The SaaS platform of programmatic advertising business helps domestic enterprises to go to sea.
How to sell straw shoes to Africans?
Zhang Kai, a post-90s casual game on mobile phones, set up a game studio with several small partners and made several popular mini-games.
Then, a very real problem was put in front of them: the mini-game they made, although fun, did not reach the stage of the fire.
It has been suggested that they can buy on large platforms and reach a certain scale. Zhang Kai consulted some large platforms and found that the promotion cost is expensive, not to mention, niche games, and most of the amount bought may be invalid.
The domestic mobile game industry is too "volume", even if their own games throw money "fire", similar games will appear crazy, and finally can only become cannon fodder.
If you can find people who really want to play in one way, even foreign game fans, it is equivalent to selling Chinese straw shoes to Africans.
Zhang Kai's story is not only the dilemma of small and medium-sized game developers, but also a common problem facing domestic game manufacturers.
But there are indeed ways to efficiently solve the problem of "selling straw shoes to Africans".
Huiliang Technology (1860. HK, or Mintegral, a subsidiary of Huiliang, is one such third-party platform.
They link a large number of fragmented programmatic traffic, and through the calculation and analysis of artificial intelligence algorithms, help customers optimize the allocation of traffic and budget, and anchor the traffic channel that is most suitable for a product, even if it is very niche; so that customers can achieve the optimal input-output ratio at a lower cost.
In 2021, Huiliang Technology's full-year revenue reached US$755 million, an increase of 46.4% year-on-year, and gross profit reached US$122 million, up 48.4% year-on-year. Compared with the unsatisfactory industry situation of Internet advertising last year, it can be described as a "contrarian" growth, but this is in line with the general trend of Chinese enterprises going to sea.
In this irreversible long-term trend, the products and services provided by Huiliang Technology for customers to "build bridges" may be found in terms of gold content and high growth from the just disclosed 2021 financial results announcement.
All rivers flow into the sea
Programmatic advertising is a broad track that has given birth to many domestic and foreign Internet giants.
According to Statista, thanks to the continuous penetration of digital in the advertising industry, the market size of the global digital advertising industry will increase from $515.3 billion in 2022 to $683.1 billion in 2026, with a compound annual growth rate of 7.39%.
There is a structural shift in market share. The share of programmatic advertising in digital advertising continues to increase, and Statista expects the proportion of programmatic advertising to increase from 81% in 2021 to 86% in 2026.
It is not only a compliance with the trend, but also a proof of the trend itself, and domestic Internet companies have increased programmatic advertising.
According to huge engine data, the proportion of programmatic advertising on domestic Internet platforms in 2019 has reached 60%, and the proportion of byteDance programming has reached nearly 90%. The United States is more than 80%, and the programmatic penetration rate of advertising platforms such as Facebook and Google is more than 95%, so from this point of view, domestic Internet companies still have a high room for growth.
Source: CITIC Securities
On the other hand, after years of rapid development of the domestic Internet industry, the game user dividend is gradually approaching the ceiling, and the domestic game industry has shown a trend of slowing growth, and it has become more urgent to find new growth points.
According to huachuang securities statistics, after the scale of domestic game users reached 660 million, the growth stagnated, and the per capita daily use time of mobile APP basically remained between 5 and 5.5 hours.
At its peak in 2017, 9369 new versions of domestic games were issued. After 2018, the new version number showed a cliff-like decline, according to GameLook's statistics, compared with the 1405 game version numbers issued in 2020, the total number of version numbers in 2021 decreased by 46.26%, almost "waist chopping".
Superimposed on the policy regulation of the protection of minors, the competition in the domestic game industry has intensified, and the growth rate has declined, especially since the epidemic in 2020, going to sea has become the only choice for more and more game manufacturers in China.
Before 2018, domestic games were mainly based on small and medium-sized manufacturers, and in terms of categories, mainly light games such as leisure and page games. After that, limited by the new version, the head factory also joined the "fleet" of going to sea.
By 2021, overseas markets have become a new engine for Chinese game growth. The annual sales revenue of overseas markets reached 18 billion US dollars, a growth rate of 16.59%, accounting for one-third of the total revenue; while the sales revenue of China's game market was 296.5 billion yuan, with a growth rate of only 6.4%.
Version number supervision is only one aspect of the appeal, and the appeal of high-quality games to go to sea is another important driving factor.
Chicken eating hands have become popular, the demand for heavy games in the United States and Japan and other markets has been opened, and head manufacturers such as Tencent, NetEase, Lilith and Funplus have begun to export to overseas markets.
Since 2020, with high-quality products + quality to win the head manufacturers Tencent, NetEase, Mihayou to set off a wave of high-quality games to the sea, App Annie in February 2022 Chinese game manufacturer revenue list, Mihayou ranked first, followed by category theme + buy volume play mainly attacked FunPlus, Lilith occupied the fifth place, Tencent, another veteran game provider 37 Interactive Entertainment and NetEase in the third, fourth and sixth places respectively.
Mihayou's "Original God" is a representative of the leading quality. Tencent also said in its earnings report that the growth in game revenue in the international market in the fourth quarter of 2021 was mainly due to the strong performance of games such as PUBG Mobile, Valorant, Clash Royale and Brawl.
NetEase's internationally launched games cover a comprehensive range, including FPS "Wilderness Action" and "End of the Battlefield", asymmetric confrontation competition "Fifth Personality" and "Tom and Jerry: Chase", survival "After Tomorrow", SLG "Coast of the Land" and multiplayer action competitive game "Forever Doom", etc., and its plan will launch "Harry Potter: Magical Awakening" and "Deadby Daylight Mobile - NetEase" in overseas markets.
Lilith Games has launched a number of blockbuster games in the global market, among which "Rise of Kingdoms" and "Sword and Expedition AFK Arena" have exceeded 1 billion yuan in a single month in the global market, and "Awakening of All Nations" has refreshed the ceiling of China's strategic mobile game to the sea several times.
These two categories are the most mainstream and largest manufacturers going to sea. They have requirements for both ad buying and localization capabilities. In addition, there are manufacturers that specialize in casual simulations, such as Tom Cat, Bole Games and McGee Taiwen, which are smaller.
Cao Xiaohuan, CEO of Huiliang Technology, said, "2022 will open the curtain on China's branding to go global, which is an irreversible long-term trend in the structural growth of Chinese enterprises."
At this point, a hundred rivers have gone to sea, and its momentum has become a reality.
Source: Huachuang Securities Research Report
However, going to sea is not so simple, because it is not familiar with foreign markets, manufacturers often have to pay a heavy "tuition".
A "hot knowledge" is that the gap between domestic traffic distribution and foreign traffic is relatively large. Domestic mainly concentrated head media, programmatic advertising is also mostly built by Internet companies, independent programmatic platforms are relatively few.
In the North American market, cable TV still occupies a high user time, and digital advertisers must rely on programmatic advertising platforms that can operate across platforms and media if they want to take into account the traffic entrance of e-commerce and mobile devices.
In the past, customers who went overseas often spent large budgets on the head platform, which not only caused high costs of purchase, but also could not solve the purpose of delivery coverage.
Affected by the epidemic, delivery optimization is more and more valued by head manufacturers, and in the future, Chinese game companies will consider more about how to effectively use channels other than Meta (Facebook) and Google.
The use of third-party platforms for delivery options has become a megatrend, so Applovin, Unity, Mintegral, and others have performed well.
Integrating the purchase volume, commercial data management and delivery into the technology middle office can screen out the appropriate traffic for customers in the complex and multi-level overseas market, and maximize the delivery efficiency.
Customers can know at a glance where the effective traffic bought for the product comes from, from which channel, which channel has the highest ARPU, if the customer wants the product to be placed in a targeted population in a certain market segment of the world, Huiliang Technology's Mintegral is a good choice.
Bucking + "pro-cyclical"
In 2021, Internet advertising ushered in the "big brake".
Advertising has always been regarded by Internet platforms as "cash cows" and is also a barometer of industry development. From the financial report data of 18 Internet companies, it is found that in the past year, many Internet advertising business revenues have declined.
Source: Deep Ring
The fourth quarter of 2021 was even more pronounced. Among the 18 companies, 7 have negative growth in Q4 advertising revenue, including benchmark companies such as Ali, Tencent and iQiyi. Due to factors such as the general environment, changes in the industry, the peaking of the user dividend and regulatory policies, the advertising revenue of Internet companies began to slow down.
On the other hand, the performance of the Internet mobile advertising platform Huiliang Technology has shown rapid growth.
According to the 2021 financial report, Huiliang Technology's full-year revenue reached $755 million, an increase of 46.4% year-on-year, gross profit reached $122 million, up 48.4% year-on-year, and net income was $149 million after deducting the costs allocated to traffic developers. Operating loss was $12.4 million. Non-IFRS adjusted EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) was $23.53 million, up 9.2% year-over-year.
How to understand the difference and impact of these two profit figures?
When we look at non-IFRS-adjusted EBITDA, it is actually more conducive to understanding, comparing and evaluating a company's business quality and operating performance by putting aside the factors that are weakly associated with recurring business.
The difference between the two figures of exchange rates is mainly due to the impact of losses such as equity incentives, depreciation and amortization, and investments in financial assets measured at fair value and the change is included in profit or loss.
For example, in early 2021, a change in fair value resulting from PAG's investment in the US$30 million convertible bonds of Huiliang Technology, one of Asia's largest independent diversified investment management groups, and a one-time fee for the media professional planning and procurement business and the revision of the Restricted Share Unit Scheme (the "RSU Scheme").
In terms of depreciation and amortization, first, under the global chip shortage and tight computing power in 2021, in order to support business growth, Huiliang signed a long-term contract to lock in servers; second, the acquisition of hot cloud data, the amortization of intangible assets generated was included in the profit and loss; third, the ad tech platform Mintegral, data analysis platform GameAnalytics and other products, R & D expenses capitalization expenditure.
These inputs, in the short and long term, further implement the new strategy of sinks.
In 2021, GameAnalytics' overall revenue was $886,000, and its extensive data coverage and high granularity were increasingly trusted by game developers. GameAnalytics' number of partner game developers was 179,000, up 33.6% from the first half of 2021 and covered 2.3 billion monthly active users (MAUs).
As well as the acquisition of hot cloud data, it will also help to improve the construction of the sink SaaS tool matrix, further strengthen the traffic expansion and technical competitiveness in China, and achieve the dual-drive development of "domestic + overseas".
Huiliang's strategy of focusing on its core business competitiveness, programmatic advertising platform, and expanding from advertising technology to full-link marketing technology, is very obvious in the 2021 financial report.
First, it is reflected in the "contrarian" growth of the core business Mintegral.
Mintegral is a global programmatic advertising platform where advertisers can make full use of global traffic to achieve advertisers' marketing needs in specific regions at the lowest cost, and achieve the purpose of precision marketing.
The latest financial report data shows that 93.95% of the devices reached by the Mintegral platform come from overseas regions, and the cumulative display of overseas regions accounts for 91.35%.
In 2021, Mintegral's revenue reached $575 million, up 88% year-on-year, with a three-year compound growth rate of 96.55%.
It is difficult to obtain customers, and it is even more difficult to retain large customers to "repurchase". Mintegral platform revenue contributed more than $100,000 to the number of enterprise-level customers 267, contributing revenue accounted for 97.7% of the platform's total revenue, retention rate of 91.5%, according to the annual report, this year's retained enterprise customers year-on-year revenue contribution, increased by 84.9%. It can be seen that for customers, entrusting products to sinks has a high ROI.
Light gaming vertical customers contributed 65.6% of Mintegral's total revenue. Recently, e-commerce and medium and heavy demand is also increasing, of which the platform's e-commerce vertical revenue increased by 91.5% year-on-year, and the revenue contribution and proportion of medium and heavy game enterprises increased. Huiliang's customer categories are constantly expanding.
The synergy between GameAnalytics and the Mintegral platform also confirms that Huiliang Technology adheres to the SaaS tool ecosystem strategy and brings scale effects with continuous expansion space.
In 2021, there were 1,319 game developers with a MAU of more than 100,000 of GameAnalytics' customers, of which 82 were Mintegral's customers, contributing 33.2% of the revenue to the Mintegral platform. Of Mintegral's customers spending more than $100,000 a year, 42 used GA's services, or 15.7 percent.
This is undoubtedly a manifestation of the achievements in conforming to the "going to sea" cycle.
Second, it is reflected in the effect of business restructuring so far.
Big media business is a type of traditional business, considering that the large media agency business in Nativex has limited development space and occupies more of the operating liquidity of the platform, and at the same time cannot form a good synergy effect with the company's strategic core business, Huiliang Technology takes the initiative to adopt a contraction strategy.
In November 2021, Huiliang Technology signed a business restructuring agreement to sell its big media agency business.
After the active contraction, the financial position of the sinks improved significantly, with accounts receivable decreasing from $199 million to $149 million and accounts receivable turnover days decreasing from 124 days to 66 days. "Focus resources on the core business, not accounts receivable".
Reduced capital occupation, the company's cash flow from operating activities was significantly more abundant, from US$15.563 million in 2020 to US$42.479 million in 2021, a substantial increase of 172.9% year-on-year.
Third, it is reflected in the direction of costs and expenses.
In 2021, the ratio of sinks technology management expenses to revenue decreased significantly, from 8.6% to 3.7%, and the ratio of selling expenses and R&D expenses to revenue increased, from 9.5% to 15.3%.
Huiliang has always adhered to the belief that R&D technology is the core driver of growth. Therefore, in terms of R&D expenditure, investment has also been increased.
R&D expenses in 2021 increased by 115.8% year-on-year to US$68.8 million. The main investment is in several aspects: First, it is a good opportunity to consolidate the R&D force and increase the investment in the team of data scientists, algorithm engineers and cloud architects, especially in the context of optimizing the organizational structure of the Internet giant.
Secondly, the algorithm framework of programmatic advertising has been comprehensively upgraded, the GPU computing power with higher input costs has been tested, and the global lack of cores and the cost of computing power have generally risen in 2021, and the cost of this part has risen; as well as the equity incentives of R& D personnel.
Continuous investment in algorithmic engines and dynamic ideas creates an effective moat that enhances client trust in sinks.
In addition to the decrease in covid-19 travel campaigns, sales and marketing expenses for FX 2021 rose 178.0% year-on-year to US$47.1 million in order to rebuild customer relationships, increase the scale of cooperation and focus on the development of new categories of programmatic advertising business. The expansion of the new vertical category will lay the foundation for the future growth of the platform transaction scale.
The expansion of the new vertical category is of great strategic significance.
Relying on the expansion and layout of the light game vertical category, the barrier formed by the first-mover advantage of Huiliang Technology has been formed. In the future, with the deepening of the understanding of vertical classes, the iteration of deep learning technology, and the accumulation of data assets, sinks can optimize the execution and fine judgment of the eCPM of each traffic (effective Cost Per Mille, advertising revenue per 1000 impressions), so as to better speculate on bidding in the asymmetric game ecology of the market, and solve the core problem of real-time bidding: how to maximize profits while maximizing revenue.
New opportunities in the post-IDFA era
After Apple's IDFA New Deal, under the premise that user data acquisition is becoming more difficult, it is difficult for large media to rely on the advantages of its user volume; more and more enterprises choose third-party platforms to help.
The top six mobile advertising technology platforms in the world are Google, Meta (Facebook), IronSource, Unity, Applovin and Mintegral. Google and Meta are the head media platforms, and the other four are all third-party platforms.
Head media platform and third-party platform, there is a big difference in algorithm, head media mainly rely on its product advantages, through the customer's information, long-term tracking of user behavior data, to obtain the system's user portraits, and then targeted advertising.
With the tightening of user privacy policies, especially after Apple's NEW DEAL, it has become difficult for big media platforms such as Meta to obtain user information.
According to huiliang technology financial report, IOS 14.5 was officially released in late April 2021, and by December 31, 2021, 48.1% of the iOS system devices could not track the advertising identifier, an increase of 19.8% compared with 28.3% in April 2021.
The "head advantage" moat of giant platforms such as Meta, Google Ads, and Snapchat has been broken.
Without accurate user information, big media platforms cannot achieve accurate delivery, and advertising effects will be discounted, so it is not surprising that advertisers turn to third-party data platforms.
The latest report of AppsFlyer shows that in the global retention list of all categories, whether it is iOS or Android, Meta and Snapchat's rankings have declined.
Among them, Meta's ranking on the iOS side slipped 4 places to sixth place, and the ranking on the Android side fell by 1 place to third place; Snapchat's ranking on the iOS side slipped 3 places to seventh place, and the ranking on the Android side slipped 2 places to ninth place.
Source: Moby Dick Goes to Sea
The future competitive landscape of the programmatic advertising market will shift from two ends to the coexistence of multiple powers.
Taking North America as an example, super large enterprises and game companies use programmatic platforms to purchase traffic through omni-channel, while platforms represented by AppLovin and Unity use the advantages of their underlying game engine ecology to establish programmatic platforms and advertising alliances for game categories.
Unlike those that focus on the mid-to-long tail traffic market, MAGN's Mintegral is a neutral platform, with both IronSource and Applovin home having game companies or studios, or potentially creating conflicts of interest with customers.
In China, because traffic is concentrated on Internet platforms, programmatic advertising is mainly done by internal Internet companies, and there are fewer third-party platforms, and Mintegral is the most prominent.
The Mintegral algorithm is primarily modeled for context and does not rely on customer privacy data, so Apple's IDFA New Deal has less impact on it.
According to a latest appflyer report, Mintegral ranks second in the global list of mid-range game retention strengths. On the double list, it is second only to Google Ads and Apple Search Ads, which have a native advantage of the channel; and in the global heavy game retention strength list, Mintegral ranks third on the Android side and fourth on the iOS side.
Mintegral is the only Chinese advertising platform in the top five that has entered the global all-category retention strength list of iOS and Android. In one fell swoop, it won the top 4 at both ends of the global all-category application retention strength list, the top 5 on the iOS side of the IAA index global game strength list, and the top 6 on the Android side, with a total of 690+ items on the list.
In the industry-wide strength list of the retention index iOS, Mintegral rose 3 places to rank fourth, ahead of the sixth-place Meta, seventh-place Snapchat, and eighth-place Google Ads, surpassing the giants with strength.
Source: AppsFlyer
The head media platform has been weakened, leaving a huge space for the development of third-party middle office companies. According to eMarketer, AdTech occupies more than 50% of the advertising value chain, and technological advancements and penetration will bring greater incremental opportunities.
Source: Zhihu, emarketer
The basic logic of Mintegral is like a funnel, the bottom layer is used to identify the scale and volume, determine the stage and link of the user may download the game, and the system matches the user This link, the algorithm requirements are extremely high. Mintegral then pushes different content to users based on their historical behavior.
It takes a long time to accumulate algorithmic models, which becomes the moat of Mintegral.
The journey is a sea of stars
As the "hidden champion" of the B-end business, the valuation and market value of Huiliang Technology are currently low, with a market value of only HK$8.6 billion.
Among several competitors, Applovin has a market capitalization of $20 billion, IronSource has a market capitalization of $4.7 billion, and Unity has a market capitalization of $29 billion. The market capitalization of the exchange rate is only HK$8.6 billion, and according to the price-to-book ratio, Applovin is 2.3 times the exchange rate and Unity is 3.7 times the exchange rate.
Source: Essence Securities
Obviously, Huiliang Technology has the potential to become a market value of 100 billion, and in the face of new opportunities, Huiliang Technology has been continuously improving its core competitiveness.
The goal of sinks is to become an enabler and connector of digital globalization.
Saas companies can help customers complete delivery, and can visualize channel delivery efficiency and optimization feedback in real time.
With the deepening of digital transformation, SaaS application scenarios continue to penetrate from edge assistance to core business, and the market size has reached 53.8 billion in 2020, and it is expected to continue to expand at a high speed in the next three years at a compound growth rate of 34%.
Source: iResearch
Zoom and Adobe are prime examples.
Zoom was listed on the NASDAQ exchange in 2019 and became a dark horse in the capital market through the epidemic in 2020, with a market value of up to $175.8 billion and a current market value of $35.3 billion.
Adobe is known to the world for Photoshop and Adobe Reader, and Adobe's share price in 2017 was only $175, with a market capitalization of $82.6 billion.
However, after transforming the cloud service system with experience cloud, creative cloud and document cloud as the core in 2017, the stock price rose sharply, rising to a maximum of $699 in 2021, an increase of nearly 300%, and a market value of up to $329.9 billion.
The SaaS concept is a qualitative leap for the development of enterprises and makes it have a huge imagination space.
Huiliang Technology from 2017 put forward the concept of technology middle office, completed the transformation from technological innovation to the identity of technology exporters, after 9 years of development, at present, Huiliang Technology can provide a full range of capabilities including promotion, realization, statistics, creativity and other capabilities of the sea SaaS toolkit.
In particular, in 2021, the company has completed the acquisition of hot cloud data and the release of a new strategic sub-brand - "Heat Engine".
The thermal engine is a set of SaaS solutions formed after the company first proposed the tool ecological strategy in 2019, based on its own product and technology precipitation, the ability to integrate hot cloud data, and the brand mission is to "make enterprise growth simpler".
The thermal engine will gradually use a set of tools to help enterprises optimize the ROI of user growth to form a flywheel that empowers enterprise growth.
It is foreseeable that continuing to focus on the programmatic advertising business, while continuing to expand the tool matrix of intelligent marketing, in the future, becoming a SaaS company with full-scenario coverage is not a distant thing.
The "Be the Bridge" of Huiliang Technology connects not only the East and the West, but also the world.