.20 -1.5
2 General Motors Co. Detroit $3,067 $2,815.70 8.9
3 Comcast Corp. Philadelphia $2,989.10 $2,763.40 8.2
4 AT&T Dallas $2,910.00 $3,135.00 -7.2
5 Verizon Communications New York $2,381.00 $2,523.00 -5.6
6 Ford Motor Co. Dearborn, Mich. $2,276.90 $2,141.30 6.3
7 L'Oreal Clichy, France $2,239.70 $2,124.60 5.4
8 JPMorgan Chase & Co. New York $2,086.90 $2,351.80 -11.3
9 American Express Co. New York $2,070.90 $2,125.30 -2.6
10 Toyota Motors Corp. Toyota City, Japan $2,008.10 $1,749.40 14.8
Source: AdAge
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Table 3: AdAge Top 10 Agencies by Worldwide Revenue
Worldwide Revenue (in $MM)
WPP $16,459.0
Omnicom Group $14,219.0
Publicis Groupe $8,494
Interpublic Group of Cos. $6,956
Dentsu $6,390
Havas $2,287
Hauhodo DY Holdings $2,184
Alliance Data Systems Corp's Epsilon $1,223
MDC Partners $1,071
Experian's Experian Marketing Services $947
Source: AdAge
2. Content Creators and Publishers (Publishers)
Content creators and publishers – everyone from Viacom, the NFL, CBS, VEVO, and
Warner Brothers down to new independent content such as Drama Fever and
Machinima and even user-generated content – seek to sell digital media placements
to a relatively concentrated group of advertisers and agency holding companies
within a very complex ecosystem of technologies, industry standards, and
advertising requirements. The technology required to deliver common, seamless
content and advertising experiences are far more complex than traditional broadcast
or cable television owing fundamentally to on-demand content delivery and 1:1 ad
targeting across diverse environments, platforms, and formats. Complexity is also
expanding due to mobile, tablet, gaming consoles, and connected TVs as well as
advertiser demand for enhanced analytics, effectiveness studies, and programmatic
buying.
3. Networks and Market Makers (Networks) – Networks, whether labeled
publisher, multi-channel, platform, or otherwise, are market makers that bridge the
gap between advertisers and content creators. They typically aggregate an audience
through the purchase of media inventory from multiple content creators and
publishers and sell these placements to agencies. (Note – this omits ~25% of video
ad impressions are bought programmatically using Real Tim Bidding (RTB) where the
intermediary -- DSP/Exchange/SSP -- never owns the inventory). Tremor Video, for
example, aggregates more than 500 sites or apps (say aetv.com or A&E on the
iPhone) from more than 100 partners (in this example, A&E/Lifetime), and then
represents this inventory to an agency, such as Starcom MediaVest, which is buying
media on behalf of an advertiser, Proctor & Gamble (P&G), for instance. What
typically makes these network businesses more defensible and sustainable than just
pure sales representation is the technology that enables video advertising on those
sites or apps to each user on a 1:1 basis, along with interesting engagement or click
through options, targeting, analytics, and optimization. A very loose traditional
media analogy might be made to a multichannel video programming distributor
(MVPD), such as Comcast, who aggregates content, provides the technology to
deliver the advertising (and in this case, the audience), and then contracts to sell a
fixed percentage of advertising inventory to a set of advertisers.
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Chart 7: The Tremor Video Network
Source: Jefferies, company data
4. Video Advertising Technology Platforms – SSPs (Supply Side Platforms),
DSPs (Demand Side Platforms) and Exchanges – SSPs and DSPs are a set of
technology companies that help publishers and advertisers buy/sell inventory
through software / SAAS platforms. The traditional ad sale whether from a publisher
or an ad network occurs through a high cost sales person that transacts with agency
buying teams and executes ad buys using signed paper IO/emails. Ad network
technology is involved in delivering the ad to a site but ad network sales people are
still required to sell the ad space and ad networks receive only one portion of the
buy. The DSPs and SSPs are automating the ad network business and giving margin
transparency / ad delivery control to the advertisers. The DSPs and SSPs have split
out some of the conflicting business models, having the DSPs focus on finding the
best ad spots for advertisers while SSPs try to make the most money for publishers.
The massive growth of these platforms in display advertising is an indicator of what is
to come for the fragmented video ecosystem. Given the tight supply constraints of
video, the DSP/SSP platforms in video will likely emphasize different types of buying
options.
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Online Video and the Marketing Funnel
The overall advertising market is often viewed as a funnel by advertisers. The funnel
tracks a consumer’s purchase decision from the time he/she is first introduced to a brand
through to the ultimate point of purchase. The chart below depicts the marketing funnel:
Chart 8: The Marketing Funnel
Source: Jefferies; Tremor Video
At the top of the funnel, advertisers are most focused on building identity and
awareness, reaching the largest possible number of potential customers at an ideal
frequency for achieving brand metrics that start with awareness and proceed to
favorability, preference, loyalty, and recommendation in the middle of the funnel.
Traditionally, TV advertising and outdoor media have been preferred when ad spend is
focused on these metrics. TV is typically bought on Gross Rating Point or GRP basis that
takes into account the primary metrics for measurement, reach and frequency. Success is
often determined through surveys and a long-term understanding of attribution that a
certain level of GRP buy will result in a certain number of cases leaving store shelves.
Glossy print advertising and high-end web display is traditionally focused on middle of
the funnel marketing and bought on an impression basis.
Digital video advertising plays in the top and middle of the funnel, where advertisers
seek to engage and educate consumers, attempting to ultimately differentiate themselves
away from competitors and drive consumer preference. The primary metrics of success
are aided and unaided awareness, brand recall, message association, brand favorability,
and purchase intent. In digital these are measured by views, completion rate,
engagement rate, survey data, and early attempts at attribution. When looking down
towards the bottom of the funnel, we note that the distinction between video
Display &
Search
TV &
Online
Video
Branding
Direct
Response
Metrics
» Extend
Reach
» Demos
» Engagement
» Brand Lift
» Purchase
Intent
» Conversion
» Video
Completion / AdEX
TV Extensions
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completions and brand lift is blurring -- these metrics tend to be highly correlated and
completions can often be used as a proxy for brand lift.
Digital video provides the ‚sight, sound and motion‛ of TV advertising and the opt-in
engagement of print advertising coupled with real-time measurement and optimization
of online, and as such, provides solutions to the number of problems associated with TV,
glossy print, and online display advertising. Digital video supersedes TV in its ability to
control frequency, which is where the most spending is lost by advertisers who are likely
targeting its audience with three or four commercials but instead reach rabid TV watchers
10+ times and rare TV watchers once.
Digital video also provides 1:1 targeting and interactivity, more spread out usage during
the day, and at this point younger demographics. Digital video supersedes print ads with
it advanced video ad formats that allow viewers to engage and interact with ads for as
long as they like, and conclude by offering a call-to-action. When compared to traditional
online display, digital video provides the benefit of an immersive, engaged audience
being entertained—an emotional and psychological difference from the search-oriented,
multi-tasking content consumer who is primed for a direct response ad. In summary, the
top and the middle of the funnel presents a large, disruptive opportunity, as advertisers
look to shift spend away from archaic ad forms such as print and local TV to new,
interactive digital video forms.
Video Advertising is Not a Zero-Sum Game…
It is important to bear in mind, that while some clients are allocating some TV spend to
digital video, many clients are also rotating more money into TV, which is why it is also
growing. Perhaps the largest part of the growth of digital video – today and probably for
the next 3-4 years – is coming from online display, promotion spend (direct mail,
coupons, etc.) and print advertising. Digital video delivers much better results, much
more cost-effectively than these three formats.
TV is an easy comparison because of the video component, but that's not yet how folks
allocate their money (with the exception of TV direct-to-consumer websites, where it is
bundled with the TV buys, not unlike how TV networks bulk Run-of-Network rotator spots
are bundled with best primetime spots).
To TV media buyers and TV marketers – in spite of their rhetoric at conferences and in ad
trades where they want to look progressive – TV and digital (web) video are still in
entirely separate eco-systems, and will likely remain that way for a bit. However, this
won't prevent digital video from solid expansion and growth (at the expense of online
display, print and promotion).
Online Video vs. Traditional Online Display Advertising
The growth of online advertising historically has been focused below this market where
the top levels of the marketing funnel ultimately flow down to the bottom of the
funnel. The bottom hones in on consumer action and purchase decision. Advertising
forms at this stage often contain the most explicit calls-to-action, appearing in the likes of
online search and online display advertising, where clicks are paramount. More
traditionally, newspaper inserts and coupons also have served well in this segment, as
redemption rates can be calculated. These audiences aren’t looking to be entertained or
engage; they are looking to transact.
Online video market dynamics differ from the traditional web display business of Yahoo!,
Aol, ValueClick, and even Google, given the differences between brand advertising
and performance / direct response advertising, each roughly 50% of marketing dollars
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spent in the US. Brand advertising of the type typically seen on TV requires a
different set of conditions to prove effective—awareness, preference, and
demand lead to higher pricing power, lower cost of customer acquisition, and
better distribution, among other things. P&G couldn’t acquire every customer of its
CPG brands manually; it is an intricate dance of the four Ps, not search-driven ROI.
Brand advertisers have a recipe for success in finding mass reach of consistent, entertained
audiences watching professional, well-known content. Brand advertisers have historically
preferred to spend upfront, buying guaranteed inventory at a premium CPM from high-
touch, white-glove direct sellers—they are buying time, 15 or 30 seconds, with the
consumer that they couldn’t achieve through another channel. And in TV, they are
buying tonnage—huge amounts compared to individual online display campaigns.
These characteristics could not be more different from the world of performance
advertising which has historically dominated digital marketing spend, and as such a
whole new class of companies have been built to serve this market. Hence, companies
such as Tremor Video look to re-aggregate premium audiences, provide proprietary video
ad formats and brand measurements, and create hybrid sales and pricing models that
serve the needs of both the digital and TV sides of the agency. These networks have used
this opportunity to build a more sustainable business structure in online video than
traditional digital display ad networks—a classification which is typically used either
pejoratively or as a cautionary tale as display ad networks are replaced more and more by
exchange-trading through DSP’s.
Working with Publishers – While online video advertising can be sold at a premium
CPM, the downside is that unlike the world of relatively infinite online display inventory,
premium digital video of the type sought after by brand advertisers is inherently scarce.
As such, the challenge for assessing the investment potential for an ad network is the dual
nature of their business. Revenue flows almost solely from agencies buying campaigns
from a direct sales organization, which an investor would typically assess financially
through traditional sales metrics. However, to win the business, a salesperson must
provide the agency with reach across a diverse set of publisher properties with
guaranteed, often transparent, placement.
Long-term publisher relationships, then, are a necessary but not sufficient condition
(definitely for ad networks, but maybe not so much for programmatic / RTB based
companies) for generating revenue from agencies, and these publisher relationships
require a different kind of financial and qualitative assessment apart from the sales
metrics. Furthermore, some investors may be turned off, in general, by a business that
essentially involves renting (the publisher content), for all intents and purposes, what is
being sold, as is the case with ad networks and inventory owned by a publisher.
Nevertheless, all the networks, including Tremor Video and YuMe, have developed
strategies and tactics to ameliorate publisher-risk concerns.
Tremor Video and YuMe, build strategic relationships by sharing publisher or agency-
side technology platforms with their partners in addition to the typical media sales
relationship. Their technology platforms may provide strategic access to publishers or
agencies, but they do not usually directly generate a meaningful amount of revenue
themselves. In the industry’s early innings, the best comparison might be to distribution
partners in the traditional media landscape, and some networks also syndicate content
and ads.
These technology platforms are also competitive with many independent ad technology
companies without ad sales teams that are often used by the largest players. Video ad
serving is an example of a technology platform which Tremor Video, YuMe,
BrightRoll, or Rhythm provide, but which can also be separately licensed from
“…the other thing that really makes us
very excited about video is that
advertisers really like it, it’s something
that translates really well from the
format that they are used to, so an
advertisement can start on television,
makes the jump to online and also
ultimately be viewed on tablets and
smartphones.”
~Marissa Mayer
CEO, Yahoo!
2Q earnings call
July 16, 2013
Brand advertising of the type
typically seen on TV requires a
different set of conditions to prove
effective—awareness, preference,
and demand are long-term
goals leading to higher pricing
power, lower cost of customer
acquisition, and better
distribution, among other things
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companies such as DoubleClick (Google), FreeWheel, and Auditude (Adobe) on
the publisher side or from DoubleClick, Atlas, or Vindico, on the agency side.
Integrated Platforms and Toolsets can cut out some of the middle men and reduce some
of the costs – $4.10 to $2.65 CPM by our estimates, or a 35% savings – creating financial
leverage and simplicity for buyers (aggregating the services of several disparate providers
up and down the value chain). It is not uncommon though for either publishers or
agencies to use a combination of ad servers to achieve their goals, and the same is true for
ad networks, exchanges, data vendors, rich media, and others who make up the
complicated competitive landscape.
Chart 9: Integrated Platforms and the Value Chain of Online Advertising
Source: Jefferies estimates
In addition, all networks similar to Tremor Video use contractual and market forces to
cement power vis-à-vis publishers, many of which are large organizations with direct sales
teams themselves and who may be the most attractive inventory for agencies. We
highlight in the appendix some of the ways networks try to build sustainable publisher
relationships. Some other networks work similarly to publishers, even owning content
and properties in order to provide a consistent property list; an example of some which
straddles video and display would be Collective and EvolveMedia. While increasing
content risk, these content networks have made the leap that traditional TV networks
made in the past; this model is becoming more prevalent with YouTube Multichannel
Networks such as Machinima, Maker, and AwesomenessTV.
That said, it is worth noting challenges with the traditional ‘black box’ (i.e., the advertiser
doesn’t necessarily know the sites on which his ads are running) ad network model.
Integrated Platforms and Toolsets
can cut out some of the middle men
and reduce some of the costs –
$4.10 to $2.65 CPM by our
estimates, or a 35% savings –
creating financial leverage and
simplicity for buyers.)
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Arbitrage situations could emerge (i.e., running ads on the least cost sites) making it hard
to compare the value of two media buys from ad networks that are not transparent in
where their campaigns run and the margin they charge. The money purportedly saved for
the advertiser can be lost by the ad network running in cheap inventory. Site transparency
is an issue in brand advertising where ROI is not immediately measured and the context /
audience reach is an important concern.
Working with advertisers and agencies – Advertisers often look at their digital video
advertising through the lens of paid media, owned media, and earned media. Paid media
is advertising bought against other content like a TV commercial. Owned media is
branded content developed by the advertiser that features its product in some
entertaining way—native advertising is an offshoot of owned media. Earned media
comes from advertising shared on YouTube, Facebook, Twitter, and elsewhere that the
advertiser does not have to pay for. While branded content and earned media are a part
of the selling process, for the purposes of this industry overview we will solely analyze
paid media in terms of how networks work with advertisers and agencies.
Unlike Network TV up-fronts where more than half of media is bought in a two-week
period in May, digital video advertising is bought year-round through both long-term
upfront media buys and an ongoing RFP process.
Digital video may be bought by varying buying groups within the agency. It may be
bought by the TV or video group, in which case the buyers are responsible for buying
across all three screens—video groups like this tend to have more brand advertising
expertise and may execute longer, larger up-fronts. Video may be bought by a digital
agency whose primary experience is in online display, and the seller may then find more
pressure for data, targeting, and price—some of the hallmarks of programmatic and
performance-driven display. Video might also be put into silos by platform—for
example, online or mobile, each with different earmarks. Video may also be bought
by a programmatic division, which can have separate budget to be allocated across
networks, or use a programmatic buying platform such as TubeMogul to source
inventory from open exchanges and private marketplaces.
Digital video networks obviously prefer up-fronts, but they also prefer being more closely
associated with TV or video across three screens. Besides the preference for performance
advertising, digital media buyers are typically young and inexperienced, and are called
upon by hundreds of salespeople with deep expense accounts. The net result in the RFP
world is a somewhat quid pro quo buying process with lots of marketplace confusion—
penetration and concurrent campaigns across advertisers, industries, and agencies is an
important sign that sales relationships don’t begin and end with one potentially
conflicted agency. The amount of revenue coming from strategic up-fronts or with
advertiser/client involvement is important to track as a leading indicator of network
strength.
Creative is typically not created with digital in mind but is repurposed from TV spots.
Creative agencies, rich media vendors, or the networks themselves will then prepare
complementary digital assets for overlays, companion banners, HTML video galleries, or
other engagement features to make the ad interactive. Networks may choose to
differentiate with ad products and creative services that improve time spent or
engagement with a basic video advertisement and receive higher CPM’s for doing so.
The key evaluation criteria of an RFP will be the placement or inventory type, how well
the network’s content or audience matches the target, what impressions or audience are
available, and of course, price. Digging deeper, the agency will also be evaluating within
placement type such as in-stream video whether the advertisement is interactive or has
some other rich media feature. They will evaluate the content to see how ‚premium‛ it is,
Unlike Network TV up-fronts where
more than half of media is bought in
a two-week period in May, digital
video advertising is bought year-
round through both long-term
upfront media buys and an ongoing
RFP process.
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what level of transparency is offered from completely opaque to transparent site lists in
bundles to transparent site-level reporting with goals even against an individual piece of
content. If they require audience targeting, they may look to see what level of
demographic or behavioral targeting is offered by the network, as well as what is
proprietary or widely available by other data vendors. They will try to understand how
many impressions the publisher can provide against a certain frequency cap. In addition
they may also want to understand whether third-party validation and agency creative
serving is possible, so that the agency can aggregate results from all media in one
dashboard.
And as we have previously highlighted, the move toward programmatic buying and Real
Time Bidding has the potential to disrupt the RFP process and should be watched closely.
The promise of programmatic is that agencies could potentially remove unsophisticated /
unextensible ad network / reach buys from the RFP process and buy using user interfaces,
similar to search advertising. Groups within the agencies are being setup to take
advantage of using software UI’s to buy advertising and remove the operational
complexity out of executing media buys, these teams include Private Brand Platform
Buying Teams and Agency Trading Desks.
Premium In-Stream is the Most Valuable Online Video Ad Format
When looking at video advertising, discussions on ‚premium‛ and ‚brand‛ are topical to
discussion. It is important to consider how the largest advertisers in the world evaluate
online video, as opposed to the marketing language of online video companies.
Advertisers have the greatest demand for in-stream advertising (or video ads before or in-
between content), as they are similar to TV commercials and are also interactive. In
terms of publisher inventory, advertisers place the highest value on in-stream
video advertising placements in long-form content such as television
episodes, movies, and to some extent, music videos. Long-form content often
generates higher completion rates and other brand-friendly metrics, and increasingly,
long-form content is getting near-TV-like ad loads; this is the reason that Hulu has been
able to lead the industry in pricing.
Tremor Video maintains one of the highest CPM’s of networks by aggregating audience
from direct-to-consumer sites of the same brands you might see on Hulu and by focusing
solely on in-stream video advertisements, which are served to viewers immediately prior
to or during a publisher’s content. Like other networks, Tremor offers a number of
proprietary ad formats including Super Pre-Roll, Pre-Roll Plus and Pre-Roll Extended Play
described below.
1) Super Pre-Roll ads contain elements within the video player such as location
search, movie show times, social media sharing and the ability to watch
additional media content from a brand.
In terms of publisher inventory,
advertisers place the highest
value on in-stream video
advertising placements in long-
form content such as television
episodes, movies, and to some
extent, music videos.
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Chart 10: Super Pre-Roll Ad
Source: Tremorvideo.com
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2) Pre-Roll Plus ads incorporate a call to action, which appears shortly after the
video starts and runs for its duration.
Chart 11: Pre-Roll Plus Ad
Source: Tremorvideo.com
3) Pre-Roll Extended Play ads provide the viewer the option to continue to watch
the entire video ad (up to five minutes) all within the traditional pre-roll ad unit.
Chart 12: Pre-Roll Extended Play
Source: Tremorvideo.com
These preroll ads are effective, especially when shown in front of premium long-form
content. Here the Pre-Roll Extended Play ad from above (with the option to watch an
extended trailer in the viewer so desires) plays in front of a 45 minute segment of The
History Channel’s Modern Marvels:
Technology
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Chart 13: Pre-Roll Extended Play
Source: HistoryChannel.com
Short-form content and clips from those same premium content companies are next on
the pricing tier and result in similar completion rates. Short-form content from lesser-
known emerging brands comes next, although these may generate pricing premiums
depending on the attractiveness of the audience and the attractiveness of the emerging
brand (which often has scarcer inventory).
4) GMC Video Pre-Roll Ad as Seen in front of short-form content from The
Montreal Gazette
Chart 14: Pre-Roll Ad / Short-form
Source: MontrealGazette.com
The next tier moves out of in-stream video advertising to interstitial video advertising,
which typically exists between non-video content such as when YouTube or The New
York Times website load (see below) or when a variety of mobile applications load on
smartphone and tablets.
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1) Interstitial ads often roll while the rest of a webpage or app loads.
Chart 15: Interstitial Video Ad on YouTube
Source: Youtube.com
2) Interactive Interstitial ads may also incorporate video components as seen in
theses mobile interstitial ad units that load while the smartphone app directs the
user to the HTML 5 version of the respective content (CBS) or game (Paper Toss)
Chart 16: Mobile Video Interstitial
Source: Jefferies; Admob
Below that inventory is in-banner video advertising, which exists in a non-video content
page as opposed to between pages. Because in-banner video inventory is not limited,
Technology
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pricing here for networks is moving toward the tonnage rates often found in online
display advertising.
Chart 17: In-Banner Video Advertising
Source: Redbook.com
Facebook is also expected to launch a new video ad product for its core desktop and
mobile platforms.
According to The Financial Times, Facebook is set to unveil this new video-ad product in
2H 2013, in an attempt to attract swaths of ad dollars from TV advertisers. These video
ads are expected to auto-play as the user scrolls down the desktop and mobile news feed.
We expect the implementation will be somewhat similar to how a Vine video plays when
a user scrolls down the news feed. See the next page for screenshots of a Vine video.
According to Ad Age, FB is selling four daily ‘slots,’ each targeting a different
demographic: women over 30, women under 30, men over 30, and men under 30. The
auto-play ads will be capped at 15 seconds (vs. the standard 30 second TV ad).
The Financial Times says FB could generate ~$1.5MM daily revenue at the onset.
According to Ad Age, Facebook is offering marketers 4 ad slots per day, each with a
$1MM price tag. Assuming a ~$22 CPM and $1MM price tag, this implies each ad would
be viewed by ~45MM users. Thus the video ads could generate between $1-4MM daily
revenue, or $365MM - $1.46B annually. Note regardless of whether Facebook prices the
ads on a CPM basis or a flat rate, the numbers work out the same.
Additionally, with the recent rollout of 15-second videos to Instagram, that platform also
looks ripe to be monetized with 15-second video ads. Instagram is currently
unmonetized, but Facebook’s VP of Global Marketing Solutions confirmed that
monetization is indeed coming to Instagram over time. At last check, Instagram had
130MM+ users, up significantly from 30MM at time of acquisition in April, 2012.
.
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August 7, 2013
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Chart 18 Honda Using Vine to Advertise -- The 2013 Honda Summer Clearance Event
Honda “We’ve Got Extreme Deals!”
Honda “This Deal Storm is Too Powerful!”
Source: Vine on Samsung S4
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Traditional Media Model
In the traditional media model, a direct sales team sells a site (e.g., CBS.com) or set of sites
(e.g., CBS Interactive) to an agency. The publisher ad server controls the advertisement
within the context of the publisher environment. The agency ad server provides tracking,
validation, and (sometimes) creative serving for a unified dashboard. The publisher ad
server calls the agency ad server via what’s called an ad tag when an advertisement is
served up on the publisher site. Each party may be layering in data or rich media to
improve the experience from proprietary collections or from other vendors.
Chart 19: Traditional Media Model
Source: Jefferies
Premium Model (like Tremor Video)
In the Tremor premium network model, Tremor’s sales team represents an aggregation of
content creators and publishers (e.g., 18-24 men and women on TMZ, NFL, and A&E) to
an agency. The publisher’s ad server communicates with Tremor’s ad server to serve an
advertisement, which then calls the agency ad server for tracking which is similar to the
direct sales model. For some of Tremor’s publisher partners, the primary publisher ad
server may be Tremor’s VideoHub for Publishers, which can help them reduce cost and
complexity if Tremor is a strategic partner. For some of Tremor’s agency partners, the
primary agency ad server may be Tremor’s VideoHub for Advertisers, which provides
access to enhanced analytics. Usually, network technology will be used in conjunction
with other independent services. Data and rich media are similar.
Chart 20: Premium Network Model (e.g. Tremor Video)
Source: Jefferies
Performance / Exchange Model
In a performance or exchange-driven model, a network will often not have a direct deal
with a publisher and sometimes won’t have the right to represent them transparently to
the agency though most exchanges place no restrictions on the buyer in terms of
disclosure – if an ad network purchases impressions from an exchange, they can tell the
advertiser which sites they ran on. The publisher ad server may use a supply-side
platform or mediator to choose between ad networks, or it may put its inventory into an
exchange, which will then call the highest bidder from a group of performance networks
with the technology working the same after that. For the premium of premium video
publishers, the performance and open exchange-driven sales channels are not really
considered—only direct sales, maybe a premium network, and increasingly, a private
exchange (used in tandem with a SSP) are used. Many publishers rely only on direct sales
such as Turner.
Chart 21: Performance / Exchange Model
Source: Jefferies
Key:
Source: Jefferies
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Online Video Competitive Landscape
Chart 22: Competitive Landscape Summary
Video Display & Rich Media
Publishers CBS, Hulu, VEVO NY Times, Gawker,
E!Online
Premium Focused Brand
Network
Online: Tremor
Mobile: Rhythm
Online: SAY
Mobile: Rhythm
Mid-Tier (Performance
Brand) Network
Online: YuMe
Mobile: YuMe
Online: Evolve
Mobile: Millennial
Performance Network Mobile: Flurry (app) Online: ValueClick
Mobile: Millennial
Platform
Platform & Private Exchange
Adap.tv, BrightRoll,
TubeMogul
Adap.tv, BrightRoll
Pubmatic
Platform & Public Exchange Adap.tv, BrightRoll AdX
Source: Jefferies
Chart 23: US Unique Visitors to Video AdTech Properties
Source: comScore
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Table 4: Top 50 Video Properties by Unique Visitors according to ComScore
Total
Unique
Viewers
(000)
Average
Daily
Unique
Viewers
(000)
Videos
(000)
Videos
per
Viewer
Minutes
per
Viewer
Minutes
per
Video
Total
Minutes
(MM)
% Ads
(Videos)
Ads Per
Content
Video
Google Sites 167,566 43,336 18,979,663 113.3 474.3 4.2 79,478 17.2 0.2
BrightRoll Platform 155,428 14,042 2,384,810 15.3 7.4 0.5 1,155 100.0
ADAP.TV 121,776 21,939 2,208,488 18.1 8.6 0.5 1,048 100.0
Specific Media 113,539 19,281 1,482,259 13.1 5.0 0.4 567 100.0
TubeMogul Video Ad Platform 94,093 9,842 1,442,628 15.3 4.7 0.3 438 100.0
LIVERAIL.COM 81,310 15,215 2,390,027 29.4 9.8 0.3 800 100.0
AOL, Inc. 74,837 9,101 1,445,078 19.3 44.1 2.3 3,300 46.4 0.9
Videology 64,260 8,675 598,124 9.3 3.7 0.4 238 100.0
Q1Media - AdExcite Video Platform 62,700 4,087 288,330 4.6 2.1 0.5 130 100.0
Tremor Video 62,020 7,700 772,829 12.5 5.8 0.5 358 100.0
Facebook 61,730 9,962 731,074 11.8 24.6 2.1 1,522 0.2 0.0
SpotXchange Video Ad Marketplace 53,929 6,742 564,400 10.5 6.0 0.6 323 100.0
Microsoft Sites 52,362 5,705 820,957 15.7 31.6 2.0 1,656 25.1 0.3
NDN 51,875 8,491 1,106,966 21.3 81.2 3.8 4,211 53.2 1.1
Viacom Digital 51,549 5,322 684,954 13.3 37.8 2.8 1,948 38.5 0.6
VEVO 50,881 5,809 631,897 12.4 38.2 3.1 1,943 11.0 0.1
Visible Measures Network 48,240 2,719 182,038 3.8 1.9 0.5 91 100.0
Yahoo! Sites 46,105 6,722 576,389 12.5 68.4 5.5 3,155 47.2 0.9
Collective Video 43,664 3,328 330,717 7.6 9.2 1.2 403 78.9 3.8
Amazon Sites 35,137 2,441 146,451 4.2 18.4 4.4 646 7.8 0.1
Turner Digital 32,359 2,922 360,340 11.1 35.5 3.2 1,150 29.1 0.4
Comcast NBCUniversal 32,005 2,265 300,294 9.4 28.9 3.1 924 64.1 1.8
Microsoft Advertising Video Network 31,592 4,954 367,059 11.6 6.0 0.5 188 100.0
CBS Interactive 24,606 2,605 644,414 26.2 81.8 3.1 2,012 60.3 1.5
Undertone 23,626 1,576 163,918 6.9 3.6 0.5 85 94.8 18.3
Vimeo 23,275 1,418 79,731 3.4 27.7 8.1 644
ValueClick Video Network 21,810 1,730 139,020 6.4 3.4 0.5 73 100.0
Break Media 21,240 1,336 79,539 3.7 5.7 1.5 120 71.5 2.5
TRAVELPLUS.TV 20,858 1,535 75,913 3.6 3.4 0.9 70 33.3 0.5
Hulu 19,983 2,036 1,955,362 97.9 243.3 2.5 4,861 71.4 2.5
NETFLIX.COM 19,536 3,984 663,792 34.0 595.5 17.5 11,635 0.0 0.0
Disney Online 19,314 1,148 85,023 4.4 12.1 2.8 235 8.5 0.1
Grab Media, Inc. 18,802 848 168,586 9.0 30.4 3.4 572 48.1 0.9
ESPN 18,485 2,724 653,466 35.4 74.8 2.1 1,383 61.0 1.6
Exponential - Adotube 17,016 1,419 81,845 4.8 2.6 0.5 44 100.0
Sony Online 16,957 1,037 274,061 16.2 26.5 1.6 449 16.1 0.2
Weather Company, The 16,396 1,187 105,656 6.4 25.4 3.9 416 36.2 0.6
DAILYMOTION.COM 16,035 1,608 321,349 20.0 90.6 4.5 1,453 39.5 0.7
Viewster Media 15,224 931 263,519 17.3 37.2 2.2 567 61.8 1.6
Source: ComScore
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Adap.tv
Acquired by AOL ~Aug 2013 for $405MM
www.adap.tv
Adap.tv provides exchange technology to publishers and advertisers for programmatic
buying of video. It does not sell media on behalf of publishers, but rather takes a cut of
transactions taking place on its exchange. While public exchange buying of video will
likely be focused on the low-end, Adap.tv has also worked with publishers such as VEVO
to build private exchanges allowing for programmatic buying of premium brand
campaigns against non-guaranteed inventory. Adap.tv’s public marketplace is not
competitive against premium networks, but its private marketplaces could be seen as a
competing channel.
Per the Tue Aug 6th Press Release:
Adap.tv Brings to AOL:
The only complete global programmatic video stack for publishers and advertisers
across all screens;
A unified yield management platform for advertisers and publishers for planning,
targeting, adserving and measurement;
One of the fastest growing platforms on the internet, with global revenue growth in
excess of 100% per year in each of the last three years;
Wide adoption by the largest global advertisers and publishers, including 83 out of
the Ad Age 100 and 70 of the comScore 100;
A talented team which has driven innovation in the automation of global video
advertising.
AOL ON
www.on.aol.com
AOL On is AOL’s platform for its complete set of video offerings; it is a curated hub for
consumers, offering videos from across 14 AOL content property channels. These
channels include food, business, entertainment, style, tech, travel, health and others. The
content is compiled from AOL properties such as HuffingtonPost, TechCrunch, AOL.com
and Engadget. Additionally, On contains proprietary, original content programs, with a
focus on a simplified user interface. All content available at AOL On will work across four
screens – desktop, mobile, tablet and connected TVs.
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BrightRoll
www.brightroll.com
BrightRoll is a large independent video advertising platform for reaching audiences across
web, mobile and connected TV. The company powers digital video advertising for the
world’s largest brands including 90 percent of the top 50 US advertisers and 17 of the top
20 advertising technology companies. The platform enables advertisers to reach 4 in 5
video viewers online and consistently ranks among the top two video ad platforms in ads
served. As a result, BrightRoll technology collects and analyzes hundreds of billions of
data points monthly enabling real-time decisions that drive ROI for advertisers.
Collective
www.collective.com
Collective connects brand marketers to audiences with high impact experiences across
display, video and mobile advertising, and their focus is more on audience targeting as
opposed to content or publisher targeting in combination with other data that a buyer
would find with Tremor or YuMe. Revenue is heavily online display. Their technology
solutions include AMP, a data and media management platform for publishers, as well as
Ensemble, an audience buying, creative organization and analytics platform for
advertisers. AMP focuses on bringing together five key media functions into one holistic
solution for publishers. Their Causal Attribution platform helps to measure ROI generated
from ad spend as well as measure offline conversions and brand lift. Collective brings
unified advertising campaigns across multiple screens for its brand advertisers.
Facebook (Instagram)
www.facebook.com
www.instagram.com
Instagram is an online photo-sharing, video-sharing and social networking service,
allowing users to take pictures and videos, then apply digital filters to them and share
them on a number of social networking services. The recently added video feature allows
users to record videos from 3-15 seconds long. Additionally, a series of new filters has
recently been added to the video function. For the iPhone 4s and the iPhone 5, a Cinema
feature has been added to help eliminate shakiness from videos that are taken on the go.
Videos appear in a user’s profile and feed, in the same manner that their photos appear.
People cannot be tagged in videos, however, they can be ‚@ mentioned‛ in the
comment so that they receive a notification.
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Flurry
www.flurry.com
Flurry works with companies to build, measure, advertise and monetize mobile
applications in the growing app economy. Flurry’s comprehensive measurement and
advertising platform has reach of more than 700 million unique smartphone and tablet
devices monthly. These 700 unique devices span across iOs, Android and other platforms
as well. Flurry works with more than 115,000 companies, is involved in more than
350,000 apps and gathers insight from more than 3.5 billion app sessions each day.
Flurry analytics measures audience reach, engagement, retention, conversions and
revenue.
FreeWheel
www.freewheel.tv
FreeWheel is a video ad serving platform that licenses technology to publishers only to
power their media properties, competing with simpler free solutions offered by video
networks as well as enterprise solutions from Google / DoubleClick and Adobe /
Auditude. Software license revenue often includes a flat CPM charge for impressions
served. FreeWheel typically works with major media companies such as NBCUniversal,
Sony, VEVO, Warner Bros., and others, and they cooperate with the video networks to
make technology interoperable given the amount of revenue (and impressions) flowing
through companies such as Tremor to publishers.
Google (YouTube)
www.youtube.com
YouTube is a video-sharing website owned by Google since late 2006. It allows users to
upload, view and share videos, using Adobe Flash Video and HTML5 technology to
display the wide variety of user-generated content. This content includes movie clips, TV
clips, music videos and amateur blogging content, amongst others. Though most of the
media uploaded to YouTube has been done so by individuals, some media corporations
offer some of their material there as well, through the YouTube partnership program.
This includes content from CBS, BBC, Vevo and Hulu. Unregistered members can view
videos and registered members can upload an unlimited amount of videos.
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Hulu
www.hulu.com
Hulu is one of the largest individual video publishers, built through a joint venture of
NBC, Fox, and eventually Disney and considered the bellwether for digital video
advertising with its content most closely resembling broadcast and cable television as well
as garnering the highest consistent CPM’s in the industry. Hulu has a collection of videos
from more than 480 content companies, including Fox, NBCUniversal, ABC, Sony Pictures
and Warner Bros. Much of Hulu’s content is an ad-supported free-to-view model, though
it offers a subscription service, Hulu Plus, as well. In the free version, Hulu acquires rights
to distribute its videos that contain a fair amount of advertising runs throughout normal
commercial breaks. Hulu Plus offers current and back season shows from ABC, Comedy
Central, The CW, FOX, NBC, MTV and Univision to connected devices for $7.99 monthly.
Rhythm
www.rhythmnewmedia.com
Rhythm is a mobile/tablet-only video network selling media on behalf of publishers while
also providing publisher-side technology for ad serving. Rhythm generates the majority
of its revenue through media sales while its technology serves an enabling function.
Carving out a premium niche as almost the mobile mirror to Tremor, Rhythm also
generates revenue through premium interstitial video and in-banner placements a la
YuMe due to differentiated inventory in the mobile and tablet market vs. online.
Simulmedia
www.simulmedia.com
Simulmedia is a New York City-based ad technology company bringing web-like ad
targeting and measurement to linear television advertising. It operates the Simulmedia
Audience Network, an audience-driven TV ad network delivering more audience reach
faster than CBS, ABC or any other network on television. Its a7 analytic and targeting
platform is driven by the world's largest database of television audience viewing
behaviors, combining the anonymous viewing data of more than 50 million Americans,
Nielsen's full national panel, Kantar's database of 65,000 national ad occurrences daily
and purchase behavior for thousands of products from MRI and Nielsen. The company
predicts TV behavior across all US viewers and then packages and sells targeted TV
campaigns to advertisers. The packages are always centered on data-defined audiences,
never specific shows, networks, geographies or time-slots.
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Tremor Video
www.tremorvideo.com
Tremor is a digital video network selling media on behalf of publishers while also
providing publisher and agency-side technology, and it has made a much larger bet on
the latter with its VideoHub for Advertisers (VHA) product as a standalone technology
solution to compete against agency ad serving platforms like Vindico (Owned by Specific
Media thru BBE acquisition) or DoubleClick. Tremor generates the majority of its revenue
through media sales while its technology serves an enabling function. Tremor has carved
out a strong position in online video with premium publishers, but it has less traction in
mobile or connected TVs with those same publishers.
TubeMogul
www.tubemogul.com
TubeMogul is a programmatic video advertising platform focused exclusively on the buy-
side of the digital media industry. Unlike ad networks, TubeMogul does not work directly
with publishers and does not buy inventory and resell it. Instead, they provide a SaaS-
based platform that brands and agencies use to buy media from both public and private
exchanges. The platform automates the execution and optimization of video campaigns
and generates analytics in real-time that are used to improve the brand impact of each
campaign. The company has two revenue channels: 1) transaction revenue based on
spending levels from clients who adopt TubeMogul's software platform 2) media revenue
from selling campaigns at a fixed price that TubeMogul fulfills using exchange inventory
bought in real-time.
Twitter (Vine)
www.vine.co
Vine is a mobile App owned by Twitter that allows users to create and post short video
clips. The maximum length of these clips is 6 seconds. After creation, the clips can be
shared or embedded on social networking services, such as Twitter and Facebook. Vine is
available for iOS devices as well as Android 4.0 or higher devices. A user’s camera will not
automatically record video; it only does so while the screen is being pressed.
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Unicorn Media
http://www.unicornmedia.com/
Unicorn Media, Inc. is a leading provider of Internet video solutions that enable
companies to maximize IP video profitability. Its patented technology, Unicorn Once™,
allows customers to ingest video content one time and deliver it to every Internet-
connected device via a single URL. Content owners can monetize their live or VOD
content on any device by dynamically inserting targeted ads and analyzing content and
ad performance in real-time on every platform, allowing for on-the-fly changes to
maximize profitability. The company is privately held and headquartered in Tempe, AZ,
with offices in Los Angeles, Orange County, New York, London and Chicago.
VEVO
www.vevo.com
VEVO is a music video and music culture publisher, created through a joint venture of
Sony, Universal with support from EMI Music and originally solely powered by YouTube
(as a move to avoid further litigation among the parties), now an investor. It is one of the
largest video properties in the world as the top YouTube MCN’s with a large O&O online
and connected device presence. VEVO’s CPM’s on its O&O properties rival Hulu given
the professional nature of its content and its target demographics, and almost all of its
revenue comes from advertising. VEVO is producing more and more original
programming, and as such appears to be a potential rival to Viacom’s MTV, as other
YouTube MCN’s go after that core MTV and Nickelodeon audience as well. VEVO recently
took a large investment from YouTube helping a somewhat tumultuous relationship
between the two parties.
Videology
www.videologygroup.com
Videology is a video demand-side platform for video RTB through exchanges (also
inclusive of their own exchange). While previously providing video enabling technology
and media sales, Videology has since transitioned to using that technology to enable their
own exchange, thus reducing perceived conflicts of interest. Videology generates revenue
through transaction fees on its exchange as well as arbitrage of guaranteed
inventory purchases on long-term campaigns (locking in rates upfront)—it is optimization
algorithms of the latter that could prove attractive financially if brand and programmatic
worlds collide.
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YouTube MCN’s
www.youtube.com/user/machinima
www.youtube.com/user/awesomenesstv
www.youtube.com/user/Fullscreen
www.zefr.com
We believe that the top YouTube MCN’s other than VEVO—Machinima, Maker,
FullScreen, ZEFR, Broadband, AwesomenessTV, etc.—are important to watch for investors
as they represent content upstarts to rival the traditional studio content and distribution
value chain as they build digital audiences on and off YouTube. Building these large
audiences on YouTube has been easier for the MCN’s than it has been building large
audiences off of YouTube for their O&O properties. And as such, they have also found it
more difficult to build robust advertising businesses at Hulu-like CPM’s. By maintaining
their audiences as agencies come to grips with YouTube, MCN’s could be attractive,
higher margin businesses than digital video ad networks; however it wouldn’t be
surprising for the Tremors and the YuMe’s of the world take advantage of the lower-cost
economics of working with YouTube content creators or find ways around YouTube sales
policies.
YuMe
www.YuMe.com
YuMe is a digital video ad network selling media on behalf of publishers while also
providing publisher and agency-side technology, such as ad serving for the former and
analytics for the latter. In most cases, larger media companies will use YuMe in
conjunction with primary ad serving technology such as DoubleClick or Freewheel. YuMe
generates the majority of its revenue through media sales while its technology serves an
enabling function. YuMe is particularly strong in connected TVs having garnered
strategic partnerships from both Samsung and LG, and they have built a presence in
mobile through its Pandora and Slacker technology deals.
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Please see important disclosure information on pages 67 - 70 of this report.
Future Trends in Online Video
Connected Devices
For many digital publishers, mobile and tablet page views have surpassed online page
views, and video views have done so or are quickly following. Add in connected TVs and
online video may end up having the smallest usage of the digital video market. The
challenge is that the video advertising market for mobile and tablet is currently much
smaller than online video; connected TV advertising is absolutely tiny in comparison to
either online or mobile. In addition, the technology to enable immersive connected
device experiences is different from that of online video with specialized players across the
mobile, tablet, and TV ecosystem. To the extent that online video networks cannot lead
in mobile or connected TVs, they may find themselves unable to grow revenue as quickly.
Authentication and Aggregators
While most major media companies have experimented with on-demand content in
digital video, authentication from cable providers such as Comcast, aggregators (Hulu,
YouTube, etc.), or subscription services (Netflix, Amazon Prime, Hulu Plus) could prove to
be a more profitable replacement for television than digital video advertising is today.
Authentication plays pose a threat to digital video networks because they are in line with
how major media companies and distribution outlets have built their sales teams and
could replicate the tonnage of TV. For now, the most used authentication properties like
HBO Go are advertising-free, but a successful replication of the cable bundle across
advertising-supported properties that effectively cuts out ad networks or limits their
inventory would be a limit on growth.
Programmatic & Private Exchanges
The rise of programmatic buying in digital is not as likely to impact premium video rates
as it has premium display rates due to market dynamics. There will be winners in public
exchanges for remnant video inventory, typically in low-end content as well as interstitial
and in-banner video where ad rates will compress. However, the convenience of
programmatic as well as dedicated programmatic budgets at some digital agencies will
likely spur the use of private exchanges for premium video inventory. Private exchanges
may limit inventory or dis-intermediate networks that do not provide an additional value-
add to agencies such as Tremor’s VideoHub. A typical publisher buy could look like this:
A direct sales team sells $2 million upfront to an agency with specific guaranteed
inventory at a $20 CPM while they also make $2 million of non-guaranteed inventory
available at a $10 CPM to be bought throughout the year via programmatic buying and a
private exchange. This could limit the network selling at a $15 CPM from accessing the
volume of inventory required to grow its business.
Video-Centric Agencies
Advertising agencies take many forms, and separate units may be set up for online
display, search, online video, mobile, mobile video, tablet, tablet/print, and so on and so
forth. However, there is an overarching trend of ‚video is video is video,‛ which should
bode well for digital video networks as specialized video buyers with a focus on brand
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advertising will be less susceptible to market confusion or ‚too good to be true‛ pricing
from less reputable ad tech companies. It should also lead to more up-fronts a la
television, which has many additional benefits than just revenue.
GRP-based buying and measurement
To enable consistent planning and reporting across traditional TV buys and digital video
we expect that buyers will demand tools that enable planning and measurement of
digital video on traditional TV metrics such as gross rating point, where the audience
reached is validated by a third-party such as Nielsen or comScore.
Video Viewability
Similar to the movement in display advertising around viewability of ads, we anticipate
that viewability of video ads will become paramount, particularly given the increased
CPM’s. A group of video technology companies called the Open Viewability Consortium
(OpenVV.org) has traction in solving viewability for the entire industry. UPDATE 06 AUG
2013 (source: www.brightroll.com) -- Video Viewability Initiative OpenVV Quadruples
Membership -- 15 new companies join the effort to move the digital video industry closer to
an open viewability standard:
The roster of new companies joining OpenVV include 24/7 Media, Adap.tv,
Adconion Direct, Blinkx, Brainient, DataXu, DG, Extreme Reach,
Media6Degrees, Meetrics, Mixpo, Nielsen, PointRoll, SourceKnowledge and
TRUSTe. These companies join founding members TubeMogul, BrightRoll, Innovid,
LiveRail and SpotXchange in the effort to create an open standard for video
viewability:
24/7 Media
“24/7 Media is joining OpenVV because we recognize that our industry needs a
standard for measurement of digital video advertising viewability. With this
standard, advertisers will continue to expand their investment in video advertising
and publishers will be able to monetize their premium content at a fair price.” Rob
Schneider, SVP Corporate Strategy and Platform Development
Adconion Direct
“Adconion Direct fully supports the OpenVV consortium and the development of an
open and transparent approach to viewability measurement for video. We believe
that viewable impressions for both video and display are essential to providing the
highest standards of advertiser solutions, and OpenVV is paving the way towards
effective industry measurements and future video advertising success.” Michael
Parkes, SVP of Sales
Brainient
“We are very pleased to be part of this industry defining initiative. We will be
integrating these metrics into our reporting over the next few months to give our
customers key insight into the quality of their interactive video ad placements.”
Anna Tracey, COO
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DataXu
“As one of the founders of Open RTB, DataXu believes in the power of industry
collaboration to solve big, thorny problems that are best solved by multiple parties
in the ecosystem working together. The concerns surrounding viewability must be
addressed with a standard measurement framework and OpenVV is committed to
moving the industry forward.” Mukund Ramachandran, GM of Video Advertising
Solutions
DG
“Our industry has the momentum now to bring brands, advertisers and agencies
increased accuracy and relevancy to their campaigns, as we shift from served
impressions to viewable impressions as a standard currency for online video
advertising. If the goal is to create parity between TV and Online Video this joint
initiative is the next step in ensuring that, together, we are able to meet the
challenges of increasingly complex campaigns with the most sophisticated
campaign management tools across all screens.” Mike Caprio, VP of Video,
Broadcast & Connected Devices
Extreme Reach
“Our clients want standardized video viewability metrics and a methodology that’s
consistent across the industry, from online publishers and networks to video ad
serving platforms. We’re pleased with the momentum of OpenVV and very happy to
be able to offer the standardized approach to viewability that our clients prefer.”
John Roland, CEO
Media6Degrees (m6d)
“We are proud to join our fellow industry leaders as a member of OpenVV. The
industry is in desperate need of an open viewability standard that prevents
disreputable companies from taking advantage of brands by delivering misleading
measurements. This consortium will help lead the industry through the necessary
legwork to achieve legitimate standards.” Alec Greenberg, VP of Media Operations
Meetrics
“As a company that specialises in visibility tracking, we welcome the OpenVV
standard to overcome the fragmented video ad inventory due to incompatible
technologies. Having the OpenVV standard will help drive knowledge and adoption
with clients in order to meet the rising demand for tracking video ads.” Anant Joshi,
Director of International Business
Mixpo
“We strongly support the motivation behind the OpenVV initiative. Raising the
awareness of off-page inventory and the need for a standards-based measurement
of viewability is vital to the video advertising industry.” Brian Cohee, SVP, Data and
Systems
Pointroll
“Advertisers find video incredibly appealing, because it allows them to engage
online consumers with dynamic, and even interactive content. Of course, these ads
are only effective when seen. With growing investment in online video, viewability is
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one of the biggest concerns. We are glad to be a part of OpenVV to solve the issues
with ad visibility and develop a standard that helps all advertisers, agencies, and
ad companies.” Mario Diez, CEO
SourceKnowledge
“We believe open standards like OpenVV lay a solid foundation of transparency
and trust with advertisers and are critical to the advancement of the online video
advertising industry. We are excited to join the OpenVV community and contribute
to further developing the open viewability standard.” Stuart MacDougall, CTO
TRUSTe
“TRUSTe is excited to do its part in helping realize viewability as a new standard for
the world of digital video. We look forward to and welcome all efforts to further
transparency within online advertising, and think OpenVV technology is a great
beginning towards developing an open source standards-based technology
offering.” Kevin Trilli, VP of Product
YouTube MCN’s and YouTube Sales Policies
YouTube Multichannel Networks (MCN’s) such as Machinima, Maker, AwesomenessTV,
FullScreen, etc. are among the fastest growing entities in digital video. These companies
sign independent YouTube creators to contracts to manage, promote, and sell advertising
around their channels, not unlike the way ad networks work with publishers. However,
their connections with these content creators tend to be deeper and longer lasting than a
traditional ad network contract or technology relationship, and the individual creators are
much smaller and less capable of selling advertising in a scalable fashion. Ad networks
such as Tremor or YuMe have generally been blocked from working with creators without
forming an MCN due to third-party sales policies on YouTube that limit ad sales to the
first-party and YouTube’s sales team itself, although these policies often have exceptions
or are otherwise highlighted by larger YouTube publishers. The downside of MCN’s is
that their business is very dependent on YouTube where CPM’s are pressured, while the
market may be getting more crowded, thus creating competition for creator contracts.
Each MCN is also investing in O&O brands and sites (which we believe also represent
great opportunities for ad networks). We think that it is worth watching how MCN’s and
YouTube’s sales policies develop, as well as how CPM’s on YouTube compare. Currently,
YouTube monetization is at an approximately $2-3 CPM (YouTube inventory sold
onGoogle’s AdX has $8-10 CPMs, with YouTube taking ~30% and preferred partners
receiving $5-7. This compares to $12-15 CPMs for networks, and mid-twenties for big
video publishers such as Hulu or VEVO.
Strategic Deals / Up-fronts / Non-IO Business
For the vast majority of video ad networks, their business lives and dies on the RFP process
followed by media buying agencies where direct salespeople compete for a piece of an
RFP that may range anywhere from $25K to perhaps $1 million, typically done on a
quarterly basis. This process does not lead to the best revenue visibility, and perhaps only
50% of a quarter’s revenue will have signed contracts to run at the start of the quarter.
The RFP pipeline may only have a little visibility one or two quarters out, absent
qualitative information from sales relationships at the agency. This lack of visibility (and
predictability) makes not only revenue projections difficult when evaluating one’s top 10
or top 20 customers, but it also provides difficulty in establishing the correct relationships
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with publishers whom the network may overpromise resulting in actual losses (if the
promise is contractual) or reputation losses (if the promise is implied). As more and more
advertising gets bought upfront, either on an individual company basis or in the market
as a whole, the video network should benefit financially.
Technology
Internet
August 7, 2013
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Please see important disclosure information on pages 67 - 70 of this report.
Nuts & Bolts of Digital Video
Advertising
CPM
CPM strength, in conjunction with financial growth, is the best sign that a premium
network will be able to maintain it gross margins, grow absolute gross profit, and grow
faster than the market. It is a sign of competitive advantage with the agency, and it
results in competitive advantage in signing publishers. A declining CPM (relative to the
market) will ultimately result in lower gross margin long-term for premium publishers, or
the need to reassess publisher inventory and move down market. The converse is not
always true as a decreasing gross margin could just be a sign of increased publisher
leverage that has no noticeable impact on the network’s strength with agencies or
pricing; increased revenue shares just slow the ability of the network to grow absolute
gross profit. If CPM decreases faster than the market at the same time as a % gross
margin decline, it is likely a sign that the network is discounting inventory which can
cause a bit of a spiral downward for both CPM and gross margin metrics and a need to
reorder its publisher universe; generally keeping pricing high and taking margin hits on
any fixed volume deals is a better long-term strategy for a premium network than
discounting.
Net Revenue / % Gross Margin
We believe that gross profit, or net revenue after inventory costs when available, may be a
better metric for measuring the performance of video networks such a Tremor Video or
YuMe. It not only takes into account the cost of buying inventory (or renting the
property, as it were), but it also puts all revenue on the same level, as technology services
revenue will likely be booked similar to software revenue with very little cost of goods
sold. We also believe that net media revenue as a percent of gross media revenue is a
good proxy for the relative strength of the network’s technology, publisher contracts, and
negotiating leverage. Longer term, it may be more of a balancing act however, as
margins likely regress to the mean as renegotiated (and it may be difficult to sustain gross
margins longer term). Fixed CPM deals with publishers are often renegotiated in the
publisher’s favor if it is seen in market that a network’s deal is too far out of norm.
Networks may also be bleeding a certain publisher that may choose not to renew,
resulting in short-term margin improvements.
So too, arbitrage opportunities are short-lived. An example of arbitrage that is currently
working its way through the market is Cost per Completed View or CPV. Under this
pricing model, brand advertisers only pay for video ads that play through to completion
on a viewer’s screen. When CPV pricing was introduced, we believe that many agencies
were unaware of the effective pricing of a $0.10 CPV in-stream video ad with a
completion rate of 85%. Simple multiplication would result in an effective $85 CPM, yet
agencies thought they were getting a bargain. This pricing has been of special benefit to
YouTube with its TrueView product, especially when it’s paying out $2-3 to publishers.
Over time, CPV has fallen on sites like YouTube to <$0.03 meaning premium publishers
can still get $0.04 or $0.05, or the equivalent of a $35-45 CPM for in-stream advertising.
Publishers though are still expecting a net CPM to them of $10-15, still leaving plenty of
room for arbitrage.
Click-through (CTR) or engagement rate (cost per engagement or CPE)
pricing follows similar patterns, usually with CTR’s being highest when an ad unit is first
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introduced (resulting in what might be called ‚fat finger‛ click-throughs in mobile, for
example) and thus an arbitrage opportunity being the highest.
Sales as Percent of Gross Media Revenue
Networks are sales businesses, and sales efficiency is key to profitability. Lower selling
costs are another sign of the value the network brings to agencies. If the network is of
high-value, it will generate larger IOs, more upfront spending, more renewals (that can
be handled by junior account managers), and more efficient digital seller. It is also a
continued sign of market maturity to see sales costs decrease over time. Networks of low
value will have inefficient sellers and out-of-control T&E spending. Selling costs should be
looked at on an annual basis, however, because sellers typically require one quarter or
more of ramp-up, and ad spend is weighted toward Q4—as such, sales costs will be
higher in Q1 and lower in Q1.
It should be noted that regardless of improvements from the status quo or even a
business being well-run, the digital video market has challenging sales economics by
traditional media standards. Sales reps, fully commissioned, earn on average $200-225K,
with many taking home $300K+ per year. This does not take into account the cost of
sales management, sales development, account management, or the ever-present
expense account, but it does mean that one of these reps must generate a minimum of $3
million in spending just to get to a 10% selling cost on their own. Watching sales costs
along with CPM is a strong way of identifying competitive execution advantage in sales.
Percent of Mobile or Connected Device Revenue
Every video network should be discussing what % of revenue is being bought and run on
mobile, tablet, and connected TV inventory. The mobile crossover of usage is happening
as we speak, and revenue should follow. Slower growth of these categories than overall
revenue or a general lack of traction may be perceived as a long-term disadvantage based
on user behavior.
Percent of Upfront Revenue
While it may not be shared regularly, the amount of revenue booked upfront for six
months or more is a leading indicator of financial strength. Like strong CPM’s, with
predictable upfront revenue, networks are able to strike advantageous agreements with
publishers increasing gross margin or winning new business from other networks in order
to grow share. And because upfront deals may be managed by lower-cost account
management, this allows networks to increase the revenue goals of digital sellers and
generate new business at a lower selling cost. The networks that can win the most
upfront or strategic business will be the most profitable. % revenue renewal rate on an
annual basis is a similarly effective sales metric if available as well.
R&D spending
R&D is a secondary metric to the above that is helpful for understanding how much the
company is investing in new technology for the long-term. Without significant
investment here, it is likely the company’s absolute gross profit growth will slow long-
term. In the near-term, a company may be able to maintain its gross margin, but over
time, its pricing will slip, its publisher universe will be culled, and ad impression growth
won’t be able to keep up with pricing declines.
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Techniques for Managing Publisher
Deals
Opaque Site Lists vs. Transparent Site Lists
How network sales teams sell into agencies is a point of contention for networks, and
each have their advantages and disadvantages. Opaque site lists (e.g., Run of
Entertainment) provide networks with optimal flexibility for sourcing inventory and not
relying too heavily on any publishing partner brand; in the end, a network wants to be
known by its own brand. The downside is that opaque site lists are typically seen as
down market, and there is a race-to-the-bottom for remnant inventory pricing a la online
display.
Transparent site lists (e.g., Entertainment – CBS, VEVO, Drama Fever, and others) provide
networks with clear value-add to the agency in terms of aggregation and dedicated
inventory, thus resulting in premium pricing, but it provides limited flexibility for sourcing
inventory and publisher negotiations and may hide the network’s brand value behind the
more famous publishers. Publisher losses are also costly in terms of agency reputation.
Nevertheless, the cost of transparency is likely worth a bundle long-term, even if it results
in short-term margin compression.
Enabling Technology
By providing technology platforms to publishers at lower cost than independent
technology providers, networks can often lock in advertising inventory or exclusivity;
smaller, independent publishers without big IT or development teams are targets here.
By providing technology platforms to agencies, networks can make buying from their
sales team simpler; these platforms may pave the way for programmatic sales that
complement direct, dedicated ad spend.
Minimum Guarantees
Minimum guarantees (a combination of CPM and fill rate) serve to block other ad
networks from accessing publisher inventory and may, for many publishers, serve as a
replacement for their own direct sales teams; premium brands without sales teams and
cable units of big media companies who don’t have well-trained digital teams often look
for these sorts of deals
Minimum guarantees, in bad times, may wreck gross margin, and so long-term deals of
this sort have positives and minuses; networks will look to limit minimum guarantees to
where they get the biggest bang for their buck with agencies.
Blended Pricing
A major advantage of networks is the ability to blend prices across publishers or across
different types of inventory. By doing so, a network may be able to sell a campaign at
$15, while giving a major media company a $20 gross CPM and a smaller company $10.
The major media company acts as a kind of loss-leader in terms of gross margin.
The ancillary benefit for the network is that agencies get used to paying $15 for the major
media company and thus will not buy from that company’s direct sales force at $20. This
increases the importance of the network’s revenue to the publisher and can result in
easier renewals.
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Savvy publishers often try to combat this by forcing CPM floors on a line-item basis and
minimum revenue shares as opposed to typical, looser CPM floors or fixed CPM
purchases; other publisher require opacity to prevent a network from selling against their
logo or inventory.
CPM Floors
CPM floors of the typical variety define either what the gross or net CPM to the publisher
should be. These help networks in non-exclusive deals prevent other networks or sales
reps from gaining access to inventory if they know they can sell to agencies at a higher
value; they also help in exclusive deals to protect from direct sales teams undercutting
them in market.
Strict CPM floors that govern what a media property may be sold at are less helpful for
networks but are more indicative of tighter relationship with a publisher’s direct sales
team.
Fixed CPM or CPE/CPV Arbitrage
By buying at a fixed CPM, networks can arbitrage between what they sell and what they
buy inventory at; this can be extremely profitable when one buys at a CPM and sells on a
cost per engagement (CPE) or cost per completed video (CPV) basis (CPV more common
at this stage of the online video marketplace development), typically either when the
network has an advantageous understanding of data or in the early stages of the market—
these arbitrage opportunities generally fade! See below for more on CPE/CPV arbitrage.
We believe that Tremor pays approximately between $7 and $9 for 1,000 impressions
that it buys from its publisher partners. As an illustration, under a traditional (non-
performance) scenario, if Tremor pays $7.50 average CPMs and sells it for ~35% gross
margin (our estimate of its non-performance Media segment gross margin), it makes
$4.00 per 1,000 impressions.
Chart 24: Illustrative Non-performance CPM Scenario
Source: Jefferies estimates
When the company sells impressions that it purchases on cost per engagement basis
(CPE), Tremor is still buying 1,000 impressions for $7.50 (using the above scenario), but
now the advertiser only pays when a viewer engages with the ad (either rolls over the ad,
or clicks to take an action as described in the Company Description section). According to
the company, an advertiser typically pays $2 per engagement. If only 1.5% of the 1,000
impressions are engaged with, Tremor makes 75% gross margin, or effectively the same
as $30 effective CPM, vs. $7.50 CPM purchase price; or a profit of $22.50 per 1,000
impressions purchased.
Sell 1,000 Impressions for
$11.50
Buy 1,000 Impressions for
$7.50
$4.00 profit per 1,000
impressions,
~35% Gross Margin
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Chart 25: Illustrative Performance CPE Scenario
Source: Jefferies estimates
The downside to fixed CPM purchases is that without exclusivity or minimum guarantees,
a publisher may take back inventory to sell elsewhere that is not priced at market rates; in
addition, a network may be stuck with a low-priced campaign that results in much lower
than the 30-40% margin they would typically get in a traditional revenue share deal.
Concentration Management
All major networks look to ensure that their inventory is not too concentrated with a
single publisher or conglomerate; the best networks manage a combination of revenue
shares, fixed CPM purchases, and varying termination dates to provide negotiation
leverage.
Content Ownership & Channels
Some networks now own content which allows them to always have an anchor property
to sell and then they can fill in around it with supporting network publishers. Others
specialize in certain channels or verticals which encourage agencies to buy and publishers
to partner.
Proprietary Ad Products
By creating ad products with special forms of interactivity, targeting, or analytics,
networks can outshine publisher direct sales teams that may not have access to the same
technology; these advantages fade as independent vendors (typically rich media) copy
network products for use by anyone.
Renewal Rights
Besides simple auto-renewal structures, some networks force renewals from publishers if
they hit a certain revenue level in a year, while others request a continued revenue share
after the termination of an agreement from advertisers they may have brought to the
table during the life of the agreement. Both of these terms encourage publishers to
renew with the same network partner.
Sell 1.5% of 1,000 Impressions for
$2.00 CPE. Advertiser
doesn't pay for non engagement
impressions.
Buy 1,000 Impressions for
$7.50
= $30 effective CPM or $22.50 profit per 1,000
impressions,
75% Gross Margin
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Appendix A – Global Internet Users &
Bandwidth Usage
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Global Internet User Growth
We expect Global Internet user growth to continue the solid secular growth trends -- 11%
5-year CAGR (‘10-15). Emerging Markets – Asia/Pac, Africa, Middle East, Latin America –
lead as they grow off of relatively smaller bases. By 2015, North America will likely
account for less than 10% of the world’s Internet users (not usage though), down from
55%+ in the ‘early days’ (1995-1997). Mobile Growth and penetration are key drivers as
consumption patterns and technology ‘leap-frogs’.
Table 5: Jefferies Global Internet User Growth Forecasts
Source: Jefferies, Internet WorldStats.com, Wikipedia, CIA Factbook, CNNIC, Computer Industry Almanac, World Bank
10-15E
5-YR
2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E CAGR
Total Internet Users (MM) 953 1,102 1,327 1,597 1,810 2,031 2,267 2,527 2,813 3,130 3,481 11%
North America 239 245 252 258 264 269 273 277 281 285 290 1%
Europe 271 312 348 390 426 465 501 532 558 578 592 5%
Asia/Pacific (including China, Japan) 324 388 510 650 764 883 1017 1169 1342 1537 1758 15%
Africa 17 33 48 67 86 111 140 176 220 274 340 25%
Middle East 11 20 34 46 58 68 77 87 98 111 124 13%
Latin America & Carribean 75 87 115 164 190 213 236 261 288 317 348 10%
Oceania 16 18 19 21 22 23 24 25 26 28 29 5%
2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E
Total Internet Users Growth (Y/Y) 16% 16% 20% 20% 13% 12% 12% 11% 11% 11% 11%
North America 8% 3% 3% 3% 2% 2% 2% 2% 1% 1% 1%
Europe 17% 15% 12% 12% 9% 9% 8% 6% 5% 4% 2%
Asia/Pacific (including China, Japan) 16% 19% 32% 27% 18% 16% 15% 15% 15% 15% 14%
Africa 71% 88% 48% 39% 28% 29% 26% 26% 25% 25% 24%
Middle East 52% 80% 71% 37% 27% 16% 14% 13% 13% 12% 12%
Latin America & Carribean 33% 16% 32% 43% 16% 12% 11% 11% 10% 10% 10%
Oceania 17% 13% 6% 6% 5% 5% 5% 5% 5% 5% 4%
2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E
Internet User Penetration 15% 17% 20% 24% 27% 29% 33% 36% 40% 44% 48%
North America 73% 74% 75% 77% 78% 78% 79% 80% 80% 81% 81%
Europe 37% 42% 47% 53% 58% 63% 68% 72% 75% 78% 80%
Asia/Pacific (including China, Japan) 8% 10% 13% 16% 18% 21% 24% 27% 31% 35% 40%
Africa 2% 4% 5% 7% 9% 11% 13% 16% 20% 24% 30%
Middle East 6% 10% 17% 22% 28% 31% 35% 39% 44% 48% 53%
Latin America & Carribean 14% 16% 20% 29% 33% 37% 40% 44% 48% 52% 57%
Oceania 50% 56% 58% 61% 63% 65% 68% 70% 73% 75% 77%
2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E
Share of Global Internet Users
North America 25% 22% 19% 16% 15% 13% 12% 11% 10% 9% 8%
Europe 28% 28% 26% 24% 24% 23% 22% 21% 20% 18% 17%
Asia/Pacific (including China, Japan) 34% 35% 38% 41% 42% 43% 45% 46% 48% 49% 51%
Africa 2% 3% 4% 4% 5% 5% 6% 7% 8% 9% 10%
Middle East 1% 2% 3% 3% 3% 3% 3% 3% 3% 4% 4%
Latin America & Carribean 8% 8% 9% 10% 10% 10% 10% 10% 10% 10% 10%
Oceania 2% 2% 1% 1% 1% 1% 1% 1% 1% 1% 1%
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Continued Bandwidth Growth…
According to a recent Cisco study, Global Consumer Internet traffic is expected to
grow 4x from 2011 to 2016, from 21 to 81 petabytes per month,
representing a 32% 5-year CAGR.
Table 6 Internet Video & Gaming Traffic Driving Global Internet Bandwidth
Consumption, Petabytes per Month
File Sharing: includes peer-to-peer traffic from all recognized P2P systems such as BitTorrent & eDonkey as well as web-based file-sharing systems Internet Video: Includes short-form (i.e. YouTube), long form (i.e. Hulu), live, video-to-TV (i.e. Netflix through Roku), online purchases and rentals webcams and web-based video monitors (excludes P2P video downloads) Web, email, data: includes web, email, instant messaging, and other data traffic (excludes file sharing) Gaming: includes casual online gaming, networked console gaming, and multiplayer virtual world gaming
VoIP: includes traffic from retail VoIP services and PC-based VoIP, but excludes wholesale VoIP transport
Source: Cisco
Internet Video is currently the largest segment of consumer Internet traffic at 10 Petabytes
a month (57% of total global Consumer Internet Traffic), yet it should continue to grow at
a robust clip (34% ’11-16 CAGR) to reach an estimated 44 petabytes per month in 2016.
As expected, mobile video traffic is growing rapidly off a lower base – from 308 petabytes
per month in 2011 (3% of global consumer Internet video traffic) to 7615 petabytes in
2016 (17% of global segment traffic). Areas with the fastest Internet video traffic growth
include the Middle East & Africa (88% CAGR), Latin America (59% CAGR) and Central &
Eastern Europe (48% CAGR). The Asia Pacific and North American regions make up the
bulk of consumer Internet video traffic today at a combined 7,325 petabytes per month,
or 70% of the worldwide total (39% Asia-Pacific; 31% North America). But while the Asia
Pacific share remains virtually unchanged through 2016 (~38% in 2016), North America’s
share of worldwide consumer video traffic is expected to decline to roughly 18% by 2016
as the more mature / penetrated region grows slower than the overall market – 20% ’11-
’16 CAGR for North America vs. 34% for the worldwide total (see Table 8 for a Summary
Sheet).
Global Consumer Internet Traffic 2012 - 2017, Petabyte per Month
by geography 2012E 2013E 2014E 2015E 2016E 2017E '12 - 17 CAGR
Asia Pacific 9,033 11,754 14,887 18,707 23,458 29,440 27%
Western Europe 5,086 5,880 6,804 7,810 9,197 10,953 17%
North America 6,834 8,924 11,312 14,188 17,740 21,764 26%
Latin America 2,656 3,382 4,049 4,588 5,045 5,487 16%
Central & Eastern Europe 2,194 2,757 3,433 4,182 5,015 5,897 22%
Middle East & Africa 410 640 944 1,334 1,816 2,432 43%
Total 26,213 33,337 41,429 50,809 62,271 75,973 24%
Global Consumer Internet Traffic 2012 - 2017, % of Total Bandwidth
by segment 2012E 2013E 2014E 2015E 2016E 2017E
Internet Video 57% 60% 62% 65% 67% 69%
File Sharing 24% 21% 19% 16% 14% 11%
Web, Email & Data 20% 19% 19% 19% 19% 19%
OnlineGaming 0% 0% 0% 0% 0% 0%
Global Consumer Internet traffic is
expected to grow 4x from 2011 to
2016, from 21 to 81 petabytes per
month, representing a 32% 5-year
CAGR.
Internet Video and Online Gaming are
the segments with the strongest
growth, with CAGRs of 34% and 52%
respectively.
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Online Gaming consumer traffic is growing the fastest, albeit off a small base (currently
<1% of total traffic) – 77 petabytes in 2011 increasing to 630 petabytes in 2016 (52% 5-
year CAGR). As with the video segment, mobile gaming traffic is growing rapidly off a
very low base with a 65% 5-year CAGR – from 4 petabytes per month in 2011 (5% of
global consumer Internet gaming traffic) to 49 petabytes in 2016 (8% of global segment
traffic). Fixed (landline, Wi-Fi, etc.) Internet gaming traffic continues to grow nicely also
with the continued emergence of premium digitally download content (PLDC) for both
connected consoles and tablets.
As we canvas the Q2 results for the Interactive Entertainment sector, digital revenues
continue to represent a growing portion (roughly 53%) of the overall total, growing at
roughly 24% Y/Y.
Again, the Asia Pacific and North American regions make up the bulk of consumer
Internet gaming traffic today at a combined 60 petabytes per month, or 78% of the
worldwide total (48% Asia-Pacific; 30% North America). The share of gaming traffic for
the two regions remains consistent through 2016 growing 300bps to 81%+.
As we have highlighted with the Internet Video and Gaming traffic, mobile bandwidth
usage is growing rapidly, albeit off a still low base, from 399 petabytes per month in 2011
up to a projected 8,244 petabytes in 2016, representing an estimated 83% 2011-2016 5-
year CAGR. Fixed Internet traffic is growing from 20,134 petabytes per month in 2011 to
a projected 73,722 petabytes per month in 2016, a 30% 5-year CAGR on a large base
representing 98% of consumer Internet traffic in 2011 moving to 90% of that traffic in
2016 (obviously with mobile traffic growing the 10% reciprocal).
Table 7 Global Consumer Internet Traffic 2011-2016, Petabyte per Month
Source: Cisco
The Asia Pacific region currently generates the most consumer Internet traffic,
representing roughly 40% of the global total, and should essentially maintain that share
through 2016. Over the next 5 years or so, North America should grow slightly slower
than the overall global market (24% 5-yr CAGR for North America vs. 32% for total
worldwide growth) which is driving its share of global consumer Internet traffic from 26%
in 2011 down to an estimated 19% by 2016. Meanwhile, the regions with the strongest
traffic growth outlook are the Middle East & Africa, Latin America, and Central & Eastern
Europe, with 5-year projected CAGRs of 73%, 53%, and 42%, respectively (see Table 8 on
the following page).
Global Consumer Internet Traffic 2012 - 2017, Petabyte per Month
by network 2012A 2013E 2014E 2015E 2016E 2017E '12 - 17 CAGR
Fixed 25,529 32,097 39,206 47,035 56,243 66,842 21%
Mobile 684 1,239 2,223 3,774 6,026 9,131 68%
Total 26,213 33,336 41,429 50,809 62,269 75,973 24%
‚There were five Exabytes
information created from the
of civilization through 2003, but
information is now created every
days and the pace of growth
-- Eric Schmidt, Google,
August
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Table 8 Summary Sheet – Global Consumer Internet Traffic Growth, 2011-2016
Source: Cisco Visual Networking Index - Forecast and Methodology, 2012-2017. Cisco Systems, 6/2013
Global Consumer Internet Traffic 2012 - 2017, Petabyte per Month
by segment 2012A 2013E 2014E 2015E 2016E 2017E '12 - 17 CAGR
Internet Video 14,818 19,855 25,800 32,962 41,916 52,752 29%
File Sharing 6,201 7,119 7,816 8,266 8,478 8,667 7%
Web, Email & Data 5,173 6,336 7,781 9,542 11,828 14,494 23%
Online Gaming 22 26 32 39 48 59 22%
Total 26,214 33,336 41,429 50,809 62,270 75,972 24%
Global Consumer Internet Traffic 2012 - 2017, Petabyte per Month
by network 2012A 2013E 2014E 2015E 2016E 2017E '12 - 17 CAGR
Fixed 25,529 32,097 39,206 47,035 56,243 66,842 21%
Mobile 684 1,239 2,223 3,774 6,026 9,131 68%
Total 26,213 33,336 41,429 50,809 62,269 75,973 24%
Global Consumer Internet Traffic 2012 - 2017, Petabyte per Month
by geography 2012E 2013E 2014E 2015E 2016E 2017E '12 - 17 CAGR
Asia Pacific 9,033 11,754 14,887 18,707 23,458 29,440 27%
Western Europe 5,086 5,880 6,804 7,810 9,197 10,953 17%
North America 6,834 8,924 11,312 14,188 17,740 21,764 26%
Latin America 2,656 3,382 4,049 4,588 5,045 5,487 16%
Central & Eastern Europe 2,194 2,757 3,433 4,182 5,015 5,897 22%
Middle East & Africa 410 640 944 1,334 1,816 2,432 43%
Total 26,213 33,337 41,429 50,809 62,271 75,973 24%
Global Consumer Internet Traffic 2012 - 2017, % of Total Bandwidth
by segment 2012E 2013E 2014E 2015E 2016E 2017E
Internet Video 57% 60% 62% 65% 67% 69%
File Sharing 24% 21% 19% 16% 14% 11%
Web, Email & Data 20% 19% 19% 19% 19% 19%
OnlineGaming 0% 0% 0% 0% 0% 0%
Global Consumer Internet Video Traffic 2012 - 2017
by network & geography 2012E 2013E 2014E 2015E 2016E 2017E '12 - 17 CAGR
Fixed 10,230 16,430 19,980 24,994 31,722 40,532 32%
Mobile 193 450 924 1,729 3,033 4,749 90%
Asia Pacific 4,960 6,716 8,800 11,460 14,894 19,309 31%
Western Europe 2,584 3,280 4,103 5,036 6,273 7,813 25%
North America 4,545 6,049 7,822 10,004 12,761 15,905 28%
Latin America 1,507 2,062 2,634 3,169 3,674 4,184 23%
Middle East & Africa 238 393 609 901 1,280 1,793 50%
Central & Eastern Europe 984 1,355 1,832 2,392 3,034 3,749 31%
Total 14,818 19,855 25,800 32,962 41,916 52,753 29%
Global Consumer Internet Gaming Traffic 2011 - 2016
by network & geography 2012E 2013E 2014E 2015E 2016E '11 - 16 CAGR
Fixed 107 158 233 369 581 51%
Mobile 8 12 19 35 49 65%
Asia Pacific 58 88 132 202 305 52%
North America 32 46 65 116 206 55%
Western Europe 18 26 37 55 75 42%
Central & Eastern Europe 2 4 6 11 17 63%
Middle East & Africa 2 4 6 11 17 62%
Latin America 2 3 5 8 12 64%
Total 115 170 251 404 630 52%
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Online Video Models
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Tremor Video Model (TRMR, Buy, $12)
Table 9: Tremor Video Consolidated Income Statement ($ in 000s)
Source: Jefferies, Company data
Q1 13A Q2 13E Q3 13E Q4 13E Q1 14E Q2 14E Q3 14E Q4 14E F2012A F2013E F2014E
License Revenue $700 $800 $588 $718 $1,670 $2,314 $2,462 $3,002 $1,733 $2,806 $9,448
Y/Y growth 134.9% 92.8% 50.0% 20.1% 142.9% 212.5% 400.0% 371.4% 0.0% 297.7% 236.7%
% of total 2.8% 2.4% 1.7% 1.9% 6.2% 5.5% 4.9% 5.8% 1.6% 2.2% 5.5%
Media Revenue $24,138 $32,009 $33,819 $36,874 $25,088 $39,799 $48,112 $49,066 $103,500 $126,840 $162,065
Y/Y growth 42.0% 29.1% 13.9% 15.2% 3.9% 24.3% 42.3% 33.1% 14.6% 22.6% 27.8%
% of total 97.2% 97.6% 98.3% 98.1% 93.8% 94.5% 95.1% 94.2% 98.4% 97.8% 94.5%
Revenues $24,838 $32,809 $34,406 $37,592 $26,758 $42,113 $50,573 $52,068 $105,233 $129,645 $171,513
% Y/Y Growth 44% 30% 14% 15% 8% 28% 47% 39% 17% 23% 32%
Cost of Revenue 13,841 18,293 19,131 21,008 15,010 23,176 27,810 28,454 61,317 72,273 94,450
% of Revenue 55.7% 55.8% 55.6% 55.9% 56.1% 55.0% 55.0% 54.6% 58.3% 55.7% 55.1%
Cost of Revenues 13,841 18,293 19,131 21,008 15,010 23,176 27,810 28,454 61,317 72,273 94,450
Total Gross Profit $10,924 $14,516 $15,275 $16,583 $11,748 $18,937 $22,764 $23,614 $43,873 $57,299 $77,063
% Margin 44.0% 44.2% 44.4% 44.1% 43.9% 45.0% 45.0% 45.4% 41.7% 44.2% 44.9%
Sales & Marketing 8,843 10,335 9,978 10,263 9,865 11,670 11,700 11,851 35,042 39,418 45,086
Product Development 2,697 3,051 3,200 3,195 4,014 4,127 4,046 4,061 8,144 12,143 16,248
General and Administrative 2,920 2,723 2,925 3,120 3,479 3,158 3,414 3,436 10,824 11,688 13,487
D&A 1,502 1,428 1,429 1,473 1,411 1,448 1,495 1,541 5,992 5,831 5,894
SBC 739 820 860 865 749 758 759 781 2,919 3,284 3,047
restructuring & other 0 0 0 0 0 0 0 0 0 0
EBIT (GAAP) ($5,038) ($3,021) ($2,255) ($1,468) ($7,020) ($1,466) $2,110 $2,724 ($16,129) ($11,782) ($3,653)
% Margin (20.3%) (9.2%) (6.6%) (3.9%) (26.2%) (3.5%) 4.2% 5.2% (15%) (9%) (2%)
Operating Income (ex-SBC)/ (Loss) ($4,299) ($2,201) ($1,395) ($603) ($6,270) ($708) $2,868 $3,505 ($13,210) ($8,498) ($606)
% Margin (17%) (7%) (4%) (2%) (23%) (2%) 6% 7% (13%) (7%) (0%)
% Y/Y Growth -- -- -- -- -- -- -- -- -- -- --
Adj. EBITDA (ex SBC) ($2,797) ($773) $33 $870 ($4,860) $740 $4,363 $5,046 ($7,218) ($2,666) $5,288
% Margin (11%) (2%) 0% 2% (18%) 2% 9% 10% (7%) (2%) 3%
% Y/Y Growth -- -- (95) (33) -- -- 12,927 480 -- -- --
Net Interest (Income) and Other (Income) 121 164 172 188 134 211 253 260 515 452 858
Adjusted Pre-Tax Profit / (Loss) ($4,420) ($2,365) ($1,567) ($791) ($6,404) ($919) $2,615 $3,245 ($13,725) ($9,143) ($1,463)
% Effective Tax Rate 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Provision / (Benefit) for Income Taxes 0 0 0 0 0 0 0 0 0 0 0
Tax Adjustments for Non-GAAP Items 0 0 0 0 0 0 0 0 0 0 0
Operating Net Income / (Loss) ($4,420) ($2,365) ($1,567) ($791) ($6,404) ($919) $2,615 $3,245 ($13,725) ($9,143) ($1,463)
% Margin (18%) (7%) (5%) (2%) (24%) (2%) 5% 6% (13%) (7%) (1%)
% Y/Y Growth -- -- -- -- -- -- -- -- -- -- --
Stock-Based Compensation 739 820 860 865 749 758 759 781 2,919 3,284 3,047
(Gain) on Legal Settlement 0 0 0 0 0 0 0 0 0 0 0
1x charge on shipping 0 0 0 0 0 0 0 0 0 0 0
Tax Effect of Non-GAAP Entries 0 0 0 0 0 0 0 0 0 0 00
Reported GAAP Net Income / (Loss) ($5,159) ($3,185) ($2,427) ($1,656) ($7,153) ($1,677) $1,857 $2,464 ($16,644) ($12,427) ($4,510)
% Margin (21%) (10%) (7%) (4%) (27%) (4%) 4% 5% (16%) (10%) (3%)
% Y/Y Growth -- -- -- -- -- -- -- -- -- -- --
Weighted Avg. Diluted Shares Outstanding 53,600 54,725 55,448 57,984 58,754 59,155 59,545 60,031 53,600 57,984 60,031
Reported GAAP EPS ($0.10) ($0.06) ($0.04) ($0.03) ($0.12) ($0.03) $0.03 $0.04 ($0.31) ($0.21) ($0.08)
% Y/Y Growth -- -- -- -- -- -- -- -- -- -- --
Sales & Marketing 35.6% 31.5% 29.0% 27.3% 36.9% 27.7% 23.1% 22.8% 33.3% 30.4% 26.3%
Product Development 10.9% 9.3% 9.3% 8.5% 15.0% 9.8% 8.0% 7.8% 7.7% 9.4% 9.5%
General and Administrative 11.8% 8.3% 8.5% 8.3% 13.0% 7.5% 6.8% 6.6% 10.3% 9.0% 7.9%
SBC 3.0% 2.5% 2.5% 2.3% 2.8% 1.8% 1.5% 1.5% 2.8% 2.5% 1.8%
F2013 F2014
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Table 10: Tremor Video Revenue Buildup ($ in 000s)
Source: Jefferies, Company data
Q1 13A Q2 13E Q3 13E Q4 13E Q1 14E Q2 14E Q3 14E Q4 14E F2012A F2013E F2014E
Total Net Revenues $24,838 $32,809 $34,406 $37,592 $26,758 $42,113 $50,573 $52,068 $105,233 $129,645 $171,513
Y/Y Growth 44% 30% 14% 15% 8% 28% 47% 39% 23% 32%
Q/Q Growth
License Revenue 700$ 800$ 588$ 718$ 1,670$ 2,314$ 2,462$ 3,002$ 1,733$ 2,806$ 9,448$
Y/Y growth 135% 93% 50% 20% 143% 213% 400% 371% 62% 237%
% of Total Revenue 2.8% 2.4% 1.7% 1.9% 6.2% 5.5% 4.9% 5.8% 1.6% 2.2% 5.5%
Total Media Revenue 24,138$ 32,009$ 33,819$ 36,874$ 25,088$ 39,799$ 48,112$ 49,066$ 103,500$ 126,840$ 162,065$
Y/Y growth 42% 29% 14% 15% 4% 24% 42% 33% 15% 23% 28%
% of Total Revenue 97.2% 97.6% 98.3% 98.1% 93.8% 94.5% 95.1% 94.2% 98.4% 97.8% 94.5%
Metrics
Media Revenue
Media Impressions 1,819.0 2,289.8 2,417.3 2,598.7 1,860.8 2,887.4 3,410.8 3,406.9 8,572.0 9,124.8 11,566.0
Y/Y Growth 11.3% 7.4% 5.1% 3.7% 2.3% 26.1% 41.1% 31.1% (16.0%) 6.4% 26.8%
Total Media eCPM $13.27 $13.98 $13.99 $14.19 $13.48 $13.78 $14.11 $14.40 $11.93 $13.86 $13.94
Y/Y Growth 27.7% 20.2% 8.2% 11.2% 1.6% (1.4%) 0.8% 1.5% 34.8% 16.2% 0.6%
License Revenue
Platform Impressions 664.0 831.0 918.0 1,122.0 2,609.0 3,616.4 3,846.5 4,690.0 1,053.0 3,535.0 14,761.9
Y/Y Growth 255.1% 372.2% 233.8% 170.4% 292.9% 335.2% 319.0% 318.0% 235.7% 317.6%
Total Media eCPM $0.64 $0.65 $0.64 $0.64 $0.64 $0.64 $0.64 $0.64 $1.10 $0.64 $0.64
Y/Y Growth (54.9%) (40.7%) (31.9%) 0.0% (1.5%) 0.0% 0.0% (41.7%) (0.4%)
Media COGS
Media COGS $13,491.0 $17,893.2 $18,837.0 $20,649.2 $14,174.9 $22,088.2 $26,701.9 $27,133.7 60,450.5 70,870.4 90,098.8
Media Gross Margin 44.1% 44.1% 44.3% 44.0% 43.5% 44.5% 44.5% 44.7% 41.6% 44.1% 44.4%
License COGS 350.0$ 400.0$ 293.8$ 359.0$ 834.9$ 1,087.8$ 1,107.8$ 1,320.7$ 866.5 1,402.8 4,351.2
License Gross Margin 50% 50% 50% 50% 50% 53% 55% 56% 50.0% 50.0% 53.9%
Total COGS $13,841.0 18,293.2$ 19,130.8$ 21,008.2$ 15,009.8$ 23,176.0$ 27,809.7$ 28,454.4$ 61,317.0 72,273.2 94,450.0
Total Gross Margin 44.3% 44.2% 44.4% 44.1% 43.9% 45.0% 45.0% 45.4% 41.7% 44.3% 44.9%
F2013 F2014
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Internet
August 7, 2013
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Please see important disclosure information on pages 67 - 70 of this report.
Table 11: Tremor Video Balance Sheet ($ in 000s)
Source: Jefferies, Company data
F2013 F2014
Q1 13A Q2 13E Q3 13E Q4 13E Q1 14E Q2 14E Q3 14E Q4 14E F2013E F2014E
Cash & Cash Equivalents $32,121 $111,266 $103,292 $113,163 $101,033 $119,135 $113,848 $119,526 $113,163 $119,526
Short-Term Investments 0 0 0 0 0 0 0 0 0 0
Accounts Receivable 30,363 33,374 40,460 41,784 42,938 38,472 47,108 47,870 41,784 47,870
Current Assets $63,873 $146,029 $145,142 $156,337 $145,360 $158,997 $162,345 $168,785 $156,337 $145,3600 0
Property and Equipment, Net 1,850 2,479 2,966 3,451 3,734 4,174 4,650 5,066 3,451 5,066
Deferred Tax Assets 1,695 1,695 1,695 1,695 1,695 1,695 1,695 1,695 1,695 1,695
Other Non-Current Assets 261 287 0 1,637 305 331 0 1,876 1,637 1,876
Total Assets $122,196 $205,006 $204,319 $217,637 $205,610 $219,714 $223,207 $231,939 $217,637 $205,6100 00 0
Accounts Payable 17,797 $23,522 $28,303 $31,081 $22,206 $34,288 $41,143 $42,097 $31,081 $42,097
Accrued Expenses & Other Liabilities 0 0 0 0 0 0 0 0 0 0
Deferred Revenue & Customer Advances 2,756 3,640 0 966 2,969 4,673 0 1,338 966 1,338
Short-Term Debt 6,019 6,019 6,019 6,019 6,019 6,019 6,019 6,019 6,019 6,019
Total Current Liabilities $26,572 $33,181 $34,322 $38,065 $31,194 $44,980 $47,162 $49,453 $38,065 $31,1940 0
Long-Term Obligations (Notes Payable) 0 0 0 0 0 0 0 0 0 0
Lease Financing Obligations Excluding Current Portion 0 0 0 0 0 0 0 0 0 0
Other Non-Current Liabilities 1,098 1,451 0 1,993 1,191 1,839 0 2,700 1,993 2,700
Total Liabilities $27,670 $34,632 $34,322 $40,059 $32,385 $46,818 $47,162 $52,153 $40,059 $32,3850 0
Convertible preferred stock 162,561 162,561 162,561 162,561 162,561 162,561 162,561 162,561 162,561 162,561
Additional Paid-In Capital 18,694 97,727 99,778 109,014 111,815 113,162 114,455 115,732 109,014 115,732
Retained Earnings (Accumulated Deficit) (86,729) (89,914) (92,341) (93,997) (101,150) (102,827) (100,971) (98,507) (93,997) (98,507)
Treasury Stock 0 0 0 0 0 0 0 0 0 0
Accumulated Other Comprehensive Income 0 0 0 0 0 0 0 0 0 0
Shareholders' Equity ($68,035) $7,813 $7,436 $15,017 $10,664 $10,334 $13,484 $17,224 $15,017 $10,664$0 $0
Liabilities & Shareholders' Equity $122,196 $205,006 $204,319 $217,637 $205,610 $219,714 $223,207 $231,939 $217,637 $205,610
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August 7, 2013
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Table 12: Tremor Video Statement of Cash Flows ($ in 000s)
Source: Jefferies, Company data
Q1 13A Q2 13E Q3 13E Q4 13E Q1 14E Q2 14E Q3 14E Q4 14E F2013E F2014E
Net Income ($5,159) ($3,185) ($2,427) ($1,656) ($7,153) ($1,677) $1,857 $2,464 ($12,427) ($4,510)
Depreciation 0 28 29 73 111 148 195 241 129 694
Amortization of intangible assets 282 0 0 0 0 0 0 0 282 0
Tax Benefit from Stock Options 0 0 0 0 0 0 0 0 0 0
Stock-Based Compensation 739 820 860 865 749 758 759 781 3,284 3,047
Deferred Taxes 0 0 0 0 0 0 0 0 0 0
(Gain) / Loss on Sale of PP&E 0 0 0 0 0 0 0 0 0 0
(Gain) / Loss on Sale of Securities 0 0 0 0 0 0 0 0 0 0
Funds From Operations ($2,898) ($2,337) ($1,539) ($718) ($6,294) ($771) $2,810 $3,485 ($7,491) ($769)
(Inc.) Dec. in A/R and Other Current Assets 5,623 (3,037) (6,799) (2,961) 179 4,440 (8,305) (2,638) (7,175) (6,324)
Inc. (Dec.) in Accounts Payable (3,278) 5,725 4,781 2,778 (8,874) 12,082 6,855 954 10,006 11,016
Inc. (Dec.) in Accrued expenses and Other Non-Current Liabilities(486) 353 (1,451) 1,993 (803) 648 (1,839) 2,700 409 707
Inc. (Dec.) in Deferred Revenue 191 884 (3,640) 966 2,003 1,704 (4,673) 1,338 (1,599) 372
Inc. (Dec.) in Deferred Rent 33 0 0 0 0 0 0 0 33 0
Change in Net Working Capital $2,083 $3,925 ($7,110) $2,775 ($7,495) $18,873 ($7,961) $2,353 $1,674 $5,770
Cash Flow from Operations ($815) $1,588 ($8,648) $2,057 ($13,788) $18,102 ($5,151) $5,838 ($5,817) $5,001
Capital Expenditures & Capitalized Software Costs (137) (656) (516) (558) (393) (588) (671) (656) (1,868) (2,309)
Purchases of Securities and Investments 0 0 0 0 0 0 0 0 0 0
Proceeds from Sales of PP&E 0 0 0 0 0 0 0 0 0 0
Proceeds from Sales of Securities and Investments 0 0 0 0 0 0 0 0 0 0
Acquisitions, Net of Cash Acquired (Forecast on Cash Flow) 0 0 0 0 0 0 0 0 0 0
Deposits and other assets 0 0 0 0 0 0 0 0 0 0
Other 0 0 0 0 0 0 0 0 0 0
Net Cash Used in Investing Activities ($137) ($656) ($516) ($558) ($393) ($588) ($671) ($656) ($1,868) ($2,309)
Proceeds from / (Repurchase of) Common Stock, Convertible Preferred Stock46 78,213 1,191 8,372 2,051 589 $534 496 87,821 3,670
Excess Tax Benefit from Stock Options 0 0 0 0 0 0 0 0 0 0
Other (Principal payments on notes payable & capital lease obligations)0 0 0 0 0 0 0 0 0 0
Net Cash Provided by Financing Activities $46 $78,213 $1,191 $8,372 $2,051 $589 $534 $496 $87,821 $3,670
Inc. (Dec.) in Cash and Cash Equivalents ($1,000) $79,145 ($7,973) $9,871 ($12,131) $18,103 ($5,288) $5,678 $80,042 $6,362
Beginning Cash and Cash Equivalents 32,533 32,121 111,266 103,292 113,163 101,033 119,135 113,848 32,533 113,163
Ending Cash and Cash Equivalents $31,533 $111,266 $103,292 $113,163 $101,033 $119,135 $113,848 $119,526 $112,575 $119,526
F2013 F2014
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Internet
August 7, 2013
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Table 13: Tremor Video Discount Cash Flow ($ in MM, except for PT)
Source: Jefferies estimates, company data
2013
2012A Q1 13A Q2 13E Q3 13E Q4 13E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
Revenue $105 $25 $33 $34 $38 $172 $228 $299 $384 $482 $577 $662 $739 $808 $869
% Y/Y Growth 17% 44% 30% 14% 15% 32% 33% 31% 28% 25% 20% 15% 12% 9% 8%
EBITDA ($7) ($3) ($1) $0 $1 $5 $12 $28 $50 $72 $96 $114 $131 $148 $163
% Margin (7%) (11%) (2%) 0% 2% 3% 5% 9% 13% 15% 17% 17% 18% 18% 19%
% Y/Y Growth (34) (58) (69) (95) (33) (298) 121 138 79 45 32 19 15 12 11
Implied Taxes on Operations $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 ($4) ($51) ($59) ($66) ($73)
% Effective Tax Rate 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 4% 45% 45% 45% 45%
Capital Expenditures ($1) ($0) ($1) ($1) ($1) ($2) ($3) ($4) ($4) ($5) ($6) ($7) ($7) ($7) ($7)
% Y/Y Growth -- -- -- -- -- 24% 28% 24% 22% 19% 14% 9% 6% 4% 2%
Change in Net Working Capital $3 $2 $4 ($7) $3 $6 $43 $11 $12 $14 $14 $12 $11 $10 $9
Unlevered Free Cash Flow ($6) ($1) $2 ($8) $3 $9 $52 $35 $58 $81 $99 $68 $76 $84 $91
NPV at 3/31/13 Valuation Date and 13.0% WACC -- $2 ($7) $3 $8 $39 $23 $34 $43 $46 $28 $28 $27 $26
Perpetuity Growth Rate / Terminal Value at 13.0% WACC Implied Terminal Value / Terminal EBITDA Multiple
2.0% 2.5% 3.0% 3.5% 4.0% 5.3x 5.6x 5.9x 6.2x 6.6x
$783 $825 $870 $920 $976 $783 $825 $870 $920 $976
Median DCF Valuation at 3/31/13 Valuation Date WACC Equity Value per Share
NPV of Cash Flows and Terminal Value $523 11% $12 $13 $13 $13 $14
Plus: Net Cash 111 12% 12 12 12 13 13
Implied Equity Value $634 13% 11 11 12 12 12
Implied Fully Diluted Shares Outstanding (MM) 55 14% 11 11 11 11 11
Implied Equity Value per Share $12 15% 10 10 10 11 11
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Google Model (GOOG, Buy, $1000)
Table 14: Google Income Statement ($ 000s)
Source: Company, Jefferies
Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13A Q3 13E Q4 13E F2012A F2013E F2014E
Reported Gross Revenue (incl. TAC) $10,645,000 $12,214,000 $14,101,000 $14,419,000 $13,969,000 $14,105,000 $15,255,100 $18,358,602 $51,379,000 $61,687,702 $72,378,202
% Y/Y Growth 24% 35% 45% 36% 31% 15% 8% 27% 36% 20% 17%
% Q/Q Growth 1 15 15 2 (3) 1 8 20 -- -- --
Cost of Revenue 3,715,000 4,926,000 6,443,000 6,108,000 5,840,000 5,948,000 6,150,876 7,761,478 20,928,405 25,253,258 27,176,568
Traffic Acquisition Costs (TAC) 2,510,000 2,600,000 2,770,000 3,080,000 2,960,000 3,010,000 3,189,991 3,773,482 10,960,000 12,933,473 15,184,952
% of Advertising Gross Revenue 24.5% 24.7% 25.5% 25.5% 24.9% 25.0% 25.3% 26.3% 25.1% 25.4% 25.2%
Net Revenue (excl. TAC) $8,135,000 $9,614,000 $11,331,000 $11,339,000 $11,009,000 $11,095,000 $12,050,109 $14,570,120 $40,419,000 $48,724,229 $57,193,250
% Y/Y Growth 24% 39% 51% 39% 35% 15% 6% 28% 39% 21% 17%
% Q/Q Growth 0 18 18 0 (3) 1 9 21 -- -- --
Consensus - #DIV/0! - 12,360 (0) - 11,902 13,315 41,415 47,482 55,530
Additional Cost of Net Revenue 1,205,000 2,326,000 3,673,000 3,049,000 2,880,000 2,933,000 3,040,220 3,267,331 10,253,000 12,120,551 11,898,948
Total Gross Profit $6,930,000 $7,288,000 $7,658,000 $8,290,000 $8,129,000 $8,162,000 $9,009,889 $11,302,789 $30,166,000 $36,603,678 $45,294,302
% Margin 85.2% 75.8% 67.6% 73.1% 73.8% 73.6% 74.8% 77.6% 74.6% 75.1% 79.2%
Research and DDvelopment 1,142,000 1,294,000 1,631,000 1,571,000 1,476,000 1,566,000 1,571,000 2,021,000 5,638,000 6,634,000 7,384,000
Sales and Marketing 1,172,000 1,313,000 1,605,000 1,621,000 1,461,000 1,601,000 1,706,859 2,250,471 5,711,000 7,019,330 8,239,398
General and Administrative 671,000 820,000 924,000 1,017,000 1,018,000 1,084,000 1,084,000 1,384,000 3,432,000 4,570,000 4,770,000
Total Stock Compensation Expense 556,000 658,000 762,000 708,000 697,000 783,000 914,400 849,600 2,684,000 3,244,000 3,503,520
Adjusted Operating Income (excl. stock comp.)$3,945,000 $3,861,000 $3,498,000 $4,081,000 $4,174,000 $3,911,000 $4,648,029 $5,647,318 $15,385,000 $18,380,348 $24,900,904
% Margin 48% 40% 31% 36% 38% 35% 39% 39% 38% 38% 44%
% Y/Y Growth 22 16 (4) 1 6 1 33 38 8 19 35
% Q/Q Growth (2) (2) (9) 17 2 (6) 19 21 -- -- --
% Margin 42% 33% 24% 30% 32% 28% 31% 33% 31% 31% 37%
EBITDA $4,456,000 $4,531,000 $4,326,000 $5,034,000 $5,073,000 $4,941,000 $5,682,249 $6,708,650 $18,347,000 $22,404,899 $27,666,823
% Margin 55% 47% 38% 44% 46% 45% 47% 46% 45% 46% 48%
% Y/Y Growth 23 20 5 11 14 9 31 33 14 22 23
% Q/Q Growth (2) 2 (5) 16 1 (3) 15 18 -- -- --
Net Interest (Income) and Other (Income) (156,000) (254,000) (63,000) (152,000) (156,000) (921,000) (69,944) (73,919) (625,000) (1,220,863) (335,603)
Adjusted Pre-Tax Profit / (Loss) $4,101,000 $4,115,000 $3,561,000 $4,233,000 $4,330,000 $4,832,000 $4,717,973 $5,721,237 $16,010,000 $19,601,210 $25,236,507
% Effective Tax Rate 18.8% 18.7% 15.5% 15.7% 10.0% 33.2% 15.7% 16.5% 17% 20% 22%
Provision / (Benefit) for Income Taxes 655,000 672,000 623,000 639,000 287,000 816,000 688,871 877,924 2,589,000 2,669,795 5,459,725
Tax Adjustments for Non-GAAP Items 118,000 97,000 (71,000) 26,000 144,000 788,000 143,561 140,184 170,000 1,215,745 757,960
Minority Interest 0 0 0 0 0 0 0 0 0 0 0
Operating Net Income / (Loss) $3,328,000 $3,346,000 $3,009,000 $3,568,000 $3,899,000 $3,228,000 $3,885,541 $4,703,129 $13,251,000 $15,715,670 $19,018,823
% Margin 41% 35% 27% 31% 35% 29% 32% 32% 33% 32% 33%
% Y/Y Growth 26 17 (5) 14 17 (4) 29 32 12 19 21
% Q/Q Growth 6 1 (10) 19 9 (17) 20 21 -- -- --
Stock-Based Compensation 556,000 658,000 762,000 708,000 697,000 783,000 914,400 849,600 2,684,000 3,244,000 3,503,520
Tax Effect of Non-GAAP Entries (118,000) (97,000) 71,000 (26,000) (144,000) (788,000) (143,561) (140,184) (170,000) (1,215,745) (757,960)
Reported GAAP Net Income / (Loss) $2,890,000 $2,785,000 $2,176,000 $2,886,000 $3,346,000 $3,233,000 $3,114,702 $4,015,813 $10,737,000 $13,709,515 $16,273,263
% Margin 36% 29% 19% 25% 30% 29% 26% 28% 27% 28% 28%
% Y/Y Growth 61 11 (20) 7 16 16 43 39 10 28 19
% Q/Q Growth 7 (4) (22) 33 16 (3) (4) 29 -- -- --
Weighted Avg. Diluted Shares Outstanding 330,136 330,793 333,314 334,977 336,663 338,337 341,785 344,091 333,314 340,525 347,919
Operating EPS $10.08 $10.12 $9.03 $10.65 $11.58 $9.54 $11.37 $13.67 $39.76 $46.15 $54.66
% Y/Y Growth 25% 16% (7%) 12% 15% (6%) 26% 28% 11% 16% 18%
% Q/Q Growth 6 0 (11) 18 9 (18) 19 20 -- -- --
Reported GAAP EPS $8.75 $8.42 $6.53 $8.62 $9.94 $9.56 $9.11 $11.67 $32.21 $40.26 $46.77
% Y/Y Growth 59% 10% (22%) 5% 14% 13% 40% 35% 9% 25% 16%
% Q/Q Growth 6 (4) (22) 32 15 (4) (5) 28 -- -- --
F2012 F2013
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Internet
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Table 15: Google Revenue Build ($ 000s)
Source: Jefferies
Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13A Q3 13E Q4 13E F2012A F2013E F2014E
Gross Revenue (including TAC)
Google Revenue (Advertising & Other) $10,645,000 $12,214,000 $14,101,000 $14,419,000 $13,969,000 $14,105,000 $13,907,800 $15,744,840 $46,040,000 $55,709,640 $65,982,745
% Y/Y Growth 24% 35% 45% 36% 31% 15% -1% 9% 21% 21% 18%
% Q/Q Growth 1 15 15 2 (3) 1 (1) 13 -- -- --
Advertising $10,225,000 $10,525,000 $10,860,000 $12,076,000 $11,900,000 $12,061,000 $12,623,700 $14,321,440 $43,686,000 $50,906,140 $60,212,385
% Y/Y Growth 23% 21% 16% 19% 16% 15% 16% 19% 20% 17% 18%
% Q/Q Growth 1% 3% 3% 11% -1% 1% 5% 13% -- -- --
% of Total Gross Revenue 96% 86% 77% 84% 85% 86% 91% 91% 95% 91% 91%
Search Revenue 8,850,000 9,000,000 8,910,000 9,704,000 9,540,000 9,486,000 9,533,700 10,771,440 $36,464,000 $39,331,140
% Y/Y Growth 17% 15% 7% 8% 8% 5% 7% 11% 11% 8%
Display Revenue (Youtube + ASC + AdMob) 1,375,000 1,525,000 1,950,000 2,372,000 2,360,000 2,575,000 3,090,000 3,550,000 $7,222,000 $11,575,000
% Y/Y Growth 81% 77% 95% 98% 72% 69% 58% 50% 89% 60%
Google Web Sites 7,312,000 7,542,000 7,727,000 8,640,000 8,640,000 8,868,000 9,283,991 10,294,560 $31,221,000 $37,086,551 44,458,053
% Y/Y Growth 24% 21% 15% 18% 18% 18% 20% 19% 19% 19% 20%
% of Total Gross Revenue 69% 62% 55% 60% 62% 63% 67% 65% 68% 67% 67%
Google.com 6,912,000 7,042,000 6,977,000 7,740,000 7,740,000 7,753,000 7,933,991 8,744,560 $28,671,000 $32,171,551
% Y/Y Growth 20% 17% 8% 11% 12% 10% 14% 13% 14% 12%
YouTube 400,000 500,000 750,000 900,000 900,000 1,115,000 1,350,000 1,550,000 $2,550,000 $4,915,000
% Y/Y Growth 186% 133% 200% 200% 125% 123% 80% 72% 182% 93%
Mobile O&O 511,840 678,780 849,970 1,123,200 1,209,600 1,241,520 1,485,438 1,750,075 $3,163,790 $5,686,634
% of Google Websites Revenue 7% 9% 11% 13% 14% 14% 16% 17% 11% 18%
Google Network 2,913,000 2,983,000 3,133,000 3,436,000 3,260,000 3,193,000 3,339,710 4,026,880 $12,465,000 $13,819,590 $15,754,332
% Y/Y Growth 20% 20% 21% 19% 12% 7% 7% 17% 20% 11% 14%
% of Total Gross Revenue 27% 24% 22% 24% 23% 23% 24% 26% 27% 25% 24%
AdSense Search 1,938,000 1,958,000 1,933,000 1,964,000 1,800,000 1,733,000 1,599,710 2,026,880 $7,793,000 $7,159,590
% Y/Y Growth 7% 6% 5% -1% -7% -11% -17% 3% 4% -8%
AdSense Display (PC) 700,000 700,000 700,000 722,000 710,000 710,000 840,000 900,000 $2,822,000 $3,160,000
% Y/Y Growth 49% 49% 27% 11% 1% 1% 20% 25% 32% 12%
AdMob 275,000 325,000 500,000 750,000 750,000 750,000 900,000 1,100,000 $1,850,000 $3,500,000
% Y/Y Growth 83% 86% 150% 200% 173% 131% 80% 47% 139% 89%
Licensing & Other $420,000 $439,000 $666,000 $829,000 $1,050,000 $1,046,000 $1,284,100 $1,423,400 $2,354,000 $4,803,500 $5,770,360
% Y/Y Growth 56% 42% 73% 102% 150% 138% 93% 72% 71% 104% 20%
% Q/Q Growth 2% 5% 52% 24% 27% 0% 23% 11% -- -- --
% of Total Gross Revenue 4% 4% 5% 6% 8% 7% 9% 9% 5% 9% 9%
Licensing excluding DCLK $180,000 $199,000 $181,000 $194,000 $400,000 $396,000 $199,100 $213,400 $754,000 $1,208,500 $1,293,095
% Y/Y Growth 82% 66% 25% 14% 122% 99% 10% 10% 41% 60% 7%
% Q/Q Growth 6% 11% -9% 7% 106% -1% -50% 7% -- -- --
DoubleClick (Ad Server License Only) $160,000 $160,000 $160,000 $160,000 $160,000 $160,000 $160,000 $160,000 $640,000 $640,000 $665,600
% Y/Y Growth -6% -6% 0% 0% 0% 0% 0% 0% -3% 0% 4%
% Q/Q Growth 0% 0% 0% 0% 0% 0% 0% 0% -- -- --
Nexus One/Google Phones/ITA $80,000 $80,000 $225,000 $350,000 $350,000 $350,000 $750,000 $750,000 $735,000 $2,200,000 $2,830,165
% Y/Y Growth -- 300% 181% 338% 338% 338% 233% 114% 308% 199% 29%
% Q/Q Growth 0% 0% 181% 56% 0% 0% 114% 0% -- -- --
Google Play $0 $0 $100,000 $125,000 $140,000 $140,000 $175,000 $300,000 $225,000 $755,000 $981,500
% Y/Y Growth -- -- -- -- -- -- 75% 140% -- 236% 30%
% Q/Q Growth - - - 25% 12% 0% 25% 71% -- -- --
Add: Hedging Revenue (Forecast periods) ($15,000) ($15,000)
Motorola Revenue (Hardware & Other) $1,250,000 $2,575,000 $1,514,000 $1,018,000 $998,000 $1,347,300 $2,613,762 $5,339,000 $5,977,062 $6,395,456
% Y/Y Growth -- -- -- -- -- -- -- -- 12% 7%
% Q/Q Growth 35% 94% -- -- --
F2012 F2013
Technology
Internet
August 7, 2013
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Table 16: Google Balance Sheet ($ 000s)
Source: Company, Jefferies
Table 17: Google Cash Flow Statement ($ 000s)
Source: Company, Jefferies
Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13A Q3 13E Q4 13E F2012A F2013E F2014E
Cash & Cash Equivalents $23,108,000 $15,437,000 $16,260,000 $14,778,000 $15,375,000 $16,164,000 $19,209,882 $22,524,300 $14,778,000 $22,524,300 $35,180,894
Short-Term Marketable Securities 26,208,000 27,685,000 29,464,000 33,310,000 34,723,000 38,268,000 38,268,000 38,268,000 33,310,000 38,268,000 38,268,000
Accounts Receivable 5,713,000 7,341,000 7,809,000 8,585,000 7,612,000 8,091,000 8,750,728 10,530,978 8,585,000 10,530,978 12,356,000
Current Deferred Taxes 51,000 146,000 230,000 1,144,000 1,017,000 1,148,000 1,119,022 1,354,690 1,144,000 1,354,690 1,731,542
Other Current Assets 1,779,000 3,248,000 3,058,000 2,637,000 4,081,000 3,190,000 3,247,019 4,176,066 2,637,000 4,176,066 4,581,589
Current Assets $56,859,000 $53,857,000 $56,821,000 $60,454,000 $62,808,000 $66,861,000 $70,594,650 $76,854,034 $60,454,000 $76,854,034 $92,118,025
Property and Equipment 9,875,000 10,909,000 11,401,000 11,854,000 12,300,000 12,912,000 13,325,637 13,929,408 11,854,000 13,929,408 16,832,500
Long-Term Equity and Other Investments 880,000 1,040,000 1,063,000 1,469,000 1,470,000 1,564,000 1,564,000 1,564,000 1,469,000 1,564,000 1,564,000
Goodwill 7,325,000 10,120,000 10,485,000 10,537,000 10,595,000 11,396,000 11,396,000 11,396,000 10,537,000 11,396,000 11,396,000
Other Intangibles 1,541,000 7,862,000 7,754,000 7,473,000 7,324,000 6,558,000 6,178,000 5,798,001 7,473,000 5,798,001 5,195,464
Long-Term Deferred Taxes 0 0 0 0 0 0 0 0 0 0 0
Prepaid Revenue Share, Expenses and Other Assets 664,000 2,263,000 2,206,000 2,011,000 2,195,000 1,891,000 2,004,078 2,370,649 2,011,000 2,370,649 2,760,558
Total Assets $77,144,000 $86,051,000 $89,730,000 $93,798,000 $96,692,000 $101,182,000 $105,062,365 $111,912,092 $93,798,000 $111,912,092 $129,866,547
Accounts Payable $760,000 $2,419,000 $2,233,000 $2,012,000 $2,094,000 $1,758,000 $2,011,715 $2,416,238 2,012,000 2,416,238 $2,606,471
Accrued Compensation & Benefits 1,017,000 1,626,000 1,926,000 2,239,000 1,445,000 1,803,000 1,850,019 2,398,686 2,239,000 2,398,686 2,674,129
Accrued Expenses & Other Liabilities 1,248,000 2,750,000 3,313,000 3,258,000 3,007,000 3,300,000 3,351,198 4,367,674 3,258,000 4,367,674 4,691,429
Accrued Revenue Share 1,164,000 1,175,000 1,108,000 1,471,000 1,437,000 1,458,000 1,573,093 1,895,404 1,471,000 1,895,404 2,260,067
Deferred Revenue 594,000 767,000 905,000 895,000 882,000 799,000 682,597 825,347 895,000 825,347 879,601
Current Income Taxes 239,000 157,000 45,000 240,000 0 0 0 0 240,000 0 270,432
Short-Term Debt & Capital Lease Obligations 4,720,000 5,134,000 4,904,000 4,222,000 4,387,000 6,211,000 6,211,000 6,211,000 4,222,000 6,211,000 6,211,000
Total Current Liabilities $9,742,000 $14,028,000 $14,434,000 $14,337,000 $13,252,000 $15,329,000 $15,679,622 $18,114,348 $14,337,000 $18,114,348 $19,593,129
Long-Term Debt & Capital Lease Obligations 2,987,000 2,987,000 2,988,000 2,988,000 2,989,000 1,989,000 1,989,000 1,989,000 2,988,000 1,989,000 1,989,000
Long-Term Deferred Revenue 42,000 97,000 100,000 100,000 79,000 132,000 112,770 136,353 100,000 136,353 240,805
Deferred Income Taxes 2,171,000 3,407,000 3,495,000 3,918,000 4,162,000 4,176,000 4,176,000 4,176,000 3,918,000 4,176,000 4,176,000
Other Long-Term Liabilities 490,000 811,000 685,000 740,000 737,000 704,000 722,359 936,592 740,000 936,592 1,034,552
Total Liabilities $15,432,000 $21,330,000 $21,702,000 $22,083,000 $21,219,000 $22,330,000 $22,679,751 $25,352,293 $22,083,000 $25,352,293 $27,033,485
Additional Paid-In Capital 20,795,000 21,357,000 22,204,000 22,835,000 23,429,000 24,334,000 24,749,912 24,911,283 22,835,000 24,911,283 24,911,283
Retained Earnings (Accumulated Deficit) 40,495,000 43,280,000 45,456,000 48,342,000 51,688,000 54,916,000 58,030,702 62,046,516 48,342,000 62,046,516 78,319,779
Treasury Stock 0 0 0 0 0 0 0 0 0 0 0
Accumulated Other Comprehensive Income 422,000 84,000 368,000 538,000 356,000 (398,000) (398,000) (398,000) 538,000 (398,000) (398,000)
Shareholders' Equity $61,712,000 $64,721,000 $68,028,000 $71,715,000 $75,473,000 $78,852,000 $82,382,614 $86,559,799 $71,715,000 $86,559,799 $102,833,062
Liabilities & Shareholders' Equity $77,144,000 $86,051,000 $89,730,000 $93,798,000 $96,692,000 $101,182,000 $105,062,365 $111,912,092 $93,798,000 $111,912,092 $129,866,547
F2012 F2013
Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13A Q3 13E Q4 13E F2012A F2013E F2014E
Net Income $2,890,000 $2,785,000 $2,176,000 $2,886,000 $3,346,000 $3,228,000 $3,114,702 $4,015,813 $10,737,000 $13,704,515 $16,273,263
Depreciation 378,000 473,000 507,000 630,000 584,000 747,000 654,220 681,331 1,988,000 2,666,551 2,163,382
Amortization of Intangibles and Warrants 133,000 197,000 321,000 323,000 315,000 283,000 380,000 380,000 974,000 1,358,000 602,537
In-process research and development 0 0 0 0 0 0 0 0 0 0 0
Tax Benefit from Stock Options (28,000) (27,000) (58,000) (75,000) (94,000) (104,000) 0 0 (188,000) (198,000) 0
Stock-Based Compensation 556,000 658,000 762,000 716,000 708,000 847,000 914,400 849,600 2,692,000 3,319,000 3,503,520
Deferred Taxes 354,000 (163,000) (168,000) (289,000) 202,000 63,000 0 0 (266,000) 265,000 0
Other / Charges (68,000) (176,000) 32,000 (4,000) 37,000 (781,000) 0 0 (216,000) (744,000) 0
Funds From Operations $4,215,000 $3,747,000 $3,572,000 $4,187,000 $5,098,000 $4,283,000 $5,063,322 $5,926,745 $15,721,000 $20,371,066 $22,542,702
(Inc.) Dec. in Accounts Receivable 301,000 (222,000) (307,000) (559,000) 256,000 (194,000) (659,728) (1,780,251) (787,000) (2,377,978) (1,825,022)
(Inc.) Dec. in Income Taxes 143,000 1,026,000 167,000 156,000 (335,000) 179,000 28,978 (235,668) 1,492,000 (362,690) (376,852)
(Inc.) Dec. in Prepaid Revenue and Other (308,000) (710,000) (9,000) 495,000 (354,000) (152,000) (170,097) (1,295,618) (532,000) (1,971,715) (795,432)
Inc. (Dec.) in Accounts Payable 169,000 (249,000) (194,000) (225,000) 87,000 (159,000) 253,715 404,522 (499,000) 586,238 190,233
Inc. (Dec.) in Accrued Expenses and Other Liabilities(855,000) 612,000 727,000 278,000 (1,059,000) 696,000 116,576 1,779,375 762,000 1,532,951 967,591
Inc. (Dec.) in Accrued Revenue (11,000) 34,000 (80,000) 356,000 (27,000) 35,000 115,093 322,311 299,000 445,404 364,663
Inc. (Dec.) in Deferred Revenue 40,000 14,000 128,000 (19,000) (33,000) 17,000 (135,633) 166,333 163,000 14,700 158,705
Change in Net Working Capital ($521,000) $505,000 $432,000 $482,000 ($1,465,000) $422,000 ($451,095) ($638,995) $898,000 ($2,133,091) ($1,316,113)
Cash Flow from Operations $3,694,000 $4,252,000 $4,004,000 $4,669,000 $3,633,000 $4,705,000 $4,612,227 $5,287,749 $16,619,000 $18,237,976 $21,226,588
Capital Expenditures (607,000) (774,000) (872,000) (1,020,000) (1,203,000) (1,611,000) (1,067,857) (1,285,102) (3,273,000) (5,166,959) (5,066,474)
Acquisitions, Net of Cash Acquired (92,000) (9,854,000) (525,000) (97,000) (251,000) (1,012,000) 0 0 (10,568,000) (1,263,000) 0
Purchases of Securities and Investments (8,791,000) (6,854,000) (8,704,000) (9,164,000) (7,870,000) (15,084,000) 0 0 (33,513,000) (22,954,000) 0
Proceeds from Sales of Securities and Investments17,396,000 5,456,000 7,143,000 5,380,000 6,319,000 10,687,000 0 0 35,375,000 17,006,000 0
Other 245,000 (360,000) (349,000) (613,000) 564,000 3,217,000 0 0 (1,077,000) 3,781,000 0
Net Cash Used in Investing Activities $8,151,000 ($12,386,000) ($3,307,000) ($5,514,000) ($2,441,000) ($3,803,000) ($1,067,857) ($1,285,102) ($13,056,000) ($8,596,959) ($5,066,474)
Debt Issuance / (Repayment) 1,249,000 749,000 (1,000) (669,000) (401,000) (58,000) 0 0 1,328,000 (459,000) 0
Proceeds from / (Repurchase of) Common Stock (47,000) (137,000) (5,000) (98,000) (210,000) (151,000) (498,573) (688,176) (287,000) (1,547,749) (3,503,520)
Excess Tax Benefit from Stock Options 28,000 27,000 58,000 75,000 94,000 104,000 85 (53) 188,000 198,032 0
Net Cash Provided by Financing Activities$1,230,000 $639,000 $52,000 ($692,000) ($517,000) ($105,000) ($498,488) ($688,229) $1,229,000 ($1,808,717) ($3,503,520)
Effect of Exchange Rate Changes 50,000 (176,000) 74,000 55,000 (78,000) (8,000) 0 0 3,000 (86,000) 0
Inc. (Dec.) in Cash and Cash Equivalents$13,125,000 ($7,671,000) $823,000 ($1,482,000) $597,000 $789,000 $3,045,882 $3,314,418 $4,795,000 $7,746,300 $12,656,594
Beginning Cash and Cash Equivalents 9,983,000 23,108,000 15,437,000 16,260,000 14,778,000 15,375,000 16,164,000 19,209,882 9,983,000 14,778,000 22,524,300
Ending Cash and Cash Equivalents $23,108,000 $15,437,000 $16,260,000 $14,778,000 $15,375,000 $16,164,000 $19,209,882 $22,524,300 $14,778,000 $22,524,300 $35,180,894
F2012 F2013
Technology
Internet
August 7, 2013
page 57 of 70 , Jefferies Equity Research, [email protected] US Internet Team
Please see important disclosure information on pages 67 - 70 of this report.
Table 18: Google DCF ($MM)
Source: Company, Jefferies
2013
2012A Q1 13A Q2 13A Q3 13E Q4 13E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E
Revenue $40,419 $11,009 $11,095 $12,050 $14,570 $57,193 $64,377 $71,082 $76,163 $80,341 $84,147 $88,059 $91,867 $95,794
% Y/Y Growth 39% 35% 15% 6% 28% 17% 13% 10% 7% 5% 5% 5% 4% 4%
EBITDA $18,347 $5,073 $4,941 $5,682 $6,709 $27,667 $32,633 $37,146 $40,158 $42,378 $44,264 $46,313 $48,289 $50,327
% Margin 45% 46% 45% 47% 46% 48% 51% 52% 53% 53% 53% 53% 53% 53%
% Y/Y Growth 14 14 9 31 33 23 18 14 8 6 4 5 4 4
Implied Taxes on Operations ($3,162) ($1,684) ($1,640) ($892) ($1,107) ($5,986) ($6,853) ($7,801) ($8,433) ($8,899) ($9,295) ($9,726) ($10,141) ($10,569)
% Effective Tax Rate 17% 33% 33% 16% 17% 22% 21% 21% 21% 21% 21% 21% 21% 21%
Capital Expenditures ($3,273) ($1,203) ($1,611) ($1,068) ($1,285) ($5,066) ($5,690) ($6,224) ($6,661) ($7,013) ($7,349) ($7,685) ($8,019) ($8,365)
% Y/Y Growth (5%) 98% 108% 22% 26% (2%) 12% 9% 7% 5% 5% 5% 4% 4%
Change in Net Working Capital $898 ($1,465) $422 ($451) ($639) ($1,316) ($717) ($305) ($64) $208 $275 $350 $376 $414
Tax Benefit from NOL Carryforwards 0 0 0 0 22 0 0 0 0 0 0 0 0 0
Acquisitions Not Reflected on Balance Sheet / Shares-- -- -- 0 0 0 0 0 0 0 0 0 0 0
Unlevered Free Cash Flow $12,810 $721 $2,112 $3,271 $3,700 $15,299 $19,373 $22,816 $25,000 $26,674 $27,894 $29,252 $30,506 $31,807
NPV at 6/30/13 Valuation Date and 11.5% WACC -- -- $3,183 $3,502 $13,715 $15,576 $16,448 $16,164 $15,468 $14,508 $13,641 $12,759 $11,931
Perpetuity Growth Rate / Terminal Value at 11.5% WACC Implied Terminal Value / Terminal EBITDA Multiple
2.0% 2.5% 3.0% 3.5% 4.0% 7.6x 8.1x 8.6x 9.2x 9.8x
$383,047 $406,315 $432,322 $461,580 $494,741 $383,047 $406,315 $432,322 $461,580 $494,741
Median DCF Valuation at 6/30/13 Valuation Date WACC Equity Value per Share
NPV of Cash Flows and Terminal Value 282,341 9% $1,062 $1,090 $1,121 $1,156 $1,196
Plus: Net Cash 54,007 10% 1,004 1,030 1,058 1,090 1,126
Implied Equity Value $336,348 11% 951 974 1,000 1,029 1,062
Implied Fully Diluted Shares Outstanding (MM) 336 12% 902 923 947 974 1,004
Implied Equity Value per Share $1,000 13% 857 877 898 923 950
Technology
Internet
August 7, 2013
page 58 of 70 , Jefferies Equity Research, [email protected] US Internet Team
Please see important disclosure information on pages 67 - 70 of this report.
Facebook Model (FB, Buy, $37)
Table 19: Facebook Income Statement ($MM)
Source: Company, Jefferies
Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13A Q3 13E Q4 13E F2012A F2013E F2014E
Total Revenue $1,058 $1,184 $1,262 $1,585 $1,458 $1,813 $1,877 $1,986 $5,089 $7,133 $9,182
% Y/Y Growth 45% 32% 32% 40% 38% 53% 49% 25% 37% 40% 29%
% Q/Q Growth (6%) 12% 7% 26% (8%) 24% 4% 6% -- -- --
Cost of Revenue 273 295 317 387 404 454 503 536 1,272 1,897 2,479
Total Gross Profit $785 $889 $945 $1,198 $1,054 $1,359 $1,374 $1,450 $3,817 $5,236 $6,703
% Margin 74.2% 75.1% 74.9% 75.6% 72.3% 75.0% 73.2% 73.0% 75.0% 73.4% 73.0%
Marketing and Sales 136 135 149 162 175 235 238 238 582 887 1,111
Research and Development 93 112 142 157 165 186 197 214 504 762 1,047
General and Administrative 72 127 129 143 151 144 156 159 471 610 918
Total Stock-Based Compensation 103 1,258 148 213 190 232 185 234 1,722 841 923
Adjusted Operating Income (excl. stock comp.) $484 $515 $525 $736 $563 $794 $783 $838 $2,260 $2,977 $3,627
% Margin 46% 43% 42% 46% 39% 44% 42% 42% 44% 42% 40%
% Y/Y Growth 23% 9% 9% 18% 16% 54% 49% 14% 15% 32% 22%
% Q/Q Growth (22%) 6% 2% 40% (24%) 41% (1%) 7% -- -- --
Adjusted EBITDA $594 $654 $701 $960 $804 $1,024 $1,017 $1,098 $2,909 $3,943 $4,796
% Margin 56% 55% 56% 61% 55% 56% 54% 55% 57% 55% 52%
% Y/Y Growth 33% 19% 22% 31% 35% 57% 45% 14% 27% 36% 22%
% Q/Q Growth (19%) 10% 7% 37% (16%) 27% (1%) 8% -- -- --
Net Interest (Income) and Other (Income) (1) 22 5 18 20 17 (11) (14) 44 12 175
Adjusted Pre-Tax Profit / (Loss) $485 $493 $520 $718 $543 $777 $794 $852 $2,216 $2,966 $3,452
% Effective Tax Rate 36% 40% 40% 41% 43% 37% 37% 37% 20% 32% 34%
Provision / (Benefit) for Income Taxes 177 (608) 431 441 134 212 294 315 441 955 1,174
Tax Adjustments for Non-GAAP Items 0 806 (222) (149) 97 75 68 87 435 327 314
Net Income Attributable to Participating Securities 68 0 0 0 2 2 0 0 68 4 0
Minority Interest 0 0 0 0 0 0 0 0 0 0 0
Operating Net Income / (Loss) $240 $295 $311 $426 $312 $488 $432 $450 $1,272 $1,680 $1,965
% Margin 23% 25% 25% 27% 21% 27% 23% 23% 25% 24% 21%
% Y/Y Growth 50 35 38 52 30 65 39 6 44% 32% 17%
% Q/Q Growth (15) 23 5 37 (27) 56 (12) 4 -- -- --
Stock-Based Compensation 103 1,258 148 213 190 232 185 234 1,722 841 923
Tax Effect of Non-GAAP Entries 0 (806) 222 149 (97) (75) (68) (87) (435) (327) (314)
Reported GAAP Net Income / (Loss) $137 ($157) ($59) $64 $219 $331 $315 $302 ($15) $1,165 $1,355
% Margin 13% (13%) (5%) 4% 15% 18% 17% 15% (0%) 16% 15%
% Y/Y Growth (10%) (201%) (138%) (69%) 60% -- -- 372% (102%) -- 16%
% Q/Q Growth (33%) (215%) -- -- 242% 51% (5%) (4%) -- -- --
Weighted Avg. Diluted Shares Outstanding 1,526 2,451 2,579 2,506 2,499 2,502 2,401 2,434 2,166 2,391 2,255
Operating EPS $0.16 $0.12 $0.12 $0.17 $0.12 $0.19 $0.18 $0.18 $0.59 $0.70 $0.87
% Y/Y Growth 48% (17%) (19%) (9%) (21%) 54% 49% 9% 0% 20% 24%
% Q/Q Growth (16) (23) 0 41 (27) 48 (3) 3 -- -- --
Reported GAAP EPS $0.10 ($0.08) ($0.02) $0.03 $0.10 $0.13 $0.13 $0.12 ($0.01) $0.49 $0.60
% Y/Y Growth (10%) (173%) (119%) (78%) 0% -- -- 309% (101%) -- 23%
% Q/Q Growth (33) (183) -- -- 213 38 0 (5) -- -- --
F2012 F2013
Technology
Internet
August 7, 2013
page 59 of 70 , Jefferies Equity Research, [email protected] US Internet Team
Please see important disclosure information on pages 67 - 70 of this report.
Table 20: Facebook Revenue Build ($MM)
Source: Company, Jefferies
Table 21: Facebook Balance Sheet ($MM)
Source: Company, Jefferies
Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13A Q3 13E Q4 13E F2012A F2013E F2014E
Total Revenue $1,058 $1,184 $1,262 $1,585 $1,458 $1,813 $1,877 $1,986 $5,089 $7,133 $9,182
% Y/Y Growth 45% 32% 32% 40% 38% 53% 49% 25% 37% 40% 29%
% Q/Q Growth -6% 12% 7% 26% -8% 24% 4% 6% -- -- --
(0.414) (0.031) 0.059 0.334
Advertising Revenue $872 $992 $1,086 $1,329 $1,245 $1,599 $1,672 $1,781 $4,279 $6,297 $8,312
% Y/Y Growth 37% 28% 36% 41% 43% 61% 54% 34% 36% 47% 32%
% Q/Q Growth -8% 14% 9% 22% -6% 28% 5% 6% -- -- --
% of Total Revenue 82% 84% 86% 84% 85% 88% 89% 90% 84% 88% 91%
$0 $152
Mobile Advertising Revenue $0 $0 $152 $306 $374 $656 $786 $890 $458 $2,706 $4,073
% Y/Y Growth -- -- -- -- -- -- 417% 191% -- 491% 51%
% Q/Q Growth -- -- -- 101% 22% 76% 20% 13% -- -- --
% of Advertising Revenue 0% 0% 14% 23% 30% 41% 47% 50% 11% 43% 49%
Desktop Advertising Revenue $872 $992 $934 $1,023 $872 $943 $886 $890 $3,821 $3,592 $4,239
% Y/Y Growth 37% 28% 17% 9% 0% -5% -5% -13% 21% -6% 18%
% Q/Q Growth -8% 14% -6% 10% -15% 8% -6% 0% -- -- --
% of Advertising Revenue 100% 100% 86% 77% 70% 59% 53% 50% 89% 57% 51%
Payments and Other Revenue $186 $192 $176 $256 $213 $214 $204 $205 $810 $836 $869
% Y/Y Growth 98% 61% 13% 36% 15% 11% 16% -20% 45% 3% 4%
% Q/Q Growth -1% 3% -8% 45% -17% 0% -5% 0% -- -- --
% of Total Revenue 18% 16% 14% 16% 15% 12% 11% 10% 16% 12% 9%
F2012 F2013
($ in M illions)
Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13A Q3 13E Q4 13E F2012A F2013E F2014E
Cash & Cash Equivalents $1,282 $2,098 $2,478 $2,384 $2,325 $3,001 $2,027 $871 2,384 871 $2,349
Marketable Securities 2,628 8,090 7,974 7,242 7,147 7,251 7,251 7,251 7,242 7,251 7,251
Accounts Receivable 482 578 635 719 659 775 802 849 719 849 1,200
Deferred Income Taxes 0 567 567 451 426 7 32 34 451 34 40
Prepaid Expenses and Other Current Assets 627 634 631 471 485 387 402 416 471 416 748
Current Assets $5,019 $11,967 $12,285 $11,267 $11,042 $11,421 $10,514 $9,421 $11,267 $9,421 $11,588
Property and Equipment 1,855 2,105 2,289 2,391 2,533 2,577 2,868 3,164 2,391 3,164 3,647
Long-Term Investments 0 0 0 0 0 0 0 0 0 0 0
Goodwill 0 0 0 0 0 0 0 0 0 0 0
Intangible Assets 189 809 1,423 1,388 1,501 1,631 1,631 1,631 1,388 1,631 1,631
Long-Term Deferred Income Taxes 0 0 0 0 0 0 0 0 0 0 0
Other Long-Term Assets 121 47 41 57 87 95 95 98 57 98 138
Total Assets $7,184 $14,928 $16,038 $15,103 $15,163 $15,724 $15,108 $14,314 $15,103 $14,314 $17,004
Accounts Payable $129 $43 $59 $65 $75 $55 $88 $94 65 94 $125
Platform Partners Payable 178 153 155 169 190 172 180 180 169 180 184
Accrued Expenses & Other Current Liabilities 337 441 409 423 430 505 497 514 423 514 768
Deferred Revenue & Deposits 93 85 85 30 30 32 38 40 30 40 53
Current Portion of Capital Lease Obligations 302 312 372 365 338 316 316 316 365 316 316
Current Portion of Long-Term Debt 0 0 0 0 0 0 0 0 0 0 0
Total Current Liabilities $1,039 $1,034 $1,080 $1,052 $1,063 $1,080 $1,118 $1,144 $1,052 $1,144 $1,445
Long-Term Debt 0 0 0 1,500 1,500 1,500 2,700 3,900 1,500 3,900 3,900
Capital Lease Obligations 404 394 530 491 420 351 351 351 491 351 298
Other Long-Term Liabilities 144 191 254 305 356 444 426 440 305 440 601
Total Liabilities $1,587 $1,619 $1,864 $3,348 $3,339 $3,375 $4,595 $5,835 $3,348 $5,835 $6,245
Convertible Preferred Stock 0 0 0 0 0 0 0 0 0 0 0
Common Stock 0 0 0 0 0 0 0 0 0 0 0
Retained Earnings (Accumulated Deficit) 1,171 1,654 1,595 1,659 1,878 2,211 2,526 2,828 1,659 2,828 4,184
Additional Paid-In Capital 4,433 11,684 12,585 10,094 9,961 10,167 8,016 5,679 10,094 5,679 6,605
Accumulated Other Comprehensive Loss (7) (29) (6) 2 (15) (29) (29) (29) 2 (29) (29)
Shareholders' Equity $5,597 $13,309 $14,174 $11,755 $11,824 $12,349 $10,513 $8,479 $11,755 $8,479 $10,760
Liabilities & Shareholders' Equity $7,184 $14,928 $16,038 $15,103 $15,163 $15,724 $15,108 $14,314 $15,103 $14,314 $17,004
F2012 F2013
Technology
Internet
August 7, 2013
page 60 of 70 , Jefferies Equity Research, [email protected] US Internet Team
Please see important disclosure information on pages 67 - 70 of this report.
Table 22: Facebook Cash Flow Statement ($MM)
Source: Company, Jefferies
Table 23: Facebook DCF ($MM)
Source: Company, Jefferies
Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13A Q3 13E Q4 13E F2012A F2013E F2014E
Net Income $205 ($157) ($59) $64 $219 $333 $315 $302 $53 $1,169 $1,355
Depreciation 110 139 176 224 241 230 235 260 649 966 1,169
Amortization of Intangible Assets 2 3 0 7 9 11 0 0 11 20 0
Stock-Based Compensation 103 1,106 179 184 170 224 185 234 1,722 841 923
Tax Benefit from Stock Options 54 327 473 179 59 89 0 0 1,033 148 0
Excess Tax Benefit from Stock Options (54) (327) (473) (179) (62) (93) 0 0 (1,033) (155) 0
Minority Interest in Consolidated Subsidiaries 0 0 0 0 0 0 0 0 0 0 0
Earnings in Unconsolidated Equity Interests 0 0 0 0 0 0 0 0 0 0 0
Deferred Taxes (24) (350) (60) 248 (7) 26 0 0 (186) 19 0
(Gain) / Loss on Sale of PP&E 0 0 4 0 0 0 0 0 4 0 0
(Gain) / Loss on Sale of Securities 0 0 0 0 0 0 0 0 0 0 0
Provision for Doubtful Accounts 0 0 0 0 0 0 0 0 0 0 0
Provision for Transaction Losses 0 0 0 0 0 0 0 0 0 0 0
Other / Charges 0 0 0 0 0 57 0 0 0 57 0
Funds From Operations $396 $741 $240 $727 $629 $877 $735 $796 $2,253 $3,065 $3,448
(Inc.) Dec. in Accounts Receivable 65 (106) (50) (80) 54 (116) (27) (47) (171) (136) (351)
(Inc.) Dec. in Prepaid Expenses and Other Assets (33) 26 31 (38) (1) 10 (40) (16) (14) (47) (338)
(Inc.) Dec. in Other Assets (6) (604) 9 2 (36) 411 0 (3) (599) 372 (41)
Inc. (Dec.) in Accounts Payable (3) (5) 28 97 1 1 33 6 117 41 31
Inc. (Dec.) in Platform Partners Payables 7 (22) (1) 14 21 (18) 8 1 (2) 11 4
Inc. (Dec.) in Accrued Expenses and Other Liabilities 2 224 (27) (2) (33) 42 (8) 17 197 18 254
Inc. (Dec.) in Deferred Revenue & Deposits 3 (8) 0 (55) 0 2 6 2 (60) 10 13
Inc. (Dec.) in Other Liabilities 11 (4) 20 16 84 113 (18) 15 43 193 161
Change in Net Working Capital $46 ($499) $10 ($46) $90 $445 ($47) ($26) ($489) $462 ($267)
Cash Flow from Operations $442 $242 $250 $681 $719 $1,322 $688 $771 $1,764 $3,528 $3,180
Purchases of Property & Equipment (453) (413) (171) (198) (327) (268) (525) (556) (1,235) (1,676) (1,653)
Purchases of Marketable Securities (877) (6,083) (1,633) (1,716) (1,508) (1,953) 0 0 (10,309) (3,461) 0
Maturities and Sales of Marketable Securities 636 598 1,750 2,449 1,602 1,847 0 0 5,433 3,449 0
Acquisitions, Net of Cash Acquired (25) (550) (336) 0 (99) (122) 0 0 (911) (221) 0
Proceeds from Sales of PP&E 0 0 0 0 0 0 0 0 0 0 0
Change in Restricted Cash and Other (1) (2) 1 0 6 (2) 0 0 (2) 4 0
Net Cash Used in Investing Activities ($720) ($6,450) ($389) $535 ($326) ($498) ($525) ($556) ($7,024) ($1,905) ($1,653)
Debt Issuance / (Repayment) 0 0 0 1,496 0 0 1,200 1,200 1,496 2,400 0
Proceeds from / (Repurchase of) Stock 0 6,761 (1) 0 0 (153) 0 (234) 6,760 (387) 1
Proceeds from Exercise of Stock Options 5 4 0 8 8 2 0 0 17 10 0
Proceeds from Sale and Lease-back Transactions 62 20 123 0 0 0 0 0 205 0 0
Principal Payments on Capital Lease Obligations (71) (72) (88) (135) (109) (91) 0 0 (366) (200) (53)
Excess Tax Benefit from Stock Options 54 327 473 (2,683) (343) 93 (2,336) (2,336) (1,829) (4,923) 2
Net Cash Provided by Financing Activities $50 $7,040 $507 ($1,314) ($444) ($149) ($1,136) ($1,371) $6,283 ($3,100) ($50)
Effect of Exchange Rate Changes (1) (16) 12 4 (8) 1 0 0 (1) (7) 0
Inc. (Dec.) in Cash and Cash Equivalents ($230) $816 $380 ($94) ($59) $676 ($974) ($1,156) $1,022 ($1,485) $1,477
Beginning Cash and Cash Equivalents 1,512 1,282 2,098 2,478 2,384 2,325 3,001 2,027 1,512 2,384 871
Ending Cash and Cash Equivalents $1,283 $2,098 $2,478 $2,384 $2,325 $3,001 $2,027 $871 $2,534 $899 $2,349
F2012 F2013
2013
2012A Q1 13A Q2 13A Q3 13E Q4 13E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E
Revenue $5,089 $1,458 $1,813 $1,877 $1,986 $9,182 $11,295 $13,712 $16,296 $19,075 $21,991 $24,740 $27,132 $29,240
% Y/Y Growth 37% 38% 53% 49% 25% 29% 23% 21% 19% 17% 15% 13% 10% 8%
EBITDA $2,909 $804 $1,024 $1,017 $1,098 $4,796 $6,076 $7,360 $8,991 $10,668 $12,488 $14,251 $15,805 $17,292
% Margin 57% 55% 56% 54% 55% 52% 54% 54% 55% 56% 57% 58% 58% 59%
% Y/Y Growth 27 35 57 45 14 22 27 21 22 19 17 14 11 9
Implied Taxes on Operations ($579) ($342) ($378) ($376) ($406) ($1,631) ($2,066) ($2,503) ($2,967) ($3,200) ($3,497) ($3,705) ($3,793) ($4,150)
% Effective Tax Rate 20% 43% 37% 37% 37% 34% 34% 34% 33% 30% 28% 26% 24% 24%
Capital Expenditures ($1,235) ($327) ($268) ($525) ($556) ($1,653) ($1,807) ($2,057) ($2,444) ($2,861) ($3,299) ($3,711) ($4,070) ($4,386)
% Y/Y Growth 104% (28%) (35%) 207% 181% (1%) 9% 14% 19% 17% 15% 13% 10% 8%
Change in Net Working Capital ($489) $90 $445 ($47) ($26) ($267) ($35) ($223) ($128) ($216) ($193) ($206) ($161) ($162)
Tax Benefit from NOL Carryforwards 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Acquisitions Not Reflected on Balance Sheet / Shares-- -- -- 0 0 0 0 0 0 0 0 0 0 0
Unlevered Free Cash Flow $606 $225 $823 $69 $110 $1,245 $2,168 $2,578 $3,452 $4,390 $5,499 $6,629 $7,781 $8,594
NPV at 6/30/13 Valuation Date and 10.5% WACC -- -- $67 $105 $1,126 $1,774 $1,909 $2,313 $2,661 $3,016 $3,289 $3,493 $3,491
Perpetuity Growth Rate / Terminal Value at 10.5% WACC Implied Terminal Value / Terminal EBITDA Multiple
2.0% 2.5% 3.0% 3.5% 4.0% 9.0x 9.6x 10.3x 11.1x 12.0x
$155,424 $165,928 $177,830 $191,428 $207,113 $155,424 $165,928 $177,830 $191,428 $207,113
Median DCF Valuation at 6/30/13 Valuation Date WACC Equity Value per Share
NPV of Cash Flows and Terminal Value $88,607 9% $39 $40 $42 $45 $47
Plus: Net Cash 8,752 10% 36 38 39 41 44
Implied Equity Value $97,359 11% 33 35 37 38 41
Implied Fully Diluted Shares Outstanding (MM) 2,662 12% 31 33 34 36 38
Implied Equity Value per Share $37 13% 29 30 32 33 35
Technology
Internet
August 7, 2013
page 61 of 70 , Jefferies Equity Research, [email protected] US Internet Team
Please see important disclosure information on pages 67 - 70 of this report.
AOL Model (AOL, Buy, $50)
Table 24: Consolidated Statement of Operations
Source: Jefferies estimates, company data
F2013
Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13E Q3 13E Q4 13E F2012A F2013E F2014Es
Reported Gross Revenue (incl. TAC) $529,400 $531,100 $531,700 $599,500 $538,300 $545,033 $547,626 $606,287 $2,191,700 $2,237,247 $2,295,776
% Y/Y Growth (4%) (2%) 0% 4% 2% 3% 3% 1% (0%) 2% 3%
% Q/Q Growth (8) 0 0 13 (10) 1 0 11 -- -- --
Cost of Revenue 384,600 396,200 382,300 424,100 393,100 389,746 392,932 436,926 1,587,200 1,612,705 1,648,921
Traffic Acquisition Costs (TAC) 80,800 82,400 89,600 104,100 97,600 97,746 100,932 116,926 356,900 413,205 413,4360
Net Revenue (excl. TAC) $448,600 $448,700 $442,100 $495,400 $440,700 $447,287 $446,694 $489,361 $1,834,800 $1,824,042 $1,882,340
% Y/Y Growth (7%) (4%) (3%) 0% (2%) (0%) 1% (1%) (3%) (1%) 3%
% Q/Q Growth (9) 0 (1) 12 (11) 1 (0) 10 -- -- --
% Margin 32% 30% 34% 35% 33% 35% 35% 35% 33% 34% 34%
General & Administrative (ex SBC) 87,600 99,200 86,100 100,800 73,100 83,293 78,905 83,453 373,700 318,751 300,288
Amortization of Intangible Assets 9,800 9,800 9,000 9,600 9,500 9,250 9,250 9,250 38,200 37,250 35,000
Patent License (Income) & Other 0 0 0 0 0 0 0 0 0 0 0
Total Stock Compensation Expense 8,600 8,600 11,100 11,200 9,700 10,476 11,314 12,219 39,500 43,709 45,895
Restructuring / Gain on Sales 7,400 (1,041,800) 100 (14,400) 3,000 (1,048,700) 3,000
% Margin 17% 246% 19% 22% 21% 21% 22% 22% 75% 21% 23%
% Y/Y Growth 36 1,644 23 2 20 (91) 14 (5) 256 (72) 13
Company-defined Adj. OIBDA $93,800 $94,700 $100,300 $123,200 $105,267 $105,894 $108,703 $117,968 $1,378,100 $437,832 $486,115
Net Interest and Other (Income) Expense (8,400) 1,100 (2,000) 1,100 2,800 3,482 3,427 3,392 (8,200) 13,101 1,858
Adjusted Pre-Tax Profit / (Loss) $55,800 $24,800 $56,300 $63,900 $59,800 $59,261 $63,112 $73,267 $200,800 $255,440 $309,709
% Effective Tax Rate 48% 403% 42% 25% 27% 45% 45% 45% 83% 42.9% 42.5%
Provision / (Benefit) for Income Taxes 18,800 87,500 24,400 31,700 21,500 26,667 28,400 32,970 162,400 109,538 131,482
Tax Adjustments for Non-GAAP Items 7,900 12,400 (700) (15,800) (5,100) (4,714) (5,091) (5,499) 3,800 (20,404) (19,484)
Minority Interest (100) (200) (100) (300) (300) (300) (300) (300) (700) (1,200) (1,200)
Adjusted Operating Net Income $28,964 $12,792 $29,224 $33,072 $30,940 $30,660 $32,662 $37,943 $104,052 $132,205 $198,911
% Margin 6% 3% 7% 7% 7% 7% 7% 8% 6% 7% 11%
% Y/Y Growth 95 500 129 (6) 7 140 12 15 60 27 50
Asset/Goodwill Impairments 500 1,900 400 3,000 0 0 0 0 5,800 0 0
Stock-Based Compensation 8,600 8,600 11,100 11,200 9,700 10,476 11,314 12,219 39,500 43,709 45,895
Patent License (Income) 0 (74,000) 0 0 0 0 0 0 (74,000) 0 0
Restructuring Costs 7,400 (100) 0 2,400 4,800 0 0 0 9,700 4,800 0
Other 0 (945,800) 3,000 (4,300) (1,800) 0 0 0 (947,100) (1,800) 0
Tax Effect of Non-GAAP Entries (7,900) (12,400) 700 15,800 5,100 4,714 5,091 5,499 (3,800) 20,404 19,484
Reported GAAP Net Income / (Loss) $21,100 $970,700 $20,800 $35,700 $25,900 $22,418 $23,698 $28,378 $1,048,300 $100,393 $133,533
% Margin 5% 216% 5% 7% 6% 5% 5% 6% 57% 6% 7%
% Y/Y Growth 349 -- 57 23 (98) 14 (21) 7,902 (90) 33
Weighted Avg. Diluted Shares Outstanding 95,000 95,500 96,000 88,100 81,100 81,100 81,100 81,100 93,500 81,000 83,214
Adjusted Operating EPS $0.30 $0.13 $0.30 $0.38 $0.38 $0.38 $0.40 $0.47 $1.11 $1.63 $2.39
% Y/Y Growth 121% 572% 154% 5% 25% 182% 32% 25% 82% 47% 46%
Reported GAAP EPS $0.22 $10.16 $0.22 $0.41 $0.32 $0.28 $0.29 $0.35 $11.21 $1.24 $1.60
% Y/Y Growth 410% -- -- 75% 44% (97%) 35% (14%) 8,972% (89%) 29%
F2012
Technology
Internet
August 7, 2013
page 62 of 70 , Jefferies Equity Research, [email protected] US Internet Team
Please see important disclosure information on pages 67 - 70 of this report.
Table 25: Consolidated Statement of Operations Metrics
Source: Jefferies estimates, company data
Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 F2012 F2013 F2014
Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13E Q3 13E Q4 13E F2012A F2013E F2014E
0 0 0 0 0 0 0
Total Reported Revenue $529,400 $531,100 $531,700 $599,500 $538,300 $545,033 $547,626 $606,287 $2,191,700 $2,237,247 $2,295,776
% Y/Y Growth -4% -2% 0% 4% 2% 3% 3% 1% 0% 2% 3%
Consensus 526 519 522 574 548 548 622 534 2,166 2,258 -
Advertising Revenue $330,100 $337,800 $340,000 $410,600 $359,200 $365,049 $367,172 $443,609 $1,418,500 $1,535,030 $1,639,382
% Y/Y Growth 5% 6% 7% 13% 9% 8% 8% 8% 8% 8% 7%
% Q/Q Growth (9) 2 1 21 (13) 2 1 21 -- -- --
% of Total 62% 64% 64% 68% 67% 67% 67% 73% 65% 69% 71%
AOL Owned & Operated Total $219,900 $226,400 $227,200 $273,400 $238,500 $242,509 $243,092 $292,689 $946,900 $1,016,790 $1,080,140
% Y/Y Growth (2%) 0% 2% 6% 8% 7% 7% 7% 2% 7% 6%
% of Ad Revenue 67% 67% 67% 67% 66% 66% 66% 66% 67% 66% 66%
% of Total 42% 43% 43% 46% 44% 44% 44% 48% 43% 45% 47%
Global Display $130,300 $139,900 $135,400 $169,800 $140,400 $153,414 $148,538 $185,981 $575,400 $628,333 $680,030
% Y/Y Growth 1% 2% -1% 0% 8% 10% 10% 10% 0% 9% 8%
% of Ad Revenue 39% 41% 40% 41% 39% 42% 40% 42% 41% 41% 41%
Domestic Display (Organic + HuffPo) $118,900 $126,800 $122,500 $152,700 $126,034 $137,956 $133,316 $165,974 $520,900 $563,280 $606,816
% Y/Y Growth -1% 0% -3% -3% 6% 9% 9% 9% -2% 8% 8%
Domestic Display (Organic) $106,900 $114,150 $109,806 $139,475 $113,314 $123,282 $118,590 $150,633 $470,331 $505,819
% Y/Y Growth -5% -1% -4% -4% 6% 8% 8% 8% -4% 8%
% Y/Y Organic Growth -4% -1% -4% -4% 6% 8% 8% 8%
% Q/Q Growth (27) 7 (4) 27 (19) 9 (4) 27 -- -- --
% of Ad Revenue 32% 34% 32% 34% 32% 34% 32% 34% 33% 33% 0%
HuffPo $12,000 $12,650 $12,694 $13,225 $13,920 $14,674 $14,725 $15,341 50,569% 58,660%
% Y/Y Growth 60% 15% 15% 15% 16% 16% 16% 16% 23% 16%
% Q/Q Growth 4 5 0 4 5 5 0 4 -- -- --
% of Ad Revenue 4% 4% 4% 3% 4% 4% 4% 3% 4% 4% 0%
Intl Display $11,400 $13,100 $12,900 $17,100 $13,452 $15,458 $15,222 $20,007 $54,500 $64,139 $73,214
% Y/Y Growth 34% 21% 18% 31% 18% 18% 18% 17% 26% 18% 14%
% Y/Y Organic Growth 34% 21% 18% 31% 18% 18% 18% 17%
% Q/Q Growth (13) 15 (2) 33 (21) 15 (2) 31 -- -- --
% of Ad Revenue 3% 4% 4% 4% 4% 4% 4% 5% 4% 4% 4%
AOL Sponsored Search $89,600 $86,500 $91,800 $103,600 $98,100 $89,095 $94,554 $106,708 $371,500 $388,457 $400,111
% Y/Y Growth -6% -1% 8% 17% 9% 3% 3% 3% 4% 5% 3%
% Y/Y Organic Growth -6% -1% 8% 17% 9% 3% 3% 3%
% Q/Q Growth 1 (3) 6 13 (5) (9) 6 13 -- -- --
% of Ad Revenue 27% 26% 27% 25% 27% 24% 26% 24% 26% 25% 24%
Third-Party Network Gross Revenue $110,200 $111,400 $112,800 $137,200 $120,700 $122,540 $124,080 $150,920 471,600 518,240 559,242
% Y/Y Growth 23% 19% 18% 31% 10% 10% 10% 10% 23% 10% 8%
% Y/Y Organic Growth 23% 19% 18% 31% 10% 10% 10% 10%
TAC $80,800 $82,400 $89,600 $104,100 $97,600 $97,746 $100,932 $116,926 $356,900 $413,205 $413,436
TAC Rate (% of Network Revs) 54% 54% 57% 57% 61% 59% 59% 59% 55% 59% 55%
TAC as a % of Total Revenue (%) 15% 16% 17% 17% 18% 18% 18% 19% 27% 27% 19%
Revenues
Brand Group $166,500 $173,500 $177,000 $213,200 $189,600 $197,790 $201,780 $228,124 $730,200 $817,294 $907,196
% Y/Y Growth -4% -2% 1% 4% 14% 14.0% 14.0% 7.0% -0.3% 11.9% 11.0%
% Q/Q Growth -19% 4% 2% 20% -11% 4% 2% 13%
Membership Group $235,000 $227,800 $221,000 $230,800 $211,500 $206,159 $200,005 $208,874 $914,600 $826,538 $746,955
% Y/Y Growth -15% -12% -10% -9% -10% -9.5% -9.5% -9.5% -11.7% -9.6% -9.6%
% Q/Q Growth -7% -3% -3% 4% -8% -3% -3% 4% -10%
AOL Networks (Gross Basis) $148,800 $153,400 $158,400 $183,500 $160,900 $165,672 $171,072 $198,180 $644,100 $695,824 $751,702
% Y/Y Growth 34% 28% 26% 37% 8% 8.0% 8.0% 8.0% 31.1% 8.0% 8.0%
% Q/Q Growth 11% 3% 3% 16% -12% 3% 3% 16% 8%
Corporate & Other $600 $300 $300 $300 $300 $300 $300 $300 $1,500 $1,200 $1,242
% Y/Y Growth -76% -80% -83% -75% -50% 0.0% 0.0% 0.0% -78.6% -20.0% 3.5%
% Q/Q Growth -50% -50% 0% 0% 0% 0% 0% 0% 3%
Intersegment Eliminations -$21,500 -$23,900 -$25,000 -$28,300 -$24,000 -$24,888 -$25,531 -$29,191 -$98,700 -$103,609 -$111,319
% Y/Y Growth 58% 59% 45% 55% 12% 4% 2% 3% 53.7% 5.0% 7.4%
% Q/Q Growth 17% 11% 5% 13% -15% 4% 3% 14% 7%
Intersegment as % of Network + Brand 7% 7% 7% 7% 7% 7% 7% 7% 7% 7% 7%
Total Revenue $529,400 $531,100 $531,700 $599,500 $538,300 $545,033 $547,626 $606,287 $2,191,700 $2,237,247 $2,295,776
% Y/Y Growth -4% -2% 0% 4% 2% 3% 3% 1% -0.5% 2.1% 2.6%
% Q/Q Growth -8.2% 0.3% 0.1% 12.8% -10.2% 1.3% 0.5% 10.7%
Adjusted OIBDA
Brand Group -$18,800 -$15,200 -$9,600 $4,900 -$4,900.00 $1,977.90 $2,017.80 $4,562.48 -$38,700 $3,658 $63,504
% Y/Y Growth -13% -25% -51% -63% -74% -113% -121% -7% -20% NM NM
% Q/Q Growth -240.3% -19.1% -36.8% -151.0% -200.0% -140.4% 2.0% 126.1%
OIBDA Margin -11% -9% -5% 2% -3% 1% 1% 2% -5% 0% 7%
Membership Group $159,500 $158,300 $156,400 $158,600 $146,400.00 $142,249.71 $138,003.45 $144,123.06 $632,800 $570,776 $515,399
% Y/Y Growth -18% -10% -5% -10% -8% -10% -12% -9% -11% $0 $0
% Q/Q Growth -9.7% -0.8% -1.2% 1.4% -7.7% -2.8% -3.0% 4.4%
OIBDA Margin 68% 69% 71% 69% 69% 69% 69% 69% 69% 69% 69%
AOL Networks $900 -$300 $300 $5,500 -$2,500.00 -$4,970.16 $1,710.72 $1,981.80 $6,400 -$3,778 $37,348
% Y/Y Growth -108% -97% -104% -151% -378% 1557% 470% -64% NM NM
% Q/Q Growth -108.4% -133.3% -200.0% 1733.3% -145.5% 98.8% -134.4% 15.8%
OIBDA Margin 1% 0% 0% 3% -2% -3% 1% 1% 1% 0% 5%
Corporate & Other -$47,800 -$48,200 -$46,200 -$45,700 -$33,700.00 -$33,363.00 -$33,029.37 -$32,699.08 -$187,900 -$132,791 -$130,136
% Y/Y Growth -10.2% -25.6% -9.4% -1.3% -29% -31% -29% -28% -13% -29% -2%
% Q/Q Growth 3.2% 0.8% -4.1% -1.1% -26.3% -1.0% -1.0% -1.0%
OIBDA Margin
Adjusted OIBDA $93,800 $94,600 $100,900 $123,300 $105,300 $105,894 $108,703 $117,968 $412,600 $437,865 $486,115
% Y/Y Growth -13.2% 17.8% 15.7% -7.4% 12.3% 11.9% 7.7% -4.3% 1% 6% 11%
% Q/Q Growth -29.5% 0.9% 6.7% 22.2% -14.6% 0.6% 2.7% 8.5%
Margin 18% 18% 19% 21% 20% 19% 20% 19% 19% 20% 21%
F2012 F2013
Technology
Internet
August 7, 2013
page 63 of 70 , Jefferies Equity Research, [email protected] US Internet Team
Please see important disclosure information on pages 67 - 70 of this report.
Table 26: Consolidated Balance Sheet
Source: Jefferies estimates, company data
Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 F2012 F2013 F2014
Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13E Q3 13E Q4 13E F2012A F2013E F2014E
Cash & Cash Equivalents $361,900 $1,468,500 $867,100 $466,600 $467,800 $524,264 $555,994 $581,288 $466,600 $581,288 $759,508
Short-Term Marketable Securities 0 0 0 0 0 0 0 0 0 0 0
Accounts Receivable 288,800 296,800 303,100 351,900 331,400 335,545 337,142 373,256 351,900 373,256 383,021
Current Deferred Taxes 93,300 40,500 38,100 40,600 44,800 44,396 47,281 54,889 40,600 54,889 66,705
Prepaid Expenses & Other Current Assets 34,800 31,000 27,900 29,200 34,400 38,541 36,713 38,607 29,200 38,607 36,361
Current Assets $778,800 $1,836,800 $1,236,200 $888,300 $878,400 $942,747 $977,130 $1,048,040 $888,300 $1,048,040 $1,245,595
Property & Equipment 499,000 490,400 487,300 478,300 472,100 455,095 439,158 425,894 478,300 425,894 366,698
Long-Term Equity & Other Investments 0 0 0 0 0 0 0 0 0 0 0
Goodwill 1,073,600 1,067,400 1,076,500 1,084,100 1,080,500 1,073,100 1,065,700 1,058,300 1,084,100 1,058,300 1,030,300
Other Intangibles 143,500 133,700 129,200 133,200 122,900 121,050 119,200 117,350 133,200 117,350 110,350
Long-Term Deferred Taxes 211,300 184,400 169,000 148,100 135,400 135,400 135,400 135,400 148,100 135,400 135,400
Other Long-Term Assets 51,100 63,000 62,700 65,300 73,200 73,310 75,699 87,695 65,300 87,695 87,744
Total Assets $2,757,300 $3,775,700 $3,160,900 $2,797,300 $2,762,500 $2,800,702 $2,812,288 $2,872,678 $2,797,300 $2,872,678 $2,976,087
Accounts Payable $70,700 $73,600 $72,600 $77,300 $77,400 $76,740 $77,367 $86,029 $77,300 $86,029 $87,961
Accrued Compensation & Benefits 74,600 95,300 117,200 151,400 58,700 65,766 62,647 65,879 151,400 65,879 62,046
Accrued Expenses & Other Liabilities 164,400 182,500 163,300 174,100 156,400 175,228 166,917 175,529 174,100 175,529 165,316
Dividend Payable 0 0 445,100 0 0 0 0 0 0 0 0
Deferred Revenue 74,200 68,400 68,600 57,800 95,600 79,436 79,331 86,909 57,800 86,909 73,122
Current Income Taxes 0 0 0 0 0 0 0 0 0 0 0
Short-Term Debt & Capital Lease Obligations 44,100 45,800 49,400 49,600 52,000 52,000 52,000 52,000 49,600 52,000 52,000
Total Current Liabilities $428,000 $465,600 $916,200 $510,200 $440,100 $449,170 $438,263 $466,346 $510,200 $466,346 $440,446
Long-Term Debt & Capital Lease Obligations 63,800 62,600 60,800 56,300 52,200 52,200 52,200 52,200 56,300 52,200 52,200
Liability for Stock Options, Exercised Early 0 0 0 0 0 0 0 0 0 0 0
Long-Term Deferred Revenue 0 0 0 0 0 0 0 0 0 0 0
Deferred Income Taxes 10,200 7,500 6,700 5,800 5,100 5,100 5,100 5,100 5,800 5,100 5,100
Other Long-Term Liabilities 75,400 78,400 81,000 73,800 46,300 51,874 49,414 51,963 73,800 51,963 48,940
Redeemable Convertible Preferred Stock Warrant 0 0 0 0 0 0 0 0 0 0 0
Minority Interest 13,700 14,200 14,100 13,400 11,700 11,400 11,100 10,800 13,400 10,800 9,600
Total Liabilities $591,100 $628,300 $1,078,800 $659,500 $555,400 $569,744 $556,077 $586,409 $659,500 $586,409 $556,285
Convertible Preferred Stock 0 0 0 0 0 0 0 0 0 0 0
Additional Paid-In Capital 3,432,000 3,456,200 2,953,800 3,458,300 3,502,100 3,503,540 3,505,096 3,506,776 3,458,300 3,506,776 3,506,776
Retained Earnings (Accumulated Deficit) (768,700) 202,100 (222,200) (188,000) (160,300) (137,882) (114,185) (85,807) (188,000) (85,807) 47,726
Treasury Stock (209,400) (209,400) (349,900) (838,400) (838,400) (838,400) (838,400) (838,400) (838,400) (838,400) (838,400)
Accumulated Other Comprehensive Loss (287,700) (301,500) (299,600) (294,100) (296,300) (296,300) (296,300) (296,300) (294,100) (296,300) (296,300)
Shareholders' Equity $2,166,200 $3,147,400 $2,082,100 $2,137,800 $2,207,100 $2,230,958 $2,256,211 $2,286,269 $2,137,800 $2,286,269 $2,419,802
Liabilities & Shareholders' Equity $2,757,300 $3,775,700 $3,160,900 $2,797,300 $2,762,500 $2,800,702 $2,812,288 $2,872,678 $2,797,300 $2,872,678 $2,976,087
F2012 F2013
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Table 27: Consolidated Statement of Cash Flows
Source: Jefferies estimates, company data
Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13E Q3 13E Q4 13E F2012A F2013E F2014E
Net Income $21,100 $970,700 $20,800 $35,700 $25,600 $22,418 $23,698 $28,378 $1,048,300 $100,093 $133,533
Depreciation & Amortization 45,900 45,000 42,700 42,700 42,600 43,151 42,163 41,310 $176,300 $169,224 $174,548
Asset Impairments 900 1,900 200 3,100 100 0 0 0 6,100 100 0
Tax Benefit from Stock Options 0 0 0 0 0 0 0 0 0 0 0
Minority Interest in Consolidated Subsidiaries (100) (200) (100) (300) 0 (300) (300) (300) (700) (900) (1,200)
Earnings in Unconsolidated Equity Interests 0 0 0 0 0 0 0 0 0 0 0
Stock-Based Compensation 8,600 8,600 11,100 11,200 9,700 10,476 11,314 12,219 39,500 43,709 45,895
Deferred Taxes 8,600 77,000 17,400 21,100 10,700 0 0 0 124,100 10,700 0
(Gain) / Loss on Sale of Securities (10,800) (945,800) (2,100) (16,800) (1,300) 0 0 0 (975,500) (1,300) 0
Other / Charges 0 (3,200) 0 600 4,800 0 0 0 (2,600) 4,800 0
Funds From Operations $74,200 $154,000 $90,000 $97,300 $92,200 $75,745 $76,875 $81,606 $415,500 $326,426 $352,775
(Inc.) Dec. in Accounts Receivable 0 0 0 0 0 (4,145) (1,596) (36,114) 0 (41,856) (9,765)
(Inc.) Dec. in Income Taxes 0 0 0 0 0 404 (2,885) (7,608) 0 (10,089) (11,816)
(Inc.) Dec. in Prepaid Revenue and Other 0 0 0 0 0 (4,251) (562) (13,889) 0 (18,702) 2,197
Inc. (Dec.) in Accounts Payable 0 0 0 0 0 (660) 627 8,662 0 8,629 1,932
Inc. (Dec.) in Accrued Expenses and Other Liabilities 0 0 0 0 0 31,468 (13,889) 14,393 0 31,971 (17,069)
Inc. (Dec.) in Accrued Revenue 0 0 0 0 0 0 0 0 0 0 0
Inc. (Dec.) in Deferred Revenue 0 0 0 0 0 (16,164) (105) 7,578 0 (8,691) (13,787)
Other (54,300) 13,100 11,200 (20,600) (51,600) 0 0 0 (50,600) (51,600) 0
Change in Net Working Capital ($54,300) $13,100 $11,200 ($20,600) ($51,600) $6,651 ($18,410) ($26,979) ($50,600) ($90,338) ($48,307)
Cash Flow from Operations $19,900 $167,100 $101,200 $76,700 $40,600 $82,396 $58,465 $54,628 $364,900 $236,088 $304,468
Capital Expenditures (15,000) (16,700) (17,300) (15,900) (16,600) (16,896) (16,976) (18,795) (64,900) (69,267) (80,352)
Acquisitions, Net of Cash Acquired 4,300 (3,200) (11,400) (21,700) (5,200) 0 0 0 (32,000) (5,200) 0
Other 300 (300) 0 0 0 0 0 0 0 0 0
Net Cash Used in Investing Activities ($10,400) $940,300 ($37,700) ($36,800) ($21,800) ($16,896) ($16,976) ($18,795) $855,400 ($74,467) ($80,352)
Debt Issuance / (Repayment) (14,400) (13,700) (13,000) (14,500) (14,200) 0 0 0 (55,600) (14,200) 0
Common Stock Dividends 0 0 0 (434,400) 0 0 0 0 (434,400) 0 0
Proceeds from / (Repurchase of) Common Stock (35,800) 16,600 (653,400) 9,100 0 (7,857) (8,486) (9,164) (663,500) (25,507) (45,895)
Excess Tax Benefit from Stock Options 0 (6,100) (200) (1,300) (1,000) (1,179) (1,273) (1,375) (7,600) (4,826) 0
Other (4,900) 5,100 100 0 (900) 0 0 0 300 (900) 0
Net Cash Provided by Financing Activities ($55,100) $1,900 ($666,500) ($441,100) ($16,100) ($9,036) ($9,758) ($10,539) ($1,160,800) ($45,433) ($45,895)
Effect of Exchange Rate Changes 0 (2,800) 1,000 700 (1,500) 0 0 0 (1,100) (1,500) 0
Inc. (Dec.) in Cash and Cash Equivalents ($45,600) $1,106,500 ($602,000) ($400,500) $1,200 $56,464 $31,730 $25,294 $58,400 $114,688 $178,221
Beginning Cash and Cash Equivalents 407,500 361,900 1,468,500 867,100 466,600 467,800 524,264 555,994 407,500 466,600 581,288
Ending Cash and Cash Equivalents $361,900 $1,468,400 $866,500 $466,600 $467,800 $524,264 $555,994 $581,288 $465,900 $581,288 $759,508
F2012 F2013
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Table 28: Discounted Cash Flow
Source: Jefferies estimates, company data
2013
2012A Q1 13A Q2 13E Q3 13E Q4 13E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E
Revenue $2,192 $538 $545 $548 $606 $2,296 $2,369 $2,511 $2,686 $2,898 $3,151 $3,448 $3,796 $4,200
% Y/Y Growth (0%) 2% 3% 3% 1% 3% 3% 6% 7% 8% 9% 9% 10% 11%
EBITDA $1,378 $105 $106 $109 $118 $486 $486 $515 $502 $543 $553 $612 $695 $749
% Margin 63% 20% 19% 20% 19% 21% 21% 21% 19% 19% 18% 18% 18% 18%
% Y/Y Growth 256 12 12 8 (4) 11 0 6 (3) 8 2 11 14 8
Implied Taxes on Operations ($1,141) ($29) ($48) ($49) ($53) ($206) ($204) ($214) ($207) ($221) ($223) ($245) ($275) ($293)
% Effective Tax Rate 83% 27% 45% 45% 45% 42% 42% 42% 41% 41% 40% 40% 40% 39%
Capital Expenditures ($65) ($17) ($17) ($17) ($19) ($80) ($83) ($88) ($94) ($101) ($110) ($121) ($133) ($147)
% Y/Y Growth 5% 11% 1% (2%) 18% 16% 3% 6% 7% 8% 9% 9% 10% 11%
Change in Net Working Capital ($51) ($52) $7 ($18) ($27) ($48) $16 $14 $48 ($23) $44 ($13) ($16) $36
Unlevered Free Cash Flow $122 $8 $48 $24 $19 $151 $215 $227 $249 $197 $263 $233 $271 $344
NPV at 3/31/13 Valuation Date and 10.5% WACC -- $47 $23 $18 $133 $172 $165 $163 $117 $141 $113 $119 $137
Perpetuity Growth Rate / Terminal Value at 10.5% WACC Implied Terminal Value / Terminal EBITDA Multiple
2.0% 2.5% 3.0% 3.5% 4.0% 7.6x 8.1x 8.7x 9.4x 10.2x
$5,710 $6,101 $6,545 $7,054 $7,641 $5,710 $6,101 $6,545 $7,054 $7,641
Median DCF Valuation at 3/31/13 Valuation Date WACC Equity Value per Share
NPV of Cash Flows and Terminal Value 3,710 8% $52 $54 $56 $59 $62
Plus: Net Cash 404 9% 49 50 52 55 58
Implied Equity Value $4,114 10% 46 47 49 51 54
Implied Fully Diluted Shares Outstanding (MM) 83 11% 43 44 46 48 50
Implied Equity Value per Share $50 12% 40 42 43 45 47
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Analyst CertificationI, Jefferies US Internet Team, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Brian Pitz, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subjectcompany(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or viewsexpressed in this research report.I, Brian Fitzgerald, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Timothy O'Shea, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Sachin Khattar, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Stan Velikov, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.
Company Specific DisclosuresTimothy O'Shea owns a long equity position of Google Inc. Common Stock.
For Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.
Meanings of Jefferies RatingsBuy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more withina 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock priceconsistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperformrated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no financial projections or opinions onthe investment merits of the company are provided.
Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.
Conviction List Methodology
1. The aim of the conviction list is to publicise the best individual stock ideas from Jefferies Global Research2. Only stocks with a Buy or Underperform rating are allowed to be included in the recommended list.3. Stocks are screened for minimum market capitalisation and adequate daily turnover. Furthermore, a valuation, correlation and style screen
is used to ensure a well-diversified portfolio.
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4. Stocks are sorted to a maximum of 30 stocks with the maximum country exposure at around 50%. Limits are also imposed on a sector basis.5. Once a month, analysts are invited to recommend their best ideas. Analysts’ stock selection can be based on one or more of the following:
non-Consensus investment view, difference in earnings relative to Consensus, valuation methodology, target upside/downside % relativeto the current stock price. These are then assessed against existing holdings to ensure consistency. Stocks that have either reached theirtarget price, been downgraded over the course of the month or where a more suitable candidate has been found are removed.
6. All stocks are inserted at the last closing price and removed at the last closing price. There are no changes to the conviction list duringthe month.
7. Performance is calculated in US dollars on an equally weighted basis and is compared to MSCI World AC US$.8. The conviction list is published once a month whilst global equity markets are closed.9. Transaction fees are not included.
10. All corporate actions are taken into account.
Risk which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.
Other Companies Mentioned in This Report• AOL, Inc. (AOL: $36.18, BUY)• Facebook, Inc. (FB: $38.55, BUY)• Google, Inc. (GOOG: $896.57, BUY)• Interpublic Group of Companies, Inc. (IPG: $16.01, UNDERPERFORM)• Omnicom Group, Inc. (OMC: $63.48, HOLD)• Publicis Groupe S.A. (PUB FP: €59.25, BUY)• Tremor Video, Inc. (TRMR: $8.04, BUY)• WPP Group plc (WPP LN: p1,192.00, BUY)
Distribution of RatingsIB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY 784 46.78% 165 21.05%HOLD 752 44.87% 116 15.43%UNDERPERFORM 140 8.35% 1 0.71%
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