2023-05-31 15:05:47 ET
Summary
- Integral Ad Science reported its Q1 2023 financial results on May 4, 2023.
- The firm helps organizations to monitor and optimize their Internet marketing strategies through a range of technologies.
- IAS has produced growing revenue and profits as companies seek greater performance from the online marketing campaigns.
- My outlook for IAS is a Buy at around $18.75 per share.
A Quick Take On Integral Ad Science
Integral Ad Science ( IAS ) reported its Q1 2023 financial results on May 4, 2023, beating 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 Hold outlook here .
IAS’ stock has had strong momentum in recent quarters, and I believe the stock still has room to run.
My near-term outlook on IAS is a Buy at around $18.75 per share.
Integral Ad Science Overview
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:
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Viewability
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Ad Fraud
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Brand Safety & Suitability
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In Geo
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Contextual Targeting
The company has numerous offices in countries, and seeks medium and large advertisers and agencies through direct sales and marketing efforts.
Integral’s Market & Competition
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, and 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:
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DoubleVerify
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Criteo
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Oracle
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HUMAN
Integral’s Recent Financial Trends
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Total revenue by quarter has grown per the following chart:
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Gross profit margin by quarter has trended lower in recent quarters:
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Selling, G&A expenses as a percentage of total revenue by quarter have fluctuated within a narrow range in recent quarters:
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Operating income by quarter has trended higher more recently:
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Operating leverage by quarter has remained positive in the last three quarters:
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Earnings per share (Diluted) have been increasing recently:
(All data in the above charts is GAAP)
In the past 12 months, IAS’s stock price has risen nearly 54% vs. that of the iShares Expanded Technology-Software Sector ETF’s ( IGV ) growth of 14%, as the chart indicates below:
For the balance sheet, the firm ended the quarter with $94.4 million in cash and equivalents, and $213.4 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 $81.2 million, of which capital expenditures accounted for only $3.0 million. The company paid $47.9 million in stock-based compensation in the last four 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 | 7.0 |
Enterprise Value/EBITDA | 38.0 |
Price/Sales | 6.7 |
Revenue Growth Rate | 23.0% |
Net Income Margin | 4.1% |
EBITDA % | 18.4% |
Net Debt To Annual EBITDA | 1.5 |
Market Capitalization | $2,830,000,000 |
Enterprise Value | $2,980,000,000 |
Operating Cash Flow | $84,240,000 |
Earnings Per Share (Fully Diluted) | $0.10 |
(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’s most recent Rule of 40 calculation was 41.4% as of Q1 2023’s results, so the firm has performed well in this regard, per the table below:
Rule of 40 Performance | Calculation |
Recent Rev. Growth % | 23.0% |
EBITDA % | 18.4% |
Total | 41.4% |
(Source - Seeking Alpha)
Commentary On Integral Ad
In its last earnings call (Source - Seeking Alpha), covering Q1 2023’s results, management highlighted the TikTok partnership ramp-up during the quarter and the partnership with Samsung and its connected television ((CTV)) efforts.
The company is expanding to over 30 markets after the quarter’s end, ‘well ahead of our prior expectation of an additional 20 markets by year-end.’
IAS is also continuing or expanding its offerings with major social media sites such as Meta/Facebook and Twitter.
The company’s net dollar retention rate was 118%, indicating good product/market fit and solid sales & marketing efficiency.
Total revenue for Q1 2023 rose 18.9% year-over-year, but gross profit margin declined 2.0 percentage points.
Selling, G&A expenses as a percentage of revenue dropped 0.4 percentage points, while operating income rose sharply by 167.6% year-over-year.
Looking ahead, management raised its revenue guidance for 2023 to $461 million, or 13% year-over-year growth.
Notably, this revenue growth rate is half of 2022’s growth over 2021.
The company's financial position is strong, with ample liquidity, some long-term debt, but impressive free cash flow and low capital expenditures; its net debt-to-EBITDA multiple is a reasonable 1.5x.
IAS's recent Rule of 40 Performance has been excellent.
Regarding valuation, the market is valuing IAS at an EV/Sales multiple of around 6.7x.
The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 5.5x on April 27, 2023, as the chart shows here:
So, by comparison, IAS is currently valued by the market at a premium to the broader Meritech Capital SaaS Index, at least as of April 27, 2023.
Risks to the company’s outlook include a slowing macroeconomic environment, reduced credit availability, which may affect customer/prospect spending plans and growing sales cycle length.
From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:
I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited ‘Macro’ two times, with leadership acknowledging macro environment challenges in the firm’s favor as companies seek to understand their online advertising spending better.
In the past twelve months, the firm's EV/Sales valuation multiple has risen 19.5%, as the chart from Seeking Alpha shows below:
A potential upside catalyst to the stock could include a lower cost of capital environment as interest rate hikes begin to taper and the downward pressure on the stock due to rising interest rates lessens.
IAS’ stock has had strong momentum in recent quarters, and I believe the stock still has room to run ahead.
My near-term outlook on IAS is a Buy at around $18.75 per share.
For further details see:
Integral Ad Science Is Well Positioned For Greater Online Ad Scrutiny