Category: advertising technology

xAd nabs WeatherBug amid improving forecast for consumer data

Scott Denne

Contact: Scott Denne

All of the venture money that poured into the early days of ad tech ensured that software wouldn’t be a differentiator – any given sub-segment of that market is home to at least half a dozen competitors, often many more. Instead, the market will be won or lost based on a more precious commodity than software developers and data scientists: access to more and better consumer data. With this in mind, xAd has acquired Earth Networks’ consumer app business, WeatherBug. In particular, the target’s mobile app offers an incentive for users to enable always-on location tracking, leading to more valuable consumer data.

The acquirer enables advertisers to target ads based on their location. That includes targeting ads to consumers near a particular location, targeting consumers who have been to a certain location in the past, and targeting audience segments based on their movement patterns. This kind of data is likely to supplant the value in tracking only online behavior. After all, what’s a better indicator of behaviors and preferences: where consumers spend time in real life or where they waste time online?

Vendors building these applications face a notable hurdle in obtaining differentiated data. Most of them draw location data from the information provided in bid requests on mobile ad exchanges. That data for any consumer only comes when they open an app that tries to fill an empty ad impression. And there’s a lot of poor-quality data flowing through that ecosystem. Many publishers have realized that adding any latitude and longitude digits to a bid request raises the value, so an outsized amount of location data places consumers at the geographical center of the US or at Amazon Web Services datacenters.

To get around that, xAd and its fellow location-targeting companies such as PlaceIQ and NinthDecimal have increasingly turned to partnerships with mobile app developers that can provide consumer locations with a greater degree of accuracy and on a more frequent basis. And apps like WeatherBug’s, which give consumers an incentive to enable always-on location tracking, are even more valuable. In addition to drawing frequent, reliable and unique consumer location data from WeatherBug’s 20 million monthly users, the deal also gets xAd a license to the weather data from the target’s former parent company.

The appetite for more and better data isn’t limited to ad tech. As predictive analytics and artificial intelligence become a meaningful differentiator of enterprise software, more of those vendors will have to seek out data to feed those capabilities. Today’s transaction is an example of that, as are larger ones such as Microsoft’s acquisition of LinkedIn, IBM’s purchase of The Weather Company’s technology business and Salesforce’s pickup of Krux.

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AT&T pays $85.4bn for Time Warner amid strong demand for original content

Scott Denne

Contact: Scott Denne

Original content plays a starring role in telecom’s future as AT&T shells out $85.4bn for Time Warner. Facing competitive pressures in its core wireless business – revenue was down year over year in that segment last quarter – AT&T plans to leverage Time Warner (owner of HBO, Warner Brothers Studios and Turner Networks, among other properties) to provide original content for the latest online content distribution properties, such as its forthcoming streaming service, DIRECTV Now.

The availability of commercial-free, on-demand content initially drew eyeballs to streaming services such as Netflix, Hulu and Amazon Prime. As troubling as that was for TV and Internet service providers to watch, it was just a remake of the distribution of content – a business where they’re comfortable. Increasingly, though, as surveys by 451 Research’s VoCUL show, original content is the draw. In our most recent survey in June, the number of Netflix subscribers that cited original content as an important factor in their subscription rose seven points from December to 34% – the same percentage of subscribers to Time Warner’s HBO streaming service also cited original content. (Only Showtime had a higher percentage, with 36%).

Differentiated content comes with a substantial price tag. AT&T will spend $85.4bn in cash and stock (split evenly) to acquire Time Warner. After bolting on Time Warner’s existing debt, the target has an enterprise value of $106bn, or 3.8x trailing revenue. That’s almost a turn higher than the valuation of Walt Disney, a company with growth in the high-single digits (compared with Time Warner’s slight declines this year). AT&T has taken out a $40bn bridge loan to fund the transaction, which it expects to close next year. When it does, AT&T expects to continue to operate the acquired business as a separate unit with the same management team.

For Time Warner, the deal provides a way out of a challenging time for high-end content producers. When quality content was pricey to create and distribute, Time Warner and a handful of others could claim a monopoly on consumer attention. That’s no longer the case. Coupled with that, trends in advertising are beginning to favor entities that can provide targeted audiences – something AT&T plans to pursue with this move. For now, advertisers still look toward networks to reach large-scale audiences. But Time Warner and others, which have no direct links to their audiences, are at risk of being disintermediated by content distributors and service providers. In that respect, it makes sense for Time Warner to make a hedge against this trend by linking up with AT&T. It also helps explain why Time Warner management had little interest in a slightly smaller bid from 21st Century Fox in 2014.

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The Krux of Salesforce’s advertising push

Scott Denne

Contact: Scott Denne

Salesforce makes a bold and belated move in advertising technology with the $680m purchase of Krux. The transaction brings Salesforce into the market for audience management platforms at a higher price and a few years behind rivals Adobe and Oracle. That’s not to say it’s too late – in Krux, Salesforce has picked up a company that’s been able to thrive as software giants poured into its market.

The acquisition of Krux caps a record amount of M&A for Salesforce. According to 451 Research’s M&A KnowledgeBase, one-third of the company’s purchases have been announced since the start of 2015. Deals during that same period, including Krux, account for almost half of Salesforce’s total disclosed and estimated M&A spending.

Its recent moves have printed at aggressive multiples. In its largest, the $2.8bn reach for Demandware, Salesforce paid 11x trailing revenue for an established and growing e-commerce platform. In nabbing smaller companies, such as configure-price-quote vendor SteelBrick and predictive analytics startup BeyondCore, Salesforce paid upward of 20x. The acquisition of Krux likely came in above 10x, but shy of 20x as it’s a more mature business than those latter two. While steep, there’s justification in that price.

For one, Krux was able to grow from serving mostly publishers to mostly marketers. The company also did that at a time when most of its peers were reformatting their strategies to avoid Adobe and Oracle – Krux, in contrast, was expanding by going head to head. Second, most of its competitors had already been acquired, leaving Salesforce with few options in this category – and the players that had sold went for 6x and up. As the advertising market begins a transition from valuing reach toward valuing individuals, audience management platforms are becoming the link between a company’s first-party data and its advertising.

Krux isn’t Salesforce’s first foray into advertising – it already sells a social media ad platform and has partnered with Krux and other ad-tech providers to enable Salesforce Marketing Cloud customers to use their marketing audiences for paid media campaigns. Still, the deal goes beyond its previous ambitions in the space. Krux is built to be the repository of advertising data for sophisticated advertisers and some of the world’s largest media buyers. Salesforce’s prior efforts in this niche revolved around enabling email marketers to spread into new channels.

Look for a full report on this transaction in tomorrow’s 451 Market Insight.

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The Trade Desk trades up

Scott Denne

Contact: Scott Denne

The first successful ad-tech IPO in two years made a strong debut on Wall Street today. But don’t expect the floodgates to open for ad-tech offerings anytime soon. The Trade Desk priced at $18 per share and began trading at $28 for a market cap north of $1bn, or 7.2x trailing revenue. Within ad-tech, there aren’t many companies that offer investors the scale, growth and potential sustainability to draw such interest.

Trade Desk deployed a different sales strategy than most of its media-buying software peers. Vendors in that space were forced to choose between scaling up quickly through short-term, low-margin deals with ad agencies or fighting those agencies for direct business with marketers. Trade Desk positioned itself as a software provider to agencies only, and therefore not a threat to its own customers. Its positioning and product led revenue to grow 2.5x last year to $114m. Through the first half of this year, it’s running at $149m trailing revenue. It’s not the largest of its peers, but does have the highest growth at that scale.

Trade Desk’s debut is good news for AppNexus, which has been working toward an IPO of its own for the past year or so. However, most ad-tech vendors with the kind of growth that Trade Desk generates are simply too small to consider a public offering. And those that have the size don’t have the growth.

Today’s offering is reminiscent of Rocket Fuel’s 2013 IPO. That company also went public on the strength of scorching growth derived from sales to the agencies. Rocket Fuel currently trades down 95% from its debut. One of its problems was that it was winning high-margin sales from agencies. Once it went public and those margins became known, its customers began to demand that it take lower margins, which hindered its growth. While that’s a risk for Trade Desk, it’s far less pronounced.

Rocket Fuel was keeping about 55% of the media spending running through its platform, while Trade Desk keeps 21%. Trade Desk targets a different part of the agency business. As its name suggests, Trade Desk sells to agency trading desks – sophisticated digital media buying operations – many of which have a contractual relationship with the company. At the time of its IPO, Rocket Fuel was catering to agency buyers on a one-time basis and before most agencies’ holding companies sought to consolidate digital spending via their trade desks.

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Trade Desk looks to trade publicly

Scott Denne

Contact: Scott Denne

The Trade Desk unveiled its prospectus Monday, showing that its agency-focused strategy may have enabled it to meet the challenge of scaling an ad-tech business. Most of Trade Desk’s peers have a complicated relationship with ad agencies and the holding companies that own them. Agencies control an outsized amount of ad spending, yet they treat most media buying platforms as a media rather than software purchase, and play ad-tech competitors off each other to see who will take the lowest margin for a campaign. This has led many media buying platform purveyors to seek to sell their wares to marketers directly, bypassing the agencies and hoping to exchange unpredictable, low-margin orders from agencies for long-term, software-like contracts.

Rather than fight ad agencies, Trade Desk embraced them by selling its software strictly to them and not to the agencies’ marketer customers. That bet has paid off. The company’s revenue increased to $114m in 2015 from $45m a year earlier. Its topline rose 83% year over year through the first six months of 2016. That growth hasn’t come at the expense of profits. The Ventura, California-based vendor eked out a tiny profit in 2014 and grew that to $15m last year. This year it’s on pace to bump that up a bit.

Selling to ad agencies is expensive. Profits remain elusive for many ad-tech firms because the sales process is never-ending, as many agencies choose to purchase media buying platforms as a one-off media expense, rather than an ongoing license or subscription. Trade Desk appears to have gained more traction in selling software contracts to agencies (389 of its agency customers have contracts in place with minimum spending levels), which has kept its marketing and sales costs down as the use among existing customers has risen.

Trade Desk allocated just 24% of its 2015 revenue toward selling its products. Other publicly traded ad-tech providers spend far greater portions of their net revenue on this activity. TubeMogul spent 41% of its revenue on sales and marketing last quarter. Rocket Fuel shelled out 55%, though far lower than the 88% it was spending at its IPO. Ad network specialists Tremor Video and YuMe were even higher at 65%.

Its ability to sell ad-tech as software, its high growth and its profitability should enable Trade Desk to fetch a superior multiple than its peers when it does begin to trade. And it will need to trade well up from those companies to get a valuation above the $600m it garnered in a private financing earlier this year. TubeMogul is the best available comp for Trade Desk. Both vendors offer a media buying platform, and both position themselves as software firms rather than services or media companies. At 57% last year, TubeMogul’s growth is less than half that of Trade Desk and the vendor has yet to turn a profit. Despite garnering one of the best multiples in ad-tech, TubeMogul trades at roughly 2x net revenue. To hit $600m, Trade Desk would need to get 4x trailing revenue.

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Media.net becomes latest Chinese ad-tech target

Scott Denne

Contact: Scott Denne

Inflated stock value on China’s exchanges and a belief in a coming currency devaluation continue to fuel a boom in overseas M&A from the People’s Republic. The latest acquirer to add to that trend is Beijing Miteno Communication Industrial Technology, which announced the purchase of Media.net, a contextual advertising technology firm, for $900m in cash. With more than four months left to go in the year, China-based buyers have crushed their previous record on foreign acquisitions three times over by spending $13.1bn, compared with $3.7bn in all of last year.

We expect such deals to continue, particularly in ad-tech, as vendors in that country widely anticipate an eventual devaluation of their currency. Whether such a devaluation will occur isn’t known, but it’s generally accepted by much of the business community in the country and that has been a factor in the sudden spurt of M&A.

China-based acquirers have been particularly aggressive in their pursuit of ad-tech companies like Media.net. These businesses play well into the arbitrage strategy that’s driving much of China’s overseas acquisitions. The buyer trades at 12.6x trailing revenue on the Shenzhen Stock Exchange – adding Media.net at a 3.5x multiple should boost that nicely. That’s a dynamic we’ve seen in several, though not all, such purchases.

Advertising technology plays well in that arbitrage strategy and those businesses have become popular targets for Chinese shoppers. On a revenue basis, valuations tend to be lower in ad-tech than other tech sectors because gross margins are lower – 15-25% gross margins are quite common. Also, a recent dearth of US acquirers for those assets has driven prices even lower. According to 451 Research’s M&A KnowledgeBase, the median historic multiple on ad-tech transactions is 2.7x TTM revenue. That has dropped to 2.2x in the past 24 months.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Verizon strikes $4.8bn deal for Yahoo’s core biz

Scott Denne

Contact: Scott Denne

Verizon moves to augment its media business with the $4.8bn purchase of Yahoo’s central assets. The deal, which wraps up years of speculation about Yahoo’s future in the new media landscape, will see its core business and operations head to Verizon to be integrated with AOL, while its investments and other assets will stay behind in a company that will be renamed and restructured as a publicly traded, registered investment entity.

Aside from licensing revenue from some of the noncore patents that Yahoo will keep, nearly all of its $4.9bn in trailing revenue will head over to Verizon. The transaction values the target’s assets at about 1x trailing revenue, compared with the 1.6x that Verizon paid for AOL last year. The discrepancy in value reflects the depth of the comparative technology portfolios. Both vendors spent heavily on ad network businesses in the back half of the past decade and early years of this one. More recently, AOL turned its investments toward programmatic, attribution and other advanced advertising technology capabilities. Yahoo doubled down on content while its ad network technologies aged.

This move is all about scaling Verizon’s media footprint. Both Yahoo and AOL have roots in the Web portal space. And both are selling to Verizon for similar prices. But Yahoo’s media assets are substantially larger. AOL generates roughly $1bn from its owned media properties – Yahoo pulls in 3.5x that amount. Owning Yahoo’s media properties will enable Verizon to offer greater reach to advertisers and therefore land bigger deals and at better margins than the ad network revenue that made up almost half of AOL’s topline. Also, having a larger audience for its owned properties will provide AOL’s ad-tech business with more data that it can use to improve its audience targeting.

Telecom services is a saturated market with few net-new customers. Most growth comes from winning business away from competitors. With this acquisition (and AOL before it), Verizon plans to leverage its investments in mobile bandwidth and distribution – its existing mobile and TV customers – to find growth in the digital media sector. According to 451 Research’s Market Monitor, digital advertising revenue in North America will increase 12% this year to $40.6bn, compared with just 4% growth for mobile carrier services.

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Mobvista sees path to a broader gaming platform with GameAnalytics in the fold

Scott Denne

Contact: Scott Denne

Mobvista makes its second international deal of the year with the acquisition of mobile behavioral analytics vendor GameAnalytics. Fueled by its recent listing on China’s NEEQ exchange, an over-the-counter board for Chinese startups, Mobvista is expanding from its roots as a mobile ad network into a broader platform for gaming monetization. Its previous transaction, the $25m purchase of NativeX, brought it reach into the US market as well as video advertising and other rich media formats.

Today’s pickup of Copenhagen-based GameAnalytics gets it software that provides game developers with audience behavioral and segmentation data that can be deployed for marketing campaigns or product development. The move mirrors Tapjoy’s (much earlier) transformation from a mobile ad network into a gaming monetization platform with its reach for South Korea’s 5Rocks two years ago. Other competitors selling a broad platform for game developers include Chartboost and Unity Technologies, a game engine developer that announced a $181m funding round earlier this week.

Mobvista is one of an expanding number of China-based businesses using M&A to grab a bigger share of the mobile app ecosystem. So far this year, Chinese companies have acquired 10 mobile assets for a total of $9.2bn – both numbers are higher than the total at the same point in any other year, according to 451 Research’s M&A KnowledgeBase. This year’s deal value total, bolstered by Tencent’s $8.6bn acquisition of Supercell, is already double that of any other previous year. Mobile apps are a large and high-growth market in China. According to 451 Research’s Mobile Marketing and Commerce Forecast, mobile advertising revenue in China will increase 86% this year to $11.6bn and account for more than one-quarter of the global market.

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Content and data form foundation of Adobe’s M&A strategy

Scott Denne

Contact: Scott Denne

At its annual marketing user conference, Adobe laid out a strategy to extend throughout and beyond marketing by touching on every part of the customer experience with content and data offerings. The company has accumulated the biggest and broadest suite of marketing software products among any of its enterprise software peers. However, it will take many years for marketing software to become a mature segment. For Adobe to maintain its position, it will need to continue to expand its offerings.

Despite the hyperbole about the level of technology spending among CMOs, marketing software remains in an early – though promising – stage. Spending continues to rise and the landscape is fragmented. It will likely remain so as new forms of media and mobile devices continue to sprout. And with them, new methods of customer engagement and increasingly fragmented audiences and data sets. The exits of enterprise software vendors such as Teradata, Hewlett Packard Enterprise and SDL provide Adobe and other remaining incumbents with an opportunity to gain market share and push into emerging corners of this category.

Adobe began its foray into digital marketing with acquisitions – first website analytics company Omniture (2009), and then website content management vendor Day Software (2010). Those two products currently sit at the core of Adobe’s marketing suite and much of the growth in its Marketing Cloud, which currently generates $1.4bn in trailing revenue, comes through the sale of them or cross-selling other offerings to customers that already use Adobe for analytics or content management.

As Adobe looks beyond marketing and toward becoming the data and content layer that powers the customer experience landscape, it could expand into areas such as e-commerce platforms, cross-channel attribution and customer data platforms. Subscribers to 451 Research’s Market Insight Service can access a full report on Adobe’s strategy, product portfolio, competitive positioning and potential targets in the marketing ecosystem.

Oracle gets back to buying

Scott Denne

Contact: Scott Denne

As valuations and deal volumes come off of last year’s high, Oracle is heading in the opposite direction. With today’s acquisition of Textura, the database giant has printed its fourth deal of 2016, after just two in all of last year. Despite that, it is not necessarily a bargain shopper. In today’s transaction, Oracle is paying $663m, or 7.6x trailing revenue, for construction management SaaS vendor Textura. Not cheap, but better than it would have spent a year ago for the target, when its shares were trading two turns higher. The purchase continues a trend that accounted for much of Oracle’s 2014 spending spree on vertically focused software (MICROS being the most notable example).

Oracle seems to come to the table more often when the market is a bit more favorable to buyers. Last year’s drop in acquisitions corresponded with an overall 18% annual rise in average valuation-to-revenue multiples (excluding those targets with less than $10m in TTM revenue), according to 451 Research’s M&A KnowledgeBase. Similarly, the largest jump in average valuation in the past decade – 36% in 2010 – witnessed Oracle’s second-lowest spending ($1.9bn) during that same period.

All signs point to a continued favorable environment for Oracle to go shopping. In our December 2015 survey of bankers and corporate development executives, nearly two-thirds of respondents anticipated a decrease in valuations in 2016. That’s almost double the previous high-water mark – or low-water mark, depending on your perspective – in our survey. Not to mention, overall deal value was down to $72bn in the first quarter of this year, from $121bn a year earlier. Even with today’s transaction, however, Oracle is still tracking below its historical pace.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.