2023-08-23 19:15:10 ET
Summary
- Integral Ad Science reported its Q2 2023 financial results, beating revenue and EPS estimates.
- The company is expanding its offerings and focusing on social media platforms and short-form video products.
- Despite a recent stock pullback, my outlook for Integral Ad Science remains positive.
A Quick Take On Integral Ad Science
Integral Ad Science ( IAS ) reported its Q2 2023 financial results on August 3, 2023, beating both revenue and EPS consensus estimates.
The firm provides enterprises with a range of online advertising monitoring and related technologies to maximize their brand performance across digital platforms.
I previously wrote about IAS with a Buy outlook.
IAS is expanding its offerings and focusing on the larger social media platforms and short-form video products.
Despite the stock's recent pullback, I reiterate my previous Buy outlook on IAS.
Integral Ad Overview And Market
New York, NY-based Integral Ad was founded to develop a cloud-based platform for independent measurement and verification of digital advertising units across various devices.
Management is headed by Chief Executive Officer, Lisa Utzschneider, who has been with the firm since January 2019 and was previously Chief Revenue Officer and SVP at Yahoo!
The company’s primary offerings include:
-
Viewability
-
Ad Fraud
-
Brand Safety & Suitability
-
In Geo
-
Contextual Targeting
The company has numerous offices in countries and seeks medium and large advertisers and agencies through its direct sales and marketing efforts.
According to a 2021 market research report by Fortune Business Insights, the global media monitoring tools market was an estimated $2.74 billion in 2020 and is forecast to reach $7.25 billion in 2028.
This represents a forecast CAGR of 13.2% from 2021 to 2028.
The main drivers for this expected growth are a continued transition of client advertising budgets toward digital channels, increasing demand for monitoring and verification capabilities.
Also, the COVID-19 pandemic increased demand for online advertising as businesses with a significant offline presence sought to diversify their revenue streams during the pandemic.
Major competitive or other industry participants include:
-
DoubleVerify
-
Criteo
-
Oracle
-
HUMAN
Integral Ad’s Recent Financial Trends
-
Total revenue by quarter has continued to rise, while operating income has turned negative in the most recent quarter.
Total Revenue and Operating Income (Seeking Alpha)
-
Gross profit margin by quarter has trended lower; Selling and G&A expenses as a percentage of total revenue by quarter have moved up markedly recently:
Gross Profit Margin and Selling, G&A % Of Revenue (Seeking Alpha)
-
Earnings per share (Diluted) have been trending higher in recent quarters:
Earnings Per Share (Seeking Alpha)
(All data in the above charts is GAAP)
In the past 12 months, IAS’ stock price has risen 63.19% vs. that of the iShares Expanded Technology-Software ETF’s ( IGV ) rise of 15.8%, as the chart indicates below:
52-Week Stock Price Comparison (TradingView)
For the balance sheet , the firm ended the quarter with $98.8 million in cash and equivalents and $193.5 million in total debt, none of which was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash flow was an impressive $97.9 million, during which capital expenditures were $3.4 million. The company paid $77.6 million in stock-based compensation in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.
Valuation And Other Metrics For Integral Ad
Below is a table of relevant capitalization and valuation figures for the company:
Measure ((TTM)) | Amount |
Enterprise Value/Sales | 5.3 |
Enterprise Value/EBITDA | 43.7 |
Price/Sales | 5.0 |
Revenue Growth Rate | 18.2% |
Net Income Margin | 5.3% |
EBITDA % | 12.12.% |
Market Capitalization | $2,200,000,000 |
Enterprise Value | $2,320,000,000 |
Operating Cash Flow | $101,330,000 |
Earnings Per Share (Fully Diluted) | $0.14 |
(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.
IAS’ most recent unadjusted Rule of 40 calculation was 30.3% as of Q2 2023’s results, so the firm has produced declining results in this regard, per the table below:
Rule of 40 Performance (Unadjusted) | Q1 2023 | Q2 2023 |
Revenue Growth % | 23.0% | 18.2% |
EBITDA % | 18.4% | 12.1% |
Total | 41.4% | 30.3% |
(Source - Seeking Alpha)
Commentary On Integral Ad Science
In its last earnings call ( Source - Seeking Alpha ), covering Q2 2023’s results, management highlighted its revenue results, beating the top end of its previous guidance.
The firm has expanded its offerings for TikTok and YouTube Shorts as well as in the connected TV space.
Total advertising revenue was made up of 84% revenue from large customers and 16% from small and medium firms.
The company’s net revenue retention rate was 115%, indicating good product/market fit and sales & marketing efficiency.
Total revenue for Q2 2023 rose 13.4% year-over-year, while gross profit margin dropped 3.0%.
Selling and G&A expenses as a percentage of revenue increased 19.4% and operating income dropped sharply into negative territory.
The company's financial position is reasonably strong, with plenty of liquidity, some long-term debt and strong free cash flow.
IAS’ Rule of 40 performance has dropped from good to needs improvement.
Looking ahead, full-year 2023 revenue growth is expected to be approximately 13.5% at the midpoint of the range.
If achieved, this would represent a sharp drop in revenue growth rate versus 2022’s rate of 26.1% over 2021.
Regarding valuation, in the past twelve months, the firm's EV/Sales valuation multiple has experienced volatility recently, as the chart from Seeking Alpha shows below:
EV/Sales Multiple History (Seeking Alpha)
Notably, the firm’s most recent earnings report resulted in a selloff of the stock.
Perhaps it was management’s guidance caution for the second half of 2023 or something else, but investors sold the stock after the earnings announcement.
The company's customers are increasingly focused on marketing efficiency as they face a more difficult macro environment.
A potential upside catalyst to the stock could include continued expansion to the major social media platforms and short-form video products.
Despite its recent pullback, I reiterate my previous Buy outlook on the stock.
For further details see:
Integral Ad Science Expands Growth Potential On Short-Form Video