Verve Q2’24 earnings preview: Core business sees great momentum

*Consensus numbers reflect the situation before the positive earnings update

On August 12, Verve issued a positive earnings update for Q2, ahead of the full report set for release on Thursday morning, August 29. The earnings update showed a 26% organic revenue growth, marking a notable acceleration from previous quarters, driven by a strong intake of new customers. In addition, the company’s efficient cost control boosted profitability, with the adjusted EBIT margin reaching 24%, up from 22% in Q2’23. Given the strong momentum in the core business, Verve raised its full-year guidance to 400-420 MEUR in revenues (prev. 380-400 MEUR) and 125-135 MEUR in adjusted EBITDA (prev. 115-125 MEUR).

Following the report's release, Verve will host a Capital Markets Day (“CMD”) starting at 10:00 CEST, where the company will discuss the Q2 results, and recent trends in the advertising industry, and provide insights into the company’s strategic focus and growth potential.

Google’s cookie policy reversal raises industry questions

We are getting increased evidence of a recovering advertising market, not only from Verve’s strong performance in its core business but across the industry, from open internet players to the walled gardens. However, on July 22, Google announced that the company is considering scrapping the deprecation of third-party cookies in Chrome and introduce some sort of opt-out mechanism for the users instead. It remains unclear whether Google will adopt a model similar to Apple’s ATT framework, how the consent interface will be designed, or the timeline for these changes. Any insights or comments regarding this and how Verve views its impact on the broader industry as well as the demand going forward will be of interest in the report. Worth repeating is that Verve’s bread and butter is mobile in-app, which is not significantly impacted by the removal of third-party cookies on Chrome. However, these actions could have a market-wide impact on factors such as pricing, budget allocations, and demand. Additionally, it is yet unclear how and when a GAID (Google mobile ad ID) deprecation will take place and its impact for mobile in-app advertising.

Focus areas: Pricing trends, product launches, and cash flows

Verve’s strong Q2 revenue growth, outpacing the growth in delivered ad impressions, suggests higher pricing (CPMs) and we will be looking for further details in the report regarding this trend and the trajectory for the rest of the year. Insights into the reception and adoption of Verve’s latest product launches, ATOM 3.0 and HyBid SDK 3.0, will also be key to evaluating future growth potential.

The adjusted net debt leverage ratio fell to 2.8x from 3.2x in the previous quarter, indicating a reduction of net debt by around 20 MEUR q/q to approx. 300 MEUR as of June 2024. Considering that Verve’s cash flows typically peak in the second half of the year due to seasonality, the strong improvement in leverage during Q2 suggests strong cash generation during the quarter. We will closely examine this in the upcoming report.

2024: A year of recovery – but some mixed signals ahead

Following the positive earnings update on August 12, our revised estimates for 2024 stand at 413 MEUR in revenue with an adjusted EBIT at 104.5 MEUR (25% margin), aligning with the company’s updated guidance. The integration of Jun Group as of August 1 is expected to sustain Verve’s strong double-digit growth in the coming quarters. However, we expect organic growth to taper gradually to 21% in Q3 and 9% in Q4. The relatively sharp decline in Q4 is largely due to tougher year-over-year comparisons, reflecting Verve’s strong performance at the end of 2023. This outlook, characterized by a lower year-over-year organic growth rate in the upcoming quarters, aligns with both the company’s guidance and broader industry trends (open internet and walled gardens), suggesting that the most pronounced phase of recovery is behind us, with growth likely to moderate going forward.

While 2024 has clearly marked a recovery in the digital advertising market, several cautionary factors remain in our view. The labor market is cooling, and the unemployment rate has increased successively as a result. Consumer sentiment came in at an 8-month low in July, giving signals of consumers’ continuous frustration with higher prices and concerns about the economic outlook. These dynamics increased the recession fears in the financial markets during the summer, with investors fearing that the Fed had waited too long with initiating rate cuts. If consumer spending tightens, it could impact advertisers' return on ad spend (ROAS) and lead to lower advertising budgets and CPMs. On the other hand, inflation shows signs of easing, making an interest rate cut more likely in the near future, which would, all else equal, be a positive development for the advertising industry as it would help stimulate economic activity and consumer spending. Overall, despite some uncertainties, we expect Verve to maintain strong growth over the next quarters.