Value stripping at the finance auctions – SPK 2 (OpenX)

OpenX describes itself as a global leader in digital and mobile advertising technology with the vision to unleash the full economic potential of digital media companies.  It seems like every VC-backed technology company with a few years growth under their shell is “a global leader” of this or that technology.  The company was one of the highlights of Spark Ventures 2012/13 annual report before being downgraded by 50% six months later in their 2013/14 interim report as being tricky to realise for its book value before 31st March 2015.  How does a global technology leader lose half its spark before hatching to stand on it’s own feet?  With survival of the fittest ruled out at the first hurdle, is this the corporate dimension of the nature – nurture debate or is OpenX another journeyman upstart.  This post will attempt to make sense of this investment in order to ascertain whether there’s value to be stripped from SPK’s investment portfolio.

What parameters define these self-proclaimed global technology leaders remain a mystery since most will eventually list on junior markets such as AIM for under £100m.  So, is it revenue – most cannot even scale the £100m bar, operating profit – most are loss-makers, global customer reach – most only operate transatlantic, scalability – most are old-school people and/or unit cost driven, collaboration with industry titans  – the real innovators have already been snapped up for billions?  Or is it just the deep pockets of the venture capitalist that run the incubators?

In their 2007/08 annual report, SPK waffled on about OpenX being spun out of Unanimis – another investee company at the time.  However, it was not until the publication of their 2008/09 annual report that OpenX magically appeared with a brought forward balance from 2007/08 of £1m.  Therefore, this is a good point to review Unanimis and OpenX timeline in the Spark Ventures incubator.

Unanimis timeline in Spark Ventures investment portfolio

Year-end	Stake	Prior Year	Addition	Disposal	Revaluation	Current Year
2007/08	11%		2,102k			2,102k
2008/09	12%	2,102k	25k		1,000k	3,127k
2009/10	12%	3,127k		(3,127k)*		Nil

*SPK realised their investment in Unanimis for £3.13m in 2008/09, published for the period ending 31st March 2009.

OpenX timeline in Spark Ventures investment portfolio

Year	Stake	Prior Year	Addition	Disposal	Revaluation	Current Year
2007/08	*
2008/09	4%	1,000k				1,000k
2009/10	4%	1,000k	200k		100k	1,300k
2010/11	3%	1,300k			1,200k	2,500k
2011/12	3%	2,500k				2,500k
2012/13	2%	2,500k			2,500k	5,000k
2013/14 (i)	2%	5,000k			(2,500k)	2,500k

* OpenX was mentioned in SPK’s 2007/08 annual report but no detail was published in the investment portfolio valuation table.

(i) Interim results as at 30th September 2013

As mentioned in the introduction, SPK devalued their investment in OpenX by 50% from £5m to £2.5m in their unaudited interim results as at 30th September 2013 after increasing the valuation by the same amount six months before from £2.5m to £5.0m.  Luckily for the auditors, they cannot be blamed for ignoring such schizophrenic valuations.  OpenX financial yearend falls conveniently at the end of June and therefore their performance should be available for both interim and final reports published by SPK,  Therefore, a quick review of OpenX’s financial performance is provided below.

OpenX KPI’s as at 30 June	Jun-09	Jun-10	Jun-11	Jun-12
No of employees	50	52	85	144
Turnover	£664k	£9,952k	£23,733k	£23,147k
Gross margin	(£23k)	£2,010k	£6,486k	£19,726k
Operating profit	(£5,676k)	(£3,307k)	(£5,989k)	(£1,238k)
Net assets/shareholders funds	£8,721k	£5,612k	£13,286k	£18,072k
Cash	£8,334k	£1,762k	£8,378k	£3,603k

Delving further into the year-on-year metrics, it can be said that OpenX has performed exceedingly well between 2009 and 2012.  They have grown their revenue, gross margin and operating profit, as well as, protecting their shareholders’ funds.  Obviously, the figures below don’t highlight non-financial variables, such as, headwinds that bubbled up between 31st March 2013 and 30th September 2013 which are privy to the management of OpenX and SPK and may explain why other investors are unwilling to pay full whack to purchase this global technology leader from SPK.

OpenX – YoY KPI movement	Jun-09	Jun-10	Jun-11	Jun-12
No of employees		4.0%	63.5%	69.4%
Turnover	1,691.1%	1,398.9%	138.5%	(2.5%)
Gross margin	183.2%	(9,023.6%)	222.7%	204.1%
Operating profit	(59.2%)	41.7%	(81.1%)	79.3%
Net assets/shareholders funds	23.0%	(35.7%)	136.7%	36.0%
Cash	17.2%	(78.9%)	375.4%	(57.0%)

An examination of OpenX disclosed shareholdings reveals that Spark Ventures is in good company, especially since the other investors include some fairly high net worth corporations.  The shareholdings also reveal that SPK is holding 17% of the ordinary or owners shares which usually bear the lion share of risk but enjoy the greatest rewards.  Preferred shares normally rank higher in the event of a liquidation and may convert to ordinary shares in certain events such as trade sale or IPO.  However, without reviewing the company’s Articles of Association, it’s difficult to determine what are the specific rights that attach to each class of shares.  Nevertheless, it’s still confusing to note that SPK’s annual report gives a shareholding of 2% which is not in keeping with either its ordinary or overall shareholding when considered pari passu with the preferred stock.

OpenX shareholders	Ordinary shares	Preferred A-E shares	Total	% Total	% Ord. shares	% Pref. shares
Vadim Telyatnikov	8,905.6k		8,905.6k	5.23%	23.87%
James Scott Switzer	6,756.7k		6,756.7k	3.96%	18.11%
New Media Spark	6,383.4k		6,383.4k	3.75%	17.11%
Capita Trustees Ltd	5,325.5k		5,325.5k	3.12%	14.27%
Unanimis Consultancy Ltd	4,992.1k		4,992.1k	2.93%	13.38%
Guy Holding LLc	4,945.5k		4,945.5k	2.90%	13.26%
Accel		3,358.3k	3,358.3k	1.97%		2.52%
Accel Ix Lp		36,308.6k	36,308.6k	21.30%		27.27%
Dag Ventures Iv-Qp LP		14,599.6k	14,599.6k	8.57%		10.97%
Index Ventures Iv (Jersey) LP		41,573.3k	41,573.3k	24.39%		31.23%
Mangrove Ii Investment Sarl		11,375.0k	11,375.0k	6.67%		8.54%
Mitsui & Co Venture Partners Iii		4,117.7k	4,117.7k	2.42%		3.09%
SAP Ventures Fund I LP		12,890.3k	12,890.3k	7.56%		9.68%
Svic No 22 New Technology Business Investment Li		8,899.2k	8,899.2k	5.22%		6.68%
Total	37,308.8k	133,121.9k	170,430.7k	100.00%	100.00%	100.00%

Moving on to the sweet end of the post, OpenX’s 2012 revenue figure of £23.1 million occurred in SPK’s reporting period ending 31st March 2013 where it reported its 2% stake as being valued at £5m.  This gives OpenX an implied enterprise value of £250m and an implied turnover multiple of 10.8.  The dramatic devaluation of OpenX’s investment by 50% would imply an enterprise value of £125m and therefore a turnover decay to £11.57m (£125m / 10.8).  This is not to say that SPK may not have used a earnings valuation basis.  However, this would be tricky since earnings have been negative for the period under consideration.

In conclusion, it would be fair to dump SPK’s 2013/14 unaudited interim valuation of OpenX and revert back to the 2012/13 valuation of £5m based on the operating performance of this investment which could potentially generate a 1.2p contribution to SPK NAV instead of the 0.6p implied in their September interim statement.  Adding OpenX’s contribution on to the revised NAV calculations of 4.2p for IMImobile whose share price has increased by over 10% since IPO, Mind Candy’s 1.0p, Firebox’s 0.11p, mBlox 0.21p etc. we start to see some value stripping potential building up on the current share price averaging 5.12p.  This is before reviewing the value potential of the other SPK investee companies: DEM Solutions, Gambling Compliance, Academia and ‘Others’ including Crocus, Symbio AB, Market clusters and a can of worms Quester Venture Partnership.

Oodutty

 

Value stripping at the finance auctions – SPK (MarketClusters)

In 2007, NewMedia SPARK (“SPARK”) made the following investee update:

“NewMedia Spark plc (SPARK), is pleased to announce an investment in MarketClusters Limited, a developer of the ‘StrategyWire’ intelligence platform enabling corporate and financial clients to accurately filter – and put into context – expert opinions created in Blogs or News feeds.  SPARK has joined other investors including a well-known group of individuals active in both technology investment and managing online information businesses. Jay Patel, a director of SPARK, will be joining the MarketClusters’ board.”

An extract from the same 2007 announcement describing the business of MarketClusters  goes:

“Founded by a former technology equities analyst with a US investment bank, MarketClusters provides customized market intelligence solutions for major corporate, SME, investment banking, venture capital and other advisory clients.

Our flagship product, StrategyWire, was launched in April 2006 and is a fully hosted intelligence solution, initially focused on the complex and converging Technology, Media and Telecoms (TMT) sectors.”

And a concluding paragraph on NewMedia SPARK from the same announcement reads:

“NewMedia SPARK is a quoted venture capital organisation based in central London focused on early stage investments in the technology, media and telecoms sectors. SPARK’s portfolio has a particular emphasis on digital media, software applications, technology and communications. As an investor, SPARK expects to add significant value to its investments through active support and strategic direction. SPARK is listed on London’s Alternative Investment Market.”

The above clips set the scene for the discussion of MarketClusters, a start-up company in which Spark Ventures Plc (SPK), on behalf of it’s AIM investors, acquired a 7% stake in 2006/07 for £351k, swiftly topping this up in 2007/08 by £299k to £650K and then by another £100k in 2008/09 to give a total investment of £750k.  In SPK’s 2008/09 annual report, there it was again, another WTF moment! After, investing £100k during the year, the investment in MarketClusters was devalued by £400k thereby reducing its 31st March 2009 year end valuation to £350k to face relegation the following reporting season to the infamous bargain basement of: Other investments (no single investment value greater than £500,000).  Worse still, there wasn’t even a courtesy comment to SPK’s shareholders about the reason for devaluating their £750k investment.

Being demoted to SPK’s rattle bag of investee companies labelled as ‘Others’ means a lack of transparency for shareholders on what these companies are actually worth.  Are they still worth the same amount that they departed the league table with or are they currently impaired and worthless?  These are questions that the management of SPK and their investment manager Spark Venture Management Holdings may choose to ignore due to the assumed immateriality of these lepers.  Employing a bit of lateral thinking, it may be a clever strategy to follow the SPK’s venture capitalist – the smart guy – representing the investment on the investee’s board of directors.  This may be an apt time to restate that Spark Ventures Plc is targeting 31st March 2015 to achieve an orderly realisation of its assets.  Over the last decade, SPK’s shareholders have lost pawns, knights and bishops and some have even thrown in the towel.  Only two possible scenarios remain: Checkmate for the shareholders or a community chest draw for the smart guys.  Therefore, a quick review of Mr Patel’s form, director of AIM quoted Spark  Ventures Plc until 2013 (shortly before exiting SPK’s largest remaining asset IMImobile by IPO) and director of unlisted Spark Venture Management Holdings, may give us an insight into the true value of MarketClusters.  An extract from SPK’s 2008/09 annual report tells us that:

“Jayesh Patel, Executive Director. Jay was part of the founding team at  SPARK and is currently responsible for  the investments in IMImobile, Skinkers, Unanimis, Complinet, MarketClusters, OpenX and gamblingcompliance. He was previously involved in Kobalt, Firebox, elata and mblox and has led a number of past exits. He was previously a Director of NewMedia Investors and held executive positions at UBS Warburg and BSkyB. He qualified as a Chartered Accountant with KPMG and holds degrees from INSEAD and the London School of Economics. Appointed to the Board on  30 January 2004.”

Smart guy! Now let’s turn our attention to the governance of Spark Ventures Plc’s shareholders funds by doing a quick reconnaissance of MarketClusters investment timeline in the SPK’s stable, key performance indicators, directors of the company, other insiders and major shareholders.

Period | % Stake | Last Year | Reval | Addition | Disposal | This Year
2006/07 | 7% | nil | nil | £351k [A] | nil | £351K
2007/08 | 11% | £351k | nil | £299k [A] | nil | £650k
2008/09 | 11% | £650k | (£400k) [R] | £100k [A] | nil | £350k
2009/10 | 11% | reported as ‘Other’ value <= £500
2010/11 | 11% | reported as ‘Other’ value <= £500
2011/12 | 11% | reported as ‘Other’ value <= £500
2012/13 | 11% | reported as ‘Other’ value <= £500
2013/14* | 11% | reported as ‘Other’ value <= £500

*2013/14 interim report as at 30th September 2013.

MarketClusters Limited takes advantage of reporting exemptions afforded UK small companies to omit figures for turnover from their annual reports.  A review of their net assets and cash position for the last 3 years shows significant deterioration of shareholders assets.  However, forming an opinion using these two performance indicators without sight of turnover and operating profit figures is meaningless.  Nevertheless, the investment seems to have the same expectation of providing a return on investment for SPK’s investors as finding flight MH370 in the Indian Ocean.

Performance indicator | 30/06/2013 | 30/06/2012 | 30/06/2011
Net assets/shareholders funds | (£59.5k) | £168.6k | £273k
Cash |£56k | £162.2k | £235.5k

What are the redeeming features of this investment?  The versatile, Mr JR Patel, since retired as a director from SPK, is on the board of MarketClusters as a non-executive director and the company is bullish about the future of their flagship products: EditorEye and StrategyEye.  Moving on to the insiders may also give us some insight on the potential value of MarketClusters to SPK’s investors.

MarketClusters directors and their shareholdings
Mr Rupert Nicholas Gregg | 43.19%
Mr Jeremy Charles Phillips | 10.69%
Mr Manoj Kumar Badale | 3.70%
Newmedia Spark Directors Limited (representing SPK)| 11.93%
Mr James Nugent Kennell | 2.42%

Other major shareholders
Dauphin Capital LP | 4.77%
Nicholas Mark Wykeham-Fiennes | 4.21%
Charles Stuart Mindenhall | 4.13%
Kean Hua Chung | 2.60%
Farringdon Consulting LLC | 1.63%

Extracting value from SPK’s investment in MarketClusters is as probable as finding flight MH370 in the Bermuda triangle.  Salvaging the £750k poured down the hatch is now totally in the hands of the illusionist JRP.

Oodutty