Research from Water Tower Research, Water Tower Research

Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

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Equity Bottom-Up

<h3>KEY POINTS</h3>
<ul>
<li>3Q22 revenue of $37.6 million was at the low end of guidance and down 4.9% Y/Y, partially driven by a tough macro and ad spending environment, and below consensus of $38.6 million. Adjusted gross profit margin was 47.9%, down 350 bps.</li>
<li>The company’s number of active customers grew by 11% Y/Y to 339. CEO Jim Lawson indicated that the company saw an infection in September as demand improved and that has continued into October.</li>
<li>CTV continued to grow well, up 36% Y/Y to $2.6 million. The company also launched its unique Health Predictive Audience product, the first of a suite of Predictive Audience products that it expects to drive growth. The goal is to get to 20% revenue growth Y/Y, but the company is not expecting to see that in 2023 as products are still ramping including its Direct Access “self-service” product.</li>
<li>In 3Q, the larger programmatic companies saw revenue increases, while the smaller ones saw declines. Lawson said that AdTheorent, while small, has unique products and is taking the prudent step to position the company with the right products for significant long-term growth—mentioning a 20% Y/Y goal.</li>
<li>Given the quarter and current ad environment, the company narrowed 4Q22 guidance, including $45.7 to $50.7 million in revenue, below consensus of $57.3 million. It expects adjusted gross profit of $29.8 to $33.0 million and adjusted EBITDA of $5.3 to $7.8 million.</li>
<li>For comparables, we have used a group of similar-growth, similar-margin ad software companies. These comps have an average forward P/E of 26.9x, while ADTH is trading at 7.9x, a 71% discount; similarly, ADTH is trading at a P/S discount of 76%.</li>
</ul>
<h2>EARNINGS SNAPSHOT</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/309/048/original/image_33703289641668217152480.png?1668217154" class="editor-image img-responsive" data-smartkarma-image-id="309048"></figure>
<p>Read all our reports on&nbsp;AdTheorent&nbsp;on our website.</p>
<h2>COMPANY OVERVIEW</h2>
<p>AdTheorent is a privacy-forward, machine-learning powered programmatic advertising company. Put simply, the company uses machine learning and data science to target digital ads based on non-individualized predictive scores. Its biggest clients are sophisticated data-driven advertisers who know digital and expect their digital campaigns to drive tangible results.</p>
<p>AdTheorent is improving the digital world for advertisers and consumers. By way of illustration, consider the following: when a consumer accesses content on a device—a mobile device, tablet, or laptop, or even a connected television—a content page will render on that device, and that screen will likely contain an opportunity to show an ad, which is called a digital impression.</p>
<p>Advertisers want to know which of these impressions or opportunities to show/serve ads to are most likely to yield engagement, conversions, or other advertiser-specified actions by their customers, such as credit card signups, online sales, hotel bookings, or airline bookings; whatever action is behind the given ad campaign the advertiser is using to try to drive those actions. They want to buy the media that will do just that.</p>
<p>Behind the scenes, there is a marketplace to buy and sell those ad opportunities. It’s an auction system that takes place in microseconds. AdTheorent occupies the demand-side platform silo in this ecosystem, enabling advertisers to purchase digital media and digital ad impressions in real time and one at a time.</p>
<p>The key to AdTheorent’s success is that it has transformed how that is done. AdTheorent uses machine learning and data science as its core method of ad targeting and campaign optimization. This contrasts with cookie-based or other ID-based or user profile-based targeting, which focus more on individual identities and retargeting users and profiles across the Internet.</p>
<p>Operating at massive scale, AdTheorent optimizes ad targeting by evaluating and providing predictive scores for more than 87 billion impressions daily, bidding on less than 0.01% of impressions scored. Decisioning at this scale enables AdTheorent to make precise ad placements for each of its world-class advertiser customers. The company also leverages advanced machine learning and data science to drive platform efficiencies by optimizing against ad impressions that represent a greater risk of IVT/fraud, poor viewability, and brand safety, or impressions that may not be measurable by third-party measurement providers.</p>
<h2>VALUATION</h2>
<h2>ADTH Trading at a Significant Discount to Its Comps</h2>
<p>A hallmark of our research at WTR is that we do not offer specific stock recommendations and/or stock price targets. Our purpose is to help educate our readers about a company and some of the factors that we believe can be relevant to their choices about when and if to invest in a particular issue. We do offer data and graphs about how the stock has been valued historically—typically using conventional metrics—and sometimes we present data and graphs that juxtapose historical valuations among issuers that are believed to be comparable.</p>
<p>For AdTheorent, we focused on comparable analysis using companies in the same industry with similar margins and growth profiles. The company has limited trading context; therefore, we are not focusing on historical valuation metrics. Catalysts for investors include visibility as a public company, new client acquisition announcements, an improved global COVID-19 health environment, continued digitization of the ad industry, and continuation of strong revenue and earnings growth trends.</p>
<p>For a comp group, we have used similar-growth, similar-margin ad software companies. These comps have an average forward P/E of 26.9x, while ADTH is trading at 7.9x, a 71% discount; similarly, ADTH is trading at a P/S discount of 76%. See Figure 1 on the following page.</p>
<p>Figure 1: ADTH Comps Table</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/309/049/original/image_52074271051668217193242.png?1668217194" class="editor-image img-responsive" data-smartkarma-image-id="309049"></figure>
<div class="content-remarks">
<p>Source: YCharts and AdTheorent</p>
</div>
<h3>DISCLOSURES</h3>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>John Roy, PhD, who is the writer of this report, covers the Technology sector for WTR. Mr. Roy, PhD and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY POINTS

3Q22 revenue of $37.6 million was at the low end of guidance and down 4.9% Y/Y, partially driven by a tough macro and ad spending environment, and below consensus of $38.6 million. Adjusted gross profit margin was 47.9%, down 350 bps.
The company’s number of active customers grew by 11% Y/Y to 339. CEO Jim Lawson indicated that the company saw an infection in September as demand improved and that has continued into October.
CTV continued to grow well, up 36% Y/Y to $2.6 million. The company also launched its unique Health Predictive Audience product, the first of a suite of Predictive Audience products that it expects to drive growth. The goal is to get to 20% revenue growth Y/Y, but the company is not expecting to see that in 2023 as products are still ramping including its Direct Access “self-service” product.
In 3Q, the larger programmatic companies saw revenue increases, while the smaller ones saw declines. Lawson said that AdTheorent, while small, has unique products and is taking the prudent step to position the company with the right products for significant long-term growth—mentioning a 20% Y/Y goal.
Given the quarter and current ad environment, the company narrowed 4Q22 guidance, including $45.7 to $50.7 million in revenue, below consensus of $57.3 million. It expects adjusted gross profit of $29.8 to $33.0 million and adjusted EBITDA of $5.3 to $7.8 million.
For comparables, we have used a group of similar-growth, similar-margin ad software companies. These comps have an average forward P/E of 26.9x, while ADTH is trading at 7.9x, a 71% discount; similarly, ADTH is trading at a P/S discount of 76%.

EARNINGS SNAPSHOT

Read all our reports on&nbsp;AdTheorent&nbsp;on our website.
COMPANY OVERVIEW
AdTheorent is a privacy-forward, machine-learning powered programmatic advertising company. Put simply, the company uses machine learning and data science to target digital ads based on non-individualized predictive scores. Its biggest clients are sophisticated data-driven advertisers who know digital and expect their digital campaigns to drive tangible results.
AdTheorent is improving the digital world for advertisers and consumers. By way of illustration, consider the following: when a consumer accesses content on a device—a mobile device, tablet, or laptop, or even a connected television—a content page will render on that device, and that screen will likely contain an opportunity to show an ad, which is called a digital impression.
Advertisers want to know which of these impressions or opportunities to show/serve ads to are most likely to yield engagement, conversions, or other advertiser-specified actions by their customers, such as credit card signups, online sales, hotel bookings, or airline bookings; whatever action is behind the given ad campaign the advertiser is using to try to drive those actions. They want to buy the media that will do just that.
Behind the scenes, there is a marketplace to buy and sell those ad opportunities. It’s an auction system that takes place in microseconds. AdTheorent occupies the demand-side platform silo in this ecosystem, enabling advertisers to purchase digital media and digital ad impressions in real time and one at a time.
The key to AdTheorent’s success is that it has transformed how that is done. AdTheorent uses machine learning and data science as its core method of ad targeting and campaign optimization. This contrasts with cookie-based or other ID-based or user profile-based targeting, which focus more on individual identities and retargeting users and profiles across the Internet.
Operating at massive scale, AdTheorent optimizes ad targeting by evaluating and providing predictive scores for more than 87 billion impressions daily, bidding on less than 0.01% of impressions scored. Decisioning at this scale enables AdTheorent to make precise ad placements for each of its world-class advertiser customers. The company also leverages advanced machine learning and data science to drive platform efficiencies by optimizing against ad impressions that represent a greater risk of IVT/fraud, poor viewability, and brand safety, or impressions that may not be measurable by third-party measurement providers.
VALUATION
ADTH Trading at a Significant Discount to Its Comps
A hallmark of our research at WTR is that we do not offer specific stock recommendations and/or stock price targets. Our purpose is to help educate our readers about a company and some of the factors that we believe can be relevant to their choices about when and if to invest in a particular issue. We do offer data and graphs about how the stock has been valued historically—typically using conventional metrics—and sometimes we present data and graphs that juxtapose historical valuations among issuers that are believed to be comparable.
For AdTheorent, we focused on comparable analysis using companies in the same industry with similar margins and growth profiles. The company has limited trading context; therefore, we are not focusing on historical valuation metrics. Catalysts for investors include visibility as a public company, new client acquisition announcements, an improved global COVID-19 health environment, continued digitization of the ad industry, and continuation of strong revenue and earnings growth trends.
For a comp group, we have used similar-growth, similar-margin ad software companies. These comps have an average forward P/E of 26.9x, while ADTH is trading at 7.9x, a 71% discount; similarly, ADTH is trading at a P/S discount of 76%. See Figure 1 on the following page.
Figure 1: ADTH Comps Table


Source: YCharts and AdTheorent

DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  John Roy, PhD, who is the writer of this report, covers the Technology sector for WTR. Mr. Roy, PhD and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.  WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.  The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

11% Customer Growth in a Tough Market, with a Positive Inflection in September