ironSource to Go Public Through SPAC Merger

ironSource, an Israeli startup specializing in app monetization, is preparing to enter the public market through a Special Purpose Acquisition Company (SPAC) merger.

Despite the increasing number of companies going public via SPACs, this particular instance warrants attention.

Notably, this marks the second instance in recent weeks of an Israeli company achieving a valuation exceeding $10 billion through a SPAC-led initial public offering.

A Significant Financial Event

ironSource presents a compelling financial profile, making its public debut particularly noteworthy.

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The company is following eToro in utilizing a combination with a public entity to facilitate the transition from private to public status.

With a valuation slightly surpassing $11 billion, ironSource’s deal exceeds eToro’s valuation by several hundred million dollars.

Collectively, these two companies are poised to generate over $20 billion in liquidity for founders, investors, associated ecosystems, employees, and the teams involved with their upcoming public launches.

Reviewing ironSource’s Journey

Today, we will revisit TechCrunch’s previous coverage of ironSource during its time as a private entity.

Subsequently, we will analyze the company’s financial performance.

Finally, we will assess the rationale behind its current valuation.

As it is Monday, a thorough examination is in order. Let's begin!

ironSource: A Review of its History, Performance, and Future Prospects

For years, TechCrunch has followed the development of ironSource, including coverage of its $85 million investment round in 2014. At that time, it was reported that the company facilitated approximately 5 million installations daily and had over 50,000 applications utilizing its SDK.

In 2019, ironSource secured over $400 million in funding with a valuation exceeding $1 billion, although specific details remained limited. TechCrunch recently reported on the company last month when it announced its second acquisition of the year; ironSource acquired both Soomla – a platform for app monetization tracking – and Luna Labs – a provider of video ad tooling – as it progressed toward becoming a publicly traded company.

According to PitchBook data, the company’s estimated value stood at $1.56 billion following its 2019 funding round. ironSource’s intention to go public with an $11.1 billion valuation represents a substantial increase in value within a relatively short timeframe.

But does the company truly justify this new valuation? Let's investigate, beginning with an analysis of its revenue growth over time:

Initially, consider ironSource’s performance in 2020 in comparison to 2019; achieving 83% revenue growth from a significant base is noteworthy. However, the company projects growth of just over 37% in 2021, and doesn’t foresee any further deceleration in revenue growth rates in the subsequent year.

The accompanying chart is also insightful. Observe the strong growth the company experienced from Q1 to Q4 in 2019. However, also note the period of stagnation during the summer months, where sequential growth nearly ceased. The contrast between this slower period and the robust growth ironSource achieved throughout 2020 is striking. While the pandemic undoubtedly increased screen time, ironSource demonstrably benefited from these circumstances.

What strategies will the company employ to maintain nearly 40% growth over the next two years? Primarily, through rapid expansion within its current customer base. In software accounting terms, ironSource exhibits strong net expansion, consistently around 140% to 150%:

This metric appears reliable, as the company clarifies in its documentation that its “calculation of our dollar-based net expansion rate includes the effect of any customer renewals, expansion, contraction and churn, but excludes revenue from new customers,” with the emphasis added by TechCrunch for clarity.

Thus far, we have a picture of a rapidly growing software company operating in a thriving market, with strong software metrics. Let’s shift our focus from “revenue and growth” to “margins and profits” to gain a more complete understanding.

Here’s a summary of relevant data:

It’s important to acknowledge that we are examining adjusted EBITDA, a metric that often excludes various costs. Therefore, these figures should be viewed with some caution, akin to a digitally enhanced photograph. However, the adjusted profit numbers are generally positive, though certain considerations are warranted.

Firstly, why did the company’s adjusted EBITDA profit margin decrease significantly from 2019 to 2020, declining from 41% to 31%? ironSource anticipates further declines to 29% in 2021, followed by a modest improvement to 30% in 2022. As the company scales, it expects increased gross adjusted EBITDA, but reaching its long-term target of 40% adjusted profit margins will take time.

A closer examination of ironSource’s financials reveals GAAP operating profits that are considerably lower than its adjusted EBITDA figures. For instance, in 2019 and 2020, the company’s operating income was $43.3 million and $74.1 million, respectively, significantly less than its adjusted EBITDA results of $74.5 million and $103.6 million.

However, this is a minor point. Investors are often willing to invest in growth-oriented companies even without current income, so our concerns regarding non-GAAP accounting may be irrelevant. Growth remains the primary focus for public investors. Therefore, the key question regarding ironSource’s value is whether investors will prioritize its 2020 growth or its projected 2021 growth.

The former is highly attractive; the latter is more moderate. However, we can refine our assessment with some calculations. At a $11.1 billion valuation and a Q4 2020-based, annualized run rate of $432 million, ironSource is valued at approximately 25.5x revenues, or 33.1x its 2020 revenues, or 24.2x its expected 2021 revenues.

Do you notice anything unusual about these figures? The company’s Q4 annualized run rate of $432 million yields a similar multiple to its projected 2021 revenues. In simpler terms, ironSource’s Q4 2020 performance is comparable to what it anticipates achieving each quarter in 2021; sequential growth is expected to slow considerably.

This is not intended as criticism, but rather a question of how investors will assess the company’s worth once it begins trading. Its backers have set the initial valuation at $11.1 billion. Soon, others will have the opportunity to evaluate their assessment and form their own conclusions.

With a projected 37% growth rate, ironSource’s growth profile is comparable to companies like Slack, Hubspot, and Wix, based on comparisons to the Bessemer Cloud Index. These companies trade at multiples of 23x, 20.1x, and 13.7x their annualized incomes, respectively. Therefore, ironSource appears somewhat expensive compared to these peers, but its profitability offers a mitigating factor.

Ultimately, the SPAC deal appears beneficial for ironSource, providing substantial capital, a public listing at a favorable price, and the opportunity to pursue its long-term corporate objectives. Further updates will be provided once trading commences.