Verve Q3'24: The risk/reward just got more attractive

While Verve's Q3 revenue aligned with our estimates, adjusted operating profit fell short of expectations. However, the company demonstrated strong cash conversion, and other KPIs remained robust. Despite the earnings miss, we maintain our Accumulate recommendation, viewing the post-report share price decline as an attractive risk/reward opportunity at current levels. Our target price remains unchanged at SEK 50.

Earnings miss balanced by free cash flow beat

Verve reported revenues of 114 MEUR in Q3, a 45% growth y/y (31% organic), which aligned with our estimates. The net dollar expansion rate as well as retention rate was at healthy 108% and 96%, respectively, indicating that existing customer continues to spend more than last year while Verve keeps churn at a low level, aligning with historical figures. We are encouraged by the early signs of synergy realization following the integration of Jun Group. Post-acquisition, Jun Group has demonstrated accelerated organic revenue growth, increasing from 2% y/y in Q2’24 (pre-acquisition) to 7% in Q3 and reaching 12% in October. While Jun Group remains relatively standalone at this stage, its growth has been further bolstered by e.g. gaining access to Verve’s CTV supply. On the downside, adjusted EBIT missed our expectations by 21%, largely due to higher costs in scaling emerging ad formats (e.g., full-screen and video ads), reduced capitalization of development costs, and impairment costs related to an unsuccessful mobile game launch. However, we believe the miss on earnings was weighed up on the FCFF, which was above our forecast and showcased strong cash conversion in the quarter.

We make only small changes in our estimates

While our revenue estimates remain largely unchanged, we have slightly lowered our earnings estimates following the Q3 report. For 2024, we estimate an adjusted EBIT of 97 MEUR (was 110 MEUR), corresponding to an adj. EBIT margin of 23% as we expect further ramp-up in new ad format to continue to weigh on margins for a couple more quarters as well as modeling for somewhat lower capitalizations on the income statement. We have also lowered our adjusted EBIT estimates for 2025-2026 by 2-4% due to these factors. However, the negative effect on the fair value from these downward revisions in earnings was offset by slightly higher FCFF estimates as we expect higher cash conversion going forward on the back of the strong Q3 results.

The share price drop following Q3 earnings presents an attractive opportunity to accumulate

The lower-than-expected earnings do not change our investment view on Verve. In fact, we believe the market may have overlooked the strong FCFF generation during the quarter, which exceeded our forecast. As such, post-earnings share price drop presents a good opportunity to accumulate in our view. Based on our 2025 estimates, Verve trades at an adjusted EV/EBIT of 7.4x and an adjusted EV/FCFF of 10x, which are on the low side compared to peers. We believe Verve is well-positioned to sustain strong growth, enhance cash conversion, and steadily deleverage its balance sheet going forward. As these events unfold, we anticipate Verve's valuation multiples to expand from current levels. Our DCF model, which we believe better captures the company’s long-term value creation, points to a potential upside for the stock at SEK 52.5 per share, supporting our positive investment view.