March 9, 2023
AcuityAds Holdings Inc Swimming Nicely Upstream
Our view: Q4/22 results were largely in line with our forecast given the choppy operating environment and ongoing investment. We view updated management commentary around the 2023 outlook as an incremental positive. Factoring in a higher revenue trajectory and slightly lower gross margins due to revenue mix, our price target of $3.50 is unchanged.
Key points:
• Comfortably navigating industry headwinds. AcuityAds stock has not been immune to industry headwinds that have included concerns around the potential impacts of evolving privacy controls, a choppy digital ad market, macro uncertainty, greater competitive intensity within ad tech and rising bond yields. At 0.8x FTM EV/net revenue (versus an average of 1.8x for select DSP and SSP peers excluding The Trade Desk), we believe the stock is more fully pricing in these headwinds. While we remain patient for more timely entry points, our focus will remain on the growth trajectory for illumin including the flow-through to profitability.
• A very constructive 2023 outlook, in our view. While economic headwinds are likely to weigh on growth, management still expects positive YoY revenue growth in 2023, including positive revenue growth in Q1/23 which largely bucks the trend of many of the company's ad tech peers. With the number of illumin advertisers increasing from 5 in Q1/22 to 8 in Q2/22, 18 in Q3/22 and 28 in Q4/22, management sees illumin momentum continuing through 2023. Cost- wise: (i) management continues to prioritize illumin-driven investment (i.e., sales and marketing, technology and product evolution), although we would expect the pace of investment YoY to ease in 2023 with management having the discretion to adjust the cost structure should the economic environment deteriorate; and (ii) as previously indicated, the revenue mix shift towards illumin self serve is expected to put downward pressure on gross margins with Q4/22 margins of 48.4%, down -362bps YoY. Our 2023 forecast factors in revenue growth of +6.9% including Q1/23 revenue growth of +8.5% (consistent with Q4/22).
• Other notables. (i) management continues to monitor the macro environment and customer spend; (ii) 1-2 year self-service illumin contracts with guaranteed revenue minimums are being pursued as a new initiative, which is a rare practice within the ad tech industry but if successful would be a strong validation of the proprietary capabilities of illumin; (iii) FCF priorities will remain reinvesting in the business to drive increased illumin adoption as well as share repurchases (4.7MM shares were repurchased in 2022 for $14.5MM); and (iv) the company continues to have a strong balance sheet with net cash of $75.1MM as of Q4/22 (including cash on hand of $85.9MM).