Our view: Solid Q3/24 results were nicely ahead of expectations. Following upward revisions to our revenue growth forecast, our price target increases from $2.50 to $3.00.
Key points:
• Convincingly returning to growth. illumin has not been immune to industry headwinds that have included concern around the potential impacts of evolving privacy controls, a choppy digital advertising market, macro uncertainty and intensifying competition within ad tech. At 0.7x FTM EV/net revenue (versus an average of 2.3x for select DSP and SSP peers excluding The Trade Desk), we continue to believe the stock is pricing in these headwinds. With what we believe is steady illumin execution, traction and penetration alongside a debt-free balance sheet and ongoing share repurchases, we continue to see value in the shares providing investors with attractive exposure to any sustained cyclical improvement in digital advertising through 2025.
• Hybrid strategy and focus on sales/marketing execution gaining traction. Management expects solid revenue growth in the seasonally strong Q4/24 (versus +22.5% YoY in Q3/24 and our Q4/24 estimate of +17.5%) with recent trends continuing driven by ongoing initiatives to improve sales/marketing execution and accelerate the sales cycle (including the appointments of a new CRO and SVP of Marketing in Q3/24) while maintaining focus on higher-value customer segments that have a higher propensity to spend. While self-service revenue growth has largely been driven by the addition of new logos (29 in Q3/24 versus 33 in Q2/24), management indicated it is taking a more customer-centric lifecycle approach to drive more sustainable long-term revenue growth, which includes: (i) a hybrid service model that includes both managed and self-serve services to provide additional support to customers ramping up on the illumin platform; (ii) more flexible provisions on long-term self-serve contracts that should drive improved uptake and revenue over time; and (iii) further enhancements to the illumin platform to improve customer experience, retention and monetization including additional tools (forecasting, reporting, measurement, automation) and integrations.
• Other notables from the quarter. (i) management expects stable gross margins in Q4/24, albeit with modest YoY compression longer-term due to mix as self-serve becomes a larger proportion of total revenues (23% of revenues in Q3/24 versus 17% in Q3/23); (ii) despite digital advertising industry growth being boosted by incremental spend from the U.S. election, political ad spend did not contribute to the company's strong Q3/24 results; and (iii) management is positive on the outlook for the advertising market into 2025 with improving advertising sentiment as interest rates and inflation ease alongside the ongoing structural shift of ad spend to digital (particularly from linear to CTV).