EQ Inc is still a pass, says Echelon

Echelon Capital Markets analyst Rob Goff says the potential is there for ad tech company EQ Inc (EQ Inc Stock Quote, Charts, News, Analysts, Financials TSXV:EQ) to develop its artificial intelligence and data analytics capabilities into new revenue streams, but investors will want to stay on the sidelines in the meantime. Goff maintained a “Hold” rating on EQ in a new update to clients on Thursday, while at the same time lowering his target price from $1.45 to $1.35 per share.

EQ Inc is a marketing services provider using AI and advanced analytics to support advertisers’ targeted and customized ad delivery. EQ’s products include ATOM, a self-serve, location-based programmatic advertising tool; LOCUS, an automated data processing platform; and Paymi, a cloud-based marketing and loyalty rewards platform. 

The company released second quarter 2022 results on August 19, featuring $3.2 million in revenue, which was up eight per cent year-over-year and up 19 per cent sequentially. Adjusted EBITDA for the quarter was a loss of $1.2 million compared to negative $453,000 a year earlier.

EQ reported 11 new client engagements over the second quarter, focusing on wins in the financial services, automotive and retail sectors. Meanwhile, the company said the negative earnings for the Q1 were a representation of the company’s continued investments in AI and data products, with management indicating the fruits of those investments will be coming later in 2022 and into 2023. EQ is rolling out new analytics tools and dashboards, saying that initial feedback from customers has been “highly positive” from the retail and automotive spaces.

“Our innovation, our product development and our constantly optimized value proposition continues to drive value to our clients. Our new data insights tools, for the retail and automotive verticals, are differentiated from anything else in the industry and will be essential for any business looking to make data-based decisions,” said President and CEO Geoffrey Rotstein in a press release.

Reviewing the quarterly results, Goff said the $3.2 million topline was in-line with his $3.3 million estimate while coming in a little under the consensus call at $3.6 million. Split up, the company’s Advertising revenues were up 5.4 per cent year-over-year to $2.3 million and Data revenues were up 14 per cent to $0.9 million. 

Gross profit for the Q2 was $1.3 million for a 38.6 per cent margin, which compared to Goff’s forecast at $1.4 million for a 43.6 per cent margin and the Street’s estimate at $1.6 million for a 38.6 per cent margin. Adjusted EBITDA at negative $1.2 million was a hair better than Goff’s call at negative $1.3 million.

With the quarterly numbers now in, Goff has trimmed his upcoming Q3 revenue forecast from $4.7 million to $3.4 million and dropped his full-year 2022 revenue call from $17.1 million to $14.1 million. 

Looking ahead, Goff said he’s expecting catalysts to come in the form of new dashboard subscription wins along with the announcement of new partnership agreements with Paymi and the completion of integrations to drive high-margin revenue growth in 2023. He said the return of the automotive sector should support higher advertising revenue upside for EQ and Goff said investors are likely to react favourably to marquee wins for the company in the insurance and finance verticals.

“We look for EQ’s Artificial Intelligence (AI) of consumer behaviour to quickly emerge as a differentiated enabler driving client strategy, proprietary marketing, and advertising programs,” Goff said. 

“The Company’s AI capabilities position it as a leader in Canadian location-based analytics. EQ leverages its AI and Machine Learning (ML) with location-based data together with primary and secondary data to predict purchase intent and analyze audiences. EQ currently works primarily with marquee names across the Media, Telecom, Automotive, and Financial verticals where its data analytics curate target audiences for media buying initiatives with recent success as a tool for capital allocation and broader marketing strategy and competitor analysis,” he wrote.

“Its success is measured in superior client ROIs that have driven significant contract expansions and no churn amongst top clients. EQ’s data analytics drive media buying with ~70 per cent of media buys integrated with data insights. Direct data profits exceed advertising profits entering 2023,” Goff said.

Goff estimated EQ to be currently trading at multiples of 5.5x and 3.6x for 2022 and 2023’s EV/Revenue, respectively, compared to its Advertising Technology peer group at 4.7x and 3.6x, respectively.

At the time of publication, Goff’s new target price of $1.35 per share represented a projected one-year return of 18 per cent. Year-to-date, EQ shares are flat, while over the past 12 months EQ is down about 14 per cent.