Disclosure: Kidoz Inc. has paid FRC a fee for research coverage and distribution of reports. See last page for other important disclosures, rating, and risk definitions.
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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
