January 28, 2011, 2:48 pm

VELT - Velti

VELT - Velti

VELT - Velti plans on offering 14 million shares(assuming over-allotments) at a range of $9-$11. Insiders will be selling 1.9 million shares in the deal. Jefferies is leading the deal, Needham, RBC, Cannaccord and ThinkEquity are co-managing. Post-ipo VELT will have 50.8 million shares outstanding for a market cap of $508 million on a pricing of $10. Ipo proceeds will be used to repay debt and fund an acquisition.

CEO and COO will each own 7%-8% of VELT post-ipo.

**Note that VELT has been trading on the London Stock Exchange since 5/06 under the symbol VEL. The close on 1/21/11 was $9.76 per share in US dollars. This is technically a secondary, although the first time VELT has floated shares in the US.

In the past these initial US listings of companies listed elsewhere in the world tend to run up into US offering and then initially sell-off post US placing. VELT has run up 30%+ in London over the past 1-2 months. 52 week range of $5-$10, VELT is right at the top of trading range in London.

From the prospectus:

'We are a leading global provider of mobile marketing and advertising technology that enable brands, advertising agencies, mobile operators and media companies to implement highly targeted, interactive and measurable campaigns by communicating with and engaging consumers via their mobile devices.'

In addition to mobile, VELT's platform allows their customers via a single online userface to use traditional media such as television, print, radio and outdoor advertising.

Through the first nine months of 2010 600 clients used VELT's platform to conduct 1,500 campaigns. Clients include 13 of the 20 largest worldwide mobile operators. Other campaign clients include AT&T, Vodafone, J&J and McCann Erickson.

Ads can be placed in 30+ countries.

Real-time monitoring of ads. Platform enables clients to manage media buys, create mobile applications, design websites, build mobile CRM campaigns and track performance.

Acquisition - in 9/10 VELT acquired Mobclix a US based mobile ad exchange. In addition, VELT acquired Ad Infuse in 2009 and Media Cannon in 6/10.

Interesting niche here with the massive growth in use of mobile technology to communicate and access data & entertainment. We've seen numerous web based online advertising ipos over the past decade +, one would expect the focus going forward will be to maximize ad spending and power on mobile devices.

wordwide mobile marketing/ad spending is expected to increase from 2007's $1.64 billion to $29 billion by 2014.

Two two customers accounted for 30% of revenue the first nine months of 2010.

75% of revenue is in Euros. UK accounts for 1/3 of revenues with both Russia and Greece accounting for 10%+.

VELT owns a majority in 2 joint ventures, one in India and one in China.


$1 per share in net cash post-ipo.

Very seasonal here as VELT notes holiday spending and ad budgets combine to make the 4th quarter the strongest annually, by far. VELT derives all of their operating margin annually in the 4th quarter.

2010 - Financials are a bit difficult to decipher because of an odd revenue recognition blip in the 4th quarter of 2009. As VELT is already trading in the London, we'll simply use those top-line estimates for 2010 and 2011. Revenue should be $120 million, a 30% increase over 2009. Operating margins slightly positive in the 10% range. Earnings of $0.16.

2011 - $160 million in revenues, another 33% increase annually. Good spot here for future growth, VELT however has not quite been able to post much in the way of operating margins. Would not expect more than 12%-15% operating margins total in 2011. Earnings of $0.30. On a pricing of $10, VELT would trade 33 X's 2011 estimates.

Conclusion - I like this niche quite a bit and would like this deal much more were it not already trading for years on another worldwide exchange. VELT in London has risen 30%+ over the past 6 weeks or so heading into this deal. This is a recommend, but keep in mind these type of ipo/secos that run up into offering tend to cool off before moving higher. Interesting deal in a niche that should show strong growth mid-term+.

January 25, 2011, 5:05 pm

DMD - Demand Media

DMD - Demand Media

DMD - Demand Media plans on offering 8.6 million shares at a range of $14-$16. Insiders will be selling 3.5 million shares in the deal. Goldman and Morgan Stanley are leading the deal, UBS, Allen, Jefferies, Stifel, RBC, Pacific Crest, Raine and JMP are co-managing. Post-ipo DMD will have 83.7 million shares outstanding for a market cap of $1.256 billion on a pricing of $15.

The bulk of ipo proceeds will be used for investments in website content.

Oak Investment Partners will own 27% of DMD post-ipo, Spectrum Equity 17% and Goldman Sachs 7 1/2%.

CEO Richard Rosenblatt, former Chairman of MySpace, was instrumental in the eventual sale to News Corp in 2006. Mr. Rosenblatt also steered iMall towards a $500-$600 million sale in 1999. Pretty good timing by Mr. Rosenblatt (in both cases) as had he waited just a few years later on each, the selling price would have been massively lower.

From the prospectus:

'We are a leader in a new Internet-based model for the professional creation of high-quality, commercially valuable content at scale.'

DMD claims that instead of creating content based on anticipated consumer interest, their properties create content that responds to actual demand.

At heart DMD is a large group of freelance online content creators as well as a website registrar. DMD contracts more than 13,000 freelancers to produce articles and videos for its websites and outside online publishers. Revenues are accrued from advertising placed on the content. Demand also runs a domain name registry, eNom, which accounts for 35-40% of revenues.

The two segments:

Content & Media - Freelancer fueled content creation studio and a network of websites including eHow.com, Livestrong.com and Cracked.com. Surprisingly DMD's owned and operated websites comprised the 17th largest web property in the US. I've looked at the list and I do not believe I have ever intentionally clicked on one of DMD's websites. 105 million unique visitors worldwide monthly. In addition, DMD places content on 375 third party websites. Bulk of Content & Media revenues are derived from ads placed on their content. **In 2010 DMD's 13,000 freelance content creators generated 2 million online articles and videos. DMD does have a number of big name third party customers including USAToday.com, the NFL's website and various newspapers online sites. This segment accounts for 60%-65% of revenues.

Registrar - 10 million domain names under management, worlds second largest registrar overall. 72% 2010 renewal rate for expiring domain registrations. 35%-40% of annual revenues.

***Note that 69% of content produced in 2010 was for DMD's eHow.com website. We can almost simplify this ipo down to this: DMD is ehow.com and a registrar, enom.com.

Two interesting notes: DMD pays just $15-$30 per article on average to their freelancers. However DMD has opted to depreciate some of this expense out over 5+ years as they claim that is the useful revenue generating lifespan. Very unusual as all other public web properties expense content costs in real time in the quarter in which they occur. DMD's method will make them appear more profitable in the short run than actual cash flows. Oddly while it makes them appear more attractive on the bottom line currently, it could negatively impact them down the road as they are depreciating years of costs that have been long paid. Personally we think the claim that an article placed online has 5+ years of useful revenue generation is a bit of stretch. Not that huge of a deal however, as the expenses will need to be accounted for at some point whether all at once or over time.

Wholly owned content library currently consists of 3 million articles and 200,000 videos. DMD expects this library will increase dramatically going forward as they continue to aggressively add content to their shelves.

Growth - nicely scalable business here, limited only by the volume of ad revenue generating content DMD can churn out. Really, the question/concern here is how much content can a company churn out that will generate ad revenues? DMD does plan on focusing internationally going forward and sees that as a prime growth spot.

Google relationship - Google's cost-per-click advertising accounted for 28% of 2010 revenues. DMD eschews direct sales staff for most of their ad generation instead utilizing Google's ad generation service.

41% of traffic derived from internet search engines with majority coming from Google.


About $1 per share in cash post-ipo.

**Nearly all of DMD's growth is being generated from their Content side as the Registrar segment have been relatively flat the past three years.

23% of 2010 revenues derived from eHow.com.

Revenue growth has been solid. Revenues of $170 million in 2008, $198 million in 2009 and a nice breakout to $252 million in 2010.

**DMD has never posted an operational profit in any fiscal year to date.

2010 - $252 million in revenue, a solid 27% increase from 2009. Slightly negative operating margins. Should note that DMD for the first time moved into a slight operating profit in the back half of 2010. Loss of $0.03. Note that cash flows will also be negative in 2010.

DMD to date has not been able to significantly lower their operating expense ratio. In 2008 it was 111%, 109% in 2009 and right around 100% in 2010. Going forward the longer term success of this ipo will be levered to DMD's ability to show more improvement in this metric...to date it has not occurred.

2011 - Looking at trends, would not be surprised to see DMD book $300 million in revenues. Operating margins have been slowly trending towards positive. 5% positive operating margins in 2011. DMD has extensive tax loss carry-forwards putting the tax rate in the just the 10% ballpark. 4.5% net margins, $0.16 EPS. Cash flows should be about break-even in 2011.

Conclusion - 2nd tier internet ipo not generating much in the form of positive cash flows or earnings. Having written that, organic growth here has been solid the past two years and appears to be trending well into 2011. At a $1.256 billion market cap (on a $15 pricing), this appears pretty fully valued here on ipo. May get some play short term due to prior successes of the CEO.

In addition, this ipo looks like an initial step to set a baseline valuation for a future buyout. eHow ranks as the number 37 visited website in the US, well ahead of another niche site such as WedMD. WBMD currently has a $3 billion market cap with about double the expected 2011 revenues of DMD. WBMD is also more profitable, however it was not at time of ipo a few years back. If one wants to make a bull case here based on comparables and buyout potential, I believe it could be made...even though I do see this one fully valued in the $14-$16 range.

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