Thomson Reuters and DoubleVerify: Navigating Growth in the Digital Information Landscape

Thomson Reuters: Organic Growth Outlook Remains Positive (NYSE:TRI)

Investment in GenAI products and new innovative products should continue to drive further growth for TRI. Investment action I recommended a buy rating for Thomson Reuters (NYSE:TRI)(TSX:TRI:CA) when I wrote about it two months ago in June, as I expected organic EPS to grow robustly given the strong adoption of AI products. Based on my current outlook and analysis, I recommend a buy rating. TRI organic growth profile continues to trend in my expected direction, and with the step-up in GenAI investments that is resulting in new innovative products, I continue to see organic growth improving. Review TRI reported earnings two days ago, where it saw reported revenue growth of 5.6% and organic growth of 6.2%, with total revenue reaching $1.74 billion. The Big 3 segments (Legal Professionals, Corporates, and Tax & Accounting Professionals) organic growth remained robust at 7.8% (vs. 7% in 2Q23). Splitting them, Legal Professionals saw 7% organic growth; Corporates saw 8% organic growth; and Tax & Accounting Professionals saw 10% organic growth. That said, adj EBITDA margin contracted by 300bps from 40.1% in 2Q23 to 37.1% in 2Q24, of which the Big 3 segments saw a bigger compression from 45% in 2Q23 to 40.9% in 2Q24. However, adj. EPS of $0.85 still came in better than consensus forecast of $0.82. With the healthy organic growth performance, management raised its FY24 reported revenue growth guidance from 6.5% to 7% to 7% (organic revenue growth raised from 6% to 6.5% to 6.5%), of which the Big 3 segments are now expected to grow organically by 8% (from the prior guide of 7.5% to 8%). Reinvestment into the business is implied to step up, as management reiterated their adj. EBITDA margin guide of 38% (43% for the Big 3 segments) despite the raised revenue guide. TRI remains one of my favorites as long as the business continues to drive improvement in its organic growth profile. Although organic growth did step down from the 9.9% seen in 1Q24 to 7.8% in 2Q24, I think the growth trend remains a positive one. To smooth out any seasonality impact, a better way to assess the organic growth improvement is to look at the two-year stack, and the trend continues to be an improving one. Currently, the big 3 segments account for 82% of total revenue and are growing at a much faster rate than the overall business. As such, from a percentage mix perspective, TRI should continue to see accelerating organic growth when the big three segments become a larger part of the business. Very encouragingly, the strong growth in the big 3 segments is driven by double-digit growth in TRI's flagship products (e.g., Practical Law, Confirmation, SurePrep, Pagero, and Indirect Tax), which means there is room for growth to further accelerate to >10%. Adoption of GenAI products continues to support strong growth (you may find my views on TRI's GenAI products in my previous post). This is evident from the performance in the Legal segment, where GenAI functionalities have been one of the key drivers that drove the 100bps improvement in organic growth vs. 2Q23. Management expects GenAI functionality demand in this segment to accelerate in the coming quarters, and I believe this is likely to happen as TRI has stepped up their GenAI product initiatives. From a capital allocation perspective, the expected budget has increased from $100 million in 2023 to more than $100 million in 2024 (per 1Q24 earnings call). From an innovation perspective, TRI continues to be on the ball by rolling out new products. In the quarter, TRI launched two additional GenAI products: CoCounsel Drafting is a legal drafting solution in Microsoft Word that enables clients to leverage Practical Law content and customers' own data. This should drive up work efficiency for users as it cuts down on the time to switch between windows. CoCounsel Checkpoint, which is a chat-based tax research solution, Notably, this is the first GenAI product that TRI launched for the Tax & Accounting segment, further convincing me that TRI can roll out and integrate GenAI capabilities across product segments. These new productivity-enhancing products should see strong adoption, as TRI's research found that AI-powered tech tools can save up to four hours per week. Another notable aspect of the CoCounsel product series is that TRI is implementing an enterprise-wide model. I prefer this pricing model vs. per-seat pricing, as any price increase will be less prominent. Given the step-up in productivity, I would expect TRI to have significant pricing power (or, in management's words, they can capture significant efficiency gains realized by clients). Valuation My expectation for the TRI EPS growth outlook remains largely the same as in my previous model, as organic growth continues to be robust and expectation expect it to accelerate over the foreseeable future. I did revise FY24 EPS organic growth down from 8% to 7% as TRI step up investments in FY24. As of 2H24, the pace of share buyback continues to track above my full-year expectation of 3% buyback. The two areas that I have adjusted in my model are DPS and valuation multiples. For DPS, since 2Q24 is over, I have adjusted to only include 2H24. Because of the recent market sell-down, TRI's valuation has become attractive relative to peers (listed below), now trading in line with peers (just 3% premium to peers' average of 38x forward PE), where it has historically traded at ~14% premium. As I don't see any structural negative change to the business that should change how TRI should trade relative to peers, I am expecting TRI's valuation to go back to a 14% premium eventually (in fact, TRI is now structurally better given the improving organic growth profile). Be reminded that TRI traded up to a 21% premium just two months ago, so going back to a 14% premium is surely plausible. Risk Near-term EPS may be slower than I modeled as TRI steps up in GenAI investments. Management did note an additional margin contraction in 3Q24 to 34%. The good news is that this should drive growth eventually when TRI rolls out new products, so EPS growth is delayed but not impaired. Another risk is that FindLaw (10% of the Legal segment revenue), an online legal information solution for consumers and small businesses, is still performing very poorly. If macro conditions remain poor, underlying demand may get worse, especially since this is a product for consumers and small businesses. Final thoughts My recommendation is a buy rating as TRI continues to see robust organic growth, underpinned by the strong performance of its Big 3 segments. Despite a slight deceleration from the previous quarter, the two-year stacked growth trend remains positive. TRI's focus on investing into GenAI should continue to support growth ahead. I consider an investment ideal if it performs its core business in a sector projected to experience structural (organic) growth in excess of GDP growth over the next 5-10 years; profits from sustainable competitive advantages that translate into attractive unit economics; In the hands of competent, ethical, and long-term thinkers; with a fair valuation Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

DoubleVerify: Leveraging AI, Social Media Measurement For Growth (NYSE:DV)

Despite high P/S and EPS ratios, holding and reassessing after a price drop is advised to ensure more attractive valuation. Thesis DoubleVerify Holdings (NYSE:DV), is in my opinion going to maintain the growth in the digital advertising market. The company's recent strategic moves, such as the implementation of the AI-powered Universal Content Intelligence tool, and the recent expedition into the qualitative measurement of social media platforms such as TikTok and Meta, have notably boosted the gains and effectiveness of the operations. In the face of the adversities posed by competitors like Integral Ad Science and Comscore, the strong foundation of DoubleVerify in digital marketing is through their unique solutions and strategic partnerships. Nevertheless, I have no strong stand towards DoubleVerify's current high P/S and EPS ratios as I am of the opinion that the best thing to do is holding and reassessing after a price drop to ensure a more attractive valuation, as much of the future potential appears to be already priced in. Business Profile DoubleVerify Holdings, is a digital media measurement and analytics company. It provides tools to verify the quality and performance of digital ads across different platforms. Founded in 2008, DoubleVerify places the emphasis on making sure that ads are viewable, fraud-free, and are mostly brand-safe. The lineups of its products are composed of ad activation solutions, measurement of media audio and supply-side platforms of it. DoubleVerify operates internationally, offering services across social media, Connected TV ("CTV"), retail media networks, and the open web. The company works with clients such as Philip Morris, Bacardi, and Anheuser-Busch in various regions. It leverages the use of tools such as the AI-powered Universal Content Intelligence and the Scibids AI platform to offer their services. Latest Projects and Their Potential Issues Recently, DoubleVerify has made use of two key programs as its strategic objectives, which include the utilization of its AI-based video classification solution, called Universal Content Intelligence, and the expansion of its social media measuring capacities, particularly, over sites like TikTok and Meta. The new release of the Content Intelligence tool, which was done in 2024 in the early months, now comes with more advanced AI algorithms that help with video content categorization. This tool helped different social media platforms to be more successful in handling the video content which they exhibited. Implication of this change has enabled DoubleVerify to grow its gross margin to 83% in Q2 2024 from 81.09% in Q1 2024, as it diminishes cost of sales through technological efficiencies. The direct impact of the use of the tool for the reduction of the cost reached $0.52 million in the second quarter alone. One another major strategic move is the company's initiative of launching the DoubleVerify social media measurement services. The social measurement revenue of the company jumped by 44% on the year-to-year comparison in Q2 2024, driven primarily by growth in short-form video on TikTok, Meta reels, and YouTube shorts DoubleVerify has now secured more than 30 new advertisers who have not previously used its services on Meta, including larger brands such as Best Buy, AB InBev, and J&J. These developments underline the company's efforts to adapt to the increasing prevalence of short-form video content, which now make up 60% of worldwide digital ad spend ex-search, according to Magna Global. Also, The expansion includes movements to build relationships with platforms like Pinterest and Reddit, where DoubleVerify has launched brand-safety and suitability metrics solutions. I see that one of the drawbacks to these advancements is that, while the AI tool performs its job, it still relies heavily on the precision of its algorithms. Moreover, it is bound to AI for providing Digital Intelligence, which could lead to pending issues if the algorithms do not adapt to digital content or faulty activities. By doing so, the software must regularly update to detect new threats and new content formats. Similar to this, the malfunction or inefficiency in the AI system can create faulty classifications, which will have a negative impact on the company's name and the client's trust in it. This risk is heightened by the increasing complexity of digital content and the potential for sophisticated ad fraud schemes. Moreover, the sets of social media measurement services for social media measurement might present a new challenge, which is overexerting operational resources and introducing compliance risks due to the nuances in international regulations and data privacy laws. For instance, Didomi shows that GDPR is enforced in Europe while the CCPA has been issued in California. The company must meet strict data privacy requirements for both regulations that it must comply with. Performance Analysis Jun 2023 Sep 2023 Dec 2023 Mar 2024 Jun 2024 Revenues 133.74 143.97 172.23 140.78 155.89 Cost Of Revenues 26.19 26.47 30.02 26.62 26.1 Gross Profit 107.55 117.51 142.21 114.16 129.79 Selling General & Admin Expenses 51.29 56.25 59.22 59.95 67.93 Net Income 12.84 13.35 33.1 7.16 7.47 Gross Margin 80.42% 81.62% 82.57% 81.09% 83.26% Net Margin 9.6% 9.27% 19.22% 5.08% 4.79% Click to enlarge Source: Seeking Alpha. Retrieved on 08-02-2024. Financials in millions USD. The fiscal performance of DoubleVerify signifies two main developments in the Q2 2024 earnings call: the consistent rise of revenues and the changes in the company's net income. Revenue was up from $133.74 million in June 2023 to $155.89 million in June 2024 as a result of its entry into social media measurement and the Universal Content Intelligence tool introduction. Take, for example, in Q2 2024, the social measurement revenue grew by 44% year-over-year due to an increase in activity on platforms like TikTok, Meta reels, and YouTube shorts. Such a focused approach to the areas of digital advertising with high demand significantly boosted overall incomes. On the other hand, the net income has been changing all the time, and it has slumped from $33.10 million in December 2023 to $7.47 million in June 2024. The decrease has resulted from the rise in selling, general, and administrative (SG&A) expenses from $51.29 million in June 2023 to $67.93 million in June 2024. These costs are related to AI technology investments as well as going into new market fields. Besides these expenses, the company managed to increase its gross margin to 83.26% in June 2024 compared to 80.42% in June 2023, thereby demonstrating good cost management. On the other hand, the net margin also dropped from 9.6% to 4.79% during the same period, indicating that the increased operational costs initially led to a short-term decrease in profitability. Peers DoubleVerify is a company performing in a very competitive digital advertising market which involves several strong players such as Integral Ad Science (IAS), Comscore, and Moat by Oracle. One instance of that is the business models between Integral Ad Science and DoubleVerify in their solutions for ad verification, fraud detection, and viewability, both of which are very similar products. IAS's product "Total Visibility," which provides deep insights for media quality and performance, directly competes with DoubleVerify's solutions. Comscore, which is another top player, is better suited in digital audience measurement and it has a prominent position in cross-platform measurement; they advertise analytics and audience insights that rival DoubleVerify's measurement capabilities. Oracle's Moat has been one of the main players in the field of ad verification, but according to Yahoo it still has pulled the plugs on certain activities recently, this has led to both an opportunity and a challenge for DoubleVerify. Moat has been engaged with big advertisers and platforms to its customer base and they might hunt for a way out, in turn, offering DoubleVerify the chance to get the new customers. However, this also gives chances to other competitors to fill the space left by Moat and enter into the market. DoubleVerify's main advantages are its AI-powered Universal Content Intelligence tool as well as its strong social media measurement instruments. These advanced products combined with the partnerships with platforms like TikTok, Meta, and YouTube put DoubleVerify in a good position to benefit from the soaring need for reliable ad verification and measurement in the digital advertising industry. Outlook for the Year Ahead In my opinion, DoubleVerify is expected to experience strong financial performance over the next year. This is primarily due to its expansion into social media measurement services on platforms like TikTok and Meta, and the implementation of tools such as Universal Content Intelligence. I foresee a revenue growth rate of 20-25% and a profit growth rate of 15-20%, driven by increased digital advertising verification and strategic alliances with major advertisers. Over the past year, Revenue Growth has risen steadily at an annual rate of 22.03%, while Profit Growth has been 9.13%. The prospective revenue growth rate is expected by me to align with the company trends, balancing positive outlooks with rising operational and competitive expenses. Nonetheless, I anticipate profit growth to be higher due to cost-saving technologies and the impactful expansion of product offerings. Combining demand-driven revenue with the sale of complementary products or premium versions, profit growth is projected by me to be greater in the upcoming year, still referencing the YoY trends. Valuation DoubleVerify's robust gross margin of 82.18% is far higher than the median of 49.16% for the application software industry. This points to a high level of operational efficiency and cost management. The company's P/S ratio of 5.88 also exceeds the industry median of 3.04, indicating the market's confidence in its revenue-generating capacity. My estimates are consistent with the forward earnings projections of analysts which are planned as a 20.74% revenue growth and 20.05% earnings growth. Due to these alignments, I estimate the company's earning per share will most likely remain within the 9 - 10 range. As far as P/S ratio is concerned, it should remain somewhere in the range of 6.0 to 7.0 as well because of the solid market position of the company and the high demand for the revolutionary verification solutions it offers. I see that this reflects a slight premium over the current P/S ratio due to expected continued growth and market expansion. The competitive landscape remains challenging, with companies like Integral Ad Science and Comscore offering robust alternatives, yet DoubleVerify's advanced AI tools and expanding global reach position it well for sustaining its valuation. Since we do align with its current positive predictions and value, we advise it as a ''hold'. Final Remarks The impression I got from DoubleVerify was positive. With its earnings increasing continuously, showing the power of its services in the market and high-level efficiency the company has, DoubleVerify has truly shown a strong financial performance. At the same time, the current high P/S and EPS ratios and the fact that my growth expectations aligns with the analysts' forecasts, imply that much of the future potential may already be priced in. While the technological solutions developed by DoubleVerify are impressive and the company's strategy developments are promising, the share does not seem to be cheap right now. I would suggest waiting for a price drop to re-evaluate whether or not the evaluation becomes more attractive. I believe that the goal of investment analysis is to basically assess the risk/return ratio and conclude whether an investment is under, over, or correctly valued. I do this by first categorizing the specific investment (value/growth/other), following by an extensive analysis that would fit that category. Such an extensive analysis would consist of as many as possible relevant qualitative and quantitative aspects that might impact the return and or risk of a specific investment. I especially like writing about undercovered stocks. It fascinates me to unravel the mystery and potential of such a stock. However, I also enjoy switching it up, learning as much as possible about all types of investments, types of risks, types of returns for all types of investors. The markets have too many interesting investment opportunities, that it would be a waste to just focus on a small part of it. My goal is to fairly, extensively, and accurately analyze investments and present them to my reader in such a way as well. Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.