illumin Holdings Inc.
Thesis of Improved illumin Traction and Execution Playing Out
Our view: Following Q2/23 results that were pre-released and slightly better than our expectations, we have made minor revisions to our forecast. Our $3.50 price target is unchanged.
Key points:
• Accelerating illumin traction with better execution. illumin has not been immune to industry headwinds that have included concern around the potential impacts of evolving privacy controls, a choppy digital ad market, macro uncertainty, greater competitive intensity within ad tech and higher bond yields. At 1.2x FTM EV/net revenue (versus an average of 1.7x for select DSP and SSP peers excluding The Trade Desk), we continue to believe the stock is more fully pricing in these headwinds. With what appears to be improving illumin traction, execution and visibility alongside a recalibration of profitability expectations, we believe current levels continue to represent an attractive entry point into the name providing exposure to any potential cyclical improvement in digital advertising through 2024.
• illumin pipeline picking up speed. We believe illumin continues to pick up speed with self-serve revenues increasing +440% YoY to $5.4MM in Q2/23 and the number of self-serve clients up +458% YoY to 173 versus 31 in Q2/22 and 122 in Q1/23. illumin self-serve annual run- rate revenues reached $22MM exiting Q2/23 versus $12MM in Q1/23. The pipeline of late-stage illumin self-serve deals is 245 (versus 208 in Q1/23) with the number of illumin demos at 178 (versus 140 in Q1/23). Furthermore, management indicated that of the 51 new self- serve illumin logos in Q2/23, 22 of these were in North America with 70% of these logos on multi-year contracts with minimum guarantees adding to revenue visibility going forward.
• Macro headwinds ahead but still expecting YoY revenue growth in Q3/23. Consistent with broader industry commentary, management cautioned that Q3/23 for Managed Services is likely to be negatively impacted by more cautious advertising behaviour given lingering economic uncertainty. Having said this, management expects positive YoY revenue growth in Q3/23 with Q4/23 bookings remaining solid. Our forecast factors in a sequential deceleration in YoY revenue growth from +17.4% in Q2/23 to +4.9% in Q3/23 and +5.0% in Q4/23, translating to YoY growth of +9.1% for 2023E (consistent with original guidance of positive YoY growth). While investments in sales and marketing and R&D and technology will continue to maximize illumin traction and increase the proportion of direct sales into the mix, management expects the pace of investments to ease versus that over the past year suggesting EBITDA (while still choppy and in and around breakeven) remains on a return-to- positive track over the medium-term with more limited cash burn and EBITDA volatility.