By Marla Backer

OTC:IZEA

IZEA (IZEA) facilitates advertising transactions within social media. Founded eight years ago, Florida-based IZEA operates a marketplace where advertisers pay creators who blog, vlog, tweet, pin or post about their products. Brands receive the attention of the creators' followers and creators are compensated for their posts. Brands are mentioned as an integral part of the content. An example would be a fashion blogger citing a specific brand or retailer when blogging about shopping.

It’s a digital form of product placement and endorsement using social media. IZEA provides an automated online marketplace that connects brands with bloggers or tweeters who, in turn, incorporate the brand into their blogs, tweets, pins, posts and other content. Marketers can search for social media content providers that are most appropriate to endorse their specific products, services or brands. Sponsorship advertising helps drive brand awareness so advertisers benefit from the buzz it generates. Content creators are compensated, enabling them to monetize their digital content. IZEA, in turn, derives revenue primarily through the sale of sponsorship campaigns to its growing pool of advertisers.

IZEA management has extensive experience in digital advertising. Founder and CEO Ted Murphy ran an interactive agency, helping to promote brands through social media. Recognizing a strong demand for social sponsorship, in 2006 he launched PayPerPost.com, an online marketplace designed to automate the process of finding content creators and publishing content for sponsorship ads. Management believes PayPerPost was the first organized marketplace for social media sponsorships. COO Ryan Schram has 16 years of media and brand marketing experience, including with CBS/Westwood One and Clear Channel Interactive.

Expanding Network, Reach and Client Base

IZDA’s content creators range from college students and mom/dad bloggers to high-profile celebrities. The company has access to over 850,000 content creators globally. Examples on IZEA’s website include a mommy blogger who incorporates sponsored brands when she is publishing recipes or photos and a family of food bloggers, among others. IZEA has announced strategic partnerships with opendorse, a marketplace for endorsements by athletes, and with Latina Lifestyle Blogger Collective. This week, IZEA announced that SocialToaster had joined the IZEA exchange.

The company ended 1Q14 with an aggregate audience of 392 million. Last month, it announced that IZEAx’s aggregate reach exceeded 500 million and attributed this growth to the addition of new content creators and Exchange partners. As the platform’s reach continues to grow, it enhances its value for marketers, we believe.

Companies that have used IZEA to launch sponsored campaigns operate in a wide variety of sectors including automotive, CPG, entertainment, financial, retail, restaurant, technology and travel. For example, IZEA launched campaigns for Bacardi, Unilever, Walmart, adidas, Clorox, Hollister and Kimberly Clark, among others, and for agencies such as Starcom MediaVest, Ketchum, MEC and Crispin Porter + Bogusky in 2Q14.

Market Opportunity

Sponsored social marketing is a form of native online advertising, in which advertisers embed their marketing message within the content. BIA/Kelsey predicts that native ad spending on U.S. social media platforms will reach $4.57 billion by 2017, up from $1.63 billion in 2012. Within the native advertising space, social media sponsorship is one of the fastest growing niches. Sponsorship revenue is IZEA’s largest revenue stream by a wide margin, accounting for 93% of total 1Q14 revenue. The company also derives revenue from posting targeted display ads and service fees.

IZEA Revenue Streams

Source: Company reports

Since 2006, IZEA has facilitated more than 3.3 million sponsored social transactions. Over the same period, revenue has grown from $2.8 million to $6.6 million. 1Q14 revenue of $1.957 million was up 41% from $1.385 million recorded in 1Q13.

1H14 Results Reflect Growing Traction

IZEA’s 1Q14 gross profit margin was 67% compared to 58%, although management cautioned to expect some erosion and targets gross margins in the mid-50% range. Bookings reached a record $1.70 million, but were up only 5% sequentially. Management cited delays due to the severe weather during the quarter and subsequently announced that 2Q14 Bookings were up 40% year-over-year to a record $2.56 million. IZEA generally recognizes revenue within one quarter of booking a campaign.

Increased Financial Flexibility Enables IZEA to Invest in Growth

Since it launched PayPerPost, IZEA has focused on scaling its platform. To accelerate its growth prospects, in February 2014, IZEA raised $12 million in a private placement of common stock and warrants. At the end of 1Q14, the company had $11.2 million in cash, with management earmarking the lion’s share to drive growth by expanding its sales team and increasing its marketing initiatives.

One month later, the company launched a public beta of the IZEA Exchange (IZEAx). Management sees IZEAx as a comprehensive ecosystem that supports the turnkey creation of a broad variety of content through a wide array of channels. Among other content, IZEAx can support blog posts, status updates, videos and photos through channels such as blogs, Twitter, Facebook, Instagram, Tumblr, LinkedIn and others. Moreover, IZEAx can assist a marketer from beginning to end, including searching for appropriate content creators to the creation of and approval of content and then tracking the campaign metrics.

Management seeks to simplify and automate the social sponsorship process and give marketers opportunities to scale their sponsored ad campaigns. By leveraging the new IZEAx platform, growing its sales team (the company added eight new sales people in 1Q14) and expanding its white label partnering opportunities, management believes that IZEA is poised for significant growth.

Risk / Reward

We believe there are significant advertising opportunities within social media and that IZEA appears to have early mover advantage in the sponsorship niche. In addition to management’s extensive experience, IZEA has also assembled a strong advisory board to help it navigate its growth at this early stage. This month, for example, IZEA announced the addition of Mike Church, who has “20-years of technology, marketing and media experience,” according to the press release. In March 2014, IZEA added Roger Clark, who was CFO of digital advertising technology company Interclick, which Yahoo acquired in 2011.

Insiders, who own about 31% of the common shares, have been buying recently. They participated in the February private placement and the CEO purchased 20,000 IZEA shares for $9,400 on June 13, 2014. Shareholders who participated in the February transaction were largely restricted from selling for the six months following the offering. This implies that there could be an overhang on the shares when the lock-up ends next month. The company has filed a shelf registration “for the sale from time to time by certain selling stockholders.”

In our view, other risks include the prospect of competition from larger, better capitalized players, potential dilution if warrants and options are exercised or if the company needs to raise additional funds and that sponsorship fails to gain traction as rapidly as the company expects. In addition, the company is a defendant in an patent litigation suit brought by Blue Calypso. Nevertheless, given the rapid growth in social media activity and advertising interest in the space, we believe it is worth taking a look at IZEA. If IZEA were able to maintain the 40+% growth rate we saw in 1Q14, we estimate that on a fully diluted basis, the shares trade at 3.6x on an EV/ prospective revenue basis.

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