Following in the footsteps of Rocket Fuel, Criteo (CRTO), and YuMe (YUME), TubeMogul (TUBE) is set to become the latest digital advertising company to go public over the past several months. Like its peers before it, TUBE is growing its topline rapidly as its client base expands and as it generates more revenue per client.

Also like FUEL and YUME at the time of their IPOs, the company is bleeding red ink as it readies to go public. The encouraging news, however, is that its loss in 1Q14 was very narrow and its gross margin is trending in the right direction.

Its IPO also comes on the heels of some very successful tech and internet-based IPOs. For instance, GoPro (GPRO), Arista Networks (ANET), TrueCar (TRUE), and Zendesk (ZEN), have all logged significant gains. The strong performance of these recent tech-related IPOs could lure investors in on TUBE’s deal.

On the other hand, the post-IPO performance of its closest competitors — FUEL, CRTO, YUME, TRMR — has been rather bleak. Specifically, as of July 10, FUEL is down 61% versus its IPO opening price, CRTO is down 23%, YUME has lost 40%, and TRMR has been clobbered, shedding 63%.

This begs the question, “Does TUBE have what it takes to break the losing streak, or, is it destined for the same fake as its peers?”

Closer Look at TUBE

TUBE provides a digital branding platform for enterprises. A distinguishing factor that TUBE points out in its road show presentation is that it focuses on branding, rather than point-and-click advertising. Most competitors, including FUEL and CRTO, provider direct response advertising placement services, in which banner ads are strategically bought and placed on various sites.
TUBE, on the other hand, strives to build brands mainly through video content that can be placed across a variety of screens (PC, tablet, mobile phone).

Through its platform, clients can plan, buy, measure, and optimize their digital video spend. The platform is integrated with many public digital video ad inventory sources where ad impressions can be purchased using real-time bidding technology. Based upon a campaign’s set objectives, TUBE automates the purchase of ad impressions.

Its platform is available through two offerings: Platform Services (66% of FY13) revenue and Platform Direct (34%). Platform Services is campaign-based, high-touch, has a fixed pricing model, with gross margin in the 50% area. Platform Direct, which is becoming a larger piece of the overall pie, is SaaS-like, self-serve, low-touch, with revenue based on a percent of advertising spend plus fees, and carries gross margin of 90%.  Naturally, the company’s strategy is to migrate users to its Platform Direct offering to drive higher operating leverage.

Financials

TUBE’s financials are a mixed bag. Its revenue growth, spurred by a combination of new client growth and increasing spend per client, is undeniably impressive. Its’ +129% figure posted in 1Q14 indicates that topline growth may not have peaked and that business is accelerating.

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The other major positive in its corner is its improving gross margin. In FY11 and FY12, gross margin was surprisingly soft due to a majority of its business coming from its Platform Services business, which has a model more akin to a traditional advertising firm. As it transitions more clients to its self-serve, Platform Direct business, its gross margin is reflecting a business that is more like a SaaS company.

Working against this IPO, though, is that the company has never been profitable and its operations are burning quite a bit of cash. The silver lining here is that it nearly broke-even in 1Q14, offering some hope that profitability may not be off in the unforeseeable future.
With that said, the company does state in its prospectus that it intends to continuing investing heavily in research and development, and sales and marketing, so a slowdown in operating expenses shouldn’t be anticipated.

Conclusion

TUBE is yet another digital advertising software IPO, following the likes of Criteo (CRTO), Rocket Fuel (FUEL), Tremor Video (TRMR), and YuMe (YUME). Each of these four recent IPOs has performed poorly since their debuts, which doesn’t bode well for TUBE’s prospects.

It does have two clear fundamental strengths, however. First, its revenue growth has been very impressive, and seems to still be accelerating. Additionally, as the company transitions away from its more traditional advertising business to its self-serve, SaaS model, its gross margins are expanding quickly. This combination had the company on the brink of profitability in 1Q14.

To wrap up, we think TUBE has intriguing growth potential and with its low float, it could open with a decent pop. But, after that, the question that has to come to investors’ minds is, “why would TUBE work out, while the last four IPOs in the space have failed pretty miserably.” Add in a valuation that is richer than FUEL and CRTO, and my enthusiasm begins to want quite a bit on this deal.

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