Solid Tremor Video Q1 Reveals A Tremendous Investment Opportunity

| About: Tremor Video (TRMR)


Q1 revenue up 41% YOY as it comes in at $34.9M vs. EST $29.38M.

Company increases FY2014 revenue guidance to a $158M to $163M range.

Margin deterioration caused by demographic pricing has finally bottomed.

New SSP solution for publishers being launched later in the year and not factored in guidance.

Gain in mobile as a percentage of revenue and other key sales metrics provide a bright light.

Amid a sector wide ad tech selloff the past two trading sessions, Tremor Video (NYSE:TRMR) released its Q1 2014 earnings to little fanfare following Tuesday's close. As I accurately predicted would happen on April 19, the sales numbers blew away expectations coming in at $34.9M for the quarter compared to estimates of $29.38M. These gains were clearly telegraphed by the comScore data released for the quarter that proved that Tremor was gaining serious traction and outperforming competitors like Specific Media and Hulu for the first time ever. The company also beat EPS expectations, posting ($0.14) compared to estimates of ($0.17). Sales guidance was also meaningfully increased for FY2014, implying that the strong Q1 revenue beat was not a one-time event.

Turning to the informative conference call, there were a few big takeaways that proved to me that despite the overwhelmingly negative market sentiment, the Tremor Video business is firing on all cylinders. Firstly, it appears that the margin deterioration, which was the subject of analyst disdain in Q4 has finally bottomed. This is evidenced by the Q4 2013 to Q1 2014 sequential increase in gross margins. Historically speaking, Q1 suffers in terms of margins while Q4 is the strongest quarter. So for Q1 2014 to show an increased margin over Q4 2013, that is quite a feat. Margins are a function of Tremor's sales mix and the shift from traditional demographic based pricing to performance based pricing drives margin expansion for the company. While this fundamental shift is well underway, it is expected to accelerate through the back half of the year to the mid-30% range according to comments made by CFO Todd Sloan on the conference call. He also stated that this low margin demographic buying has been declining during Q2 and the sales mix is improving to favor performance pricing. So, Q2 margins should be sequentially up over Q1 and Q4 2013, which is a great trend and a sign that the bottom is finally in.

Furthermore, the company announced a new SSP or Supply-Side Platform to cater to demand. This is a brand new publisher focused initiative that we did not know about prior to this call. At some point, this product will be accretive to revenue but it is not baked in to the increased FY2014 guidance, leaving some potential room to exceed expectations even more. It was stated by management on the call several times that "guidance is very conservative," leading me to speculate that 2014 is being set up for a series of beats which will inevitably instill investor confidence that disappeared following the Q3 2013 miss that the company stock price has yet to recover from. It looks like the company has learned its lesson and does not want to disappoint again and repeat November's carnage.

One of the metrics that I was greatly anticipating was how Tremor is adapting in the marketplace shift to mobile. As a percentage of total revenue, the company reported an increase in mobile sales from 9.3% to 13.2% for the same period one year ago. That is an increase of 41.9%, which quickly dismisses the critics who claim that Tremor has no mobile strategy. Clearly mobile is gaining traction, and fast. The widespread shift to the new patented VideoHub DSP programmatic solution later in this quarter will only accentuate these gains. VideoHub is now completely programmatic across all screens and advertisers no longer need to painstakingly predict their budget per screen. It was revealed on the call that 31 advertisers are currently Beta testing the product. The full roll-out will be during this quarter. Customer embracement of this product is also highly supportive to long-term gross margin expansion, so again it's pretty clear that the margin bottom is in. I keep coming back to margins because that was the main analyst complaint about Tremor following the Q4 2013 report, and the reason the stock subsequently sold off despite an early pop.

Other takeaways include Tremor adding some new exclusive publisher accounts that bolster its advertising inventory. Mentioned on the call were the additions of Fuse TV and Pac 12 Network among others. Also, a new partnership with Affinity Answers will help leverage the incredible amount of social data generated by Tremor and when inputted into the VideoHub system will allow advertisers to really target consumers who are most likely to buy. This is a very unique and ambitious offering. Also, alluding to my prior comScore research, overall ad impression volume was sky high as expected, up 76% year over year. Client retention was also improved, up to 85% from 80% on a last 12-month rolling basis. Additionally, average client spend was up 22% in the same period. And finally, despite all these customer wins, SG&A decreased as a percentage of total revenue, which confirms the achievement of operational efficiency objectives that the CEO laid out in a recent investor presentation. Surprisingly, over the same period, R&D spend increased significantly by $1.63M, showing a strong investment in the future while forgoing a larger EPS beat this quarter.

Despite all of these improvements in business fundamentals, Tremor Video stock sits at depressed levels that are near historic low prices. Informed investors have a unique opportunity to buy shares at a 60% discount to the IPO price. My bet is that these savings will not last forever. With $2 per share in cash and a rapidly growing business that is on the forefront of a fundamental shift to bring TV ad dollars online, smart money hedge fund managers like Craig Hodges are starting to pay attention to this story and are buying up blocks of the company hand over fist. It won't be long until the stock price catches up with reality or the company is acquired.

Disclosure: I am long TRMR. 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.