2023-08-10 15:33:14 ET
Adcore Inc. (ADCOF)
Q2 2023 Earnings Call Transcript
August 10 2023, 10:00 AM ET
Company Participants
Kovi Fine - General Manager
Omri Brill - Chief Executive Officer
Yatir Sadot - Chief Financial Officer
Presentation
Kovi Fine
Hello, everyone. Welcome to our earnings call, August 2023. Thank you so much for joining. We're just going to give a few last minutes for people to continue joining, and then we'll kick off straight away. Okay. Great. let's go straight ahead. So, great to have you today. My name's Kovi Fine. I'm a General Manager here at Adcore. Today, we're going to be hearing from Omri Brill, CEO of Adcore, and Yatir Sadot, CFO of Adcore.
Just to speak about the agenda, what we'll be covering today. Starting off with some forward-looking statements. The CEO opening remarks followed by CFO financial highlights, and finishing off with a brief Q&A. Please take a minute or two just to review the forward-looking statements and information.
Great. Thank you. And, with that, I'm going to hand it over to Omri Brill, CEO of Adcore.
Omri Brill
Great. So, good morning, everyone, and thank you, Kovi, for the intro. And, we welcome everyone to the company Q2 2023 earning call. And we have a strong report to present to you today, which obviously, we are proud of the performance of the company in Q2, and then let me share my slides so we can get started.
So, as I mentioned, Q2 2023 was a very strong quarter for us. It's marked a significant achievement and a positive growth for the company. And we're very proud of the results we've been able to get. But, actually, in this earning call, before we dive deeper into the Q2 numbers, I would like to take this opportunity and basically discuss move high level strategic opportunities for the company as well on focusing on the long-term vision of the company, which obviously can lead us for a -- in the path of a continuing -- continued success.
So usually, we dive straight to the numbers, but we want to make this call a bit different and talk a bit in the beginning high level strategy and the way the company is based and what is it for the company, what the future holds for the company moving forward. So actually, I would like to start with, like, some very interesting graphs that cover industry changes that we see in our industry, online advertising.
And the first graph that I would like to share is basically demonstrate a Google, both Google and Meta are basically a losing dominance of market share within online advertising. And this graph actually cover everything from 2008 to 2024. And blue is a -- the blue portion of the graph is Meta and Google share. And we can clearly see is that it's peaked around 2016, 2017. But since it's peaked, that was the top of the market share, almost 50% and then it's declined. It's declined -- starting to decline.
And actually what we can also say, it's the raise of, let's say, competitor channels or competitor ad networks, it wasn’t existing back then, competitors like TikTok, like Amazon Advertising, like, Apple advertising, for example, and many, many others. So the market becoming more complex, and that's not necessarily a blessing for a company like Adcore.
And the same story exactly that we see with Google and Meta, we see with regards to North America share with online advertising. So this graph actually going back to 2000, and until 2020 fall. And, again, North America, that's the blue portion of the graph, and we can clearly see that in 2000, it was the still the early days of the internet, North America was representing 75% of online advertising globally. Then obviously fast forward now, we are talking about maybe 50%. So again, this emerging market, emerging countries, and basically, the market become more and more diverse. Yet again, it’s not necessarily a blessing for Adcore.
So it's the same story, whether we see it in geographically or we see it with regards to ad network, more complex market, more competitors, and basically somebody that now is doing all advertising his life, it's not as easy as it used to be, let's say 10 years ago. And, actually, this graph actually tell the story quite well. So if in 2007, somebody would come to us and say, I would like to do online advertising, they probably can -- we can recommend it to do Google, which had back then maybe like 50% of the market share of online advertising, and it can maybe only focus in US, which was still quite a large market by itself, and that was fine. So life was easy. He can do it by himself, basically.
And even in 2017, 10 years after that, still maybe not only Google, maybe Google and Facebook back then, but maybe it's enough. And now fast forward to 2023, we have so many channels, so many markets, and basically, it's very complex for online advertisers to have relationship with every single channel in every single market. So ideally, if they have somebody that sit in the middle like a gateway, what Adcore is doing, this can be a very good news for them. And, actually, it's also good news to the different channels as well.
So only for the channels, the life is becoming more complex and the channel ability to operate in any single market, and every relationship with every single client is questionable. And that's why Adcore now works very strategic partnership with many channels, whether it's Microsoft or Criteo, and many others as well, because they need somebody, a company like Adcore to sit in the middle and basically have the relationship with the customers from one end, but -- and [indiscernible] from other end, obviously, have the technology and able to scale up the activity of everyone.
And another thing that I would like to cover is how the company is accelerating. So everything, it took us a long time to do before, now it's taking us a very short period of time relatively. And, basically, when I founded this business in 2006, we were still one office, not so -- not a lot of people in Tel Aviv, Israel, and it's took us more than a decade until 2017, until we opened the first outpost outside of Tel Aviv, which was Melbourne, Australia.
And then fast forward after the company became a public company, geographic expression was a major effort of the company and what's took us to take it between 2006 and 2017, literally took us three years to open another four different outputs. So after we went public, we opened the Hong Kong subsidiary, we opened the Shanghai subsidiary. Obviously, the Canadian Adcore Inc., which is the public company, and in 2022, we also opened the US subsidiary.
So whatever the company used to do for a long period of time, now we can do much faster. And actually, we are quite pleased with the current geographical present of the company. So we don't accept another, let's say, new outpost in the near future. We think that we need -- we should focus on what we have right now and making the most out of it.
And the same story exactly is that we see with geographical expansion. Actually, it's funny, but we can see it with stake development as well. So in 2006, when the company just started, we launched our first version of our app, Adcore Views for campaign creation and optimization. And it's took us more than a decade until 2017 to launch our second app, which is Feeditor, for feed optimization. And then, let's say after going public, what we can see is that again, it's took us like three hours to launch another four different apps.
Obviously, we have focused marketing. This is our Shopify app and WooCommerce app. In 2022, we also launched Alerter, which is account monitoring up with [indiscernible] which is a campaign performance app and in 2023, which is relatively new, now we launched Media Blast, which is account creation and account funding up. And so whatever took us a long time before, we can do much faster now, and this give us of confidence on the company ability now to grow much quicker and basically to scale up everything that we are doing.
Another interesting thing that the company is doing is that we are implementing vertical integration strategy. So if historically the company know how to provide solution, technology solution, evolve, feed creation, and optimization, and campaign creation and optimization, we decide that actually the media journey of a typical customer was totally start with feed creation optimization or even campaign creation actually start way before with, let's say, account creation, account funding, maybe media research and planning. And then after the campaign is created, you would need monitoring app. You would need analytical app. You would need financial -- financing and budget management app.
So basically, company decided we would we would like to be in every single touch point across, let's say, the customer media journey and basically supply value over there. And the strategy exactly proving itself. So fast forward, we already have under the Adcore marketing cloud, seven different apps, Media Blast, which is the newest addition to the cloud. It's basically allow client, do it yourself, account opening, and account founding too., aiming more for, I would say, small business type or a small agency type of businesses, mainly in emerging markets, but not only there. A very interesting app that we started to see a lot of let's say traction over there and it's already generated their revenue for us.
Effortless Marketing, account creation app, both for Shopify, and WooCommerce, Feeditor, one of the flagship app for feed optimization, views. The first app that we developed for feed, for campaign creation, Alerter, account monitoring, and so we're going to have the focus component. So it's going to also have predictive analytical abilities. Semdoc, which is account I would say analytical tool and [indiscernible], which is basically campaign performance apps that we developed. So, again, every single touch point in the user journey, now we have a solution to provide, and that give us a lot of fast strength and a lot of power.
And that's bringing me to the company updated vision, which is basically serving as a gateway to enable multi-regional and multi-channel accessibility, connecting pieces and customer effortlessly. So, basically, the fact that the company is ever to be so many different regional location and having different, I would say, app and technology solution for every single touch point, that's give us a lot of power and basically ability to have, like, all-in-one solution for customer. And that's also give us a lot cross-sell and upsell opportunity for every client that we bring. So we can bring, for example, maybe client for, I don't know, the account creation and account self-funding app. And then, obviously, we can upscale them to another app or maybe even sell them some marketing solution or services that we can provide them.
So, again, the most solutions that we have, the more services that we have, the more technology and applications that we have, and there is more upsell and capability for the company. And that's actually we already started to see this power within the company results. Q1 was very strong, Q2 2023 is yet another very strong report. And bear in mind that historically, the first part of the year in online advertising, is just, let's say, warm up for the second part of the year because Q3 and Q4 are supposed to be even stronger historically, and the company, believe that 2023 have a potential to become a monster year for the company.
So let's dive into some of the Q2 2023 report highlights. And let's start with the with top line, middle line, numbers. So as we can see, Q2 was a very strong report for us. Top line revenue was CAD6.9 million. This represented 33% year-over-year growth compared to the CAD5.2 million that we have in the previous year. And gross profit, we saw a massive increase of 41% year-over-year to CAD3 million this year compared to CAD2.1 million in 2022. So, again, very strong quarter. And as you can see from the graph, Q3 and Q4 historically supposed to be even stronger quarters for us.
So if we started this, the first half of the year is so strong, we have a lot to expect from the second part of the year. And if we talk about quality gross KPIs, and we mention them across the previous earning calls, then there's few KPIs that the company like to look at. The first one I would say is gross margin. And if you remember, the company’s -- as long as it's within the 40% to 50% range and, Q2 2023 was 43%. So it's exactly where the company anticipated to be and was very happy for it and yet again 41% in gross profit growth that's very impressive as well.
And, again, another, let's say, quality KPI for us is the revenue we can generate for North America, which is a strategic market for us. And over there, we see the same trend of growth, like, it continues. So 60% year-over-year growth in North America, and we believe we can even be a bit more aggressive over there in the second part the year.
If we discuss Amphy and we discuss a bit the monthly average burn rate for Amphy, so we can clearly see it's went down a lot. So for between, let's say, Q1 2023, which was CAD81,000, now we are sitting at CAD66,000 in Q2, and we expect to see this trend continue well into Q3 and Q4 as well. So we are doing a lot of effort to be a more efficient, a more efficient operation. And Amphy is already bearing fruit. The peak was CAD120,000, basically, monthly bills that we had in Q1 2022.
And since then, we managed to cut it in more than 50%, which is impressive. And on the flip side, on the positive side, you can see the same trends that we see on Amphy let's say site and block visitor is continue. So Q1, so we, we saw 48 average monthly visitor, and we almost doubled it up and now in Q2 ‘23 to almost CAD100,000 and we anticipate that Q3, this trend going to continue as well. So, again, we are earning less cash, and we see like a more, I would say, interest within the Amphy platform, which is, I think, it's a positive site for us.
And so just to wrap up, the highlights of Q2 numbers. Revenue grew 33% year-over-year, gross profit 41% year-over-year growth, EMEA revenue grew by an impressive 50% year-over-year, North America revenue grew 16% year-over-year. And even APAC, if you remember, it was declined actually in 2022. It's now back on a growth trend and basically growing 29%. So we see growth across the board in every single region that the company is operating.
And talk a bit about, the share price and basically, so the common share price is around, CAD0.20. And obviously, if you look at comparable, we believe that share is fairly undervalued. And the company, that's why we continue to buy shares as well, until we're going to see a very strong uplift in the stock. In NCIB, we purchased in Q2, almost 300,000 shares for cancellation, and the company invested in this buyback plan almost CAD67,000. And, obviously, we're going to continue to do so as long as we think that the share price is undervalued.
And so in the beginning of the year, we talk about, the company, I would say high level targets for 2023. So the first target that we mentioned is maintain strong balance sheet with focus on increasing cash reserve. So I think like, Yatir can touch it a bit on his report on his data, but cash flow is improving a lot. The operation profit and loss is improving, and we see -- we definitely think that we are on the right trend that the company expect for sure Q4 2023 to be a positive quarter both in cash flow and operational profit, but, hopefully, it's going to happen even earlier in Q3, but stay tuned.
And so I think like over there, we definitely see a positive momentum. Obviously top line, bottom line but also bottom line numbers are improving. Second KPI, target is keep the gross margin within the 40% to 50% range. So yet another check, 43%. And third goal is to achieve a dual digit growth in revenue, gross profit and operation profit. So 33% growth in revenue, 41% growth in gross profit and operation profit improved more than 30%. So I think like lots improved. So I think, like, we are definitely in the right direction and expand our global footprint in North America yet again. We see this region is continuing to grow year-over-year and also quarter-over-quarter.
Number five is strengthening the strategic partnership to drive mutual growth and market share. So the company recently was named as Microsoft advertising channel partner of the year and, obviously, channel partner in EMEA. And then, we recently also announced partnerships that we have with Amazon Advertising and also, the company become a preferred retrial partner of Criteo in a in Israel, hopefully, it's going to be followed up with other markets as well. So we are definitely moving in the right direction and obviously invest in R&D.
And, again, you can see there is a lot going on. Personal office, we have a brand new brand site -- website with more focus on the work related learning courses and obviously with AMC that we recently launched another app, the Media Blast app. So yet again, we are moving actually and accelerating our R&D efforts.
Okay. I think that's was my remarks for today. So we covered a lot. We talk about high level strategy changes that we've seen within our industry that obviously affect the company and actually represent a massive opportunity for us to act as a gateway in the media. The fact that the company is accelerating whatever it took us a decade to achieve, now we can literally achieve it within one year or two years. So that's amazing. That means we can achieve much more and grow much faster. And we already started to see that within the result. So the company have a more holistic approach. We understand what is our value proposition within the market. And basically, this is starting to bear fruit, and I think the reports will speak for themselves.
And I think like finances, Yatir?
Yatir Sadot
Thank you, Omri, and good morning, everyone. We'd like to present a clear and comprehensive overview of our second quarter financial results, highlighting both a GAAP and non-GAAP metrics, all denominated in Canadian dollars. Despite facing a difficult business environment, our team performed well in the second quarter, maintaining the same positive momentum we experienced in the first quarter this year. As I mentioned in the last call since mid-2021, we've strategically focused on higher margin revenue streams and building relationship with the scalable resilient clients. This approach has enhanced our business sustainability and improved our long-term profitability.
Now let's dive into details. For the three months ended the June 30, 2023, we delivered revenue of CAD6.9 million compared to CAD5.2 million year-over-year, an increase of CAD1.7 million or 33%. We are delighted to have achieved the upper range of our projections for the second quarter. Gross profit was CAD3 million compared to CAD2.1 million, an increase of CAD900,000 or 41%. This quarter, gross margin was 43% compared to 40% in the same period last year. We kept the target range of gross profit between 40% and 45%, and we are we are feeling very comfortable as Omri mentioned before.
As for operational expenses, R&D expenses were CAD0.4 million or 6% of revenues compared to CAD0.4 million or 8% year-over-year. Sales and marketing and general and administrative expenses were CAD3 million or 43% of revenues compared to CAD2.3 million or 44% of revenues year-over-year. SG&A expenses increased mainly due to partnerships expansion and marketing expenses. Operating loss was CAD0.4 million compared to an operating loss of CAD0.6 million. This decrease in loss was mainly driven by the increase in revenues. Net loss was CAD0.5 million compared to a loss of CAD1.2 million year-over-year.
This slide, we will discuss the total revenue. And, as you can see, on the left wing of the slide, we went up by 33% year-over-year, quarter of -- on the second -- in the second quarter of 2023 compared to the same period last year. And on the right wing of this slide, you can see the growth for this first six months of this year by 38% compared to the same period last year. As for geo revenue breakdown. As you can see, EMEA and APAC showed the most growth year-over-year. EMEA grew by 50%, APAC grew by 29% and North America grew by 16%. We continue to observe strong momentum and notable expansion in our partner's plan.
Now let's discuss about the net cash used in operating activities. In the three months ending June 30, 2023, the company utilized CAD0.4 million in net cash for operating activities only, a notable decrease from the CAD1.3 million used during the same period last year. This positive shift can be attributed to the team's diligent efforts in, one, enhancing our collections from clients, and number two, reducing vendor payments and securing improved terms with existing suppliers.
In terms of financial position, we ended Q2 with cash and cash equivalents of CAD6.2 million as of June 30, 2023 compared to CAD8.8 million at December 31, 2022. Total working capital of CAD7.8 million compared to CAD9.2 million at December 31, 2022, a decrease of CAD1.4 million or 16%. The decrease in cash is mainly attributed to, first of all, media payments related to the fourth quarter of 2022, purchasing shares through the NCIB plan, as Omir mentioned before, the intensive investment in Amphy and expanding our partnership spend.
We anticipate reducing our cash expenditure in operating activities and increasing our cash and cash equivalents in the later half of 2023 compared to 2022. This expectation is based on increased demand for the company's products and enhanced profitability. We still hold debt free position and the company continues to be debt free for the future scene.
Adjusted EBITDA, our quarterly non-GAAP results reflect adjustment for the following items. Depreciation and amortization totaled the CAD201,000, share based payment totaled CAD126,000, other nonoperational items CAD191,000. And for the three months ended June 30, 2023, adjusted EBITDA was CAD112,000 compared to a loss of CAD30,000 for the same period last year. Adjusted EBITDA for the AdTech activity was CAD337,000 in the same period.
Thank you, everyone. And with that, I will turn the call back to Kovi.
Question-and-Answer Session
A - Kovi Fine
Thank you, Yatir. We're now going to be heading into some Q&A. These are some presenting questions, and I will go ahead and read them. I'll read them to Mr. Omri Brill and then you'll take it from there. So starting, number one, does the company expect to be profitable by Q4? If not, when?
Omri Brill
Yeah. So I already mentioned it in my opening remarks, the short answer is yes. And hopefully, we can achieve it even before that in Q3, but I think, like, we can definitely see the trend, the company, let's say loss is nearing or shrinking, and the company has become more efficient and more profitable. And with, like, the historical momentum that overall advertising have in the second part of the air, then for sure we believe they can be profitable in Q4 and hopefully even before.
Kovi Fine
Okay. Great. Do you anticipate any M&A activity in 2023 to spur growth?
Omri Brill
So the market condition is still very much challenging. So I would say never say never, but if we're talking about M&A that we can use maybe some of our shares as capital, then may be yes. But if that means that we need now to allocate, our own cash for it, then maybe I think it's too early. So it depends. That's the honest question.
Kovi Fine
If the economy heads towards a recession, how big of an impact will this have on your business?
Omri Brill
It's a good question. We're in recession, I would say, for the past year and a half now, and we're still waiting for him in a sense. So, hopefully, it's not going to come, but I think, like, up until now, obviously, with COVID and post-COVID effect and, obviously the interest rate is going up in everywhere in the world, so there's obviously a lot of focus say, changes within the economy and market condition are anything but normal. But I would say even under this type of condition, the company has been able to outperform our original expectation and show very strong start of the year of 2023. So I would say for now, we don't anticipate any, I would say, any negative business condition more than what we see up until now. Hopefully, we can see some positive business condition moving forward, but with the current business condition, the company expect to have a very strong second part of the year as well. That's my -- that's the company estimation.
Kovi Fine
Are you planning to expand to any new geographic areas?
Omri Brill
It's a good question. I think, like, I already touched a bit in my remarks that we are happy with our current geo present. Like, we are literally for a company in our size are very well spread. We're in Tel Aviv, Israel. There's the headquarters of obviously Canada, which is where we are listed as well. We have another branch now in the US as well. Melbourne, Australia. Two offices in greater China region. So I think that we might as well focus in what we have and making the most out of it. So I don't see us opening any new office anytime soon. But, again, that's for 2023.
Kovi Fine
Great. The next question is, will you maximize your NCIB allowance?
Omri Brill
Yatir, maybe you would like to answer this one?
Yatir Sadot
Yes. I will take it. We're already maximizing the program's potential. So, this is a pretty straightforward answer.
Kovi Fine
Okay. Will GMs continue to improve and what's the long-term target?
Omri Brill
Yeah. I think, like, we mentioned it before. Like, we happy as long as it's in -- the gross margin, within the 40% to 50% and Q2, it was 43%. So I think, like, yeah, we feel comfortable where we are we are today. Obviously, if it's -- it could be more even nearing 50%, this could be even better for the company, but as long that we are within this range, we are happy with the results.
Kovi Fine
EMEA growth was very strong. Do you expect this to continue for the year?
Omri Brill
It's a good question. EMEA is outperforming in terms of market, for the past, I would say 12 months or so, which is encouraging. And -- but I think like the company is lucky enough to be very well spread and then I think like a revenue coming, I think almost [38% and 7%] (ph) from APAC and EMEA and then the rest coming from North America. So even if one market for whatever reason is started to slow down, we still have two other markets that can take its place. So I think like, yes, EMEA is doing great. We expect it to continue doing good, but even if EMEA for whatever reason, going to start to slow down, we are still lucky to have APAC and North America to take its place as the leading most.
Kovi Fine
Great. what was the biggest driver in the 70% reduction in cash burn for the quarter?
Omri Brill
Yatir?
Yatir Sadot
Yeah. I will take it. So the primary reason for the cash reduction is due to a media payments made in early Q1 2023 media payments related to the activity in the fourth quarter of 2022. Other explanations, related, as I mentioned before, to the purchasing shares under the NCIB, the investment in Amphy, and, of course, the expanding -- the extension of our partnerships plan.
Omri Brill
Yeah. To what Yatir just says that, obviously, in a sense, the case that we are losing in Q1, we related to Q4 the last year, we should be earning back in the Q4 of this year in a sense.
Kovi Fine
What was Amphy’s contribution and impact in the quarter?
Omri Brill
Yatir?
Yatir Sadot
Yeah. Amphy contributed, like, CAD21,000 to the company's total revenue this quarter. And the company invested CAD236,000 on Amphy’s project. So this is on the level of the revenue and on the level of the expenses.
Omri Brill
Okay. Of that, I would add that also for Amphy, historically, the quarter four is a strong quarter as well. So even for Amphy, the second part of the year should look much better and we are in the projection of flowing the bandwidth over there as well. So more revenue unless burn rate is obviously a good news for Amphy for the company as well.
Kovi Fine
How should investors evaluate the company throughout the year given industry seasonality?
Omri Brill
Yeah. So we talk about seasonality a lot. Like, in a in a sense, what you can think on online advertising, that literally the year is building up quarter-over-quarter. So historically, Q1 is the slowest month of year. People spend all the money during the holiday season. It's winter. There's not a lot of activity going on. So there's not a lot of spending. So that's historically the slowest spot there. And then Q2 started to pick up. It's already spring. So we have the spring break and people starting home renovation and maybe some real estate related activity. So we see more momentum in Q2. Q3 is even stronger. It's already summer. So we have all the summer breaks, travel related spends. There's more activity, people are outside. People are enjoying themselves. So, obviously, Q3 is even stronger. And then to finish then with a bang, like, Q4 is obviously stronger months of the year with holiday season and all the holiday related expenses. So Q1, Q2, Q3, Q4, very simple.
Kovi Fine
Great. And that completes our Q&A section. So thank you everyone who sent in your questions. And that'll conclude today's call. So thank you very much for joining in, and have a great day.
Omri Brill
Great. Thank you, guys. Thanks, Kovi, for the hosting and thanks, Yatir, for your remarks on the financial report. And again, thanks for everybody to join us today.
For further details see:
Adcore Inc. (ADCOF) Q2 2023 Earnings Call Transcript