Conversant CNVR
August 21, 2014 - 2:28am EST by
andreas947
2014 2015
Price: 26.50 EPS $0.00 $0.00
Shares Out. (in M): 67 P/E 0.0x 0.0x
Market Cap (in M): 1,775 P/FCF 10.0x 10.0x
Net Debt (in M): -20 EBIT 0 0
TEV: 1,750 TEV/EBIT 0.0x 0.0x

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  • Digital marketing
  • Buybacks
  • Advertising
 

Description

Summary

 

We focus on smaller companies with Ft. Knox balance sheets and large & sustainable free cash flow yields and we are typically seeking a mid-teens FCF yield or higher on an unleveraged basis.  The objective is for the sustainable FCF to eventually drive up the share price to a more reasonable valuation, through share buybacks, debt reductions, dividends, or accretive acquisitions.  Obviously, it is important we have a management team that cares about shareholder value.  We also focus on small and micro-cap stocks because there is a much better chance to find an attractive investment opportunity which is under-followed or undiscovered.

 

One larger company we believe is under-valued is Conversant Inc. (CNVR), which provides digital marketing services in the U.S. and internationally.  CNVR operates through two segments, Affiliate Marketing and Media.  The Affiliate Marketing segment provides technology, network, and customer services that enable advertisers to create their own online sales force comprising third party website publishers.  The Media segment provides a suite of digital marketing services and tailored programs that help marketers create and increase awareness for their products and brands, attract visitors, and generate leads and sales through the internet and mobile applications.  The company sells its products to advertisers and advertising agencies.  The company was formerly known as Value Click, Inc. (VCLK) and changed its name to Conversant, Inc. in February 2014.  Affiliate Marketing’s segment revenues and segment operating income for LTM were $171m and $107m, respectively.  Media’s segment revenues and segment operating income for LTM were $422m and $129m, respectively.

 

CNVR offers a comprehensive range of digital marketing services across its Affiliate Marketing and Media business segments.  CNVR  believes the unique combination of its: scale and breadth of services; vast amounts of proprietary data spanning online and offline channels; cross device capabilities; and industry leading approach to personalized communication, all combine together to position it to be the digital marketing services provider of choice for major marketers and the advertising agencies that service them.  CNVR believes its services help marketers achieve a variety of strategic objectives, including customer relationship management (CRM), new customer acquisition, and branding.

 

CNVR has an attractive, asset-light business model with high margins (EBITDA margins of mid 30’s or higher), limited capital expenditures, and limited working capital needs.  CNVR is generating strong free cash flows.  In 2013, CNVR generated free cash flow (we define as cash from operations less capital expenditures) of about $165m and, for LTM (June 2014), FCF is about $175m.   CEO John Guiliani, who took over in late 2012, is implementing a strategy to consolidate CNVR’s various digital advertising businesses together onto a single platform (see Conversant Personalization Platform below).  CNVR has about 67m shares outstanding at about $26.50 per share for a market cap of about $1.75b.  CNVR has a strong balance sheet with a net cash position of about $20m at Q2 of 2014.  CNVR has an enterprise value (EV) of about $1.73b.  CNVR is trading at a 10% unleveraged FCF yield with good prospects for stronger growth in revenues and adjusted EBITDA in 2015 and 2016.  CNVR is making significant investments in increased operating expenses in order to drive revenue, especially in the Media segment, and this has (we believe) temporarily depressed adjusted EBITDA margins.  By 2016, we believe CNVR could generate $250m in adjusted EBITDA and FCF of $180m to $200m. 

 

We believe with stronger revenue growth and adjusted EBITDA margins, CNVR could trade for 10x adjusted EBITDA, with a debt- free balance sheet, or a market cap of about $2.5b by 2016.  CNVR has about 67m total shares outstanding today and has been aggressively repurchasing shares over the past five years (for example, at year-end 2008, there were about 92m total shares outstanding).  We believe CNVR’s total share count could be near 55m by year-end 2016.  Based on a $2.5b market cap and 55m shares outstanding, CNVR would have a share price of about $45 per share or 65% higher than the current price of $26.50 per share.

 

CNVR’s highly cash generative business model enables it to concurrently make organic growth investments, complete strategic acquisitions, and repurchase large amount of common stock.  The combination of these shareholder-driven activities, concurrently executed, likely represents a very powerful driver of long-term shareholder value creation.

 

Background

 

CNVR went public in March 2000 as ValueClick (VCLK) and has completed 18 acquisitions (8 of which were subsequently divested) since its inception, including three acquisitions in the past three years.  In April 2011, CNVR acquired Greystripe, a brand-focused mobile advertising network with expertise in ads delivered on smartphone applications for about $71m.  Greystripe provided CNVR with immediate scale in the U.S. mobile advertising market.  In August 2011, CNVR acquired Dotomi, a leading provider of data-driven (customer relationship management or CRM), intelligent display media for major retailers, for total consideration of $288m.  Dotomi enables advertisers to re-market to their existing customers through customized display ad campaigns.  Dotomi provided CNVR with a unique set of data-driven targeting capabilities combined with expertise in brand strategy and creative development.  In February 2014, CNVR acquired SET Media, a digital video technology company, for cash consideration of $26m and assumption of $4m in employee obligations.  SET Media strengthens CNVR’s technology offerings and adds unique video targeting and brand safety capabilities to its platform.

 

Importantly, these acquisitions were completed for almost $380m over the past three years yet CNVR has still maintained a net cash balance sheet as of Q2 of 2014.  This highlights the Company’s strong cash generating ability and management’s opportunity to make selective acquisitions to add important product features or services or geographies to continue to build its overall value-proposition.  We believe CNVR can continue to selectively fit gaps to meet customer demand through these tuck-in type acquisitions over time.  We believe CNVR’s vision of an integrated solution to customers’ advertising requirements which is highly focused, analytical, and efficient will be a compelling alternative to both direct advertising customers and advertising agencies (see Conversant Personalization Platform below).

 

We believe advertisers and ad agencies are increasingly using technology to become more surgical about how they are spending the vast of dollars they invest in sales and marketing.  CNVR is well-positioned to benefit from this trend.  CNVR should also benefit from continued strong growth in the ecommerce industry (through its Affiliate Marketing segment) and continued strong growth in digital advertising (through its Media segment). 

 

Affiliate Marketing Segment

 

Affiliate marketing has become a key part of marketing for leading brands.  CNVR says advertisers in its affiliate network report that the affiliate channel delivers return on advertising spend performance that is among the highest across all marketing channels.  CNVR’s Affiliate Marketing segment is the dominant player in its industry with a market share estimated at more than 50%, with a strong network of advertisers and website publishers, both benefiting significantly from CNVR’s value-added services.  Affiliate Marketing’s network includes thousands of advertisers and over 60,000 publishers.  Affiliate Marketing enables advertisers to expand their reach and grow their businesses through a “pay-for-performance” approach, through their own fully-commissioned online sales force comprised of third-party website publishers, also known as affiliates.  During 2013, Affiliate Marketing generated more than $8b of transactions for its advertising clients and paid more than $700m in commissions to affiliates.  Advertisers upload their offers onto CNVR’s system, making them available for placement by affiliates.  Affiliates apply to join the advertisers program and upon acceptance, affiliates select and place the advertisers’ offers on their websites or mobile websites, in email campaigns, or in search listings.  Affiliate Marketing serves as a trusted clearinghouse which collects commissions due from advertisers and disperses them to thousands of affiliate each month.   Affiliate Marketing primarily generates revenue from variable commissions paid by advertiser customers, based on a percentage of commissions advertisers pay to affiliates.  In 2014, CNVR plans to introduce Affiliate Personalization, which will leverage the Conversant Personalization Platform to identify and customize promotional offers for select target segments, for both new and existing customers.  Affiliate Marketing’s competitive strengths include: 1) leading scale and reach; 2) industry-leading expertise; 3) innovative tracking technology; 4) analytics and insights; and 5) strong network quality.  For LTM ended June 2014, Affiliate Marketing generated segment revenues and operating income of $171m and $107m, respectively.

 

Media Segment

 

CNVR’s Media segment is positioned to benefit from the secular shift towards digital advertising, which is expected to increase at about 11% per annum through 2016.  During this period, digital advertising is expected to increase from 25% of the total U.S. advertising market to about 30%.  Media’s solutions enable marketers to deliver personalized communications and are designed for flexibility based upon each brand’s specific needs.  The level of personalization, data integration, creative development, cross channel delivery, and measurement sophistication is tailored for each individual client.  Media is led by its customer relationship management or CRM business, which has a proprietary database of over 260m anonymous profiles of consumer purchasing behavior.  These profiles are highly valuable to major advertising clients, who can focus and monitor their advertising investments more effectively.  The CRM database is continuously updated as consumers take actions online and interact with marketers in offline channels.  Media’s competitive strengths include: 1) exclusive data sources which enable precise user identification; 2) seamless ability to reach individual consumers across channels and devices; 3) real-time decisions and execution; and 4) ability to provide unique ROI measurement.  For LTM ended June 2014, Media generated segment revenues and operating income of $422m and $129m, respectively.

 

Conversant Personalization Platform

 

The Conversant Personalization Platform enables leading brands to engage their customers on a personal level.  Based upon each marketer’s specific needs, they can determine the level of personalization, data integration, creative development, cross channel delivery, and measurement sophistication that is appropriate for them.  CNVR management has talked about a common ID in the past and this common ID allows the Company to link up individual profiles across its many businesses, so CNVR can identify people on different devices as the same person.  Management indicated that, after the common ID was put together, the Company’s online presence or reach was second only to Google’s.  This is all part of CEO Giuliani’s One Conversant integration strategy which management believes further differentiates the Company in a highly competitive market.  CNVR continues to work on its personal calibration engine, which is an initiative that will further help clients make decisions on where to best spend their money.  There is the potential for a model which may allow clients to have more control in the decision process, which is something they want.  Overall, CNVR’s investments in this area are creating a stronger value proposition for its clients and are where the Company believes the overall market is likely heading.  We agree.

 

Customers

 

CNVR sells its products and services to a variety of advertisers and advertising agencies.  Its revenues are generated from thousands of customers and there is no significant customer concentration in either of its business segments.

 

Seasonality

 

CNVR’s business is subject to seasonal fluctuations, with the calendar fourth quarter generally being its strongest.

 

Financial Results for 6mos of 2014

 

Six month revenues were $283m or up 7% versus $263m in prior year, and six month adjusted EBITDA was $90m versus $97m in prior year as CNVR increased operating expenses to drive higher revenue growth and adjusted EBITDA in 2015 and 2016.  Operating expenses increased by about $10m in Q2 alone.  These higher operating expenses are related to one-time corporate rebrand costs (fron ValueClick to Conversant in early 2014), operating losses at SET Media, and investments in video and other areas.  Total employees have increased by about 9% in H1 of 2014.  For Q3, management guided to 8% revenue growth and revenue in the range of $142m to $148m and adjusted EBITDA of $44m to $47m or a margin of 31.4% at the midpoints.  Management expects EBITDA margins to rebound in seasonally strong Q4 of 2014 and into 2015 due significantly to stronger revenue growth from Media due to video and other investments being leveraged and starting to generate revenue. 

 

Strong cash generative business model and attractive FCF yield

 

CNVR has a highly cash generative business model which is asset-light with limited capital expenditures and working capital needs and a high ROIC.  CNVR currently trades at an attractive 10% unleveraged FCF yield, with strong prospects for growth in adjusted EBITDA and FCF in 2015 and 2016.  CNVR has a high ROIC business model (over 100%) based on adjusted operating to the investment in net working capital plus net PPE.  Consequently, with even modest revenue growth, we think CNVR can generate significant incremental FCF from current levels.

 

CNVR’s highly cash generative business model enables it to concurrently make organic growth investments, complete strategic acquisitions, and repurchase large amount of common stock.  The combination of these shareholder-driven activities, concurrently executed, likely represents a very powerful driver of long-term shareholder value creation.

 

Potential Benefit from Growth in Ecommerce, Digital Advertising, and Digital Video Advertising

 

Both of CNVR’s business segments are in growing markets.  Affiliate Marketing should benefit from the continued strong growth in the ecommerce industry over the next several years.  Ecommerce is expected to grow about 11% per year through 2016, according to industry sources.  Media should benefit from the continuing trend towards increased digital marketing expenditures over the next few years.  Digital advertising expenditures currently represent about 25% of total advertising expenditures in the U.S. and this share is expected to increase to about 30% by 2016.  The digital advertising industry is expected to grow about 12% per annum in the U.S. over the next couple of years.  As Cuyler1903 has noted in his excellent write up of YuMe (YUME), there is tremendous growth potential, in particular, in digital video advertising, as consumers increasingly shift their media consumption to a digital format, and video commercials which might have been seen on television, are instead viewed on a desktop or mobile environment.  CNVR’s recent purchase of SET Media is meant to position the Company to participate in this strong growth in digital video over the next few years.  CNVR management has made several optimistic comments about the potential for digital video and SET Media in particular, but we will have to see how this plays out. Overall, both of CNVR’s segments should benefit from their strong positions in growing digital markets.

 

Strong Competitive Position In Affilate Marketing and Media Segments

 

We believe the Company has a very strong competitive position in digital marketing services.  CNVR is the largest player in the Affiliated Marketing segment business, with close to a 50% market share, a well-established leadership position, and a highly attractive “pay-for-performance” business model for customers.    Its network of thousands of advertising customers and over 60,000 digital publishers is not easily replicated.  Affiliate Marketing provides important value-added services such as monitoring transactions and collecting and disbursing fees to its advertising and affiliate customers.  About $8b of transactions were completed through the Affiliate Marketing segment network in 2013.  Advertiser customers find this business model very attractive since it is basically a pay-for-performance model, where they only pay for transactions.  The Media segment’s CRM business includes approximately 260m anonymous customer profiles with important and proprietary information on purchasing patterns.  CNVR acquired Dotomi’s CRM business in 2012 and this has formed a strong foundation for its Media segment. The Media segment is rapidly expanding its capabilities in mobile (via acquisition of Greystripe) and video (via acquisition of SET Media) as these become higher growth opportunities in today’s digital advertising industry.

 

 

 

 

 

 

 

 

Strategic Investments in 2014 Should Drive Stronger Revenue Growth and EBITDA Margins in 2015-6

 

The Company is making substantial investments in additional operating expenses (mostly people) in order to drive stronger revenue growth and better EBITDA margins going forward.  These incremental expenses are significantly focused on the digital video opportunity which is quite significant over the next few years.  These increased operating expenses have resulted from additional sales people and additional product capabilities, including SET Media’s video capabilities, which enhance CNVR’s value proposition to advertising customers.  We do not believe the Company has seen the benefit resulting from these investments in sales and marketing and product development (video and SET Media).  The Company expects these investments to drive stronger revenue growth in H2 of 2014 and 2015.  (For six months of 2014, Affiliate Marketing revenues grew about 11% and Media segment revenues grew about 7%).  The Company also expects its adjusted EBITDA margins to improve in H2 of 2014 and into 2015 as stronger revenues get leveraged over more stable operating expense levels.  We believe the result of these factors could be stronger revenue growth in 2015 and higher adjusted EBITDA margins, which together should drive meaningful improvement in adjusted EBITDA in 2015.  We believe CNVR’s adjusted EBITDA could be roughly $225m in 2015 and $250m in 2016.

 

CEO Giuliani Consolidating Businesses into Unified Platform

 

John Giuliani became CEO of CNVR in late 2012 and has refocused the Company on a unified approach to its traditionally separate digital marketing businesses.  His objective is to simplify and integrate CNVR’s various capabilities onto one platform that is easy for advertiser customers to use (see Conversant Personalized Platform).  We believe this approach makes sense and will increase the value-proposition to customers and tighten their relationship with the Company.  Advertising customers will be able to reach customers across various platforms on whatever device (desktop, smartphone, etc.) they are using to access digital content (display, video, or mobile).  We believe this integrated approach is what advertisers want and is where the market is likely heading over time.  CNVR’s unified platform approach will also make it easier for advertiser customers to utilize and benefit from its substantial CRM information database, with over 260m anonymous customer profiles.

 

Trends Towards More Focused Advertising Spend

 

We believe the huge advertising and marketing dollars which are being spent by major marketers are becoming increasingly focused and ROI-driven.  We believe CNVR is well-positioned to benefit from these trends with its digitally focused and highly analytical approach to advertising spending by major marketers.  We believe these capabilities to track and monitor more specifically the marketing and ad dollars spent with continue to attract a greater share of total ad dollars towards digital marketing.

 

Attractive Upside Potential

 

In 2013, CNVR generated approximately $165m of FCF (cash from operations less capital expenditures).  We believe CNVR can grow revenues and adjusted EBITDA in 2015 and 2016 based on continued modest growth in Affiliate Marketing and increased growth in Media due to growth in mobile, video, and display areas, all over a more stable level of operating expenses.  EBITDA margins have been reduced to the low to mid 30s in 2014 due to investments which management is making in sales and marketing and product development, including video and SET Media.  We believe these investments will help CNVR improve its revenue growth rates in 2015 and 2016 and adjusted EBITDA margins will move closer to historical levels as these investments are leveraged against higher revenues.

 

We believe CNVR can achieve adjusted EBITDA of about $250m and free cash flow of $180m to $200m in 2016, and maintain a balance sheet with zero net debt.  Furthermore, we believe CNVR could concurrently repurchase up to 12m common shares to reduce total shares outstanding to about 55m by year-end 2016.  We believe CNVR could trade for $2.5b or 10x adjusted EBITDA in 2016 with zero net debt and about 55m total common shares outstanding or a share price of about $45 per share, 65% higher than current price of $26.50 per share.

 

Share Repurchases and Dividends

 

CNVR has repurchased over $1b of common stock since 2001, including about 15% of total shares outstanding in the latest 12 months.  CNVR recently initiated an additional $150m share repurchase program.  We believe CNVR’s management is acutely aware of the current depressed relative valuation of its stock and has confidence that its organic and inorganic investments will drive increased revenues and adjusted EBITDA in 2015 and 2016.  Consequently, we expect CNVR to continue to aggressively repurchase shares, spending $100m to $150m per year on share repurchases in 2015 and 2016.  CEO John Giluiani is a significant shareholder, with about a 4% ownership stake in CNVR.  We believe the entire management team is very focused on driving shareholder value over the next couple of years.

 

“Ft. Knox” Balance Sheet Enables Value Creation

 

CNVR has a “Ft. Knox” balance sheet with a net cash position of $20m at Q2 of 2014.  We believe management has positioned CNVR to generate $150m to $200m of FCF per year in 2014 through 2016.  Therefore, we think CNVR could end 2016 with total shares outstanding of about 55m or 18% lower than current 67m shares, as CNVR’s strong free cash flow is directed toward share repurchases.  We believe management is evaluating acquisitions but is likely to be careful in deploying its excess capital.  CNVR has completed multiple strategic acquisitions during 2010 to 2013 and divested non-core divisions which do not fit its integrated strategy.  CEO John Guiliani and his team have been focused on integrating and simplifying CNVR’s businesses which we believe will improve and highlight their value proposition to major advertiser customers.

 

Conclusion and Target Price

 

Based on 10x our estimated EBITDA of $250m for 2016 and zero net debt at year-end 2016, we believe CNVR could trade for an EV of close to $2.5b or $45 per share or more versus $26.50 per share today (+65%).  If CNVR continues to execute and its digital marketing business performs as we expect, we think our target price can be achieved.  Further, CNVR’s digital marketing business has a well-established competitive position in both its Affiliate Marketing and Media segments as well as important relationships with major advertisers and advertising agencies with a highly focused approach to advertising spending.  We believe CNVR could prove an attractive acquisition to a strategic or private equity acquirer.

 

 

 

 

Major shareholders

 

 

Vulcan Value Ptrs

    7,475

11.7%

Invesco Ltd

4,216

6.3%

Vanguard Group

3,714

5.5%

Investec Asset

3,507

5.3%

London Co of Virginia

3,223

4.8%

BlackRock Fund

2,918

4.4%

Blue Harbour Group

3,045

4.8%

John Giuliani, CEO

2,648

4.1%

 

 

 

Avg   Daily Volume

Price per share

$26.5

   

737,000

 

Shares outstanding

67

 

 

Market value

$1,775

 

 

 

52 week range

$18.62

$28.79

 

             
 

Income statements

 

 

 

 

 

 

     6 mos

     6 mos

 

     FYE 12/31

2008

2009

2010

2011

2012

2013

2013

2014

 

Sales

$455  

$423  

$431  

$400  

$540  

$573  

$263  

$283  

 

Gross profit

$316  

$306  

$314  

$266
 

$362  

$390  

$178  

$189  

 

SG&A expenses

$278  

$224  

$222  

$162  

$228  

$222  

$108  

$127  

 

Adjusted EBITDA (1)

$77  

$82  

$98  

$139  

$193  

$222  

$97  

$90  

 

Adjusted EBIT

$38  

$82  

$93  

$104  

$134  

$168  

$71  

$62  

 

Net income

($214)

$67  

$90  

$101  

$102  

$102  

$38  

$72  

 

EPS - continuing ops

($2.12)

$0.71  

$0.98  

$1.04  

$1.00  

$1.22  

$0.38  

$0.55  

 

Cash flow statements

 

 

 

 

 

 

     6 mos

     6 mos

     FYE 9/30

2008

2009

2010

2011

2012

2013

2013

2014

Net income

($214)

$67  

$90  

$101  

$102  

$102  

$38  

$72  

Dep & amort

$39  

$34  

$27  

$32  

$42  

$39  

$19  

$19  

Non cash adjust

$322  

$24  

$6  

$19  

$22  

$53  

$36  

($24)

Working capital chgs

($16)

($1)

($26)

($37)

($10)

($15)

($13)

$28  

Cash fr operations

$131  

$124  

$97  

$115  

$156  

$179  

$80  

$95  

 

 

 

 

 

 

 

 

 

Capital expenditures

($7)

($5)

($10)

($11)

($18)

($14)

($6)

($7)

Dividends

$0  

$0  

$0  

$0  

$0  

$0  

$0  

$0  

Share repurchases

($151)

($35)

($38)

($138)

($104)

($215)

($52)

($81)

Acquis, net

($105)

($63)

($42)

($217)

$0  

$0  

$0  

$48  

Est. free cash flow

$124  

$119  

$87  

$104  

$139  

$165  

$74  

$88  

Balance sheets

 

 

 

 

 

 

 

 

     FYE 9/30

2008

2009

2010

2011

2012

2013

6/30/14

 

 

 

 

 

 

 

 

 

 

Cash

$197  

$159  

$197  

$117  

$137  

$81  

$84  

 

Total assets

$3,596  

$567  

$614  

$881  

$900  

$818  

$736  

 

Total debt

$375  

$0  

$0  

$168  

$143  

$140  

$65  

 

Shareholder equity

$1,423  

$407  

$473  

$564  

$591  

$505  

$510  

 

 

 

 

 

 

 

 

 

 

Net debt

$178  

($159)

($197)

$51  

$6  

$59  

($19)

 

 

 

 

 

 

 

 

 

 

Shares outstanding

92.30

87.20

82.30

81.50

78.90

74.10

67.00

 

                               

 

 

(1)      Adjusted EBITDA is net income from   continuing operations, plus interest and other income, plus income tax   expense, plus amortization of acquired technology and acquired intangible   assets, plus depreciation and leasehold amortization, plus stock based   compensation, plus acquisition related costs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Valuation & Valuation Ratios

 

 

Market value

$1,775

EV / Adjusted EBITDA

8.0

Net debt

($20)

Enterprise Value / Cash from Ops

8.2

Enterprise value

$1,750

Enterprise Value / Revenues

269%

 

 

Price per share

$26.50

 

Shares outstanding

67

 

Market value

$1,775

Avg Daily Volume

 

   

737,000

 

52 week range

$18.62

$28.79

 

 

 

                   

 

 

 

 

 

 

 

 

 

 

 

                   
 

 

 

 

                   

 

 

 

 

 

                   

 

                                               

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Income Statements

             
               
               

 

2009

2010

2011

2012

2013

6   mos. 2013

6   mos.

2014

Affiliate Marketing Segment

 

 

 

 

 

 

 

Revenue

 

 

 $139

$150  

$163  

$75  

$83  

Cost of revenue

 

 

$17  

$18  

$18  

 

$  

Gross profit

 

 

$122  

$132  

$145  

$  

 

Operating Expenses

 

 

 $38

 $41

 $43

 

 

Segment income from ops

 

 

$85  

$91  

$102  

$46  

$51  

 

 

 

 

 

 

 

 

Media Segment

 

 

 

 

 

 

 

Revenue

 

 

$261  

$391  

$410  

$188  

$200  

Cost of revenue

 

 

$114  

$152  

$157  

$  

$  

 Gross profit

 

 

$148  

$238  

$253  

$  

$  

Operating expenses

 

 

$73  

$118  

$116  

$  

$  

Segment income from ops

 

 

$75  

$120  

$137  

$59  

$51  

 

 

 

 

 

 

 

 

Total Segment income from ops.

 

 

$159

$212

$239

$105

$102

Corporate expenses

 

 

$27  

$29  

$29  

$14  

$18  

Stock based comp.

 

 

$13

$21

$19

$9

$10

Amortization of intangibles

 

 

$15

$28

$23

$11

$13

Consolidated income from ops.

 

 

$104

$134

$168

$71

$61

 

 

Geographic Summary

             
               
               

 

2009

2010

2011

2012

2013

6   mos. 2013

6   mos.

2014

Revenue

 

 

 

 

 

 

 

United States

 

 

 $348

$492  

$527  

$240  

$260  

International

 

 

$61  

$52  

$47  

$23  

$24  

Total

 

 

$400  

$540  

$573  

$263  

$283  

 

 

 

 

 

 

 

 

Income from Operations

 

 

 

 

 

 

 

United States

 

 

$94  

$128  

$162  

$68  

$60  

International

 

 

$11  

$6  

$5  

$3  

$1  

 Total

 

 

$104  

$134  

$168  

$71  

$62  

 

 

 

 

Quarterly Consolidated Balance   Sheets

               

 

 

 

 

 

 

 

 

 

                         
                         

 

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

   

Current Assets:

 

 

 

 

 

 

 

 

 

 

   

     Cash andj equivalents

108  

88  

120  

137  

129  

127  

55  

81  

90  

84  

   

     A/R, net

106  

119  

124  

147  

123  

110  

111  

149  

132  

126  

   

     Prepaid exp. & other

11  

11  

10  

9  

11  

18  

10  

10  

10  

 

   

     Income taxes receivable

5  

11  

16  

7  

6  

30  

18  

7  

44  

 

   

     Deferred tax assets, current

10  

10  

10  

10  

10  

9  

0  

2  

5  

 

   

     Other current assets

-

-

-

-

-

-

-

-

-

46  

   

      Current assets held for sale

-

-

-

-

-

-

49  

33  

-

 

   

       Total Curent assets

240  

238  

281  

311  

278  

294  

242  

281  

281  

256  

   

Note Receivable

29  

29  

28  

28  

27  

-

-

-

-

 

   

Property and equipment, net

21  

26  

28  

29  

29  

28  

29  

28  

27  

29  

   

Goodwill

435  

434  

434  

435  

434  

434  

389  

389  

402  

402  

   

Intangible assets

105  

96  

88  

82  

75  

69  

55  

49  

52  

46  

   

Deferred tax assets

9  

11  

10  

12  

12  

11  

12  

12  

0  

 

   

Other assets

1  

1  

4  

3  

2  

4  

3  

3  

2  

3  

   

      Total Assets

841  

835  

874  

900  

858  

840  

787  

818  

765  

736  

   

 

 

 

 

 

 

 

 

 

 

 

   

Current Liability

 

 

 

 

 

 

 

 

 

 

   

     Accounts payable & accrued exp

108  

116  

116  

128  

107  

106  

91  

126  

109  

 

   

     other current liabilities

6  

2  

5  

4  

9  

3  

2  

4  

2  

 

   

     short term borrowing

-

-

-

10  

-

-

-

-

-

 

   

     CPLTD

10  

10  

10  

10  

10  

10  

-

 

-

 

   

        Total current liabilities

124  

128  

131  

142  

126  

119  

103  

138  

112  

122  

   

Income taxes payable

22  

23  

22  

26  

27  

28  

29  

24  

24  

 

   

Deferred tax liabilities

1  

1  

1  

1  

1  

1  

0  

1  

11  

 

   

LTD

95  

163  

165  

133  

70  

93  

195  

140  

60  

65  

   

Other non-current liabilities

 

-

7  

7  

7  

7  

7  

 

 

40  

   

        Total liabilities

243  

314  

326  

309  

231  

247  

335  

313  

216  

227  

   

 

 

 

 

 

 

 

 

 

 

 

   

Total Stockholder's equity

599  

521  

548  

591  

627  

593  

452  

505  

549  

510  

   

 

Quarterly Income Statements

                   
                     
                     

 

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Revenue

$146  

$154  

$161  

$200  

$134  

$128  

$134  

$176  

$146  

$137  

Cost of revenue

$55  

$60  

$63  

$71  

$42  

$42  

$43  

$56  

$47  

$47  

Gross profit

$92  

$94  

$98  

$129  

$92  

$86  

$91  

$120  

$99  

$90  

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

Sales and marketing

$21  

$21  

$21  

$23  

$21  

$21  

$22  

$24  

$27  

$26  

General and admin.

$20  

$20  

$20  

$22  

$17  

$14  

$15  

$18  

$18  

$16  

Technology

$16  

$17  

$16  

$17  

$14  

$14  

$14  

$14  

$16  

$17  

 

$6  

$6  

$6  

$4  

$4  

$4  

$4  

$5  

$5  

$4  

Total operating expenses

$63  

$63  

$64  

$65  

$55  

$53  

$54  

$60  

$65  

$62  

Income from operations

$29  

$30  

$34  

$63  

$37  

$33  

$37  

$60  

$34  

$28  

Interest and other

$0  

$1  

$0  

($1)

($0)

($23)

($0)

($1)

($0)

$1  

Income before income taxes

$29  

$32  

$34  

$62  

$37  

$10  

$37  

$59  

$34  

$28  

Income tax expense

$9  

$13  

$14  

$26  

$14  

$4  

$14  

$20  

$13  

$11  

Net income from cont ops

$20  

$19  

$21  

$36  

$23  

$6  

$22  

$39  

$20  

$17  

Net income (loss) from disc ops

$1  

$2  

$2  

$0  

$3  

$4  

($4)

$7  

$0  

-

Gain on disposal, net of tax

-

-

$1  

-

-

$2  

-

-

$34  

$1  

Net income

$22  

$20  

$24  

$36  

$26  

$12  

$18  

$46  

$54  

$18  

 

                         

Catalysts

  1. Low valuation (10%+ unleveraged FCF yield and 8x LTM adjusted EBITDA, which is depressed due to investments in growth).
  2. Steady and continued reduction of total shares outstanding from 67m at Q2 of 2014 to 55m at year end 2016.
  3. Projected 2016 adjusted EBITDA of $250m and free cash flow of about $180m to $200m.
  4. Enhanced appreciation for the value of CNVR’s targeted digital marketing information and Affiliate Marketing network.
  5. Strong growth and secular shift in digital video advertising drives increased revenues and adjusted EBITDA in CNVR’s Media segment (helped by SET Media acquisition).
  6. Possible acquisition of CNVR by a strategic or financial purchaser.
  7. Increased analyst coverage and recognition of CNVR.

Risks

 

  1. The U.S. economy declines, including the retail industry, which is cyclical.
  2. We are defining FCF as cash from operations less capital expenditures and including non-cash stock comp and some other add-backs which some investors would not want to include.
  3. CNVR is unable to improve its adjusted EBITDA margins and/or grow its revenues as we expect.
  4. New technologies (Google, etc.) impact or dis-intermediate CNVR’s business model
  5. Problems with privacy issues or control of confidential customer information.
  6. Misallocation of capital into a poor acquisition. 

 

 

 

Disclaimer

 

Disclaimer:  We own shares of CNVR.  We may buy or sell these shares at any time without notice.  The information in the write-up is believed to be correct as of the date written but VIC members should do their own verification of this information and analysis of this potential investment.  We undertake no obligation to update this write-up if new information arises at a future date.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

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    Description

    Summary

     

    We focus on smaller companies with Ft. Knox balance sheets and large & sustainable free cash flow yields and we are typically seeking a mid-teens FCF yield or higher on an unleveraged basis.  The objective is for the sustainable FCF to eventually drive up the share price to a more reasonable valuation, through share buybacks, debt reductions, dividends, or accretive acquisitions.  Obviously, it is important we have a management team that cares about shareholder value.  We also focus on small and micro-cap stocks because there is a much better chance to find an attractive investment opportunity which is under-followed or undiscovered.

     

    One larger company we believe is under-valued is Conversant Inc. (CNVR), which provides digital marketing services in the U.S. and internationally.  CNVR operates through two segments, Affiliate Marketing and Media.  The Affiliate Marketing segment provides technology, network, and customer services that enable advertisers to create their own online sales force comprising third party website publishers.  The Media segment provides a suite of digital marketing services and tailored programs that help marketers create and increase awareness for their products and brands, attract visitors, and generate leads and sales through the internet and mobile applications.  The company sells its products to advertisers and advertising agencies.  The company was formerly known as Value Click, Inc. (VCLK) and changed its name to Conversant, Inc. in February 2014.  Affiliate Marketing’s segment revenues and segment operating income for LTM were $171m and $107m, respectively.  Media’s segment revenues and segment operating income for LTM were $422m and $129m, respectively.

     

    CNVR offers a comprehensive range of digital marketing services across its Affiliate Marketing and Media business segments.  CNVR  believes the unique combination of its: scale and breadth of services; vast amounts of proprietary data spanning online and offline channels; cross device capabilities; and industry leading approach to personalized communication, all combine together to position it to be the digital marketing services provider of choice for major marketers and the advertising agencies that service them.  CNVR believes its services help marketers achieve a variety of strategic objectives, including customer relationship management (CRM), new customer acquisition, and branding.

     

    CNVR has an attractive, asset-light business model with high margins (EBITDA margins of mid 30’s or higher), limited capital expenditures, and limited working capital needs.  CNVR is generating strong free cash flows.  In 2013, CNVR generated free cash flow (we define as cash from operations less capital expenditures) of about $165m and, for LTM (June 2014), FCF is about $175m.   CEO John Guiliani, who took over in late 2012, is implementing a strategy to consolidate CNVR’s various digital advertising businesses together onto a single platform (see Conversant Personalization Platform below).  CNVR has about 67m shares outstanding at about $26.50 per share for a market cap of about $1.75b.  CNVR has a strong balance sheet with a net cash position of about $20m at Q2 of 2014.  CNVR has an enterprise value (EV) of about $1.73b.  CNVR is trading at a 10% unleveraged FCF yield with good prospects for stronger growth in revenues and adjusted EBITDA in 2015 and 2016.  CNVR is making significant investments in increased operating expenses in order to drive revenue, especially in the Media segment, and this has (we believe) temporarily depressed adjusted EBITDA margins.  By 2016, we believe CNVR could generate $250m in adjusted EBITDA and FCF of $180m to $200m. 

     

    We believe with stronger revenue growth and adjusted EBITDA margins, CNVR could trade for 10x adjusted EBITDA, with a debt- free balance sheet, or a market cap of about $2.5b by 2016.  CNVR has about 67m total shares outstanding today and has been aggressively repurchasing shares over the past five years (for example, at year-end 2008, there were about 92m total shares outstanding).  We believe CNVR’s total share count could be near 55m by year-end 2016.  Based on a $2.5b market cap and 55m shares outstanding, CNVR would have a share price of about $45 per share or 65% higher than the current price of $26.50 per share.

     

    CNVR’s highly cash generative business model enables it to concurrently make organic growth investments, complete strategic acquisitions, and repurchase large amount of common stock.  The combination of these shareholder-driven activities, concurrently executed, likely represents a very powerful driver of long-term shareholder value creation.

     

    Background

     

    CNVR went public in March 2000 as ValueClick (VCLK) and has completed 18 acquisitions (8 of which were subsequently divested) since its inception, including three acquisitions in the past three years.  In April 2011, CNVR acquired Greystripe, a brand-focused mobile advertising network with expertise in ads delivered on smartphone applications for about $71m.  Greystripe provided CNVR with immediate scale in the U.S. mobile advertising market.  In August 2011, CNVR acquired Dotomi, a leading provider of data-driven (customer relationship management or CRM), intelligent display media for major retailers, for total consideration of $288m.  Dotomi enables advertisers to re-market to their existing customers through customized display ad campaigns.  Dotomi provided CNVR with a unique set of data-driven targeting capabilities combined with expertise in brand strategy and creative development.  In February 2014, CNVR acquired SET Media, a digital video technology company, for cash consideration of $26m and assumption of $4m in employee obligations.  SET Media strengthens CNVR’s technology offerings and adds unique video targeting and brand safety capabilities to its platform.

     

    Importantly, these acquisitions were completed for almost $380m over the past three years yet CNVR has still maintained a net cash balance sheet as of Q2 of 2014.  This highlights the Company’s strong cash generating ability and management’s opportunity to make selective acquisitions to add important product features or services or geographies to continue to build its overall value-proposition.  We believe CNVR can continue to selectively fit gaps to meet customer demand through these tuck-in type acquisitions over time.  We believe CNVR’s vision of an integrated solution to customers’ advertising requirements which is highly focused, analytical, and efficient will be a compelling alternative to both direct advertising customers and advertising agencies (see Conversant Personalization Platform below).

     

    We believe advertisers and ad agencies are increasingly using technology to become more surgical about how they are spending the vast of dollars they invest in sales and marketing.  CNVR is well-positioned to benefit from this trend.  CNVR should also benefit from continued strong growth in the ecommerce industry (through its Affiliate Marketing segment) and continued strong growth in digital advertising (through its Media segment). 

     

    Affiliate Marketing Segment

     

    Affiliate marketing has become a key part of marketing for leading brands.  CNVR says advertisers in its affiliate network report that the affiliate channel delivers return on advertising spend performance that is among the highest across all marketing channels.  CNVR’s Affiliate Marketing segment is the dominant player in its industry with a market share estimated at more than 50%, with a strong network of advertisers and website publishers, both benefiting significantly from CNVR’s value-added services.  Affiliate Marketing’s network includes thousands of advertisers and over 60,000 publishers.  Affiliate Marketing enables advertisers to expand their reach and grow their businesses through a “pay-for-performance” approach, through their own fully-commissioned online sales force comprised of third-party website publishers, also known as affiliates.  During 2013, Affiliate Marketing generated more than $8b of transactions for its advertising clients and paid more than $700m in commissions to affiliates.  Advertisers upload their offers onto CNVR’s system, making them available for placement by affiliates.  Affiliates apply to join the advertisers program and upon acceptance, affiliates select and place the advertisers’ offers on their websites or mobile websites, in email campaigns, or in search listings.  Affiliate Marketing serves as a trusted clearinghouse which collects commissions due from advertisers and disperses them to thousands of affiliate each month.   Affiliate Marketing primarily generates revenue from variable commissions paid by advertiser customers, based on a percentage of commissions advertisers pay to affiliates.  In 2014, CNVR plans to introduce Affiliate Personalization, which will leverage the Conversant Personalization Platform to identify and customize promotional offers for select target segments, for both new and existing customers.  Affiliate Marketing’s competitive strengths include: 1) leading scale and reach; 2) industry-leading expertise; 3) innovative tracking technology; 4) analytics and insights; and 5) strong network quality.  For LTM ended June 2014, Affiliate Marketing generated segment revenues and operating income of $171m and $107m, respectively.

     

    Media Segment

     

    CNVR’s Media segment is positioned to benefit from the secular shift towards digital advertising, which is expected to increase at about 11% per annum through 2016.  During this period, digital advertising is expected to increase from 25% of the total U.S. advertising market to about 30%.  Media’s solutions enable marketers to deliver personalized communications and are designed for flexibility based upon each brand’s specific needs.  The level of personalization, data integration, creative development, cross channel delivery, and measurement sophistication is tailored for each individual client.  Media is led by its customer relationship management or CRM business, which has a proprietary database of over 260m anonymous profiles of consumer purchasing behavior.  These profiles are highly valuable to major advertising clients, who can focus and monitor their advertising investments more effectively.  The CRM database is continuously updated as consumers take actions online and interact with marketers in offline channels.  Media’s competitive strengths include: 1) exclusive data sources which enable precise user identification; 2) seamless ability to reach individual consumers across channels and devices; 3) real-time decisions and execution; and 4) ability to provide unique ROI measurement.  For LTM ended June 2014, Media generated segment revenues and operating income of $422m and $129m, respectively.

     

    Conversant Personalization Platform

     

    The Conversant Personalization Platform enables leading brands to engage their customers on a personal level.  Based upon each marketer’s specific needs, they can determine the level of personalization, data integration, creative development, cross channel delivery, and measurement sophistication that is appropriate for them.  CNVR management has talked about a common ID in the past and this common ID allows the Company to link up individual profiles across its many businesses, so CNVR can identify people on different devices as the same person.  Management indicated that, after the common ID was put together, the Company’s online presence or reach was second only to Google’s.  This is all part of CEO Giuliani’s One Conversant integration strategy which management believes further differentiates the Company in a highly competitive market.  CNVR continues to work on its personal calibration engine, which is an initiative that will further help clients make decisions on where to best spend their money.  There is the potential for a model which may allow clients to have more control in the decision process, which is something they want.  Overall, CNVR’s investments in this area are creating a stronger value proposition for its clients and are where the Company believes the overall market is likely heading.  We agree.

     

    Customers

     

    CNVR sells its products and services to a variety of advertisers and advertising agencies.  Its revenues are generated from thousands of customers and there is no significant customer concentration in either of its business segments.

     

    Seasonality

     

    CNVR’s business is subject to seasonal fluctuations, with the calendar fourth quarter generally being its strongest.

     

    Financial Results for 6mos of 2014

     

    Six month revenues were $283m or up 7% versus $263m in prior year, and six month adjusted EBITDA was $90m versus $97m in prior year as CNVR increased operating expenses to drive higher revenue growth and adjusted EBITDA in 2015 and 2016.  Operating expenses increased by about $10m in Q2 alone.  These higher operating expenses are related to one-time corporate rebrand costs (fron ValueClick to Conversant in early 2014), operating losses at SET Media, and investments in video and other areas.  Total employees have increased by about 9% in H1 of 2014.  For Q3, management guided to 8% revenue growth and revenue in the range of $142m to $148m and adjusted EBITDA of $44m to $47m or a margin of 31.4% at the midpoints.  Management expects EBITDA margins to rebound in seasonally strong Q4 of 2014 and into 2015 due significantly to stronger revenue growth from Media due to video and other investments being leveraged and starting to generate revenue. 

     

    Strong cash generative business model and attractive FCF yield

     

    CNVR has a highly cash generative business model which is asset-light with limited capital expenditures and working capital needs and a high ROIC.  CNVR currently trades at an attractive 10% unleveraged FCF yield, with strong prospects for growth in adjusted EBITDA and FCF in 2015 and 2016.  CNVR has a high ROIC business model (over 100%) based on adjusted operating to the investment in net working capital plus net PPE.  Consequently, with even modest revenue growth, we think CNVR can generate significant incremental FCF from current levels.

     

    CNVR’s highly cash generative business model enables it to concurrently make organic growth investments, complete strategic acquisitions, and repurchase large amount of common stock.  The combination of these shareholder-driven activities, concurrently executed, likely represents a very powerful driver of long-term shareholder value creation.

     

    Potential Benefit from Growth in Ecommerce, Digital Advertising, and Digital Video Advertising

     

    Both of CNVR’s business segments are in growing markets.  Affiliate Marketing should benefit from the continued strong growth in the ecommerce industry over the next several years.  Ecommerce is expected to grow about 11% per year through 2016, according to industry sources.  Media should benefit from the continuing trend towards increased digital marketing expenditures over the next few years.  Digital advertising expenditures currently represent about 25% of total advertising expenditures in the U.S. and this share is expected to increase to about 30% by 2016.  The digital advertising industry is expected to grow about 12% per annum in the U.S. over the next couple of years.  As Cuyler1903 has noted in his excellent write up of YuMe (YUME), there is tremendous growth potential, in particular, in digital video advertising, as consumers increasingly shift their media consumption to a digital format, and video commercials which might have been seen on television, are instead viewed on a desktop or mobile environment.  CNVR’s recent purchase of SET Media is meant to position the Company to participate in this strong growth in digital video over the next few years.  CNVR management has made several optimistic comments about the potential for digital video and SET Media in particular, but we will have to see how this plays out. Overall, both of CNVR’s segments should benefit from their strong positions in growing digital markets.

     

    Strong Competitive Position In Affilate Marketing and Media Segments

     

    We believe the Company has a very strong competitive position in digital marketing services.  CNVR is the largest player in the Affiliated Marketing segment business, with close to a 50% market share, a well-established leadership position, and a highly attractive “pay-for-performance” business model for customers.    Its network of thousands of advertising customers and over 60,000 digital publishers is not easily replicated.  Affiliate Marketing provides important value-added services such as monitoring transactions and collecting and disbursing fees to its advertising and affiliate customers.  About $8b of transactions were completed through the Affiliate Marketing segment network in 2013.  Advertiser customers find this business model very attractive since it is basically a pay-for-performance model, where they only pay for transactions.  The Media segment’s CRM business includes approximately 260m anonymous customer profiles with important and proprietary information on purchasing patterns.  CNVR acquired Dotomi’s CRM business in 2012 and this has formed a strong foundation for its Media segment. The Media segment is rapidly expanding its capabilities in mobile (via acquisition of Greystripe) and video (via acquisition of SET Media) as these become higher growth opportunities in today’s digital advertising industry.

     

     

     

     

     

     

     

     

    Strategic Investments in 2014 Should Drive Stronger Revenue Growth and EBITDA Margins in 2015-6

     

    The Company is making substantial investments in additional operating expenses (mostly people) in order to drive stronger revenue growth and better EBITDA margins going forward.  These incremental expenses are significantly focused on the digital video opportunity which is quite significant over the next few years.  These increased operating expenses have resulted from additional sales people and additional product capabilities, including SET Media’s video capabilities, which enhance CNVR’s value proposition to advertising customers.  We do not believe the Company has seen the benefit resulting from these investments in sales and marketing and product development (video and SET Media).  The Company expects these investments to drive stronger revenue growth in H2 of 2014 and 2015.  (For six months of 2014, Affiliate Marketing revenues grew about 11% and Media segment revenues grew about 7%).  The Company also expects its adjusted EBITDA margins to improve in H2 of 2014 and into 2015 as stronger revenues get leveraged over more stable operating expense levels.  We believe the result of these factors could be stronger revenue growth in 2015 and higher adjusted EBITDA margins, which together should drive meaningful improvement in adjusted EBITDA in 2015.  We believe CNVR’s adjusted EBITDA could be roughly $225m in 2015 and $250m in 2016.

     

    CEO Giuliani Consolidating Businesses into Unified Platform

     

    John Giuliani became CEO of CNVR in late 2012 and has refocused the Company on a unified approach to its traditionally separate digital marketing businesses.  His objective is to simplify and integrate CNVR’s various capabilities onto one platform that is easy for advertiser customers to use (see Conversant Personalized Platform).  We believe this approach makes sense and will increase the value-proposition to customers and tighten their relationship with the Company.  Advertising customers will be able to reach customers across various platforms on whatever device (desktop, smartphone, etc.) they are using to access digital content (display, video, or mobile).  We believe this integrated approach is what advertisers want and is where the market is likely heading over time.  CNVR’s unified platform approach will also make it easier for advertiser customers to utilize and benefit from its substantial CRM information database, with over 260m anonymous customer profiles.

     

    Trends Towards More Focused Advertising Spend

     

    We believe the huge advertising and marketing dollars which are being spent by major marketers are becoming increasingly focused and ROI-driven.  We believe CNVR is well-positioned to benefit from these trends with its digitally focused and highly analytical approach to advertising spending by major marketers.  We believe these capabilities to track and monitor more specifically the marketing and ad dollars spent with continue to attract a greater share of total ad dollars towards digital marketing.

     

    Attractive Upside Potential

     

    In 2013, CNVR generated approximately $165m of FCF (cash from operations less capital expenditures).  We believe CNVR can grow revenues and adjusted EBITDA in 2015 and 2016 based on continued modest growth in Affiliate Marketing and increased growth in Media due to growth in mobile, video, and display areas, all over a more stable level of operating expenses.  EBITDA margins have been reduced to the low to mid 30s in 2014 due to investments which management is making in sales and marketing and product development, including video and SET Media.  We believe these investments will help CNVR improve its revenue growth rates in 2015 and 2016 and adjusted EBITDA margins will move closer to historical levels as these investments are leveraged against higher revenues.

     

    We believe CNVR can achieve adjusted EBITDA of about $250m and free cash flow of $180m to $200m in 2016, and maintain a balance sheet with zero net debt.  Furthermore, we believe CNVR could concurrently repurchase up to 12m common shares to reduce total shares outstanding to about 55m by year-end 2016.  We believe CNVR could trade for $2.5b or 10x adjusted EBITDA in 2016 with zero net debt and about 55m total common shares outstanding or a share price of about $45 per share, 65% higher than current price of $26.50 per share.

     

    Share Repurchases and Dividends

     

    CNVR has repurchased over $1b of common stock since 2001, including about 15% of total shares outstanding in the latest 12 months.  CNVR recently initiated an additional $150m share repurchase program.  We believe CNVR’s management is acutely aware of the current depressed relative valuation of its stock and has confidence that its organic and inorganic investments will drive increased revenues and adjusted EBITDA in 2015 and 2016.  Consequently, we expect CNVR to continue to aggressively repurchase shares, spending $100m to $150m per year on share repurchases in 2015 and 2016.  CEO John Giluiani is a significant shareholder, with about a 4% ownership stake in CNVR.  We believe the entire management team is very focused on driving shareholder value over the next couple of years.

     

    “Ft. Knox” Balance Sheet Enables Value Creation

     

    CNVR has a “Ft. Knox” balance sheet with a net cash position of $20m at Q2 of 2014.  We believe management has positioned CNVR to generate $150m to $200m of FCF per year in 2014 through 2016.  Therefore, we think CNVR could end 2016 with total shares outstanding of about 55m or 18% lower than current 67m shares, as CNVR’s strong free cash flow is directed toward share repurchases.  We believe management is evaluating acquisitions but is likely to be careful in deploying its excess capital.  CNVR has completed multiple strategic acquisitions during 2010 to 2013 and divested non-core divisions which do not fit its integrated strategy.  CEO John Guiliani and his team have been focused on integrating and simplifying CNVR’s businesses which we believe will improve and highlight their value proposition to major advertiser customers.

     

    Conclusion and Target Price

     

    Based on 10x our estimated EBITDA of $250m for 2016 and zero net debt at year-end 2016, we believe CNVR could trade for an EV of close to $2.5b or $45 per share or more versus $26.50 per share today (+65%).  If CNVR continues to execute and its digital marketing business performs as we expect, we think our target price can be achieved.  Further, CNVR’s digital marketing business has a well-established competitive position in both its Affiliate Marketing and Media segments as well as important relationships with major advertisers and advertising agencies with a highly focused approach to advertising spending.  We believe CNVR could prove an attractive acquisition to a strategic or private equity acquirer.

     

     

     

     

    Major shareholders

     

     

    Vulcan Value Ptrs

        7,475

    11.7%

    Invesco Ltd

    4,216

    6.3%

    Vanguard Group

    3,714

    5.5%

    Investec Asset

    3,507

    5.3%

    London Co of Virginia

    3,223

    4.8%

    BlackRock Fund

    2,918

    4.4%

    Blue Harbour Group

    3,045

    4.8%

    John Giuliani, CEO

    2,648

    4.1%

     

     

     

    Avg   Daily Volume

    Price per share

    $26.5

       

    737,000

     

    Shares outstanding

    67

     

     

    Market value

    $1,775

     

     

     

    52 week range

    $18.62

    $28.79

     

                 
     

    Income statements

     

     

     

     

     

     

         6 mos

         6 mos

     

         FYE 12/31

    2008

    2009

    2010

    2011

    2012

    2013

    2013

    2014

     

    Sales

    $455  

    $423  

    $431  

    $400  

    $540  

    $573  

    $263  

    $283  

     

    Gross profit

    $316  

    $306  

    $314  

    $266
     

    $362  

    $390  

    $178  

    $189  

     

    SG&A expenses

    $278  

    $224  

    $222  

    $162  

    $228  

    $222  

    $108  

    $127  

     

    Adjusted EBITDA (1)

    $77  

    $82  

    $98  

    $139  

    $193  

    $222  

    $97  

    $90  

     

    Adjusted EBIT

    $38  

    $82  

    $93  

    $104  

    $134  

    $168  

    $71  

    $62  

     

    Net income

    ($214)

    $67  

    $90  

    $101  

    $102  

    $102  

    $38  

    $72  

     

    EPS - continuing ops

    ($2.12)

    $0.71  

    $0.98  

    $1.04  

    $1.00  

    $1.22  

    $0.38  

    $0.55  

     

    Cash flow statements

     

     

     

     

     

     

         6 mos

         6 mos

         FYE 9/30

    2008

    2009

    2010

    2011

    2012

    2013

    2013

    2014

    Net income

    ($214)

    $67  

    $90  

    $101  

    $102  

    $102  

    $38  

    $72  

    Dep & amort

    $39  

    $34  

    $27  

    $32  

    $42  

    $39  

    $19  

    $19  

    Non cash adjust

    $322  

    $24  

    $6  

    $19  

    $22  

    $53  

    $36  

    ($24)

    Working capital chgs

    ($16)

    ($1)

    ($26)

    ($37)

    ($10)

    ($15)

    ($13)

    $28  

    Cash fr operations

    $131  

    $124  

    $97  

    $115  

    $156  

    $179  

    $80  

    $95  

     

     

     

     

     

     

     

     

     

    Capital expenditures

    ($7)

    ($5)

    ($10)

    ($11)

    ($18)

    ($14)

    ($6)

    ($7)

    Dividends

    $0  

    $0  

    $0  

    $0  

    $0  

    $0  

    $0  

    $0  

    Share repurchases

    ($151)

    ($35)

    ($38)

    ($138)

    ($104)

    ($215)

    ($52)

    ($81)

    Acquis, net

    ($105)

    ($63)

    ($42)

    ($217)

    $0  

    $0  

    $0  

    $48  

    Est. free cash flow

    $124  

    $119  

    $87  

    $104  

    $139  

    $165  

    $74  

    $88  

    Balance sheets

     

     

     

     

     

     

     

     

         FYE 9/30

    2008

    2009

    2010

    2011

    2012

    2013

    6/30/14

     

     

     

     

     

     

     

     

     

     

    Cash

    $197  

    $159  

    $197  

    $117  

    $137  

    $81  

    $84  

     

    Total assets

    $3,596  

    $567  

    $614  

    $881  

    $900  

    $818  

    $736  

     

    Total debt

    $375  

    $0  

    $0  

    $168  

    $143  

    $140  

    $65  

     

    Shareholder equity

    $1,423  

    $407  

    $473  

    $564  

    $591  

    $505  

    $510  

     

     

     

     

     

     

     

     

     

     

    Net debt

    $178  

    ($159)

    ($197)

    $51  

    $6  

    $59  

    ($19)

     

     

     

     

     

     

     

     

     

     

    Shares outstanding

    92.30

    87.20

    82.30

    81.50

    78.90

    74.10

    67.00

     

                                   

     

     

    (1)      Adjusted EBITDA is net income from   continuing operations, plus interest and other income, plus income tax   expense, plus amortization of acquired technology and acquired intangible   assets, plus depreciation and leasehold amortization, plus stock based   compensation, plus acquisition related costs.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Valuation & Valuation Ratios

     

     

    Market value

    $1,775

    EV / Adjusted EBITDA

    8.0

    Net debt

    ($20)

    Enterprise Value / Cash from Ops

    8.2

    Enterprise value

    $1,750

    Enterprise Value / Revenues

    269%

     

     

    Price per share

    $26.50

     

    Shares outstanding

    67

     

    Market value

    $1,775

    Avg Daily Volume

     

       

    737,000

     

    52 week range

    $18.62

    $28.79

     

     

     

                       

     

     

     

     

     

     

     

     

     

     

     

                       
     

     

     

     

                       

     

     

     

     

     

                       

     

                                                   

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Segment Income Statements

                 
                   
                   

     

    2009

    2010

    2011

    2012

    2013

    6   mos. 2013

    6   mos.

    2014

    Affiliate Marketing Segment

     

     

     

     

     

     

     

    Revenue

     

     

     $139

    $150  

    $163  

    $75  

    $83  

    Cost of revenue

     

     

    $17  

    $18  

    $18  

     

    $  

    Gross profit

     

     

    $122  

    $132  

    $145  

    $  

     

    Operating Expenses

     

     

     $38

     $41

     $43

     

     

    Segment income from ops

     

     

    $85  

    $91  

    $102  

    $46  

    $51  

     

     

     

     

     

     

     

     

    Media Segment

     

     

     

     

     

     

     

    Revenue

     

     

    $261  

    $391  

    $410  

    $188  

    $200  

    Cost of revenue

     

     

    $114  

    $152  

    $157  

    $  

    $  

     Gross profit

     

     

    $148  

    $238  

    $253  

    $  

    $  

    Operating expenses

     

     

    $73  

    $118  

    $116  

    $  

    $  

    Segment income from ops

     

     

    $75  

    $120  

    $137  

    $59  

    $51  

     

     

     

     

     

     

     

     

    Total Segment income from ops.

     

     

    $159

    $212

    $239

    $105

    $102

    Corporate expenses

     

     

    $27  

    $29  

    $29  

    $14  

    $18  

    Stock based comp.

     

     

    $13

    $21

    $19

    $9

    $10

    Amortization of intangibles

     

     

    $15

    $28

    $23

    $11

    $13

    Consolidated income from ops.

     

     

    $104

    $134

    $168

    $71

    $61

     

     

    Geographic Summary

                 
                   
                   

     

    2009

    2010

    2011

    2012

    2013

    6   mos. 2013

    6   mos.

    2014

    Revenue

     

     

     

     

     

     

     

    United States

     

     

     $348

    $492  

    $527  

    $240  

    $260  

    International

     

     

    $61  

    $52  

    $47  

    $23  

    $24  

    Total

     

     

    $400  

    $540  

    $573  

    $263  

    $283  

     

     

     

     

     

     

     

     

    Income from Operations

     

     

     

     

     

     

     

    United States

     

     

    $94  

    $128  

    $162  

    $68  

    $60  

    International

     

     

    $11  

    $6  

    $5  

    $3  

    $1  

     Total

     

     

    $104  

    $134  

    $168  

    $71  

    $62  

     

     

     

     

    Quarterly Consolidated Balance   Sheets

                   

     

     

     

     

     

     

     

     

     

                             
                             

     

    Mar-12

    Jun-12

    Sep-12

    Dec-12

    Mar-13

    Jun-13

    Sep-13

    Dec-13

    Mar-14

    Jun-14

       

    Current Assets:

     

     

     

     

     

     

     

     

     

     

       

         Cash andj equivalents

    108  

    88  

    120  

    137  

    129  

    127  

    55  

    81  

    90  

    84  

       

         A/R, net

    106  

    119  

    124  

    147  

    123  

    110  

    111  

    149  

    132  

    126  

       

         Prepaid exp. & other

    11  

    11  

    10  

    9  

    11  

    18  

    10  

    10  

    10  

     

       

         Income taxes receivable

    5  

    11  

    16  

    7  

    6  

    30  

    18  

    7  

    44  

     

       

         Deferred tax assets, current

    10  

    10  

    10  

    10  

    10  

    9  

    0  

    2  

    5  

     

       

         Other current assets

    -

    -

    -

    -

    -

    -

    -

    -

    -

    46  

       

          Current assets held for sale

    -

    -

    -

    -

    -

    -

    49  

    33  

    -

     

       

           Total Curent assets

    240  

    238  

    281  

    311  

    278  

    294  

    242  

    281  

    281  

    256  

       

    Note Receivable

    29  

    29  

    28  

    28  

    27  

    -

    -

    -

    -

     

       

    Property and equipment, net

    21  

    26  

    28  

    29  

    29  

    28  

    29  

    28  

    27  

    29  

       

    Goodwill

    435  

    434  

    434  

    435  

    434  

    434  

    389  

    389  

    402  

    402  

       

    Intangible assets

    105  

    96  

    88  

    82  

    75  

    69  

    55  

    49  

    52  

    46  

       

    Deferred tax assets

    9  

    11  

    10  

    12  

    12  

    11  

    12  

    12  

    0  

     

       

    Other assets

    1  

    1  

    4  

    3  

    2  

    4  

    3  

    3  

    2  

    3  

       

          Total Assets

    841  

    835  

    874  

    900  

    858  

    840  

    787  

    818  

    765  

    736  

       

     

     

     

     

     

     

     

     

     

     

     

       

    Current Liability

     

     

     

     

     

     

     

     

     

     

       

         Accounts payable & accrued exp

    108  

    116  

    116  

    128  

    107  

    106  

    91  

    126  

    109  

     

       

         other current liabilities

    6  

    2  

    5  

    4  

    9  

    3  

    2  

    4  

    2  

     

       

         short term borrowing

    -

    -

    -

    10  

    -

    -

    -

    -

    -

     

       

         CPLTD

    10  

    10  

    10  

    10  

    10  

    10  

    -

     

    -

     

       

            Total current liabilities

    124  

    128  

    131  

    142  

    126  

    119  

    103  

    138  

    112  

    122  

       

    Income taxes payable

    22  

    23  

    22  

    26  

    27  

    28  

    29  

    24  

    24  

     

       

    Deferred tax liabilities

    1  

    1  

    1  

    1  

    1  

    1  

    0  

    1  

    11  

     

       

    LTD

    95  

    163  

    165  

    133  

    70  

    93  

    195  

    140  

    60  

    65  

       

    Other non-current liabilities

     

    -

    7  

    7  

    7  

    7  

    7  

     

     

    40  

       

            Total liabilities

    243  

    314  

    326  

    309  

    231  

    247  

    335  

    313  

    216  

    227  

       

     

     

     

     

     

     

     

     

     

     

     

       

    Total Stockholder's equity

    599  

    521  

    548  

    591  

    627  

    593  

    452  

    505  

    549  

    510  

       

     

    Quarterly Income Statements

                       
                         
                         

     

    Mar-12

    Jun-12

    Sep-12

    Dec-12

    Mar-13

    Jun-13

    Sep-13

    Dec-13

    Mar-14

    Jun-14

    Revenue

    $146  

    $154  

    $161  

    $200  

    $134  

    $128  

    $134  

    $176  

    $146  

    $137  

    Cost of revenue

    $55  

    $60  

    $63  

    $71  

    $42  

    $42  

    $43  

    $56  

    $47  

    $47  

    Gross profit

    $92  

    $94  

    $98  

    $129  

    $92  

    $86  

    $91  

    $120  

    $99  

    $90  

    Operating Expenses:

     

     

     

     

     

     

     

     

     

     

    Sales and marketing

    $21  

    $21  

    $21  

    $23  

    $21  

    $21  

    $22  

    $24  

    $27  

    $26  

    General and admin.

    $20  

    $20  

    $20  

    $22  

    $17  

    $14  

    $15  

    $18  

    $18  

    $16  

    Technology

    $16  

    $17  

    $16  

    $17  

    $14  

    $14  

    $14  

    $14  

    $16  

    $17  

     

    $6  

    $6  

    $6  

    $4  

    $4  

    $4  

    $4  

    $5  

    $5  

    $4  

    Total operating expenses

    $63  

    $63  

    $64  

    $65  

    $55  

    $53  

    $54  

    $60  

    $65  

    $62  

    Income from operations

    $29  

    $30  

    $34  

    $63  

    $37  

    $33  

    $37  

    $60  

    $34  

    $28  

    Interest and other

    $0  

    $1  

    $0  

    ($1)

    ($0)

    ($23)

    ($0)

    ($1)

    ($0)

    $1  

    Income before income taxes

    $29  

    $32  

    $34  

    $62  

    $37  

    $10  

    $37  

    $59  

    $34  

    $28  

    Income tax expense

    $9  

    $13  

    $14  

    $26  

    $14  

    $4  

    $14  

    $20  

    $13  

    $11  

    Net income from cont ops

    $20  

    $19  

    $21  

    $36  

    $23  

    $6  

    $22  

    $39  

    $20  

    $17  

    Net income (loss) from disc ops

    $1  

    $2  

    $2  

    $0  

    $3  

    $4  

    ($4)

    $7  

    $0  

    -

    Gain on disposal, net of tax

    -

    -

    $1  

    -

    -

    $2  

    -

    -

    $34  

    $1  

    Net income

    $22  

    $20  

    $24  

    $36  

    $26  

    $12  

    $18  

    $46  

    $54  

    $18  

     

                             

    Catalysts

    1. Low valuation (10%+ unleveraged FCF yield and 8x LTM adjusted EBITDA, which is depressed due to investments in growth).
    2. Steady and continued reduction of total shares outstanding from 67m at Q2 of 2014 to 55m at year end 2016.
    3. Projected 2016 adjusted EBITDA of $250m and free cash flow of about $180m to $200m.
    4. Enhanced appreciation for the value of CNVR’s targeted digital marketing information and Affiliate Marketing network.
    5. Strong growth and secular shift in digital video advertising drives increased revenues and adjusted EBITDA in CNVR’s Media segment (helped by SET Media acquisition).
    6. Possible acquisition of CNVR by a strategic or financial purchaser.
    7. Increased analyst coverage and recognition of CNVR.

    Risks

     

    1. The U.S. economy declines, including the retail industry, which is cyclical.
    2. We are defining FCF as cash from operations less capital expenditures and including non-cash stock comp and some other add-backs which some investors would not want to include.
    3. CNVR is unable to improve its adjusted EBITDA margins and/or grow its revenues as we expect.
    4. New technologies (Google, etc.) impact or dis-intermediate CNVR’s business model
    5. Problems with privacy issues or control of confidential customer information.
    6. Misallocation of capital into a poor acquisition. 

     

     

     

    Disclaimer

     

    Disclaimer:  We own shares of CNVR.  We may buy or sell these shares at any time without notice.  The information in the write-up is believed to be correct as of the date written but VIC members should do their own verification of this information and analysis of this potential investment.  We undertake no obligation to update this write-up if new information arises at a future date.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    See above

    Messages


    Subjectbear case?
    Entry08/21/2014 10:08 AM
    Memberspecialk992
    Good writeup, makes a lot of sense. Any idea why the short interest is so high (and increasing)? The best I can figure is that investors worry about the sustainability of margins in a world where CRTO, FUEL and RUBI are spending like crazy for growth. However, the comp is not as bad as it looks since the overall corporate margins are skewed high by Commission Junction (which doesn't compete with the next-gen adtech players), making the disparity in Media marigns not look as extreme.
     
    I also see that Jim Zarley is selling a lot of stock after making well-timed buys in the past. Giuliani not selling though.

    SubjectAcquired
    Entry09/11/2014 04:16 PM
    Membermm202
    Brilliant call.  Very well done.
     
    : Alliance Data to acquire Conversant for $35 per share, or $2.3B
    Alliance Data Systems (ADS) and Conversant (CNVR) announced the execution of a definitive agreement whereby Alliance Data will purchase Conversant. Under the terms of the agreement, Alliance Data will acquire all outstanding shares of Conversant for a combination of cash and stock valued at approximately $2.3B, or $35 per Conversant share. The purchase price, structured to be paid with approximately 48% cash and 52% ADS shares, represents 10x Conversant's expected forward adjusted EBITDA of $230M for 2015. The transaction is subject to regulatory approval and customary closing conditions, and is expected to close by year end. The transaction has been unanimously approved by the boards of directors of the two companies. Alliance Data expects substantial accretion from the transaction: approximately 50c-75c to core EPS in year 1 and year 2, respectively, excluding transaction costs. Importantly, no revenue or cost synergies have been factored into the accretion estimates. Post-closing, Conversant will operate as part of Epsilon. The transaction, which is structured as a merger of Conversant into a subsidiary of Alliance Data, is subject to Conversant stockholder approval, expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and other customary closing conditions

    Subjectgreat call
    Entry09/11/2014 04:18 PM
    Memberci230
    well written write-up too
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