| Profitability becomes focus. Prior to the market open on November 10, Mogo, Inc. reported 3Q22 revenue results that were largely consistent with our expectations. More important than 3Q results was new commentary outlining a shift in strategy toward delivering near-term profitability. As a result, the company has begun restructuring operations, which includes some workforce reductions, a decrease in marketing spend, as well as a deemphasis and potential exit from sub-scale operations. Looking forward, management believes there is an additional 25.0% to 35.0% of operating cost savings, which should be realized over the next several quarters. As a result, we believe the company can achieve positive adj. EBITDA by 3Q23, or even earlier. We remind investors that the company successfully restructured the business around COVID-19, driving adj. EBITDA margins of near 50.0%, giving us confidence in management’s ability to deliver on these goals. While our $4 price target may seem lofty, given where MOGO shares trade today, we expect investor interest to increase meaningfully as future results allow investors to extrapolate a path to profitability. This, in our view, should drive a re-rating of MOGO shares at valuation levels more consistent with high quality financial technology peers, as the company makes progress on its path to profitability. Operating results. The company reported 3Q22 revenue of C$17.3M, largely consistent with our C$17.4M forecast and Street estimates. On a year over year basis, subscription and service revenue increased 9.7% while interest income increased 15.1%. Gross margin of 62.8% was down sequentially from 65.6%. Operating expense of C$18.5M, below our C$20.00M forecast, reflects increased cost discipline as the macro environment continues to weaken. We expect further reductions in coming quarters, driving positive adj. EBITDA in 2023. While revenue was largely consistent with expectations, meaningfully lower operating expenses resulted in an adj. EBITDA loss of only C$2.8M, well below our C$3.7M loss estimate. Mogo added 54,000, new members during the quarter slightly below the 66,000 added during 2Q22. The company remains well capitalized with a cash, digital assets, and investment portfolio balance as of September 2022 of C$106.0M. Revenue guidance adjusted lower to reflect ongoing restructuring, but profitability should drive investor interest. In concert with 3Q22 operating results, the company announced it was revising its 2022 revenue guidance lower. The company now expects full year 2022 revenue of between C$68.0M and C$69.0M, below the previous range of C$69.0M to C$72.0M. This suggests a sequential decline in revenue in 4Q22 as the company looks to deemphasis some sub-scale business units. While 2023 Street revenue estimates are likely to decrease on the restructuring announcement, we believe an accelerated path to profitability will be appreciated and rewarded by investors. As mentioned earlier in this report, the last time the company focused on profitability, it began generating adj. EBITDA margins of near 50.0%. That would suggest potentially as much as C$20.0M to C$30.0M of adj. EBITDA is possible in 2024 even if the company were to shrink revenue approximately 10.0% from 2022 levels. An EV/EBITDA multiple of 15.0x, on just C$20.0M of adj. EBITDA would warrant a valuation on Mogo shares approaching our $4.00 price target, while giving no credit for the company's investment in Coinsquare. |