Ad-tech is a cash efficient industry with a healthy rebound when economic activity recovers. Ad-tech earnings will be critical for the broader tech landscape, and major players such as Google, Facebook and Snap Inc. have reported this week. Google was the first to report, and sales grew 32% during the quarter, which “reflected broad-based strength in advertiser spend and strong consumer online activity” according to Google CFO Ruth Porat. Google’s strong results suggest that ad-tech could show resilience with individual companies despite sector wide headwinds.
However, Meta Platforms (Facebook) reported notably weaker results than Google, driven by changes in Apple’s iOS related to mobile tracking and privacy. The company guided for weak growth in the first half of 2022 and expects sales to rise just 3% to 10% YoY in Q1 2022. Furthermore, management estimated that changes in iOS will be a $10 billion headwind during the year. While changes to iOS will impact most mobile advertising companies, we suspect that Facebook will be most impacted due to its heavy reliance on mobile tracking via its Audience Network. Furthermore, some companies may actually experience a net benefit from the changes.
Snap Inc. reported on February 3rd and results came in relatively stronger than Meta’s. Snap guided for sales to grow 36% YoY next quarter, well above Meta’s guide for 7% YoY growth at the mid-point. The large disparity between Snap and Meta’s forward guide highlights that Apple’s changes to iOS will have varying degrees of impacts on companies in the ad-tech space.
In the analysis that follows, I give a brief overview of the ad-tech industry and discuss key metrics that investors should be aware of heading into Q4 earnings.
Ad-tech: Top 10 EV/FWD Revenue Multiples
Below we ranked ad-tech stocks based on their EV/NTM sales multiples. The Trade Desk (TTD) has the highest multiple in the ad-tech sector, as the ad platform reported that sales increased 39% YoY in Q3 coupled with a robust 41% adjusted EBITDA margin. The Trade Desk also has strong partnerships, and Founder-CEO Jeff Green explained on the company’s Q3 call that “the world's leading advertisers are standardizing on our platform”, a trend that is likely contributing to its premium multiple.
Unity also sports a premium multiple, driven by the company’s dominate position in mobile gaming ads. Over 70% of the world’s mobile games are built in Unity, and the company also has exposure to other growth markets such as 3D modeling and augmented/virtual reality. Unity’s software tools are also useful for many applications beyond gaming, such as Industrial Applications and A.I. and machine learning.
It is noteworthy that ad-tech valuations have compressed in 2022 following the heightened volatility in financial markets. Nonetheless, ad-tech is a very cash efficient industry, evident by the robust free cashflow (FCF) margins shown below. We expect that ad-tech will see a rebound before or around H2 2022 as supply shortages are expected to ease, which can lead to an increased demand for advertising.
Ad-tech: Top 10 Three-month Forward YoY Growth Rates
Below is a chart of ad-tech stocks that are expected to grow sales the fastest in the upcoming quarter. Looking forward, Digital Turbine (APPS) is expected to grow the fastest, mostly due to its recent acquisition of AdColony and Fyber. Magnite’s (MGNI) growth rate is also skewed due to its acquisition of SpotX.
FuboTV (FUBO) is expected to grow sales YoY by triple digits in Q4, driven by a ramp in subscriber growth. The company had preannounced Q4 revenue and subscriber growth, which came in above its initial guide. Specifically, subscribers increased 100% YoY to 1.1 million and Q4 sales are expected to rise by 107% YoY to $217 million at the mid-point. The preannouncement of results was ahead of a Needham Conference, where FUBO CEO David Gandler highlighted that “[in 2022] we're going to be heavily focused on ad-tech, because we want to unlock a lot of that value that's going to drive margins”.
As mentioned above, ad-tech is a highly cash efficient industry and FuboTv’s rapid expansion of ad sales will help drive margin improvements at the firm.
Top 10 Weekly Share Price Movements
Below is a table of the weekly change in share price for our universe of ad-tech stocks (week ended 01/28). Markets have been volatile recently, however there are signs that ad-tech is beginning to bubble under the surface.
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For example, ironSource (IS) staged a double-digit rally last week as its share increased 11%, while The Trade Desk (TTD) and HubSpot (HUBS) increased 7% last week. ironSource reported strong results in Q3, as sales increased 60% YoY and its dollar based net expansion ratio was robust at 170% during the quarter. On the Q3 call, CEO Tomer Zeev stated that Apple’s recent iOS IDFA changes will be a net positive for the company. It is also noteworthy that over the last three-months, The Trade Desk has outperformed most ad-tech stocks. This trend, coupled with its premium multiple outlined above, likely signals that the market believes that The Trade Desk is one of the leading ad-tech platforms heading into Q4 earnings.
Top 10 Changes in sales growth estimates – last 90 days
The table below ranks ad-tech stocks by their topline revisions over the last 90 days. An increase in topline revisions signals that the Street believes that the company will grow faster than initially believed, which can result in outperformance. As mentioned above, FuboTv (FUBO) preannounced Q4 topline results, which came in ahead of its initial guidance and contributed to the rise in sales estimates recently. PubMatic (PUBM) had beaten its Q3 topline guide by 12% and also raised its FY2021 guide by 11%, which contributed to the higher sales estimate for the company. During its Q3 call, PubMatic’s Founder-CEO Rajeev Goel explained that the company has limited exposure to IDFA and added that demand for the company’s solutions will grow as third-party cookies and IDFA are phased out.
Update on EV/Fwd revenue multiples:
Overall stats:
Overall ad-tech forward median: 3x
Top 5 ad-tech forward median: 10x
Overall ad-tech forward average: 5x
EV/FWD SALES:
As shown below, the median and average ad-tech EV/NTM sales multiple had been relatively static throughout 2021 and has since compressed meaningful in 2022. Given ad-tech’s reliance on a strong economy, the market may be pricing in slowing growth, which has led to a reduction in ad-tech valuations. Furthermore, Apple’s changes to IDFA and third-party tracking have introduced uncertainty into the market, which has likely had a near term impact on valuations. However, if sentiment and the outlook for economic growth improves, then ad-tech valuations could quickly recover.
Top 5 EV/FWD SALES:
In the chart below, we can more clearly see the large dispersion in ad-tech valuations, as the top 5 premium valued ad-tech stocks have had their EV/Fwd sales multiples rapidly expand since 2020. However, the top 5 valued ad-tech stocks have had their valuations materially compress since November, falling from a median of 23x in early November to a low of 10x as of January. The median ad-tech stock has also experienced a multiple compression in recent weeks, falling from a multiple of 6x to a median multiple of 3x over the same time period.
EV TO FWD Sales Growth Buckets:
We can further dissect the change in ad-tech valuations by breaking up the group into high growth (>30%), mid growth (>15% and <30%) and low growth (<15%). The below chart shows the historical valuations for stocks in various growth buckets. Each growth bucket has had their valuations compress since November, with the high growth bucket experiencing the steepest decline and falling slightly beneath the mid growth median valuation.
The market likely expects growth to decline in the near term and has adjusted valuations accordingly. However, there are signs that advertising growth is stable within specific earnings reports. For instance, Microsoft stated during its most recent Conference Call (01/25/22) that search and advertising revenues increased 32% YoY, which were better than expected and benefitted “from a strong advertising market”.
Top EV TO FWD SALES:
The below chart provides a more holistic view of the ad-tech landscape heading into Q4 earnings, sorted by EV to NTM revenue multiples. As mentioned above, The Trade Desk (TTD) sports a premium multiple and has outperformed the majority of its peers during the recent market sell-off. Unity (U) and HubSpot (HUBS) are closely behind, and are expected to grow faster than The Trade Desk in the near term.
The last chart is based on EV to FWD sales but also takes into account forward growth expectations. By scaling valuation relative to forward growth, we can more clearly see which companies are cheapest relative to forward growth. A low value in the below chart means that a company is cheap relative to growth.
Note that some names may be skewed due to acquisitions such as Digital Turbine (APPS). Both HubSpot and ironSource look relatively cheaper after accounting for their relatively stronger growth rates. The Trade Desk looks relatively more expensive after considering its topline growth rate, as it is expected to grow slower than the median ad-tech company.
Finally, the last table we will be discussing includes aggregate ad-tech operating metrics. The below table illustrates the median topline growth, margins and FCF generation for the ad-tech industry. The median growth rate was 47%, and the market expects the median ad-tech stock to grow sales by 22% YoY in Q4. Gross margins remained robust at 64% and cashflows were strong at 18% of three-month sales for the median ad-tech company.
Ad-tech is a highly cash efficient industry that is dependent on a strong economy. If economic growth is sustained, then ad-tech valuations will likely quickly rebound. The I/O fund will be watching this industry closely heading into Q4 earnings. Find out what the Street is saying about ad-tech stocks headed into Q4 earnings in our I/O Fund’s preview of 7 Ad-Tech stocks for Q4 Earnings.
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Google parent Alphabet’s results have further renewed optimism in the stock market as the company beat analysts’ revenue estimates by 4.9% and EPS by 13%. It was led by the growth in advertising and cloud revenues. Advertising revenue grew by 33% to $61.24 billion. The company also announced the 20-for-1 stock split.
On the other hand, Facebook’s results disappointed as it missed analysts' EPS estimates by 4% and only managed to beat revenue estimates by 0.7%. The revenue outlook for the next quarter also disappointed the Street since it only expects revenue to grow in the range of 3-11% YoY. Revenue in Q4 grew by 20% to $33.67 billion. We have stayed away from the stock due to the various privacy issues and failed efforts to enter new markets like stable coins and dating. Not to mention the Cambridge Analytical data scandal.
Snap Inc. reported on February 3rd and results came in relatively stronger than Meta’s. Snap guided for sales to grow 36% YoY next quarter, well above Meta’s guide for 7% YoY growth at the mid-point. The large disparity between Snap and Meta’s forward guide highlights that Apple’s changes to iOS will have varying degrees of impacts on companies in the ad-tech space. The stock is up 59% after hours following the positive report while Facebook is down 28% following its report.
In this earnings preview, we cover Digital Turbine, Twitter, HubSpot, Trade Desk, Roku, Magnite, and PubMatic. To understand valuations across the Ad-Tech companies and how the sector is positioned moving into earnings, please reference our analysis, “I/O Fund’s Ad-Tech Q4 2021 Earnings Overview.”
The company’s revenue grew 338% YoY to $310.2 million. However, the company’s results include AdColony and Fyber results which were acquired earlier this year. For better comparison, the management provides pro forma revenue growth i.e. 63% YoY. The analyst’s consensus estimates suggest revenue to grow 299% to $353.21 million in the next quarter.
The management believes that the company’s current Total Addressable Market has significantly increased from about $96 billion to about $369 billion due to the various acquisitions.
Macquarie analyst Tim Nollen has an outperform rating and a price target of $80. He is bullish on the company due to “Industry and macro tailwinds (secular growth in mobile gaming and digital ads, alongside lower app store fees); an expansion into brand advertising (a $400 billion-plus total addressable market); upside to current estimates; and the attractive valuation.”
Roth Capital Partners analyst Darren Aftahi has a price target of $90. He is positive on the +25% revenue growth, the SingleTap feature, and also on the company’s various partnerships. “Therefore, not only can [Digital Turbine] expand its wallet share on existing devices, it can capture additional upside and long-tail revenues on new devices as well, especially with market expansion outside the U.S. given various partnerships with Samsung, Telefonica and others.”
Please note that the I/O Fund may or may not agree with the above financial analysts, yet we objectively report what the Street is saying. You may view our previous analysis of the company below:
The company’s revenue grew 37% in Q3 and the consensus forecast suggests revenue to grow 22% to $1.57 billion in the next quarter. It will be the first earnings call for the new CEO, Parag Agrawal. In the Barclays Tech Conference, he mentioned his priorities include smooth transition to all the stakeholders and improving the execution to deliver great products and results.
Truist analyst Youssef Squali has a buy rating and a $50 price target. He believes, “The company's Q4 revenue growth should decelerate sequentially to 22% from 37% in Q3, reflecting tough Y/Y comps, and normalization from peak engagement on the platform due to COVID.” However, he still expects over 20% growth, led by healthy ad budgets, new monetization tools, and mDAU growth.
Mizuho analyst James Lee lowered the company’s price target to $56 from $70. He has a neutral rating on the stock. In his view, “While the management changes are necessary to enable Twitter to accelerate the development, introduction, and update of its products, it could take time for the new strategy to take shape for users and revenues to reach the company's long term targets.”
HubSpot’s Q3 revenue grew 49% to $339.2 million. The company’s total number of customers increased 34% to 128,144. The consensus analysts’ estimates suggest revenue to grow 42% in the next quarter. The company’s revenue growth has been good since it grew at a compound annual growth rate of 41% from its IPO in October 2014 till Q3 2021.
Mizuho analyst Siti Panigrahi has lowered the company’s price target to $500 from $790 and has a buy rating on the stock. In his view, “Software-as-a-service momentum has stalled thus far in 2022 amid concerns over rising interest rates.” However, the analyst does not see any deterioration of fundamentals despite the market sell-off. On the other hand, Barclays has also lowered the price target to $550 from $800.
Goldman Sachs analyst Gabriel Borges has a buy rating and a $953 price target. The analyst notes that the company responded positively during the early days of the Covid-19 pandemic. He points out that the company lowered the starter package price and introduced a freemium product, which led to the increase of the customers. Over a period of time, he sees a potential for its customers to move to a higher-priced plan.
The Trade Desk Inc – Tentative Earnings Date is February 18th
The company's Q3 revenue grew 39% YoY to $301.1 million, excluding the political spend related to the previous year's U.S. elections; the growth was about 47%. The consensus analysts' estimates suggest revenue to grow 22% to $389.82 million. The management expects Q4 revenue to be about $388 million. It did not give specific guidance and mentioned about the uncertainty to the advertising industry due to rising Covid-19 cases. In the earnings call, founder and CEO Jeff Green mentioned that the IOS changes did not have any material impact on the company's business.
Jefferies has upgraded the stock to a buy rating and has a price target of $105. In his view, "Broadening adoption of connected TV viewership is driving more dollars toward programmatic advertising, from linear TV; the Solimar product launch is the biggest since Next Wave, which drove an acceleration in rev growth following its mid-2018 launch; and TTD is in a relatively better position to weather the privacy changes from Apple's iOS 14, compared to Walled Garden names like FB and SNAP."
On the other hand, Stifel analyst Mark Kelley has resumed coverage on the stock with a hold rating and a price target of $68. He says that the feedback he heard about the stock is positive. He also believes that Connected TV advertising still has room to improve. However, he sees the company's shares are "stretched at current levels."
Roku Inc – Tentative Earnings Date is February 18th
The company’s Q3 revenue grew 51% to $680 million and the analysts' consensus estimate suggests revenue to grow 38% to $897.65 million in the next quarter. The management expects revenue in the range of $885 million to $900 million and adjusted EBITDA of $65 million to $75 million. The company’s active accounts at the end of Q3 were 56.4 million, a net addition of 1.3 million in Q3.
According to the NPD's Weekly Retail Tracking Service, the company has been the top-selling smart TV operating system for the second consecutive year in the U.S. Also, according to the study conducted by Hypothesis Group, Roku is Canada's number 1 streaming platform. On other recent news, Fox News International announced that it is expanding distribution on Roku, which should supplement Roku’s international growth.
Deutsche Bank analyst Jeffrey Rand has lowered the company’s price target to $300 from $400 and has kept the buy rating on the stock. He believes that the company is well-positioned in the rapidly growing connected TV market and the recent sell-off is overdone. Q4 earnings could be a positive catalyst for the stock. His checks indicate that the advertising market remained strong in Q4 despite some initial concerns about brands reducing ad spending due to supply chain issues.
The company completed the acquisitions of SpotX and SpringServe this year. Revenue excluding traffic acquisition cost (TAC) was $114.1 million, up 89% and up 26% on a pro forma basis (SpotX and SpringServe included in Q3 20 for comparisons). The consensus analysts’ estimates suggest revenue ex-TAC to grow 71% to $139.85 million. Management expects revenue ex-TAC in the range of $138 million to $142 million.
Truist analyst Matthew Thornton has a price target of $23 and a Buy rating. The analyst believes that the setup could be interesting into the second half of the year on easing supply chain issues and the stock trading 13-times and 11-times expected FY22 and FY23 adjusted EBITDA. He further notes that the Q4 consensus expectations are reasonable but a bit cautious on Q1.
Needham analyst Laura Martin has a buy rating on the stock but has lowered the price target from $70 to $25. The analyst highlights broader short-term concerns like tougher comps, supply chain concerns, and omicron variant slowing digital ad growth for companies under her Streaming and AdTech coverage that drove multiple compression last year and in 2022-to-date.
PubMatic’s revenue grew by 54% in Q3 and is expected to grow 34% in the next quarter to $75.55 million. The company’s revenue grew at over 50% in the previous four quarters. It also has an excellent net-dollar retention rate (NRR) of 157% for the trailing twelve months ended September 2021.
In the words of the company’s CEO, “We use a land and expand approach, coupled with a usage-based revenue model. When we deliver incremental value to our customers, we participate in their upside which further accelerates our profitable business model and enables us to invest for future growth. This flywheel positions us well for sustained and profitable growth and market share gains.”
The management expects revenue in the range of $74 million to $76 million, representing a growth of about 34%. It had raised the full-year 2021 guidance from the range of $205 million-$209 million to the range of $225 million-$227 million, representing a growth of about 52%. It also expects the full-year 2022 revenue to be at least $281 million.
Jefferies has been positive about the company as they believe that the recent iOS changes will not have much impact on the company. They also point out that the company has been trading below its historical averages.
The I/O Fund is a team of analysts who share their research publicly as they build a portfolio of 20 stocks. Our team has record results for a retail Fund and we also have four-digit gains on some of our free newsletter coverage. You can learn more about our premium service by clicking here or sign up for our free newsletter here.by clicking here or sign up for our free newsletter here.
Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.
The chess pieces are being rearranged in ad-tech and I don’t think this quarter is very meaningful in terms of where this will go long-term. These shifts can take a while but our strategy from the beginning has been to stick close to first-party data companies. Magnite is given access to first-party data by representing publishers and the rest of our stocks are firmly cemented in first-party data.
I think it is a false assumption that we have all of the information from 10 days of IDFA changes and iOS 15 being live. The migration towards or away from certain ad platforms can take months, quarters or years. But there is certainly evidence that the shift has begun.
Regarding who will do well long-term, it will be those who work with first party data. There is quite a bit of evidence that this is where the advertising world is headed. Listen to Twilio’s call and you’ll see they are a cloud company banking on this shift.
“Digital growth and digital personalization or how businesses are building their businesses is a tremendous opportunity. And that opportunity is actually accelerated by the [Indiscernible] changes, like on the world of IDFA tags and third-party cookies, and all those things getting change because companies here rely on what's just honestly shenanigans. Like in the changes that have been going on, whether cookies or IDFA tags, these privacy changes are on the right side of history. And so, what Twilio's providing is the antidote to all those changes, which is a personalization and marketing system that starts with first-party data.”like on the world of IDFA tags and third-party cookies, and all those things getting change because companies here rely on what's just honestly shenanigans. Like in the changes that have been going on, whether cookies or IDFA tags, these privacy changes are on the right side of history. And so, what Twilio's providing is the antidote to all those changes, which is a personalization and marketing system that starts with first-party data.”
Here is what Magnite said in their recent call: “It’s been a third-party cookie world with third-party data that has really ruled the ecosystem. And I think publishers are clearly seeing a shift and buyers are starting to acknowledge this is really good information [first-party data]. They have a direct relationship with the consumer.”It’s been a third-party cookie world with third-party data that has really ruled the ecosystem. And I think publishers are clearly seeing a shift and buyers are starting to acknowledge this is really good information [first-party data]. They have a direct relationship with the consumer.” My original thesis on Magnite was centered around first-party data.
Here is what Roku said regarding the shift from third-party data to first-party data in their earnings call, “Yes, as you alluded to and the way you framed up the question, the disruption and the noise around the loss of cookies and device IDs like Apple's IDFA in general is a net benefit to Roku, really for two reasons. First, independent ad tech is very challenged in an environment, where these identifiers are getting more scarce because, they don't have these identifiers. They don't have a direct consumer relationship, whereas Roku does. And so we're always working on our platform with our own first-party data and it's a fundamental advantage for us and ultimately is bringing brands to us.”They don't have a direct consumer relationship, whereas Roku does. And so we're always working on our platform with our own first-party data and it's a fundamental advantage for us and ultimately is bringing brands to us.”
This is what you’ll need to ask yourself – are all of these management teams wrong or is the market wrong? Because clearly the market is penalizing these first-party data companies while rewarding third-party data companies (Snap deeply penalized compared to Facebook which is excessive on third-party data AND Roku penalized vs The Trade Desk which is only third-party data). Granted, the Trade Desk would be more affected by browser cookies being eliminated (this could happen end of 2023) but to have no affects long-term compared to Roku is not the correct outcome.
Hopefully by now, you know we would close a position if we thought the story was materially weaker than we previously estimated. When we close a position, our goal is to move that money into a compounder. However, I also don’t mind standing in front of a train and saying the market is wrong if I think the product isn’t fully understood. How many times will I have to do this with Roku? We can add Q3 2021 to the long string of misunderstood moments in Roku’s history!
We already covered Snap following earnings here, but I will tell you that October 2021 is now branded in my mind as another example of how the market lives in an alternate reality of two extremes. When Snap was experiencing its biggest one day loss, the company was simultaneously launching the most bullish product in the company’s history – Arcadia. This product helps Snap scale AR brand ads beyond its own platform. It’s a critical moment when an advertising company is able to monetize audiences outside of its own feed (or channel), and therefore, it’s bizarre to see a double digit drop during the month of Arcadia’s launch (but will provide a great editorial someday).
Magnite has always been a high flier for us; one where we are counting on the whole being greater than the sum of its two parts. If CTV ads were at saturation like mobile or desktop, then we would not be in Magnite or maybe even Roku. It’s this tailwind that has been able to overcome the current headwinds. Magnite not pictured because a pro-forma was not offered, however, we believe the pro forma growth rate for Magnite is around 25% placing the company between Google and Twitter.
Here is Pay TV ad spend in the United States alone compared to CTV ad spend of $24 billion. When Pay TV ad budgets stars declining like cable TV subscribers has declined, then we know we are finally in the true market for CTV ads.
Roku Earnings
There is a lot to unpack with Roku. Despite headwinds, it’s technically the strongest ad-tech company in terms of forward growth yet the market is going through a serious (and intense) period of doubt. We will need to discuss Player revenue, what supply shortages mean for smart TVs and dongles and competitors such as Google and Amazon and. The supply shortages affect Roku’s active accounts but Netflix also made it clear during Covid that there was a pull forward in terms of subscribers, which is similar to Roku’s situation.
Even despite these near-term risks, Roku is guiding for 37% growth which is the highest of all ad-tech companies above $20 billion in market cap. Notably, Roku is guiding high (comparatively) on a very large revenue base of $890 million at the midpoint for next quarter. Compare this with The Trade Desk, guiding for 21% on revenue of $339 million.
We will quickly go over the financials before breaking down the main issues that the market is concerned about. Then, we revisit our thesis to see if Roku is still on track. The goal is to always figure out where the market is wrong and being inefficient.
Financials:
Roku’s total revenue grew 50% year-over-year to $680 million. Platform revenue increased 82%to $583 million. Gross profit increased 69% and active accounts increased 23% year-over-year. Sequentially, active accounts were low at 1.3 million adds.
Average revenue per user (ARPU) is at $40, representing an increase of 49%. To grow ARPU from $27.00 to $40.00 in roughly a year is unheard of. Here is how Facebook’s ARPU compares with it taking the company 16 years to reach $40 ARPU while it took Roku four years from the launch of its ad exchange to achieve this ARPU. You’ll see the jump from $27.00 ARPU to $40.00 took a few tries between 2017 and 2020 for Facebook while Roku has nailed this incredible monetization growth in one year.
Clearly, Roku does not have billions of users like Facebook but ARPU is a vital sign as to the strength of an ad platform. It’s also helps to elucidate why Roku management is taking it on the chin with Player revenue (see below) and what they mean by flywheel across Roku’s diversified product line, which is an operating system, an ad exchange that extends to mobile and the web, and a publisher.
The $40 ARPU means that Roku can take losses growing its audience and will be able to make up for those losses over time – and that’s exactly what Roku intends to do.
Player revenue is down 26% year-over-year. There are also losses on the player from $20.2 million in profit in the year-ago quarter to $97.4 million in losses in the current quarter. The company stated the following regarding these losses, “While Roku player unit sales were down year-over-year in Q3 2021 (following the extraordinary demand spike we saw in Q3 2020), unit sales were above pre-COVID Q3 2019 levels. Our player unit costs were impacted by the supply chain disruptions. However, we chose to insulate our consumers from these increased costs to prioritize account growth, resulting in Player gross margin decreasing to -15%. We view this Player gross margin erosion as temporary.”
Regardless of transitory issues with player revenue, the substantial increase in ARPU is helping the margins quite a bit with gross margins of 53.5% up from 47.6% in the year-ago quarter and adjusted EBITDA up 132% from $56.2 million to $130.1 million. The gross margins for next quarter are forecast to be weaker at 43% and adjusted EBITDA will be lower between $65 million to $75 million compared to $113 million in Q4 2020. The company explained that the lower EBITDA is from “investing in headcount, product development, and sales & marketing to drive future growth.”
Roku is guiding for quarterly revenue of $885 million to $900 million next quarter or 37% growth, up from $649.9 million in the year-ago quarter. The company is guiding for gross profit of $385 million, or 26% growth year-over-year. To reiterate, what the market doesn’t like is that margin decrease from giving players away at a loss.
Player sales is the main reason that Roku got clobbered. I don’t believe it was over active users as they were up 23% year-over-year, which in the face of declining player sales is quite impressive. It’s important to remember that earnings are relative and Q3 of last year saw very strong Covid tailwinds where users were buying hardware and staying home. Apple is the bellwether on this issue of the electronics and consumer hardware boom that is now tapering off.
Roku management emphasized the fact the growth is stronger this quarter than pre-Covid levels. “Meanwhile Roku player unit sales remained above pre-COVID levels and the average selling price decreased 7% year-over-year as we chose to insulate consumers from higher costs.” However, with player unit sales down 26% in the face of tough Covid comps, the market is concerned.
Logically, analysts and investors know they are not invested in Roku for the player yet the player can weigh on margins. The gross margin in this quarter was strong for Roku at of 53.5% but the guide of 43% is why there was a sell-off (in my opinion). Wall Street has always been worried about Roku’s margins relative to its player revenue.
Roku is a growth machine – comparatively speaking, it’s heads and shoulders above other ad-tech companies in terms of revenue size (roughly $900 million for Q4) with the strongest guide in our universe at 37%. This communicates how management views headwinds or tailwinds – both are an opportunity for a land grab. Here’s one way Roku is seizing the supply shortage: “As mentioned earlier, we chose to insulate our consumers from increased component and logistics costs, resulting in player gross margin decreasing to negative 15% in Q3.” In addition, the company plans to keep dongles stocked so that if smart TVs sell-out or are too expensive for consumers, they can upgrade their current television with a Roku player.
Here's a question from Laura Martin on the call that is important to understand why Roku could come out ahead in light of supply issues: “But if you're going to sell out of those [dongles] anyway because TVs are running out why would you cut price [of the dongles]? Why wouldn't you double price and still sell out and just and still add as many subs, but at a higher price because you've got dongles in stock when all the TVs smart TVs are running out of inventory at the retail level?”
Here was the answer: “So the supply chain — in the case of players we're not — our goal wasn't to not sell out. We are paying more for expedited shipping for — to get chips get in front of the line for chips. So the results of all that is our costs are going up. But we haven't sold out yet. We've just been paying for air shipping and we've been spending money to insulate the retailer and the end customer from pricing issues and supply issues. So far we've been doing that relatively effectively.”
The translation is that they can air ship boxes of dongles and keep them on the shelves because of their small size while TVs sell-out and/or are cost prohibitive for consumers with average of 42% increase in price. “That [TV sales] is down. The market is down 31% year-over-year in part because pricing on U.S. TVs on average is up 42%. And the U.S. TV market is actually down below pre-COVID levels in the corresponding period in 2019.”
When asked why they aren’t doubling the price given the supply constraints (i.e., and appeasing Wall Street on the margins), the answer is that they are actually going to take a hit on the players at about (15%) because they want to keep costs low, which in turn, will grow active accounts. This goes back to the $40 ARPU. Once someone is a Roku user, there are high switching costs and Roku’s advertising flywheel can make up for the loss on hardware.
Competitors:
What management said on the call exactly matches my understanding, which is that Roku has always been competing against Google and Amazon. There is no change to the story here. Here is what an analyst asked: “First, just coming back to TVs for a second. Obviously, there's some new kind of incremental competition in market between Google TCL, Amazon Fire TV branded TVs and kind of what Comcast is doing. It remains to be seen how successful that will be. But I guess the question is that that narrative is there and I'm curious what you guys think about to kind of offset that narrative?”, there's some new kind of incremental competition in market between Google TCL, Amazon Fire TV branded TVs and kind of what Comcast is doing. It remains to be seen how successful that will be. But I guess the question is that that narrative is there and I'm curious what you guys think about to kind of offset that narrative?”
Here is what management said, “But we've been competing very successfully with large companies, all the companies you mentioned since the beginning. And if you look at where we are in terms of that competition, we've gone from no market share in TVs to the number one licensed TV OS brand in the US with about a-third of all TVs sold now running the Roku operating system. We've built an incredibly strong brands around streaming. We've achieved large scale with lots I believe lots of scale growth to continue in front of us. Most of our growth is in front of us.
…So we've been competing very effectively. We take competition very seriously. I don't see any particular dramatic change in the competitive landscape, with all the stuff that's going on. It's just more of the same, and we will continue to compete in market share.”I don't see any particular dramatic change in the competitive landscape, with all the stuff that's going on. It's just more of the same, and we will continue to compete in market share.”
They also stated Amazon Prime was not up for negotiation at this time. “As for the — your Amazon question, we have renewal discussions with hundreds of partners each year. It's normal course of business. Our goal in these discussions is always to reach an agreement that's good for our partner, good for our customers, delivers a great user experience. Despite what you may have read, our Amazon agreement is not up for renewal or in negotiations at this time.”
We had a Member post on recent stats on the Wire from Conviva. Here is what Roku’s lead looks like:
Here is how Roku looks on a Global scale – Roku is green, Amazon is white and Samsung is yellow.
That picture is worth a thousand words as to why we are long Roku. Our thesis here is that Roku is the royal flush in terms of its positioning. You can view our webinar here.
Lawsuit with Google:
Who hasn’t Roku fought (and won against?) – Peacock, HBO Max and Fox have all threatened to remove access before eventually folding. Google is especially in a bad position here as they are asking for search data from Roku customers to be shared with them, which Roku does not do for other apps. They also want preferential treatment in search results. Keep in mind, that YouTube TV has been off Roku platform since April and Google created a workaround for YouTube TV to be accessed through the YouTube app. The percentages shown above help illustrate why Roku fights these apps – they are the top dog in this space.
The chances that Google goes up against a well-informed tech CEO in the court of law on data requests and preferential treatment with search results is very low. Roku can expose Google in ways that a Congress Vs. Zuckerberg was not able to as Congress does not know enough about data collection to handle Zuckerberg. Meanwhile, Roku representatives can easily describe the issues with Google. The discovery process will be enough for Google to fold, in my opinion, so let’s see if this prediction turns out to be true. It will also leave Google wide open to have an example made of the company in terms of Big Tech’s overreach. Google tends to play things safe in this regard as there’s a whole lot of data issues lurking beneath the surface; no reason to wake a monster.
CNBC and others are also publishing favorably for Roku, including viewing a 2019 email that shows Google did ask for preferential treatment: “But a 2019 email from Google to Roku that was viewed by CNBC shows Google did ask for preferential treatment for YouTube in Roku’s search results.” And, two members of Congress are already salivating at the idea of taking Big Tech to court.
Let’s Revisit the Thesis:
Now that we’ve dissected why Player revenue is struggling and why Google is small beans in the Connected TV world (and very unlikely to go to court), let’s revisit why we are here. What management said towards the end of the call sums it up: “I mean, if you think about the big picture, we believe all TV is going to be streamed. That means, there's one billion broadband households around the world. They're going to get all their TV through streaming. So, a pretty small percent of those are actually doing that todayThat means, there's one billion broadband households around the world. They're going to get all their TV through streaming. So, a pretty small percent of those are actually doing that today.”
Here's another way to frame the growth that is in front of Roku: “I think if you just think about the drivers of our ad business because some of your questions were about our ad business, the biggest driver of the ad business is not these kinds of details. It's the fact that if you look at TV time in the US today adults 18 to 49 spend 42% of their TV time streaming. But if you look at the amount of ad spend on streaming versus traditional TV, it's only 22% has moved to streaming. So there's this big gap still and that gap is starting to close, but has a long way to go. That — the rate of that closure because they will catch up eventually and the rate of all viewers moving to streaming those are the biggest drivers of our ad business which is a $60 billion opportunity.”It's the fact that if you look at TV time in the US today adults 18 to 49 spend 42% of their TV time streaming. But if you look at the amount of ad spend on streaming versus traditional TV, it's only 22% has moved to streaming. So there's this big gap still and that gap is starting to close, but has a long way to go. That — the rate of that closure because they will catch up eventually and the rate of all viewers moving to streaming those are the biggest drivers of our ad business which is a $60 billion opportunity.”
Magnite Earnings
Magnite has gone through a streak of acquisitions (2020-2021) following a large merger in the previous year (2019) and also a name change. The company uses pro-forma to indicate growth for the combined company of Magnite and SpotX. Ex-TAC refers to revenue that excludes acquisition costs. For our purposes, pro-forma is what the Street will be judging Magnite on moving forward.
If the acquisition comes together nicely then we can reasonably expect this growth to accelerate (assuming the whole is greater than the sum of its two parts). Usually in tech growth, acquisitions are strategic rather than accretive yet financial analysts are only able to model the accretive growth post-acquisition. Magnite’s strategy is to become the strongest supply-side player globally and to circumvent the need to figure out hardware (like Roku) by going direct to publishers.
SpotX was a strong company coming into the acquisition and it almost resembles more of a merger in that regard. This is why pro-forma growth is low in the first year at 26% in Q3 and CTV revenue is up 51% on a pro-forma basis. Compare this to 290% CTV growth if we look at only Magnite last year. SpotX brings about $30 million per quarter to Magnite and this is primarily CTV revenue.
Losses are widening on Magnite to a total of $24.3 million, up from $10.5 million. The adjusted EBITDA margin of 35% is based off ex-TAC revenue, so the comparison to last year pre-SpotX is not as meaningful. Operating cash flow was $34 million in Q3.
Magnite did state in normal conditions, they calculate the growth for CTV ads would have been about 40% year-over-year in the upcoming quarter. “From a comp perspective, if you were to remove political from 2020 Q4, our guide – so our guide straight up is about a 23% year-over-year growth in CTV. If you were to remove the political comp, you get to the low 30s in a year-over-year growth scenario. And if we look at the weakness that Michael mentioned in travel, in automotive, we believe that’s impacting us to perhaps $3 million to $4 million in CTV in Q4. And if you factor that in, we’re at about a 40% year-over-year growth rate.”
For Magnite, the company was more insulated because Android revenue helped make up for any loss on iOS revenue. The company estimates that their exposure is in the single digits and they are seeing a high opt-in rate (likely through the publishers). Magnite’s big risk comes at the end of 2023 when Google will end cookies on Chrome. In the meantime, Magnite plans to build solutions for “first-party publisher segments collected in a privacy compliant manner.” It’s something to monitor but not a concern at this time as it’s two years away.
Magnite’s earnings call is one of my favorites to listen to as the management is often asked industry questions and they give very insightful answers about what they think is going on in the ad industry. Here’s an example of where they were asked about Snap and Facebook.
Analyst: “Hi guys. Obviously, Snap and Facebook felt the brunt of Apple’s privacy changes. And I think you kind of alluded to this and talked about it before, but do you believe ad spend shifted out of social media in totality where you don’t play and into the open Internet or CTV as you talked about earlier? And does that – did that benefit results at all, or it sounds like this could be a long-term issue for social media players. So, is this a catalyst for the open Internet as we push forward?”
Answer: “Yes, Nick, this is Michael. Good question. I believe so long-term, yes. But there is a class of advertisers that really became expert at advertising in the mobile ecosystem and relied heavily upon IDFA that they are not going to be able to shift their spend overnight, right. They are just so used to that ecosystem, the attribution measurements. They have grown to trust their models are based upon from a conversion and lifetime value of the acquisition. All those things have to be reworked not unlike an advertiser that’s lived on Nielsen household ratings and linear TV having to get used to more of the measurement in CTV. And so – so, I think there is no question in the open web will be a beneficiary from that. I just think there will be an evolutionary – an evolution period where these marketers will have to treat their models, get comfortable with new methodology, new attribution and continue from there.”
Here's another explanation:
“We read a lot about the advertisers that have stalled their campaigns or stock spend or decreased spend because they are having a really challenging time working with attribution and customer acquisition costs, etcetera. Those guys are extraordinarily lower funnel. They are extremely sophisticated mobile advertisers. To think that they might jump from that world right into the world of CTV is probably a bit of a stretch. And those are the guys that spend $1,000 a day, $5,000 a day on the Facebook, Instagram, etcetera. But then there is a whole other slew of marketers that do social video advertising, that have much larger campaigns, that also take into account brand attribution, that I think are perfect. And our team is set up for that, Jason.”To think that they might jump from that world right into the world of CTV is probably a bit of a stretch. And those are the guys that spend $1,000 a day, $5,000 a day on the Facebook, Instagram, etcetera. But then there is a whole other slew of marketers that do social video advertising, that have much larger campaigns, that also take into account brand attribution, that I think are perfect. And our team is set up for that, Jason.”
Those quotes are actually bullish for Snap as what Magnite is communicating is that savvy mobile marketers need time to rework measurement and attribution but that doesn’t necessarily mean they will jump ship to CTV ads. They did indicate the push for CTV ads could come from smaller advertisers and we saw this with Roku’s Shopify announcement, as well.
· Regarding Atomera, this story centers around the announcement of the JDA. Until that happens, there’s not much to update. Knox is watching this one closely on technicals.
· Keep an eye on the forum for a Palantir update today/tomorrow and any others that would require a response on what the ER offered. If there’s a beat, we actually de-prioritize these as it means our thesis is playing out and we prefer to spend our time writing analysis on any misses.
ZoomInfo reported 11/1/2021 and beat on both the top and bottom -line. Q3 sales increased 60% YoY to $198 million, which was also 8% above the Q3 consensus estimate of $184 million. The 60% YoY growth rate represented an acceleration from the 57% and 50% YoY growth rates in Q2 and Q1 2021, respectively. However, after adjusting for recent acquisitions, organic sales grew 54% YoY in Q3, which was static to the 54% YoY organic growth rate in Q2. Enterprise customer count and organic bookings growth also deaccelerated during the quarter, which has moved us to the sidelines. I touch on these trends in more detail below.
Continuing down the income statement, gross margin increased 250 bps YoY to 81% while adjusted operating margin fell YoY from 47% to 39%. A rapid 225% YoY increase in research and development expense drove the margin compression, as the company invests in new products such as conversational intelligence. On the Q3 call, CEO-Founder Henry Shuck explained that the company is investing heavily in conversational intelligence, a market that ZoomInfo believes can be an $18 billion opportunity. As shown below, recent acquisitions and expansion into new verticals such as conversational intelligence, recruiting, and training have expanded ZoomInfo’s total addressable market to $70 billion. Finally, adjusted Q3 EPS doubled YoY from $0.07 to $0.14 and also bested the consensus estimate of $0.12 by 2 cents.
During the quarter, management also cleaned up its corporate structure by eliminating its multi-class share structure, resulting in the same economic and voting interest for all shareholders. The improved corporate governance and reduced complexity is expected to enable the company to be included in stock indices, which should increase demand for its shares going forward. This event also created a taxable event as pre-IPO shareholders saw a step up in their cost basis. The company recorded a $4 billion tax asset and $3 billion tax liability as of Q3, with the net $1 billion tax asset lowering future cash taxes over time.
Increased Outlook and Strong Customer Metrics but a Slight Deacceleration in Growth
ZoomInfo’s topline beat also led to a rise in guidance. Management raised their FY2021 sales guide by 4% to $732 million (at the midpoint). The guide implies 54% YoY revenue growth, up from the prior guide of 48% and also implies an organic growth rate of 50%.
Given the recent challenges in the advertising market related to changes to IDFA, it is great to see that ZoomInfo continues to expect robust growth going forward. CEO-Founder Henry Shuck explained during the Q3 call that explained that “our continued investment in privacy is a competitive differentiator.” The company’s roll out of ‘privacy clusters’ in 2020 and its focus on B2B company data, rather than individual level data, has likely helped it navigate the changing market place around data and privacy.
Furthermore, the company’s focus on B2B data is a direct result of its strong growth with enterprise customers. Customers with over $100,000 in annual contract values (a proxy for enterprise customers) grew 74% YoY to 1,250 customers, an acceleration from the 69% YoY growth in Q3 and also outpaced the 60% YoY growth in Q3 sales. The growth was also robust on a sequential basis, as enterprise customers increased 14% QoQ, however this was a slight deceleration from the 16% QoQ increase in Q2, but faster than the 9% QoQ rise in organic sales (shown below).
The acceleration in enterprise customer growth is important as it helps support a premium multiple and highlights how ZoomInfo is increasingly becoming known as a category-defining company in B2B sales and marketing. However, the deacceleration on a sequential basis is something to note and may signal that growth will slowdown in the near term. Dollar based net retention remained static at 108%, which has room to improve as ZoomInfo has made a series of acquisitions that have expanded the amount of products that customers can expand into.
Finally, the company’s revenue quality has also improved, which also supports a premium multiple. We can measure revenue quality by observing trends in both accounts receivables and deferred revenue. Accounts receivables increased just 22% YoY, while deferred revenue increased 63% YoY during Q3, which outpaced the 60% YoY increase in Q3 sales. The relatively faster pace of growth for deferred revenue signals that ZoomInfo is collecting more cash from its sales than in prior years, a sign of strength.
Bookings were also strong during Q3, but did deaccelerate during the quarter. For instance, Q3 organic bookings increased 49% YoY in Q3, a deacceleration from the 71% and 65% growth rates reported in Q2 and Q1, respectively. Bookings can be lumpy, and management stated on the Q3 call that bookings “can be imprecise metrics to assess in-period activity and forward momentum”. Nevertheless, the deacceleration in bookings is something we will need to be mindful of going forward, especially considering ZoomInfo’s premium forward sales multiple of 29x.
The deacceleration in organic growth, sequential enterprise customer growth and organic bookings moved ZoomInfo to the ‘chopping block’ as the company was in our momentum portfolio and we did not want to hold the company if growth starts to slow.
In summary, ZoomInfo beat both top and bottom -line Q3 estimates and also raised its FY21 sales guide. During the quarter, ZoomInfo reorganized its corporate structure, which allows the company to be included in more indices going forward. The company has also been able to navigate the changes to the data privacy landscape well, evident by the robust growth in enterprise customers. The strong growth with enterprise customers provides support for future sales growth. However, organic sales growth slightly deaccelerated during the quarter (growth was static at 54%), as did sequential enterprise customer growth and YoY organic bookings, a trend we will need to be mindful of going forward, especially considering ZoomInfo’s premium multiple. Since we do not want to hold a company in our momentum portfolio that may be slowing down, we decided to cut our ZoomInfo holdings.
This quarter, we chose to go over Roku, Snap, PubMatic, The Trade Desk, Magnite, Pinterest, and Digital Turbine for an earnings preview on what to expect from these ad-tech companies. This list was chosen by those with the most forward growth, those with the highest valuations or those that have recently completed an acquisition so we can look deeper into what the Street is expecting from management.
Roku Inc– Earnings on November 05th
Below is a chart of Roku’s financials from last year, last quarter and what is expected in the upcoming quarter.
The consensus estimates suggests that the revenue growth will be slowing down in the next quarter. Below are the analysts’ views on Roku.
Wells Fargo analyst Steven Cahall has recently downgraded the stock to Equal Weight and reduced the price target from $488 to $350. He states that "The primary reason we go from Overweight to Equal Weight is, while there may still be a long ARPU runway, it's far better understood," Cahall writes in a note. "Consensus CY22E/CY23E ARPU is +50%/+47% over the past year to now $50/$60. In our January deep dive, we called CY22E ARPU of $55 a bull case scenario; but current consensus shows our alpha has decayed. The Q2 ARPU beat slowed a lot from Q1."
On the other hand, Guggenheim analyst Michael Morris says that the recent sell-off is a good opportunity to buy the shares as he upgrades the stock from a neutral rating to a buy with a price target of $395. “We expect the connected television ad marketplace will continue to grow at a rapid pace and that Roku will be a primary beneficiary — this view is unchanged,”
KeyBank analyst Justin Patterson has said that the New Amazon fire TV’s as an incremental positive to the company and its competitive position. He notes that Amazon’s devices appear to be similar to Roku’s offering.
Please note, the I/O Fund does not necessarily agree with the financial analysts mentioned above rather our goal is to objectively review companies. Our premium members have been updated frequently on Roku and we have been able to buy this stock very early before the market understood the true potential of this cord-cutting and AVOD play.
PubMatic revenue growth rate is expected to show a notable deceleration in comparison with the recent quarter although margins remain high. We will be keeping an eye on the net dollar-based retention ratio in the next quarter. The management has raised the 2021 revenue growth forecast to 38% to 40% and 25% next year.
Macquarie analyst Tim Nollen has an outperform rating on the stock with a price target of $37. He believes that the company benefits from “a strong advertising backdrop in which traditional advertising is shifting to digital, open Internet players are gaining share from walled gardens, and ad spend is consolidating around fewer SSPs,".
Macquarie further states “PubMatic is banking on real CTV growth coming from open exchange, where the OpenWrap bidding engine will be able to grow alongside that migration – though that still needs time to play out”.
“And on an enterprise value/sales basis, it's trading at roughly a 3.5x discount to its closest peer, Magnite and a 5x discount to the broader ad-tech universe.”
You can find the ad-tech companies which had their growth estimates updated in the last few months here.
The Trade Desk Inc – Earnings on November 05th
The consensus revenue estimates for the next quarter suggests a sharp drop in the revenue growth, as well. One of the primary reasons for the strong revenue growth in the second quarter was due to lower comps as Q2 2020 revenue fell 13% YoY.
Needham analyst Laura Martin has a buy rating with a price target of $100 and her 3Q21 revenue estimate is $284M.
She is of the view that “Digital markets have proven themselves to have winner-take most economics, and we believe TTD is the winner among DSP’s (demand side platforms). 30% of TTD’s revenues come from CTV which should accelerate TTD’s growth trajectory since CTV revenues are growing 3-5x faster than other digital media categories. About 15% of TTD’s 1H21 revenues came from outside the US, and offshore is growing faster than the US, suggesting a longer growth runaway”.
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Citi analyst Nicholas Jones has a price target of $85 and a neutral rating. He believes: “Trade Desk is a dominant and best-in-class adtech player, but continues to see risk associated with technology disruption and privacy regulation”.
The revenue growth is expected to be lower than the second quarter but higher than the previous year. The adjusted EBITDA in the second quarter showed a strong growth when compared to the previous year. The management also expects to show an improvement in the third quarter.
Goldman Sachs’ analyst believes that the company has a high chance to achieve its target of 50% plus revenue growth in the next three years. Goldman Sachs also believes that the strong growth will be accompanied by margin expansion with the EBITDA margins improving from -13% in 2021 to 40% in 2026. It has a price target of $90.
RBC is also positive on the company. They have initiated coverage on the company with an outperform rating and a price target of $88. According to the analysts “Snap has everything pointed in the right direction to become a top social media business,stable footing in an attractive secularly growing ad market, an evolving direct response/ad-load/downfunnel commerce narrative leading to potential ARPU [average revenue per user] and profitability upside and finally, new products that could invite broader usage and incremental monetization.”
Channel checks were more mixed, but the analysts think the possibility of adverse near- or medium-term effects “seems low” compared to the stage of the company’s developing monetization.
The company is benefitting from the strong growth in digital advertising. However, as discussed earlier the super growth was partly due to the M&A with SpotX.
Analysts are positive on this stock as Berenberg analyst Alexandra Ross has initiated coverage with a buy rating and a price target of $37. Other analysts who are positive about the company include Susquehanna analyst Shyam Patil. He likes the company as a CTV play and is also optimistic about the recent acquisitions of SpotX and SpringServe.
Earlier this year, Truist analyst Thornton said, “Magnite is well positioned in the connected-TV advertising space, with secular growth in connected TV estimated to represent more than half the company's overall revenue by 2024”.
Pinterest Inc – Earnings on October 28th
The stock fell after releasing the 2Q 21 results as the company failed to meet the consensus global monthly active users (MAUs) in spite of beating the revenue and EPS consensus estimates. The management in the earnings call mentioned that due to the lack of visibility they will not be giving guidance for MAUs for this quarter.
RBC Capital analyst Brad Erickson initiated coverage of Pinterest with a Sector Perform rating and $58 price target. “We believe user growth is likely closer to plateauing than not and our channel feedback indicated that outside of targeted categories, conversion needs improvement, particularly vs FB where we think user crossover is virtually 100%. Expectations have come down after last quarter’s miss. However, we need to see an improving content or commerce experience before getting more constructive”.
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Piper Sandler analyst Thomas Champion has a neutral rating and a $68 price target. He believes “that the post Q2 earnings selloff may be overdone. Recent monthly active user declines seem driven by non-mobile app users, which contribute less to the financial model”. He sees a more favorable setup for the stock into year-end.
Earlier this year, Argus analyst downgraded the stock to neutral in response to lower user growth in the second quarter. “The disappointing guidance reflects the decline in online sales as traditional stores reopen and users spend more time away from home. But it has strong brand recognition in the U.S. and prospects for growth in international markets over time."
Canaccord analyst Austin Moldow has upgraded the stock from a hold to a buy. He also raised the price target to $95. “The company has now gotten stronger with its transition into "a full phone lifecycle monetization engine" thanks to the addition of in-app advertising, which grew the total addressable market. He further notes that the Digital Turbine's valuation has "become more reasonable" and the fundamentals have improved up to justify the valuation”.
On the other hand, Macquarie analyst Tim Nollen has initiated coverage on the company with a neutral rating and $60 price target. He's unable to determine the relative position of Digital Turbine's on-device software versus ironSource's (IS). Digital Turbine's in-app advertising business has only just now come on board, and while these acquisitions are growing fast, they are notably smaller than peers”.
Oppenheimer analyst Timothy Horan reiterated an Outperform rating and $100 price target. "Single-Tap could be a revolutionary product, akin to the transition from banner ads to video. Despite the already significant dollars, Single-Tap is very early in its growth phase, with APPS being very selective on the brands being allowed to participate. The moat on Singe-Tap is sizable: IP, hundreds of millions of devices scale, as well as huge investment in last-mile measurement and attribution."
Bradley Cipriano and Royston Roche contributed to this article.
Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.
In this earnings preview, we review key companies in ad-tech to gauge what to look for in the upcoming Q3 earnings reports. Last quarter, ad-tech saw a rebound in ad spend from Covid yet it’s likely we saw the high-water mark for many companies as the ad industry faced extraordinarily low comps coming out of the historic lows of Q2 2020 when Covid led to reduced spend.
Snapchat will be the first among the ad-tech companies to kick-off the Q3 earnings when it reports on October 21st. In the analysis that follows, we give a brief overview of the ad-tech sector and discuss key trends that investors should be aware of heading into Q3 earnings.
Below is a table of ad-tech stocks ranked by their EV/Fwd sales multiples, along with their most recent YoY growth rate, gross and free-cashflow (FCF) margins. Many Ad-tech names are growing strongly, but M&A activity has inflated some growth rates such as APPS and MGNI. Adjusting for acquisitions, APPS and MGNI reported pro-forma sales growth rates of 104% and 79%, respectively. PINS had the strongest organic topline growth at 125%, as international sales at the company surged 227% YoY during Q2.
Top 10 EV / Fwd Revenue Multiples
However, we can see the high-water mark starts to kick in with the upcoming quarter. Looking forward, Digital Turbine is forecast to grow the strongest in Q3, but this is skewed due to the company’s recent acquisitions. FUBO has high expectations heading into Q3 as subscriber growth from the NFL season which started in Q3 should help fuel sales growth at the company.
Top 10 Three-month Forward YoY Growth Rates
The below table ranks the ad-tech stocks that saw the largest one week change in their share price. With Ad-tech earnings on the horizon, the market may be pricing in which stocks it anticipates to perform strongest. Notably, Digital Turbine and HubSpot have been strong all year and have been some of the strongest Ad-tech stocks recovering from the recent sell off in tech stocks.
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We can also see the market continues to question Fubo per the YTD price action below. We’ve written in detail as to why we think the company is stronger than the market realizes due to tailwinds from OTT live sports specifically and the monetization potential from sports betting. We’ve also recently commented on Twitter that Roku is likely to do even better globally than domestically as ad-supported streaming will be preferred over subscriptions in countries with lower GDPs. Considering that the Roku team created the leading operating system in 2008 and has led in the United States for 13 years over Amazon and Google, we think the team is capable of entering new geographies.
Top 10 Weekly Share Price Movement
In the table below, ad-tech stocks are ranked by percentage of change in their forward sales growth estimates over the last 90 days. A rise in growth estimates can lead to a higher multiple, however the market remains in a “wait and see” stage for names such as FUBO and PUBM, as their stocks have declined despite an increase in forward expectations. FUBO has high expectations as sports streaming from the NFL should boost revenues, while PUBM is a relative newcomer to the Ad-tech market and the Street may be waiting for the company to prove it can compete. In general, PubMatic is in a tough place to compete in the tech stack due to the number of competitors on the supply side.
Top 10 Changes in sales growth estimates – last 90 days
Although ad-tech has seen some double-digit declines over the past three months, we do not think this will last for long. Ad-tech is a robust industry that is cash efficient and tends to outperform other sectors in tech. For instance, two of the FAANGs are ad-tech related and there could be more tailwinds for those who hold first-party data as Facebook and Apple duel over third-party ad tracking and measurement. We covered this here.
At the I/O Fund, we have plenty of exposure to ad-tech and are not concerned with any temporary pullbacks.
Update on multiples
Below, I give an overview of topline multiples for the Ad-tech sector. The multiples shown below are calculated by scaling Enterprise Value (market cap + debt – cash) to forward sales. A higher multiple means the company has a premium valuation.
Overall Ad-tech stats:
Overall Ad-tech forward median 7x
Top 5 Ad-tech forward median 24x
Overall Ad-tech forward average 10x
EV/FWD SALES:
Ad-tech valuations peaked during the beginning of the year and have trended down since. The multiple compression has driven the median Ad-tech EV/Fwd sales multiple to 7x, which is below the median 10x multiple that Ad-tech received heading into Q3 earnings last year (2020). If Ad-tech performs strongly in Q3 2021, then the Street may award Ad-tech a higher multiple.
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The I/O Fund has stated that we see the current market as a buying opportunity with an in-depth macro analysis from Portfolio Manager, Knox Ridley. The valuations illustrate that we are nearing the 6 Median EV to Forward Revenue and the 10 Average EV to Fwd Revenue, which barring a black swan event like March of 2020, is low for ad-tech valuations. We to tend not hunt for bottoms, rather we prefer to trim near tops and add to key positions near bottoms. Therefore, for the style of the I/O Fund, the current valuations are a buying opportunity and we sent a recent Roku buy notification to our I/O Fund Members at $309.30.
By bifurcating the data for the top 5 in the chart below, we see the valuations in some names have largely recovered their multiple compressions since the beginning of the year. Snap, The Trade Desk, Hubspot, Roku and Pinterest have the highest valuations. The recovery in these premium valued names suggests that the market believes that these five stocks will likely outperform the rest of the group going forward.
TOP 5 EV/FWD SALES:
Below, we break the valuations into the following buckets:
Ad-tech High Growth Median EV to Fwd Revenue 10x
Ad-tech Mid Growth Median EV to Fwd Revenue 4x
Ad-tech Low Growth Median EV to Fwd Revenue 4x
We can further dissect the change in ad-tech valuations by breaking up the group into high growth (>30%), mid growth (>15% and <30%) and low growth (<15%). The above chart shows that the high-growth Ad-tech stocks were valued higher earlier in the year, as the market may be anticipating a slowdown in ad spend in the near term.
EV/FWD SALES IN GROWTH BUCKETS:
The chart below highlights the large gap in valuations for ad-tech leaders such as TTD and SNAP and the rest of the sector. SNAP and TTD are valued ~400% higher than the median multiple of 7x, while relatively new entrants PUBM and TRMR are valued below the Ad-tech median, at 6x and 4x, respectively.
EV TO FWD SALES Ad-tech UNIVERSE:
We also include a chart based on EV to Fwd sales but this takes into account forward growth expectations. By scaling valuation relative to forward growth, we can more clearly see which companies are cheapest relative to forward growth. Stocks on the right side of the chart below have the cheapest growth, meaning that they are trading at a bargain. Some standouts are SNAP, which fell from being valued 4x the median to just 2x the median once growth was accounted for. Moreover, FUBO is one of the cheapest Ad-tech stocks when considering their forward growth rates. TTD remains the most expensive and APPS and MGNI are skewed by recent acquisitions, meaning that they appear cheaper because of acquired sales.
Finally, the last table we will be discussing are ad-tech operating metrics. The above table shows that the group as a whole is performing well, as the average median growth in the most recent quarter was a strong 81%, however this should be discounted due to the low base period in the prior year due to Covid (discussed above). Looking forward, the market expects ad-tech to continue to grow strongly as the median growth estimate is 38%.
Two years ago, the I/O Fund wrote about Apple’s mobile privacy changes and kept our newsletter readers aware of these changes as they rolled out. Going into earnings, we are seeing headlines that Facebook may be affected. We think when Big Tech goes up against Big Tech, that investors should watch the outcomes closely. Our stance for the past two years is that Apple owns the real estate on iOS, and everyone else is renting. The hierarchy is straight forward yet many critics question Apple’s decisions, often feigning concern for the impact to small businesses. We do not think Facebook cares about small businesses at all, per se, but rather about ad dollars.
This upcoming quarter will be the first full quarter to reflect the change. Some models suggest about 7% decline if 20% of iOS users opt-in. The opt-in rates quoted here match what is being reported (about 1 in 5 users opt-in for Facebook to track them). Flurry also stated about 20% were opting in. Meanwhile, according to Bloomberg, some agencies are reporting that companies went from spending “nearly all” of their budget on Facebook to more around two-thirds or half of their budget due to the iOS tracking changes.
The reality is that Apple built the ecosystem and it’s theirs to monetize as they see fit. In this equation, consumers matter too, and data should not have been collected without permission in the first place. Although we’ve been covering privacy concerns since 2014, we specifically called out Facebook in 2018 during Cambridge Analytica to discuss the various ways Facebook was collecting data without permissions.
We’ve also maintained that Apple is running out of near-term growth markets so it makes sense they’re looking for ways to expand their revenue. Below is a snapshot of Apple’s growth pre-Covid in 2019. Due to an increase in time spent indoors, even sleepy segments like personal computers exploded overnight. However, these segments could return to pre-Covid levels (or even lower if consumer hardware saw a pull forward). This helps us to understand Apple’s motivation taking back its real estate. My only question is … why didn’t Apple do this sooner?
Pictured below: 2019 revenue for Apple and it’s iPhone segment
Below are excerpts and links to our previous analysis, which was written for our free newsletter subscribers over the past few years.
Governments Won’t Be Able to Stop Facebook and Google — But Apple Could
In April 2018, Congress tried to piece together how Facebook’s platform works. It ended up being a disaster. Anyone who works in the mobile-ad industry knows that the mobile device, notorious for its massive data leakage, could be used to collect thousands of data points daily to reveal personal thoughts, behaviors and political preferences.
When Facebook CEO Mark Zuckerberg answered a question on how Facebook makes money — “We sell ads, senator” — he wasn’t fooling the ad industry. It’s well aware that Facebook sells audiences and identities, as the company’s ads would be worthless without extracting data points from the mobile device and aggregating them for targeting.
This isn’t your typical targeting of pizza (or beer) ads during football games. This targeting knows you better than you know yourself, as it monitors your actions with data science and look-alike modeling.
The only force that can stand up to the complex tracking methods used by Google and Facebook will be an opposite, yet equal, force. It will not come from governments, which think that paying for search results is the problem. Rather, the problem is the pervasive code and software that continually tracks people, which no competitor can compete with.
Turns out, there is an opposite and equal force in magnitude that has chipped away at the anti-competitive tracking that occurs in the browser with Intelligent Tracking Prevention (ITP). Yet it has not done so on the leakiest device of all: mobile. And that would be Apple.
Facebook and Google aren’t the only companies that track users on mobile and browsers. They simply have software and code in more places. For instance, Facebook’s software is in 32% of the top 500 app market — and up to 800,000 applications. They track billions of non-Facebook users with software that can track you whether you have navigated one of their digital properties or not.
There is no way to opt out of Facebook or Google from tracking you, as their tracking is simply everywhere. In fact, security experts, including Bruce Schneier of the Berkman Center for Internet and Society at Harvard, call such tracking outright surveillance.
The incredible depth of information those giant companies have on mobile and internet users is the “moat” that generates unprecedented cash flow in advertising.
Advertising Stocks Face New, Major Challenge with Apple’s iOS 14
Excerpts:
Tim Cook has publicly criticized [Facebook with its software development kit “Audience Network” installed in 300,000 applications on iOS and Android combined and has seen nearly 200 billion downloads. Google’s AdMob is even worse with installation in 1.5 million applications and 375 billion downloads. (Now consider that users did not authorize or download this software on purpose!)
[Despite Apple’s privacy advertisements] what happens on the iPhone most certainly does not stay on the iPhone. Mobile has become a free-for-all in data collection over the past ten years. The device leaks volumes of information through software development kits (SDKs) installed inside every application. Most applications have 18 SDKs, which extends beyond Facebook and Google to include a mix and match of ad software companies although the most pervasive being Google and Facebook who are inside the far majority due to the depth of their data for cross-targeting.
The concept of Apple pioneering privacy at the client level is not new. Apple began to restrict tracking on the Safari browser through iterations of Intelligent Tracking Prevention (ITP) from 2017 to 2019. As I covered previously in depth, Apple implemented strict requirements, such as having a relationship with the customer within the last 24 hours to place a cookie, and companies have continued to find loop holes.
Unlike cookies on the web, where there is a tag on the browser, mobile identifiers have much stronger tracking capabilities. Apple’s IDFA enables the following: user tracking, marketing measurement, attribution, ad targeting, ad monetization, programmatic advertising including DSPs, SSPs and exchanges, device graphs, retargeting of individuals and audiences.
What investors may not realize is these advertising cash machines are largely dependent on tracking software for the high CPMS (cost per thousand views) and CPIs (cost per install) they charge because they can track actions on a granular level even days after a mobile user has seen an advertisement. The mobile users are not aware they are being tracked by many companies they do not have a first-party relationship with (but the developer or publisher does). These developers and publishers must now obtain permission. Without permission, the inventory on mobile becomes less valuable.
Mobile applications, such as Spotify, Uber, Lyft, and mobile gaming, for example, are also dependent on the ability to track and identify cohorts for user acquisition. This is one reason we see the top line grow rapidly in ridesharing at the expense of the bottom line; these companies are crunching customer acquisition costs and lifetime value (LTV) across specific demographics and then using lookalike modeling to target the demographics with the best LTV.
Facebook’s Surveillance-Like Software is Called Audience Network
The betrayal was two-fold. On one hand, a first-party data company boldly entered the third-party data marketplace to broker data, risking the trust of its social media users. Secondly, Facebook did everything in its power to make sure social media users would not find out. Audience Network, which fuels a substantial portion of Facebook’s revenue from the social network, has not been disclosed to the public to this day. It is eerily absent from PR releases and discussions around privacy. Unless a Facebook user was a detective, they would have no reasonable way to know that Facebook operates Audience Network and is selling private data across hundreds of thousands of applications at an estimated 40% of the app market.
Built in 2012, Audience Network went live in 2014, and caused Facebook to stage a remarkable turnaround on the stock market. Facebook has posted consistent returns ever since. This is in marked contrast to the years prior to Audience Network, between 2012 and 2014, when Facebook faltered quarterly, often losing 50% of its stock value due to frequent, disappointing earnings.
Disclaimer: Beth Kindig and I/O Fund does not own stocks mentioned in this article. This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.
ZoomInfo, formally known as DiscoverOrg, was founded in 2007 and is the premier platform used for highly accurate sales and marketing intelligence. The company is a cloud-based platform that delivers intelligence and analytics to salespeople so they can better target their customers, shorten the sales cycle and increase win rates.
The company is the market leader in business to business (B2B) sales data and has recently reported an acceleration in growth, especially with enterprise customers. The company commands a dominate position, evident by its strong topline growth and cashflow generation. While there are risks, such as privacy concerns and changes to third party cookies, the company is positioned well to benefit from a market undergoing a fundamental shift, as enterprises increasingly modernize their sales processes. In the discussion that follows, I discuss ZoomInfo’s business and the fundamental shift underway in its core market, along with a discussion on its recent financial performance, valuation and key risks.
ZoomInfo’s opportunity
The core of what ZoomInfo does is to help sales professionals know what companies they should be engaging with, who makes the buying decisions and how to contact them.
The company’s B2B sales data is highly accurate as the firm employs a team of 400+ data scientists to train the company’s AI and ML models that constantly source and update ZoomInfo’s 95 million+ company profiles, 500+ million contact methods and 1.6 billion+ daily record events. ZoomInfo is known for having highly accurate information, and the company provides a guarantee that 95% of its data is accurate at any given time. The company provides buying intent data that helps source deals and up to date contact information on decision makers to help close deals.
ZoomInfo operates in a market undergoing a massive fundamental shift, which has only just begun. According to a Forrester report commissioned by the company, only 1.2% of enterprises utilize mature B2B intelligence practices and technology. The report also found that companies that have adopted some B2B intelligence practices and technology generate 35% more leads, resulting in higher revenues and faster growth. CEO-Founder Henry Schuck explained this trend during the Q2 Earnings Call:
“In our conversations with customers, we find companies are still in the early stages of modernizing how they go-to-market. They're just beginning to use data and insights instead of intuition and automated workflows instead of inconsistent one-off sales motion. This is a secular shift that we believe will accelerate.
We estimate that today, the market is only penetrated in the single-digits. And Gartner has indicated that by 2025, 60% of B2B sales organizations will transition from experience and intuition-based selling to data-driven selling, merging their sales processes, sales applications, sales data and sales analytics into a single operational practice.”
The below chart also illustrates how companies are modernizing their sales teams. According to a survey of enterprise CMOs by Gartner, marketing technology has become an increasingly larger part of the enterprise sales budget. Marketing tech has grown from ~22% of an enterprise’s sales budget in 2017 to ~27% of the budget in 2021, taking share from agencies and labor expense. Enterprises are shifting resources away from manual processes and towards tools that improve the efficiencies of sales and marketing teams.
Furthermore, B2B sales and marketing campaigns have evolved into complex projects that cost $100,000+, so having reliable data for highly focused campaigns is paramount. We can directly observe this trend with large enterprise software companies, such as Intuit, Palo Alto Networks and Splunk, each rapidly increasing their S&M expenditures in recent quarters. These companies spend millions on S&M expense per quarter to capture B2B sales.
The below chart illustrates how B2B S&M expenditures has recently accelerated. For instance, the aggregate quarterly S&M expense for the below sample of enterprise software providers increased 28% YOY in Q2 2021, an acceleration from the 11% and 26% growth rates in Q2 2020 and Q2 2019, respectively. The acceleration in B2B enterprise S&M expense adds support that ZoomInfo’s market opportunity is growing at an accelerated rate.
Another trend that supports ZoomInfo’s growth going forward is the rising trend of programmatic advertising, which is highly dependent on accurate data. This is a favorable trend for ZoomInfo, as its robust, high-quality data is critical for efficient programmatic ad-buying. Essentially, as programmatic budgets grow, the demand for accurate third-party data increases. ZoomInfo address this demand by providing targeted audience data and buyer intent data. As the fundamental shift of modernized B2B selling strengths along with a continued rise in B2B S&M expense and programmatic ad-buying, ZoomInfo should be able to continue to grow at an accelerated rate going forward. The company’s recent results also support the narrative that there is still plenty of runway ahead of the firm, which we discuss in greater detail next.
ZoomInfo’s recent results: accelerating enterprise growth and improving cashflows
ZoomInfo recently reported an acceleration in key metrics such as sales and enterprise customer growth, highlighting the firm’s position as the leader in its end market. For instance, Q2 2021 sales increased 57% YOY to $174 million, which beat estimates by $12 million. Q2 sales included a $4 million benefit from acquired companies, and absent this benefit, organic sales increased 54% YOY, which represented an acceleration from the 50% and 53% YOY growth rates in Q1 2021 and Q4 2020, respectively.
The strong topline beat also flowed into guidance, as management increased its FY2021 sales guide by $32 million (5%) to $705 million at the mid-point. The forward guide includes $10 million from newly acquired companies, and absent acquired sales, the guide still came in 3% above the Street’s initial estimate.
Further highlighting the strength in ZoomInfo’s results, enterprise customer growth also accelerated. For instance, customers with annual contract values (ACV) >$100,000 increased 69% YOY to 1,100, which was faster than the company’s 57% YOY topline growth rate. This trend is also evident when viewed on a sequential basis. As shown below, customers with ACV >$100,00) have grown faster than sales on a QoQ basis for the last three quarters.
Generally, enterprise customers are higher value relative to other customer cohorts because they are more likely to expand into new products and can support larger budgets. As a result, the strength in ZoomInfo’s enterprise customer growth improves the quality of recently reported topline growth and also supports a premium valuation.
Another important metric is ZoomInfo’s net retention ratio (NRR), which was static YOY at 108%. ZoomInfo’s NRR is below other tech peers with retention ratios in the 130%+ range. However, the company has made a series of acquisitions and CEO-Founder Henry Schuck explained on the Q2 Earnings Call that he expects these deals to become meaningful to sales in 2022 and 2023 than in 2021. In other words, NRR will likely improve going forward as recent acquisitions are fully integrated onto the platform and cross-selling ramps.
Continuing down the income statement, Q2 adjusted operating profit increased 38% YOY to $76 million, while adjusted operating margin fell YOY from 49% down to 43%. The decline in adjusted operating margin was due to a ramp in hiring, as ZoomInfo’s employee count increased from 1,300 in June 2020 to 2,100 as of August 2021. Adjusted EPS of $0.14 beat estimates of $0.12 by $0.02.
It is also noteworthy that ZoomInfo is well beyond the ‘rule of 40’, as its 57% topline growth rate and 43% operating margin (a proxy for cashflow margin) put it closer to the ‘rule of 100’. In fact, ZoomInfo provided the following slide during its Analyst Day presentation, which showed that the company was in the top quartile for CY21 revenue growth and operating margins.
Further confirming ZoomInfo’s strength is its cashflow performance. For instance, free cash flow conversion was 120% of adjusted operating income, meaning that ZoomInfo collects more cash than it reports as profits. ZoomInfo is able to do this because of its strong market position, as the company collects cash upfront from customers. The upfront collection of cash is a significant advantage for ZoomInfo as it is effectively an interest free loan from customers that helps support ZoomInfo future growth. The upfront collection of cash is also a sign of market dominance, showcasing that ZoomInfo has pricing power over its customers (customers generally want to pay later, and sellers want to be paid upfront). Being paid upfront also supports a premium multiple.
As mentioned above, ZoomInfo is in a dominate market position due to its first mover advantage and large, highly accurate industry specific data. This market dominance is also present in ZoomInfo’s financials, as the company is rapidly growing with enterprise customers and these customers are paying cash upfront. In the next section, we discuss the firm’s valuation and conclude with key risks that investors should be aware of.
Valuation
ZoomInfo claims to have no direct competition, rather it competes with niche operators. Due to the lack of directly comparable peers, it is best to compare ZoomInfo to other fast growing and highly profitable tech firms, such as Zoom Video, Snowflake, Adobe, Veeva and Shopify.
Against this peer set, ZoomInfo’s P/S multiple of 38x was 28% higher than its peers but its most recent growth rate of 57% was also higher than the peer median of 54%. Moreover, ZoomInfo’s forward growth rate of 49% YOY is well above the peer median of 31%. A faster growth rate helps support a premium multiple.
As discussed above, ZoomInfo also reported an acceleration in enterprise customer growth. Since enterprise customers have larger budgets and can pay more and expand into more products, they are higher value and support a premium multiple. Furthermore, the company has pricing power as its customers pay cash upfront, which helps support future growth and also supports a premium multiple.
Key risks and conclusion
Data protection is a major theme globally. The FTC is increasingly enforcing data privacy in the U.S, European Union enacted the General Data Protection Regulation (GDPR) in 2018, the U.K. has a Brexit-amended GDPR that went into effect in 2021 and California Consumer Privacy Act went into effect in 2020. These laws have added tremendous complexity and impose certain restrictions and obligations on companies such as ZoomInfo.
However, this data compliance complexity can actually work in ZoomInfo’s favor, as it provides a barrier to entry. New entrants must try and compete with ZoomInfo’s robust data and also comply with complicated compliance burdens, which could make the endeavor cost prohibitive.
ZoomInfo also takes privacy and compliance seriously and has a dedicated team to processing requests for deletion of contact information and also announced an expansion to its privacy team. The company’s goal is to build trust and the company has implemented a program for providing direct notifications to individuals that are in its databases.
There are also risks associated with third-party tracking cookies and the IDFA changes announced by Apple. These changes impact the way that data is collected by third-parties, and could limit ZoomInfo’s buyer intent data. However, ZoomInfo rolled out ‘privacy clusters’ in 2020 “which allow ZoomInfo to deliver B2B intent in a privacy-first way without the reliance on cookies or other Identifier For Advertisers (IDFA) or Personal Identifiable Information (PII) based tracking”. So while ZoomInfo will likely be impacted by the change in third-party tracking, its focus on B2B company data, rather than individual level data, should limit the impact on the firm going forward.
In conclusion, ZoomInfo is positioned well to benefit from a fundamental shift happening with B2B selling. Enterprises are looking for ways to scale their sales and marketing programs with repeatable processes, and ZoomInfo has the data platform to facilitate this trend. The company reported an acceleration in growth as well as an acceleration in enterprise customer growth, which supports a premium valuation. Moreover, the company gets paid upfront in cash, evident by its strong cashflows, which further highlights the company’s market dominance and also supports a premium valuation. While there are risks, such as privacy concerns and changes to third-party cookies, these trends may actually work out in ZoomInfo’s favor by increasing the barrier to entry. Looking forward, ZoomInfo can be expected to continue to grow at a robust rate as B2B sales increasingly modernize.
Technical Setup
By Knox Ridley
Zoom Info’s recent earnings report attracted a swarm of new buyer. This can be seen with the large spikes in volume, which propelled ZI to new highs. After breaking out of its IPO high at $64.40 (green on the chart), ZI has been consolidating above this breakout, which is historically a bullish sign. It has further formed a minor cup and handle pattern just below the $67.50 resistance zone (blue on the chart), which it is currently attempting to breakout from. If confirmed, we expect to see a nice move within our momentum portfolio.
Disclosure: The I/O Fund owns shares in ZoomInfo and does not have plans to change its position within the next 72 hours. You can access the I/O Fund’s positions herehere. The above article expresses the opinions of the author, and the author did not receive compensation from any of the discussed companies
Every management team has a style and Wall Street (and/or the NLP machines – these two terms becoming synonymous) often penalize management teams that are more forthright. I actually like these teams better because I’m setting up for many quarters or many years for an investment. I’d rather hear the issues upfront so I don’t have to dig around for them like a detective. Roku is a management team that I can simply kick back and listen to the call because they tell you exactly the risks and the opportunities. The market, however, prefers more of a sugar high and Roku management isn’t great at dishing out sugar highs.
The words “tough year-over-year comps” came up a lot in Roku’s call. It would be easy to focus on those words and assume Roku is in a tough spot coming out of the increase of usage from last year. Meanwhile, I think Roku is as strong as ever. Remember that we are invested in the Pay-TV ad dollars trend. Those who question Roku think we are invested for the cord-cutting trend. The cord-cutting trend began around 2005. The Pay TV ad trend began in 2017 and started to contribute meaningful revenue in 2018. This is critical to understand.
If Roku were only a cord-cutting stock, the 1.5 million net adds could be a concern although it’s still 28% year-over-year. This is why there is market weakness right now. Essentially, Roku is experiencing the same pull forward that Netflix warned about, which is that the customers interested in streaming and converting from cable did so during Covid.
Global User growth does need to get sorted, and I fully expect the management to figure this out. Just remember, that some of the best global stories come from the best domestic stories. Meaning, the teams doing well in the United States are the ones who expand to do well globally. We do have Magnite as a global CTV company but their angles are slightly different, which I covered in the LTBH webinar. Right now, Roku has expanded to Canada, Mexico, Brazil, Germany and UK.
Let me quote Anthony Wood on just how unafraid of Google he is:
We've been competing with large companies, including Google in our space for since we started, and we compete extremely well. And the primary difference in the way we compete versus Google as we built from the beginning, a software platform designed specifically for TV, whereas they take their phone, operating system, Android, and they ported it to TVs. So if you look at the history of computing platforms, whether it's windows on PCs, or Android on phones, or Roku on TVs, purpose built, operating systems traditionally have always won in terms of market share. And it's because, when you build something from the ground up for a new user environment, for new business models, it's just more effective. And so that's really the kind of where the source of our competitive advantage come from. And it's working well for us and has worked historically, you know, we compete extremely well, we're the number one streaming platform in the US by a pretty wide margin., a software platform designed specifically for TV, whereas they take their phone, operating system, Android, and they ported it to TVs. So if you look at the history of computing platforms, whether it's windows on PCs, or Android on phones, or Roku on TVs, purpose built, operating systems traditionally have always won in terms of market share. And it's because, when you build something from the ground up for a new user environment, for new business models, it's just more effective. And so that's really the kind of where the source of our competitive advantage come from. And it's working well for us and has worked historically, you know, we compete extremely well, we're the number one streaming platform in the US by a pretty wide margin.
You can apply the same thought process to Samsung.
In the meantime, keep an eye on ARPU becoming disjointed from user growth. For instance, this quarter it was up 46% year-over-year.
Five-year trend in ROKU’s ARPU metric
Sequential growth in APRU over last 5 quarters – note that 2Q21 was the fast pace of QoQ growth since ROKU went public.
ROKU’s YOY growth in ARPU – YOY growth has accelerated for 4 consecutive quarters
The thing to ponder is why is ARPU going up so much? Here’s why I think this is happening:
The most important statement Roku made in this earnings call was in regards to signing all 7 major advertising agencies and the transition of Pay TV ad dollars. The company is talking about signing upfront contracts for television advertising.
This is a long quote so bear with me bc it’s important on what they’re saying.
Regarding your question about the upfront, it was a pretty transformative upfront season for us. We closed it several months earlier than we have over the last couple of years concurrent with traditional TV networks. I think that's an indication that streaming has arrived as a first-class citizen in the way brands think about allocating their annual budgets, because it deals with all seven major agency holding companies and more than double commitments in terms of dollar basis. it was a pretty transformative upfront season for us. We closed it several months earlier than we have over the last couple of years concurrent with traditional TV networks. I think that's an indication that streaming has arrived as a first-class citizen in the way brands think about allocating their annual budgets, because it deals with all seven major agency holding companies and more than double commitments in terms of dollar basis.
So it's definitely coming out of the pandemic, increased urgency by marketers to follow audiences, especially amidst steep ratings declines. Nielsen reported a 29% decline among adults 18 to 49 year-over-year. But it's also a function of our scale and our capabilities, including one view which played a pretty prominent role, our ad platform, our DSP, and our data. And this upfront season as well, our ability to offer originals exclusive content, the performance of that content in the time since as well as our new brand – branded content studio offering really resonated with brands and stuff, it not just brought in a significant uptick in dollars and earlier commitments. It also brought in a significant new set of advertisers who had not yet committed with us in the upfront. Over 42% of our advertisers were first-time upfront advertisers with Roku. So overall, we're extremely pleased with how we did the upfront and also think it's a good Harbinger for how we'll perform throughout the year during the scatter period. Thanks for the question. But it's also a function of our scale and our capabilities, including one view which played a pretty prominent role, our ad platform, our DSP, and our data. And this upfront season as well, our ability to offer originals exclusive content, the performance of that content in the time since as well as our new brand – branded content studio offering really resonated with brands and stuff, it not just brought in a significant uptick in dollars and earlier commitments. It also brought in a significant new set of advertisers who had not yet committed with us in the upfront. Over 42% of our advertisers were first-time upfront advertisers with Roku. So overall, we're extremely pleased with how we did the upfront and also think it's a good Harbinger for how we'll perform throughout the year during the scatter period. Thanks for the question.
In the LTBH webinar, I went over OneView and how Roku will be monetizing audiences outside of Connected TV and onto mobile and desktop. You can find this on our Roku and Magnite LTBH webinar around minute 28:00. That slide in the webinar is important to revisit if you’re wanting more information about Roku’s strategic advantage as a Pay TV/CTV ad exchange that can monetize beyond its own audience numbers. This is technically Roku becoming a demand side competitor by leveraging first party data. By focusing on Roku’s audience, we are only seeing half the picture (Roku’s position on the supply side). By “demand side,” I mean the side of the ad transaction for advertisers. By “supply side,” I mean the side of the transaction for publishers. In this case, Roku is moving onto the other side to work directly with advertisers. This is a critical change in their story that began with OneView although it’s not surprising or unexpected as strong first-party data ad players who own the stack typically move in this direction (Facebook, Google).
There are other microtrend stats the management discussed that confirms our understanding of where we are in the trend for a Pay TV ad stock (i.e., remember, we are not invested for cord-cutting although it’s a nice-to-have. Similarly, we are in Fubo for live sports and the synergies with sports betting — not the cord-cutting trend that began with Netflix). The first is that Nielsen reported a 29% decline for traditional TV networks among 18 to 49-year olds. The second statistic is that only 39% have a streaming TV service. Roku echoed what we have published in the past, which is that “it’s all going to move towards streaming.”
The Roku Channel is also growing steadily with management stating, "In Q2, we continued to drive robust growth of The Roku Channel with streaming hours more than doubling year-over-year."
Financials Overview
By Bradley Cipriano
Roku’s Q2 sales increased 81% YOY to $645.1 million, beating consensus estimates by 4%. Revenue was driven by a 46% YoY increase in ARPU (now at $36.46) and a 28% YoY rise in active accounts (now at 55.1 million). The firm’s platform sales surged 117% YoY to $532.3 million, an acceleration from the 101% and 46% YoY growth rates in Q1 2021 and Q2 2020, respectively. In fact, this represented the fastest pace of YoY growth since 2017, demonstrating ROKU’s ability to scale its ad business. Importantly, we believe that ROKU is still in the early stages of scaling its ad platform, as the international market remains untapped.
Offsetting ROKU’s platform sales, its player sales increased just 1% YOY to $113 million. However, we note that this number is somewhat subdued as ROKU decided to absorb cost increases (due to a tight supply environment) instead of passing them onto the customer with higher prices. Since ROKU absorbed the price pressures, it reported a -$7 million gross loss in its player segment during this quarter. Importantly, ROKU operates its player segment close to breakeven, as management prioritizes user growth as it scales its ad platform. This is a wise decision by management, considering the acceleration in its ad platform discussed above.
The math also shows that this strategy is sustainable. For instance, ROKU lost $7 million selling its players during the most recent quarter. Considering ROKU nets ~$19.12 per user per year, ROKU can make up the $7 million gross loss in the next twelve months with just ~350k active accounts.
Since ROKU added 1.5 million accounts during the latest quarter, it will easily be able to offset this relatively benigngin loss going forward. Unfortunately, management expects the negative gross margins in the player segment to persist into 2022, which will eat into the firm’s profitability.
On the bright side, ROKU’s platform gross profit rose 149% YoOY to $345 million, easily offsetting the negative margins in the player segment. Consolidated gross margin improved 1,120 bps YoOY to 52%, well above the trailing 3-yr average of 46%. These results flowed down to ROKU’s bottom-line, as 2Q21 EPS increased from a loss of -$0.35 in 2Q20 to a profit of $0.52 as of the latest quarter, which also beat the Street’s expectations by 351%.
However, we believe that ROKU’s current earnings are temporarily inflated. This is because the firm made cost cuts last year due to COVID-19, and management disclosed that expenses will rise going forward as these cuts are unwound to support future growth. Furthermore, ROKU has spent $98 million on media content acquisitions this year, instead of developing this content in-house. This approach temporarily juices earnings since the $98 million acquisition costs are initially capitalized and expensed over-time. If ROKU had developed this media content in house, it would have incurred the expenses more immediately.
ROKU also allocated $47 million of the $98 million of content acquisition costs to goodwill, rather than to media assets. This trend cosmetically inflates ROKU’s earnings growth going forward because goodwill is never expensed to the income statement (it is instead tested for impairment) and hence, distorts the true costs of acquiring the content. Nevertheless, ROKU acquiring media content is akin to a drug manufacturer acquiring a bio-tech firm with solid Phase 3 results. The media acquisition allows management to quickly ramp ROKU’s original media content and to remain laser focused on its ad platform, which is crucial to ROKU’s success.
Looking forward, ROKU guided Q3 sales to $680 million at the midpoint, representing a 50% YOY growth rate which was 5% above consensus. Similarly, 3Q21 EPS was guided to be ~$0.06, above initial expectations of a -$0.22 loss. We expect ROKU to continue to report strong topline growth, especially considering its untapped international opportunity. For example, ROKU has been selling its players to international markets such as Canada, the UK, France, Ireland, Mexico, Brazil and will start marketing its players in Germany in H2 2021.
Magnite Summary:
Roku critics point towards lack of global growth and market penetration. My personal thoughts are that global is way too early to call right now and that Samsung and Google will likely have its hands full competing with Roku long-term in emerging markets. However, Magnite provides exposure to global CTV ad dollars and this has been clearly laid out in our thesis both in our written reports and our LTBH 1-hour webinar. Magnite is our global CTV pick, essentially. With that said, the long-term growth rate of 25% from the company seems low and it’s my hope that the company is setting expectations correctly and plans to easily beat this guidance following its string of acquisitions.
The one thing about ad-tech companies like Magnite is that they use a lot of jargon in their earnings calls. I’ll help simplify the main points before we go into the financials.
Magnite is exposed to desktop revenue, reported under OLV revenue (online video). Therefore, it’s a big win for Magnite that Chrome is pushing out the removal of third-party cookies to 2023.
On the product front, Magnite is now an ad server on top of being a Supply Side Platform (SSP). Strategically, this allows Magnite to compete with FreeWheel and Google and helps them maintain their position “as the largest independent programmatic CTV marketplace.” The SSP allows for programmatic and private market place bidding while the ad server stores the creatives and serves the ads. The SSP facilitates the selling/bidding (auction) while the ad server actually manages, stores and serves the ads. SpringServe is the acquisition that resulted in an ad server for $31 million. The acquisition came from SpotX’s option to buy.
Here’s the flow when you visit a website or watch a connected TV app/show: The page or app calls the ad server, a bid request is sent to the SSP, the SSP auctions off the space to demand-side platforms and ad networks, the winning bid sends its creatives to the ad server, the ad appears on the site you’re viewing or the connected TV show you’re viewing.
In this case, Magnite now owns the full stack. The goal is to give small-to-medium sized publishers even less of a reason to work with FreeWheel and Google.
Overall, management continues to echo our understanding of Magnite’s positioning. They pointed towards India and Asia as markets the company is focused on. The company also repeated it’s discussion of private marketplaces and why an independent SSP on CTV can do well here compared to a public auction marketplace.
I’ve gone into detail on this point in the past, so I won’t elaborate fully here other than to paste this quote:
“With the traditional TV upfront season recently concluded, I’d like to clear up confusion regarding how we participate in these upfronts. Direct-sold and upfront refers to who is doing the selling, but direct and upfront deals increasingly include programmatic media spend commitments, because buyers and sellers want to realize the workflow efficiencies and targeting gains that programmatic provides.
So, how do we participate in upfronts and direct-sold CTV? First through private marketplaces, where our platform serves as the pipes that connect buyers and sellers. As you may recall, a substantial majority of our CTV revenue comes from PMPs. In supporting PMPs, our textures as a self-service productivity and workflow tool to efficiently execute CTV campaigns. We also participate in direct-sold inventory through our managed service business, which provides demand facilitation and serves as a great onboarding source to get buyers into the programmatic ecosystem.”-CEO of Magnite on Q2 earnings call
“However, Connected TV inventory is unique as the inventory is premium and goes for $25 to $40 for placements on a private marketplace. This means that publishers will work with maybe one or two SSPs total as the private marketplace does not result in higher bids because the pricing is already agreed on.
SSPs and DSPs especially come under pressure because they don’t own the audience. However, Magnite is leveraging a few key strengths, such as becoming the primary independent SSP in the Connected TV arena. On the earnings call, the management stated that it would be hard for other SSPs to compete at this point, given the unique private marketplace environment of Connected TV. This is due to Magnite’s acquisition strategy, and we see the effects of this in the Disney partnership, where Magnite is the obvious choice on the supply side.”
The takeaway is that investors in Magnite, like ourselves, should understand that the bids occurring on private marketplaces is partly why Magnite can do well in the CTV environment whereas display ads online became highly competitive in an open marketplace.
Financial Analysis:
By Bradley Cipriano
In the prior quarter (1Q21), MGNI reported results that were underwhelming when compared to ROKU’s strong 1Q21 print. However, during the 1Q21 Conference Call, CEO Michael Barrett explained that growth had started to rebound in Q2 and that “all was well”. CEO Barrett’s comments were confirmed when the company reported 2Q21 results on 08/05/21, as 2Q21 sales increased 170% YOY to $114 million, 22% above the consensus estimate.
However, due to the impact from recent acquisitions, reported sales are not comparable to the prior year. As a result, MGNI also disclosed that adjusted pro-forma quarterly sales increased 79% YOY to $100 million, which assumes that acquisitions were closed last year and also adjusts for traffic acquisition costs (TAC). On a segment basis, CTV pro-forma sales increased 108% YOY to $34 million, while on-line video and display pro-forma sales increased 60% YOY to $66 million. Due to nuances in GAAP accounting following MGNI’s recent acquisitions (discussed below), we believe that adjusted pro-forma sales are the best metric to use to measure MGNI’s true growth rate in the near term.
MGNI’s financial results continue to be tough to analyze from a financial perspective. This is due to all the moving pieces, as the company has made a series of transformational acquisitions in the past year and a half, which has complicated YOY comparisons. Nonetheless, these acquisitions have positioned MGNI to benefit from the rise in connected TV (CTV) ad spend and the industry-wide migration from direct ad sales to programmatic ad auctions.
For instance, MGNI recently closed its $1.2 billion acquisition of SpotX on April 30th, 2021. MGNI stated that “following the Telaria Merger and SpotX Acquisition, we believe that we are the world’s largest independent omni-channel sell-side advertising platform, offering a single partner for transacting globally … and the largest independent programmatic CTV marketplace … allowing buyers access to a global, scaled, independent alternative to "walled gardens," who both own and sell inventory and maintain control on the demand side”. We had also discussed back in April that the SpotX acquisition will allow MGNI to rapidly expand internationally, which should support increased growth and margins going forward.
While the SpotX acquisition positions the company to succeed in the CTV ad market, it also unfortunately complicates MGNI’s accounting. For example, SpotX recognizes sales on a gross basis, while MGNI had previously recognized most of its sales on a net basis (net of TAC). As a result, the company has reported an adjusted pro-forma growth rate to help investors better gauge MGNI true topline growth rate.
Moreover, since SpotX recognizes sales on a gross basis, this can artificially dampen MGNI’s reported gross margins, as the topline is inflated while gross profit remains static. As well, accounts receivables are accrued on a gross basis, which makes MGNI receivables balance appear severely outsized relative to sales. A ballooning receivables balance can signal that a company is pulling forward sales, which is a negative trend and something investors tend to avoid. We suspect that MGNI’s complex accounting is having a temporary negative impact on MGNI share price, due to a subdued gross margin and an inflated receivables balance. However, these concerns will likely dissipate as MGNI’s results start to annualize and the Street gains a better understanding of MGNI’s future growth prospects.
At the moment, the Street is dependent on management’s adjusted, pro-forma metrics. Looking forward, management guided for 3Q21 sales (excluding TAC) to be $115 million at the midpoint, representing a 15% sequential rise in sales (89% YOY). Management also guided for 3Q21 CTV sales of $43 million at the midpoint, which represents a robust 27% QOQ growth rate (307% YOY).
During its Q2 Conference Call, management explained that its long-term expected growth rate (ex-TAC) will be ~25% with 30% to 35% adjusted EBITDA margins.
As a comparison, TTD reported that its Q2 sales grew 101% YOY to $280 million, while the company guided for Q3 sales to grow 31% YOY (1% QOQ) to $282 million with a 35% adjusted EBITDA margin. TTD did not provide long-term guidance.
Vuzix committed the two cardinal sins for an earnings report — which are: 1) a big miss and 2) vague guidance.
Before I go into those issues around the earnings report, I want to point out that the company is actually on the right track. This is a technology that had zero adoption for decades and our report outlined that the medical industry is likely the right industry for Vuzix to see early adopter traction. You can read our previous coverage here where we point towards the medical industry as a main driver: https://io-fund.com/premium/ar-vr-h2-2021-update-and-vuzix-deep-dive
The company reported 240% growth in surgical eyewear sales in the most recent quarter. The earnings call listed many medical corporations and hospitals who are using Vuzix and will continue to buy more from the company. This market is expected to be in the $6 billion range by 2025. If Vuzix owns 8% of the market, that will be $500 million in revenue. It’s looking like that will be reasonable for Vuzix as they are doing well in this this industry in terms of early adoption. Perhaps it’s contrarian right now in the face of a terrible earnings report, but I believe the medical industry and manufacturing are (indeed) moving forward on augmented reality and will require hardware (smart glasses) for this rather than a mobile phone (Apple’s iOS).
We were very early to Unity with coverage at IPO regarding its augmented reality potential. As I write this, the company reports today. If you’re a Unity investor, you’ll need to ask yourself if it’s for AR gaming or AR enterprise. I’d say at least 50% of Unity’s story is for AR enterprise. If you agree with me (read my report here), then keep in mind, enterprise AR will not be displayed or utilized on a mobile phone. As you know, we plan to revisit Unity after we get more information on how IDFA affects the company as gaming is primarily driven by app downloads on iOS. So far, most companies are saying the impact has been delayed so not sure what we will get today AH.
My concern with Vuzix is not its long-term potential. I think the company will be firmly on the map after a few quarters. AR enterprise is a viable market for tech investors to consider, and as I’ve stated in this intro, AR enterprise requires glasses. Snap has a loophole with Apple’s iOS which is why we recommended this one many months ago but what you’re seeing with Snap now will eventually be seen across the entire AR market.
There is no way around the fact that AR will require hardware. That’s not my concern with Vuzix, rather it’s whether we are parking our money in a stock that won’t give us gains in the next 5 months. This is because we have to compete on performance. Therefore, if we close Vuzix, we will likely re-enter early next year. Right now, we are not closing Vuzix rather it’s up to Knox and his chart work (he is laying out a plan for the forum). My understanding is that his thoughts are that he prefers to catch the company on an uptrend.
Vuzix Earnings: Unpacking the Disappointment
I actually don’t mind if a small cap stock that is taking on a sizable TAM has a big miss as long as the key metrics I’m tracking come in strong. Smart glasses grew 21% and as stated the industry where Vuzix is likely to see the most sales were up 240%. Medical sales makes up 25% of revenue.
The company’s official reported that the sales of smart glasses for the three months ended June 30, 2021, rose 21% in the period to $2.8 million led by a 22% increase year-over-year in unit sales in the M400 smart glasses and a 77% year-over-year increase in Blade smart glasses revenues.
There was certainly an increase in expenses with R&D up 50% and sales and marketing up 164%. This is despite engineering services declining from $600,000 to $300,000 (we aren’t invested in the company for engineering services so no matter to us on this).
What bothers me is a lack of guidance. As an investor and shareholder, I’d like some idea as to what a company is expecting in terms of sales. This is all we got:
Christian Schwab
Hey, good afternoon guys. Thanks for the slide presentation. I guess when I'm looking at Page 4 of the slide presentation and in the commentary and the prepared comments, I'm just trying to figure out, can you give us a range of revenue outcome that you expect for the year in 2021 and what type of growth rates we should really be thinking about in the second half of 2021 versus the second half of 2020?
Grant Russell
Yes. 2021 should continue to see consecutive growth as we move from our second quarter. Some of the business in the second quarter was timing related, frankly. That said, none of the SaaS-based software that we expect ultimately will start to add to the revenue stream. I would count in a second, especially in the third and fourth quarter of this year, even though some might be there. So you're probably going to be a little bit softer match. I think it's right in line, Christian, with the numbers that we discussed in the past. I think you look at the 3 million to 4 million units for the kind of a numbers, and then more in the fourth quarter.
Christian Schwab
Okay. Okay.
Grant Russell
That’s hard forecast there. Sorry.
Christian Schwab
Yes. No, I appreciate that. I guess if we sum up those numbers, I mean, could Q4 be big enough to do $20 plus million this year? Is that a little bit too optimistic and it may take too many things going in the right direction right now?
Paul Travers
It would take some things going in the right direction. I mean, it's not impossible to see that some of the business we had could do that, but I mean, I can't, we certainly would not give that advice right now, because there's question marks on the timing for it. And unfortunately, this industry is zero down. It's coming. You can see it, our business continues to grow and move forward. And the size of some of the things that we're talking about are getting bigger and bigger without doubt. It's only a question of, is it this month, the next month, in and out based upon the timing. Yes. It could be there Christian, but we'd have to really work to make that happen.
Knox has been pretty clear on the forum that small caps are out of favor. When this sector is out of favor, it can be brutal. When the sector is in favor, investors run around withbe in a state of FOMO. We want exposure to some small caps because there is outsized reward when you do well in this category. We don’t see any nefarious issues here with Vuzix and we don’t think this quarter defines the opportunity. With that said, we are using purely technicals at this point to determine if we remain or exit the position. We do this with most momentum stocks and I’m stating this as more of a reminder than anything unique to Vuzix.
Pinterest reports on Tuesday, April 27 after market close. The stock recently dropped as much as 10.8% in one day due to reports that the company had a soft ending to Q1.
We wanted to take this opportunity to present the app data for Pinterest and provide an in-depth preview of the upcoming earnings report, which shows approximately 4% sequential growth and 21% growth year-over-year for DAUs. Interestingly enough, this is approximately the same YoY growth level that Snap reported for DAUs in its most recent earnings report, which we cover below.
A glimpse at the App Data
Please note, we use app data to spot trends—we do not use app data to make earnings calls on what a company will report. We use Apptopia data, a provider of app intelligence and competitor tracking service.Apptopia data, a provider of app intelligence and competitor tracking service.
Pinterest user engagement remained strong in Q1 2021 despite loosening of Covid restrictions, based on app data from Apptopia. Similar to Snapchat, which reported earnings April 22 and grew DAUs 22% YoY, Q1 user trends for Pinterest were mostly positive.
In Q1, daily active users were up 4.12% QoQ versus 5.09% the previous quarter, and up 21.16% YoY.
Source: Apptopia with graphs by David MarlinDavid Marlin
In Q1, monthly active users were up 4.09% QoQ versus 5.15% the previous quarter, and up 21.64% YoY.
Downloads were down 5.80% QoQ versus up .28% the previous quarter, and up 18.69% YoY.
Sessions were up 1.99% QoQ versus 5.11% the previous quarter, and up 20.07% YoY.
Pinterest reports Tuesday, April 22 after close and is guiding for Q1 2021 revenue growth in the low 70% range YoY with non-GAAP operating expenses at a similar level compared to last quarter. The consensus estimate is $475.11 million, up 74.71% YoY, according to Seeking Alpha.
Pinterest executives have warned that reopening could reduce engagement. Like other adtech stocks, Pinterest saw record high engagement but reduced advertiser demand in Q1 and Q2 2020, as advertisers slowed or paused their spend. Advertisers during these early-Covid quarters shifted away from awareness campaigns and towards high performance ads. Later, revenue growth accelerated in Q3 and Q4 as advertiser demand returned.
According to last week’s ad-tech analysis, we anticipate a small deceleration YoY in user engagement due to tougher comps—engagement reached record levels last March, according to the Q1 2020 earnings report—with strong international growth. Despite usage trends being mixed, if we see an ad rebound revenue can still climb higher.
Pinterest fell as much as 10.8% on April 16, after a cautious report from independent research firm Cleveland Research that was summarized by Seeking Alpha.
Pinterest ended Q1 had a softer end to Q1 "than mid-quarter expectations would indicate and some agencies/partners are noting a deceleration from Q4 levels," according to Seeking Alpha’s synopsis of the report, which added that "some omni-channel retailers are seeing Pinterest spending decelerating."
Below, we look at Q1 2021 results from Snapchat for clues about the potential adtech rebound and compare this to Apptopia data, a provider of app intelligence and competitor tracking service.
What to look for in the upcoming report
Going into Covid, Pinterest had less exposure to highly impacted verticals such as travel, according to the Q1 earnings report. When asked in Q1 what is holding Pinterest back from capturing more travel-related advertising dollars, CEO Ben Silbermann said the company is optimizing for core shopping verticals such as home décor and apparel.
“I will say that when we look at our plans for increasing kind of purchasing activity on Pinterest, travel is not the first place that we’re optimizing for,” Silbermann said. “We think there’s a really big opportunity in a lot of our core shopping verticals, which is why shopping and conversion-driven events continues to be a focus.”
Ad dollars follow planning activity, which is why ad spending moved away from categories such as wedding planning and travel events, according to the Q1 earnings report. As normal events and activities return, we expect ad dollars to follow at some point this year.
For the full year, Pinterest executives are expecting positive trends due to investments in new tools like shopping and automation; international expansion; and monetization into Latin America during the first half of the year, according to the last earnings report. Latin America is forecast to see 10.2% YoY growth in digital ad spending this year, after an 18.4% drop last year, according to a report from Dentsu.
Snapchat Doubles Active Advertisers
Global digital ad spending is projected to grow 10.1% YoY, with 18% growth in social media, according to the Dentsu report, which we discussed recently in our earnings coverage of Pinterest, Snapchat, Twitter, and Facebook.
Snapchat reported earnings April 22, achieving the highest year-over-year revenue and daily active user growth rates in over three years, according to the earnings report. Snapchat grew revenue to $770 million, up 66% year-over-year, and grew DAUs 22% year-over-year to 280 million. The company also approximately doubled its active advertiser base YoY, and offered strong guidance of 80% to 85% YoY revenue growth.
Traditionally strong categories for Snapchat, such as theatrical films, have started to return, and the company is seeking to increase categories where it is well positioned but has had less exposure, including travel and leisure.
The approach could pay off, according to the report from Dentsu. Sectors that restricted advertising the most due last year are set for the biggest recovery, with ad spend in travel and transport forecast to grow nearly 30%.
Conclusion
Despite mixed reports about Pinterest’s upcoming earnings report, we are seeing similar year-over-year growth in DAUs as Snapchat reported, which is 21.16% and 22% respectively. We are hopeful that with an ad-rebound in many sectors that Pinterest will also have a healthy earnings report, where low ad revenue last year will offset tough comps in usage.
Disclaimer: I/O Fund currently owns shares of Snap and Pinterest. In addition, the author, Jessica Ablamsky, owns shares of Pinterest, has owned options on Pinterest, and may own options on Pinterest again in the future. Jessica Ablamsky has owned options on Snapchat in the past and may purchase shares or own options again in the future. The content in this article is intended to be used for informational purposes only. The author has not received any compensation from any third party or company discussed in this article. The content is the expressed opinions of the author and is intended for educational and research purposes. Any thesis presented is not a guarantee of any particular stock’s future prices, so please factor this risk into your own analysis. It is very important that you do your own analysis before making any investments based on your personal circumstances. The author is not a licensed professional advisor. Please seek counsel form a licensed professional before acting on any analysis expressed in this article, to see if it is appropriate for your personal situation.
