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A Snakk for the long run

TIM HUNTER
Last updated 05:00 10/03/2013
snakk
Lawrence Smith/Fairfax NZ
Tasty offering: Snakk founder Derek Handley.

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Maybe it was the Sir Richard Branson effect. Or maybe it was another sign of the market's hunger for investment product.

When tiny digital advertising start-up Snakk Media listed on the NZAX on Wednesday its shares rocketed from 6.5c to as high as 40c within hours.

By mid afternoon the stock had settled around 30c, valuing Snakk at a frothy $62 million. Indeed, for a company whose revenue for the year to September was just $2.4m, it was nothing short of extraordinary.

Has the market gone mad?

With Branson in the frame it's clear Snakk is not your average start-up. At a small gathering in Auckland to mark the Snakk listing, the Virgin Group entrepreneur popped up on video - apparently from his Caribbean island home - to wish his good friend Derek Handley, founder of Snakk, all the best.

"Every big company was a small one once," he said. Handley had global aspirations for Snakk, so "good luck in making it happen".

Handley has a track record as a successful entrepreneur. In 2010 he sold the mobile marketing company he ran with his brother, The Hyperfactory, to US media company Meredith for about US$13.7m, plus earn outs, according to Meredith's annual reports.

There are, therefore, good reasons to pay attention to Snakk Media, but the issue for investors is what the business might be worth.

This is not an easy question to answer, particularly since Snakk is not an easy business to understand.

In a general sense, Snakk's business seems to involve helping brand advertisers communicate with consumers via smartphones and tablet computers.

It has two revenue streams. One derives from its services in assembling the mobile "inventory" - digital advertising space on mobile media applications such as the Sydney Morning Herald or games such as Angry Birds.

This inventory can be sliced and diced to target particular consumer segments, a service for which Snakk charges a margin on the cost of the adspace.

The second revenue stream involves charging the inventory providers such as, presumably, the Sydney Morning Herald, royalties for the use of software technology that helps deliver the advertising.

Or something like that anyway. Having talked to Handley and several Snakk executives, I still can't be sure I've understood the business model.

Snakk currently operates only in Australia and estimates the total mobile advertising market there last year was about A$14m-A$15m, giving the company a market share of about 15 per cent.

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Its aim is to grow its share of the growing mobile market, which is estimated by consultancy Frost & Sullivan to expand at a compound rate of 43 per cent a year for the next five years.

By 2016 the market size is estimated to be about A$82m.

So if Snakk, say, doubled its market share, it might have revenue of about $25m-$30m in three years.

The company says it hopes to break even in 2015.

But the idea is to expand well beyond Australia, particularly into big Asian markets which are expected to adopt mobile technology more rapidly than Australia or New Zealand.

The Asia Pacific mobile advertising market is expected to reach US$8.5 billion by 2016, according to consultancy PWC.

So that's the plan - be the leader in a growing market of international scale.

It's a good plan and Snakk has people who could make it work. But in my view anyone paying 30-40c a share right now is getting ahead of themselves.

According to the interim report posted to the stock exchange, Snakk's most recent share issue - undertaken in the last five months - raised $761,635 at 6.5c a share.

It is likely to be tapping its shareholder base for more capital more than once over the next few years, using share purchase plans which require less onerous documentation than public offers.

The overall picture then is of an ambitious, early-stage business seeking committed investors who can tolerate high risk and are prepared to take a long view.

It's great to have a company like that coming to the public market and let's hope it fulfils its promise.

But investors should be careful not to look for too much too soon.

Tim Hunter is deputy editor of the Fairfax Business Bureau.

- Sunday Star Times

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