Canadian IPO Markets are Waking Up After its 2016 Hibernation: SmallCapPower Special Report

First quarter of 2017 has seen almost as much Canadian IPO activity as all of 2016, raising $13.3 billion of equity capital, a 206% increase year over year

SmallCapPower | May 1, 2017: After the worse 12-month period for initial public offerings (IPO) in nearly two decades, the wheels are finally turning again for the Canadian capital markets. The first quarter of 2017 has seen almost as much Canadian IPO activity as all of 2016 with six new listings, compared with just one during the same period last year, and eight for FY/2016. Altogether, the 2017 IPOs raised $13.3B of equity capital, a 206% increase Y/Y. With the Canadian capital markets hitting the ground running so far in 2017, we anticipate seeing many more private companies seizing this opportunity to go public.

In this report, we focus our attention on Canada’s fastest-growing sector: technology. Having already witnessed the success of eCommerce giant Shopify (TSX:SHOP)—which had its initial public offering in May 2015—we will shift our focus on the digital advertising space. With the increasing trend of shopping online, we anticipate eCommerce retailers to increase their digital advertising expenditures, which entails juicy revenues for the near-IPO private Internet technology companies on our list: AppNexus Inc., Hootsuite Media Inc., and District M Media Inc.

Industry Highlights

  • A PWC survey highlights 2016 as the worst year for IPOs in its 20-year history, plummeting past previous lows of the financial crisis of 2008. The poor performance has been attributed to a hangover from the European debt crisis, shock of Brexit, and the U.S. presidential campaign. The tech sector has received significant private equity and venture capital interest recently, and is expected to be the starting point for an IPO revival in Canada. Between the TSXV and TSX, Renewable Energy and Technology categories saw over $350mm of capital being raised in Q1/2017.
  • In its January 31st debut, health-food restaurant chain Freshii Inc. (TSX:FRII) raised $125.4mm from an initial offering at $11.50/share. Based on 31.3 million shares outstanding, this implies a valuation of $382.5mm for Freshii. Since its IPO, shares of Freshii have gained over 6.5% as the Company aims to expand its footprint, working with a franchise partner to enter the British market in addition to opening 150-160 new franchises worldwide. Initially planning to sell shares for $8.50-$10.00/share, the higher offering price indicates strong investor interest in the capital markets, which is optimistic for companies planning to go public.
  • The first quarter of 2017 saw 71 new listings (35 TSXV, 36 TSX), including 40 companies, 7 capital pool companies (CPC), 23 exchange-traded funds (ETF), and 1 closed-end fund (CEF). Within the companies, mining led the way with 18 new listings, followed by financial services and life sciences with 5 new listings each. About $13.3 billion of equity capital was raised in Q1, with $69.9mm and $4.4mm of financing on average on the TSX and TSXV, respectively.
  • WeedMD (TSXV:WMD) saw strong investor interest as it began trading on the TSXV on April 27, ending the day up 41.6% at $0.85 from its initial offering price of $0.60. The Company’s wholly-owned subsidiary, WeedMD RX Inc., is a licensed producer under the Access to Cannabis for Medical Purposes Regulations. For more information on the company, click here.

Upcoming Ad Tech Events

  • Connect via Hootsuite: From Reach to Revenue, Profiting from Social: May 3rd, hosted by Hootsuite Media Inc. via online with any internet-connected device.
  • AppNexus Summit: Architecting the Future of Ad Tech in Europe: May 4th, hosted by AppNexus at the King’s Place, London, United Kingdom.
  • Content Marketing World Conference and Expo: September 5-8th, hosted by CM World at the Huntington Convention Center of Cleveland, Ohio, USA.
  • Ad Tech: November 1-2nd, hosted by the Comexposium Group at The Metropolitan Pavilion, New York, USA.

Investment Thesis

According to eMarketer, North American digital advertising expenditures—think social media, mobile phones, tablets, and other Internet-connected devices—will grow past traditional television advertising to US$77.4 billion, or 38.4% of total ad spending in 2017. Within digital advertising, ‘programmatic’ will be the fastest-growing form of digital advertising, amounting to 84% of all expenditures by 2019 (Figure 1). Programmatic refers to the use of software to purchase digital advertising, without the need of traditional request for proposals (RFP), human negotiations and manual insertion orders. ‘Programmatic’ is the future of digital advertising; not only is it cost effective, but it also benefits from data analytics in its ability to zone in on target audiences and boost ROIs for marketing campaigns.

Figure 1: US Programmatic Digital Display Ad Spending, 2015-2019
Billions, % change and % of total digital display ad spending

SOURCE: eMarkter

Video is one form of advertising that has benefited from advancements and control of programmatic platforms. Using algorithms and big data analytics from its inventory of user data, digital ad platforms can hone in on users most likely to be engage with certain ads, which boosts advertising success with increased conversion rates. Thus, two people can visit the same website, but view completely different ads due to their individual interests. This data-driven technology is the backbone of companies such as AcuityAds Inc. (TSXV: AT) and Trade Desk Inc. (NASDAQ: TTD), which have both had their initial public offerings recently, and have seen their shares more than double!

Businesses operating in the digital advertising space not only see their revenues grow from a loyal, sticky recurring sales model—akin to software-as-a-service (SaaS) companies—but also from increasing expenditures by existing customers. As advertisers see their marketing dollars bring in increasing sales, they naturally spend more on future campaigns. Consequently, both AcuityAds and Trade Desk have seen their revenues grow at a CAGR of over 90% in the past three years (Figure 2).

Figure 2: AcuityAds and The Trade Desk’s Aggressive Revenue Growth Rate

SOURCE: Thomson Reuters

Since eCommerce is relatively early in its growth stage—accounting for only 8-10% of all retail transactions in North America—we can expect more and more companies to increase their online operations. As a result, we anticipate digital marketing budgets to increase as online retail competition grows fiercer, which bodes well for our notable performers. With a business model proven by both AcuityAds and Trade Desk, while operating in one of the fastest-growing tech sectors, the three IPO candidates should definitely be added to your watch list!

IPO Candidates

In choosing our notable performers, we considered four key factors: revenues, number of employees, funding to date, and growth profile. Companies with robust revenues and increasing number of employees are indicative of a healthy and growing company. Sources and amounts of funding are important in helping valuate a company as well as indicating confidence in the business. The level of funding also helps to distinguish which companies are most likely to IPO; investors want their money back and companies that have taken more funding are under the greatest pressure to go public.

**Please be advised that due to the nature of privately-held companies, financial information was retrieved via our own reporting, that of other publications, estimates of industry experts, in addition to figures given by the companies themselves. Although we have tried our outmost best in reporting accurate information, we cannot guarantee that the figures noted are exact. 

AppNexus  Inc.

CEO: Brian O’Kelley

Number of Employees: 1,000

Estimated Revenues: US$300 million

Total funding to date: $8 million

Estimated market value: US$1.5-2 billion

Snap Inc. (NYSE: SNAP) may have dominated the Tech IPO scene so far this year, however investors are excited about AppNexus Inc., which is rumoured to have filed its IPO paperwork confidentially in 2016. Unlike AcuityAds and the Trade Desk that focus on buying advertising space for marketers (demand side), AppNexus is a one-stop shop platform for buyers and sellers alike. Whether you’re a publisher or an advertiser, AppNexus is a holistic solution that serves both buy-side and sell-side markets. Its platform allows real-time buying and selling of digital advertising for marketers, publishers, content providers, and media investment management companies.

According to Crunchbase, AppNexus has gone through 11 funding rounds totalling over US$300mm, and had received a valuation of US$1.4B during a Series E funding round in 2014. In its latest September funding, AppNexus raised US$31mm, including a US$10mm investment from News Corp and Yahoo Japan. The deal also includes a partnership with News Corp—which owns The Wall Street Journal and Dow Jones Newswires—where the Company’s advertising properties will begin using AppNexus products. Another investor worth noting is WPP (NASDAQ: WPPGY), a leading global communications services provider, which invested US$25mm in addition to divesting its Open AdStream (OAS, now known as Xaxis for Publishers) to AppNexus. AppNexus has integrated OAS into its publisher suite, offering publishers a single ad delivery platform to maximize revenues across any digital medium or platform (video, mobile, display, social, etc).

Figure 3: Buy-side Platform Capabilities (for marketers)

SOURCE: Company Website

Most recently, AppNexus has gone through a significant corporate restructuring as well as numerous strategic acquisitions. The Company has laid off 150 jobs as it separated into two divisions: a buy-side advertising platform for advertisers (Figure 3) and a sell-side for publishers to sell advertising real estate (Figure 4). Along with the OAS acquisition, the Company acquired Yieldex, a digital advertising and analytics company. AppNexus aims to incorporate Yieldex into its publisher solution to help maximize the monetization of their ad inventory using top of the line analytics and forecasting tools. To date, AppNexus has partnered with numerous large-cap companies, including Linked-in, Wayfair, Bloomberg and Microsoft—for which it has become the go-to programmatic ad platform in 57 markets around the world.

Figure 4: Sell-side Platform Capabilities (for publishers)

 

SOURCE: Company Website

Looking ahead, it will be interesting to see how AppNexus’ hybrid business strategy performs in comparison to strictly buy-side or sell-side ad tech companies. Although the hybrid structure is common in China, it is not without flaws resulting from conflicting interests: how do you maximize monetization for a publisher’s ad spaces, while offering the best value and highest conversions for marketers? Nonetheless, AppNexus has a bold strategy and strong partnerships with the potential to scale and challenge Google (NASDAQ: GOOGL) and become the largest independent ad technology company.

Hootsuite Media Inc.

CEO: Ryan Holmes

Number of Employees: 1,000

Estimated Revenues: US$150-200 million

Total funding to date: US$250 million (approximately)

Estimated market value: US$750 million – US$1 billion

As seen by tweets from Elon Musk and President Trump, social media is a powerful platform that connects businesses and people all around the world. Hootsuite Media Inc. is a social media managing platform that allows businesses to harness the power of social by letting them build customer relationships, listen to the needs of the market, and grow their revenues. The Company has over 15 million users including over 800 of the Fortune 1000 companies, and has partnered with 35 social media networks.

Hootsuite allows customers to manage multiple social networks on a single platform, which not only saves time, but also consolidates data analytics from various campaigns to help connect and grow your brand. Hootsuite’s dashboard offers scheduling and assignments, allows collaborators to join in, and produces social analytics reports. The Company has a freemium subscription-based model for its platform—where the base platform is free but there are add-on services—however makes additional revenues from commissions of digital advertisements on social media networks such as Twitter and Facebook. According to eMarketer, social network ad spending will reach $35.98 billion this year, representing 16% of all digital ad spending worldwide (Figure 5)! This number is expected to increase substantially as social media platforms integrate the more expensive and rapidly-growing video ad formats.

Figure 5: Global Social Media Ad Spending

SOURCE: eMarketer

According to Crunchbase, Hootsuite has received US$250mm in five funding rounds, including its most recent $60mm Series D funding it used to acquire Zeetl (Figure 6). With the acquisition, the Company plans to integrate Zeetl’s technology to create shortlinks to convert text to more direct voice calls on social media. By being able to connect with customers over the phone, Hootsuite will be able to provide a useful tool when managing customer service and complaints—especially without Twitter’s 140 character limit!

Figure 6: Timeline of Hootsuite’s Funding

SOURCE: Crunchbase

In 2H/2017, Hootsuite Media Inc. achieved a milestone as it became cash-flow positive after trimming 10% of its staff. After years of reinvesting to grow the business and become a market leader in social media management, the Company is now in charge of its own destiny. Although there are big players in the space, such as Salesforce (NYSE:CRM) and Adobe (NASDAQ:ADBE), Hootsuite has one major competitive advantage: an open ecosystem designed to work with third-party apps such as MailChimp for e-mail marketing or Zendesk for customer service. With a platform available in more than 16 languages and used in more than 175 countries, Hootsuite Media Inc. is poised to scale and become a global, multi-billion dollar, dominant force in digital marketing.

District M Media Inc.

CEO: Jean-Francois Cote

Number of Employees: 12

Estimated Revenues: <$10 million

Total funding to date: $8 million

Estimated market value: $25 million

Akin to AppNexus, District M provides marketplaces and trading technology for marketers and publishers alike. However, District M is in a much earlier stage of its funding and growth cycle. The Company has raised $8mm (first round) to date, backed by Quebec’s Fonds de Solidarité FTQ—a development capital fund that channels the savings of Quebecers. District M has been recognized in the Deloitte Fast 50 for two years in a row, which distinguishes Canada’s top tech companies based on their revenue growth percentage.

District M’s flagship product, ‘Header Bidding,’ is an advanced programmatic technique that allows web publishers to offer ad inventory to multiple SSP/ad exchanges simultaneously before making the ad call to their server. Unlike AppNexus, which has its own ad exchange, District M’s platform allows for multiple demand sources (exchanges and bids) to compete on every impression. Since the program allocates impressions to advertisers with the highest CPM bids (cost per thousand advertisement impressions), publishers can increase their revenues dramatically (Figure 7). Furthermore, the program is very easy to use and requires a set up that takes less than 30 minutes to implement and is live within 24-48 hours of installation.

Figure 7: District M’s Header Bidding Technology

SOURCE: Company Website

For advertisers, District M has created an inimitable self-serve platform called ‘Camp’, which provides analytical reports of campaigns in as well as uses machine learning to better understand target customers. The ad management platform takes real-time statistics into consideration to properly manage campaigns using data from sites to which ads are delivered in addition to a wide array of performance indicators: format, devices, geography, weather conditions, user interests, etc. In fact, ‘Camp’ even allows advertisers to view a heat map of the most clicked areas of an advertisement to help design the most effective creative. You can view a demo video of the ‘Camp’ reporting platform here.

Based out of Montreal, District M was founded in 2013 by five digital media professionals and now employs nearly 50 employees with offices in Montreal, Toronto, and New York. The Company has already solidified its technology and is now looking to recruit talent to boost sales in Canada, the U.S., and abroad. In its three years, District M has already subscribed 4000 publishers and has grown revenues at a CAGR of 40%. Looking ahead, the Company appears to be uniquely positioned as a one-stop shop for advertisers and publishers alike, with a potential growth trajectory of AppNexus— so long as it does not get acquired before that!

Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.

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