Leader In Fast-Growing Digital Coupon Industry Sets Debut

Investor's Business Daily

THE BUZZ

People love to save money on goods and services with coupons.

Finding and collecting coupons has gotten a lot easier with the advent of online computing. Research firm eMarketer estimates 48% of U.S. adult Internet users redeemed a digital coupon for shopping last year.

While print coupons are still the most widely used, digital coupons have caught on as a mainstay activity, as eMarketer estimates 97 million U.S. adults will access coupons via the Internet by the end of this year, growing to 100 million in 2014.

An early entrant in the market was RetailMeNot, which aims to raise $191 million by selling 9.2 million shares in an initial public offering expected to launch next week.

But there are questions as to whether RetailMeNot is approaching its expiration date.

"They were the early adopters of digital coupons, but now it's very competitive and there are no barriers to entry," said Francis Gaskins, founder of research firm IPO Desktop.

The market for digital coupon solutions is highly competitive, fragmented and rapidly changing. This includes competition from cash back and loyalty websites, search engines like Google (GOOG), social networks like Facebook (FB) and comparison shopping websites. Online competitors include Groupon (GRPN), Amazon (AMZN) and Amazon-led Living Social.

The good news is it's in a fast-growing market and as such, the IPO will likely collect some buzz when its retail road show begins this Thursday in New York.

"We are encouraging retail and institutional investors to look at this offering," said Scott Sweet, senior managing partner at IPOboutique.com. "But RetailMeNot needs to make a clear distinction that they are not like the many other companies out there.

THE COMPANY

RetailMeNot claims to operate "the world's largest digital coupon marketplace." In 2012, it featured digital coupons from more than 60,000 retailers and brands. These include coupons for Walmart (WMT), Kohl's (KSS), Target (TGT), Home Depot (HD) and many more. The company has contracts with more than 10,000 retailers.

Coupon categories include clothing, electronics, home and office, travel, health and beauty, shoes and food.

Total visits to the website topped 464 million in 2012, up 32.5% from the prior year.

The original founding company was WhaleShark Media, which entered the digital coupon market in 2009 and has received more than $300 million in venture capital funding. In 2010, WhaleShark acquired Australia-based RetailMeNot. That was followed by the acquisition of a U.K.-based coupon firm, three France-based coupon companies and one based in the Netherlands. It also competes in Germany. The company now lists eight primary websites.

Three of those sites, including RetailMeNot, also support Apple (AAPL) iPhone and Google Android applications. WhaleShark took on the RetailMeNot brand as its corporate name last March. It expanded into Canada last month.

The company lists several trends driving the industry.

It starts with consumers increasingly using the Web to make purchase decisions and shop online. Another is the growth in mobile shopping, with the proliferation of smartphones and tablets.

Then there is the mindset of consumers always looking for savings. In addition, retailers are increasingly ramping up their online presence.

RetailMeNot provides several solutions to enhance the online shopping and coupon-using experience, connecting consumers with retailers and brands.

"We believe that our strong brand recognition has allowed our marketplace to become the leading destination for consumers looking to save money on retail purchases," according to the company's S-1 prospectus filing with the SEC.

In 2012, RetailMeNot had more than 24 million monthly unique visitors to its website, "more traffic than the majority of our retailer's own websites attract," it said.

About 97% of net revenue in 2012 came from commissions earned when consumers made purchases using digital coupons featured on its websites and mobile applications.

RISK/CHALLENGES

RetailMeNot is an early-stage company, which makes it difficult to fully evaluate its current business and future prospects. And as is sometimes the case with young companies like this, the storefront may look prettier than what is inside. Case in point is Groupon, which RetailMeNot has sometimes been compared to, though perhaps unfairly.

Groupon, before it launched its IPO in November 2011, was pounded by critics for its accounting methods and business model. Nonetheless, the buzz on Groupon was strong as shares rose 31% on its first day of trading. But from that point on for the next 12 months shares fell and fell. In April 2012 auditors disclosed a "material weakness" in financial reporting at the company.

And as more competitors entered the market, Groupon spent more on marketing to maintain its growth, but business continued to slip. In March of 2013 its CEO was replaced.

As RetailMeNot listed in the "Risks" section of its S-1, several factors could affect business performance, including the loss of existing retailers or the inability to add new ones, or new customers.

"With the introduction of new technologies and the influx of new entrants to the market, we expect competition to persist and intensify in the future, which could harm our ability to increase sales and maintain our profitability," according to RetailMeNot.

THE RESULTS

Revenue in 2012 rose 80% to $144.7 million. Net income of $26 million was an increase of 53% from the prior year.

For the second quarter ended June 30, which are preliminary and not yet finalized, RetailMeNot expects to report revenue of about $42.3 million, up 41% from a year ago, but net income is expected to fall 17% from the year-ago quarter.

In the first quarter, revenue rose 37%, to $40.6 million. That compares with 50% growth in the fourth quarter.

"They had a tremendous growth rate from 2011 through 2012," said Gaskins. "Their growth rate is now slowing as sales and marketing costs are increasing. It's risky.

USE OF PROCEEDS

The company is selling 9 million shares, of which half are being sold by the company and the other half by insiders and early investors. Gaskins calls that a red flag.

"Normally, if it's a good deal the venture capitalists do not show signs of wanting to get out," he said.

About $80 million of net proceeds will go to selling stockholders, executive officers and others.

RetailMeNot expects to use $52.5 million of the proceeds from the IPO to pay unpaid dividends and $6.6 million to repay notes that mature on Aug. 31. It expects to use the balance of its proceeds for working capital and other general corporate purposes.

THE MANAGEMENT

G. Cotter Cunningham

Chief executive, president and chairman

Age 50, the company founder previously served in various positions with Bankrate (RATE) for seven years, ending in 2007 as chief operating officer. He has an MBA from Vanderbilt University and a BA in business economics from the University of Memphis.

Kelli Beougher

Chief operating officer

Age 43, joined in 2009 as senior vice president of operations and was promoted to COO in May 2012. From 2001 to 2009 she served in various positions at Rakuten LinkShare. She has a BA in marketing from the University of Texas.

Douglas Jeffries

Chief financial officer

Age 57, joined as CFO in December 2012. Previously he was executive vice president and CFO at Taleo, where he helped guide the company through its acquisition by Oracle, and Hewlett-Packard's acquisition of Palm before that. He holds an MBA from the University of Southern California and a BS in accounting from California State University, Chico.

RetailMeNot

Austin, Texas(512) 777-2970RetailMeNot.comLead underwriters: Morgan Stanley, Goldman Sachs and Credit SuisseOffering price: $20-$22Expected date: week of July 15Ticker: SALE

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