BOMBED OUT - The Q4 AdTech Earnings Preview…This is a tough one to write but I want to get some words down because I still love the space but these names have gotten destroyed.
Granted some of it has been fundamentally driven given the broader ad slowdown but so much of it has been multiple contraction the last 12-24 months.
In my opinion, too much pain has been seen. Especially given so many of these names have rock solid balance sheets and are in the midst of significant business shifts with the broader AdTech industry to a more programmatic approach which in the long run is a lot more scalable and profitable business proposition.
Some have Regulatory headwinds around GDPR, COPPA compliance & platform changes from ios14 third party tracking changes and broader 3
rd party cookie elimination on Android.
You can off the top throw out more than half of the garbage that is listed on the TSX Venture that are just cash incinerators that were able to raise money in 2021 that have no real business model. I think you can narrow down the focus down to about 5 or 6 names.
1) Adcore – ADCO.TO (HOLD)
2) AcuityAds – AT.TO (NO TOUCH)
3) Kidoz – KIDZ.V (STONG BUY)
4) Sabio Holdings – SBIO.V (BUY)
5) Yangaroo – YOO.V (WATCH)
6) Zoomd Technologies – ZOMD.V (SELL)
What do all these names have in common, all with significant cash positions that all generated significant EBITDA in 2021/2022 that all saw slowdown in their business into the back half of 2022. Now we gotta figure out what ones can turn it around.
Lets Dive in;
1) Adcore – ADCO.TO Market Cap - $16M
Enterprise Value - $8M EV/Gross Profit - <1.0x EV/Gross Proft TTM EBITDA – 3x EV/EBITDA Pro – Hard not to look at this thing on a valuation basis and not think its stupid cheap. They took their medicine in 2022 on the gross margin side which crushed the profitability of the business but are out the other side of that. As a result, as the year progresses, they will start to get some operating leverage on incremental sales.
As well, with the balance sheet it gives them a lot of optionality whether it is for a tuck in/larger acquisition. This was an international business before it went public with heavy Australia/Asia exposure and are just starting to build out their US business. So there are growth drivers there on a go forward basis and the Asia consumer is going to come out flying out of China after being locked down for 3 years as a large percentage of their client base is consumer facing.
Con – This is where things just get messy, they have massive customer concentration risk with the Tourism Israel contract that is at risk. As well, this one is probably the most exposed to Google Cookie policy changes so there are definitely headwinds there on both a effectiveness and resulting gross margin profile of the business.
The big elephant in the room here is the Amphy E-Learning platform that is just a blackhole of capital. They raised capital in 2021 during COVID at a ridiculous valuation to build it out. Management must realize that times are changed. They can not keep wasting money at this. Spin/Sell it off or close it down because it aint working in 2023.
On Q4 – They have already pre-announced from what I think is a relatively solid Q4 with 40% gross profit dollar growth on a YoY basis. That validates my thought process that they are on the other side of this margin compression and should see positive gross profit dollar growth into FY23
STATUS (HOLD) – With that balance sheet and that valuation I can’t bring myself to sell it because good things tend to happen to real cheap stocks. As well, I think the gross profitability of the business has bottomed and should see some operational leverage from here.
But if they continue to burn money on Amphy or loose the Tourism Israel contract you gotta be prepared to dump it the next day.
2) AcuityAds – AT.TO Market Cap - $140M
Enterprise Value - $57M EV/Gross Profit - <1.0x EV/Gross Profit TTM EBITDA – 10x EV/EBITDA ( I don’t believe the number) Pro – Once again, balance sheet must be mentioned here with $88M of cash on the balance sheet and an aggressive buyback. From a management perspective they have a done a good job from the 2015-2019 period rolling up a series of smaller businesses into a very attractive platform. So, with that balance sheet a lot of optionality to make another go of it especially at trough valuations in the space.
The industry is going programmatic and their Illmunin business is clearly growing nicely 50%+ YoY no close to a 50% run rate business. That can’t be ignored
Con – I hate the accounting here, this management team buries so many cost on the balance sheet with capitalizing a significant portion of R&D salaries even after Illmunin launched into the market and massive stock comp in relation to reported “adjusted” EBITDA. For example, in the first nine months of 2022 they have added back $5.5M in stock comp & $2.7M in intangibles assets for a total of $8.2M in expenses that are added back against $3.3M in reported “adjusted” EBITDA. They are burning a lot of capital…
Secondly, there is a massive revenue mix problem into 2023 as management stated they are going to be sunsetting the pre-existing Managed Services business which as of Q3 is still two thirds of revenue. There is going to be a massive contraction in overall gross profit dollars while they build out Illmunin. I don’t see why you want to hang around during that transition when they are already burning cash.
On Q4 – They have been struggling all year already to grow on a YoY basis and I still think it is too early to see Illmunin to outgrow the sunsetting managed services division.
STATUS (NO TOUCH) – I just can’t get behind that revenue mix transition until the headline growth rate picks up and the true OpEx number comes more in line…
3) Kidoz – KIDZ.V Market Cap - $40M
Enterprise Value - $38M EV/Gross Profit - <4.5x EV/Gross Profit TTM EBITDA – 8x EV/EBITDA (If you capitalize R&D salaries like others for comparative basis) Pro – The is by far the most strategic asset in all the AdTech stack from a consolidation perspective given the walled garden nature of their SDK offering and other peers in the space that got taken out at the beginning of COVID for 8-10x Sales vs Kidoz trading today <2x EV/Sales.
You gotta through on top of that the strategic positioning from a regulatory point of view. Their targeting engine uses a contextual approach and is not reliant on Cookies and not affected by Goggle Ad Changes. Add to that they are COPPA/GDPR compliant and are not affected by Apple ios14 changes that sent a shiver down the entire industry that crushed Facebook in 2H 2022. Their offering becomes more attractive on a relative basis.
Given this is a platform business you must hit on platform usage, ad rates & demand will fluctuate but if usage continues to grow the long term value of the business will continue to grow. If we just look back to last Q Monetizable Impressions are still growing 45% & Video Views growing 110%. If you can aggregate eyeballs the advertising dollars will come.
Con – Have to hit on their programmatic offering here, they have been slower in rolling out their full-fledged programmatic offering than I would like. That is where the industry is going and will help them better monetize that platform growth.
Secondly, must hit on gross margin growth here. You are going to see some gross margin compression as mix shifts to more programmatic but should help scalability on the OpEx side. I am optimistic though that when you look at it on a gross profit dollar basis that Q2 was the nadir and gross profit dollar growth should pick up from here.
Must touch on capital market positioning here, from communication strategy to share buyback has been a total mess. They have spent a significant portion of capital/stock on investor communications which has been an utter waste. Heck I could do a better job… Conceptually I like the buyback but execution has been a mess. They were buying back stock as high as 0.52/share as recently as November yet let the stock melt all the way down to the low 0.26/share here without being on the bid. Just unacceptable…
On Q4 – This is the monster Q for them. With close to 50% of annual revenues being recognized in Q4 it is going to be a monster Q. With the usage growth seen in Q3 I am optimistic for Q4 for ad dollars. Especially as advertisers look for Facebook alternatives in a post ios14 world. This is their Super Bowl.
STATUS (STRONG BUY) – I just think from a strategic asset perspective it is the most undervalued asset in the AdTech stack due to the SDK it has. This is not just another DSP offering. As long as the usage metrics continues to grow at a 20%+ clip you can just keep buying.
4) Sabio Holdings – SBIO.V Market Cap - $41M
Enterprise Value - $42M EV/Gross Profit - <1.25x EV/Gross Profit TTM EBITDA – 7x EV/EBITDA (If you capitalize R&D salaries like others for comparative basis) I think I already said my piece on that name for 2023… (See link) https://stockhouse.com/companies/bullboard?symbol=v.sbio&postid=35217591 On Q4 – This is going to be the peak growth rate for the name for the foreseeable future, with massive uptick in growth form 2022 Midterm Election spending. On the cost side management commentary that FY22 1H was peak OpEx growth which should really start driving EBITDA growth into FY23.
STATUS (BUY) – These guys are in the hottest area of the Ad market in Connected TV as the traditional players come in with ad supported OTT offerings from Netflix to Disney. As well, this is one of the only names that has been able to hold on to that 50%+ gross margin profile during the ad downturn. I get a little nervous from a stock price perspective though of these recent IPOs as more and more stock becomes free trading at the same time as the growth rate peaks as you comp against Election spending into 2H 2023.
5) Yangaroo – YOO.V Market Cap - $3M
Enterprise Value - $5M EV/Gross Profit - <0.5 EV/Gross Profit TTM EBITDA – N/A Pro – The awards management division within the business is the crown jewel asset that is a cash cow that is worth more than the entirety of the market cap of the business in my opinion. Throw in the music division this builds a base business that covers a significant portion of the cost structure.
As bad as the balance sheet looks, they were able to take the imminent credit risk off the table, also there is significant insider ownership with a material amount of paid in capital relative to the current market cap that I think they are invested alongside investors to see a higher outcome.
Con – We must be honest with ourselves; the ad business has been an absolute mess since COVID ever since that big contract that was awarded during Mike Bloomberg presidential run. They bet the balance sheet on that last acquisition at the top of the market that just killed the stock.
This business has been around a long time that has been reliant on the awards management/music side and has dabbled in the ad business. The question remains if they can really scale that Ad division at that scale. I just don’t know.
On Q4 – They have managed to cut costs on the ad side of the business and are guiding to Q3 as being the nadir of the ad business, remains to be seen but I am optimistic. As they return to EBITDA profitability it will take some of the balance sheet concerns off the table.
STATUS (WATCH) – So illiquid, that if you get in you better be right, because you wont be able to get out. With that said I have nibbled a bit here and there. After they were able to close that debenture in Q4 and able to take the credit risk off the table I am so tempted but want to see a sustainable return to profitability before I pull the trigger in size. I am willing to pay higher prices after the turn because at these prices it is free optionality on the Ad business because the awards management/music side is such a steady business.
6) Zoomd Technologies – ZOMD.V Market Cap - $18M
Enterprise Value - $15M EV/Gross Profit - <0.8 EV/Gross Profit TTM EBITDA – 4x TTM EV/EBITDA Pro – I much prefer their Search based ad engine as search-based ads are much more effective because there is intent there. Compound that fact they now have their Programmatic Self-Serve Offering in the market place now in Skipper. Also, the intent-based nature of their search product makes them a lot more immune to Apple ios14 & Google Cookie Changes.
From an integration point of view, the business development side has been strong they have integrations into all the major platforms from Facebook, Snapchat, TikTok & Etc. so they are pulling data and provide exposure to all the major subsets of eyeballs.
From a cost perspective they took their medicine earlier on in the cycle and controlled costs so that so much of the 2021 gross profit dollar improvement went straight down the bottom line.
Con – Oh man, where do I even start. Must start with management strategy and disclosure. They were attributing the turbo charged growth to their platform and leaning into “growth” industries in 2021. Well… turns out it well a levered bet on crypto and unprofitable tech. When the tech/crypto trade blew up so did their revenue. See Q3 Revenue Down 39% YoY. They did a terrible job guiding to that slowdown.
In the face of collapsing revenue growth, they are facing contracting operating leverage with the profitability profile continues to compress. That is just such an ugly combination and in the face of the top line decline I don’t see where those bottoms anytime soon as the revenue declines have just started.
On Q4 – Massive mismanagement of the business and expectations here yet management has guided to Q3 being the nadir on growth declines with the growth rate bottoming. Do I believe them after the past 6 months, absolutely not. Especially after the continued collapse in tech/crypto into yearend.
STATUS (SELL) – You just cant own it for the next 6-9 months in the face of the utter collapse of the revenue base and I feel the pain stuck with some in it still. As there will be no recovery in those end markets anytime soon. The management team has lost all credibility and market trust. Especially as CEO just quit right before that disaster of a Q3 came out. You have at least 3Qs of negative YoY revenue growth before you can even look at the name again from the LONG side.
So there it is, 6 names. AcuityAds & Adcore have regulatory headwinds in the face of significant revenue and customer mix challenges going forward, but given those balance sheets they have a lot of flexibility to maneuver around. On a strategic asset basis Kidoz I think is unmatched that you can just BUY and put away and look 5 years later and be very happy. Sabio Holdings has the strongest secular tailwinds anywhere in the AdTech space with a growth rate that has be so resilient through 2022. Yangaroo is the free option bet down here just waiting on the turn of the core advertising business. Finally, Zoomd Technologies, I just got that one dead wrong, being unknowingly LONG a levered bet on unprofitable tech & crypto into an asset bubble in 2021. I just got blown up and had to move along as best as I could. Good Luck. You are suppose to BUY low and SELL high after all… Time to do some shopping in some of these names. LONG – ADCO KIDZ SBIO YOO ZOMD