The story is pretty simple - paper coupons in Sunday newspapers are dead or dying. Not only is circulation declining but the already-small redemption rates for paper coupons have dropped from 1.5% to 0.6%. [The IPO roadshow slides are archived here.]
On the flip side online coupons from Coupons.com (COUP) have soared in reach and redemption rates there have more than doubled from 6.1% to 15.1%. The existing paper coupon companies (like Valassis and Catalina) have failed to make the transition.
Although the company might be viewed as consumer-facing they are actually more about infrastructure and in many ways serve consumers indirectly. To quote the roadshow:
"We've had over 7 million downloads of our mobile applications, and that is without significant advertising of those mobile applications — but that number excludes retailer, consumer packaged goods companies and publisher applications that have many, many more times the number of downloads than we have. Coupons.com powers the mobile applications for some of the largest manufacturers, retailers and publishers in the United States. "
COUP has been at this for a while (1998) and is now embarking on a third iteration of their platform which encompasses a the fairly complex and decidedly "enterprise" world of POS. Because 90% of retail is still physical the integration of the digital coupon into all aspects of the actual shopping environment and work flow is critical.
COUP generated $168M in revenues during 2013 on 1.3B of transactions (versus 315B CPG coupons distributed). Using a 20% ultimate conversion rate on that volume yields about 63B transactions which would equate to $8.1B in revenue at flat pricing. All this illustrates is that the company has plenty of room to grow.
Management goes on to point out that total advertising spend by CPG is $34B and total trade promotion spend is $200B per year. There is no shortage of opportunity for COUP and so far management has executed well on going after it.
The company has invested heavily in the last two years in R&D and building technology. There was a big bump in spending to $40M year for both 2012 and 2013 which should begin to ramp down as the "Coupons.com 3.0" platform launch completes. Financial results have recently swung to a positive adjusted EBITDA. To quote from the COUP IPO roadshow transcript:
"In 2012 and 2013 each, we spent more than $40 million in R&D. In 2011, we started to build our new real-time point-of-sale platform that enables delivery of digital, paperless coupons to retail customers primarily through mobile. We believe that this is a significant competitive moat for us, as it is very difficult and complex integrating to retail point-of-sale systems and requires a significant amount of scale and stability. "
Long term management has put forth a model calling for 30-32% adjusted EBITDA on 66% to 68% gross margins which is where they are at now. These numbers look a little aggressive but doubt anyone will care at this juncture. There's no doubt that the business will be nicely profitable at scale. No sense getting lost on whether the operating margins are 25% or 30%.
So where does this price and settle out? We'd expect the deal to come well above the initial $12 to $14 filing range. After the deal there will be about 75M shares outstanding. If we use $20 for an initial price that puts the capitalization at $1.5B or 10x trailing sales.
As we have seen with deals like that capture acute investor attention multiples of 30x to 60x sales can be achieved as stocks get bid up to levels of total market opportunity. We're pretty sure this one is going to find strong aftermarket buying.
We will try and complete an IV model prior to the shares trading but based on what we know now anything below $40 will probably be considered a "buy" by institutions and analysts.
Just for fun we did some "back-of-the-envelop" analysis using a 40% growth rate and 30% margin translates into a company doing just over $1B in sales and $300M operating profit in about 5 years. A 35x multiple on earnings gets you to $10B or $140/share.
What could go wrong? It's hard to find reasons not to own this name but we would suggest that a combination of decreased coupon promotions and/or unit price pressure could emerge as aspects of the story that investors don't like. Other than that some might note that the company is "only" growing at 40% or so versus some other names posting closer to 100% annual growth.
In this market and with this story we don't see much nitpicking. Related names include OpenTable (OPEN), Cvent (CVT) and RetailMeNot (SALE) and GroupOn (GRPN).
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