AGC AdTech Industry Update_01.2016

January 2016 INSIGHTS

Linda Gridley, Partner

AdTech Industry Update Programmatic, Mobile and Video are Keys to Near Term Growth

Confidential 1

State of the Advertising Industry

Recent Trends and Transactions in the AdTech Industry

Public Companies and Select Recent AdTech M&A and Private Placement Transactions III

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Agenda

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Period of Major Disruption and Opportunity in the Advertising Industry

The advent of digital, mobile and big data technologies is causing dramatic changes in the advertising industry

Advertising / Marketing / Customer Relationship Management has now become a “CEO” level strategic issue. It no longer represents simple “tactical” spending on which TV program to advertise on and/or how to figure out which 50% of the marketing spend is accountable

CMOs must work harder to understand technology & its uses for marketing. The days of delegating this to the CTO are over

‒ Advertisers in Control

‒ Mass oriented ads pushed to Consumers

‒ Minimal targeting or knowledge about ad effectiveness

‒ Creative “ruled”

‒ “Superbowl ticket” relationship between ad exec and CMO client

‒ Agency served as middleman between client and all other marketing related vendors

‒ Consumers in Control

‒ Ads are increasingly personalized and targeted based on specific consumer behavior

‒ Effective consumer engagement “rules”

‒ The “CMO’s table” is increasingly crowded and competitive…not just about Superbowl tickets anymore

‒ Other marketing vendors bypassing agencies and building direct-to-client relationships

MAD MEN DAYS TODAY

Source: AGC Partners

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The increasing role of digital and big data technologies in advertising has changed the dynamics of the traditional ad agencies’ relationships with their CMO clients

Traditional Ad Hold Co.’s

- Stuck in “Mad Men” Days - Don’t want to own tech - Highly unattractive acquisition

structures →hard to invest in growth

Consulting Firms

- Marketing is now key strategic issue for CEOs

- These firms have the logical “ear” to the CEO & CMO

- As campaigns become more data centric (less creative), they are a huge threat to the agencies’ traditional CMO relationships

CMO

- More tech focused - Ability to be more effective and

efficient with marketing spend - Customer experience and

lifecycle analysis approach

Software / Mk. Automation

- Similar theme to ad tech with

email & creative automation & big data analytics as the core competency to what they bring to the CMO

AdTech

- Key drivers in use of data to change marketing process

- Consolidation leading to scale & a few big industry leaders

- Complex to understand with important ramifications if wrong → CMO’s team needs to understand

Traditional Media/Vertical Market Expertise

- Less developed theme but some specific examples

- Publishers see marketing as a way to improve declining traditional media revenues & creative synergies

- Some firms building integrated vertically oriented solutions to compete against more general traditional relationships


Period of Major Disruption and Opportunity in the Advertising Industry

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Ad spending across major media channels in the U.S. is expected to total $183 billion in 2015 When marketing services spending is added in, the total spend is expected to be approximately

$407 billion U.S. Ad Spending Forecast (a)

Source: (a) ZenithOptimedia (Advertising Expenditure Forecasts, June 2015)

Size and Growth Characteristics of the U.S. Ad Industry

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Size and Growth Characteristics of the U.S. Ad Industry (a)

Traditional ad spending excluding digital was relatively flat in 2013 and 2014 and is down 2-3% per quarter in 2015

Digital ad spend was up 18-20% in 2013 and 2014 and is up 17-22% per quarter in 2015

Some of the stats around traditional ad spend are pretty bleak Print ad spend has declined $54 billion since its peak Consumer magazine ad spend has declined in 15 of the last 17 quarters National TV ad spend growth has slowed for six consecutive quarters Newspaper ad spend has declined for the past 35 consecutive quarters including double digit declines in Q2 and

Q3 2015

Source: (a) Goldman Sachs Research – 2015 Quarterly Ad Monitor

US Advertising Growth by Media

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Size and Growth of the U.S. Digital Ad Market

Digital Marketing in the U.S. is expected to increase 12% annually from $57 billion in 2014 to $103 billion in 2019 according to Forrester Research. It represents 27% of all ad spend in 2015 Search will continue to dominate the spend (54% of 2014 total & 44% of 2019 total) Spending on mobile and social are the big growth drivers

Source: (a) Forrester Research: US Digital Marketing Forecast, Nov 2014 (b) Salesforce 2015 State of Marketing Cloud

US Digital Market Forecast (a) Areas of Increase and Decrease in 2015 Budget (b)

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Source: Ad Age Annual Agency Report, CapIQ, Yahoo! Finance

2013/2014 Ad Tech IPOs Changed the Industry Dynamics

There was a wave of Ad Tech IPOs in 2013 and early 2014 For the most part, the early ones were high flying stocks based on “Big Data Meets the Advertising

Market” theme and big growth dynamics Most stocks did well for awhile and then dropped dramatically Median performance IPO to year end 2015 = (26%) But, these companies going public introduced the “need for scale” in the industry

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Need For Scale Drove Consolidation Wave in 2014

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There were 21 Ad Tech M&A deals of greater than $100M in value in 2014 ($ in Millions)

Date Acquirer Size Revenue EBITDA

Implied Enterprise Value to LTM

Target

Sep. 2014 $2,300M 3.7x 11.2x Jul. 2014 382 5.5x ND Feb. 2014 408 6.5x ND Mar. 2014 360 16.4x ND May 2014 101 8.1x ND Apr. 2014 205 2.1x ND Aug. 2014 230 2.6x ND Jun. 2014 350 6.6x 44.0x May 2014 310 12.4x ND Jul. 2014 240 4.8x ND Sep. 2014 107 14.4x ND Jul. 2014 222 2.2x ND Jun. 2014 235 1.3x ND Jun. 2014 150 5.8x ND Mar. 2014 200 ND ND Dec. 2014 1,100 9.2x ND Nov. 2014 640 ND ND Jul. 2014 175 4.4x ND Aug. 2014 190 3.4x ND May 2014 109 ND ND Nov. 2014 100 ND ND

Source: CapIQ & Goldman Sachs Research

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Date Target Acquirer Sector Price LTM Rev. Multiple

Dec 2015 Ad Network $180M ND

July 2015 Mobile $300M(1) 1.1x

June 2015 Software $594M 2.9x

May 2015 Diversified $4,400M 1.6x

April 2015 Mobile $533M 3.6x

March 2015 Personalization $100M 4.2x(2)

March 2015\ Analytics $100M ND

March 2015 DMP $195M 5.6x

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Only nine deals of $100m+ in value in 2015 amidst a difficult year for AdTech in the public markets

(1) Unofficially announced amount (2) Net revenue multiple

2014 M&A Wave Much Greater than 2013 or 2015

Only four deals of $100m+ in value in 2013 as focus was on AdTech IPOs

Date Target Acquirer Sector Price LTM Rev. Multiple

Sep 2013 Mobile $350M 3.5x

Aug 2013 Video $405 4.1x

Aug 2013 Mobile $228M 3.2x

June 2013 Email Marketing $2,296M 7.2x

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So far, the industry consolidation centers around three areas: Mobile, Video and Data The first round of the consolidation is 75%+ complete but new opportunities/business models are emerging Video and Mobile are still very early – expect these two areas to be the hot areas for 2016 Also, cross channel attribution and real audience identification will also be key capabilities sought after in

2016

Key Consolidation Themes in Ad Tech

Mobile

Video

Data

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Key Potential Ad Tech Industry Trends for 2016 (a)

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1. Digital Ad Spending to Surpass TV Spend in 2017 – Implications? Ad spend on video should be the big “winner”

Greater clarity on performance of marketing spend

Are marketers ready? – Significant investment in technology and people

2. Programmatic Continues to “Drive the Bus” – +50% of digital in 2016 Quality of inventory takes center stage over pricing

Fraud issues of 2015 get solved, or at least better

3. Mobile, Mobile Everywhere – Brands struggle to catch up to consumer behavior Ad verification and viewability is more complicated on mobile

4. Scale Matters – Further separation of the “men from the boys” Internet Titans’ share of the industry becomes even more dominant led by Facebook and Google

See the effect of a “Walled Garden” at scale (e.g. Facebook’s mobile ad inventory)

Only need 2-3 “winners” per category – layoffs will continue elsewhere, especially companies that are not profitable yet

2015 layoffs were just “the tip of the iceberg” (e.g. Turn, Collective, Centro, Rocketfuel)

5. Brands continue to build up their in-house capabilities as they increasingly understand the importance of their customer data to the success of their digital ad campaigns Agency role/relationship will need to evolve

6. AdBlocking Meets “Main Street” 7. New Buyers Enter the M&A Game? Source: (a) AGC Partners

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#1 – Digital Ad Spend to Surpass TV Spend

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According to eMarketer, digital ad spending will surpass TV spending in 2017 Digital is expected to represent 37% of total ad spending vs 36% for TV By 2019, this chasm widens to 41% vs. 35% respectively Mobile is expected to grow from 22% in 2016 to 29% in 2019 Print is the biggest “loser” dropping from 16% in 2015 to 12% in 2019

Source: eMarketer – Mobile to Account for More than Half of Digital Ad Spending in 2015 (a) Salesforce 2015 State of Marketing Cloud

Areas of Increase and Decrease in 2015 Budget (a)

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#1 – Digital Ad Spend to Surpass TV Spend – Video is Big “Winner”

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For the first time, U.S. adults spent more time on digital video than on social networks in 2015 and an increasing amount of time relative to TV (1)

This was especially true of millennials Popular new shows on places like Netflix and Amazon will help contribute to these trends

Source: (1) eMarketer April 2015

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According to an annual survey done by Brightroll, almost 50% of all ad agencies surveyed said they included video as a component of their digital RFPs – this is up from only 25% of the time in 2011

Additionally, the same survey reported that 72% of the agencies surveyed thought online video advertising was more effective than TV advertising

The same Brightroll survey revealed that agencies (and hence clients) are getting smarter and more sophisticated vis a vis measurement of success It’s not just about completed views anymore – conversion, brand lift and viewability also matter

Source: Brightroll 2015 Ad Agency Survey

Online video is more effective than TV

Online video is about the same as TV

Online video is less effective than TV

I don’t know

In your experience, how effective is online video advertising when compared to the following alternatives?

Completed views –

Conversion –

Brand lift –

Viewability –

CTR (Click-thru-rate) –

Inventory quality –

GRP/TRP (gross/targeted rating point) –

Validated impressions –

Sales impact –

20%

18%

17%

14%

10%

7%

6%

5%

4%

What is the most important success metric for your digital video campaign?

#1 – Digital Ad Spend to Surpass TV Spend – Video is Big “Winner”

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#2 – Programmatic “Drives the AdTech Industry Bus”

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Programmatic ad spending has seen meteoric growth and now represents over 50% of total digital ad spend $15 billion in 2015 and expected to grow 19%

CAGR through 2020 Programmatic offers better efficiencies, more

transparency, and improved targeting/measurement vs. traditional media buying

Within programmatic, mobile and video are the largest growth segments

Source: Business Insider Intelligence

Programmatic Ad Revenue

Share of Digital Ad Rev.

Programmatic Growth Rates

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#2 – Key Trends in Programmatic for 2016

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QUALITY BECOMES KEY IN 2016

Not just about price anymore Quality Ads / Quality Data / Quality Targeting

Improvement in ad viewability and transparency More accurate attribution and measurement Increased use of cross-device campaigns and increased use of programmatic mobile Increased importance & use of first party data sources vs. 3rd party Brands continue to invest in in-house trading desks

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#3 – Mobile, Mobile Everywhere – Brands Struggle to Catch Up to Consumer Behavior According to Comscore, mobile accounts for two out of every

three minutes spent consuming digital media in the U.S. Mobile devices are the “go to” platform for consuming digital media,

especially with millennials

According to eMarketer, mobile ad spend is now over 50% of all digital ad spend and it is expected to grow at a CAGR of +29% through 2020 Mobile is expected to represent 70% of all digital ad spend by 2019

Display and search are the largest sectors within mobile today and are expected to continue to drive the growth

Source: eMarketer – Mobile to Account for More than Half of Digital Ad Spending in 2015 dated Sept. 1, 2015 Comscore – April 2015

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Between 2014 and 2015, marketers saw a significant increase in the importance of social and mobile marketing According to a study done by Salesforce, 70% of all marketers see mobile as a critical enabler of

their products and services

However, in reality, the successful, impactful execution of mobile ad campaigns can be quite difficult Small screen size More difficult targeting & attribution Cross channel verification and tracking still early

Source: (a) Salesforce 2015 State of Marketing

Mobile Marketing Impact on Business (a)

#3 – Mobile, Mobile Everywhere – Brands Struggle to Catch Up to Consumer Behavior

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#4 – Scale Matters – Internet Titans Dominate the Industry

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According to the Q2 2015 quarterly PWC/IAB industry report, the top 10 ad selling companies represented 72% of all digital ad money Although this % has remained relatively unchanged (i.e. 69% -

74%), we expect this to increase in the future as mobile ad spend becomes more dominant

We also expect to see continued rivalry between Google (64% share of search market) and Facebook (#1 in Display – 25%)(1)

with their mobile efforts being the key success driver

% share of total revenues (a)

Source: (1) Forbes.com – July 2015 (a) IAB/PwC Internet Ad Revenue Report, HY 2015 eMarketer – March 2015

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#5 – Brands Build Up In-House Capabilities

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Many people believe that there is a general trend for CMOs to build up more digital marketing capabilities in-house rather than using agencies and/or technology partners The CMO’s job is more complex and customer data is seen as a “core” asset to a marketer’s success

Data Analytics seems to be the biggest focus of current in-house capabilities

First party data is becoming more and more valuable relative to third party data Actual behavior vs. look alike or spam

Consumers seem surprisingly more willing to share their data for the right incentives

Source: (a) Teradata: Enterprise Priorities in Digital Marketing, Sept 2014 (b) eMarketer-Trends for 2016: Six Predictions for What Will Happen

% of Companies Surveyed with These Capabilities In-House (a)

Reasons for Sharing Data with Companies According to US Internet Users, May 2015 (b)

% of respondents

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#5 – Brands Build Up In-House Capabilities – CMO’s Job is Broader/More Complex

The CMO’s job has become much more complex in this new “customer centric” marketing environment. A good CMO needs to understand change management, data management, and consumer experience design, not simply provide creative and media channel expertise. Key challenges/issues include the ability to:

Provide a single, integrated view of the customer across channels across all of the

customer’s lifecycle

Manage multiple campaigns across multiple channels efficiently and effectively

Offer highly targeted personalized ad campaigns

Determine what capabilities to do in-house and what to use partners for and who the best type of partner is

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#6 – AdBlocking Meets “Main Street” in 2016

Source: (a) Pagefair & Adobe: 2015 AdBlocking Report

AdBlocking is a huge, global issue that significantly impacts the user experience Technical effects favor spending shift to “walled garden” or “logged in” environments

Estimated loss of 2015 revenue due to adblocking = $21.8 billion globally and $10.7 billion in the U.S. Globally, the number of people using adblocking software increased by 41% YoY vs. 2014

16% of the U.S. population blocked ads in Q2 2015

Broad adoption? – Think online version of “Do Not Call” But will increased adblocking help drive improved ad quality?

Global AdBlocking Growth (a)

Cost of Blocking Ads (a)

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#6 – AdBlocking Usage – Early Adopters are Tech Savvy Males

Source: Pagefair & Adobe: 2015 AdBlocking Report

Global Share of Ad Blocking

AdBlocking is still in its early adopter phase – used by 5% of internet users and 9% of impressions Usage highest for Google Chrome (126m monthly users, 53% of all adblocking traffic) and

lowest in mobile (1.6% of all ad blocking traffic) Not surprisingly, adblocking is more prevalent amongst sites that are attractive to tech savvy people

and young males Gaming sites have the highest use of ad blocking

Many industry analysts expect adblocking usage to increase dramatically now that Apple has introduced adblocking capabilities into its desktop and mobile operating system software

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#7 – New Buyers Enter the AdTech M&A Game?

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2016 may just be the year for new buyers in AdTech. Why?

1. Industry is maturing and the chasm between the “winners” and “losers” is widening

Hence buyers can better assess the value and risk of what they are buying

Buyers can also make “platform acquisitions” with more confidence

2. Mobile and video are key industry growth drivers and may attract new types of buyers

Telecom; cable and traditional media are good potential candidates

3. The value of first party data to an overall marketing stack offering is becoming more clear

Will the other big enterprise software guys follow the path set by Oracle (BlueKai; Datalogix)?

Is ecommerce data the “holy grail” of digital marketing and will we see M&A transactions around that theme?

4. Cross device measurement and analytics is becoming increasingly important as marketers look to create one consolidated view of their customers

Will ad agencies and other data management companies step up and make acquisitions here?

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FINALLY…Will 2016 be…

The Year of PROFITABILITY?

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Public AdTech Companies

Source: CapIQ

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Selected Recent AdTech M&A Transactions

Source: CapIQ, 451 Research Selection criteria based on size and publicly available information

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Source: Pagefair & Adobe: 2015 AdBlocking Report, CapIQ

Private Placements Greater than $25m

2015 was a surprisingly solid year for financing in the AdTech industry Nowadays, there’s a perception that VC/PE firms are leaving the AdTech industry behind, but in reality,

there were more $25m+ deals in 2015 than in 2013 or 2014 as per the chart below Moreover, the deals in 2015 represented a broader spectrum of subsectors, including creative

optimization companies, SSPs and measurement and analytics companies

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Selected Recent AdTech Private Placements

Source: CapIQ Selection criteria based on size and publicly available information.

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Selected Recent AdTech Private Placements (cont’d)


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Selected Recent AdTech Private Placements (cont’d)


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UNDISCLOSED COMPANY

AGC COMPLETES 28 DEALS IN 2015

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Contact Information & Disclaimer

This document is intended to serve as information only, and to suggest that further analysis and consideration may be warranted. Unless otherwise indicated, AGC does not believe that the information contained herein is sufficient to serve as the basis of an investment decision. There can be no assurance that these statements, estimates or forecasts will be attained and actual results may be materially different. Only those representations or warranties which are made in a definitive purchase agreement will have any legal effect. To learn more about the company/companies that is/are the subject of this commentary, contact one of persons named herein who can give you additional information.

Linda Gridley Partner, Co-Head of

Digital Media Group - New York [email protected]

212-400-9710

Gee Leung Partner, Digital Media Group - San

Francisco [email protected]

650-241-1490

Jon Guido Partner, COO, Co-Head of

Digital Media Group - Boston [email protected]

617-261-4126

Markus Salolainen Partner, Head of Europe,

Digital Media Group - London [email protected]

+44 7776 193 861

AGC AdTech Industry Update_01.2016

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