TRMR - Tremor International Contends With Ad Industry Challenges

2023-04-20 12:42:33 ET

Summary

• Tremor International went public in June 2021, raising $129 million in gross proceeds in a U.S. IPO.
• The firm provides buy-side and sell-side programmatic and other advertising solutions.
• TRMR has suffered from an advertising industry pullback due to changes in platform user tracking and advertisers' reduced spending.
• Until management can restart material revenue growth organically and turn around deteriorating operating results, I'm Neutral [Hold] on TRMR.

A Quick Take On Tremor International

Tremor International ( TRMR ) went public in June 2021, raising approximately $129 million in gross proceeds from an IPO that priced at $19.00 per ADS.

The company has developed an online video advertising platform for publishers and advertisers.

Given ongoing macroeconomic uncertainties, specific challenges in the advertising industry for independent platforms, and the firm’s worsening operating income and earnings results, I’m Neutral [Hold] on TRMR for the near term.

Tremor International Overview

Tel Aviv, Israel-based Tremor was founded to assist advertisers and publishers by creating an end-to-end automated video advertising marketplace.

Management is headed by Chief Executive Officer Mr. Ofer Druker, who has been with the firm since November 2017 and was previously CEO of Matomy Media Group.

The company’s primary offerings include:

• DSP - Demand Side Platform

• DMP - Data Management Platform

• SSP - Supply Side Platform

• Analytics

The company pursues relationships with blue-chip global brands and their advertising agencies as well as publishers in several industries such as consumer, financial, entertainment, healthcare, retail and others.

Tremor’s Market & Competition

According to a 2022 market research report by imarc, the global market for online advertising was an estimated $187 billion in 2021 and is forecast to exceed $349 billion by 2027.

This represents a forecast CAGR of 10.9% from 2022 to 2027.

The main drivers for this expected growth are an increase in online advertising demand from enterprises and more programmatic purchasing options by suppliers.

Also, while the COVID-19 pandemic had a temporary slowing effect on growth in the first half of 2020, online marketing is expected to become an even more prevalent method of marketing in a post-pandemic business environment for many industries.

Major competitive or other industry participants include:

• Roku (ROKU)

• Viant Technology (DSP)

• Samsung (SSNLF)

• MediaMath

• Magnite (MGNI)

• PubMatic (PUBM)

Tremor’s Recent Financial Trends

• Total revenue by quarter has varied as follows, with Q4 2022 results including the prior acquisition of Amobee:

• Gross profit margin by quarter has trended higher in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter have also trended higher more recently:

• Operating income by quarter has moved lower in recent quarters:

• Earnings per share (Diluted) have also trended lower more recently:

(All data in the above charts is GAAP)

In the past 12 months, TRMR’s stock price has fallen 57% vs. that of sell-side platform company PubMatic’s drop of 43.6%, as the chart indicates below:

The company’s net retention rate during 2022 was only 80%, declining from 2021 due to ‘lower spending by advertising customers amid a challenging market condition.’

For the balance sheet, the firm ended the quarter with $217.5 million in cash and equivalents and $98.5 million in total debt, all of which was categorized as long-term debt.

Over the trailing twelve months, free cash flow was $76.6 million, of which capital expenditures accounted for only $6.4 million. The company paid a hefty $50.5 million in stock-based compensation in the last four quarters, but management believes SBC will be ‘significantly lower’ going forward.

Valuation And Other Metrics For Tremor

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

As a reference, a relevant partial public comparable would be sell-side only company PubMatic; shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

TRMR’s most recent GAAP Rule of 40 calculation was 21.5% as of Q4 2022’s results, so the firm is in need of improvement in this regard, per the table below:

(Source - Seeking Alpha)

Future Prospects For Tremor International

In its last earnings call (Source - Seeking Alpha), covering Q4 2022’s results, management highlighted the ‘market share expansion and above average growth rates within CTV,’ [Connected T.V.] although linear TV represents a much larger opportunity presently.

Q4 CTV advertising spend growth was 59% year-over-year, and leadership believes the CTV market, aided by its recent acquisition of Amobee, ‘will provide the company and its customers with increasing advantages over time.’

In the wake of mobile platform changes from IDFA and the loss of user tracking, the firm is seeing customers consolidating their advertising budgets among fewer platforms.

Looking ahead, management expects full year 2023 core programmatic revenue to grow at around 5% and its performance business revenue will decline, although no figure on the decline was provided.

The company's financial position is reasonably strong, with ample liquidity, relatively low debt and fairly strong positive free cash flow.

Regarding valuation, the market is valuing TRMR at an EV/Sales multiple of around 1.0x.

The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.3x on March 30, 2023, as the chart shows here:

So, by comparison, TRMR is currently valued by the market at a substantial discount to the broader Meritech Capital SaaS Index, at least as of March 30, 2023.

The primary risk to the company’s outlook is a likely macroeconomic slowdown or recession, which may continue to reduce advertiser spending and reduce its revenue growth trajectory.

While management has been focused on maintaining profitability, it has barely done so when looking at the last two quarters of 2022.

Given ongoing macroeconomic uncertainties, specific challenges in the advertising industry for independent platforms, and the firm’s worsening operating income and earnings results, I’m Neutral [Hold] on TRMR for the near term.

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