Kidoz Inc.
Client Delays Impact Revenue; Sector Outlook Remains Strong
Published: 12/7/2023
Author: Sid Rajeev, B.Tech, CFA, MBA
Sector: AdTech | Industry: Advertising
| Metrics | Value |
|---|---|
| Current Price | US $0.21 |
| Fair Value | US $0.82 |
| Risk | 4 |
| 52 Week Range | US $0.14-0.44 |
| Shares O/S (M) | 131 |
| Market Cap. (M) | US $27 |
| Current Yield (%) | n/a |
| P/E (forward) | n/a |
| P/B | 4.0x |
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Report Highlights
Highlights
In Q3, revenue dropped 20% YoY, falling 18% below our estimate due to clients delaying ad campaigns. We were disappointed with the revenue decline, especially considering the upward trend in global digital ad spending. Major digital ad platforms, YouTube (NASDAQ: GOOGL), and Meta (NASDAQ: META), reported revenue growth of 12% YoY and 24% YoY, respectively.
Another contributing factor to the decline in revenue is KIDZ's shift in sales strategy within the U.S. Instead of relying exclusively on resellers, the company expanded its sales team to prioritize direct sales; a strategy management believes will be more successful in boosting revenue, and margins.
KIDZ's ad network spans 5,000+ apps, reaching 400M kids. Prominent brands such as McDonald's (NYSE: MCD), Disney (NYSE: DIS), Lego, Kellogg's (NYSE: K), and Nintendo (TYO: 7974), advertise on KIDZ’s platform. Management has indicated that their newly launched ad platform, Prado, designed for teens and parents, is gaining significant momentum.
In Q3, gross margins improved by 2 ppt YoY, aligning with our forecast. However, EBITDA, and EPS, deteriorated due to lower revenue.
We anticipate a faster growth trajectory in global ad spending for 2024, driven by cooling inflation, and lower interest rates. We anticipate central banks will initiate rates cuts in H1-2024.
KIDZ’s forward EV/R is 1.3x vs the sector average of 3.0x, implying a 57% discount.
As Q4 usually comprises 50% of annual revenue, its results will indicate the success of KIDZ’s new direct sales strategy.
Financials 
Q3 revenue was down 20% YoY, missing our forecast by 18%
Gross margins increased by 2 pp YoY, in line with our forecast
Despite a 20% YoY increase in operating expenses, they stayed in line with our forecasts
As a result of lower revenue, EBITDA, EPS, and FCF deteriorated, and fell well below our estimates
Healthy balance sheet, with negligeable debt
Source: FRC/Company
None of the outstanding options are in the money
Sector Outlook
Source: FRC / Various
Global digital ad spending is projected to grow by 10.5% this year, up from 8.6% in 2022 (Source: eMarketer)
In 2023, KIDZ’s revenue growth lagged behind global digital ad spending, after outperforming global growth by an average of 3.3x over the past three years
FRC Projections and Valuation
As Q3 was weaker than expected, we are lowering our near-term forecasts
Source: FRC
As a result, our DCF valuation declined from C$1.47 to C$1.15/share
Digital AdTech Companies
Source: S&P Capital IQ / FRC
KIDZ’s forward EV/R of 1.3x (unchanged) is significantly lower than the sector average of 3.0x (previously 2.9x)
Our comparables valuation decreased from C$0.53 to C$0.48/share, driven by our lower revenue forecast
We are maintaining our BUY rating, and adjusting our fair value estimate from C$1.00 to C$0.82/ share (the average of our DCF and comparables valuations). While Q3 fell short of expectations, we remain positive on the stock, given management’s conviction in their new sales strategy, Prado’s initial success, and a robust sector outlook.
Risks
We believe the company is exposed to the following key risks:
1. Operates in a highly competitive space
2. Unfavorable changes in regulations
3. Ability to attract publishers and brands will be key to long-term growth
4. FOREX
