Redeye comments on MGI’s Q3 2023 report, showing stronger sales and underlying profitability than expected. In the quarter, MGI saw positive one-off effects of cEUR63m related to releasing earnouts for its previous acquisition of AxesInMotion.

Net sales in Q3 2023 came in at EUR78.3m (87.6), above our estimates of EUR77.6. Sales decreased 11% y/y (including fx headwinds and recent divestments), while organic growth was 1%. On a segment basis, DSP accounted for 11% of sales, and the SSP accounted for 89% of sales. The positive deviation stems from the DSP segment.

Looking at profitability, Adj EBITDA came in at EUR23.1m (23), for a margin of 29.5% (26). This was 11% above our estimates of EUR20.8m. Adj EBIT (excl PPA) was also stronger than our estimates and came in at EUR18.4m (18.5), yielding a margin of 23% (21). &nbsp;

Adj Net profit continued to be harmed by high-interest expenses and came in at EUR4.4m (8.4), which is still ahead of our estimates of EUR2.9m. Note that we exclude the positive realization of earnouts here, while MGI does not.

Operating cash flow was solid and came in at EUR27.8m, while free cash flow reached EUR17.5m in the quarter. Still, the cash flow in the period was EUR2.8m as interest expenses are included within the financing segment in the cash flow statement. Thus, MGI ended the quarter with a net debt of EUR305m versus EUR308m in Q2 2023. Hence, the net debt / Adj EBITDA ratio remains at 3.2x by the end of the quarter.

Verve Group

* Lack of a diversified and wide revenue base, potentially exposing the company to risks associated with market fluctuations or customer loss.
* Possible cyclical nature of the advertising business, which could impact financial performance during economic downturns.

* Strong recurring revenue model based on advertising volumes, enhancing business stability and predictability.
* Asset-light business model allowing for efficient scaling with high incremental returns and minimal reinvestment needs.
* Clear competitive moat through extensive database and market leadership in the in-app advertising market.

* Lack of consistent earnings growth, with EPS growth not exceeding historical averages or maintaining stability over longer periods.
* Net debt exceeds two times operating cash flow, potentially indicating challenges in debt management.
* Absence of dividend payments or growth, limiting appeal for income-focused investors.
* Return on Equity (ROE) has not consistently reached 20% over the last five years, indicating potential room for improvement in capital utilization.

* Strong profitability with gross profit margin exceeding 40% and operating margin above 20%, indicating pricing power and competitive advantage.
* Consistent revenue growth above industry average over the last five years, suggesting market share gains and strong demand.
* High operating cash flow conversion (above 80%) over the past five years, demonstrating ability to generate real cash profits.

* EPS growth has been dampened by high debt and interest costs, potentially impacting overall financial performance.
* Lack of clear information about sustainability-related performance incentives in executive compensation plans.
* Insufficient information available to assess the CEO evaluation process and succession planning.

* Visionary CEO with long-term perspective and deep industry knowledge, consistently delivering on promises and creating shareholder value.
* Strong commitment to innovation and strategic planning, focusing on ID-less solutions and niche market segments.
* Clear and consistent investor communication, emphasizing long-term business value and transparency about mistakes.
* Founder-CEO owns a significant stake (c25%) in the company, aligning management interests with shareholders.

Media and Games Invest (MGI)
(EUR m)	Q1'22	Q2'22	Q3'22	Q4'22	Q1'23	Q2'23	Q3'23a	Q3'23e	Diff %	Diff (Abs)
Net Sales	65.9	78.1	87.6	92.9	68.8	76.2	78.3	77.6	1%	0.7

Total Operating costs	-49.0	-58.0	-66.2	-66.4	-51.3	-56.2	-14.6	-56.8

Adj EBITDA	17.6	21.1	23.0	31.5	19.0	21.3	23.1	20.8	11%	2.3

EBITDA	16.9	20.0	21.4	26.5	17.4	20.0	63.7	20.8	206%	42.9

D&A	-7.1	-8.1	-8.1	-34.9	-6.4	-7.2	-8.3	-6.8
D&A less PPA	-4.0	-4.7	-4.5	-3.5	-3.9	-4.7	-4.7	-4.3

Adj EBIT	13.6	16.4	18.5	28.1	15.1	16.6	18.4	16.5	12%	1.9

EBIT	9.8	12.0	13.3	-8.4	11.0	12.8	55.4	14.0	296%	41.4

Net financials	-6.6	-7.7	-8.8	-14.8	-10.5	-12.7	-12.8	-13.2

Net Profit	2.5	3.0	3.1	-29.1	0.4	1.5	39.2	0.4	11043%	38.9
Adj Net Profit	6.4	7.5	8.4	2.3	3.1	4.0	4.4	2.9	56%	1.6
Adj EPS	0.04	0.05	0.05	0.01	0.02	0.02	0.03	0.02	56%
Source: MGI (Historical data), Redeye Research (Forecasts)

Deviation table:

Outlook and revisions: