putilich/iStock via Getty Images
AcuityAds (NASDAQ:ATY) is undergoing a transition from a managed platform to it’s new Illumin self-serve DSP platform. The company is a small-cap Canadian company listed on both the TSX (TSX:AT:CA) and the Nasdaq. The company has acknowledged struggles on ramping customers and revenue but has recently gotten on the right track. Some issues with focus and sales organization have led to underperformance of expectations the past 2 years. Leading indicators of success have improved significantly in the past 6 months with potential for solid growth in 2023. The stock trades at a very cheap valuation when you net out its cash as the company has a significant cash pile from its US IPO in 2021. The stock has been in a downtrend since which has led to a ton of negativity overhang on the shares. However, ATY has seen strong new customer growth the past few quarters and is starting to see dividends on the past 6 quarters of increased investment.
Value territory
The primary reason to hold the shares at these levels is the company is trading just above book value. The company has strong customer relationships built through many years in the advertising technology space and a $120m revenue business. The cash horde of $88.2 million CAD means the company will continue to repurchase shares consistently. They started their NCIB (normal course issuer bid) which allows a 10% buyback in May 2022, and since then have bought 7.1% of the public float. Look for them to complete the full NCIB and renew when possible in May 2023. The company also has a good chance of getting purchased in the future or going private if the valuation stays so low. Insiders have 15% of the fully diluted share count giving them very aligned interests with the common shareholders to increase the share price. Revenue for the recent Q3 2022 was $29.0 million CAD, up 5.5% over the prior year. The company is facing macroeconomic headwinds as companies continue to pull back on advertising spend to increase net margins. Despite that the company is making good progress with modest increases in sales and technology costs. Those costs combined rose to $10.1m in Q3 2022, up from $7.8m last year in the Q3. This is a reasonable investment considering the progress made on the Illumin platform and building out additional sales capacity. Gross margins came in at 51.3% even from a low revenue base with good potential for improvement once the company scales Illumin over 2023. The company managed a profit of $2.8 million in Q3, down over last year but showing the company isn’t burning cash.
Above you can see the stock is only trading at 1.1x book value and revenue growth has bottomed out and has begun to improve the past 2 quarters. The company is competing in the same industry as the 1000 pound gorilla that is The Trade Desk (TTD). However, the company points out they aren’t directly competing as TTD is focused on the large agencies and ATY is focused on the mid market. This does also show that the industry has potential to be highly profitable if you can scale your platform to a high level. The industry continues to have takeouts commonplace, with AcuityAds both a potential acquirer or someone that could be bought.
Illumin Platform (AcuityAds IR)
Illumin gaining momentum
Illumin has some powerful features that make it useful to ad agencies. One is a drag and drop interface that resembles that of Alteryx – something that makes it easy for new users to understand. The Journey canvas lets you see a visual of the entire customer journey and lets you personalize how you deal with each customer persona. As you can see in the table below, the company is starting to see more momentum inside Illumin, in both customer adoption and top line revenue. The company noted on the Q3 conference call out that most of the 17 new customers added in the quarter did not provide significant revenue. Most of that revenue will be coming online in Q4 2022 and should help the top line grow. The company is hitting its stride with its sales and marketing efforts, adding a sales leader from Salesforce (CRM) to lead the team as chief revenue officer, Nadeem Ahmed. He was instrumental in leading the healthcare vertical at Salesforce which has been an area of strength for Acuity recently. The company saw an uplift in demo’s of the Illumin platform of 161% from Q1 to Q3 2022. This shows the sales motion is starting to pay dividends as they continue to add mostly new customers that have not spent with ATY prior. 78% year over year growth is good momentum and shows the companies focus on this new platform. Growth has been strong in the software, pharmaceutical and financial services verticals in particular. The platform is great at reducing complexity in getting marketing campaigns set up and it provides a strong return on investment. The remainder of their legacy revenues which will be 50% leaving 2022 will be transitioned to Illumin mid 2023 when they sunset their old platform.
| Illumin Platform Metrics | Q2 2021 | Q3 2021 | Q4 2021 | Q1 2022 | Q2 2022 | Q3 2022 |
| Revenues | $5.2m | $7.4m | $10.2m | $7.9m | $10.2m | $13.2m |
| Customers (agencies using platform) | 40 | 52 | 62 | 61 | 77 | 94 |
Bottom Line
AcuityAds is a rare value stock in the software space, with significant upside possible with an improvement in execution. The company is seeing better traction on its Illumin platform but the market has given it no credit for the acceleration – yet. This moment in time provides an opportunity as both a mid term 3-6 month trade and as a long term hold. Often in these situations a activist investor will come in and show the market what it’s missing. Anything below $1.50 USD would be a great entry point for those with a high tolerance for volatility.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
Be the first to comment