SITO: An Emerging Player in the Fast Growing Mobile Ad Industry

Sito Mobile recently uplisted its shares on the NASDAQ: SITO.

SITO operates in the fast growing mobile location-based advertising market.

The mobile location-based advertising market is expected to see exponential growth by the end of this decade.

Sito Mobile, with its product offerings, is well-positioned to capitalize on this growth.

As consumers continue to spend more time online, there has been a substantial growth in mobile advertising. The robust growth in the industry has also made it ripe for M&A activity. Some of the major players in the industry include Millennial Media Inc. (NYSE: MM), TubeMogul Inc. (NASDAQ: TUBE) and Tremor Media (NYSE: TRMR). An emerging player in the mobile advertising space is Sito Mobile (NASDAQ: SITO).

Sito Mobile (SITO) is a Jersey City, New Jersey-based mobile location-based advertising platform. SITO’s solutions enable marketers to create content targeted to audiences, based on location, interests, behaviors and loyalty. The company’s shares recently began trading on the NASDAQ, and it recently reported strong quarterly results which showed continued growth. Despite some challenges, the outlook for mobile location-based advertising remains robust. SITO’s uplisting, coupled with its improving financials, should bring some attention to the company.

Growing Market

Globally, the increasing use of smartphones is driving mobile advertising. As more and more people are using advanced mobile devices, marketers see this as an important channel to reach customers. Writing in the Search Engine Land, columnist Wesley Young notes that mobile device usage now accounts for half of the time spent on digital media. Young notes that people are always on mobile and advertisers as a result are now paying more attention to mobile.

According to Young, the increase in use of mobile is also having an impact on local search. At the Social + Mobile Conference last year, Thrive Analytics founder Jason Peaslee and SMG Local Spectrum VP of Digital Services Hynek Stehno provided some interesting data, which highlights the impact mobile devices are having on consumer media consumption. Some of the points highlighted by two included; over half of time spent online is on mobile devices; 60% of consumers use mobile devices to find information on local products and services, with 40% being “on-the-go”; and around $4 billion to $6 billion will be spent on location-based mobile advertising in 2014.

According to Berg Insight, the total value of global real-time mobile location-based advertising and marketing market is expected to increase to $14.8 billion by 2018. In 2013, the total value of the market was just $1.66 billion. Further location-based advertising and marketing will represent around 7% of digital advertising.

BIA/Kelsey is even more bullish in its outlook for the market. In a report, BIA/Kelsey notes that in the U.S. alone, location-targeted mobile ad revenues will grow from $6.8 billion in 2015 to $18.2 billion in 2019.

SITO: An Emerging Player in a Fast Growing Industry

SITO is an emerging player in the industry with two principal product offerings;

Location Based Advertising

Through this offering, the company delivers display ads and videos on behalf of advertisers. The features of this offering include;

1) Geo Fencing- Customers are targeted within a certain radius of location and technology is utilized to push coupons, ads, promotions to mobile apps.

2) Verified Walk In- Through this feature foot-traffic can be tracked to locations

3) Behavioral Targeting- This feature helps in tracking past behaviors over 30-90 day increments allowing for real-time campaign management

4) Analytics and Optimization- This feature helps in tracking metrics like user demographics, psychographics, CPM, click-throughs and time of engagement

SITO Mobile Messaging

This is a platform for building and controlling tailored programs, which include messaging, customer incentive programs etc.

In his article on Search Engine Land, Young notes that click through rates for mobile display ads depend on the type of geo-targeting used. Based on data from LSA Insights, all types of geo-targeting provided a boost to CTR performance, however, geo-fencing (which is a feature of SITO’s offering) and geo-aware led to two times improvement. Further Secondary Action Rates, which include calls, directors or requests for more information, was an impressive 10% for geo-fencing.

SITO has been able to further boost its offering with the acquisition of Hipcricket’s mobile advertising business last month. The company acquired the business for $3.7 million in a cash and stock transaction. Commenting on the acquisition, which will allow SITO to tap new revenue streams for its mobile advertising business, SITO CEO Jerry Hug had this to say;

“This transaction marks the successful culmination of a process we began over a year ago. t now provides us with our most coveted asset within Hipcricket, and represents a major growth catalyst for SITO Mobile in many ways. First, we add a great team of experienced mobile advertising professionals that will enable a smooth transition and continued growth within the mobile advertising industry. Second, due to Hipcricket's expansive network, we are stepping into many great new relationships with marquee advertising clients.”

Strong Results

The growth in the location-based advertising market is reflected in SITO’s most recently reported quarterly results. Earlier this month, SITO reported Q3 results (ended June 30th, 2015). Total revenue for the quarter was $3.68 million, up 72% over the same period in 2014. The improvement in revenue was driven primarily by ongoing growth in SITO’s Media Placement revenue. In the June quarter, Media Placement revenue jumped an impressive 15 times to $2.154 million. Media Placement revenue registered 32% growth on a sequential basis.

There was also revenue diversification in the June quarter. Media Placement revenue accounted for 59% of total revenue, while mobile messaging revenue accounted for 38% of the total revenue. With the acquisition of Hipcricket’s mobile advertising business in the current quarter, SITO’s revenue will see further diversification in the coming quarters.

There was also substantial improvement on the margin front. SITO’s gross margin improved 400 basis points over the previous year and 300 basis points over the previous quarter. The improvement in margins was led by strong margins for the Media Placement business.

NASDAQ Listing to Increase Visibility

Up until recently, SITO’s shares traded on the OTC market. Of course any stock trading on the OTC market suffers from the lack of visibility, which is probably why SITO is not seen in the same light as some other mobile advertising companies. An uplisting to NASDAQ was one of SITO’s near-term goals and this month the company achieved this important goal.

SITO began the uplisting process initially by announcing a reverse stock split. The company announced a 1 for 10 reverse stock split, which reduced the number of outstanding shares to $16 million.

On August 10th, SITO’s shares began trading on the NASDAQ. CEO Hug said this on the NASDAQ listing;

“This has been one of our defined goals for 2015 which will help to increase our exposure, enabling us to attract a broader range of institutional investors and analysts. We have accomplished a great deal over the past several quarters and remain focused on executing our plan.”

A NASDAQ listing will certainly go a long way in improving SITO’s visibility among institutional investors. Many of these investors will probably find SITO a bargain, considering the anticipated growth in location-based mobile advertising market.

A Bargain in a Fast Growing Industry

SITO had revenue of $11.3 million for the first nine months of its current fiscal year. If the company achieves $15 million in full fiscal year revenue, this would translate to just under $1 per share, which means that SITO currently trades at around 4x sales. If SITO’s multiple moves closer to around 6x to 7x sales, which is reasonable for a growth story like SITO, the stock could see at least 50% upside from its current levels. But remember that SITO, as well as the location-based advertising market, is seeing substantial growth. And therefore valuing the company on current fiscal year sales estimate might not be appropriate. Even if SITO sees revenue growth of just 25% over the next three years, which is modest considering the outlook for the location-based advertising market and the impact of Hipcricket mobile advertising business acquisition, the company’s revenue would reach around $27.50 million. This would translate to roughly $1.70 per share in sales, giving price to sales ratio of around 2.5x. Even if SITO’s multiple doubles, this would give a value of $8.50 per share. This is more than 100% upside from SITO’s current levels.

Risk Factors

One of the risks with SITO is dilution. At the end of June quarter, SITO had $2.8 million in cash. But considering the company will have to keep investing in growth, it may need to raise more cash in the future. However, dilution is always a risk with company SITO’s size.

Another risk is competition. Location-based advertising market is extremely competitive. However, this market is growing at an exponential pace and SITO does have a unique offering which the company’s CEO highlighted. Hug said, “SITO builds all it’s technology in-house and has been focused on the relationship of matching location data against time since 2011. This allows us to create customized audiences based on an advertisers target demographic that is sourced.

from our location data. These more niche audiences lead to less impression waste and higher attribution, which is part of our core offering. This leads us to our other big differentiator which is Verified Walk-in Attribution. Our VWI product provides advertisers a 1:1 match against how many people were exposed to an ad and then walked into a store. We are able to provide this data at a very granular level that is unmatched in the marketplace and provides our clients real-time analytics on attribution and lift.”

Finally, there are some concerns around the sector itself. One of the concerns is that Google (GOOG) and Facebook (FB) are buying their own ad tech. Given their scale of operations, competition for mobile advertising companies will always be a challenge. Further a major concern is the rise of ad blocking. I raised these concerns to CEO Hug and he said, “Ad blockers have been around for many years and this is not really a new topic. The main reason ad blockers exist is because many consumers are delivered ads that have no relevance to them, so they never see the true value. Our goal is to provide relevant ads to consumers at or near the point of purchase and these data driven strategies are where the market is heading. As ads become more relevant, less users will download and opt-in to these ad blocking softwares which will limit the effect it will have on the industry. In mobile and for SITO specifically the impact will be even less as the majority of location based inventory is in-app, while ad blocking software on the market today only pertains to mobile web inventory.”

Despite competition from giants like Google and Facebook, the market is big enough for emerging players like SITO, especially considering the fact that most marketers look to diversify when it comes to online advertising i.e. they do not rely only on Google and Facebook. SITO is operating in a young industry that is still emerging. The company certainly has the product offerings to capture a share of the ever growing pie. Ad blocking is a concern for the industry but Hug believes that if ad blocking software does make an impact on the industry, it will begin to take away revenues from the publishers and all the free content people come to expect will go away. Essentially, users will have to accept ads if they want free content.