Programmatic advertising faucet "secondary growth".
The global advertising industry is back on a growth track in 2021.
According to MagnaGlobal, one of the world's largest media advertising negotiators, global digital advertising (including search, social media, banner and digital audio advertising) sales increased by $105 billion to $442 billion in 2021, a 31% increase in growth.
On the other hand, the growth rate of China's Internet advertising industry in the same period has declined visibly. According to the "2021 China Internet Advertising Data Report", the Internet industry achieved advertising revenue of 543.5 billion yuan (excluding Hong Kong, Macao and Taiwan), an increase of 9.32% year-on-year, an increase of 4.53 percentage points slower than the previous year, and has been weak.
Judging from the data of Internet manufacturers, this trend is even more obvious. Tencent, Douyin and Baidu's advertising businesses all experienced slowing or even negative growth in the third quarter of 2021.
It is worth noting that the exchange of technology (1860. Hk) (hereinafter referred to as "Huiliang" or the "Company") advertising business has seen a continuous increase against the trend.
As a global mobile Internet technology platform, Huiliang's main business model is to use mobile advertising platforms and analytics platforms to provide services including programmatic advertising, while providing user acquisition and monetization services for APP platforms. Remittances charge fees based on the effectiveness of advertising and value-added services.
Programmatic advertising is the focus of Huiliang Technology.com. In the four quarters of 2021, the Mintegral platform carrying the sink business achieved four consecutive revenue increases, of which Q4 increased by 256.34% year-on-year and 88.19% for the whole year.
Source: Collated by alpha workshop research institute
On 31 January 2022, Huiliang Technology (01860) announced that it will hold a special general meeting of shareholders on 22 February 2022 to consider proposals related to the sale of the media professional planning and procurement business and the amendment of the Restricted Share Unit Plan (the "RSU Plan").
After this action, the core of the business is more concentrated on the programmatic advertising business, and it is conceivable that the gross profit level will also increase.
The driving factor behind the sustained and rapid growth of foreign exchange rates that can outperform the global and Chinese markets can be attributed to: the distribution of business globalization allows companies to rely on the advantages of overseas markets to serve the needs of Chinese Internet companies going overseas and hedge the impact of the decline in the growth rate of customers' domestic markets.
Taking marketing as the entry point, the development path of in-depth industry SaaS ecology, as well as the recent divestiture of media agencies, focusing on the main business of programmatic advertising, etc., these have enabled Huiliang to firmly grasp the target customers and continuously achieve new long-tail business increments.
The preferred service provider for domestic Internet enterprises to go overseas
After more than 20 years of development, the long-term survival model of China's Internet has reached a crossroads.
On the one hand, as of December 2020, the number of mainland Netizens was 989 million, and the Internet penetration rate reached 70.4%, of which the proportion of mobile Internet access was 99.7%, almost touching the ceiling of penetration.
According to Alibaba's 2021 financial report, the number of retail business users in China increased by only 17 million, compared with more than 100 million in fiscal 2019.
At the same time, the growth space of other pillar businesses of Internet manufacturers is also gradually narrowing, such as games, and the number of approved versions in the past three years has shown a continuous downward trend. In 2019, there were still 1570 models that received the version number, which was reduced to 1316 in 2020 and only 775 in 2021.
Everything points to the fact that after the harvest of the "low-hanging fruit" that was once within reach, Chinese Internet companies have had to find another fertile ground.
Under the guidance of the strategy of breaking through regional growth boundaries, overseas markets have become gold mines in the eyes of Chinese Internet companies, and large factories and small factories have joined the army of going to sea.
Or take the game industry as an example. Google data shows that in the first half of 2021, the overseas game market revenue of Chinese developers was 8.1 billion US dollars, an increase of 47%, close to twice the overall growth rate of the overseas game market of 24%.
The share of overseas has reached 23.4%, becoming the world's first, and in 2017, this figure was only 10%.
Most of these overseas customers have chosen the sink. One of the reasons is that the sinks have already been laid out.
In 2016, the rise of ultra-casual games in North America, at its peak, except for a few blockbuster games, the top 20 of the list were all occupied by ultra-casual games.
It was at this time that Sinks seized the opportunity to focus its business on interactive advertising, such as the optimization and design of incentive videos (players are rewarded for completing the game's tasks as required).
Source: Mintegral website
According to open market data, as of the first half of 2021, the proportion of Huiliang Technology's revenue in regions such as the Americas and Europe has increased from 35.65% in 2018 to 67.4%. In the third quarter of 2021, the retention rate of advertisers was as high as 85.95%, and the number of new advertisers increased by 25.72%.
Source: Company Announcement
Source: Company earnings
Slogan on Mintegral's website is "connecting the Markets of East and West." Overseas manufacturers choose Huiliang to a large extent based on their deep understanding of overseas audiences and customer needs, and can provide effective solutions.
For example, overseas game manufacturers will invest a considerable part of their budget on creative materials, Mintegral can not only help customers solve creative materials, but also through the material output optimization system algorithm capabilities, so that advertising products to achieve better operational results.
Huiliang has designed an interactive demo ad for Top Games' SLG game Civilization Overlord.
Through a set of playing methods, the user's learning cost for this medium and heavy game is reduced, and the inertia of trial muscle memory is generated, which is finally 61.08% higher than the CTR (Click-Through-Rate) of conventional video ads, the CVR (conversionrate conversion rate) is increased by 53.68%, and the IVR (Impression/Install Rate, single-asset user conversion rate, is 147.55%) higher.
If the global layout is to keep up with the development trend of the industry, then the high retention rate means that customers recognize the value of the platform, which is not only the embodiment of core competitiveness, but also an important foundation for future business diversification and expansion.
Meitu, ByteDance, Alibaba, etc. are all customers of Huiliang Technology, and Tik Tok and Meitu Xiuxiu will also go to the sea to find Huiliang.
Screenshot taken from a video of Mintegral's global customer message
Technology + Creative "Combo Fist"
From the mad men on Mad Men on Madison Avenue in New York in the last century (quoted from the American drama "Mad Men", generally referring to advertising creatives), using ideas in their brains to determine everything, to this century, Google's Math Men let data and algorithms determine the effectiveness of advertising. The advertising industry has undergone several dimensional transitions.
In addition to deploying a huge algorithm cluster in the cloud, Zhu Xiaoqiang, the algorithm leader of Alimama Display Advertising, joined Huiliang as chief artificial intelligence officer in 2021 to continue to support algorithm iteration. Such a stroke is also rare on third-party advertising platforms.
Technology is the cornerstone of business growth. But the moat for building the competitiveness of advertising platform business cannot only have excellent algorithms. Like the barrel principle, thriving alone does not solve the underlying problem.
How do I implement a global optimal solution? The answer given by the sink is "the resonance of algorithms and ideas".
In 2017, DCO (Dynamic Creative Optimization) technology shined on Taobao Double Eleven, with tens of millions of pictures and copywriting being personalized in real time, and the system distributed user traffic according to the conversion effect.
From the earliest graphic creativity, to the current "large-cap" video idea, to the "niche" interactive creativity with a higher terminal conversion rate, Huiliang has long applied DCO technology to the latter.
The Mintegral platform's algorithm combines a set of different elements into multiple sets of different experience creatives, tracks the conversion effect, and then dynamically allocates the budget to the combination of high conversion elements, so that the ROI of customer advertising continues to improve.
What is the equivalent of this DCO concept?
It is not a simple marketing algorithm that recommends similar products according to the user's historical behavior, but after any combination of all creative elements and a small range of trials, it is determined which combination has the highest ROI, and then expands the scope of promotion, further optimizes, and ultimately maximizes the benefits of dynamic advertising.
Examples of parameters to be algorithmized in this process:
1. Select which APP.
2. Which ad slot is selected in the app.
3. Which ad form to choose in the advertising slot.
4. Which ad elements and combinations to choose from in your ad.
5. The algorithm dynamically feedbacks the input-output ratio of the combination, and screens and optimizes the creative combination.
Mintegral's internal system is constantly iterating over algorithms to improve user click-through and conversion rates. Compared with the traditional programmatic creative algorithm that mines user interest through historical data and then serves similar advertisements, Mintegral's technical threshold can be said to be a generation higher.
Mintegral uses algorithms and creative materials to optimize each other to form continuous positive feedback and continuously iterate, making Mintegral's system capabilities industry-leading.
This is where the growth momentum of Huiliang Technology lies.
Source: Company website
In the four quarters of 2021, Mintegral's quarterly growth rate showed a continuous growth trend, with revenue growing from $96 million to $190 million. Fourth-quarter revenue increased by 256.3% year-on-year.
Compared with competitors, as early as 2020, Mintegral's revenue growth rate has surpassed AppLovin, ironSource and Unity, Mintegral has a unique differentiation in business model and technology, which is the key reason to win the favor of customers.
First of all, Mintegral's play style is more in line with the characteristics of the industry.
The mobile application ecosystem has always been characterized by a high degree of market fragmentation. For example, the Google Play Store has more than 2.87 million applications, the Apple App Store has 1.96 million applications, and the gaming app alone has more than 1.3 million applications.
For mobile application developers, it is necessary to focus on product development and iteration, but also to stand out in a highly competitive market. As a result, developers desperately need integrated, one-stop tools to ease the burden.
With clear pain points, Mintegral provides developers with solutions that cover the marketing side.
In contrast, Applevin, the American counterpart of Huiliang Technology, has chosen another path. Applovin's business coverage spans both mobile app promotion and game development, "both refereeing and athlete".
AppLovin's main sources of revenue are the content business and the marketing software business. Among them, the content business is mainly AppLovin's own and cooperative mobile game business.
The business started in 2018 and works with 14 game studios around the world through capital operations, with more than 200 mobile games and nearly 40 million DAUs, who contributed 51% of Applevin's revenue in 2020.
In contrast, Huiliang Technology adheres to the positioning of "water seller" in the mobile application industry, and its identity as an independent third party is more in line with the interests of developers and is more easily accepted by the majority of developers.
On the other hand, sinks began to streamline their operations. According to the company's latest announcement, the company decided to divest the media agency business as a whole and optimize the business structure.
On 31 January, Huiliang Technology announced that it would hold a special general meeting of shareholders on 22 February 2022 to consider proposals to sell the media professional planning and procurement business and amend the Restricted Share Unit Plan (the "RSU Plan").
Explaining the content of the announcement in large vernacular is to transfer the traditional, low-margin, and large-capital-occupied media agency business out of the listed company platform, focus on the main business, and improve operational efficiency. At the same time, the expanded pool of options due to share swaps can attract and retain more core talent.
More importantly, Huiliang will divest all its agency businesses and fully focus on programmatic media platforms.
Revisiting exchange rates using the NRR valuation method
Here, we introduce the income retention rate as an indicator to further observe the sinks. NRR (Net Revenue Retention) has now become an important tool for the valuation of U.S. SaaS companies.
There is no NRR in the equivalent earnings report, but a similar figure is given NER (Net expansion value), are these two figures the same thing?
According to the description in the financial report: the net expansion rate NER is the ratio of the average revenue contribution of retained customers in the current period, divided by the average revenue contribution of retained customers in the base period, and NRR refers to the previous period of paying customer income generated in the current period in addition to the previous period paid customer income.
The two concepts are very similar, so the NER of the sink can be roughly used as NRR.
The NRR of great companies remains at a high level, with most NRR > 100%, such as the familiar SAAS company Snowlake's NRR > 160%, zoom > 130%, Cloudflare > 120%.
As of the first half of 2021, the exchange volume of NERs is 126.3%, which is almost at the same level as these companies.
A common formula for calculating a company's valuation using the NRR/NER method is:
EV (Enterprise Value) = ARR (Annual Revenue of Enterprises) * ARR multiple (Common Annual Revenue Multiple of Listed Companies, Similar Industry P/E) * Growth Rate (Annual Growth Rate) * NRR (Net Revenue Retention Ratio).
Apply each parameter, for example:
1. The 2021 revenue of the Sinks Mintegral platform business is 574 million US dollars, so the ARR here is 5.74.
2. The compound annual growth rate of the revenue of the sink in the past three years is 162%, that is, the Growth rate = 1.62.
3. The net income expansion rate for 2020 is NER of 126%, assuming that the sink volume will continue to maintain such a NER level.
4. According to saaS Capital, the average ARR multiple of listed companies given by SAAS Capital is 12 (unlisted companies) to 16.6 times (listed companies).
Source: SAAS Capital
The calculations found that even after the divestiture of the media agency business of Huiliang, mintegral's supportable valuation is still between $14 billion and $19.5 billion, which means that even if the exchange rate is not listed, its valuation should exceed the current market value of $10.8 billion, which is a lot of room for imagination.
This valuation method restarts the growth perception of sinks from another perspective.
Respond to Apple's privacy protection and personal privacy protection laws
In April 2020, Apple updated the IDFA (Advertising Identifier, the unique device identifier on Apple's system, itself created for mobile marketing advertising) policy, based on which developers can model users (likes, needs, etc.) to deliver ads more efficiently.
After the implementation of the new policy, developers can only use IDFA for ad tracking if the user chooses "authorization and consent".
While some have expressed skepticism about Apple's "protect privacy" rhetoric, the impact of the New Deal on the advertising industry is real. According to the statistics of Single, a member of the Post-IDFA Alliance, only 16.8% of users chose to accept ad tracking.
The NEW DEAL ON IDFA has long been traceable, and even more far-reaching: further increases are not ruled out in the future.
In 2017, Apple pioneered the use of cookies in Safari that can record users' personal information and help them model. Google Chrome followed suit, and in the end less than 10% of users confirmed that they were allowed to use cookies on web pages.
The impact of IDFA on mobile advertising is now twofold. The first is attribution statistics, through the pursuit of data, developers can know which app the source of clicking ads; secondly, user portraits, through the App usage trajectory, to clarify the user's preferences, so as to customize the user's delivery plan.
To sum up, the impact of Apple's IDFA New Deal on the mobile advertising industry is reflected in the tightening of the user data acquisition side. This tightening will have a negative impact on behaviors such as attribution analysis and user profiling from the data side.
Therefore, getting rid of the dependence on IDFA is already a must in the mobile advertising industry. In this regard, Huiliang Technology began to lay out as early as 2019.
Beginning in mid-2019, Mintegral has gradually focused on modeling and estimating users' immediate interests, and has invested a lot of effort in dynamic creative tuning. For example, the user is modeled through the contextual information browsed by the user, and the user's needs are estimated. In this way, the dependence on IDFA is reduced.
The accurate judgment of the technical path makes the growth model of Huiliang Technology more resilient.
In iOS 14.5 released in April 2021, Apple began to implement the new POLICY of IDFA, Meta (formerly Facebook) came under pressure, and ROI also fell.
But Mintegral continued to grow in May and June, earning $45 million and $49 million, respectively, before reaching new highs each month and re-entering the top three ad markets in the hyper-casual game market.
The SaaS ecosystem is taking shape
From the perspective of growth path, the sink starts from advertising and does not stop at advertising, and the development direction shows an unusual trend. The company's business scope has long gone beyond simple marketing, which can be seen from the only two acquisitions since the establishment of the company.
In 2016, the company acquired GameAnalytics, a European mobile game data analytics platform focused on providing game analytics tools to independent game developers and game publishers around the world. Compared with the sink, his granularity is finer, such as the analysis and insight of the game's level upgrade.
According to huiliang technology's 2020 financial report, the monthly active users reached by the GameAnalytics platform reached 1.94 billion, and the number of active games accessed was close to 100,000.
In 2021, the company acquired Hot Cloud Data, a leading third-party mobile monitoring and marketing technology service provider in China.
Product coverage statistical analysis, advertising effect monitoring, advertising management, creative insights, advertising fraud prevention and other fields, has a marketing management system covering the whole life cycle of mobile advertising.
Prior to this, Huiliang Technology's capabilities were concentrated in the marketing side, hot cloud data and GameAnalytics, one helping Huiliang broaden the coverage of marketing services and the other increasing the depth of the company's services in the gaming field. The company is also expanding new vertical categories, such as heavy gaming, e-commerce, etc.
In addition, Huiliang Technology launched the cloud computing business brand SpotMax in 2020, aiming to optimize the use efficiency of cloud computing resources for mobile application developers and avoid the impact of peaks. At present, the company has reached a cooperation with Alibaba Cloud.
The "horizontal + vertical" coverage shows that the company is interested in taking algorithm + creativity as the starting point and gradually deepening the SaaS ecology covering the mobile application industry.
Therefore, whether from the horizontal coverage of the business or from the perspective of depth, the word "platform" can only represent the current value of the sink. Given the depth of its business, ecological effects are the true value of the company.
In the Internet industry, the valuation of product companies is one billion US dollars, the valuation of platform level is 10 billion US dollars, and the ecological level is often 100 billion US dollars.
Whether it is the early GamesAnalytics, the hot cloud data, or the current launch of Spotmax, it is the sink's attempt to continue to dig deeper into the value of the current customers, which is also in line with the global industry pace.
At the same time, after this divestiture and restructuring, the core of Huiliang's business has become more prominent, and the programmatic advertising business, the development of the domestic market and the expansion strategy to medium and heavy games and more vertical categories will surely lead more Chinese Internet companies to "capture" the attention of global users.
Huiliang has been established for less than ten years, and the road is already under the feet of Xiongguan.