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Phorm Investment Thesis

  • On August 21, 2014 we bought 13,244,444 shares of Phorm, an Internet personalization technology company (Press Release).
  • Phorm is listed on the AIM Exchange in London under the ticker PHRM and the stock is currently trading at 9 pence a share.  At a market capitalization of $100M we believe PHRM represents a unique situation for extremely aggressive investors operating in the micro-cap growth space.
  • Our investment thesis is based on our expectation that Phorm is about to experience explosive sales growth at large scale this fall as its platform throughput converges toward critical mass in Turkey, Russia and China.
  • As a growth company, PHRM’s value is not obvious in the current financials. All its value is in the explosive potential for the future.


Phorm is an Internet personalization technology (ad-tech) company that partners with leading Internet Service Providers (ISPs) to provide a platform for highly targeted advertising. Phorm installs its hardware/software solution at its ISP partners’ locations and inspects the Internet traffic packets of opted-in customers going through its platform at the center of the network. Phorm’s software then interprets this information to deliver market-leading advertising conversion results.

The company is operational with test and small-scale campaigns in Turkey, China and Russia. It plans on expanding to larger campaigns and growing its global footprint in 2015.


Founder and Chief Executive Officer Kent Ertugrul has been a member of Phorm's Board of Directors since the company began in 2004. Kent has built up a number of businesses in finance and technology over the past 20 years. Kent attended St Paul's School in London and holds a Bachelor's degree in Politics from Princeton University. He started his career in investment banking, working at JP Morgan, Credit Suisse and Morgan Stanley before going into business on his own.

His early ventures included Migs Etc, which offered tourists flights on Mig aircraft as the Soviet Union embraced market economics. Additionally, as director and Chief Financial Officer, he oversaw the growth of Compass Technology into a leading PC-based voice mail company. In 1991 Compass merged with California based Octel Communications, which in turn was acquired by Lucent Technology. Prior to starting Phorm, Kent founded Life.com, a desktop software and online interactive diary, and Voxster, a company enabling instant messaging from email.

Kent has worked for more than 17 years with the same technology team specializing in creating and developing technology to enhance social interaction. Phorm was publicly listed on the London Stock Exchanges AIM market in 2004. (Source Company)

Mr. Andrew James Croxson, also known as Andy, serves as the group’s Chief Operating Officer, Chief Financial Officer and Secretary of Phorm Corporation Limited (formerly Phorm Inc.). Mr. Croxson serves as Interim Global Chief Financial Officer of Phorm, Inc. since December 2008. He has deep experience of advising brand leading media and technology companies and strategic insights into building and scaling global operations. He was employed at Technology, Media and Telecommunications (TMT) specialists Ingenious Consulting. He served as a Partner at Spectrum Strategy Consultants. He serves as Director of Phorm China Limited. He served as a Director of Phorm Corporation Limited from June 19, 2012 to April 30, 2013. He is an ACA qualified chartered accountant and has a Masters Degree from both Oxford and Cambridge Universities. (Source: Bloomberg)

I met with management a month ago and I am very impressed by their vision for the company.

Value Proposition

Phorm’s business model aims to deliver highly targeted quality advertising to internet users. Google ($GOOG) advertising is “search input” driven and therefore limited in scope.  Phorm’s technology looks for patterns in a user’s viewing habits (not just text search) through a safe and anonymous opt-in system. Phorm’s algorithm can then present more relevant advertising compared to what is already present on all pages (including the long tail) its users visit. This advantage results in a higher conversion rate than text search and a higher advertising value proposition at the long tail with more relevant ads.

All parties involved gain value:

ISPs are attracted to Phorm’s solution because it enables them to access a substantial portion of the $133bn online advertising market, competing with search engines (Google, Baidu).  Currently, search engines like Google capture the lion’s share of directed advertising through ad-words type of algorithms, where advertisers pay on a per-click basis to appear in a specific search result. Phorm splits the advertising revenues with the partner ISPs.  The ISPs are highly incentivized to adopt Phorm’s platform because the partnership allows the ISP to diversify revenues and participate in the huge and growing online advertising market.

Customers of the ISPs are incentivized to opt-in with free anti phishing/malware software, promotions, and more relevant advertising.

Web publishers and advertisers value this service because of Phorm’s higher conversion rate than text search and a higher advertising value proposition at the long tail with more relevant ads and more revenues generating capabilities.

ISP Providers

Phorm has been successful in partnering with ISPs in Turkey, Russia, and China.  Right now the majority of revenues are derived from the partnership with TTNET, which has a leading market share in fixed line within Turkey.  With partners in Russia and China, Phorm is currently in the testing phase and expects to begin small-scale commercial campaigns in the next few months. 

To Critical Mass Sales Cycle

It is our understanding that the “To Critical Mass Sales Cycle”, which is defined as the time from Phorm’s introduction to an ISP to the launch of an initial large scale marketing campaign, ranges from 2 to 4 years under normal conditions.  Obviously, only when a large set of customers have opted-in can Phorm approach Web publishers and advertisers with an appealing value proposition. Upon the closing of a large advertising contract, the business then enters a hyper growth phase of revenues.

As the company gains traction in its root markets, we expect the length of this cycle to shrink feeding on its successes as it enters new geographies.

In theory, this is how it is supposed to work.

The Delay


Phorm went public on the London AIM Exchange in 2004. Its stock price increased to 3000 pence in 2008 and has since declined to 9 pence. What went wrong? The disruptive nature of Phorm’s proposition and some self-inflicted wounds resulted in a significant PR headwind (Source: Company).  A professional group of anti-Phorm campaigners, posing as ‘grass-roots’ campaigners, some privacy advocates, and short sellers were successful in preventing Phorm from reaching commercial scale. After causing some initial delays its impact on its sales cycle is now decreasing significantly. Phorm obtained a Court order against certain protesters which should discourage potential campaigners from going after the company.

Phorm has not yet experienced a meaningful amount of sales in its history. Losses increased to $63M in 2011 and $47M in 2013. The company has an accumulated deficit of about $280M. The company exited 2013 with a monthly burn rate of about $3M.

Currently, Phorm is as ugly as you can get and that is keeping investors away. We think this is about to change.


Here is a snapshot of the 2014 interim results to June 31 (Press Release):


In the press release, Kent Ertugrul states:

In summary, growth rates achieved so far have been very significant and we expect them to accelerate. Comparing H1 2013 to H1 2014, we have seen a 44 fold increase in peak daily unique users, a 42 fold increase in advertising requests and a 18 fold increase in revenues. Simply extrapolating those growth rates moving forward would lead us to highly respectable large scale revenues. However, we believe that, based upon what we currently have in hand and in our pipeline, rates of growth should in fact accelerate further, particularly as current test campaigns convert into full-scale commercial campaigns.

We believe that Phorm’s revenues, because of the nature of its “To Critical Mass Sales Cycle”, will follow the 44 fold increase in peak daily unique users. Currently, Phorm’s financials are as ugly as you can get, and that is keeping investors away. We think this is about to change.  If in fact the rate of growth accelerates further which we believe will happen this fall, the market’s perception about Phorm is about to change in a dramatic way. 

Why We Invested

We believe that the latest equity funding will help the company approach cash flow positive. This aggressive statement implies that Phorm will see its revenues explode in the next six months as it completes its initial sales cycle in Turkey, Russia, and China. To reach break-even requires the company to reach more than $40 million in revenues at a minimum. What gives us the confidence that this is about to happen?

There are three things that are essential for Phorm to reach economic viability.

1.       The technology must work.

2.       The company must persuade a very large number of ISP customers to opt-in.

3.       The company must develop relationships with a large numbers of advertisers and online content publishers.

During 2013, the company has demonstrated across several case studies in Turkey that the technology works. The technology has delivered highly effective advertising at market leading conversion rates for many of its advertiser customers.

Although this was enough to prove the business model, it was performed at such a small scale (less than 1M users) that it did not generate significant revenues. But today Phorm is reaching more than 5 million users daily in Turkey.  This allows the company to pursue large scale advertising budgets.

The Turkey business is ready to see a significant increase in revenues very quickly. The Turkey online advertising market should reach $0.8B market in 2014. In Turkey, Phorm has a partnership with TTNET which controls more than 70% of the broadband market. Phorm is in a great position to capture a significant slice of this market.

It gets better…

Phorm has partnered with 6 ISPs in Russia reaching 10.4m users. The business is at the test campaigns stage but it should follow the Turkey business trajectory. The online advertising market in Russia is about $2.6B. Phorm is in a great position to capture a nice slice of this market as well.

It gets way bigger

The company expects to have in excess of 50 million opted-in ISP customers in China by the end of the year.  China has 618m Internet users from which 190m are broadband users. Some 53 million China residents logged onto the Web for the first time in 2013 (Source: Investors’ Business Daily) which bodes well for broadband service growth. The online advertising market is $18B currently and should benefit from the strong Internet adoption tailwind.

Recently, Phorm signed a memorandum of understanding with China Telecom which will speed up the establishment of partnerships with additional regional carriers. The company is now commercially live with eight ISP partners split between Russia and China. We believe that more Chinese ISPs are about to come online.

The total online opportunity in China, Russia, and Turkey is $22B. In 2015 and beyond Phorm will most likely expand its geographic footprint globally. Over time, we expect the company to tackle the entire $133B global online advertising opportunity. The advantaged nature of the model should help Phorm take a material share of this market. As we said before, success in its current business will help Phorm shrink the “To Critical Mass Sales Cycle” which will add more fuel to its expansion and growth.

If the current raise is insufficient to bring the company to cash flow positive, we believe that given the growth potential, the company will get additional funding. If this happens, the dilution will be mitigated by the massive growth rate this company should experience in the future. 


Phorm has a market capitalization of $100 million. We believe that this is an amazing value for an advantaged online advertising business. It is true that our analysis focus squarely on the potential for significant revenue expansion without paying much attention to net income. We believe that if revenues come in as expected, Phorm will be rewarded handsomely even if its net profit margins come in at a much lower level than Google’s 21% net after-tax profit margin.  Phorm has about $280M of accumulated deficit to recover before it starts paying taxes.

This business has the potential to reach more than $1B in revenues within five years. A conservative 10% net profit margin would push the stock to much higher levels than the current stock price. You do the math. If you gave me $280m today I could not build a Phorm. The spent money has not been lost. It is embedded in the value of the platform.

If our expectation about its revenues doesn’t materialize, the stock is going to zero.

Disclaimer: Michael Bigger and related entities own more than 13 million shares of Phorm. Phorm is a highly distressed situation and it is not suitable for the majority of investors. The likely outcome of an investment is a loss of principal. In other words, the probability of losing all your investment in this situation is very high. Phorm has generated no revenues for most of its 10+ years of existence. Take our opinions with a grain of salt and do your homework. None of Bigger’s entities individually or in aggregate have an obligation to file its position with the SEC at the time this article was published.

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