#104: MNTN S1-Filing
By the numbers, equity valuation estimate
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In this post, we dissect MNTN’s S1 filing. This is one of many reasons why people show up at AdTech Economic Forum NYC.
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MNTN S1-Filing
We took a first look at MNTN’s S-1 filing. The company bills itself as:
MNTN is the Hardest Working Software in Television™, bringing unrivaled performance and simplicity to Connected TV advertising. Our self-serve technology makes running TV ads as easy as search and social and helps brands drive measurable conversions, revenue, site visits, and more.
MNTN was originally founded as SteelHouse in 2009 (known for retargeting). In June 2021, SteelHouse underwent a rebranding, adopting the name MNTN. This change was part of a broader strategy to emphasize its focus on Connected TV (CTV) advertising.
Concurrent with the rebranding, MNTN acquired Maximum Effort Marketing, the creative agency co-founded by actor Ryan Reynolds. Following the acquisition, Reynolds became MNTN's Chief Creative Officer, and Maximum Effort continued to operate as an agency within MNTN.
As of February 2022, MNTN raised $119 million in a Series D funding round, bringing its valuation to $2.21 billion. Now the company is planning to go public.
The numbers according to Quo Vadis
Income Statement
In FY24, the company claims net revenue (after TAC) at $226 million, 28% YoY growth.
The S1 filing does not disclose gross ad spend. We assume MNTN is not much different than TTD or CRTO when it comes to days payable and days receivable.
If days payable are 90 days (TTD and CRTO average ~110 days), then we can back into TAC at $258M. Add TAC to net revenue and you get gross ad spend at $483 million which equates to a 47% take rate.
Assuming 47% take are close to reality, and if we had to guess, the bulk of the 484 employees listed in Pitchbook support a managed service business vs. a self-service platform business like The Trade Desk, for example.
After we adjust the cost of revenue (e.g. cost of revenues consists primarily of hosting and data costs, third-party service fees, and personnel costs) by removing staff cost and stock-based compensation which are better classified as fixed costs), the cost of revenue as % of net revenue is 25%. That’s really high given the comparables (TTD, CRTO, PUBM, MGNI, DSP) and something to look into a bit more. We’d expect that the decrease over time with more scale.
We add back the staff cost and stock-based compensation to fixed operating expenses (technology and development, sales and marketing, general and administrative, amortization of acquired intangibles) resulting in a –1% EBIT margin.
Considering the company is 16 years old, we’d expect at least 10% operating profit margins at this point if not more.
Balance Sheet
Moving on to MNTN’s FY24 balance sheet, the foundations for valuing the company become more clear.
The company has $82 million in cash, which is sufficient to support operating working capital.
Assuming 90 days payable to estimate TAC and gross ad spend as per what we previously illustrated, days receivable would be around 50 days. Again, this is something to look into because the spread across the comparables is around 15 days.
In any case, operating working capital flipped from –$2.2M in FY23 to +$3.1 in FY24.
To cut to the chase, we classify all balance sheet items as:
Operating assets
Non-operating assets (e.g. goodwill is non-operating in our book and just an artifact of GAAP accounting the same goes for deferred tax liabilities which we adjust in our cash tax estimate vs. tax expense in the income statement)
Operating liabilities
Non-operating liabilities
Debt and debt equivalents (e.g. we calculate operating lease liabilities at $4.3 million which does not appear to be included in the S1 but lease expense in FY23 is disclosed at $911K)
Equity and equity equivalents
Total debt and debt equivalents are $267 million, we’ll come back to that subject in a moment.
All said and done, our re-classifications and adjustments give us $107 million in FY24 invested capital and $163 million total funds invested if we’re splitting hairs.
Net Operating Profits Less Adjusted Taxes (NOPAT)
Notably, what the S1 lists as “other non-current liabilities” is mostly a deferred tax liability.
Assuming a 27% marginal tax rate (federal, state, and local), and after removing the tax shield effects from interest payments (that’s a flow to debt holders vs. equity holders and we are only interested in the value of equity), and also removing the embedded interest tax shield in operating lease liabilities mentioned above, we get NOPAT of –$7.5 million for FY24.
Key Ratios
Return on invested capital (ROIC) in FY24 was –7%, which is not great for a 16-year-old company in the adtech space, particularly one that’s strumming the tune of CTV.
On the other hand, MNTN’s capital efficiency is more or less on par with the comparables at $2.10 dollars in net revenue for every dollar of invested capital.
As our readers know, we view capital efficiency and net revenue per employee as the two management KPIs that matter most to maximizing the spread of ROIC over the cost of capital to create maximum value for shareholders.
Quick Valuation
With $483 million in estimated gross ad spend, it’s important to realize that TTD and CTRO needed around 8 years from founding to reach $1 billion.
MNTN is 16 years old.
Quo Vadis calls attracting $1 billion in gross ad spend the “unicorn club.”
That said, if we re-birth the company in 2021 when new money came in from investors (along with debt and debt equivalents) and the company rebranded from Steelhouse to MNTN in 2021, then getting to $1 billion by say 2029 is a reasonable target. If so, that means MNTN’s average annual growth rate over the next 5 years will be 15%.
Here’s the thing. CTV is growing but access to the most valuable inventory is mostly locked up. It is also worth recognizing that linear TV spending is not declining at nearly the same rate.
On the other hand, a massive long tail of CTV streaming content has emerged (we’re talking millions of apps) which supports our thesis that media flows open web display ads have a new long-tail home to find.
The other key target to achieve is 25% EBIT margins over the same 5-year period. Operating profits are always the hard part.
Given the $1 billion target for gross ad spend and 25% EBIT margins, and assuming take rates remain at 47% and capital efficiency improves to $2.50 (which is doable), the enterprise value today is $758 million.
After deducting $267 million in debt and debt equivalents, MNTN’s equity value is just $491 million.
Valuation Stretch Goal
Let’s instead aim for $2 billion in gross ad spend in 2029. That’s a 33% average growth rate over the next 5 years. Impressive for sure.
Let’s boost capital efficiency to $3.00 and keep EBIT margins at 25% which is hard for most companies to achieve.
We end up with a $1.6 billion equity valuation.
To put a $1.6 billion equity value into perspective, MNTN would be slightly smaller than RAMP and bigger slightly bigger than DSP.
See you at AdTech Economic Forum NYC on March 19 at the fabulous New York Times Center. Smash the button below and use code: ATEFNYCQuoVadis.
Disclaimer: This post, and any other post from Quo Vadis, should not be considered investment advice. This content is for informational purposes only. You should not construe this information, or any other material from Quo Vadis, as investment, financial, or any other form of advice.
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