Share Prices Take Big Drop In Wake Of RMG Q3 Financials Release
November 15, 2013 by Dave Haynes
It’s off 13% today as I look, and trading at waaaay below what it was in the spring when the company went on the market. It is sitting around $5 and has been as high as $18-ish this year.
The combined digital OOH and software firm, now based in Dallas, reported on Thursday:
- Pro forma combined total revenues increased 13% from Q3 2012.
- Continued execution on international expansion strategy by establishing offices, adding sales staff, or adding customers in Singapore, China, and Brazil. Continued investment in expanding sales and services resources by adding 16 new revenue generating or sales supporting employees in the quarter.
- Entered into a strategic, long-term relationship with Regus, the global workplace provider, to develop the RMG Office Media Network, the US’ largest in-office digital media network, to engage audiences with sight, sound, and motion across approximately 650 Regus business centers in the US. The relationship demonstrates RMG Networks’ revenue synergy potential in providing combined video advertising and technology solutions.
- Completed previously announced follow-on equity issuance and used a portion of the proceeds to pay down $10.3 million of debt within the quarter. Subsequently amended credit facility and expect to repay additional $15.2 million of borrowings. Amended credit facility lowers effective interest rate to 8% and eliminates scheduled principal payments. Combined debt repayments and credit facility amendment expected to result in annual interest and principal repayment savings of over $5 million in 2014.
Garry McGuire, CEO of RMG Networks, commented, “RMG made significant progress during the third quarter, executing our end-to-end solutions strategy. We developed a significant partnership to launch a major office media network and have continued our efforts to expand our market opportunity. I am particularly encouraged that we are continuing in Q3 the strong year-over-year top line growth we also reported in Q2, especially in the context of 2013 being a year of investment and integration and before a number of our expected growth initiatives have fully produced results.”
Mr. McGuire concluded, “Our continued investments in our platform are intended to drive future revenue growth and deliver profitability through operating leverage. Our focus for the remainder of the year is on stringently executing our growth plan, cross-selling opportunities between our two businesses, adding new ad inventory and inventory partners, expanding our geographic reach and continuing to expand our solutions portfolio. RMG Network’s mission is to be the leader in the ad-tech-video media marketplace through organic growth and by acting as a consolidator of our fragmented industry.”
Third Quarter 2013 Review
RMG Networks completed the business combinations of Reach Media Group Holdings, Inc. and Symon Holdings Corporation, or Symon, on April 8 and April 19, 2013, respectively. Symon was determined to be the Predecessor Company for accounting purposes and accordingly Symon’s historical financials are included for comparison in RMG Networks’ “as-reported” financials. Because Symon recorded results of operations on a January 31 fiscal year and because the results of Reach Media Group Holdings, Inc. are not included in Predecessor Company financials, third quarter 2013 results as-reported are not comparable with the Predecessor Company’s results for third quarter 2012. Therefore, for ease of comparison, we provide in the following results and tables pro forma combined adjusted results for the 2013 and 2012 third quarters as if the companies had existed as a combined entity for the relevant periods.
Pro Forma Combined Adjusted Results
Total third quarter 2013 revenues were $16.4 million, an increase of 13% from $14.6 million in the third quarter of 2012.
- Advertising revenue of $4.3 million decreased 14% from $5.0 million in third quarter 2012 due to a record campaign from one of our advertisers that represented 20% of our Q3 2012 advertising revenue and did not reoccur in Q3 2013.
- Product sales revenue of $5.5 million increased 44% from $3.8 million in third quarter 2012 due to increasing demand from businesses looking to utilize digital video and visualization solutions in their workplace.
- Maintenance and content services revenue of $4.1 million remained relatively flat from $4.3 million in third quarter 2012.
- Professional services revenue of $2.6 million increased 67% from $1.5 million in third quarter 2012 due to an increase in our professional services resources and greater product sales.
Operating loss was $4.4 million compared to operating loss of $2.8 million in the third quarter of 2012. This increased loss is attributable to lower gross margin as a percentage of sales in the current year period, primarily resulting from lower advertising revenue versus our fixed advertising sales costs, and higher operational expenses in the current year period as the company invests in new sales and marketing staff to support growth initiatives. In addition, the company recognized $0.8 million in transaction-related costs and $0.6 million in stock based compensation expense.
Adjusted EBITDA loss was $1.4 million compared to profit of $1.8 million in the third quarter of 2012, decreasing for the reasons described above.
Total revenue for the successor company for the quarter ended September 30, 2013 was $15.6 million; total revenue for the predecessor company for the quarter ended October 31, 2012 was $8.5 million.
Operating loss for the successor company for the quarter ended September 30, 2013 was $5.3 million; operating income for the predecessor company for the quarter ended October 31, 2012 was $0.7 million.
RMG continues to anticipate double-digit year-over-year revenue growth for the balance of 2013 and 2014. For the full year 2013, the company expects total pro forma combined adjusted revenue to be $71 million to $76 million, which is slightly below the range previously provided due to a slower than expected ramp up in certain of the company’s international expansion and new product roll-out initiatives. The company believes that continuing its investments in revenue-generating sales and marketing resources during the second half of the year was and is important to capture the market opportunities before it. Accordingly, it anticipates that 2013 Adjusted EBITDA will be between $(1.0) million and $1.0 million. The company expects a robust Q4 in its core businesses, with gross margin improvements versus those experienced in Q3 and a strong finish to the year. The fourth quarter is traditionally the strongest revenue-generating quarter for both business units and that pattern is expected to continue.
Beyond 2013, the company continues to target organic revenue growth in its existing combined core Media and Enterprise businesses of 20+% per year with an additional 5% to 15% revenue growth from organic geographic, network and product expansion. Expected M&A activities would supplement these revenue growth rates. With an underlying platform established through investment in 2013, the company continues to expect achieving significant operating leverage and Adjusted EBITDA growth in 2014 and beyond. The company is choosing to provide its guidance in this new format to account for the reality that the growth in its business is not perfectly linear. The company, however, is not changing its view regarding the assumptions underlying its growth targets or the strength of its future prospects.
I have sent a note to my RMG contacts, essentially asking what’s up with trading?
At first, and not having much close knowledge of the company’s activities, it seems the company came out of the blocks making noise as a media company first. But the Q3 ad revenues – despite the investment/resources – were actually off quite a bit (14%) from a year earlier. Meanwhile, the old Symon software side of the business seemed to have had a great quarter, going up 44%.
RMG also had a $4.4M, which we can assume wasn’t quite what investors had in mind.