Take a pass on EQ Inc, says Echelon

Rob Goff of Echelon Capital Markets has quieted his expectations surrounding EQ Inc (EQ Stock Quote, Chart, News, Analysts, Financials TSXV:EQ), downgrading the stock from a ‘Speculative Buy’ to a ‘Hold’ rating, while also lowering his target price from $1.60/share to $1.45/share for a projected return of 13 per cent in an update to clients on Thursday.

Founded in 1995 as Cyberplex and headquartered in Toronto, EQ Inc provides digital marketing services using real-time and advanced analytics to help businesses track and optimize their targeted campaigns.

Goff’s latest update comes after the company released its first quarter financial results for the 2022 fiscal year, with his rating and target changes attribtued to a drop in his estimates on data revenues along with a modestly higher EBITDA drain for 2022.

“While the greater drain reflects investment costs to stimulate growth, we do not see that resulting in upgraded 2022 revenues,” Goff said. “The resulting return of 13 per cent supported a move to our Hold rating in a market where our tech coverage names include peers with more aggressive target returns.”

EQ’s quarterly report was headlined by revenue of $2.7 million to come out slightly ahead of the $2.4 million estimate set out by Echelon while producing a 54.6 per cent year-over-year increase. 

The company’s advertising revenue provided a significant beat at $2.1 million for the quarter compared to the $1.6 million Echelon projection, which Goff partially attributed to additional traction in its Paymi platform, which links to users’ credit cards to provide cash back rewards for credit and debit card transactions, along with executing on lower-margin contracts. However, the company’s data revenue was a slight miss at $585,000 in relation to the Echelon estimate of $750,000.

On the margins, the company reported gross profit of $0.9 million to match the Echelon estimate, with the 34.6 per cent margin coming in below the forecast of 41.6 per cent. Meanwhile, EQ reported an adjusted EBITDA loss of $1.6 million, which came in slightly below the Echelon forecast of a $1.3 million loss on account of increased upfront investment in the first half of 2022.

“Our focus this quarter was to continue to productize our data solutions and build upon our recurring monthly revenue,” said Geoffrey Rotstein, President and CEO of EQ in the company’s May 30 press release. “Significant progress was accomplished on both initiatives, and we are pleased with the progress of our products and the value they have generated for our clients. Our tools and solutions, which leverage our proprietary data and technology, will continue to push our growth throughout 2022 as we focus on our core verticals and our path to profitability.”

Moving forward, Goff is looking for a potential increase in advertising for EQ’s automotive vertical as supply chain issues ease, car inventories are replenished, and dealers have an incentive to advertise, which he cites for potential outperformance in the final quarter of 2022. Goff is also looking for a similar impact in the insurance vertical, where client acquisition costs can be significantly lowered using analytics and algorithms alongside high gross margin audience segmentation data services.

In addition, Goff referenced the company’s focus on data productization, with insights being available to geocohorts.

“The capability of grouping by behaviour provides an extra layer of privacy for individuals as personal identifiable information is not included in aggregate analytic data presented to customers,” Goff said. “We see the successful implementations of EQ’s dashboards as an opportunity to upsell advertising contracts at no additional customer acquisition costs to the company.”

With the first quarter results now in place, Goff revised his 2022 financial projections, as he now forecasts $17.1 million in revenue for 2022 (previously $16.9 million), paired with small reductions in his gross profit from $4.1 million to $3.9 million, and a revised adjusted EBITDA loss forecast of $4.1 million instead of a $3.9 million loss.

Looking ahead to 2023, Goff maintained a revenue forecast of $22.9 million with $10 million in gross profit, with an expected positive turn in adjusted EBITDA of $1.1 million.

Despite the target drop and re-rating, Goff remains positive on the shares viewing limited downside.

“We see more aggressive, positive share performance for EQ and the potential for positive PT moves with evidence of revenue traction that we expect from data initiatives including sector insights where we see a large opportunity for EQ to monetize its data capabilities,” Goff said.

EQ shares have produced a five per cent return on investment since the start of 2022, gradually rising from its 2022 low of $1.12/share on March 8 to peek above its starting point, reaching $1.28/share on Wednesday.