Eight years ago, Hubspot's Platform Ecosystem VP Scott Brinker introduced Martech's Law, a now-famous thesis that technology changes at an exponential pace, while organizations change at a logarithmic rate (https://www.nnw.fm/ALrg5). By definition, the gap between technological advances and business implementation gets wider all the time, creating a conundrum for management that requires quick decision making to keep up with tech. For its part, the coronavirus pandemic tightened the gap by forcing the hands of businesses to rapidly adopt new digital solutions to reach consumers, a cataclysmic event that resulted in explosive growth for DGTL Holdings Inc. (TSX.V: DGTL) (OTCQB: DGTHF) (Profile), as major international brands came in search of DGTL's artificial intelligence-driven marketing platform. What COVID-19 did to accelerate everyday use of adtech and martech will not be undone, which benefits an array of companies in the space, including Digital Turbine Inc. (NASDAQ: APPS), Viant Technology Inc. (NASDAQ: DSP), IZEA Worldwide Inc. (NASDAQ: IZEA) and PubMatic Inc. (NASDAQ: PUBM).
- An estimated 62% of Americans shop more online post the backdrop of COVID-19.
- DGTL more than doubling revenues with its Hashoff to approximately $5 million or more in the first year since acquisition.
- Company lands Suntory, the third-largest producer of premium distilled product brands worldwide, as new client.
- DGTL trading at three to four times price-to-earnings ratio, while sector peers are trading up to 50 times.
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The New Advertising Paradigm
COVID lockdowns, while unfortunate to say the least, may have been a blessing in disguise for some companies that were forced into purposeful choices on spending. This was especially true for advertising and marketing budgets, as they are the lifeblood to sales that keep a brand in business. With stimulus money going to people globally, advertising spend needed to be more targeted than ever to get into the wallets of consumers, most of which were sheltering, working and shopping at home.
Brands must transition to digital outreach or face the reality of business stagnating and dying. In a Bazaarvoice survey of more than 5,000 consumers across different countries, 49% said that they shop more online now than pre-COVID, including 62% of Americans, 59% in Canada and 70% in Mexico. To that point, a Criteo study showed that 70% of businesses surveyed agreed that their company's marketing function became more important during the pandemic for reasons spanning the full customer journey spectrum.
Quick to respond to the burgeoning opportunity, DGTL Holdings Inc. (TSX.V: DGTL) (OTCQB: DGTHF) is building a portfolio of B2B enterprise Software-as-a-Service (SaaS) in the digital media, martech, ecommere and adtech sectors. The company's first acquisition, Hashoff, put the company squarely in the forefront of influencer marketing, a practice where people with large social media followings or "experts" in certain niches are hired to endorse products to their audience. As noted in an Influencer Marketing Hub presentation, 75% of companies are dedicated a budget to influencer marketing in 2021.
Hashoff uses proprietary technology to give clients unparalleled access to content creators in the emerging influencer markets that still only comprised about $9.7 billion of the overall $572 billion spent on advertising in 2020. The Hashoff platform is turnkey, using machine learning (ML) and artificial intelligence (AI) to allow client companies to comprehensively search and identify freelance content creators that best align to reach the target demographic, albeit at global scale or a highly refined group, a service dubbed CaaS (content-as-a-service). In addition to its self-serve SaaS platform, DGTL also offers managed services for its customers.
Revenue Growth, Breakeven in Sight
The Hashoff acquisition speaks volumes about the management team at DGTL and its ability to execute acquisitions and accelerate growth by nailing KPIs (key performance indicators). Pre-acquisition by DGTL, Hashoff was generating approximately $500,000 in quarterly revenue. In the quarter ended August 31, 2020 – the first quarter with Hashoff under the DGTL umbrella – revenue increased 83% from the year prior quarter to $1.16 million. During the subsequent quarter, revenue rose to $1.25 million. DGTL's Q3 financial numbers show a similar growth curve, with quarterly revenue growth reaching 68% and FYTD revenue growth reaching 71%.
Even with a conservative estimate of no quarter-over-quarter growth, revenue at Hashoff would extrapolate to approximately $5 million in the first 12 months being owned by DGTL, a massive improvement from the acquisition date.
Furthermore, DGTL is funding an aggressive revenue growth plan in which Hashoff must reach a milestone of $8 million in ARR in order to receive 100% of the value of cash and shares on transaction and is now streamlining operations to reach cash flow breakeven within the calendar year, meaning their first acquisition would be self-sustaining without any fundraising necessary for operations.
Name Brands Like a Blue Chip
Doubling revenue and achieving cash-flow neutrality in only 12 months is an impressive accomplishment for any upstart. Although, with DGTL management coming from senior executive roles at companies including Hearst, Yahoo, AOL-Time Warner, RocketFuel, Facebook, Google, Microsoft, RBC and IPG, meeting KPIs is more of a mandate than an option in its portfolio model. The performance has underscored shares of DGTL rising more than 200% since going public in August 2020, as early investors took notice of the first enterprise software acquisition.
The Hashoff platform has attracted the biggest names across a multitude of markets, including its key categories of consumer packaged goods (CPG), health care and retail, which should be particularly hot as the pandemic fades and economies fully re-open. DGTL's news feed speaks loudly to the quality of customers using Hashoff technology, with more coming aboard constantly. The roster of large cap clients includes DraftKings, Door Dash, Veritone, Anheuser Busch-InBev, PepsiCo, Nestle, Post Holdings, Danone and Keurig-Dr. Pepper, Dunkin Brands, The Container Store, Ulta Beauty, Pizza Hut, Live Nation, The CW, Scribd, Syneos Health, and Novartis, to name a few.
More to Come, Yet Just 4x P/S Ratio
On April 26, Japan-based Beam Suntory Holdings (BSI) added its name to the list of tier-one Hashoff clients. BSI is the third-largest producer of premium distilled product brands worldwide, trailing only Diageo and Pernod Ricard. This new major account is the owner of iconic global brands, such as Jim Beam, the number-one selling bourbon brand in the world, as well as Maker's Mark, Knob Creek and Laphoraig, the top-selling single malt scotch brand. BSI is seen as the global leader in the top-selling Japanese whiskey brands, worldwide.
The Suntory service agreement is focused on video-based content, a new market segment that Hashoff is championing through its access to more than 150 million influencers.
DGTL anticipates growth within the Suntory Holdings family of brands and is also currently managing requests for proposals, as demand continues to increase. That doesn't appear to be reflected in the valuation of the young company yet. As management succinctly details in its presentation, industry comparables are trading at much higher multiples, particularly as a measure of enterprise value to revenue and price-to-sales ratio. Others in the asset class are trading 10 to 15 times and even as high as 50 times on price-to-sales, while DGTL is currently trading at a significant discount to these peers, at approximately four times sales.
Vying for Market Share in a New Ad World
The organization change trajectory of Martech's Law is undergoing a hockey stick-type of growth as companies effectively absorbed years' worth of change in a matter of months at the hands of COVID-19. Moving to digital technologies was inevitable in the ever-digitization of the world; the coronavirus simply gave the trend a shot of adrenaline, and in the new normal of a global gig-economy, there is no looking back.
Digital Turbine Inc. (NASDAQ: APPS) simplifies content discovery and delivers relevant content directly to consumer devices. Digital Turbine's on-demand media platform powers frictionless app and content discovery, user acquisition and engagement, operational efficiency and monetization opportunities. Adopted by over 40 mobile operators and original equipment manufacturers around the world, the platform has delivered more than 3 billion app preloads for ad campaigns. The stock was a real beast in the last year, rising from a low of $3.48 to as high as $102.56.
Viant Technology Inc. (NASDAQ: DSP) completed a successful initial public offering in February, pricing at $25 and jumping ahead to open at $44 per share, as the latest public entrant to the hot ad tech market. The company, which gets its ticker from the acronym from "demand-side advertising platform," markets its DSP branded Adelphic, which automates managing, buying and measurement of advertising across multiple channels. The company call hundreds of Fortune 500 advertisers as customers using its data and analytics to maximize return by trying to pinpoint and reach target demographics.
IZEA Worldwide Inc. (NASDAQ: IZEA) is recognized as a pioneer in influencer marketing technology, having its roots in the social media adtech space for more than a decade now. Most recently, IZEA was awarded a new contract from an unnamed Fortune 10 customer. IZEA couldn't name the company due to disclosure rules, but it did say it is a repeat customer that tripled its budget in the first four months of 2021 compared to the spend for all of 2020. After setting a record for its best quarter for managed services in Q4, IZEA expects to top that when it reports Q1 2021.
PubMatic Inc. (NASDAQ: PUBM) is another new public player in the adtech space, completing its IPO in December and popping almost 50% on its first day of trading. The 14-year-old sell-side advertising platform operator priced its IPO at $20, opened at $25.12 and continued upward to reach $76.96 at the start of March. Another company that can speak to demand from big brands, PubMatic calls Verizon and News Corp. clients.
No one could have foreseen COVID-19 or the incredible effect it would have on the planet. It has touched every part of life. One other thing that no one, not even the savviest of analysts, saw coming was the way the virus leveled the playing field in advertising, with small tech firms emerging as leaders with enviable client lists and next-generation technology. These companies are now true growth stocks instead of speculative plays. It will almost certainly lead to another market activity that investors like to see — consolidation, as companies look to deepen their roots through acquisitions.
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