A Potentially Huge Market, And A Company That Might Be Well-Placed To Take Advantage Of It.
At present the majority of an advertising company’s social media budget is directed towards display advertising. This is changing however, as more and more advertisers are starting to direct a portion of their budget towards a type of advertising called social media sponsorship (SMS). SMS is the practice of an advertiser paying celebrities, or other influential people, to promote products or services through the social content they produce. For example, if a sports drink company wants to draw attention towards its latest offering, it might pay an athlete to tweet about it.
This method of advertising has so far been relatively limited in its growth by the fragmentation of the market. In other words the expense necessary to find, negotiate, and coordinate the terms of an agreement between an advertiser and an ‘influencer’, has up until now outweighed the potential benefit. This is changing however, with a number of company’s now acting as market makers between the two parties. One such company is IZEA (OTC: IZEA).
Incorporated in 2006 IZEA is a 39 employee company based in Florida. It has developed, and is currently running a number of platforms designed to aggregate advertisers and social media publishers. When an advertiser uses IZEA’s platforms to find and pay a social media publisher IZEA receives a small fee. The fees vary depending on the reach and influence of the individual, and individual payments are usually small, but entire campaigns can total tens or hundreds of thousands of dollars.
As already mentioned the market itself has been limited by its conditions, but a recent Nielson report suggests that this could be about to change. It states that the majority of the advertisers and agencies surveyed indicated that they had been using social media advertising for less than three years, which demonstrates that paid social media advertising is still a maturing field. It also reports that 64% of advertisers are increasing their paid social media advertising budgets in 2013. In addition to this, of the advertisers surveyed 44% stated that the availability of social media benchmarks would lead to them to increase their paid social media advertising, a benchmarking that is achieved through IZEA’s platforms.
The growth potential in these statistics is echoed in IZEA’s most recent financials. In 2010 revenue was approximately $3.8 million. This increased to approximately $4.3 million in 2011 and again to $4.9 million in 2012. Gross profit also increased, from 55% in 2011 to 57% in 2012. For Q1 2013 IZEA reported revenue as just short of $1.4 million which, when annualized, projects 2013 revenue at around $5.5 million.
This growth, IZEA states, is down to a number of things.
The first of these is the culture of the company and its employees. The ‘IZEA way’ of approaching the market is constant evolution, reinvention and innovation. In its latest financial reports this approach is credited with offering IZEA its largest competitive advantage. Next is the first mover advantage IZEA was able to benefit from by its founder and CEO, Ted Murphy, being the effective creator of the social media sponsorship industry. This advantage enabled IZEA to develop a brand loyalty amongst publishers and advertisers before its competitors had a chance to do so.
IZEA has also undergone a number of both structural and operational changes over the past few years which have enabled the company to maintain its expansion rate.
In 2011 IZEA acquired Magpie, an advertising network based in Germany, which served to broaden IZEA’s European footprint. Also in 2011 IZEA partnered with an Indian media company, IZEA UTV, with the goal of developing Sponsored Tweets, a service that will serve to monetize the 12 million Twitter users in India. In December 2012 it acquired FeaturedUsers (a Twitter marketing platform) and more recently IZEA has announced a strategic partnership with Hand Picked Media. Hand Picked Media is a female-focused network of UK influencers that will give advertisers access to a publisher base that spans the UK.
What can investors expect from IZEA over the next 12 months?
The revenue growth that IZEA experienced between 2011 and 2012 was primarily down to an expansion and remodeling of its sales force. Throughout 2013 IZEA are aiming to expand this sales force once again, with sales teams deployed throughout the United States and the rest of the world, tasked with forming deep relationships with advertising companies and in turn attracting new business.
IZEA also expects to continue to expand, through further strategic partnership and acquisition. In the press release associated with the partnership agreement with Hand Picked Media IZEA’s COO, Ryan Schram stated that IZEA ‘looks forward to announcing additional partnerships throughout 2013.’
IZEA is also currently developing the first Native Ad Exchange. Native advertising is the use of advertisements that adopt the look and feel of the platform, blog or website that is hosting them, and is an area of online advertising that alongside SMS, is also expected to expand over the next few years. The Native Ad Platform is expected to be live by Q3 2013.
So what are the risks associated with IZEA?
The main risk for investors considering IZEA over the coming 12 months is its ability to meet its funding requirements. In order to take advantage of the SMS market’s growth potential IZEA must be able to raise finance to meet both its daily operational expense and maintain its expansion.
In 2011 operating expenses were $6.6 million, increasing to $7.2 million in 2012. With 2012 gross profit of $2.8 million this equates to a net loss of approximately $4.6 million for the year, up from a loss of $3.9 million in 2011. A further net loss of around $900,000 was reported for the first three months of 2013.
Short term financing is being relied upon, mainly through one of IZEA’s independent board members, Brian Brady. Recent SEC filings show Brady has loaned IZEA around $750,000 year-to-date, the assumption being that this will have to continue until IZEA either attracts alternative funding or is able to grow its revenue to a level that meets its operational expense.
Another item of note is IZEA’s capital structure. Liabilities currently outweigh assets by a ratio of around three to one, with a shareholder deficit of approximately $1.3 million. IZEA’s market capitalization is just short of $1.86 million based on approximately 7.14 million shares. One thing that must be taken into consideration however is that in its most recent 10-Q IZEA reported that as of March 31st there are 5 series of preferred shares outstanding, totaling just over 2.5 million, of which a Treasury Stock calculation reveals that 1.1 million could be dilutive. This puts IZEA’s fully (current) fully diluted market capitalization at approximately $2.1 million, with shares that could be subject to further dilution as market price increases and more of the options become dilutive.
IZEA has a number of competitors, including Facebook (NASDAQ: FB), Glam Media, Federated Media, Foursquare and Groupon (NASDAQ: GRPN). Groupon and Facebook have market capitalizations of $6 billion and $58 billion, and revenues of $2.5 billion and $1.46 billion respectively. Federated Media, a company that competes directly with IZEA for both influencer registration and advertiser interest are reported to command revenues of approximately $90 million. Glam media is rumored to have filed the initial documents required to go public, and has revenues that are reported to be as high as $400 million.
The financial position of these companies in relation to IZEA, means that success is reliant upon its ability to leverage certain strategic and operational advantages such as first-mover and leadership.
There also exists industry inherent risk. The future of IZEA is largely dependent on SMS, a concept of which wide scale public perception has not yet been determined. Also in order to maintain growth IZEA is reliant upon the continued popularity and user involvement in social media itself. Although figures currently report an opposite trend there is always a possibility that this might change.
To conclude, IZEA is at present placed to benefit from the expected growth in the online paid advertising industry. If further finance can be raised, and used, to drive revenue growth and increase operational efficiency throughout 2013, then there might be considerable value in its current price.