It’s come to this: The hopes of an industry are pinned on two SEC filings.
Both AppNexus and The Trade Desk are close to submitting S1 forms with the Securities and Exchange Commission, indicating plans to go public in the coming months and releasing key financial details.
In the case of The Trade Desk, the company may already have filed confidentially under the SEC’s “emerging growth” rules, according to sources. Those rules allow companies in rapid-growth sectors to keep the details of their financials quiet in the run up to their IPOs, for competitive reasons.
AppNexus has not filed its S1 yet but has been working for the past year to prepare for that outcome, as AdExchanger previously reported.
An IPO this year from either of the two companies would likely come as good news for all companies in the struggling ad tech sector. Both are scaled programmatic technology players with large customer counts and a high ratio of software-based revenue.
According to Tolman Geffs, co-president at investment banker Jordan, Edmiston Group: “These are both high-quality platforms that have establish themselves as winners with highly sustainable, nonarbitrage business models. Unlike other ad tech IPOs that come to mind, customers are not going to be embarrassed by the reported gross margins. So both the IPO and M&A market will welcome resetting the bar for advertising technology IPOs.”
Josh Wepman, managing director at GCA Savvian Advisors, rang a similar note. “If it’s true, the IPO market becomes a viable path again. You don’t have to necessarily look for an M&A exit,” he said.
Indeed, the two public offerings, should they materialize, will come as manna from heaven to legions of investors and founders in ad tech and marketing tech companies whose private valuations have suffered from painful comparisons to public companies. All are trading down from their year-ago prices, and some are severely down, such as Rocket Fuel (-74%) and Tremor Video (-43%). Even Criteo, historically a golden child among public ad tech stocks, is off 15%.
“It’s terrible,” said Luis Hanemann, partner at e.ventures. “When I bring a potential deal to a partner meeting and it’s related to ad tech, you can feel the strong negative sentiment. If there were two successful IPOs, it would be really helpful for the finance activity in the overall ad tech sector.”
Hanemann chalks up the negativity to three factors. First, “the very low multiples of the companies that went already IPO.” Second, “for most investors, it is really hard to predict who is going to make it.” Third, the belief that “the really big guys, Facebook and Google, are going to be even stronger than now, so that independent players don’t have a strong chance to build a long-term business.”
In the case of The Trade Desk, industry watchers say the company is growing like a weed with strong year-over-year gross revenue gains, and has benefited from a strong focus on serving agency customers. Its 2014 revenues were $202.1 million, according to Inc. Magazine’s annual survey, representing a three-year growth rate of almost 7,000%. 2015 data isn’t available but sources say the company has continued its strong trajectory.
For AppNexus, the financial picture is less certain. Management tells AdExchanger the company’s widely publicized efforts to remove nonvalid inventory from its supply pool has not hurt revenue, but it’s possible the company hasn’t grown as quickly as it might have otherwise as a result of that effort. Also, with the growth of its buy-side ambitions, facilitated by business from investor-partner WPP Group, will the company’s financials reflect a shift away from pure SaaS and toward insertion order-based revenue? Time will tell.
Another potential issue for AppNexus is headcount. The company has more than 1,000 employees, about triple what The Trade Desk employs. Perhaps sensing its cost-control issues with public market investors, AppNexus has kept its headcount relatively flat since mid-2015.
According to Hooman Radfar, former CEO, founder and chairman of AddThis (acquired by Oracle this year), the ultimate impact of the two S1s may come down to a single question: For each company, what’s the contribution from media services versus software?
“If The Trade Desk really is making about 80% recurring, 20% service [revenue], they’re not just arbitraging media and are truly a platform. They could get a multiple anywhere between five and seven times revenue,” he added. “If they trade that high, that could reignite the marketing automation sector in a major way.” (Radfar considers SaaS-based ad tech as a category of marketing automation.)
But, Radfar cautioned, “With ad tech, margins compress as you scale as many companies are just arbitraging inventory they don’t own.”
This practice puts them in competition with Google and its intense scale, an untenable situation.
“The world has changed. You either own the inventory and the data, or you don’t.” He noted that marketing tech companies tend to be better positioned than their ad tech counterparts. “What companies like Oracle and Adobe are saying to marketers is different: We will provide the tools so you can do it yourself. Those companies and others in the marketing automation space don’t have to worry about running into [Google, et al.] as they scale. It’s a different business.”
Radfar suggests companies reliant on media-based revenues should not expect a boost from any looming IPOs.
“From a venture/angel perspective, no one is funding an ad network anymore,” he said. “Those days are over unless something massive changes.”
Correction: Story previously inaccurately stated The Trade Desk was New York-based. Its headquarters are in Ventura, CA.
