illumin Holdings Inc.
(ILLM-T) C$2.50
Client Growth Translating into Revenue Growth
Event
Q2/23 results.
Impact: SLIGHTLY POSITIVE
With consolidated revenue and adjusted EBITDA pre-released together with the announcement of the substantial issuer bid on July 26 (see our recap note here – link), the incremental information from the results related largely to the drivers of near-term growth, particularly the illumin self-serve platform. The pre-released results showed that revenues generated from illumin self-serve had a material step- up to $5.4mm from $2.2mm in Q1/23; so we were happy to see that client growth was a healthy 51 logos added in the quarter, following +40 in Q1/23, +27 in Q4/22, and +17 in Q3/22. Management provided colour on other KPIs, including late-stage demos and pipeline growth (outlined on page 3), which suggest that the illumin self- serve platform is starting to hit its stride, in our view.
As such, we have slightly increased our self-serve revenue forecasts for both 2023 and 2024, but have offset that with a reduction in managed services in 2024. Given the shift in the mix of revenues to self-serve, our gross-margin estimates have come down. The shift to self-serve should drive higher EBITDA margins in the long term owing to operating leverage, but we have assumed that the company will reinvest into organic growth initiatives, such that our EBITDA forecasts have come down. That said, we are introducing our 2025 estimates today, where we assume a healthy y/y step-up in EBITDA margins owing to the assumed organic investments made in 2024.
TD Investment Conclusion
We are happy to see that revenue growth trends are pointing to the right direction now, but we note that there are still lingering uncertainties in the broad advertising industry. As such, we are maintaining our 1.6x multiple, but rolling forward our valuation period to 2024E, with the passage of time, and removing our 15% macro uncertainty discount. With the inclusion of the full $40mm SIB, our target price increases to $3.00, from $2.50 previously, but we maintain our HOLD rating as ILLM shares have recovered over 35% from their recent trough.