Raketech reported revenue of EUR19.0m and adjusted EBITDA of EUR5.1m for Q1 2024. This was in line with the preliminary numbers announced on May 1, following a Google update that impacted the business negatively. Our estimates ahead of the announcement of preliminary results, stood at EUR21.3m and EUR5.1m, respectively. Coming to the performance per segment and region, all saw somewhat lower topline than expected. Direct costs were lower than expected however, driven by a strong gross margin in Sub-affiliation which was disclosed for the first time this quarter. Opex was largely in line with our forecast, albeit with lower employee costs (adjusted for restructuring costs of EUR0.8m) while other costs were slightly higher than expected. The company saw good cash flow of EUR6.5m, supported partly by working capital changes. Raketech settled earnouts of EUR13.0m during the quarter, and following this, the closing balance of remaining earnouts stood at EUR33.9m at the end of Q1 2024, The balance sheet remains strong where the net debt, excluding remaining earnouts, stood at EUR2.8m at the end of Q1 2024.

Raketech comments that it experienced an unexpected magnitude from the Google core update that was carried out in March and ended in April. Adjusting to Google updates is generally business as usual for affiliate marketing companies and good assets can typically recover from changes that impacts negatively in the short term. A broad portfolio of assets can help mitigate overall impact as well, and with exception of Casumba, Raketech’s assets looks to have performed well following the update. Regarding Casumba, the company states that it has implemented SEO recovery strategies and improved content quality whereafter the company has seen stabilizing traffic. Revenue of EUR 5.9m in April also suggests that revenue generation is stabilizing, considering that January revenue of EUR7.3m implies average revenue of EUR5.8m in February and March. Still, the lower run rate resulted in a downgrade of Raketech’s EBITDA guidance, which now stands at EUR20m for 2024E compared to the earlier level of EUR24m-26m.

While Q1 2024 was a setback for Raketech after a period with strong performance during 2020-23, driven by solid performance from Sub-affilation and Casumba, we believe the outlook for the company remains positive. The Sub-affiliation continues to see strong performance with solid YoY growth albeit a sequential decline from the seasonally stronger Q4. Outlook for the segment also remains positive, with continued strong demand from existing and new publishers as well as expansion into new markets. The strong gross margin of 23% in Sub-affiliation illustrates potential for margin expansion, although with variability on a quarterly basis. Furthermore, growth should also be supported by the strategic growth initiatives that were launched in the quarter which includes: lower SEO dependency, grow sports vertical, increased media partnerships and expand to new geographies. As illustrated in the chart below, we continue to see potential for profitable growth in the coming years.

While the dividend was withdrawn to improve financial flexibility, we believe this make sense to ensure cash availability ahead of the next Casumba earnout payment (EUR14m to be paid withing next 12 months). However, we also highlight that we expect the earnout to be covered by the cash flow generated in 2024E. As such, we expect that net debt should be at around the current level (EUR2.8m) in end of Q1 2025E, after the next earnout is paid. The final two earnout installments totalling EUR20m have a flexible payment schedule and can be settled at any point until September 2026E. In our view, this creates potential to do buybacks and/or reintroduce a dividend for FY 2025E.

Coming to our estimate changes following Raketech’s updated guidance and the run-rate revenue in April, we have lowered our topline forecast by 16% and EBITDA estimate by 20% for 2024E. Looking into 2025-26E, we have increased our growth expectations for the US following the positive comments regarding progress of affiliation revenue and the launch of Sub-affiliation. We also assume that Casumba can see some recovery and following negative growth for the Rest of World region in 2024E, we assume growth of 20% in 2025E and 15% in 2026E. Still, with the lower base in 2024, our 2025-26E topline and EBITDA estimates are down 12-13% and 15-18%, respectively. On a positive note, we have revised our assumptions for amortizations as the current run-rate implies that most intangible assets will be fully amortized by the end of 2025E, which have resulted in increased EBIT and EPS estimates. The tables below summarizes group key financials as well as revenue per and segment and region.

We have adjusted our valuation on the back of the lowered estimates where our new base case stands at SEK35 (SEK40) while the new bull case is SEK68 (SEK80) and the bear case SEK12 (SEK14). Our base case implies c6-7x EV/EBITDA 2024-25E while the share currently trades at c2-3x EV/EBITDA 2024-25E (including earnouts). We see potential for the valuation multiple to move higher if the company can see recovery from the Casumba assets. The table below summarizes key assumptions for the valuation scenarios.