Location Sciences: Verify is the future
Location Sciences Group PLC (LON:LSAI) is a high growth technology company and a global leader in location verification. The company recently reported results for the first half (H1) of 2020. These were in line with the trading update issued in July, with revenues up 1% (or +43% including securitised revenues), with period end net cash at £1.65mln.
The main growth driver going forward – Verify:
‘Verify’ is the flagship product for Location Sciences, offering location data validation for mobile advertising campaigns. Carriers of mobile-phone-based advertising can command a large price premium for advertising that targets consumers in a specific physical location. Brands who wish to use location-based mobile advertising face a major problem, with inaccurate or estimated location data from ad publishers. The Verify platform allows brands to authenticate their location-based advertising.
The Verify platform continues to gain recognition in the marketplace and is now in use with major global brands and advertising agencies. In this report, we examine the progress.
Also, during the current year, Location Sciences added a new product to the Verify platform, called Verify Audience. This allows clients to verify data for audience location habits over time, rather than just at the moment when an advert is viewed and therefore extends the commercial reach of the Verify platform. Verify Audience signed its first client in September — a leader in the US location-based marketing industry.
Overall progress of the group during COVID-19:
The H1 results showed continued solid revenue generation for Verify, as well as for Location Sciences’ other product platform, ‘Insights’ (details in this report). Nonetheless, activity has been well below the level that the company had targeted at the start of the year, due to the impact of COVID-19 on key end-customer segments such as restaurants and retail. Despite these challenges, the company was able to narrow its operating losses through a 35% reduction in admin expenses and to maintain a satisfactory net cash position. We expect a reacceleration of revenue growth in the coming quarters.
Leading technology for location-targeted mobile advertising
Through the Verify platform, Location Sciences delivers a unique solution for location-targeted mobile advertising. This is an increasingly important function within the US$160bn-per-year mobile advertising market. The new Verify Audience product adds an exciting new growth avenue for the company, and we believe that on a multi-year view Location Sciences is capable of generating revenues of over US$50mln annually.
We argue that the current market cap is not reflective of the company’s growth potential, notwithstanding the current pandemic-related challenges in the mobile ad space.
Conclusion and valuation
The Verify platform is the main driver for the group
Location Sciences has two distinct product platforms:
1) The Insights platform gives customers the ability to query a location data lake containing more than 40 billion data points. The Location Sciences Insights platform is partnered with X-Mode, the world’s leading location data provider.
2) Verify, the world’s first independent and media agnostic location verification tool, allows brands, media agencies and suppliers the ability to tackle the issue of inaccuracy and fraud in location-based advertising campaigns.
The Verify platform addresses markets worth US$10bn
Two platforms
Source: Proactive Research
Both platforms are generating significant revenue and gross profit for the company.
Insights
The Insights platform offers the following capabilities:
- Transportation: in 2018, Location Sciences designed features to enable a demand-led transportation system, giving the ability to improve the quality of public transport systems.
- Attribution: this is the measurement and analysis of out-of-home and digital advertising on driving store visits.
- Competitor analysis: clients can understand the competition through enhanced location insights. This helps them to plan marketing strategies in a more focused and meaningful way.
- Location planning: the dashboard provides footfall analysis, allowing clients to plan the next location, whether that is a retail unit, bar or restaurant.
- Audience analysis: clients can create audiences based on locations visited and obtain insights into the behaviour of these audiences.
- Mergers and acquisitions: the platform can provide insights related to a wide range of corporate activity. For example, if two supermarkets are planning a merger, the mergers & acquisitions (M&A) team can understand the overall level of customer overlap per region and per store.
Partnership with X-Mode realises value from the Insights platform
In January 2020 Location Sciences announced a partnership with X-Mode, the world’s leading provider of location data. Under this partnership, X-Mode acquired Location Sciences’ data-pool for a fee of up to US$640,000. Location Sciences is still able to offer the Insights product, with access to the full global X-Mode pool, under a fee structure which recognises X-Mode’s ownership of the intellectual property. We expect Insights revenues to continue to make a contribution to Location Sciences.
Verify
Our focus in this report, however, is the Verify platform, as this is the main strategic focus of the company and the main driver of revenue growth in the coming years. Verify is a unique and proprietary software-based platform that uses advanced algorithms to interrogate location data supplied by mobile ad distributors and to protect the client from paying for poor quality location-targeting.
The first Verify product launched was Verify Proximity, which is used for ‘proximity marketing’ campaigns that pay for imprints only from a mobile device that is close to a specific location. Examples might include a convenience food outlet that wants to target commuters entering a particular station.
Verify Audience adds a new customer base for the Verify platform
During 2020 Location Sciences has added another Verify product called Verify Audience. This is used for ‘derived audience segment’ campaigns, which target an audience based on their historic location behaviours.
We believe that Verify will be the main driver for growth for the group in the coming years. The following chart outlines the revenue trajectory.
Location Sciences revenue
Source: Proactive Research
The COVID-19 crisis has had an impact on trading during 2020. In particular, a proportion of the revenues for Verify are paid directly in proportion to volumes of advertising, which declined markedly in some segments during the second quarter (Q2) of 2020.
The company responded with some immediate cost cuts, reducing administrative expense for the first half by 35% year-on-year. This led to a narrowing of the underlying earnings (EBITDA) loss for the first half, in spite of the revenue pressures.
We believe the company is well-positioned to deliver revenue growth in 2021 and 2022, and to continue a convergence toward positive profitability.
Location Sciences is a different company to the old Proxama PLC
Group progress
Location Sciences is a young company. It was formed in 2017 as a subsidiary of Proxama PLC and launched its first product in June 2018. The company has now disposed of the old Proxama businesses and is no longer managed by the old Proxama management team. It is important for investors when looking at the historical share price and financial information to be aware that full-year 2019 (FY19) is the first full year of Location Sciences' business.
The following diagram illustrates the timeline of the development of the business:
Timeline of main events
Source: Proactive Research
Continuing to sign customers across the product range
A key yardstick of progress for Location Sciences moving forward is the signing of new clients, particularly to the Verify platforms. During 2019 and 2020 year-to-date (YTD) there have been a number of significant new signings:
Verify Proximity signed new customer deals with Vicinity Media, The7Stars, Blis Media, and Aldi, and a Global Master Service Agreement with Horizon Media.
Insights has signed the UK health service, The NHS, as a new customer.
Verify Audience signed its first customer in September 2020 – InMarket, a leading company in the US location-advertising industry.
COVID-19 has had a disruptive impact, especially for customers in the restaurant and retail sectors
Recent revenue progress
The company has achieved strong revenue progress since the launch of Verify in 2018 and its rollout in the US in 2019. Progress has been disrupted by COVID-19 during Q2 and Q3 2020. In particular, Verify receives a significant portion of revenues on a fee-per-impression basis. These revenues are therefore affected by advertising industry volumes. Some customer groups that use location-based mobile ads essentially suspended advertising in Q2, in particular fast-food chains and some high street retailers. There are clear signs that this has begun to improve, and we expect further improvement in the quarters ahead.
The following chart illustrates the recent revenue progress.
Recent revenue progress
Source: Location Sciences data
The company takes a conservative view of what is considered "underlying" revenue progress
We include a specific category “Insights one-off”. Under the terms of the X-Mode deal, Location Sciences continues to receive revenue from Insights. Accounting rules obliged Location Sciences to recognise some securitised revenues on completion of the deal (in H1 2020) although these will only be realised in H2 2020 and H1 2021. In the interest of prudence, in its H1 report Location Sciences split out £190,713 of securitised revenue to be considered ‘non-underlying’.
Although revenue growth was positive year-on-year in the first half (even excluding securitised revenue from Insights) the revenue outcome was still clearly below management original goals, due to COVID. In response to these conditions, Location Sciences undertook substantial cost-cutting measures reducing admin expense to £785,000 from £1,204,000 (H1 2019).
The following chart illustrates the reduction in the cost base:
Cost reductions were delivered, which allowed Location Sciences to narrow its operating loss in H1
Cost base
Source: Proactive Research
We believe that these measures leave Location Sciences well positioned to trade through the current crisis and come out the other side.
The big driver - Verify
The global mobile advertising market totals US$160bn (2020e), of which 40% consists of location-targeted advertising (estimates from various market sources).
There are a variety of different players in the online advertising value chain:
- Brands who wish to place online adverts.
- A media agency that manages the ad campaign for the brand.
- Various distributing agencies, which include demand-side platforms, ad exchanges and ad networks, and supply-side platforms. This market place is responsible for placing the ad in front of the consumer.
- The ad is displayed by publishers such as websites, apps and social media.
The following diagram illustrates the value-chain.
Four layers in the mobile advertising value-chain
The mobile advertising value-chain
Source: Proactive Research
The incentive for passing on poor quality location data
Location-based mobile advertising targets customers in a specific location. For example, a cab-hailing service operating only in London, New York and Sydney may only want to pay for impressions (views of the ad) generated in those cities.
A brand pays considerably more for location-targeted mobile advertising than for non-targeted, typically US$10 CPM (Cost Per Mille, fee per thousand impressions) versus US$0.5 CPM for impressions with no location data.
Distributors may be incentivised to pass on low quality location data
However, it is estimated that only 20% of consumers give consent for apps to use their location data. If a publisher admits to his advertising customer that 80% of impressions have no location data, and duly charges only US$0.5 CPM for those impressions, then this publisher would miss out on a significant amount of revenue. It can therefore be in the interest of the publisher to generate location data by whatever means necessary, potentially at the expense of accuracy.
Verify – the solution to poor location data
Verify offers a tool that enables brands to ensure that their location-targeted advertising is being delivered as intended. The platform allows the brand to receive analytics on a real-time basis to assess which distribution channels are achieving the required level of performance. Real-time access allows advertisers and their agencies to optimise their campaigns in-flight.
There are two ways of deriving location for digital advertising. The most effective is using global positioning satellite (GPS) data from the consumer’s device. This is typically accurate to within 50-100 metres; however, a significant proportion of consumers will opt out of providing their GPS data — clicking “no” when the app they are using asks to use their location.
The alternative for deriving location is using IP (Internet protocol) addresses; however, an IP address can sometimes produce a location that is only accurate to within 50km. Some brands wish to target only consumers whose daily routine takes them within walking distance of a particular shopping centre or train station, so 50km is no use. Meanwhile, dynamic IP addresses are even less useful, as these IP addresses change frequently so that a physical location drawn from a database is often incorrect. Overall, using IP addresses can be acceptable for some advertisers, but only if the advertiser is aware of the limitations.
Advance algorithms sort quality location data from estimated or approximated data
Verify uses advanced pattern-recognition algorithms and machine-learning to identify location patterns that are unlikely to be genuine, i.e. computer generated locations.
The following graphic illustrates an artificially generated spread of user locations.
Visualising location data that is artificially generated
Source: Location Sciences
An important development for the location advertising industry will be the introduction of Apple's iOS14 operating system in October 2020. With iOS 14 users will be given the choice of sharing an approximate location as an alternative to their precise location, or no location at all. A further change to the system will be introduced in early 2021, when the choice to share the IDFA (the unique identifier for advertisers) will be elevated to a per app setting.
The new operating system update will have a significant impact on location advertisers - particularly when it comes to behavioural audiences and precise location targeting at scale. We believe that the result will be an increase in the volume of location data being shared, but with more of the data being provided on an approximate basis. We believe this provides further opportunity for Verify.
Verify can optimise an ad campaign as it progresses
Economics of Verify
During an advertising campaign, a user of Verify can identify publishers or distributors who are providing unreliable location data. These can then be eliminated, during the campaign, to allow the budget to be focused on sites and apps that are delivering impressions with accurate location data attached.
The following chart illustrates the cost-benefit of Verify to the brand. This is based on a US$1mln advertising campaign, with publishers delivering 65% of their location data inaccurately, and with Verify eliminating 75% of these inaccuracies. We believe that these are realistic figures for a real campaign.
More than 40% reduction in non-productive ad spending
Savings from using Verify Proximity
Source: Proactive Research
In this example the brand saves over US$400,000 that can be recycled into productive advertising during the course of the campaign.
Verify Audience
A further addition to the Verify platform was the launch of Verify Audience during Q2 2020. This version of Verify addresses the market for location-based derived audience segments. A ‘derived audience segment’ campaign targets consumers based on their previous visiting of a particular physical location, as opposed to proximity marketing (the first application of Verify) which depends on their location at the exact time the ad is viewed. We estimate that location-based audience segment advertising represents a market about four times larger than proximity marketing (which will remain important for Location Sciences).
The customer economics of Verify Audience will be slightly different from Verify Proximity, with the Audience product being sold on a revenue share agreement with a minimum licence fee. We believe this model represents an attractive sharing of value creation for Location Sciences and for the customer.
Financial position
Location Sciences raised £1.05mln of new capital in March 2020. As a result of this, the company ended H1 with £1.65mln of net cash. Cost reduction measures have reduced the cash utilisation rate, and the company reports that it ended Aug 2020 with £1.4mln of net cash.
The following chart illustrates the evolution of the cash position:
Cash position
Source: Proactive Research
Location Sciences has stated that the current capital position is sufficient to support the company's activities through to Q2 2021. We believe that during the next two quarters the company will have re-established a solid upward trajectory in its trading activity, and this should provide a solid platform for any future capital raise.
Large revenue potential is not fully reflected in the share price
Conclusion
Through the Verify platform, Location Sciences delivers a unique solution for location-targeted mobile advertising. This is an increasingly important function within the US$160bn-per-year mobile advertising market. The new Verify Audience product adds an exciting new growth avenue for the company, and we believe that on a multi-year view Location Sciences is capable of generating revenues of over US$50mln annually.
We argue that the current market cap is not reflective of the company’s growth potential, notwithstanding the current pandemic-related challenges in the mobile ad space.