WEDNESDAY, 19 NOVEMBER 2014

Xurpas, Inc:

All the good in mobile

Company background. Xurpas, Inc. is a technology company whose major business is the
creation and development of mobile consumer content, principally mobile casual games. About
70% of the companys revenues come from user fees collected from mobile subscribers who
play their games and consume their non-gaming content. A secondary source of revenues (30%
of the top line) is the companys mobile enterprise segment, where it provides platform solutions
and mobile marketing services to institutional customers.

Favorable industry growth outlook. According to management, the key sources of growth
for the mobile content industry will be the rising internet and smartphone penetration rates in
the Philippines. According to management sources, the countrys internet penetration rate has
grown to 37% in 2013 from just 9% in 2009. Meanwhile, the countrys smartphone penetration
rate settled at only 15% in 2013, and is forecast to grow to 30% in 2014, and 50% in 2015. The
increase in the countrys internet and smartphone penetration rates will be driven by increasingly
affordable smartphones in the market.

Applying the sachet model to mobile consumer content. Xurpas most important source of
revenues is its mobile consumer content business. And the content that it primarily sells is its
proprietary casual games, namely: Grab-a-Gold, Globe Games with Friends, and play Smart.
Majority of those who consume Xurpas games are the prepaid subscribers of major telecom
companies Globe and Smart (the Telcos), who have a combined prepaid subscriber base of
107 Mil. Growth potential is still significant since Xurpas digital content products currently enjoy
a following of ~4 Mil active users based on managements estimates (excluding non-regular or
one-time users). This represents only 3.7% of the countrys prepaid subscriber base.

Rapidly growing earnings and margins. As evidence to the favorable growth prospect of the
industry and Xurpas ability to execute, the companys revenues over the past three years have
grown at a compound annual rate of 63% to Php252 Mil in 2013. Margins have consistently
expanded as well since total operating costs have grown at only half the pace of revenue growth.
Xurpas net margin settled at 45% in 2013, from 22% and 19% in 2012 and 2011, respectively.
The rapid growth in revenues, coupled with the consistent expansion in margins, has led to
earnings growing at a compound annual rate of 151% to Php113 Mil in 2013. Xurpas has
sustained its growth momentum so far this year.

Attractively valued relative to growth potential. Based on the offer price of Php3.97/sh,
and annualized 2014E earnings of Php200 Mil, we believe that Xurpas is being valued at a
2014E P/E of 27.9X. This is higher than the local consumer sector average 2014E P/E of 25.6X.
However, given that Xurpas is expected to grow at a significantly faster pace of 73.2% y/y in
2014E compared to the 13.5% y/y median and the 54% y/y maximum, we believe that valuations
are justified.

Garie Ouano
garie.ouano@colfinancial.com

PHILIPPINE EQUITY RESEARCH

Company background
Xurpas, Inc. is a technology company whose major business is the creation and development of
mobile consumer content, principally mobile casual games. About 70% of the companys revenues
come from user fees collected from mobile subscribers who play their games and consume their
non-gaming content. A secondary source of revenues (30% of the top line) is the companys mobile
enterprise segment, where it provides platform solutions and mobile marketing services to institutional
customers.
Exhibit 1: Revenue Composition

Source: Xurpas

The company was incorporated in November 2001, originally as a third-party mobile content vendor
for a Finnish telecommunications company. Xurpas is principally owned by Nico Nolledo (CEO),
Raymond Racaza (COO), and Fernando Garcia (Chief Technology Officer and Corporate Secretary),
each with a 25.7% stake in Xurpas (post-IPO).

Favorable industry growth outlook

According to management, the key sources of growth for the mobile content industry will be the rising
internet and smartphone penetration rates in the Philippines. According to management sources,
the countrys internet penetration rate has grown to 37% in 2013 from just 9% in 2009. Meanwhile,
the countrys smartphone penetration rate settled at only 15% in 2013, and is forecast to grow to
30% in 2014, and 50% in 2015. The increase in the countrys internet and smartphone penetration
rates will be driven by increasingly affordable smartphones in the market, with companies like
Cosmic Technologies, Inc. (Cherry Mobile) and MySolid Technologies and Devices Corp. (MyPhone)
marketing devices that are priced at less than half the cost of higher-end devices.

Applying the sachet model to mobile consumer content

As shown earlier, Xurpas most important source of revenues is its mobile consumer content business.
And the content that it primarily sells is its proprietary casual games, namely: Grab-a-Gold, Globe
Games with Friends, and play Smart.

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Majority of those who consume Xurpas games are the prepaid subscribers of major telecom
companies Globe and Smart (the Telcos), who have a combined prepaid subscriber base of 107 Mil.
Growth potential is still significant since Xurpas digital content products currently enjoy a following
of ~4 Mil active users based on managements estimates (excluding non-regular or one-time users).
This represents only 3.7% of the countrys prepaid subscriber base.
The mobile subscribers of Xurpas games and content are charged only ~Php5.00 per day of
(unlimited) usage, on average. Since pre-paid subscribers usually do not own credit cards, Xurpas
debits the cost of the game from the subscribers prepaid credits (load). Once the user fee has
been debited, a subscriber is now allowed access to Xurpas roster of mini casual games, which the
company continually updates with new offerings. Xurpas then splits the proceeds with the telecom
companies on a 50-50 basis. No other service fees are paid by the telecom companies.

Expanding user base to further expand margins

Given the nature of Xurpas business, cost to develop programs is fixed regardless of the number of
users. Therefore, gross and net margins expand with rising user volumes.
Xurpas has been quite successful in efficiently expanding its subscriber base. Currently, Xurpas
casual games are integrated with social media functions that allow current active users to share their
gaming experience (eg. win streaks, etc.) with their online networks. Thus, in essence, the growth in
Xurpas subscriber base has been reliant on word-of-mouth marketing. Management claims that the
online community of its games is currently quite healthy, which has been a key contributor to the rapid
growth in revenues and earnings.

A monopoly in its own right

According to management, the strength of the business model lies in its ability to provide a mobile
gaming service to prepaid customers where the payment method does not require the use of credit
cards, which the target market usually has no access to but is currently the most widely-used model
for mobile gaming applications. Management claims that it is the only player, within the local mobile
casual games segment, to have been able to monetize gaming content in this way.
On a different level, Xurpas also owns and operates the platform by which mobile content is advertised
to the prepaid market. The Griffin SMS Gateway Program (Griffin) is a proprietary platform developed
and owned by Xurpas. Griffin is a platform that telecom companies use to course billing-related
communications to their subscribers (via SMS). Because Xurpas owns and controls Griffin, it also
uses the platform to advertise their mobile content services, with the consent of the Telcos.
The company also uses the information it gets from this platform as a strategic pricing tool. For
instance, Xurpas is able to advertise its games to potential customers, and offer a price that is
tailored to the amount of their recent prepaid credit purchase. In this sense, Xurpas is able to exercise
discriminatory pricing methods to maximize per-user revenues.

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Lastly, Xurpas also manages and maintains Globes internet portal for mobile content. In other words,
Xurpas has the ability to monitor how the telcos subscribers behave online when searching for and
consuming content, and can use this information to adjust and innovate its own content offerings.

but still competing in the larger mobile content industry

Although competition is apparently scarce with respect to Xurpas own specialty area and platforms,
the company also competes in the broader consumer content market. This means that Xurpas
competes with digital content providers who offer other forms of mobile content besides casual
games (e.g. music, videos, etc.). Within this broader arena, Xurpas competes with over a hundred
mobile content providers, some of which include the Telcos in-house content development arms, and
third-party content providers such as ABS-CBN Mobile, and GMA New Media, Inc.
According to management, Xurpas has a market share of 15% in this broader market. In terms
of revenues, management claims that it is the largest player in the market, and is in fact larger
than all its competitors combined. Aside from its mobile casual games, other forms of content that
Xurpas develops and sells are info-on-demand services, licensed content (eg. music and videos),
and messaging & social media applications and add-ons (eg. chat stickers).
Xurpas consumer content business has grown sevenfold over the past two years from earnings of
Php13.7 Mil in 2011 to Php99 Mil in 2013. Both its gaming and non-gaming segments were equally
important contributors to the segments overall growth as revenues from each sub-segment grew at
a CAGR of 67% and 66%, respectively. This drove total segment revenues to grow at a CAGR of
67% to Php190 Mil.
The growth in the segments earnings was also driven by expanding margins, which more than
doubled from 20% in 2011 to 52% in 2013. The company expects 2014 revenues to grow by 63% y/y
to Php310.4 Mil with a net margin of 58%, implying an 82% y/y growth in 2014 earnings to Php180
Mil.

Cornering a 30% share in the mobile enterprise market

As discussed earlier, 30% of Xurpas revenues come from its mobile enterprise segment. Under
this segment, Xurpas develops and maintains proprietary platforms for businesses. It also offers its
Griffin platform for use by businesses/brands in exchange for service fees. Griffin can be used for
purposes such as SMS-based mobile marketing. Xurpas relevant competitors in this line of business
are Stratpoint Technologies, Inc. and Seer Technologies, Inc. Xurpas share of the market is 30%.
Some of the companys past clients for its mobile enterprise segment have been major brands such
as Axe Apollo, Clear, Gatorade, and Jollibee. Xurpas mobile enterprise segment has grown at a
CAGR of 85% to Php21 Mil in 2013 earnings from Php6.2 Mil in 2011. This was driven by a 52%
compound annual growth in revenues to Php61.8 Mil in 2013, and an expansion in net margins by
an average of 550 bps annually to 34% in 2013 from 23% in 2011. The company expects revenues
from the segment to grow by 11% in 2014 to Php68.3 Mil, with a net margin of 42%, implying 2014
earnings of Php29 Mil.

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Rapidly growing earnings and margins

As evidence to the favorable growth prospect of the industry and Xurpas ability to execute, the
companys revenues over the past three years have grown at a compound annual rate of 63% to
Php252 Mil in 2013. Margins have consistently expanded as well since total operating costs have
grown at only half the pace of revenue growth. Xurpas net margin settled at 45% in 2013, from 22%
and 19% in 2012 and 2011, respectively. The rapid growth in revenues, coupled with the consistent
expansion in margins, has led to earnings growing at a compound annual rate of 151% to Php113
Mil in 2013.
Exhibit 2: Revenue and Earnings Results (2011-2013, in Php Mil)

Source: Xurpas

Xurpas has sustained its growth momentum so far this year. For 1H14, revenues doubled y/y to
Php190 Mil, while net margins expanded to 53% from 45% the same period last year. The expansion
in revenues and margins drove 1H14 earnings to grow 133% to Php100 Mil.
Exhibit 3: Revenue and Earnings Results (1H13-1H14, in Php Mil)

Source: Xurpas

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To raise equity capital for regional expansion and content diversification

For its IPO, Xurpas will be offering a total of 344 Mil primary common shares at an offer price of
Php3.97/sh. The offer shares imply a post-IPO float of 20%. The offer period will run from November
17-25, and the listing date of the stock is tentatively set on December 2 under the stock symbol X.
Net proceeds from the offer will amount to ~Php1.2 Bil.
Exhibit 4: Offer Details

Offer period
Listing Date

Nov 17 - 25
Dec 2

Offer shares (Mil primary common shares)

344

Pre-IPO outstanding shares

Post-IPO outstanding shares
Float (%)
Offer price (Php per share)

1376
1720
20.0
3.97

Source: Xurpas

The company expects to use ~60% of the net proceeds to finance the expansion of its content
distribution points to the Indonesian, Bangladeshi, and Thai markets. According to management,
the expansion into regional telecom markets is necessary in order for the company to lessen its
dependence on only two major customers (Globe and Smart). Moreover, the company is confident
that it will be able to replicate in these markets its performance in the Philippines given core similarities
between the said markets, such as a predominantly prepaid mobile user population. Xurpas plans
to execute its expansion through either acquisitions, or partnerships with foreign telecom companies
similar to its arrangement with Globe and Smart. No definite agreements or targets have yet been
set.
Meanwhile, ~20% of the proceeds will be used for the development and expansion of its existing
content offerings. Here, the company plans to acquire strategic targets with the aim of gaining
access to proprietary technologies and content to further beef-up its ability to develop and distribute
content to its current and future target markets. The balance of the proceeds will be used for general
corporate purposes.

Attractively valued relative to growth potential

Based on the offer price of Php3.97/sh, and annualized 2014E earnings of Php200 Mil, we believe
that Xurpas is being valued at a 2014E P/E of 27.9X. This is higher than the local consumer sector
average 2014E P/E of 25.6X. However, given that Xurpas is expected to grow at a significantly
faster pace of 73.2% y/y in 2014E compared to the 13.5% y/y median and the 54% y/y maximum, we
believe that valuations are justified.

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Exhibit 5: Relative Valuation

Consumer Sector
2014E P/E EPS Growth (%)
CIC
19.9
-9.0
CNPF
20.6
54.0
DNL
29.6
32.0
EMP
24.4
13.0
JFC
38.2
16.0
PGOLD
25.1
0.0
PIP
17.4
0.0
RFM
17.5
14.0
RRHI
28.8
-38.0
URC
34.8
16.0

Consumer sector average

Consumer sector median

25.6
24.8

9.8
13.5

Xurpas, Inc.

27.9

73.2

Source: COL estimates, Xurpas

Risks
Content distribution dependent on only two major customers. The distribution of Xurpas
content offerings is dependent on the companys access to the infrastructure and network of Globe
and Smart (Globe more so than Smart). Moreover, as discussed earlier, Xurpas consumer content
business also effectively competes with Globes and Smarts own content offerings, which are
developed in-house. Thus, Xurpas consumer content business is vulnerable to the risk that major
telecom companies decide to bar Xurpas access to their networks.
Despite this, management believes that the risk can be mitigated. Firstly, according to management,
Xurpas partnership with the telecom companies was initially borne out of the fact that Globes and
Smarts content development capabilities were insufficient to meet the content demands of their
subscribers. This served as an incentive for the telecom companies to open their networks to thirdparty content providers. Thus, the consumer content market is not necessarily an either-or scenario
with respect to access to telecommunications networks.
Moreover, as discussed earlier, Xurpas plans to expand the distribution of its content to other telecom
players in the greater SEA region is also the companys way of further reducing the concentration risk
by diversifying its distribution channels.

Industry prone to talent poaching. The ability of Xurpas to consistently develop innovative
content is dependent on the talent of the companys developers. According to management, the
manpower needed to develop digital content is prone to being poached by local and international
competitors. Aside from having an above-average employee turnover, management mitigates this
risk by making an active effort to ensure that its offerings are centered on their proprietary platforms
instead of any one developer. For instance, although the companys individual casual games may
be attributed to specific developers, the core platforms within which these games are integrated (eg.
Globe Games with Friends or Grab-A-Gold) is property of the company. Moreover, management
claims that no specific game has ever been a particular blockbuster. As an added consolation, high
turnover concerns are usually compensated by a healthy inflow of fresh talent anyway, according to
management.
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Subscriber base vulnerable to online fads. The growth in Xurpas customer base could be
compromised by the emergence of potentially more appealing content, especially given the viral nature
of good games or apps. To mitigate the risk, the company continually diversifies its content offerings
of both games and non-games. As discussed earlier, because Xurpas maintains and monitors traffic
on Globes online portal for mobile content, the company thus has access to information regarding
content consumption trends online. Management uses this information to identify areas that need
attention, and to direct their content development initiatives.

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Investment Rating Definitions

BUY

HOLD

SELL

Stocks that have a BUY rating have attractive

fundamentals and valuations, based on
our analysis. We expect the share price
to outperform the market in the next six to
twelve months.

Stocks that have a HOLD rating have either

1.) attractive fundamentals but expensive
valuations; 2.) attractive valuations but
near term earnings outlook might be poor
or vulnerable to numerous risks. Given the
said factors, the share price of the stock may
perform merely inline or underperform the
market in the next six to twelve months.

We dislike both the valuations and

fundamentals of stocks with a SELL rating.
We expect the share price to underperform in
the next six to twelve months.

Important Disclaimers
Securities recommended, offered or sold by COL Financial Group, Inc.are subject to investment risks, including the possible loss of the principal amount
invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and it may
be incomplete or condensed. All opinions and estimates constitute the judgment of COLs Equity Research Department as of the date of the report and are
subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a
security. COL Financial ans/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of
securities of the companies mentioned in this report, and may trade them in ways different from those discussed in this report.

2401-B East Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Center, Pasig City, 1605 Philippines
Tel: +632 636-5411

WEDNESDAY, 19 NOVEMBER 2014

XURPAS

Fax: +632 635-4632

FIELD NOTES

Website: http://www.colfinancial.com

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