1 Good Life Networks Inc. GOOD $0.195 TSX.V Exchange | | Market Cap $18M Description: Good Life Networks is a rapidly growing digital advertising company that has developed a proprietary technology predicated on machine learning algorithms, an advanced form of artificial intelligence. In machine learning, a designer creates an algorithm which learns to make decisions with limited or no additional human involvement. In other words, the algorithm “writes itself” by learning from the data. Most importantly, Good Life Networks has acquired an impressive client portfolio, which has translated into equally dramatic revenue and adjusted EBITDA growth (up 107% and 148%, respectively, in 3Q 2018). Good Life Networks established and operates the world’s highest-speed programmatic video ad exchange (see pages 1-3), which functions much like the Nasdaq for stocks. The efficiency, speed and trustworthiness of the exchange has resulted in impressive market share gains, as well as a strong industry reputation. Despite its stellar recent accomplishments, Good Life Networks remains a small company (trailing 12 months reported revenues of $15.6 million) competing for business in an enormous addressable market. U.S. programmatic video (or streaming media) ad spending has grown at an almost geometric pace over the past few years, reaching an estimated US$11.4 billion, up from US$3 billion in 2015 (see Figure 1 on page 2). Continued market share and client gains should have an outsized effect on Good Life Network’s financial results, particularly given a slow-growing cost structure reflecting the automated nature of its business. (Even with two recent acquisitions (see below and pages 4-5), the company has only 21 full-time employees.) In December 2018, Good Life Networks closed two key – and immediately accretive -- acquisitions to further its goal of becoming a prominent and highly profitable streaming advertising venue. First, 495 Communications, LLC is a Los Angeles-based digital advertising and video and content company which boasts publishing partners controlling more than 3,500 premium websites. Second, Impression X is a leading connected television (CTV) technology company. This acquisition will help Good Life Networks reach the large and increasing number of consumer TVs that are connected online. How Programmatic Video Advertising Works: Programmatic video advertising is a technology whereby the process of selling and buying video ads is streamlined by automation using real-time bidding (RTB), thus removing any decisions by human intermediaries. More specifically, a programmatic video advertiser can buy ad space based on set conditions, such as reaching a desired audience of, say, 25-34 year old women who are interested in fashion, while maintaining a set cap for the overall advertising budget. (More refined audience targeting generally results in improved conversion rates and lower costs of customer acquisition.) In turn, the Good Life Networks platform engages in a RTB process -- which lasts a fraction of a second -- in order to Tormont50 Research Tormont50: Identifying timely topics and trends in the sub-$200 million market. Research Type: Emerging Timeliness: Current Date: Jan. 18, 2019
Transcript
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Good Life Networks Inc.
GOOD $0.195 TSX.V Exchange | | Market Cap $18M
Description: Good Life Networks is a rapidly growing digital advertising company that has developed a
proprietary technology predicated on machine learning algorithms, an advanced form of artificial intelligence.
In machine learning, a designer creates an algorithm which learns to make decisions with limited or no
additional human involvement. In other words, the algorithm “writes itself” by learning from the data. Most
importantly, Good Life Networks has acquired an impressive client portfolio, which has translated into equally
dramatic revenue and adjusted EBITDA growth (up 107% and 148%, respectively, in 3Q 2018). Good Life
Networks established and operates the world’s highest-speed programmatic video ad exchange (see pages 1-3),
which functions much like the Nasdaq for stocks. The efficiency, speed and trustworthiness of the exchange
has resulted in impressive market share gains, as well as a strong industry reputation.
Despite its stellar recent accomplishments, Good Life Networks remains a small company (trailing 12 months
reported revenues of $15.6 million) competing for business in an enormous addressable market. U.S.
programmatic video (or streaming media) ad spending has grown at an almost geometric pace over the past
few years, reaching an estimated US$11.4 billion, up from US$3 billion in 2015 (see Figure 1 on page 2).
Continued market share and client gains should have an outsized effect on Good Life Network’s financial
results, particularly given a slow-growing cost structure reflecting the automated nature of its business. (Even
with two recent acquisitions (see below and pages 4-5), the company has only 21 full-time employees.)
In December 2018, Good Life Networks closed two key – and immediately accretive -- acquisitions to further
its goal of becoming a prominent and highly profitable streaming advertising venue. First, 495
Communications, LLC is a Los Angeles-based digital advertising and video and content company which boasts
publishing partners controlling more than 3,500 premium websites. Second, Impression X is a leading
connected television (CTV) technology company. This acquisition will help Good Life Networks reach the large
and increasing number of consumer TVs that are connected online.
How Programmatic Video Advertising Works: Programmatic video advertising is a technology whereby
the process of selling and buying video ads is streamlined by automation using real-time bidding (RTB), thus
removing any decisions by human intermediaries. More specifically, a programmatic video advertiser can buy
ad space based on set conditions, such as reaching a desired audience of, say, 25-34 year old women who are
interested in fashion, while maintaining a set cap for the overall advertising budget. (More refined audience
targeting generally results in improved conversion rates and lower costs of customer acquisition.) In turn, the
Good Life Networks platform engages in a RTB process -- which lasts a fraction of a second -- in order to
Tormont50 Research
Tormont50: Identifying timely topics and trends in the sub-$200 million market.
Research Type: Emerging Timeliness: Current Date: Jan. 18, 2019
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Figure 1. Pace of Programmatic Video Ad Spending
display the ad to the appropriate consumers. Since various advertisers, each with slightly different user data
requirements, are simultaneously bidding, the advertiser willing to bid the highest wins.
Frequently, a digital advertising buyer will utilize a demand-side technology platform (DSP) that allows the
buyer to manage and purchase programmatic video ads from multiple ad exchanges (see below) and supply
side platforms (SSPs) through one interface. Phrased differently, DSPs remove an advertising buyer’s concerns
that it chose the right websites on which to advertise. DSPs are designed to minimize the cost of every
advertising impression bought by routing them through the exchange which has the lowest advertiser
competition.
An ad network works for the publisher, or seller, side of the two-party system, connecting advertisers to publishers that have web pages with advertising – matching ad space supply from publishers with advertiser demand. An ad network combines the ad inventory from many publisher websites into one platform and resells it to advertisers by adding a certain margin to the inventory. A programmatic video ad exchange, such as Good Life’s high-speed system, is a technology platform where publishers and ad networks sell their impressions on an automated basis. Exchanges work with multiple seller sources simultaneously to auction off the impressions on a real time basis. Ad exchanges frequently connect to DSPs or SSPs, but advertisers can also buy from ad exchanges directly see Figure 2 on page 3. We note another feature which adds liquidity to the marketplace: ad networks and agency trading desks often buy ad space from an exchange, mark it up and attempt to sell it for a profit. A well-run video ad exchange satisfies both of its constituents: advertisers reach a precise consumer audience at the lowest price; and publishers sell their inventory at likely better prices. In addition, the ads are consumed by an engaged audience.
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Figure 2. Graphical Representation of Where a Video Ad Exchange Fits Into the Digital Ad Industry
Source: Good Life Networks Inc.
Three other key features of a video ad exchange are speed, brand safety and customer privacy, all of which are strengths of Good Life’s platform and are explained in detail below. Speed. Good Life’s exchange makes 117,000 decisions per second. Perhaps more importantly, the system makes a decision on the validity of a potential user of the system in 10 milliseconds and delivers the ad in 200 milliseconds. This delivery speed is more than three times faster than the Interactive Advertising Bureau (IAB) standard of 750 milliseconds.
Brand Safety. To safeguard the reputations of its brand partners, Good Life Networks has implemented a two-step process to ensure that a proposed video ad has indeed been submitted by the true advertiser. First, Good Life’s algorithms are designed to check the validity of the ad. Second, the company’s network is connected to an independent third party which performs the same tests. This intense focus has resulted in a 23% ad rejection rate due to a fraudulent or suspicious nature. Indeed, Good Life Networks calculates that about 98% of fraudulent advertisers have been screened out, well above the IAB requirement of 90%. Customer Privacy. Good Life’s algorithms have been designed such that they do not capture or use the personally identifiable information (PII) of consumers. Misuse of such personal data has been headline news for many social media giants like Facebook and Google, and Good Life Networks’ architecture has been and likely will continue to be a key factor in capturing business from advertisers who are naturally sensitive to this issue. The positive ramifications of Good Life Networks’ careful attention to the handling of online data and this burgeoning PII issue are illustrated by the recently enacted rules and laws below:
• In May 2018, the European Union (EU) passed rules on General Data Protection Regulation (GDPR). Under GDPR, any company offering goods or services to customers in the EU is obligated to protect the personal data it gathers from misuse and exploitation, and to ensure its
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privacy. Failure to comply could result in a fine ranging from 10 million euros to 4% of annual worldwide revenues.
• California has passed the Consumer Privacy Act, its digital privacy law version of the GDPR; it takes effect in 2020. Among other things, consumers in that state can force tech companies not to sell or share their personal data. If a company fails to follow that dictate, a consumer and the state’s attorney general can sue for up to US$750 and US$7,500, respectively, for each violation.
Good Life Networks’ Integrations As an illustration of the company’s rapid growth and perhaps even
more rapid market acknowledgement of the effectiveness of its platform, consider the following points about
the close relationships it has with customers. Good Life Networks terms these relationships — with both
advertisers and publishers — as integrations.
An integration occurs when the company’s relationship as the ad exchange of choice of, say, an advertising
agency is so close that the parties agree to a computer server-to-computer server integration. In more
illustrative terms, the servers are hard-wired together. For example, Good Life Networks announced in July
2018 that it had reached an integration agreement with the digital marketing arm of a Fortune 500 US-based
telecommunications company. Prior to January 2018, Good Life Networks had 17 integrations. In 3Q 2018
alone, it added 30 such relationships, bringing its total in 2018 to 47.
The key financial implication of the 30 new integrations: each accord is expected to boost Good Life Networks’
annual revenues by an average of $30,000 per month, or about $360,000 per year. So, the integrations signed
on a rolling twelve months basis could be expected to generate $10-11 million of incremental revenues. As
noted earlier, the company’s total ad exchange revenues over the twelve months ended 9/30/2018 were about
$15.6 million.
On a going forward basis, Good Life Networks plans to focus more on deepening its relationships with its
existing integration partners than reaching additional agreements. As a result, revenues derived from the
company’s current client base is expected to grow significantly.
Good Life Network’s Recent Acquisitions - Strong Growth Potential and Immediately Accretive:
We list below the revenues and EBITDA of 495 Communication and Impression X, the two companies Good
Life Networks acquired in December 2018. The details of the consideration paid to acquire the shares of the
private companies are listed in the footnotes of Table 2 on page 9.
Revenues for the Twelve EBITDA for the Twelve
Months Ended 9/30/2018 Months Ended 9/30/2018
495 Communications $17.7 Million $2.5 Million
Impression X $6.0 Million $2.0 Million
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495 Communications, a well-established digital advertising company which boasts client relationships with
such well-known brands as Discover Card and Singapore Airlines, has demonstrated strong growth on a
standalone basis and should similarly benefit from the use of Good Life Networks’ proprietary technology. We
particularly note that 495 Communications works with over-the-top (OTT) content providers to exclusively
distribute their OTT content, which is streamed to viewers over the open internet.
Impression X, a Connected TV digital advertising company, is a key player in an industry experiencing
geometric growth. A Connected TV is a television set that is linked to the internet and facilitates the delivery of
streaming video content — and therefore streaming advertisements. The IAB projects that CTV ad revenues
should nearly quadruple to US$31.5 billion from $8 billion in 2015. Another data point: AppNexus, a
programmatic video ad exchange company purchased by AT&T in the summer of 2018 (see pages 5-6), realized
a 700+% year-over-year increase in advertising spending on its Connected TV marketplace in the second
quarter of 2018. We believe that incorporating Good Life Networks’ fast and effective video advertising
technology into Impression X’s operations will boost its revenues and margins significantly.
We believe that GOOD is evaluating further acquisition targets in the digital advertising space, particularly
companies with expertise in mobile communications. Future targets could be somewhat larger than the 495
Communications and Impression X transactions and may be located outside of North America.
Longer-Term Opportunities For Good Life Networks: We believe that two issues seemingly unrelated
to Good Life Networks’ digital technology -- an accounts receivable factoring venture and a “Walled Garden”
opportunity – could in time have very positive financial implications for the company.
• Accounts Receivable Venture. Amazingly, programmatic digital advertising transactions are finalized in
a small fraction of a second (see page 3), yet payments are frequently not made for up to 90-180 days,
creating a significant financial burden for the recipients of those funds. As an outgrowth of such cash
crunches, some publishers are forced to factor their receivables at punishing interest rates, sometimes
exceeding 20% on an annual basis.
Good Life Networks believes that its programmatic digital technology can be applied to shorten these
pay cycles. The company has entered into an agreement with the Einstein Exchange to launch an
accounts receivable peer-to-peer initiative using blockchain. The companies’ initiative is U.S. patent
pending.
• “Walled Garden.” We believe that Good Life Networks may in time be invited to reconfigure its
programmatic video ad technology so that it can deliver a tailored version of its ad exchange to a
“Walled Garden” platform, both within a mobile handset environment and, separately, to a social media
giant. A walled garden is defined as a closed ecosystem in which all the operations are controlled by the
ecosystem operator, and a good example of such a well-positioned and protected platform is Amazon
Prime. Obviously, if Good Life Networks were able to create and operate such a specialized exchange,
its revenues and earnings would be boosted significantly.
AT&T’s Acquisition of AppNexus at a Very High Revenue Multiple: In August 2018, AT&T acquired
AppNexus for US$1.6 billion. Like Good Life Networks, AppNexus operates a successful programmatic video
ad exchange. Measured by revenues, AppNexus’ exchange is substantially larger than Good Life Networks’.
AppNexus was a private company prior to the transaction, but media reports suggest its revenues were about
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US$150 million, or about ten times the trailing twelve months revenues of Good Life Networks’ ad exchange. If
the media estimates are correct, AT&T purchased AppNexus for more than ten times revenues. In comparison,
Good Life Networks trades at only about 1x trailing revenues of its ad exchange and only about 0.5x trailing
consolidated pro forma revenues (accounting for the Impression X and 495 Communications transactions).
Detailed Forecast for Good Life Networks: In Tables 1-5, we project Good Life Networks earnings, cash
flow and key balance sheet items through 2020. The footnotes to the tables reflect some of our most important
modelling assumptions. Since Good Life Networks’ acquisitions of 495 Communications and Impression X
were quite large in comparison to the revenues and cash flow of its base video ad exchange business, our
projections are keyed off pro forma revenues and EBITDA for the combined company over the twelve months
ended 9/30/2018. The most important projections from the modelling work are as follows:
• Based on Good Life Networks’ 30 successful integration agreements signed in 3Q 2018, as well as
projected strong results at the company’s newly acquired entities (which themselves should be bolstered
by the application of Good Life Network’s proprietary technology to their business), we expect Good
Life Networks to report consolidated adjusted EBITDA of about $13 million in 2019 and $17 million in
2020. (Adjusted EBITDA is calculated before share-based compensation expense.)
• Earnings per share should be robust, reaching around $0.09 in 2019 and $0.13 in 2020.
In comparison, Good Life Networks reported $0.01, $0.00, and a loss of $0.05 in 3Q, 2Q and 1Q of
2018, respectively.
• Good Life Networks’ core video ad exchange business is extremely solid; exchange revenues increased
278% in 2017 and a further 142% in the first nine months of 2018. Furthermore, the business has
consistently posted gross margins in the mid-40% range, although Good Life Networks expects margins
to be reduced to the mid-30% range during 2019. Many other participants in the digital advertising
space report gross margins in the mid-20% vicinity.
• We do note, however, that the digital advertising business has a high degree of cyclicality. Generally,
fourth quarter revenues comprise around 40%-50% of full year revenues. In turn, the first quarter is a
trough period, reflecting slower advertising sales after the end of the holiday season.
• Given the company’s low capex spending needs, Good Life Networks could generate free cash flow of
$7.3 million and $11.7 million in 2019 and 2020, respectively.
• Our projections only reflect the 495 Communications and Impression X acquisitions. We believe
further deals are likely, but they are not factored into our models.
Table 3. Footnotes Related to Projected Pro Forma Income Statement (Table 2)
Footnotes:
(A) The projected revenue growth in 2019 primarily reflects the 30 integration agreements which the company reached in 3Q 2018. Our projections for 2020 reflect growth from the company's client relationships, coupled
with additional projected integrations as Good Life Networks' industry reputation continues to grow.
(B) On 12/18/2018, Good Life Networks closed the acquisition of 495 Communications, LLC, a leading advertising
and content marketing company, for US$15 million. According to CohnRenzick LLP, 495's revenues and adjusted EBITDA for the twelve months ended 9/30/2018 were US$13.3 million (C$17.7 million) and US$1.9 million
(C$2.5 million), respectively.
495 is a content publisher with a list of partners that includes 2,000 premium websites, as well as proprietary mobile and connected TV applications.
The US$15 million consideration paid to 495 consists of the following:
* US$3.5 million in cash, less the amount of outstanding indebtedness.
* A cash earn-out, up to a maximum of US$5.5 million for hitting performance benchmarks.
* A share/cash earn-out of a maximum amount of US$6 million, payable in cash or GOOD shares, for hitting performance benchmarks.
(D) On 12/18/2018, Good Life Networks closed the acquisition of Impression X, Inc., a leading connected TV advertising company, for a purchase price of up to US4.5 million.
The US$4.5 million paid to Impression X consists of the following:
* US$500,000 in cash.
* US$400,000 of GOOD common share purchase warrants.
* A performance earn-out of US$1 million in cash.
* A performance earn-out of US$2.6 million in GOOD warrants.
(F) We assume that growing current businesses of 495 Communications and Impression X will be boosted by the
integration of Good Life Network's proprietary video ad technology platform into their businesses.
(G) Our forecast only reflects Good Life Networks’ announced and closed acquisitions. Further acquisitions would likely be additive to our forecasts.
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Table 4. Good Life Networks Projected Pro Forma Cash Flow Statement
PRO FORMA CASH FLOW STATEMENT
(In Thousands of Canadian Dollars)
2020E 2019E 3Q 2018 2Q 2018 1Q 2018
Reported Net Income $11,651.2 $8,002.6 $1,011.0 $252.7 ($2,948.5)
Average Valuation Excluding GOOD 4.3 28.2 Median Valuation Excluding GOOD 3.0 24.7
Valuation of GOOD Based If It Were
Priced on:
Average Group Valuation - TEV $168 $218
Implied Value of GOOD Shares $1.77 $2.31
Median Group Valuation - TEV $118 $191
Implied Value of GOOD Shares $1.23 $2.02
NOTES:
Good Life Networks TTM pro forma revenue included $6.0MM from Impression X and $17.7MM from 495 Communications.
Good Life Networks TTM pro forma EBITDA includes $2.0MM from Impression X and $2.5MM from 495 Communications. Good Life Networks pro forma total enterprise value includes a $5 million debt facility.
Source: S&P Capital IQ data.
Jim McFadden, CFA
Tormont50 Research
01/18/2019
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