TRMR - Tremor International Faces Challenging Advertising Macro Environment

2023-12-06 17:00:49 ET

Summary

• Tremor International Ltd reported a 13.0% YoY revenue growth in Q3 2023.
• The company operates an online advertising platform for both the buy side and sell side of the market.
• I view the stock as currently fully valued with no expected increase in advertising activity or revenue in the near term, as the advertising industry remains challenged.

A Quick Take On Tremor International

Tremor International Ltd ( TRMR ) reported its Q3 2023 financial results on November 22, 2023, producing year-over-year revenue growth of 13.0%.

The firm operates an online advertising platform for both the buy side and sell side of the market.

I previously wrote about Tremor with a Hold outlook due to revenue challenges amid an advertising industry slump.

Given the results of my discounted cash flow calculation indicating Tremor International Ltd stock is fully valued at its current price of around $3.90 and no foreseeable jump in advertising activity or revenue in the near term, my outlook on Tremor remains Neutral [Hold] at this time.

Tremor International Overview And Market

Israel-based Tremor has developed a platform that helps advertisers and website owners buy and sell online advertising capacity via its automated marketplace.

The firm is led by CEO Ofer Druker, who has been with Tremor since November 2017 and was previously CEO of Matomy Media Group.

The company’s primary capabilities include:

• DSP - Demand Side Platform

• DMP - Data Management Platform

• SSP - Supply Side Platform

• Analytics.

Tremor seeks new customers among large global brands, ad agencies and publishers across various major industries, including financial, consumer, healthcare, entertainment, retail and others.

According to a 2023 market research report by Mordor Intelligence, the global market for online advertising was an estimated $210 billion in 2022 and is expected to reach $390 billion by 2028.

This represents a forecast CAGR of 10.9% from 2023 to 2028.

The primary reason for this forecasted rise is an increase in internet penetration and wider adoption of smartphones amid an ongoing shift from traditional to digital advertising by brands.

The COVID-19 pandemic also shifted demand forward after an initial slowdown.

Major competitive or other industry participants include:

• Roku

• Viant Technology

• Samsung

• MediaMath

• Magnite

• PubMatic.

Tremor International’s Recent Financial Trends

Total revenue by quarter (blue columns) has proceeded unevenly; Operating income by quarter (red line) has turned negative but has made progress back toward breakeven in recent quarters:

Gross profit margin by quarter (green line) has trended higher in recent quarters; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have oscillated higher more recently:

Earnings per share (Diluted) have dropped materially in the last several quarters from its performance in 2021 - 2022:

(All data in the above charts is GAAP.)

In the past 12 months, TRMR’s stock price has fallen 50.5% vs. that of PubMatic, Inc.’s ( PUBM ) gain of 14.1%:

For balance sheet results, the firm ended the quarter with $199.1 million in cash and equivalents and $98.9 million in total debt, all of which was long term.

Over the trailing twelve months, free cash flow was $32.7 million, during which capital expenditures were $8.4 million. The company paid $25.8 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Tremor International

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

(Source - Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Based on the DCF, the firm’s shares would be valued at approximately $3.72 versus the current price of $3.88, indicating they are potentially currently fully valued.

As a reference, a relevant partial public comparable would be PubMatic:

(Source - Seeking Alpha.)

The company’s most recent unadjusted Rule of 40 calculation was negative (0.1%) as of Q3 2023’s results, so the firm has performed poorly in this regard, per the table below:

(Source - Seeking Alpha.)

Commentary On Tremor International

In its last earnings call (Source - Seeking Alpha ), covering Q3 2023’s results, management’s prepared remarks highlighted the hiring of a new Chief Marketing Officer and completing the rebranding of its products to Nexxen. The company will likely change its name to Nexxen (NEXN) after a shareholder vote in December.

Management has noted increasing conversations with linear advertising executives about shifting further to digital platforms.

So, the company is optimistic that its future growth in CTV (Connected TV) will be fueled by this trend and its ability to serve cross-platform requirements.

Also, leadership has fully integrated its Amobee acquisition, which is powering its Nexxen Discovery business intelligence offering, enabling customers to perform audience discovery, cross-screen planning, activation and measurement in one place.

Regarding the conflict in Israel, the firm generates more than 85% of its revenue contribution ex-TAC from the U.S., where its largest base of employees is situated. Certain Israel-based employees have been called up to active duty, so the firm may have some risk if the conflict widens.

The company is also planning to authorize a $20 million share repurchase program in the near future.

I prepared a chart showing the frequency of keywords and terms mentioned by analysts and management on the most recent conference call:

The chart shows a high frequency of negative terms such as "uncertain," "challenge," "headwind" and "macro."

Analysts questioned the leadership about the macro environment, partnership strategy and the shift from linear to digital.

Management said it is seeing stabilization of the macro environment in Q4, but guidance has been cautious due to uncertainty around deals being able to close by year-end.

The company is pursuing partnerships that provide increased capabilities and market reach.

Leadership believes the shift from linear to digital TV will happen over the next 3 - 5-year period and believes the company is well-positioned to take advantage of this shift due to its integration of Amobee, creating a cross-platform solution.

For the quarter’s results, total revenue for Q3 2023 rose by 13.0% YoY, and gross profit grew by 2.3%, both positive results.

Selling and G&A expenses as a percentage of revenue fell by 2.3% year-over-year, but operating income dropped to negative $3.4 million for the quarter.

The company's financial position is strong, with plenty of liquidity, a smaller amount of long-term debt and strong free cash flow.

TRMR’s Rule of 40 performance has been poor and has deteriorated sequentially into negative territory.

Looking ahead, consensus revenue growth estimates for 2023 suggest a decline of about 2% versus 2022.

This would be about the same revenue decline rate as 2022 versus 2021.

In the past twelve months, the firm's EV/Sales valuation multiple has fallen significantly, as the chart from Seeking Alpha shows below:

Given the results of my discounted cash flow calculation indicating the stock is fully valued at its current price of around $3.90 and no foreseeable jump in advertising activity or revenue in the near term, my outlook on Tremor International Ltd is Neutral [Hold] at this time.

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