Verve Q2'25: Short-term pain, long-term gain

We have lowered our estimates in response to the SSP platform migration issues and increasing FX headwinds, which prompted Verve to cut its FY25 guidance. Management expects the technical issues to be temporary, with most being resolved by the end of Q2. So far, the customer impact has been limited, as reflected in a high Q2 retention rate of 98%. However, we believe the platform outage and the stock price reaction to the guidance cut highlight the increased short-term uncertainty but also signal growing concerns among the investor base. Even so, following our estimate revisions, we continue to see a very attractive return potential in the next 12 months and reiterate our Buy recommendation, while lowering our target price to SEK 32 (was SEK 45).

Severe technical issues and FX headwinds led to FY25 guidance cut

In the previous quarterly report, Verve disclosed that early Q2 revenue was negatively affected by technical issues related to the unification of its SSP platforms. These issues escalated further, leading to severe disruptions that negatively impacted customer onboarding as well as the ability to scale new and existing customers. While the unification of all In-app SSP’s (~85% of the company’s SSP revenue) was completed in July, the recovery in onboarding and scaling has been slower than what the company anticipated. These factors, coupled with additional FX headwinds, resulted in Verve cutting its FY25 revenue guidance by 9% and adjusted EBITDA by 20%,  at the midpoint. In close connection with the guidance revision, Verve released its Q2 figures, which fell short of our estimates across the board.

Q2 interpretation blurred by outage, we cut our estimates despite resilient retention

Due to the negative revenue effects following the platform outage, interpreting the Q2 report is somewhat more difficult, especially in distinguishing the negative revenue impact from the SSP platform outage versus broader market softness. While ad spending appears to have stabilized since late Q2 and into Q3, as also noted by the company, we still see the outlook as uncertain. On a positive note, it appears that Verve has not, at this point, lost any customer as a direct effect of the outage, with the retention rate being high at 98% in Q2 (2Y avg. 96%). However, the SSP platform outage, while now largely resolved as of July, adds additional uncertainty into the mix regarding risks of future setbacks, the pace of recovery, and potential impacts on customer relationships and trust going forward. Following the profit warning and Q2 results, we have cut our FY25 revenue and adj. EBIT estimates by 7% and 18%, respectively, with a follow-through effect on the rest of the forecast period.

Valuation remains compelling despite near-term uncertainty

Considering the company’s already low absolute valuation multiples heading into the FY25 guidance revision, we believe the stock price reaction (-24%) highlights growing concerns among investors. In our view, the timing of the profit warning (against the backdrop of recent share price weakness) and the company’s track-record of underpromising and overdelivering are contributing factors to this, which could drive heightened short-term volatility in the share price. As such, we believe the coming couple of quarters will be crucial for management to restore credibility and investor trust. Based on our updated estimates, Verve trades at an adjusted EV/EBIT of 6x-5x and an EV/FCFF (excl. earn-outs) of 9x-7x for 2025-2026e, which are very low multiples in absolute numbers, in relation to peers, and relative to our acceptable valuation range. As such, we see upside potential in the valuation multiples, and our DCF model, which captures Verve’s long-term value creation, points to a potential upside with a fair value estimate of SEK 41 per share (was SEK 49.6). However, due to increased short-term risks, as discussed above, we set the target price below our fair value. Should management succeed in restoring investor confidence and some of the near-term uncertainties ease, we see further upside towards our estimated fair value range.