Sizmek: Pure-Play Online Ad Delivery Platform, High Double-Digit Earnings Growth and Reasonable Valuation

Sizmek (Nasdaq: SZMK), recently spun-off as the online advertising business of Digital Generation Inc. (DGIT), has over 15 years of pioneering experience in targeted online advertising development, planning, delivery and analysis – using rich media, video, traditional online channels and social media. The company’s open ad platform delivers creative and finely targeted digital ads across online screens – computers, tablets, mobile devices and more – through its network of 20,000 advertisers that serve over 1.5 trillion impressions each year across 48 countries. Sizmek has about 900 employees.

As part of its spinoff from DGIT, Sizmek shareholders will receive a special $3 cash distribution for every Sizmek share held.

For its fourth quarter ended December 31, 2014, Sizmek reported a 16% increase in revenue and a 42% jump in adjusted EBITDA. For the full year, adjusted EBITDA was up 112% and operating cash flow more than doubled.

At $12.98 per share (as of March 7, 2014), Sizmek has a market capitalization of $395.3 million – 1.09x book value – based on about 30.8 million shares outstanding. Shares started trading on the Nasdaq on Monday, February 10, 2014, and have limited history as a public company. The company is debt-free and offers sizable capital appreciation upside.

At roughly 1x book value, shares are very compelling given high double-digit earnings growth, zero debt and strong cash reserves. As such, Sizmek is very well positioned at the cusp of globally-exploding social media advertising as an undisputed leader in its space.

In February 2014, Sizmek launched Social Connect – a way to connect partners in the social media ecosystem with Sizmek’s Open Ad platform and social marketing tools for rich media creative development, ad targeting, verification and tracking. With Sizmek, companies can advertise on fragmented social media sites using a single comprehensive platform that simplifies the process and significantly boosts consistency, targeting, tracking and ad effectiveness.

15-year Pioneer Rebrands as Sizmek, Offers $3 One-Time Dividend

Sizmek’s predecessor company, Digital Generation, was a leading multi-screen advertisement management and distribution platform that enabled ad campaign management across television, the Internet and mobile devices – faster, smarter and more competitively. DG had the world’s largest hybrid network for broadcast video delivery through a combination of technology, services and a hybrid satellite + Internet network. Through unified multi-screen ad serving and management, the company also offered unified asset management and unparalleled cross-channel research and analytics. DG’s technology allowed over 11,000 global advertisers and agencies to reach their target audiences through 6,000 television broadcast stations and over 11,500 web publishers in 78 countries. DG managed over 10% of the world’s media assets.

In 2013, DGIT contemplated reorganization with the sale of its television ad delivery business to privately-held Extreme Reach Inc., which offers a video ad platform, and a spinoff of DGIT’s online assets into an independent publicly traded company.

In February 2014, DGIT announced the spinoff of its online assets and advertising business into a new online company – Sizmek, Inc. (Nasdaq: SZMK). Existing DGIT shareholders received one Sizmek share and $3 in cash as a special distribution for every DGIT share held. Sizmek’s online advertising business is used by over 5,000 ad agencies in 48 countries. After the transaction, Sizmek had zero debt, $60 million in cash and $60 million in working capital. Sizmek shares commenced trading on February 7, 2014.

In parallel, the company announced the sale of its television ad delivery business to Extreme Reach for $485 million. DGIT’s television division includes state-of-the-art content management, creative and production resources, digital asset management and syndication services for advertisers. DGIT used the $485 million to extinguish all outstanding debt and pay its shareholders the $3 one-time dividend, and strengthen Sizmek’s balance sheet.

Strong Global Presence with Top 100 Advertisers

Sizmek helps its clients reach targeted audience pockets across the globe through tailored messaging that optimizes for media, context, content and audience – four critical factors in the ad process. Sizmek serves ads without bias to media or media buying methodologies, and this media independence has made Sizmek one of the most distributed and successful platforms in the fragmented online ad space.

Simplifies Ad Placement across Fragmented Online, Social Media

Sizmek’s MDX open ad stack integrates:

Campaign Management which is enhanced by creative tools and plug-ins compatible with HTML5 and Flash. Campaign management includes integrated tool sets that help advertisers generate high-impact creatives adaptable across all screens that enable simultaneous ad operations across thousands of sophisticated campaigns.

Marketing Channels that allow seamless multiscreen ad campaigns with synchronized messages with display ads, video, rich media, social media, email, website and mobile advertising.

With Media Decisioning, Sizmek monitors over 60 billion pre-bid impressions and offers analytics to support brand safety and contextual targeting.

MDX’ Data Collection and Analytics module collects campaign delivery and performance data across all ad channels, and lets advertisers independently verify campaign spend and ROI.

Visionary Management Led Online Spinoff

Sizmek is lead by Neil Nguyen, President and CEO. Neil is a 15-year veteran who earlier served as CEO of DGIT and was instrumental in growing the company through 14 acquisitions that transformed it into a leading global ad delivery and syndication platform.

Craig Holmes serves as CFO, and was earlier the CFO at DGIT and other mobile, software and technology companies after rising to Partner at Arthur Andersen. Ricky Liversidge serves as Chief Marketing Officer and focuses on evangelizing Sizmek’s campaign management solutions to global advertisers and ad agencies. Ricky came to Sizmek from Adobe, where he served as VP of Product Marketing for Media Solutions. Greg Smith serves as Chief Technology Officer and was previously CTO at DGIT and Move Networks (Move focused on adaptive video streaming technologies).

Collectively, management has deep industry knowledge, experience and strategic insights that position them well to capitalize on their leadership in online ad delivery, including social media.

Q4 and FY 2013 Results – Pro Forma

(Sizmek is a spin off from DGIT on February 7, 2014 so results presented here are pro forma.)

For its fourth quarter ended December 31, 2014, Sizmek reported a 16% increase in revenue to $47.6 million relative to the year-ago quarter, with operating income of $2.6 million (a positive swing from a loss of $2.6 million after taking out a $11.4 million goodwill impairment expense in Q4 2012). Adjusted EBITDA was up 42% to $12.8 million from $9 million in the year-ago quarter.

In the quarter, revenue was up 25% in North America (the company’s largest geography), adjusted EBITDA margins were up 500 basis points to 27% on execution improvements and its positive operating income included a $2.5 million one-time charge related to acquisitions made.

The company added several high profile clients in the quarter on strong acceptance of its Open Ad Stack approach that allows customers to seamlessly deliver true multiscreen ad campaigns through the marketing cloud.

The company reported full year revenue of $161.1 million, up 15%, with a narrower operating loss of $6.8 million. Full year adjusted EBITDA was up 112% to $29.3 million from $13.8 million in 2012.

For the full year, operating cash flow more than doubled to $18.5 million. Sizmek exited the year with $22.6 million in cash and owners’ equity of $293.1 million.

Looking ahead, Sizmek projects revenue growth of 10% to 20% in 2014 to $177 million – $193 million, with adjusted EBITDA of $21 million to $26 million.

Cash balance jumped to $65 million and the company became debt free after proceeds from the sale of DGIT television assets to Extreme Reach were used to pay down debt and improve Sizmek’s balance sheet.

Summary

Sizmek is a 15-year old company at the cutting edge of the Internet, mobile and social revolution. Its unbiased feature-rich ad platform allows advertisers to seamlessly delivery ad content to a fragmented audience across multiple online, mobile and social applications. Post-spinoff, Sizmek is a well-capitalized pure play for online advertising with significant global growth potential as humans increasingly flock to Internet, mobile and social sites, with strong monetization yet to come as online and mobile payments ramp-up, which will create demand for point-of-sale ad delivery to relevant consumer apps and devices. The company is debt-free, cash flow positive and has a strong balance sheet. Shares trade at about book value and appear significantly underpriced relative to Sizmek’s revenue and earnings growth potential. This company is real – it has an Open Ad platform that delivers revenue, a solid client base and a cash-flow positive business model, and is a leading provider in a growing and fragmented field. Simply put, there’s a lot to like in Sizmek for long-term capital appreciation.

Outdated document.
The document was written more than 6 months ago. Information may be outdated.