|Shares Out. (in M):||104||P/E||0||0|
|Market Cap (in $M):||83||P/FCF||0||0|
|Net Debt (in $M):||-167||EBIT||0||0|
OneMarket is a micro-cap spinoff whose shares sold off due to “traditional” spinoff forced selling which was exacerbated by international factors. OneMarket is a very-well funded start up with a vision to build a business with a strong moat built on network effect. The value of cash and marketable securities on the balance sheet is $1.44 per “effective” share while shares trade at ~$0.80. If one adds the cash burn of the past two years and price paid for three startups, the “value” per share is ~$2.84.
Please note that all numbers are in USD but share price is denominated in AUD. I translated the share price into USD as well.
OneMarket: Brief Introduction
OneMarket is a technology company that was incubated within Westfield and was spun off (well, it is called demerger in Australia) as part of a merger between Westtield and Unibail-Rodamco.
OneMarket Shares Were Subject to Massive Forced Selling
Non-economic / forced selling was created by “traditional” spin off factors and exacerbated by international complications (i.e., Australian listing).
1. OneMarket market cap was less than $200M when it started trading. Thus, it is de minimis compared to Westfield market cap ($10B+): 50x difference!
2. Spin off distribution ratio: one share of OneMarket was distributed for every 20 shares of Westfield.
3. M&A arbitrageurs who likely piled into Westfield shares after its transaction with Unibail-Rodamco was announced were not natural holders of a micro-cap company.
4. Almost all non-Australian shareholders could not receive shares of OneMarket under the rules and regulations of Australia. Instead their shares were aggregated by a sale agent and then disposed. It would be fair to say that the sale agent was not the most price-concisions seller.
What Does OneMarket Do?
OneMarket’s goal is to develop a retail technology network that seeks to help bricks-and-mortar retailers compete more effectively in the evolving retail environment.
OneMarket wants to develop product solutions which bring together retailers, shopping venues, brands and technology companies (“network participants”) and solve three key issues facing the retail industry today:
(1) technology inefﬁciencies,
(2) issues of cost and access to the latest technology, and
(3) data deﬁciencies.
A typical bricks-and-mortar retailer has fewer touchpoints with its customers than Amazon, Alibaba, or JD and as a result knows significantly less about its customers habits, spending patterns, and purchasing habits than online retailers. In other words, traditional retailers lack holistic views of their customers. Regardless of how much money traditional retailers decide to spend (and by the way retailers are cash strapped!), they will not get such holistic view. Hence, the logical solution is to build a network where its participants would share data and together develop a holistic view of their customers. The network approach would also allow spread resources – money and talent – across multiple retailers. Simplistically, if each large retailer needs to spend $100 on a new product / solution if it builds by itself, wouldn’t 10 retailers be better off if a neutral party builds the product in question for $150 (i.e., $15 apiece) and provide it to everybody?
Only a network approach can help retailers survive in the era of Amazon’s dominance. Such network will have to be run and administered by an independent, trusted third party. OneMarket wants to be such third party.
Spin Off Rationale
Spinning off OneMarket as an independent company was a very sensible move for a variety of reasons.
First, spin off has eliminated or at least substantially reduced potential conflicts of interests. OneMarket as a 100% owned subsidiary of Westfield would have been less likely to attract other owners of shopping venues that are natural competitors of Westfield. Now this issue does not exist. According to Westfield’s filings, Westfield was considering a separation transaction for this exact reason even before its deal with Unibail-Rodamco. However, the merger transaction accelerated the spin off.
Second, the business focus of Westfield and OneMarket is radically different: one is a real estate company, and another aspires to become a technology company building a scalable network.
Third, hiring, retaining and incentivizing tech talent should be easier as a separate company due to ability to issue RSUs and options to employees.
Fourth, the enhanced proﬁle that OneMarket should get as a public company should also assist in attracting network participants.
In October 2012 Westfield established Westfield Labs as an internal innovation lab. Westfield Labs unit was tasked with understanding key concerns and challenges that shoppers experience with Westfield shopping venues and using digital technology to address those issues. As a result, Westfield Labs built digital products and services that were tailored for Westfield properties and shoppers. My read, however, is that Westfield Labs never made a substantial impact on Westfield as a whole.
At some point Westfield management / Westfield Labs realized that trying to innovate within Westfield’s venues would not be sufficient, and the idea of building a network of venues and retailers was born. Westﬁeld board member Don Kingsborough was appointed President of Westﬁeld’s digital and data business in July 2016 and was tasked with deﬁning a new strategy for that business. In January 2017, Westﬁeld Retail Solutions was established with a view to create a broad network of retailers, shopping venues, brands and technology companies spanning well beyond Westﬁeld’s properties.
Corporate Structure and Share Count
OneMarket Limited is an Australian listed company that owns 90% of OM Delaware that is an operating entity. Unibail-Rodamco-Westfield owns remaining 10%. The 2018 Equity Incentive Plan will be diluting both OneMarket and Unibail-Rodamco pro rata.
OneMarket has ~103.9M shares. OM Delaware has ~16M shares. OneMarket owns~14.4M and WCL Holdings own ~1.6M. OneMarket and WCL Holdings would be diluted pro rata by the implementation of the 2018 Equity Incentive Plan. The maximum number of shares of common stock that have been reserved for issuance under the 2018 Equity Incentive Plan is 4M (20% of the issued capital of OM Delaware on a fully diluted basis).
Because of this 90% ownership, I am operating with the “effective” share count of ~115.44M (103.9M / 90% = 115.44M). This number is before future dilution.
Retail Ecosystem Within Which OneMarket Operates
The ecosystem within which OneMarket operates includes brands, retailers, shopping venues, and consumers.
OneMarket Likely Has a Jumpstart on its Competitors
OneMarket likely has a jumpstart vis-à-vis its potential competitors. First, OneMarket and its predecessor spent significant amount of money and human capital to get where it is right now. Second, OneMarket has strong relationships with shopping venues and retailers due to its former affiliation with Westfield.
Building a Moat, Chicken-and-Egg Problem, and Building Momentum
As any other business trying to build a network and subsequently benefit from the network effect, OneMarket would be facing a chicken-and-egg problem. Good news is that OneMarket has already got some shopping venues and retailers. That should make signing up new participants somewhat easier but it is far from being easy.
Importantly, the success of OneMarket would depend on how fast it would build momentum by attracting more retailers and shopping venues. As any network business, OneMarket’s network would be getting more and more valuable with every incremental participant joining. That will solidify OneMarket position and would make other retailers and shopping venues more likely to join.
If OneMarket does not do it fast, it would face two major risks: (1) early adopters may get disengaged and (2) competitors may emerge.
So far OneMarket has developed the following tech capabilities:
1. Consumer identification
2. Communication with Consumers
3. Location Data
4. Logic Capabilities
Consumer identification capability allows to compile common identities in a comprehensive data base of consumers containing useful information for network participants with the ability to connect consumer identities across various touch points.
Communication with consumers capability includes a variety of communication channels whereby network participants and consumers can interact with each other and seamlessly move between channels whilst continuing the interaction in a way that enriches the experience. Those channels include various established mechanisms of digital communication and messaging as well as communication through voice-enabled devices. OneMarket has introduced Hadley which is OneMarket’s consumer facing brand.
Location data capability allows to collect accurate indoor location data in shopping venues, car parks, airports, retailers and other venues.
Logic capabilities enable OneMarket to provide predictive consumer insights to network participants so that they can better service consumers and offer optimal offers to consumers at the right time.
OneMarket currently has 5 products. Below I provide a brief overview of each product.
1. Live Receipts
a. Interactive digital receipt that allows retailers / venues / car parks on network to engage shoppers after a transaction online or in store by creating an engaging post-purchase communication flow with the consumer.
2. Intelligent Parking
a. Network software product that enables all types of venues to upgrade their existing parking offering to reduce difficulties consumers face when entering / exiting controlled parking.
3. Shopper Profiles
a. Network data product that allows retailers/venues to download individual shopper profiles enabling them to offer unique products, offers, discounts and experiences.
4. Shopper Intelligence
a. Network data products that leverages data science capabilities to analyze data for retailers and venues that reveal insights and reformations for performance improvement.
5. Shopper Exchange
a. Digital ad marketplace that enables brands and retailers to drive incremental sales by using purchase and browsing history for targeting and attribution of digital ads.
There are two groups of customers: (1) legacy customers of startups that OneMarket acquired and (2) customers that OneMarket signed up itself.
The first group includes:
- 23 United Kingdom based retailers that currently subscribe to OneMarket’s digital receipts product, which is a precursor to the fully- networked Live Receipts product.
- Approximately 36 brands that used the Shopper Exchange product in 2017
The second group is more relevant and important for OneMarket going forward. Nordstrom signed up for Shopper Exchange and Live Receipts products. OneMarket also signed up Unibail-Rodamco/Westfield. Los Angeles International Airport (LAX) implemented Live Receipts product for an initial term of 6 months (it is unclear whether that pilot has been extended).
Finally, on June 11, 2018 (i.e., after the spinoff) OneMarket announced that Retailers Express, GUESS, and New Stand, as well as shopping center owners/operators Macerich, Taubman and Steiner + Associates are partnering with OneMarket.
OneMarket would monetize its non-media product and media products differently.
Non-media products would be monetized through subscription fees and usage fees (e.g., transaction fees, revenue share, cost savings share).
Media products would be monetized mostly through a traditional CPM / CPC model.
Cash and Expected Cash Burn
OM Delaware has ~$166.5M of cash and marketable securities on June 30, 2018.
OneMarket estimates that its cash burn would be ~$6.9M per month excluding the initial set-up and closure costs.
That money would be spent on further product and technology development: “The expenses are expected to be incurred regardless of the level of revenue generation. Essentially all of the expected cash expenditures will be incurred to further develop the OneMarket network and related products, as well as sales, general and administrative efforts.” (Source: Demerger Prospectus).
The monthly cash burn breakdown is as follows:
- Salaries and wages = $3.6M
- Employee beneﬁts = $0.6M
- Contract labor = $0.8M
- Technology contracts = $0.6M
- Legal and other professional services = $0.2M
- Rent and other facilities costs = $0.4M
- Other general and administrative costs = $0.4M
- Marketing = $0.1M
- Public listing costs = $0.2M.
OneMarket expects that its cash will be sufﬁcient to meet its anticipated cash needs until late 2019. After that OneMarket will likely need to access other sources of funding. I would note that these calculations provided by OneMarket assume zero revenue generation.
Future Funding and Dilution
According to the Demerger Prospectus, OneMarket or OM Delaware would need to raise more capital in late 2019. However, either entity can raise capital earlier than that depending on available opportunities. Importantly, it is more likely that new capital would be raised at OM Delaware level.
What Is One Market Worth?
At its core, OneMarket is a well-funded start up. It has de minimis revenue, several, products, grand vision, and lots of cash on the balance sheet. Predicting its revenue and free cash flow is next to impossible.
However, we can look at the amount of capital that OneMarket has spent to date and how much more it expects to spend using cash on its balance sheet to arrive at the “replacement cost”. If we can buy shares of OneMarket below substantially below that that “replacement cost”, shares are attractive. Obviously, the key underlying assumption here is that $1 of historical expenses has created $1 of value and the same would be true for the future expenses .
The replacement cost consists of three components: (1) cash to be spent in the future (from the balance sheet), (2) cost (value?) of startups that OneMarket acquired through OneM&A transactions, and (3) cash spent on operations (historical).
Element #1: Cash and Marketable Securitas on the Balance Sheet
As of June 30, 2018, OneMarket had cash and marketable securities of $166.5M or $1.44 per “effective” share.
Element #2: Historical Cash Burn
Net cash ﬂows used in operating activities was negative ~$67.9M in 2017 and negative $39.2M in 2016. Thus, the total for two years was negative ~$107M. This equates to $0.93 per “effective” share.
I will ignore any CapEx to keep things simple.
Element #3: M&A Transactions to Acquire Startups
OneMarket has acquired three companies:
1. 12 Digit Marketing, Inc. (12 Digit) in February 2017 for $40M.
2. FluiM, Inc. (FluidM) in March 2017 for $3.5M.
3. Paperless Recipients Ltd (Yocuda) in September 2017 for $11.3M.
Thus, the total consideration paid was ~$54.8M. This equates to $0.47 per “effective” share.
It is important to note that the goodwill from those acquisition does not show up on OneMarket’s balance sheet. OneMarket took a massive goodwill write down at the end of 2017 and this is how the company explained it:
“OneMarket is an early stage technology operation, with revenues unable to be forecast with sufﬁcient reliability to support the carrying value of acquired goodwill. As a consequence, acquired goodwill has been impaired in full at 31 December 2017.”
Putting It All Together
Putting three elements together I get to the value of ~$2.84.
I know that that this approach has several limitations and deficiencies. Here are just a few. Was the historical cash burn justified? Has the company overpaid for three startups? Will the future cash burn be efficient?
I do not know answers to these questions. What I do know is that $2.84 is A LOT HIGHER than $0.80 (AUD 1.10) where shares currently trade. If you ignore the historical cash burn and price paid for startups, the cash balance is still way above the share price. That’s why I call “value investing and margin of safety meet VC investing”.
You can read the bios of a half a dozen executives in the filing, so I will focus on two key executives.
Donald Kingsborough is CEO. He worked for Atari in the late 70s and early 80s. More importantly, in 2001 he founded Blackhawk Network and was its CEO for a decade. You are probably very familiar with Blackhawk Network’s business (gift cards exchange business benefiting from the network effect). Thus, Donald Kingsborough successfully built another network business in the past!
After Blackhawk he worked as PayPal’s Vice President of Global Retail, Global Business and Corporate Development.
Sadly and importantly, Mr. Kingsborough has a health issue which presents an obvious risk. This is what the Demerger Prospectus says:
“Mr Kingsborough has a health issue that may affect his ability to perform his duties if there was a deterioration. Mr Kingsborough has advised the Westﬁeld Board and the OneMarket Board that he currently considers that the issue does not prevent him from continuing in his role. The matter is being closely monitored and measures are in place to provide support to him as required.”
CTO Mike Blandina seems to have very solid experience. He was Vice President of Engineering at PayPal, Director of Engineering for Google Wallet, Chief Operating Ofﬁcer at TxVia, Inc and Group Vice President and Chief Technology Ofﬁcer at Blackhawk Network. So CEO and CTO go back to Blackhawk.
It is worth noting that several other C-level executives worked at Blackhawk. It makes it more likely that the executive team has the right chemistry.
All in all, I tend to like the management team.
I do not like the executive compensation arrangements.
CEO has a base salary of $1.4M and can receive a bonus of $1.4M (100% bonus).
CEO also received 700K RSUs (~3.5% of OM Delaware).
CTO has a base salary of $650K and can receive a bonus of $650K (100% bonus).
CTO also received 290K RSUs (~1.45% of OM Delaware).
No collective bargaining agreements.
There are lot of risks:
1. Product failure.
2. Business model failure.
3. CEO health issues.
4. Inefficient cash burn.
Why do I like it then? First, Westfield went through a great deal of trouble to create a separate public company OneMarket. Probably, Westfield board of directors saw a great potential. Second, OneMarket is very well funded. Third, the share price is below net cash and way below the “replacement” cost.
1. Customer wins.
2. Product launches.