Member Info for 1GW_

Another consideration is perhaps that to be effective at posting negatively it helps if you're not a figure of general derision with zero credibility.

It could be that our negative poster actually is thinking about buying in if he gets the backup he's looking for in the results. The problem he might be worried about though is some of the run-ups that have happened ahead of TUs and results in the past - and there's speculation about the TU, reaction to the TU and then speculation about the results to come between here and the results. He knows (I would guess) that he couldn't possibly bring himself to buy in if the share price rose, say, another 50%, so he might desperately be trying to keep the share price down by posting negatively in order to leave himself the option of buying in at what he considers a "good" price.

Why he isn't prepared to own up to that, or whatever his real motivation is, does puzzle me. How could the real reason be any worse than some of the speculation about his motivation?

Wasn't my reply to brassneck on the negative side? I suggested his revenue estimate might be high (as a base case) and his opex estimate low. I cautioned that the revenue in particular was very unpredictable imo. Isn't the period ahead of results or an expected TU when you would expect serious analysis-minded investors to talk on an investment bulletin board about what might be in the results? This bulletin board is a community of interest, the interest being the company that most of us have invested in. We ( the investors) want it to do well, we hope it will do well, and the reason most of us are still invested, I imagine is that we think it has a reasonable chance of doing well. We like talking about what the company is doing, how it is performing and where it might go. This is normal behaviour and not evidence of some awful boiler-room scam, I would suggest.

I'll have another go at this, because IMO there really is some twisted logic around this "higher risk" because the cash has gone down argument.

This is not like buying a house, a car, or some fancy electronics (i.e. "non-productive assets") on credit where if you can't keep up the repayments you lose the asset.

R1 is a business, it has assets and it generates its own cashflows. At the end of FY17 it had a risk profile, which was influenced by its assets (including the cash in the bank) and the range of possible cashflow scenarios that could happen.

At the end of FY18, it has a different risk profile, influenced by the same sorts of things. The cash has gone down but its range of possible cashflow scenarios has also changed, principally because it has acquired RadiumOne and YuMe.

So (IMO) it is a complete nonsense to say the risk has gone up because the cash has gone down. It only makes sense to talk about the risk of the whole business - and then you have to define what do you mean by risk? If you just mean "staying in business" you might have one answer, if you mean "reaching a (non-zero) target share price" then you might have another. And if you mean "becoming sustainably profitable" that would also be a different question. The cash has gone down, but almost certainly the cash-generating potential and robustness of the business has gone up and you have to try to balance the positives and negatives to decide whether overall the "risk" has gone up or down.

STT - so you're claiming a successful trade, having sold some at 50p? And that's against how many unsuccessful trades? Not a great track record is it?

If you really want to keep score, I would offer my many (profitable) arb trades Sept'17 - Jan'18 as evidence - explained and declared at the time.

Wouldn't they put me ahead on that metric?

Why would I call videology a "grown-up" company? I said grown up companies tend to roll over debt financing once they have it and I also explained what I meant by grown-up in terms of companies seeking debt financing to optimise their capital structure in the first place. I didn't say all companies with debt financing are "grown up" did I?

Debt does not per se make a company "higher risk". It depends what the company uses the debt financing for. To take a simple but extreme example, if taking on additional debt stops a company going bust because it has a temporary working capital cashflow problem then the debt has clearly reduced the risk.

Hence my question to you to explain your earlier simplistic and non-sensical statement. Why in your opinion was R1 lower risk at the end of FY17 than it was at the end of FY18, if indeed that's what you meant?

As I tried to show, stt, your statement is a nonsense unless you state the other assumptions that underpin it. There's nothing wrong in having your own opinion, but if you state it on a bulletin board it's good if you can defend it. So are you saying the trade off of some cash for the business scale, efficiency and diversity that comes with Radiumone and Yume added risk? In what way? Are you perhaps saying that you don't believe the business will be operating cash flow positive this year? Or are you just using simplistic and non-sensical statements to try to engender concern in the minds of shareholders?

STT's statement: "I think a business with $75m cash is lower risk than a business with $100m secured credit facility, which has been partially (or fully) drawn down. "

Well there's a statement. Doesn't it depend on a host of factors? What the cashflows of the 2 businesses are, what the assets and liabilities are, quality of management, nature of the business etc?

But let’s assume you’re talking about R1 at end-FY17 vs R1 at end-FY18. So we’re talking about a business which had $75m cash/equivalents/marketable securities pre-RadiumOne and pre-YuMe vs one that had $27m net cash and equivalents ($37m cash less $10m drawn down on the credit facility) post-YuMe and post-RadiumOne.

Which of those businesses is lower risk surely depends on the risk-mitigation that came with the additional cash and smaller business vs that which comes with the larger business. If R1 was going to be sub-scale and likely to have weak operating cashflow going forward, then it might well be lower risk post-acquisition, even with less cash initially, if the operating cashflow is likely to turn significantly more positive and the business has achieved sufficient scale to be inherently more robust and sustainable. This is what the RadiumOne and YuMe acquisitions were about isn’t it?

The point about “grown-up” companies is that investors expect management to optimise the capital structure of the company. Once a company is sufficiently “grown-up”, in the sense that positive operating cashflow is becoming relatively secure, that is likely to mean taking on some debt because that is likely to increase the returns to shareholders compared to leaving “excess” cash in the bank earning essentially a risk-free rate of return.

For completeness on the debt position, the other loan, a $35m subordinated loan, was repaid on 8th June. This, I think, was the bridging loan for the YuMe acquisition and was offset at the balance sheet date by $35m of restricted cash ("cash collateral against the term loan which was used to fund a portion of the cash consideration related to the YuMe transaction.")

So I think on 8th June they repaid the $35m loan out of "cash and equivalents" which would have released the $35m "restricted cash" back to "cash and equivalents".

20-F:
"In addition to RhythmOne’s revolving credit facility, RhythmOne entered into a Subordinated Loan and Security Agreement with Silicon Valley Bank that made available to certain of RhythmOne’s subsidiaries a subordinated loan not to exceed $35.0 million. The obligations of each borrower under this facility was guaranteed on a full and unconditional basis by certain of RhythmOne’s subsidiaries. The subordinated loan matured on June 2, 2018 and RhythmOne used its available cash and cash equivalents balance to extinguish the $35.0 million outstanding balance. RhythmOne no longer has the ability to borrow against this facility. The loan bore interest at the greater of the Prime Rate less 1.50% and 2.75%, and interest was payable monthly. For the period the effective interest rate for this loan was 3.04%."

Note 18 to accounts:
"Restricted cash of $0.7m within non-current assets represents deposits with financial institutions as a condition of certain property leases and restricted cash of $35.0m within current assets represents cash collateral against the term loan which was utilized to fund a portion of the cash consideration related to the Yume transaction The non-current asset classification is due to the cash not being immediately accessible by the Group due to the long-term nature of the leases. The current asset classification is due to the short-term nature of the term loan."

The facility is for $25m, not $100m, although it may be increased up to $100m under certain conditions. They had borrowed $10m as of the balance sheet date (31st March 2018) and had cash of $37m, i.e. net cash of $27m after subtracting the $10m debt.

"On 8 November 2017, RhythmOne and certain of its subsidiaries entered into a senior secured revolving credit facility with Silicon Valley Bank and certain other lenders party thereto pursuant to which certain subsidiaries of RhythmOne may borrow up to $25.0 million of revolving loans. The funds are designed to provide cash resources to support potential strategic initiatives and general corporate purposes. Subject to satisfaction of certain conditions, the total revolving commitments under the Revolving Credit Facility may be increased by an amount not to exceed $75.0 million. This facility bears interest at either Libor plus an applicable margin or the United States Federal Funds effective rate plus 0.5% in addition to an applicable margin. For the period the effective interest rate for this facility was 4.67%. This revolving credit facility matures on 8 November 2020. As of 31 March 2018, the Company had $10m of borrowings from this facility."

They renew it because that's what grown-up companies do. They want some debt financing because it's relatively cheap and they want the flexibility to put cash down for a big acquisition if the right opportunity comes along. They are expecting to be significantly cash generative this year aren't they? Ed always seems to be commenting that adj Ebitda is a good proxy for ops cash, so $50m adj Ebitda in fy19 should mean lots of ops cash.

If it's a 3-year facility then presumably they will look to refinance it fairly soon. These things tend to get rolled over with the rate moving according to movement in bond rates and perception of credit-worthiness of the borrower, don't they?

STT, you say: "The $100m credit facility ISN'T new either, is it?. They set it up last Nov, didn't they?.
So is it not credible to believe that they set up the credit facility because they expected to use it for some of these 'significant costs' that they have mentioned..."

No it is absolutely not credible imo, it's a completely different scale of "significant". I think they set up the line of credit in part to give them the option of moving to a more normal capital structure for an established company - i.e. some debt funding - which should enhance returns to equity holders at acceptable risk as the business gets bigger and more predictable. And in part I am sure they had their eyes on a line of funding that could be used for the "right" consolidation opportunity were it to come along.

For example, they no longer have the costs of regular quarterly reporting that YuMe needed to do as a US-quoted public company. And although these US-reporting requirements are new to R1, don't you think YuMe was already subject to some or all of them and so incurring its own significant costs complying with them?

And as at end-year didn't they have a buffer of $27m net cash? i.e. $37m actual less $10m borrowed on the credit facility.

"The combined company will incur significant costs and devote substantial management time as a result of becoming subject to reporting requirements in the United States, which may adversely affect the operating results of RhythmOne in the future."

STT - you keep quoting this as though it's something new and scary. It was in the prospectus (the F4). If you remember R1 expects to achieve savings in public company costs (of which this is a part) from the merger. At the time of the YuMe merger announcement they estimated annual savings at $10-12m and that was increased to $15m in the full year results announcement.

YuMe merger announcement, 4th September:

"The Company believes that the Acquisition represents an attractive opportunity to achieve savings of approximately US$10-12m per annum (before tax) across the combined businesses from, inter alia; functional redundancies as a combined entity, duplicative vendor relationships and public company costs, with associated one-off costs of no greater than US$1m."

Full year results:
" The Company expects to realize approximately $15M in annualized synergies. "

I've just realised there's a lot of 1HFY17" s in those posts of mine which should be 1HFY18's. The prospectus gave pro-forma accounts for the 6 months ended 30th September 2017, which was 1HFY18.

Actually, that WC comment of mine isn't quite right. There are 2 things going on - one is increase in revenue, which leads to greater WC tied up on average, the other is WC seasonality which leads to higher WC at end-1H compared to end-2H. So while you can pro-rata the base for revenue, you need to know what the seasonality impact is as well and I'm not sure you've got that separately identified - you could go back to the semi-annual revenue numbers to work out how big an increase there was in 1HFY18, remembering to adjust for "discontinued operations", and then work out how much the "base" expansion effect was but I'm really not sure it's worth it, given the big cloud of uncertainty around the revenue number.

brassneck - I don't know about "tweaking" your assumptions. Not sure mine are going to be any more valid, just offering a slightly different angle. The reality I think is that (from the outside) there's huge uncertainty around the revenue number and that will flow through to nearly every other metric. I think from the law of averages (or is it mean reversion?) R1 ought to get an upside surprise on revenue at some point, but it might not be this half. More seriously, I do think they are relatively well positioned to use the "industry challenges" as tailwinds rather than face them as headwinds, given their focus on verification and trust, and that could surprise everyone to the upside at some point.

My own expectations are really based around them delivering on the $50M-$60M or so of full-year adjusted EBITDA that they have effectively guided to, I think, by referencing consensus. It was clear from the AGM that Eric was not focused on hitting a particular revenue number, but thought that he was going to be judged on whether or not he hit the profitability numbers that were in the analyst notes. I would hope that they get a decent wedge of that adjusted EBITDA in 1H, but it is likely to be 2H-weighted as cost savings (and hopefully revenue) ramp up. I hope that that adjusted EBITDA comes without too many exceptionals but it will come with a lot of amortisation which will drag on IFRS (bottom-line) profit. It would be great if they could scrape across the IFRS breakeven line in 1H with the promise of something more in 2H.

On cash then, I'm not sure I've much comment. Working capital is a big unknown. My memory of that 1H FY18 number ($11.1m) is that some of it was "normal" seasonal but some of it was something specific to the RadiumOne acquisition which they expected to unwind - i.e. a short-term out-in to do with RadiumOne rather than something they expected to repeat each year.

If you look back at the 17th Oct 2017 TU ahead of the 1H results they commented

"...net cash used of c. $20M relating to the RadiumOne acquisition cash consideration and working capital, c. $7M used in broader group operating activities to fund a first half working capital investment - driven by increased revenues and in line with normal seasonal working capital trends,..."

So I might hope $7M was the "normal" wc outflow (perhaps scaled to revenue excluding RadiumOne though) and the other $4m was a one-off. If that were so, and the $7M equates to the $95M R1 (excl RadiumOne) revenue then maybe similar seasonal impact would suggest $14M wc outflow on revenue of say $190M and pro-rata for different revenue estimates. And then perhaps increase slightly for the trend to longer payment times? But I could be wrong, and working capital is in any case subject to the vagaries of when exactly bills are paid.

I didn't comment on gross margin before. I think we might see something higher than 43% there. Going back to the pro-forma accounts in the prospectus we had:

Proforma FY17: 45% overall, 50% YuMe, 42% excl YuMe
Proforma 1HFY18: 43% overall, 48% YuMe, 39% excl YuMe

Given they did 43% actual in 2HFY18, with only 2 months of YuMe, and only $17m YuMe revenue at that, I think they might be expecting to do better than 43% overall for 1HFY19 if YuMe revenue has recovered, particularly if they have been shedding some low margin business.

Actually, the pro-forma statement $101m half-year opex seems to include $4m exceptionals to do with Perk, RadiumOne and YuMe acquisitions. And R1's own 1HFY17 results included $7m of exceptionals (acquisition+). So perhaps the baseline should be $94m and a 20% saving would take us down to $75m. So in that context, $81m looks more credible, although still a bit of a stretch I think.

Some thoughts on Part 1 focusing on 1H. Revenue is tricky and there must be a huge range of possible outcomes. $205m might be a bit high as a base case and opex at $81m also looks a bit ambitious to me, but I would hope they can do better than $7m exceptionals.

Revenue

From the quarterly stats, volume and fill rate tend to go up from Q1 to Q2 (fy) but price tends to go down. Revenue goes up by an average of 35% from Q1 to Q2 over FY17 and FY18, which against the $87m for Q1FY19 would suggest $118m for Q2 or $205m for H1. So that's the same number by a slightly different route. However, while Q1-Q2 FY17 is a relatively clean comparison, Q1-Q2 FY18 is muddied by the acquisition of RadiumOne towards the end of Q1 (there would have been an extra $20m of revenue from RadiumOne in Q1 FY18 if the acquisition had been completed at the start of the year). If I adjust the Q1 FY18 revenue figures for that, it would bring the average Q1-Q2 revenue growth down to 11% and give $97m for Q2, or $184m for H1 FY19.

So $184m revenue perhaps from that analysis.

Another datapoint is the pro-forma numbers in the prospectus (F4). On page 213 they gave a pro-forma income statement for 1H FY17 - ie an estimate of what the results would have looked like for 1HFY17 if they had owned R1, RadiumOne and YuMe for the whole period. This showed $209m of revenue. Revenue seems to have been rather light in Q4FY18, and they have suggested that some less profitable revenue might have been let go, so I think we might expect that $209m base to have been lowered and getting back to it would be a very good result.

So $205m from brassneck and $184m or $209m from me depending on methodology. But this isn't a traditional business with a well-defined backlog that can be used to model future revenues. Nor is it in "steady-state" which might allow good predictive models to be built (eg based on previous quarterly stats). So the actual revenue number for 2Q and therefore 1H will be influenced by the particular headwinds and tailwinds that impact R1 in 2Q - and these could throw the number significantly off any modelled numbers.

Opex

Pro-forma number for 1hFY17 in the prospectus was $101m. They talked about annual savings of $10m-12m with one-off costs of no greater than $1m. So say $95m for a half-year once those are done. But they also talk about an average 20% reduction in costs - which would take them down to say $81m for the half year. I asked about the baseline for this at the AGM but Mark Bonney refused to clarify.

I think it would be optimistic to assume the whole 20% would have been locked in by 1st April, so $81m is very much a stretch target imo. But I would hope it doesn't need a whole $6m additional exceptionals to deliver it, on top of the $1m mentioned for the $10-12m annual saving.