MGI Q1 on Wednesday: We expect decent but lower growth in a more uncertain environment

Analyst Comment

MGI will publish their Q1 results on Wednesday morning (May 31). Starting out the year we expect Q1 revenue growth to come in at a high single digit percentage. As for profitability we expect a slight decrease mainly due to higher costs and higher amortization estimates. The first quarter of the year is traditionally the weakest for ad tech companies and according to MGI, revenues typically drop 20% to 30% in Q1 compared to Q4 due to seasonality. The current year is in some ways clouded in uncertainty with indications that 2023 will be a weaker year for ad spending growth. The Q1 results of other ad tech companies have been mixed with revenue growth ranging from -0.2% to 21%.

We estimate high single digit growth to start out the year

We expect Q1 revenues to come in at 71.8 MEUR (Q1’22: 65.9 MEUR), a 9% increase year-on-year. Our assumption is that growth will be mostly organic with some non-organic growth from the AxesInMotion and Dataseat acquisitions. The 9% growth rate might seem paltry compared to the 27% (18% organic) achieved last year, however, we are heading into a year of more uncertainty. During the second half of 2022 and leading into this year there has been chatter regarding a slowdown in ad spending with different actors voicing their concerns about how 2023 will turn out. The worry is mainly that the overall weaker macroeconomic environment of today would lead to companies cutting back on their marketing/user acquisition budgets.

In preparation for MGI’s Q1 earnings release we have gone through the Q1 results of some of MGI’s competitors to gauge how the digital ad market is developing. The results are mixed with the large walled gardens of Meta and Alphabet reporting revenue growth for their advertising segments of 4% and -0.2%, respectively. Meanwhile the open internet competitors reported Q1 revenue growth ranging from 2% to 21%. PubMatic (2%), Magnite (10%), Apploving (14%), and The Trade Desk (21%).

Estimates of stable but lower profitability due to increased costs and higher amortization

We expect adjusted EBIT to come in at 11.8 MEUR (Q1’22: 13.6 MEUR), which corresponds to a margin of 16% (Q1’22: 21%). The lower margin is due to a combination of slightly higher operating costs & amortization, slightly lower other operating income, and not adding back any non-recurring costs (Q1’22: 0.7 MEUR). Our estimate for adjusted EBITDA is 16.9 MEUR (Q1’22: 17.6 MEUR). Going further down on the income statement we expect adjusted EPS to decrease to 0.03 EUR (Q1’22: 0.04). In addition to the factors mentioned above the EPS is burdened by higher financial expenses due to rising interest rates.

Limited visibility regarding revenue growth for 2023

For the current year, we estimate revenues to grow by 9% to 354 MEUR. This slower revenue growth compared to previous years (2022: 18%*, 2021: 38%*) reflects our assumption that overall ad spending will be lower. We do, however, assume that digital advertising and especially programmatic will continue to grow faster than overall ad spending as it continues to capture market share from traditional methods. When it comes to profitability, we expect it to come in lower compared to the strong performance of last year. The reasons for the lower margin estimates are much the same as detailed in the paragraph above: higher costs, higher amortization, and not adding back non-recurring costs (2022: 8.5 MEUR). Our estimate for adjusted EBIT comes in at 68.9 MEUR (20% margin) compared to 86.2 MEUR (27% margin) in 2022. As for adjusted EBITDA our full year estimate is 89.3 MEUR (2022: 102.9 MEUR). In March 2023 MGI announced that they had issued new bonds and repurchased a part of the already existing ones. The newly issued bonds carry a higher interest rate (7.25% + 3m EURIBOR), which combined with the rising EURIBOR rates will increase the financial expenses of the upcoming years by several million. We will update our estimates regarding the financial expenses in conjunction with the release of the Q1’23 report. With MGI choosing not to provide guidance during the Q4’22 earnings release (except that they expect revenues to grow) it is with great interest we await the Q1 results as an indicator of how the rest of the year is going to develop.

*Organic revenue growth rate. Total growth rate 2022: 29%, 2021: 80%