GOOG - Marin Software: Little Room For Error As Ad Demand Declines

Summary

• Latest agreement with Google cut revenue by approximately 10 percent on a quarterly basis.
• Spend from some of its existing customer base continues to decline.
• Results from a couple of recent deals with Walmart and Yahoo should give a glimpse into the future prospects for the company.

Marin Software ( MRIN ), which provides enterprise marketing software for advertisers and agencies in various markets around the world, continues to struggle to gain momentum and generate sustainable revenue and earnings, and as overall economic conditions point to a probable contraction of ad spend in 2023; especially in the first half.

With Google ( GOOG ) cutting its quarterly contract with MRIN from $2.3 million, which accounted for approximately 46 percent of its quarterly revenue, to $1.8 million a quarter, it instantly lowered total revenue by over 10 percent; something I think the company is going to struggle to make up for in the near term.

On the other hand, it has also entered into some recent deals with Walmart ( WMT ) and Yahoo, which should give an idea of the reach of its software platform and the pricing power it has in the current ad environment.

Since June 21, 2021, when MRIN took off on a 3-week run, when it traded from approximately $1.38 per share, and soared to as high as $26.00 per share before reversing direction, the company hasn't been able to find support, trading as low as $.9099 per share on December 22, 2022, before jumping to approximately $1.50 per share on February 1, 2023, and now trading at $1.30 as I write.

It's apparent to me that swing traders saw an opportunity to take a position after the company dropped to almost $.9099 per share and are now riding it until it shows signs of fatigue, which I think it is now doing.

In this article, we'll look at its recent performance, macroeconomic headwinds, and how the company is likely to perform in 2023.

Some of the numbers

Revenue in the third quarter of 2022 was $5 million, down 19 percent from revenue of $6.2 million in the third quarter of 2021. Revenue for the first nine months of 2022 was $14.9 million, compared to revenue of $18.6 million in the first nine months of 2021.

As mentioned above, after Google cut its quarterly contract by $500,000, it accounted for a drop in overall revenue by over 10 percent on a quarterly basis. Based upon its past performance, it's going to struggle to make up for that drop in revenue anytime soon.

Gross profit in the reporting period was $1.8 million, compared to $3.00 million in the third quarter of 2021. Gross profit in the first nine months of 2022 was $5.1 million, compared to gross profit of $9.00 million in the first nine months of 2021.

Net loss in the third quarter was $(5.7) million, or $(0.36) per share, compared to a net loss of $(3.1) million or $(0.22) per share in the third quarter of 2021. Net loss in the first nine months of 2022 was $(13.00) million, or $(0.83) per share, compared to a net loss of $(7.9) million, or $(0.66) per share in the first nine months of 2021.

The main concern there is the company continues on its downward spiral with little in the way of positive catalysts to turn around its declining performance.

As for cash and cash equivalents, MRIN had $31.48 million at the end of the third quarter of 2022, down from cash and cash equivalents of $47.00 million at the end of calendar 2021. At the end of the prior quarter, it had cash and cash equivalents of $37.5 million.

Challenge and strategy

Management sees the decline in its recent performance coming from a drop in ad revenue because of weakness in the overall economy, which has resulted in companies cutting back on ad spend.

Based upon customer feedback, the company stated its strategy going forward is to boost spending in order to grab more mindshare from companies and agencies. It did this through the last calendar quarter of 2022, and it'll be important to see if any of its extra spend has paid off yet.

With $31.7 million in cash, for now, the company has more than enough to expand its brand into the awareness of more potential customers.

My major problem with this strategy is the way management views it, in the sense of this being a near-term problem that the company is facing.

The fact is, since 2013 when the company was trading at approximately $139.00 per share, it has steadily plummeted in price over the next decade, with only temporary reprieves; it has never been able to sustainably support its share price over the last decade. So the idea that this is a problem that has just presented itself isn't confirmed by the numbers, nor the share price of the company over time.

While I agree the company has to attempt to boost awareness of its brand, the thing I'm not convinced about is if there is much demand for the product. After all, I would think that over the last ten years, the company would have been able to make more inroads in the ad market by now, especially with there being a prolonged bull market for much of that time.

In other words, I'm not fully convinced the weak performance of the company is only because of the recent pullback in some ad spending, rather, it appears it is associated with a lack of enthusiasm for its products.

Recent customer progress

Since its last earnings call, MRIN has announced a couple of partnerships it has entered into, which may, at least in part, offset some of the loss of revenue from the revised Google contract.

In early December 2022, MRIN said it was now an API partner with Walmart via joining its Walmart Platform Partner program. Companies that use MRIN's ad management platform will have the option of using Walmart Connect that should result in an easier way to directly connect with their customers.

By bringing together "lower-funnel marketplace advertising with paid search and paid social campaigns" the brands should be able to boost demand for their products and services.

For those unfamiliar with MRIN, its use with Walmart Connect underscores the fact it's a complementary tool that has the potential to enhance the experience of companies and their customers; that's how it generally works with all of the businesses MRIN works with. The other deal was the recent announcement by MRIN that Marin Software will be integrated with Yahoo for the purpose of improving advertisers' "campaign buying and optimization."

Through the integration with Yahoo DSP, the MRIN's users will now have access to Yahoo's "programmatic tools, enhanced transparency and optimization, and direct connection to premium inventory sources."

This deal also points to the purpose of MRIN, which is to complement existing ad platforms, not to be the main ad player in the sector.

Conclusion

Based upon the decline in revenue from the revising of its contract with Google, the announcement it's going to increase marketing spend to expand its brand, and the two recent deals or partnerships that will allow users of its platform to integrate with Walmart and Yahoo, MRIN is at a crucial stage of its growth.

The company is going to have to show that it's spending in generating results and that those results are significant enough to make a difference in the performance of MRIN.

If management can prove this, then it may have sustainably turned the corner and may be poised for a period of growth. Under that scenario, the company would probably experience a significant increase in its share price.

On the other hand, if it spends more and the results are disappointing, and the deals with Walmart and Yahoo don't move the needle much, the company will not only have to pivot but show how that pivot is going to benefit shareholders.

As mentioned earlier, based upon its 10-year performance, I'm starting to seriously question, not only the demand for MRIN's products but how its customers view them.

For example, if Google felt it enhanced its ad platform, why would it cut back on its deal with MRIN? After all, $500,000 is pocket change for Google, and if it believed the results from MRIN were valuable, it would have not only retained its deal but added to it, in my opinion.

With all that in mind, MRIN has a lot to prove before it can be a serious player in the ad industry because it has yet to find a way to sustainably grow the company and retain customers at a meaningful level.

Until it does so, I can't see a reason to take a position in the company, other than bottom-feeding as a swing trader, or possibly a short looking to cash in, which now that the share price of MRIN has bounced nicely off its 52-week low, appears to be ready to correct, as there are no visible catalysts outside a couple of deals with Walmart and Yahoo that we have no idea as to how they'll add to the top and bottom lines of the company in the quarters ahead.

For further details see: