Chit Chat Stocks - Fundamental Analysis: LiveRamp Holdings (RAMP)

Episode Date: April 12, 2020

On this show we discuss LiveRamp Holdings. Find out why Brett gave it a rating of 7.5 and Ryan a rating of 8.0.  --- Support this podcast: https://anchor.fm/chit-chat-money/support Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome in. You are listening to the Fundamental Analysis Show on Chit Chat Money. My name is Brett Schaefer and I'm here with Ryan Henderson and we are talking another advertising company. They're part of the advertising network or infrastructure. It is called LiveRamp Holdings. Ticker is R-A-M-P. And Ryan actually had a chance to talk with one of the employees there. So do you want to give a, you know, you're going to go into a little deeper dive on what they do and then the history of the company because it is quite complicated. It's not something I think really any normal consumer would know about. Right. You touched on it there.

It's, first of all, it's B2B. So most consumers do not know about it. And also it took me a long time to figure out the business model, what all goes into it. I still don't know all of it, but I did get the chance to talk to one of their employees, and she gave me a much better understanding for it. Before I get into what she said, I have a quote from their investor relations page. If any of you are good with tech, maybe you'll be able to understand what they said. But it's, LiveRamp provides the identity platform leveraged by brands and their partners to deliver innovative products and exceptional experiences. So that's their jargon for it.

what I'm learning is, okay, so I'm going to try to simplify it both for myself and for the listeners. So live ramp has tons of clients that provide customer data to them. So think like visa sends data to live ramp. Let's say that's the customer data live ramp, then pools that customer data into what are called identity links. So these identity links are anonymous. So they don't have like a name to them but they'll have all the data to essentially be an identity um so an example here this um id link 155 uh is lives in washington he's male he's 25 years old and he makes a hundred thousand dollars a year and he's it's got all this data points but it has no name to it because i'm pretty sure with one of the new consumer privacy protection acts there is like a rule

against selling data because it is maybe it's always been that way but you can't sell a person's data because a company doesn't own that person's data so this essentially takes customer data and moves it into anonymous identities so which you can still target and segment legally um and it has the privacy but you aren't um it's not an actual person essentially yeah that's how that's how most of these go, I believe, even with Facebook or Google, you're just kind of going through a cohort of a person where interest likes what they've done in the past, transaction data, things like that. Right. And so the identity link is basically the center of the business. So the revenue that they generate all stems in various ways from the identity link. So one

common way that they might generate revenue would be DSPs. So think the trade desk or other demand side platforms pay for the identity links so they can better target ads for their customers so they can figure out which of those identity links or groups of identity links they might want to target. But all aspects of the ad tech funnel use live ramp. So DSPs, SSPs, publishers, brands, advertisers, they all use live ramp in one way or another. It's not like they just feed them to demand side platforms. It's all of them using them, which is why they have the scale that they have. So for reference, they have roughly 200 million identity links. Facebook, who is basically the name in advertising has 220 million identities. I don't comment on that, but I'm

pretty sure that was the number. So, uh, that kind of gives a reference for the scale that they have. And I hopefully it simplifies the business model enough so everyone can understand it. yeah i mean 200 seems like a lot 200 million but i that's weird that facebook only has 220 million is that just from people that they have like core user data on for people that use the stuff a lot because it seems like it should be higher right i mean it must be it must be yeah essentially the identities of core user data i'm assuming um it was in one of uh live ramps sort of slides that i saw that okay but i'm gonna get into the history uh live ramp holdings is what they're called used to be known as axiom corporation was actually founded all the way

back in 1969 so it used to be known as demographics incorporated in conway arkansas so originally all they did was produce mailing lists using phone books and payroll processing but after tons of name changes and acquisitions, Axiom bought LiveRamp in 2014 for $310 million. At the time, LiveRamp was a spin out of Rapleaf, which was a marketing and data company. And LiveRamp back then was combining data sources to better segment and target customers, a little similar to what they do now. But slowly, Axiom started to sell off the other parts of their business and they They began to acquire and integrate new businesses into LiveRamp, and eventually they just changed its name to LiveRamp.

So it must have been successful enough that they basically just pivoted the entire business into LiveRamp. Their first public equity offering was actually in 1983. Side note, I took a look at the management team and quite the impressive resume for a lot of the people. Yeah, I think the CEO was a CFO at Amazon, which I guess people love. um, Amazon executives for good reason. Usually they have done quite well with the success of that company, but I'll get into the valuation here. They have a market cap of $2.2 billion

ticker of R A M P that is ramp, uh, and a price of $32 and 80 cents. And that is of April 11th, 2020. So we're recording this on a Saturday. So the last trading day was on the ninth. So that's where the price is closed at their EV to sales is at 4.7 margin adjusted price to sales of 36. Again, that is price to sales divided by sales growth and gross margin, trying to combine all of the growth metrics that maybe a basic valuation would take into account, especially for a company like this that isn't profitable. And for reference, 36 is below average, but not by much. Their cash flow is break even and has been positive the last quarter, I think, but net

margins are really low. And that is probably the nature of where they are at in a business. And they also reference that they use a lot of stock-based compensation for acquisitions and employee acquisitions. So if they're doing like acqui-hires or acquiring a small company, things like that, they say they use stock as currency, which you'll get back. So it's not a cash expense, so you'll get higher operating cash flow, but your net income will be lower because it is technically a GAAP expense. they have no dividend and their shares have actually gone down from 77 to 67 million over the past year which is quite a lot and they've returned over 1 billion in capital to shareholders since 2011 so they're big into share buybacks net debt of negative negative 782 million very

clean balance sheet from a liability standpoint so really good they got a lot of uh wiggle room uh in case they have a downturn here and then sales and marketing right now is at about 50 percent of revenue and so just so everyone knows net debt um when we use a net net net debt number and it's negative that means there is no debt um like it's a positive well they could they could have debt but the cash um and current asset cash at equivalence outweighs that okay right and so sometimes that can kind of be a little misleading when i first read it um but i'll get into the earnings. So their third quarter ended December 31st, 2019. So they've got one of those weird gap schedules, I guess. And so the third quarter revenue was, the third quarter was basically the

last quarter they reported. Third quarter revenue was $102 million up 28% year over year. This was their first quarter ever reporting revenue of higher than a hundred million. Good for them, I guess. They really made sure to highlight that. Subscription revenue was 82 million up 25%. percent marketplace and other revenue was 21 million up 38 percent they had 63 percent gross margins that actually expanded six percentage points so last year i believe it was 57 percent operating loss was 41 million last year that operating loss was 48 million this time this time last year operating cash flow was 16 million last year they had negative 11 million and operating cash flow. So good pivot there. Net loss of $38 million for the quarter. Like you said,

net margins are not great. I mean, they are non-existent actually, but cash and cash equivalents totaled $767 million at the end of the quarter. They repurchased $121 million in shares since March 31st, 2019, and they're spending around 51% of revenue on sales and marketing. I did get some of their customer numbers though. They've increased direct subscription customers 20% year over year to a total count of 770. Remember, these are businesses when I say customers. They now serve 21% of the Fortune 500 companies, now have 50 customers whose subscription contracts exceed 1 million in annualized revenue, and their subscription net retention was 112% for the quarter. All good customer numbers there. And outside of

the profitability metrics looked relatively solid. Welcome back. Let's hit the second half of the show here. First up is digging trenches and that is the moat rating. I mean, I'll just keep mine short. I don't think they have one right now because they're not a walled garden. They're not vertically integrated. They're just a piece, well, an important piece of the advertising landscape. They're not the entire thing. And I think they're subjected to dealing with large companies like Facebook, Google, and others. Yeah. Sorry if my phone went off there and you guys heard that. But yeah, I agree. They're too small right now. And unless you're one of the walled gardens, especially in the ad tech space, it's hard to give you any sort of moat. I will

say that they offer sort of a differentiator in terms of what they do versus those walled gardens i think their only true competitor based on talking with their employee their largest competitor is oracle um which also is a very large company so they've got a lot of capital to fight against i'm gonna go low probably one or two if you're buying it you're probably not buying it for their Yeah, definitely not all right next up further reading. What are you looking into more if you were thinking about buying this stock so Pricing power is number one versus their competitors and then that also leads into what's their customer value proposition? versus Oracle so we when I was talking with the employee she was saying that

The the differentiator there is that they are an independent party so they're not pitching any of their own stuff oracle uses their um ad tech solutions to kind of pitch their own stuff so they're also involved i i can't i like as as someone who's not a business it's hard for me to differentiate what the value is versus one of those so that that's definitely something you want to look into if you're buying shares yeah i guess net Net retention rate is a good indicator, I think, but I'll go into mine and I guess net retention is not perfect, but mine would be addressable market. How necessary is this spending when times are tight?

Is it a stable market? Is it consumer or business discretionary or is it business like cyclical or whatever those terms are? Something that they're going to spend on, a business is going to spend on all the time or can they choose to not spend on it? I think they probably lie in the part where a business can stop spending on them, which I think is not a good thing. But again, this is probably something where you'd want to go through the S1, read all

those, or go through the 10K and look at everything that they're related to, and then all the companies that they could potentially work with. If it's not that much larger than what they are right now, obviously their growth is going to stall, and that can be an issue if you're pricing in a lot of growth when you're buying the stock. but I'll get into the next section here. Future growth opportunities, what do you have? So mine is their Authenticated Traffic Solution or ATS.

So ATS is a solution for publishers and supply-side platforms that helps them recognize authenticated users on-site in real time. So that allows them to better enable data-informed ad targeting. Okay, so think about it this way. the users on your site um and the the identity link i should say is on your site you're able to recognize that real time that's going to allow you more valuable ad space um as far as like yield that way and so i mean you can imply kind of the uh benefits for an ssp there um but then on top of that for your own data informed targeting if you wanted to target new stuff

to think about how valuable that ATS solution would be. Yeah, that makes sense. I mean it's a little complicated because it's something we're not like, we don't ever use personally and it's a little tougher to see but you want like, I don't know, it just seems like it makes sense. They could easily be tricking us here, you know what I'm trying to say? Where like they're saying all these cool tech terms and makes it sound good that they're valuable to companies

but it could just be, I don't think it is all bullshit, but it could just be stuff like that, right? Yeah, okay, so I will mention that the employee that I talked to and then another person that I talked to in the ad space, Daval Kotecha, who we've had on the show here, both of them mentioned that they've had to start using it recently and that they've found the relevance of it through their own work and they both obviously work in the ad tech space.

so i'm taking their judgment for it um and i i have i'm so not tech savvy and basically anyone that's worked with me knows that so um i am really just taking their word for it yeah all right well i'll get i'll get into my future growth opportunity it is live ramp safe haven they launched this barely a month ago and i'll go give some quotes here from the press release live ramp safe haven enables omni-channel data and audience collaboration in a neutral permission controlled privacy first environment to ensure the safety and security of data basically i think that means that omni-channel data just is like every you know data from everywhere from a lot of different places and then they combine it they get audience collaboration which i think means collaboration

from different partners say someone like visa and facebook or visa and spotify or someone like those working together and then neutral means that they don't like benefit directly from this data they're the third party the switzerland as they like to call themselves and then they're permission controlled which means and then privacy first which is following all the laws another quote they have here they said for example if you're a retailer you've historically been limited in your ability to deliver shopping insights to your cpg partners with live ramp safe haven you now have the capability to collaborate with your cpgs and provide them with insights essentially it is another way for them to be the middleman and help say like your walmart and you have a cpg which is

like campbell soups you work together use live ramps capabilities to better target better get you know the food out to the people and you know stocking things like that all the things that can help both of those businesses work better together yeah and both of those are both of our future growth opportunities are examples of ways in which they generate revenue stemming from the identity link so that's kind of the base and then you kind of work around that and there are a lot of products that are a little too complicated for us to understand but it's based around that core technology what are your highlights and lowlights highlights first one's easy strong balance sheet and then i got another one here they're partnering with the important players

like facebook pinterest twitter spotify they mentioned that the conference calling on some of their uh what do they have like presentations that they partner with these large companies and the company has proven they can reinvent themselves they're not anchoring to all their old business models they can change and disrupt themselves then i also like the strong net retention rate that is a good sign low lights for me i do not like data-driven ads businesses as much as i can stay away from those i can i guess the only really the only ones that um that i truly own would be like match group and roku uh would be something like that but i typically don't like that just because politically there's a lot of uh things that

can go wrong there there could be more regulations coming down the line that could ruin a business like this they have a huge operating loss history at least from the past few years here although it's getting better it is quite large and they could be greatly impacted by a company trying to vertically integrate on data-driven ads although i think they have made itself made it clear that they are the like someone can't just take this business from them because say facebook or someone tried to do this people wouldn't want to work with facebook in this way they want to work with a neutral third party i think it's similar to how roku is more popular maybe among the advertisers and things like that and then like the services

compared to someone like Amazon and Apple who have actually competing streaming video services. Does that make sense at all? Yeah, and they're partnering with some of those companies. So Facebook, you know, partnering with them is almost a validation of their technology. And when you think of them as a competitor, it's almost more like they're validated by Facebook there.

um my highlights are the customer value prop seems to be there and to touch on your low light the data-driven ad space i used like i used to feel that same way and now i'm starting to realize if i'm gonna have a hard time investing if i'm like against that because most companies generate revenue in that way either that or subscription but um you're basically eliminating like half the companies in the world if you're against ad tech. I will say though, yeah, highlights of the people that I've talked to in the ad tech space, a lot of them are saying that more and more people are using them, which is anecdotal, but it's helpful, I guess. And then, yeah, like I said, the customer value prop seems to be there. My lowlights though, is that in the last 12 months,

they've had operating losses of 188 million. Operating margins are getting better, but with their current cash balance that gives them just over four years of operating runway runway without having to significantly decrease costs or raise more money usually i'm a little i usually get a little upset if there's a high marketing spend as a percentage of revenue and that is like the one red flag for me here on the business um so i i want to see operating expenses decrease as a percentage of revenue continue to do that at least slowly yeah and then one note on the operating losses uh the i would look at the cash flow because yeah if they do a bunch of stock-based compensation uh that is an expense but it's not a cash expense uh and shares are going to go up

like shares outstanding you're going to go up and you're going to get diluted but it's technically not going to impact them on their balance sheet uh although if they do buy back stock that is redeploying that cash and maybe neutralizing the shares but then you're actually depleting your cash balance yeah all right what's your rating for the stock i like it i think i think there's a chance i could buy it someday but not like this week or something like that i'm definitely going to need to do more research just because it's a new business something i haven't looked at before uh but i'll give it like a seven five pretty standard like some of the things on here but i really want to know can this be a way larger business uh if i'm going to buy in and i just don't

know that right now. It's honestly, it's almost in the too hard pile for me where it's not worth it to spend one to two months researching the company and then coming away still not really understanding why people use it. Yeah. Yeah. So I'm in line with you there. I'm going to go with an eight. My problem is that yes, it goes in the too hard pile. It's out of my circle of competence, but maybe I spend the next month researching it and I find out that I really like it because there are a lot of things to like about it from what I'm understanding.

I wish I was in the ad tech space so I had a better understanding for this. If I had a better understanding of the entire business model, the products that they offer and the entire customer value prop, this could be like a nine because the numbers weren't bad. paying attention to operating cash flow they weren't bad and management seems

stellar and I like the product that they offer but there's just too many things I guess I don't understand about the business yeah and you have to you have to take into account if you research more you might find out you might not like it as much and it would come down to all the way to like a six or something you would never invest in at all just because it's something you didn't know about and you found out later right right all right yeah that can happen as well. Well, that's going to do for this episode. Thank you guys for listening. Make sure to follow us as always on Twitter to give us updates or we'll give you updates and you give us

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