Original-Research: Verve Group SE (von GBC AG): BUY

Classification of GBC AG to Verve Group SE

Company Name:	Verve Group SE
ISIN:	SE0018538068
Reason for the research:	Research study (Note)
Recommendation:	BUY
Target price:	6.60 EUR
Last rating change:
Analyst:	Marcel Goldmann, Cosmin Filker

HY1 2024: Dynamic sales development thanks to strong organic growth; disproportionately high earnings growth due to the onset of economies of scale and savings effects; GBC estimates and price target also raised following guidance increase

Business performance in the first half of 2024

Verve Group SE (Verve) published its Q2 and half-year figures for the current financial year 2024 on 30 August 2024. In the first six months of the year, the ad-tech platform group continued its growth strategy at a high growth rate in the context of a further recovery in the advertising industry and was able to grow significantly faster than the industry as a whole. Group digital revenue increased dynamically by 23.5% year-on-year to € 179.04 million (HY1 2023: € 144.93 million).

The positive Group sales performance was primarily driven by the high-volume Supply Side Platform business unit with a significant increase in segment sales of 28.1% to € 167.64 million (HY1 2023: € 130.84 million). By contrast, revenue in the essentially smaller DSP business area, which was significantly strengthened and expanded by this year's Jun acquisition (takeover in June 2024), fell to € 11.41 million (HY1: € 14.10 million).

In line with their dynamic sales development, EBITDA increased disproportionately by 29.0% to € 48.27 million (HY1 2023: € 37.41 million) compared to the same period of the previous year due to economies of scale and cost optimisation effects (resulting from the cost-cutting programme introduced in 2023). Adjusted for one-off costs and special effects (e.g. M&A or consulting costs), adjusted EBITDA (Adj. EBITDA) for the first half of 2024 totalled € 51.10 million (HY1 2023: € 40.40 million), an increase of 26.5% compared to the same period of the previous year. At the same time, the adjusted EBITDA margin increased slightly to 28.5% (HY1 2023: 27.9%).

Earnings growth also continued at net level (consolidated earnings after minority interests) with a jump in earnings to € 6.86 million (HY1 2023: € 2.57 million).

Business performance in Q2 2024

Due to their accelerated (internal) growth momentum over the past quarters, a high growth rate was recorded in the second quarter in particular. In Q2, Group sales increased significantly by 26.8% to € 96.57 million compared to the same quarter of the previous year (Q2 2023: € 76.18 million). Adjusted for currency effects, organic growth of 26.0% was achieved.

The main growth drivers here proved to be the strong customer demand for privacy-first targeting solutions from new customers and the expansion of (digital) advertising budgets (net dollar expansion rate Q2 2023: 82% vs. Q2 2024: 109%) with existing customers. The growth achieved was also reflected in a 33.0% increase in larger software customers (annual revenue of more than USD 100,000) to 851 (Q2 2023: 642), with the total number of customers also increasing significantly to 2,518 software customers at the end of the second quarter (Q2 2023: 1,976). At the same time, the number of adverts delivered to digital customers increased significantly by 23.8% to 224 billion (Q2 2023: 181.0 billion).

According to the company, the ad-tech company once again succeeded in further increasing its market share in the past quarter, particularly through innovative AI-based customer solutions such as ATOM 3.0, Moments.AI and ML-driven optimisations (for SKAN), thereby expanding its existing market position.

In terms of operating earnings development, Verve achieved a significantly disproportionate increase in EBITDA of 40.5% to € 28.08 million (Q2 2023: € 19.99 million) due to the strong organic quarterly growth recorded and a reduced structural fixed cost base. Group EBITDA adjusted for one-off and special effects (e.g. M&A and consulting costs) increased by 36.6% to € 29.10 million (Q2 2023: € 21.30 million). At the same time, the adjusted EBITDA margin increased significantly to 30.1% (Q2 2023: 28.0%).

In view of the high profitability and strong operating cash flow, the Verve Group was able to improve its leverage ratio (net debt/adj. EBITDA) to 2.8x (end of FY 2023: 3.1x) and is aiming for a further improvement to 2.4x by the end of the 2024 financial year. In the medium and long term, the technology company is even aiming to further reduce its leverage ratio to 1.5x to 2.5x.

Forecasts and evaluation

With the publication of its quarterly and half-year figures, the Verve Group has also revised its previously raised corporate guidance upwards again. In view of the positive half-year performance and its visibility in August regarding the further course of the financial year, the technology company now expects Group sales in a range of € 400.0 million to € 420.0 million (previously: € 380.0 million to € 400.0 million) and an adjusted EBITDA (Adj. EBITDA) of € 125.0 million to € 135.0 million (previously: € 115.0 million to € 125.0 million).

It should be noted here that the adjusted company guidance does not include any potential (additional) advertising income from the upcoming US election campaign, which is expected to occur between the end of the third quarter and the fourth quarter of 2024 in particular and thus opens up significant upside potential for revenue. It should be emphasised at this point that the US presidential candidate Kamala Harris is aiming for record spending on digital election advertising as part of her election campaign (according to media reports, around USD 200 million for digital advertising or digital advertising channels) and is therefore planning the strongest digital advertising campaign in US history.

At the same time, the technology company has also adjusted its previous medium-term financial targets upwards in the form of an average annual (adjusted) EBITDA margin of 30.0% to 35.0% (previously: 25.0% to 30.0%) due to the significant increase in the Group's size and profitability following the Jun acquisition. At EBIT margin and net leverage level, an improvement to 20.0% to 25.0% (previously: 15.0% to 20.0%) and a reduced leverage ratio (net debt/adj. EBITDA) of 1.50x to 2.50x (previously: 2.0x to 3.0x) is expected. In terms of medium-term growth ambitions, Verve continues to expect an average annual growth rate of 25.0% to 30.0% (CAGR).

In view of the convincing half-year performance and the raised corporate guidance and increased medium-term financial outlook, we have adjusted our previous sales and earnings forecasts for the current financial year 2024 and also for the following years upwards. For the current financial year, we now expect consolidated sales of € 401.24 million (previously: € 380.12 million) and EBITDA of € 119.29 million (previously: € 108.92 million). Based on conservative assumptions, we expect sales of € 502.11 million (previously: € 475.91 million) and EBITDA of € 156.84 million (previously: € 148.77 million) for the following financial year 2025.

Overall, we continue to assume that the Verve Group will be able to dynamically continue its growth trajectory thanks to its strong market position in the digital advertising market and innovative technologies (privacy-first customer solutions, etc.). The recently acquired Jun company (effective from 1 August 2024) should lead to an even stronger pace of growth and improved Group profitability thanks to the expected synergy effects as part of the Group integration and strong positioning on the demand side.

In light of our increased sales and earnings forecasts, we have raised our previous price target to € 6.60 (previously: € 6.00) per share. The onset of the roll-over effect (price target based on the following financial year 2025 instead of 2024) also had the effect of increasing the price target. In view of the current share price level, we therefore assign a 'BUY' rating and continue to see significant upside potential in the Verve share.

You can download the research here: http://www.more-ir.de/d/30731.pdf

Contact for questions:
GBC AG
Halderstrasse 27
86150 Augsburg
0821 / 241133 0
research@gbc-ag.de

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Date (time) of completion: 06/09/2024 (8:25)
Date (time) of first distribution: 09/09/2024 (9:00)