| Revenue Is Inflecting at This Ad-Tech Company Keeping Content Safe for Kids |
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Kidoz Inc
KIDZ-TSX.V / KDOZF: OTC
Current Price: $0.94
52 Week Hi/Low: $1.25 / $0.125 |
| | Average Daily Volume (3month): 22K
Issued and Outstanding: 131,124,989
Options: 5,875,000 at $0.50
Fully Diluted: 136,999,989
Market Capitalization: $120M
Insider Ownership: 18% - 23,571,472
TTM Revenues: $7.9M USD TTM Net Profit: $0.1M
TTM Adjusted EBITDA: $0.8M P/S: 13.9x
P/E: 1,233x
Debt: $40K
Cash: $1.2M
Highlights - Company is hitting an inflection point with revenue growing at 50% CAGR over the last 3 years
- Hit annual profitability for the first time in 2020
- Introducing a new programmatic ad solution, likely in Q2 2021 and at full run-rate by Q4 2021, greatly expanding its reach to advertisers while maintaining its kid-safe ethos
- Very scalable business model
- Strong insider ownership
- Undiscovered
About Kidoz
Remember being a kid and spending all Saturday morning watching cartoons on TV? In today’s digital world, that concept has been replaced with tablets and mobile devices as the medium providing children with access to virtually unlimited content. Kids are spending an increasing amount of time accessing games, movies, and other content on their tablets and mobile devices. Of course, given the age and maturity of this demographic, there’s extreme sensitivity and an entirely different subset of advertising laws and policies for targeting this market. And with limited kids watching traditional TV, advertisers are scrambling to penetrate this niche. Kidoz is one company that has built a business around this unique marketplace, in an ethical, safe, and profitable manner.
Kidoz Inc. (KIDZ.V on the TSX Venture Exchange, KDOZF on the Grey Market) is a leading provider of advertising technology for companies looking to advertise safely to children on mobile platforms. Kidoz has developed a substantial inventory of impressions and playable ads that it pushes out to ad-supported mobile apps. The differentiator for Kidoz from other advertisers is that kids advertising cannot use trackers like location information, device identifiers, behavioural data, and other identifiers that track users across the Internet. These are commonly called IDFA (Identifiers for Advertisers) on Apple and AAID (Google Advertising ID) for Google. Kidoz does not utilize these trackers and curates the ads to ensure appropriate advertising reaches kids. This is not an easy task and some of the broader platforms such as YouTube have difficulty ensuring this, especially when so much of the larger tech companies’ competitive advantage comes from providing targeted ads through the copious amounts of personal data they obtain from their users.
The graph below shows the life cycle of the advertising and how Kidoz can support the advertisers in a safe way to the child and pre-teen demographic:
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| | In the end, Kidoz is paid by brands placing ads, and it already supports most of the major kids’ brands, such as Disney, Hasbro, Mattel, and Lego to name just a few. Management indicated that no brand makes up more than 6-7% of their revenues; however, diverse brand spends can come through the same conduit such as media agencies. In the most recent fiscal year (2020), Kidoz’s top 2 customers made up $2.7m and $1.5m in revenue; this does not seem like a concern as they are media agencies with multiple ad campaigns for different end customers.
Children’s viewing sources are also changing drastically. In the past, advertisers could rely on advertising through television to pitch their products; however, this is migrating towards online sources more and more, both on large platforms like YouTube and TikTok as well as apps on mobile devices such as phones & tablets. Parents are rightly concerned with what types of ads their kids are exposed to and Kidoz is establishing itself in the space.
Industry/Market Overview
Kidoz operates in the mobile in-app advertising space. Essentially, these are ads that are embedded in the apps themselves and can be just visual or playable in nature. This advertising niche has grown in the mobile space as more and more people spend time in-apps rather than in more traditional mobile search areas, making this a significant growth area to be targeted. The ad space is dominated by household brands such as Facebook, TikTok and Google which have the resources and targeting ability to hit a wide market. However, there is a tier below this that focuses on other apps as well as providing a toolkit for marketers/advertisers to manage their accounts; this includes companies like AppLovin, UnityAds, and ironSource. There is positive pricing pressure in this space due to it being a growth area.
There is a larger focus on shifting to programmatic advertising as this automates a lot of the process while maximizing the use of their advertising inventory. The downside is that this may lead to lower engagement. Kidoz’s methodology so far is to utilize a direct methodology that ensures it has the controls in place to appropriately market the right kinds of ads to their young demographic. However, the company is making strides to further enhance its advertising potential.
The Next Steps
The company has done well in this curated ad space but is looking to expand into programmatic advertising to better utilize its inventory of impressions as well as to provide a more diversified advertising offering to brands. Programmatic advertising is substantially less costly to provide as it is essentially machine to machine purchasing of advertising, which allows for greater scalability of the business.
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| | Programmatic advertising is a big opportunity for Kidoz; it makes up 88% of the general advertising spend. It essentially removes a lot of the administration for both the advertiser and the publisher. The difficulty in applying this process in the kids’ advertising space has been to ensure content is appropriate as well as no digital tracking. Kidoz has been working on developing a solution, which is currently going through its quality assurance cycle, to meet this need. Management is hoping to have this offering out in Q2 with it at a full revenue run rate by Q4. Q4 is traditionally the busiest quarter, with Christmas and Thanksgiving stoking new toy and game offerings so getting this additional advertising source available should be a large benefit to the company.
The company is currently monetizing roughly 12% of its more than 2 billion impressions; this should allow the company to further leverage these assets without a lot of additional cost.
The Company
Kidoz has a very invested management team, with 18% of shares held by management. The company has another 27.84% held by family offices and 24.17% of shares held by institutions, leaving a float of roughly 30% shares. Despite being in a growth mode, the company has not issued any shares during fiscal 2020 or Q1 2019 as it has been able to rely on its internally generated cash flow.
This has led to a very cost-effective approach to managing the company. Unlike many companies, Kidoz has taken a pragmatic view to managing its costs. For example, it uses outsourced sales geographically to keep its costs down rather than have a larger dedicated internal team; this likely helped it continue to grow despite the COVID travel restrictions. These costs ran at roughly $0.4m for both fiscal 2020 and 2019, very good considering revenue increased from $4.5m in 2019 to $7.1m in 2020.
The company also expenses its research and development through the income statement, which can depress its earnings in the short run. Many of the costs for the programmatic expansion are thus already accounted for, meaning the planned revenue should have a very high contribution to Kidoz’s bottom line, which is already profitable. Management has indicated they are already staffed up to ensure the programmatic ad platform can be completed so no additional staff is required.
Kidoz has 23 staff, with roughly 40% based in Canada and 40% in Israel, the remaining are contracted around the world. This does give the company the ability to run essentially a 24/6 operation due to the time changes and geography, which can be helpful in propelling projects forward, though requiring some coordination. They also recently announced a stock option program available to all its staff at current pricing, adding to the ability to retain its staff.
The company recently hired Research Capital Corporation to assist with its capital market services. The company is largely under the radar at this moment, however, the stock responded very strongly to its strong Q4 and 2020 annual results; Regardless, it is important for any microcap to get its message out. Management indicated it should have some good news flow going forward, which is supported by programmatic role out milestones and earnings reports. We also think the fact the company reports in US dollars bodes well if the company is considering a future up-listing onto a US exchange. Management indicated they do not have a need to raise money but would consider taking advantage in the event of a run-up in its share price.
Management/Board
Kidoz’s management team and Board have a strong tech background. The genesis of Kidoz began with the December 28, 2018 acquisition of Kidoz by Shoal Games (since renamed to Kidoz Inc.). Shoal’s largest shareholder, and now Kidoz’s largest shareholder, is Tarrnie Williams, a legendary Canadian tech entrepreneur. Mr. Williams is most well known for serving as president of Distinctive Software, prior to its acquisition by EA Sports, but has served as founding directors for several biotech companies that have eventually led to acquisition. Mr. Williams has been and continues to be a director of many tech companies and owns 12.25% of Kidoz’s outstanding shares and serves as Kidoz’s executive chairman.
Eldad Ben Tora, co-CEO, came to Kidoz Inc from Shoal’s acquisition of Kidoz. Mr. Ben Tora is a serial entrepreneur who has been with Kidoz since 2013 and has extensive experience growing and scaling tech companies. Mr. Ben Tora holds 4.07% of Kidoz’s outstanding shares. His Co-CEO Jason Williams served as CEO of Shoal for the 8 years leading into the acquisition of Kidoz and holds 0.95% of outstanding shares. He is also the son of Tarrnie Williams.
Both Co-CEOs are on the board, as well as Kidoz’s CFO H.W. Bromly. The remaining board member include Ms. F Curtis who has been with Shoal/Kidoz for 12 years with a background in compliance and financial services; Mr. Kalborg, who has an extensive background in software and licensing; and Mr. David who has a strong business background as well.
Both management and the Board have a strong background in the tech industry with experience in building and running growing companies. Chairman Williams likely has extensive contacts that have helped grow the business. Kidoz and Shoal worked together for a year, prior to the combination, which has led to the decision to have co-CEOs be a positive for the company.
Risks
Competition. There is a lot of competition in the ad tech space, so it is very possible for a larger player to try to move in. Many of these players rely on their advertising being targeted and driven by personal data; these core competencies are the exact opposite of what is permitted in this space. Management has indicated that Google has been more supportive than competitive since Kidoz’s system fills a hole that their ad system is not built to support. Some companies like IronSource & AppLovin drive users to install additional apps through their ads; this breaks engagement with kids and is a red flag for parents so not a real competitor in this space.
SuperAwesome is the most direct competitor to Kidoz and was purchased by Epic Games in September 2020. Kidoz management indicated that they have largely focused on auditing and PC games while Kidoz has focused on mobile; Epic, the maker of Fortnite, may also skew a little bit older with less of a core competence in Kidoz’s markets. There is a big addressable market, so there should be room for more than just one.
Speed of Scale. This risk dovetails into the above competitors; Kidoz is in an exciting and profitable space but it needs to be able to get to scale to continue to leverage its expertise. The programmatic business could be a real game-changer, but it also may reduce the edge it has in direct ad placement. If their rollout is effective, their technological edge should give it a first-mover advantage. The base business is still growing, but the real game-changer will be the ability to scale up as quickly as possible in the new line.
Valuation
The company provided a business model below modeling out the anticipated growth of its based direct ad tech business:
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| | The company is profitable and is trading at a TTM price to sales of 13.9x. The model clearly shows that the company can scale with its fixed costs largely under control. However, management has not factored in the potential from the Q2 programmatic ad launch. With it not up and fully operational until Q4 2021, looking at 2022 revenues may be the best baseline. Since we are unclear on the potential of the programmatic business, I think it would be safe to use the potential monetization of its ad base as a variable. With only 12% currently used, management gave an indication that it could get up above 50% at some point. Programmatic advertising also represents a majority of in-app advertising. With a full quarter of Christmas & holiday bookings, it is not hard to see that sales could potentially double by 2022. |
| | This multiple compares favorably to SuperAwesome’s last publicly disclosed capital raise at 4.7x revenue. It is likely that it was acquired at a higher multiple than that when Epic purchased it. This gives us some good potential upside if Kidoz is able to deliver.
Final Thoughts
Kidoz is operating in the mobile advertising business and has established its business by targeting the kids marketplace which must adhere to unique advertising laws. While most of the companies in the advertising business are focused on an older demographic, as it is a much larger total addressable market, there are a few operators that specialize in kids’ advertising.
With a profitable advertising platform, Kidoz is now focused on expanding its solutions by adding programmatic advertiser, which allows for greater scalability of their ad-platform. Since the business is designed for scale, and development costs have already been expensed, we recognize the potential value from the programmatic advertising in its ability to drive high gross margin revenues and bottom-line profits.
The executive team has a proven track-record in delivering shareholder value and has a vested interest in delivering future value as insiders own roughly 18% of the shares. The team has demonstrated it can execute on multiple years of growth and has achieved its first year of profitability. At the current valuation, we recognize investors have already priced growth into the stock.
However, while the company may appear expensive using traditional value-based metrics the company’s significant growth rate, large addressable market, scalability, and early mover advantage makes the company very attractive. Additionally, now that Kidoz’ operations are self-funded from internal cashflows, we believe there’s an added downside protection against any potential dilution.
While the Company shares are quite illiquid, we believe its an opportunity to add an undiscovered and high-quality business at an attractive price. We believe that as Kidoz continues to execute and scale its business model it becomes an attractive takeover target for any competitors looking to enter this market. We will continue to monitor the Y/Y execution, margin profile, and profitability as key metrics for our thesis.
We view shares of Kidoz as a buy up to $1.15
Disclosure: Paul Andreola is long shares of Kidoz (KIDZ-TSX.V)
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