Marin (MRIN) Rising: How Far Will It Go?

If you missed my last live broadcast, be sure to check it out here (I discussed MRIN in greater depth at the 28 minute mark)… and as always, be sure to read my disclosures/disclosures below. Cheers!

Marin Software (MRIN) has taken flight on news that it has entered into a three-year revenue sharing agreement with Google.

According to MRIN, the agreement is meant to fund further development of its enterprise tech platform and software products. This will be fueled by revenue payments from Google based on revenue generated from Marin’s tech platform in connection with its clients’ spending on search ads. As a result, MRIN has upped its Q4 guidance by $3 million on the top and bottom lines. Guidance now calls for $14.6M-$15.1M in sales and an adjusted operating loss of $2.4M-$2.9M.

Unbeknownst to most investors, MRIN’s operating loss belies the company’s cash flow. During its most recent earnings call, management said:

“In terms of the balance sheet, we saw a cash decline of $2.5 million, which was better than our cash burn during Q2. As discussed last quarter, we have taken and continue to take meaningful steps to reduce our overall operating expense structure, including headcount reductions, lease restructurings and many other cost saving initiatives. These actions in conjunction with our management of working capital have served to improve our cash burn when comparing Q2 with Q3. We will continue to focus on cash management during Q4 and expect to narrow our cash burn during the quarter.”

In other words, with pre-Google cash burn pulling back toward $2 million per quarter, Google’s $3 million should flip MRIN from being a cash burning machine into a cash generator. $2 million of burn + $3 million of Google = $1 million of cash generation per quarter = $4 million per year = $0.66 of cash generation per share.

Based on the press release, SEC filings, and my discussion with management, that’s how I interpret the situation. As a result, I think MRIN’s cash balance should bottom out at $10-13 million (about $2 per share).

So, give the $0.66 of cash flow any multiple you choose, then add the $2 of cash, and there’s your current valuation.

Keep in mind, that’s a per-tax number. Thanks to MRIN’s NOL balance, they won’t be paying any notable taxes for a long time. Regardless, if you want to value the company on a fully-taxed basis, you can use something closer to $0.50 per share.

If you so, you should not only add back the net cash ($2 per share), but also add something to account for the value of MRIN’s NOLs. As of December 31, 2017, the Company had federal and state net operating loss carryforwards of approximately $110,087 and $91,585, respectively.

All said, the company values its tax assets at just over $40 million (close to $7 per share), but currently have that written down to zero on the balance sheet (because there’s been no imminent reason to believe they’d be able to utilize them… until now). I have a problem with the $40 million number, because I don’t see how they can accrue “$110,087 and $91,585, respectively” worth of tax liabilities to offset their tax assets in a timely fashion.

That being said, without a firm idea of where revenue is going over the next 10 years, valuing the NOLs is a tricky proposition.

 

So what about the future valuation?

The timing of the Google deal is prescient. MRIN is set to ramp its next-generation system, which promises to return the company to top-line growth. Read its latest transcript for info on that.

Assuming revenue growth returns, MRIN will likely offer strong operating leverage from a fairly reliable / profitable / recurring revenue stream.

Based on their operating structure, roughly 40% of each incremental dollar of revenue should flow straight to the bottom line. If they can turn profitable, the value of their NOLs could get unlocked quickly.

Again, I’m not here to make valuation calls or implications. All of this is simply walking through some scenarios / numbers. I am literally typing all of this as I think through it in my head. I go through this exercise with all of my investment opportunities.

Typing it all up gives me notes to fall back on. It also gives you facts and calculation frameworks with which to work. From there, it’s up to you to decide where everything should shake out.

What’s interesting about this exercise is that MRIN was close to $20 last year, nearly $25 in 2016, over $50 in 2015, about $88 in 2014 and close to $140 (its all-time high) in 2013. Those who know how to run the math can see why (and use that same math to determine whether it can reach those levels again).

As you can see from the valuation frameworks above, it’s not unreasonable to think that MRIN can recoup a good chunk of its past value. That being said, it’s hard to calculate a scenario under which the 2013/2014 levels get justified anytime soon.

In short, subject to my disclosures / disclaimers, I think the stock still offers appealing risk/reward from these levels. Due to its extremely low effective float (just 2 million shares), I didn’t want to wait for a pullback — it could reach fair-value equilibrium quickly if investors are competing for those remaining available shares. In turn, that will likely make the stock quite volatile, so be careful.

In recent weeks, I started quietly buying, treating it like a VC investment. I planned on revealing this at an appropriate moment, but the Google news beat me to the punch. Unfortunately for most people, the chart didn’t tell you that this was coming…

…but the MATH and RESEARCH said that something was likely (though not guaranteed) to happen sooner or later.

That’s the advantage that fundamental analysis and risk/reward have over charts (especially in an ugly tape like this). This is why I maintain some of the positions I have, opting to use hedges and options to protect myself against short-term losses. In the end, value always finds its way home. Those who know how to calculate value can count on that, even if we don’t know WHEN it will happen. This is why patience is so important.

It’s been frustrating to see MRIN faltering these past couple of years, but the math reached a level that made it a “cheap development-stage company” in my eyes. Google just validated that.

In any case, I have a nice-sized position and left room to buy more if it pulls back.

In the meantime, it’s time to dust off my list of cheap companies with heavy R&D investment again… stay tuned!

Appendix: 8-K Text

On December 17, 2018, Marin Software Incorporated (the “ Company ”) entered into a Revenue Share Agreement (the “ Agreement”) with Google LLC (“ Google ” and together with the Company generally, the “ Parties ”) for the Company to develop its enterprise tech platform and software products. The Agreement is effective as of October 1, 2018 (the “ Effective Date ”).

The Company will receive revenue payments from Google based on (a) revenue generated on the Company’s tech platform in connection with the Company’s clients’ spend on Search Ads (as defined in the Agreement) appearing on Google Search only, during a relevant calendar quarter (“ Eligible Google Search Revenue ”), and (b) revenue generated on Company’s tech platform in connection with its clients’ spend on Search Ads appearing on the Eligible Search Engines (as defined in the Agreement), excluding Google Search, during the relevant Contract Year (as defined below) (“ Eligible Non-Google Search Revenue ”). In the case of Eligible Google Search Revenue, following Alphabet Inc.’s public confirmation of its earnings for each calendar quarter, Google will provide the Company with the Eligible Google Search Revenue for the applicable calendar quarter and at the end of the calendar year and make a revenue payment to the Company. In the case of Eligible Non-Google Search Revenue, at the end of each annual anniversary of the Effective Date (a “ Contract Year ”), the Company will submit a report containing its Eligible Non-Google Search Revenue to an independent third-party auditor appointed by (the “Auditor ”), whereby such Auditor will report its findings to Google on the accuracy of the reported revenue. If the Auditor determines that the Company accurately reported its Eligible Non-Google Search Revenue, Google will make a revenue share payment to the Company. If the Auditor determines that the Company inaccurately reported its Eligible Non-Google Search Revenue, then Google will have no obligation to make any revenue payment until the Auditor determines such amount to be accurately reported.

Each revenue share payment will consist of a baseline revenue payment and an incremental revenue payment, the baseline revenue payment is a fixed percentage against all applicable Eligible Google Search Revenue and Eligible Non-Google Search Revenue, subject to a minimum baseline for such revenue amount. At the end of each Contract Year, if all aggregate Eligible Google Search Revenue and Eligible Non-Google Search Revenue for all calendar quarters during such Contract Year exceeds the aggregate minimum baseline for such revenues during the same Contract Year, then the Company will be entitled to an incremental true-up payment equal to a higher fixed percentage against the actual Eligible Google Search Revenue and Eligible Non-Google Search Revenue in excess of the aggregate minimum baseline for such revenues.

The Company will reinvest a fixed percentage of the baseline revenue payments received during the term of the Agreement to drive tech platform innovation. The Company will also reinvest a fixed percentage of its incremental revenue payments received during the term of the Agreement, where such fixed percentage escalates each Contract Year, up to 100% in the third Contract Year. Such reinvestments will be made exclusively for the growth, development, innovation and expansion of the Company’s enterprise tech business. Additionally, the Company has agreed to invest a specified amount of its own funds each Contract Year to further its enterprise business. Such investments will be subject to the review and assessment by the Auditor.

The Agreement contains customary confidentiality provisions, and representations and warranties of each of the Parties.

The Agreement terminates on September 30, 2021; provided, however , that at least three months prior to the expiration, the Parties will consider extending or renewing the Agreement. Google may terminate the Agreement under certain circumstances, including the Company’s material uncured breach of the Agreement, the Company’s breach of the confidentiality and publicity provisions of the Agreement, the Company’s breach of its representations and warranties, the Company is unable to pay its debts as they fall due, or the Company’s Quarterly Adjusted EBITDA (as defined in the Agreement) is a negative number in the three months ending September 30, 2020. The Company may terminate the Agreement at any time for any reason by giving at least seven days’ notice in writing. In the event that either Party experiences a Change of Control (as defined in the Agreement) then the other Party may immediately terminate the Agreement at any time for a period of 30 days following the Party’s receipt of notice of such Change of Control.

Happy Holidays & Best Wishes For A Prosperous 2019,

Mark G.

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Disclosures / Disclaimers: I am long MRIN and TPCS. However, this is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.

I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.

I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter.  Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.

I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article. The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

The primary purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.

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6 thoughts on “Marin (MRIN) Rising: How Far Will It Go?

  1. Probably a dumb question, but one thing that doesn’t make sense to me. If you value the NOL’s and then come up with a value per share (using your example approx. $3), those NOL’s are the total value that could be unlocked over a period of some years. Correct? So would you still consider the $3 in this example in the valuation or would you divide that $3 by the number of years you expect it to take to earn the benefit and add that number into the valuation estimate? Thanks.

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    1. Actually a really good question. To value NOLs, you have to generate a forward-looking earnings estimate to see how much of the NOLs will be utilized each year. Then you do a DCF analysis on your estimate of each year’s utilized NOLs.

      That’s part of the reason why a stock can rip like this so quickly. When you suddenly go from unprofitable to profitable it completely changes the valuation dynamics, right down to nuances, like NOLs going from essentially worthless to highly valuable.

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      1. Ok, that makes sense. I still need to learn to properly calculate DCF vs using multiples one day, but I definitely understand the concept.

        Leads to another question: Google or any big tech that is profitable could buy them and use all of the NOL’s first year against their earnings?

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        1. Also good question. 100% no. In fact, there are pretty strict rules that can invalidate a portion (or all) of the NOLs when a certain % of the company changes hands, among other things.

          However, in basic situations where the company is just flipping from unprofitable to profitable, they usually stay largely intact.

          By the way, DCF is pretty easy and situations like this because NOLs have a finite life. DCF is slightly more complex when dealing with company earnings, which continue on (and with varying growth rates) as long as the company exists.

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