“People love answers, but only as long as they’ve found them.” – Criss Jami
Today we take an in-depth look at an interesting overseas-based tech/advertising game. The company has a solid balance sheet and appears to be reasonably valued. The company listed in the United States last year and there have been rumors of private interest in it. A full analysis follows below.
Tremor International Ltd. (TRMR) is an Israel-based end-to-end digital advertising platform that enables advertisers to reach relevant audiences and publishers to maximize returns from their content. The company runs across all digital channels, but focuses on ads in video format across all devices and connected TV. [CTV] and boasts Amazon (AMZN), Twitter (TWTR)and Disney (DIS) as customers. Tremor was founded as Marimedia in 2007 and listed its shares on the AIM London stock exchange in 2014. It has been a serial trader since 2011, changing to its current moniker in 2019 after buying Tremor Video in 2017. The company’s U.S. Depository Shares (ADS), which represent two common shares on AIM, listed on NASDAQ in June 2021 in an offering that raised net proceeds of $134.8 million dollars to $19.00. While not technically a canceled IPO, TRMR shares are lower than their US debut, currently trading at just under $14.50 per share, translating to a market capitalization of just over $1.1 billion.
The digital advertising market is made up of brands and advertising agencies (called the demand side) that purchase advertising inventory from digital publishers and application developers (called the supply side). Tremor has built its platform, which serves both demand and supply, through multiple acquisitions. It executes contracts called insertion orders that govern the terms of a campaign between the advertiser and the publisher. The company also has agreements that allow users to access its Data Management Platform (DMP). In total, it has over 1,200 brands and over 400 agencies on its demand-side platform. [DSP]with approximately 1,500 web, mobile and CTV publishers active on its supply-side platform [SSP].
Tremor’s DSP provides clients with access to ad inventory, audience targeting and enhanced reporting, all designed to allow them to execute their digital marketing campaigns in real time across different ad formats while maximizing the return on investment. Customers have the choice between a self-service solution or a managed solution that relies on the company’s expertise. Tremor’s SSP monetizes digital inventory for publishers by enabling their content to have the necessary code and requirements for programmatic advertising integration. Its DMP allows advertisers and publishers to leverage first-party and third-party data from a variety of sources to help optimize advertising campaigns. The company’s three-pronged end-to-end platform supports a wide range of media and devices, providing a large-scale marketplace. Tremor charges its clients a platform fee which is either fixed, a percentage of spend, or based on the number of impressions an advertisement receives. About 90% of its revenue comes from the United States
Digital advertising market
Global digital ad spending was approximately $455 billion in 2021 and is expected to grow at a CAGR of 11.4% to reach $700 billion in 2025. Major vendors are google (NASDAQ:GOOG) (NASDAQ:GOOGL), Meta platform (FB) Facebook and other social media companies. Tremor has targeted CTV and digital video as its niche—which accounts for about four-fifths of its revenue—in part because ad spend in that subspace is expected to grow at a faster rate than the rest of the market.
Another reason for the company’s CTV focus is growing regulations regarding the use of third-party cookies, which are small text files placed on consumer devices when an internet browser is used, to collect data. Firefox and Safari web browsers have removed these tracking technologies from their platforms and additional regulation may further restrict their use. CTV data collection devices are not intended to be subject to the same scrutiny as Internet cookies.
Tremor also focuses on high-margin programmatic advertising, where algorithms and AI match buyers and sellers almost instantly in the digital advertising marketplace. This segment currently accounts for approximately one-third of total global digital ad spend and, like digital video, is expected to grow faster than the overall market. It accounted for 80% of the company’s revenue in the first nine months of 2021, compared to 72% in the year-ago period.
Tremor’s DSP rivals the likes of Roku (ROKU), Viant (DSP), Samsung (OTC: SSNLF)and MediaMath, while its SSP clashes with companies such as Magnite (MGNI) and PubMatic (PUBM).
3Q21 results and outlook
In addition to more traditional line items, the company measures its performance with a metric known as “non-TAC contribution”, which is defined as gross profit plus depreciation and amortization attributable to revenue cost and cost revenue (excluding D&A) minus traffic acquisition costs [TAC]. The net effect of this calculation is to eliminate the impact of expenses that are unrelated to the performance of the underlying business.
On November 11, 2021, Tremor reported 3Q21 earnings of $0.21 per share (non-GAAP) and Adj. EBITDA of $42.3 million on revenue of $87.0 million vs. $0.11 per share (non-GAAP) and Adj. EBITDA of $19.6 million on revenue of $56.1 million, representing improvements of 116% and 55% at Adj. EBITDA and top lines, respectively. Net income beat Street estimates by $0.04 per share while revenue was $6.2 million above consensus. The non-TAC contribution increased by 54% to $76.7 million. CTV revenues increased 115% from 3Q20.
As strong as these results are, they appear to represent a deceleration in growth, with the first nine months of 2021 reflecting even larger increases in Adj. EPS (716% at $0.56 per share (non-GAAP)), Adj. EBITDA (402% at $107.2 million), revenue (84% at $239.4 million), non-TAC contribution (93% at $213.4 million) and net cash from operating activities ( 947% to $121.4 million). Additionally, Adj. EBITDA margins on a contribution basis excluding TAC were 55%. However, the pandemic strongly impacted advertising demand on Tremor’s platform in 1H20 as marketing budgets were reduced. As such, the 1H21 competitions were extremely easy.
Management plans to generate FY21 Adj. EBITDA of at least $149 million and ex-TAC contribution of at least $298.4 million, representing organic improvements of 150% and 62% from FY20, but these metrics are also overstated by the pandemic. Comparisons to FY19 are futile as Tremor only purchased their SSP (Unruly) in 2020. That leaves 4Q21 Adj. EBITDA guidance of $42 million and ex-TAC contribution of $85 million, representing year-over-year organic growth of 7% and 16% (respectively), as the most significant metrics to give a glimpse of the company’s future. Although a bit narrow, the 4Q21 estimates versus the actual 4Q20 numbers at least represent a normal operating environment versus a somewhat normal operating environment.
Despite what appeared to be a strong performance, shares of TRMR have fallen more than 20% since the release of 3Q21 results. Investors may have chosen to focus on the 4Q21 outlook and that hasn’t helped this YouTube Rumble free-speech alternative fall Trembling after accusing him of censoring conservative media personality Dan Bongino. Whether it’s just advertisers who didn’t want to be associated with Bongino or something more egregious from Tremor, the optics aren’t good.
Review and analysts’ comments:
Thanks to its profitable business model and the funds raised during the listing of its ADS on NASDAQ in June 2021, the company is in excellent financial position with cash of $333.3 million and no debt on its balance sheet as of September 30. 2021. That cash – used in the past for acquisitions – is said to have prompted two large institutional investors to make the case for a share buyback, according to Sky News. Prior to listing on NASDAQ, Tremor occasionally paid a special dividend, but none since 2018.
Street analysts agree that the share price is cheap, although this is not surprising given that all five companies providing coverage were bankers on Tremor’s ADS offering. Collectively, they have three buy ratings and two outperform ratings with a 12-month median price target of approximately $25.00 per share.
The same Sky News article (dated November 22, 2021) also hinted that the company could be in talks to be taken over by a private equity firm. With a bit of a puzzle valuation – currently trading at EV/FY21E Adj. An EBITDA ratio of 5.3 with an impeccable balance sheet, strong cash generation, good growth prospects in a growing industry and a focus on the high growth part of this industry – it would absolutely not be surprising if these rumors turn into reality. Either way, the cheap valuation puts a floor in this “broken ADS” and the recent selloff provides a great entry point for a “watch item” position.
I like TRMR overall, but didn’t consider it a big deal. First, I’ve never done well with Israel-based businesses for some reason. Moreover, when inflation and interest rates are on the rise, which they are now, value stocks have significantly outperformed growth stocks.
“When I was a 14-year-old boy, my father was so ignorant that I could hardly bear to have the old man around. But when I turned 21, I was amazed at how much the old man had learned in seven years..” – Mark Twain
Bret Jensen is the founder and author of articles for the Biotech Forum, the Busted IPO Forum and the Insiders Forum