So to start off we know the title isn’t really fair. But still the past has not been kind to “video platform” companies – here we are reminded of BrightCove (BCOV) and KitDigital (KITD) which have both done poorly. Going back further to specialized video servers like SeaChange (SEAC) the story doesn’t get better.

That doesn’t mean that TubeMogul (TUBE) doesn’t have a chance. But let’s take a look at the story starting with some highlights from their IPO roadshow transcript:

TubeMogul is an enterprise software company that offers a self-serve platform for digital branding. Branding agencies use our software to launch sophisticated, scalable digital video campaigns onto any device within minutes. Our clients include many of the world’s leading brand advertisers — so named because they seek to establish emotional connections with consumers — primarily using TV ads so that they can maintain and improve differentiation, market share, pricing power and ultimately sales.

The enthusiasm for our software is translating into exceptional growth. Total media spend for our software grew at 151% compound annual growth rate over the last two years and our total spend for Q1 2014 was up 194% over Q1 2013.

The clients work with us in two ways. We have a managed service called Platform Services where we manage campaigns for clients at a fixed price; and we have a self-serve offering called Platform Direct, where clients manage campaigns completely on their own. We charge these clients a percentage of spend plus software fees, which makes this offering more SaaS-like. Our gross margins on our Platform Direct offering average around 90%.

What’s also exciting is that the first-year cohort spend is increasing, as well. The class of 2011 spent $2.5 million their first year; the class of 2012 spent $6.8 million their first year; and the class of 2013 spent $22.2 million their first year.

It’s a fact that TV is migrating to Internet delivery. Many of you that have kids at home see this happening already. As this trend continues, we believe it’s inevitable that TV ads will be purchased digitally through software, as well. Harnessing this fundamental shift is our opportunity and a trend that we saw seven years ago when we started the company.

Our competitors are companies that sell video advertising solutions to advertisers — not to publishers. Amongst the set, we plan to win the quadrant where branding meets software. Our software is purpose-built for brand advertising — the largest of all advertising sectors — with unique concerns and objectives apart from direct response. And unlike other companies that are just buying programmatically or using real-time bidding on behalf of their clients; most of our clients are actually logging in and using the software completely on their own.

We track Platform Direct clients as a key measure of our progress. We’ve grown the number of Platform Direct clients from 25 at the end of 2011 to 208 at the end of 2013. While growing the number, we’ve also increased the average spend per client from $98,000 in 2011 to $351,000 in 2013.  [Ed. This is an impressive number for “self service.”]

Our long-term goal is that Platform Direct will make up 85% of our spend with 15% coming from Platform Services. As a result, our goal is 73-75% long-term gross margin with an adjusted EBITDA margin of 26-30%.

All in all this is a pretty impressive set of metrics and strategy. Strong revenue growth with expanding gross and net margins is beautiful music to the investment market.

Valuation

The company plans to offer 6.2M shares at $12 mid-point of the range to have a $74M deal. Assuming the green shoe is exercised the share count will be about 30M for a $360M market capitalization on what should be $100M in 2014 revenues. Not a demanding P/S multiple given the strong growth with high and expanding gross margins.

We may do an IV on this one eventually but using the back of an envelope we can put revenues up at $250M in two or three years, apply a 20% net margin (EBITDA adjusted back to reality) and use a 20x multiple to arrive at a $1B valuation.

Investors should realize that the “target” model won’t be realized until the company hits a much higher revenue level but this gives at least a rough working “top” for the stock post-pricing.

The management team is a little patchy here so we think investors need to be careful and keep doing homework on this deal. The first few quarters as a public company for TUBE will be pivotal since the team is largely unproven.

 

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