Affle(India) Ltd (Affle), founded in 2006, is an ad tech company that helps advertisers drive user acquisition, improve engagement and increase the frequency of transactions through mobile advertising using its proprietary consumer platform. Key investors include Microsoft, D2C, Itochu, Bennett Coleman & Co. Ltd. & Centurion. Affle launched its IPO end of July & got listed on the exchanges on 8th August 2019.
Affle has two business segments: Consumer platform; and Enterprise platform. Its Consumer platform primarily provides the following services: (1) new consumer conversions (acquisitions, engagements and transactions) through relevant mobile advertising; (2) retargeting existing consumers to complete transactions for e-commerce companies through relevant mobile advertising; and (3) an online to offline (“O2O”) platform that converts online consumer engagement into in-store walk-ins. Its Enterprise platform primarily provides end-to-end solutions for enterprises to enhance their engagement with mobile users.
As on 31st March 2019, Affle Consumer platform had approximately 571 mn consumer profiles in India. It provides services across the value chain in digital advertising, spanning the areas of DMP, DSP/SSP, fraud detection and ad network. It is one of the very few companies that has products spanning the entire value chain. Further, it has increased its breadth of its service offerings, especially to e-commerce and mobile app driven companies, following the acquisition of Vizury Commerce Business and RevX Platform. The Indian market presents high barriers to entry given its unique challenges, such as a disjointed demographic, which is just getting habituated to digital applications (such as the use of e-commerce, digital payments, etc.) and low CPCU. Achieving profitability in such a price-sensitive market is possible only for companies that are familiar with the dynamics of consumer profiles and has a track record of working alongside brands locally for years. Therefore, extensive consumer profile data, proprietary technology and local knowledge makes Affle better placed compared to global peers to deliver profitability in India.
The Company’s solutions are sold through its sales and marketing team, which as on 31st May, 2019 comprised 51 persons across its six offices, one sales agent in Malaysia and through referrals from existing customers. Its customers include the companies for which it undertakes a mobile ad campaign as well as the advertising agencies acting for such companies. Its business is asset light and scalable as shown by the fact that its employee benefits expenses, depreciation and amortization expenses and other expenses has remained relatively unchanged despite significant changes in its revenue in the last three fiscal years.
Revenue from top 10 customers account for 64.5% of its revenues in FY19. If Affle fails to keep key customers or fail to attract a broader range of customers, it would have a material adverse effect on its business, results of operations, cash flows and financial condition. Four of Affle’s top 10 customers for FY19 on a consolidated basis were advertising agencies. Most of its agreements with these parties are typically for a period of one or two years. There is no guarantee that these agreements will be extended, renewed or replaced. If it has an unsuccessful engagement with an advertising agency on a particular advertising campaign, it risks losing the ability to work not only for the company for whom the campaign was run, but also for other companies represented by that agency. Another risk to the agency model is also that large advertisers set up in-house teams to work with ad tech vendors. In additions there could be a potential risk from Amazon’s foray into the digital advertising market. Lastly inability to source data due to changes in regulations, technology or restrictions placed by browsers on data collection through cookies could be a problem.
The Company focuses on user conversion, as its revenues are dependent on success rather than clicks. In terms of revenue model, 92% of the company’s revenue comes from CPCU (Cost per converted user) model while the remaining comes from CPC (Cost per click)/CPM (Cost per thousand impressions) model.
Affle has a strong moat around its DMP (data management platform) + mFaaS (fraud detection platform), backed by a large dataset (~2bn user profiles and ~300bn data points) and efficient fraud detection algorithm.
Affle has one of the best operating metrics in the industry, with an EBITDA margin of ~28% in FY19 despite operating in India, which is a challenging market to function given the highly fragmented demographics, low online shopper penetration and low CPCU rates. In FY19, Affle generated ~56% revenue from outside India and had ~582mn and ~870mn user profiles in emerging markets and developed markets, respectively. Beyond India the monetization factor is low at 1-2% vs ~7% in India as of FY19, implying growth potential. Further, CPCU rates in those markets are 2-5x of that in India.
Affle has an asset light model & maintains RoCE above 40% and operating margins/net margins of ~28%/~21% which should attract premium valuations. We also believe that online advertising & promotion has immense potential & should grow in excess of 30% annually over the next few years.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 12 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’