illumin Holdings Inc T.ILLM

Part 3

[Torontojay]

Risk

 

The two main risks here are:

1. There is no substantial growth to Illumin, and the majority of growth we are seeing now is being converted from the legacy system. This question was asked (if vaguely) on the conference call. Tal’s response was reasonable; legacy user revenue was down due to supply chain issues, and Illumin revenue was largely up from increase revenue of existing Illumin users and bringing in new clients. 67% of Illumin rev growth was new users. If we take it at face value, this indicates that Acuity is seeing increased growth from new business.
2. The Tier 1 clients in the pipeline never convert to revenue. This is a legitimate risk. All we have to go on is the commentary from the earnings call that their are several Tier 1 clients in the pipeline that are ready to make a deal, but are hampered by macro economic issues such as supply chain delays. Specifically mentioned were (8) auto manufacturers. Tal seemed genuinely surprised/disappointed that some of those deals hadn’t closed yet, and I believe he thinks they are close to closing on them.

Other concerns:

• Labor shortages: Everyone has commented on the difficulty of hiring qualified personnel to execute business plans. For Acuity, this may be a lower concern, but one to keep an eye on.
• They hinted at a Shopify partnership on their Twitter page the day before earnings. There was no such announcement during the earnings call, and when asked, Tal backtracked on there being a deal in place. I “hope” that there is something in the works that just hasn’t been finalized, and whoever is running their Twitter account jumped the gun; but it doesn’t leave a lot of confidence with shareholders. We keep getting these vibes that they are on the cusp of something big, but then no real news. Shareholders need some positive news to restore confidence.
• Integration of small/medium size businesses into Illumin: This was a major part of my initial thesis with Acuity. The ability to open up a huge TAM of currently unrepresented market. It is apparent that we are farther away from this coming to fruition than originally thought. I think this comes down to 2 issues:

1. They’re focusing on revenue now, before they build the base for the future. Tal already mentioned focusing on the mid-market clients for quick growth. They’re also going after larger clients; those that can significantly move the needle on revenue. Tal stated he expected Tier 1 deals to be in the $10+ million range each. The business cycle is longer here, but it makes sense to go after these larger (and stickier) clients, but it keeps them in direct competition with powerhouses such as The Trade Desk vs a new untapped market.
2. I think they’ve realized they don’t yet have all the tools necessary to seamlessly bring in small advertisers with little to no manual effort on Acuity’s side. Tal mentioned they needed a creative tool and a payments tool imbedded into Illumin. It is a little disheartening that they either didn’t see the need originally, or failed to disclose the need in earlier updates. That said, they do have plenty of cash and have been looking at multiple deals. I would expect any new deal to fill one or both of these needs.

Outlook

Tal stressed multiple times on the conference call that they plan to push for “Mega Growth” in 2022, even if it’s at the expense of EBITDA. They believe they have a product that is a differentiator in the market with Illumin, they have some use cases under their belt, clients already on the service are increasing spend, and advertisers are expected to resolve their supply chain issues next year.

Acuity is ready to push full steam ahead. They anticipate converting multiple Tier 1 ($10+ million) clients, integrating all legacy clients onto Illumin, and finding the right strategic acquisitions to enhance their self service capabilities. On the creative side, Moovly Media $MVVYF, with a market cap around $21 million, could be an interesting acquisition (I’m also a shareholder of Moovly).

Now, can they execute?