MGI – Media and Games Invest — A strong start to the year

Verve (OMX: VER)

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Research: TMT

MGI – Media and Games Invest — A strong start to the year

MGI’s Q124 report shows an impressive 21% organic revenue uplift over Q123, with both good new client recruitment and higher spend from existing clients as corporate confidence rebuilds. With the market shift towards privacy-first advertising, despite Google’s continued deadline extensions for full cookie withdrawal, MGI’s AI-driven contextual targeting solution is well-placed. The move to a single infrastructure on the Google cloud should enhance scalability and improve efficiency. Our forecasts are edged ahead, to the midpoint of management revenue guidance, which is restrained by caution over the macroeconomic outlook. The rating remains at a discount to peers, despite an 80% share price gain year to date.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

MGI – Media and Games Invest

A strong start to the year

Q1 trading update

Media

8 May 2024

Price

€1.77

Market cap

€281m

Net debt (€m) at 31 March 2024

318.8

Shares in issue

159.2m

Free float

71.0%

Code

M8G

Primary exchanges

Deutsche Börse Scale, OTCQX

Secondary exchange

Nasdaq Stockholm First North Premier Growth

Share price performance

%

1m

3m

12m

Abs

17.3

91.3

42.6

Rel (local)

15.6

75.7

23.5

52-week high/low

€1.9

€0.8

Business description

MGI – Media and Games Invest operates a software platform for the automated buying and selling of digital advertising spaces in real time. It is the market leader in in-app advertising in the US and among the largest providers in Europe. MGI also serves substantial CTV volumes, plus channels such as mobile web and digital out-of-home.

Next events

Interim results

29 August 2024

Analyst

Fiona Orford-Williams

+44 (0)20 3077 5739

MGI – Media and Games Invest is a research client of Edison Investment Research Limited

MGI’s Q124 report shows an impressive 21% organic revenue uplift over Q123, with both good new client recruitment and higher spend from existing clients as corporate confidence rebuilds. With the market shift towards privacy-first advertising, despite Google’s continued deadline extensions for full cookie withdrawal, MGI’s AI-driven contextual targeting solution is well-placed. The move to a single infrastructure on the Google cloud should enhance scalability and improve efficiency. Our forecasts are edged ahead, to the midpoint of management revenue guidance, which is restrained by caution over the macroeconomic outlook. The rating remains at a discount to peers, despite an 80% share price gain year to date.

Year end

Revenue (€m)

Adjusted EBITDA* (€m)

PBT*
(€m)

EPS*
(c)

EV/EBITDA
(x)

P/E
(x)

12/22

324.4

93.2

38.6

13.4

6.4

13.1

12/23

322.0

95.2

26.8

35.8

6.3

5.0

12/24e

360.0

105.0

32.7

14.1

5.7

13.1

12/25e

396.0

118.7

61.5

26.2

5.1

6.9

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Guidance remains cautious

With such a strong start to the year, there is a natural temptation to extrapolate, particularly since events such as the Olympic Games and various elections would normally increase advertising spend. The new management guidance (was ‘meaningful double-digit’ revenue growth) indicates revenue in a range of €350–370m, with adjusted EBITDA of €100–110m. There is an element of caution baked in here, given the current geopolitical situation and the uncertainty on the timing of interest rate reductions, which would stimulate ad-spend. The slight dilution to margin reflects a lower level of capitalised cost, rather than any underlying trading issue. Our forecasts are edged up to the midpoint of the target range for now.

Improving market awareness

As a relative newcomer to the adtech space, MGI has done a remarkable job in assembling the key elements on both supply side (SSP) and demand side (DSP). It is market leader on iOS and Android mobile in-app SSP in North America with a prominent position in Europe (Pixalate). It also has a leading position on Apple’s new privacy-first application programming interface (API), SKAN 4.0. The further extension into Connected TV should also help drive medium-term revenue.

Valuation: Discount reduced but plenty of upside

Adtech shares have had mixed performances over the year to date, averaging out positive, with scale a clear benefit. MGI has outperformed the peer set strongly over the same period (+80%) and is in the upper echelons over 12 months (+43%), reducing the discount at which it trades across pure adtech and relevant content categories. Parity of rating on EV/revenue and EV/EBITDA across FY24–25e would now see the price climb to €3.73 (from €3.70 in March).

Growing client base and net dollar expansion

MGI’s adtech operations trade under the Verve Group brand, which is positioned as an ecosystem bringing together data, media and technology to deliver efficient and privacy-compliant advertising solutions.

Ad impressions in Q124 were 20% up on the prior year, in what is inherently the weakest reporting period. Pricing (expressed as cost per mille, or CPM) has not yet significantly bounced back, according to management, particularly at the commodity end of the market where there is little, if any, targeting. This highlights the importance of having solutions that offer the advertiser the benefits of targeting (right people, right places, right time) without compromising user privacy.

While the final deprecation of cookies on Google has again been delayed, this time out to 2025, awareness is now finally building across the market and budgets are starting to shift.

One of MGI’s key performance indicators is the number of clients generating over $100,000 of gross revenue. This initially applied to supply-side software clients. The group has now also disclosed the total number of clients with over $100k of revenue, which allows us to see the scaling up of the demand side of the group. The growth reflects a combination of new, larger clients and existing clients where revenue has climbed through that threshold through underlying growth and/or expanding budgets. The net dollar expansion rate climbed to 110% in Q124, up from 95% in Q423. Total software clients, of all sizes, numbered 2,410 in Q124, up 30% year-on-year, with the onboarding process increasingly efficient.

The increased awareness of Verve Group in the market, particularly with the AI-driven contextual offering, ATOM, is attracting additional inbound business. The latest version, ATOM 3.0, was released at the end of April, with first-mover advantage of a scalable, privacy-first solution for iOS which management views as a potential game changer.

There is still work to be done growing the DSP, which could scale to represent half of the group’s revenues.

Exhibit 1: Key quarterly statistics

Q122

Q222

Q322

Q422

Q123

Q223

Q323

Q423

Q124

Ad impressions (bn)

156

161

172

181

166

181

186

206

199

Supply-side software clients >$100k revenue

479

513

546

551

557

559

559

568

594

Demand-side software clients >$100k

N/A

N/A

N/A

N/A

55

83

131

159

170

Revenue (€m)

65.9

78.1

87.6

92.9

68.8

76.2

78.3

98.7

82.5

y-o-y revenue growth (%)

27%

37%

39%

16%

4%

-2%

3%

26%

20%

q-o-q revenue growth (%)

-18%

19%

12%

6%

-26%

11%

3%

26%

-16%

EBITDA (€m)

16.9

20.0

21.4

26.5

17.4

17.4

63.7

27.3

20.2

Adjusted EBITDA (€m)

17.6

21.1

23.0

24.0

19.1

19.1

23.1

31.7

22.0

Adjusted EBITDA margin (%)

27%

27%

26%

26%

28%

25%

30%

32%

27%

Source: MGI

Full year forecasts nudged ahead

Our full year revenue is edged ahead from €355m to €360m, with adjusted EBITDA lifted from €103.3m to €105.0m, both figures being at the midpoint of the newly issued management guidance. For FY25e, we have pencilled in top-line growth of 10%. At last year’s interims, revenue guidance was reduced to reflect weak CPM pricing, itself a function of poor market demand for advertising inventory, and we suspect that this experience has constrained management’s optimism regarding the FY24e outturn, preferring to err on the side of caution.

As the year progresses, we may see upside from improving CPM and greater corporate confidence should the macroeconomic backdrop improve. It should be noted that this is all organic growth. While M&A is not ruled out, any deals would need to be meaningfully accretive to be considered.

Capitalised own product development in Q124 was €6.8m, 8% of net revenue, down from 11% in Q123. This resulted in an adjusted EBITDA margin of 27%, with our full year forecast being for 29.2%, rising to 30.0% in FY25e. There is still investment to be made, particularly in building out the DSP proposition. The move to a unified platform on Google Cloud should support this margin progress.

Adjusted leverage set to dip below 3.0x by end FY24

Leverage at the end of Q124 was 2.4x trailing 12-month reported EBITDA; 3.2x on an adjusted EBITDA basis. This adjusted figure would drop to 2.9x adjusting further for a normalised working capital position and outstanding earnout payments. Inherent seasonality dictates cash outflows in the first half, inflows in the second.

Earnout payments now total just €27m, of which €12m is payable in shares.

Our modelling suggests adjusted leverage for end FY24 of 2.7x, falling to 2.1x for FY25e.

Valuation

We evaluate MGI compared to three sets of peers: (relatively) pure adtech, ad software combined with content (games or other) and (relatively) pure gaming. Although this leads to a cumbersome peer table, it allows us to see the slightly different dynamics. Adtech performance year to date has been very mixed, with strong performances from Criteo and PubMatic, and Digital Turbine at the other end of the scale. The median performance has been a gain of 10%. Ad software and content companies also had a mixed showing, with AppLovin continuing to perform particularly strongly (+96% year to date), while the purer gaming companies have (on average) underperformed.

Looking at average EV/revenue and EV/EBITDA across FY24 and FY25, parity across the peer set would suggest a share price of €3.73, from the €3.70 calculated in March. This is a little below the figure derived from our DCF of €4.14 (WACC: 10%, terminal growth of 2%), up from €4.06 when we last ran these numbers in March.

Both approaches result in figures well above the current share price of €1.77, up 80% year to date.

Exhibit 2: Financial summary

€000s

2021

2022

2023

2024e

2025e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

252,166

324,444

321,981

360,000

396,000

Operating costs excl. D&A

(187,124)

(239,691)

(193,523)

(260,113)

(279,413)

Adj. EBITDA

 

 

71,216

93,202

95,171

105,000

118,700

EBITDA

 

 

65,042

84,753

128,458

99,887

116,587

Operating profit (before amort. and excepts.)

 

 

48,768

76,556

76,943

86,779

99,100

Amortisation of acquired intangibles

(11,964)

(14,853)

(11,229)

(11,229)

(11,229)

Exceptionals

(4,708)

(27,100)

(6,500)

(3,500)

(500)

Share-based payments

(1,466)

(1,613)

(1,613)

(1,613)

(1,613)

Reported operating profit

36,804

34,886

57,601

70,437

85,759

Net Interest

(21,919)

(37,959)

(50,171)

(54,054)

(37,612)

Joint ventures & associates (post tax)

0

0

0

0

0

Exceptionals

1

0

0

0

0

Profit Before Tax (norm)

 

 

26,850

38,597

26,771

32,725

61,488

Profit Before Tax (reported)

 

 

14,887

(3,073)

7,430

16,384

48,147

Reported tax

1,169

(9,064)

(2,718)

(5,407)

(15,888)

Profit After Tax (norm)

28,018

21,085

57,220

21,926

41,197

Profit After Tax (reported)

16,055

(12,137)

46,113

10,977

32,258

Minority interests

(7)

(88)

(513)

(520)

(525)

Discontinued operations

0

0

0

0

0

Net income (normalised)

28,019

20,947

56,933

22,446

41,723

Net income (reported)

16,061

(12,049)

46,626

11,497

32,783

Average Number of Shares Outstanding (m)

141.7

156.2

159.2

159.2

159.2

EPS - basic normalised (c)

 

 

19.77

13.41

35.75

14.09

26.20

EPS - normalised fully diluted (c)

 

 

19.77

12.01

32.08

12.65

23.51

EPS - basic reported (c)

 

 

11.33

(7.71)

29.28

7.22

20.59

Dividend (c)

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

179.8

28.7

(0.8)

11.8

10.0

Adjusted EBITDA Margin (%)

28.2

28.7

29.6

29.2

30.0

Normalised Operating Margin (%)

19.3

23.6

23.9

24.1

25.0

BALANCE SHEET

Fixed Assets

 

 

650,495

823,637

813,515

838,625

866,095

Intangible Assets

605,746

791,284

796,608

823,277

852,306

Tangible Assets

4,681

5,522

3,963

2,404

845

Investments & other

40,068

26,831

12,944

12,944

12,944

Current Assets

 

 

283,598

221,022

193,514

174,646

201,412

Stocks

0

0

0

0

0

Debtors

97,497

52,229

32,281

36,493

40,143

Cash & cash equivalents

180,156

149,992

121,740

98,660

121,777

Other

5,945

18,801

39,493

39,493

39,493

Current Liabilities

 

 

243,433

219,471

240,768

247,328

256,194

Creditors

53,754

68,711

80,335

90,488

99,354

Short term borrowings

32,020

31,903

34,510

32,390

32,390

Other financial liabilities

137,611

97,515

104,402

104,402

104,402

Other non-financial liabilities

20,048

21,342

21,521

20,048

20,048

Long Term Liabilities

 

 

383,168

503,443

413,804

413,804

401,804

Long term borrowings

343,925

389,386

348,038

348,038

341,038

Other long term liabilities

39,243

114,057

65,766

65,766

60,766

Net Assets

 

 

307,493

321,745

352,457

352,139

409,510

Minority interests

(59)

1,211

(182)

(182)

(182)

Shareholders' equity

 

 

307,434

322,956

352,275

351,957

409,328

CASH FLOW

Operating Cash Flow

16,055

(12,137)

46,113

10,977

32,258

Depreciation & amortisation

28,238

58,135

29,402

29,450

30,829

Working capital

(5,714)

68,140

31,572

5,941

5,216

Exceptional & other

1,167

(15,611)

(85,443)

1,613

1,613

Tax

1,514

6,002

2,718

0

0

Net finance cost

23,583

37,959

50,171

54,054

37,612

Net operating cash flow

 

 

64,843

142,488

74,533

102,034

107,528

Capex

(39,844)

(46,007)

(42,878)

(44,561)

(33,299)

Acquisitions/disposals

(255,790)

(138,000)

0

(10,000)

(25,000)

Equity financing

109,338

27,900

0

0

0

Dividends

0

0

0

0

0

Other

(24,920)

(53,413)

(52,301)

(31,825)

(19,112)

Net Cash Flow

(146,373)

(67,032)

(20,646)

15,649

30,117

Opening net debt/(cash)

 

 

57,690

198,600

273,900

297,427

281,768

FX

0

0

(2,881)

0

0

Other non-cash movements

5,463

(8,268)

0

10

0

Closing net debt/(cash)

 

 

198,600

273,900

297,427

281,768

251,651

Source: Company accounts, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by MGI – Media and Games Invest and prepared and issued by Edison, in consideration of a fee payable by MGI – Media and Games Invest. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

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General disclaimer and copyright

This report has been commissioned by MGI – Media and Games Invest and prepared and issued by Edison, in consideration of a fee payable by MGI – Media and Games Invest. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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London │ New York │ Frankfurt

20 Red Lion Street

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United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Claranova — EBITDA improvement across all divisions

On relatively flat H124 revenue, Claranova grew adjusted EBITDA more than 50% year-on-year as the focus on profitability over growth started to deliver. With Avanquest’s loss-making non-core business reducing, myDevices hitting break-even and customer acquisition costs back under control in PlanetArt, the company is better positioned to drive profitable growth. Management is targeting an adjusted EBITDA margin of c 10% in FY24. The company has refinanced its debt, providing funds to repay the OCEANE convertible debt that was due for repayment from August, with the maturity of the new debt extended to April 2028. A new CEO and chairman have been appointed and a strategic review is underway.

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