2023-03-30 12:08:06 ET
Adcore Inc. (ADCOF)
Q4 2022 Earnings Conference Call
March 30, 2023 10:00 a.m. ET
Company Participants
Omri Brill - Chief Executive Officer
Yatir Sadot - Chief Financial Officer
Conference Call Participants
Presentation
Unidentified Company Representative
Okay, we're going to begin now. On this call this morning, the company's CEO, Omri Brill, will provide an update on the company's operations and strategy, followed by a financial review by Adcore's CFO, Yatir Sadot, of the company's Q4 2022 financial statements, after which we will answer pre-sent questions and take questions from participants.
I would like to take a moment to remind participants of the Safe Harbor statement. This conference call contains certain forward-looking information and forward-looking statements, collectively forward-looking information, including statements about the company. I will now give you a few moments to take a look at the forward-looking information as reflected on the screen.
And at this time, I'll be turning the call over to Omri Brill, Adcore's CEO, to update you on the operations and strategy of the business.
Omri Brill
Thank you very much, Gabe, and a good morning, everyone. Not every day the company have a chance to present its annual result and a full quarter result as well. And for us, that's obviously not a regular date; a special date and exciting day. And there is a lot we would like to share with you today. So, obviously, we would love or like to summarize the results of the entire year, also what the company been able to achieve in the fourth quarter, which is what, the biggest quarter in the year. And equally important, also share some of the company goals, targets, and plans for 2023, because it's not only about what happened in 2022, equally important is what the company is set to achieve in 2023. And I think you will today, a conference call especially interest.
So, let me share my screen, and let's start with the presentation. If I can -- okay. So, let's jump right into the numbers, and they're basically -- this is actually a very good slide because it's still in very graphical and visual way how the year was developed for Adcore. So, we started the year, in Q1, with top line revenue of CAD 4.7 million and a gross profit of CAD 2 million. And then, Q2 was CAD 5.2 million in revenue and CAD 2.1 million in gross profit. And then, a big jump between Q2 to Q3, CAD 7.5 million in revenue and CAD 3.4 million in gross profit. And actually a very strong finish to the year, Q4, almost CAD 9 million in revenue and almost CAD 4 million in gross profit.
And if you look at just quarter-over-quarter, Q4 over Q3, we see a 17% increase in top line revenue, and [indiscernible] increase in gross profit revenue as well. So, the starting of the year was a bit slow for Adcore, but again we've managed to gather momentum, especially in the second-part of the year. And basically that reflects very good in this slide. If you look at gross margin and if you remember when we just started the year, [with company say] (ph) that it want to focus a bit its strategy and focus more on profitability and the quality of growth on the expenses of wasn't any cost. So, basically and the company has itself a target for the gross margin to be within the range of between 40% to 45%, but this is exactly what we managed to do.
The entire yearly gross margin led at exactly 43%, so that's right in the middle or a bit in the upper part of the range that we set ourselves to be. And that's a big increase over the 30% gross margins we achieved in 2021, so basically almost 50% increase in gross margin. So, that's like, for us, a very important achievement, and basically that sets the company back on the track of, let's say, what historically was the gross margin of the company profitability. And another important KPI for us in 2022 was expanding our footprint in North America, which for us is a key market. And I'm glad to report that we managed to achieve this goal as well.
Q4 revenue was almost CAD 2 million, and this is like back-to-back with CAD 2 million revenue in Q3 as well. And if we look year-over-year, Q4 compared to 2022 compared to 2021, we can see massive increase of almost 150%. So, basically, North America is growing, and is growing fast. And we expect to see this momentum carried into 2023 as well. With regards to Amphy, actually Amphy can report very, very encouraging result in the entire year of 2022, and especially in the fourth quarter of the year. So, total revenue for Amphy in 2022 [solely] (ph) was CAD 118,000 compared to '21 or almost CAD 22,000 in 2021, so that's a massive spike of almost 500%. And gross profit increased from CAD 81,000 to CAD 21,000, again a massive spike of almost 300%.
But equally important, in Q4, Amphy generated revenue of CAD 60 million, so that means that 50% of the Amphy yearly revenue actually happened in the last quarter of the year. And this is following, let's say, a big change that we did with Amphy, refocusing Amphy on more of the professional side, more enterprise-related courses. And I think that started to bear result. And we are very happy to report positive result also from the Amphy front as well, especially in the fourth quarter, but again in the entire year, especially if we need to compare it to 2021.
Another very big achievement that the company had in Q4, Adcore was nominated the one -- as Microsoft Channel Partner of the Year in the entire EMEA region. So, this -- Microsoft, it's a strategic partnership with Adcore grants for the -- this is the fourth year that we are into this partnership. And over the time, this strategic partnership grow, improve itself. And the fact that the company been able to be named as the number one channel partner with the entire EMEA region, this mean the strength of this partnership, the value of this partnership, and this is exactly what we would like to see happening in 2023, but with also other channels, not only with Microsoft. And I will touch base about it later down this presentation.
So, just to wrap up, I would say the key highlights for today report, if you're talking about yearly highlights, I would say the following. Gross margin improved from 30% in 2021 to 43% in 2022, that's actually 40% increase or year-over-year. [Indiscernible] in 2022 went down to 32% compared to 51% in 2021, so this means the company is more diversified, there is more client acquisition that happened in 2022, and this means that the company is a stronger, more balanced company in 2022, even if you compare it to 2021, for example. North America, again a key market for us, and also the EMEA region, we saw massive way growth in these two region, 125% year-over-year grow in North America, and 71% increase in the EMEA region. And even though the company top line revenue went down 2022 compared to 2021, again, if you look under the wood and we start looking at gross profit, then actually we saw an increase in gross profit year-over-year of CAD 700,000 and 6% decrease year-over-year.
So that means the company lost revenues that were less qualified or less quality revenue with the company's lower gross margin and basically not went down in gross profit or gross margin, but the other way around, we managed to improve in these two key factors as well. So, all in all, I would say very positive year and a very strong finishing of the year. So, if you need to compare the second part of the year to the first part of the year, just in Q4, we generated revenue like in Q1 and Q2 together.
So let's show you the strength of momentum that we have in Q4. And when we talk about guidance for Q1 2023, you can see that the same momentum is carried well into 2023 as well. So, if we look at quarterly again, revenue grow quarter-over-quarter with almost 20%, gross profit grew in 12%, again, massive growth quarter-over-quarter. Top line revenue in the last quarter was 50K and that's 50% of the entire yearly revenue that was made in a single quarter. So, that means [indiscernible] is gathering a very nice momentum as well. And I say all in all, very positive quarter, very positive end of day or second part of the year. And all in all, we can be very happy with what we achieved in 2022. But equally important, very optimistic regarding what can be achieved in 2023. And when we look at the cost and the current share price, which is 0.25, then obviously this is not even near where we think it should be. And if you look at comparable and we put all the major company over there, then you see this is a massive upside to the stock price.
Look, EV gross profit average is almost five compared to less than one for [ESCO] (ph). So, that's more than 600% upside EV to adjusted EBITDA, average compared to around six for ESCO. Again, 400% upside and according to these metrics, we can look at an upside of anywhere between CAD 1 to even CAD 1.5 for the stock price. So, again, deeply undervalued, and if you look not only the company don't also put the money where our mouth is, then you can see that in Q4, the company continued to purchase shares. We purchased more than 700 million shares in the open market.
Average share price was 0.92, and total money invested in this effort was more than CAD 200,000. And we will continue to do it throughout 2023. If you believe, continue to believe that the share price is undervalued, it is like buying opportunity over as well. So, we continue to do whatever it takes in order to support our investors and also seize the opportunity if needed.
So, when we talk, you know we already discussed what the company been able to achieve in 2022 and also discussed the positive momentum the company gathered in the second part of the year. But then when we look at the Q1 2023 guidance, we can see that we expect the same momentum to carry well into 2023. So, we expect revenue to land in Q1 of anywhere between CAD 6 million to CAD 6.5 million, gross profit to be anywhere between 2.25 to 2.6 and gross margin to be anywhere between 38% to 40%, so very strong opening of the year. This represents top line growth, potentially of anywhere between 30% to 40% year-over-year and middle line growth of anywhere between 13% or 15% to 30% year-over-year. So, like I say, we have a very positive momentum in Q3 and Q4 2022 and a far better start of 2023, if we need to compare it to how the company started 2022, which was copied start, I would say.
And so, what are the company targets for 2023, where the company is aiming? And equally important, what you as investors should keep an eye on when the company result, quarterly result, and making sure the company is actually moving in the right direction and execute on what he promised to do. So, I would say six main target or six main goals for the company, for us this year.
Number one is obviously to maintain a strong balance sheet with a focus on increasing our cash reserve. So, basically we're already two years into the downtrend in the capital market and nobody have unfortunately crystal air ball in order to know where this target is going to finish. We can guess that we are more nearing to the end, that we are into the start, but never again the company need to be protective, protect the balance sheet, protect our cash reserve. This is exactly what we would want to see in 2023 as well. So, that's I would say number one target. So, keep an eye on the balance sheet. Number two is keep our gross margin within the 40% to 50% range. Again, we managed to do it very successfully in 2022 and we want to keep this success in 2023 and behind.
Obviously, this is where we want to be, this is where we feel comfortable being number three, achieving double sorry digit growth both in revenue, gross profit and operational profit. So, I think if we need to look at comparable of what we can achieve 2023 compared to 2022, so we expect in 2023 to present results that actually all the key metrics are moving in the right direction and we see positive trend, top line, middle line and bottom line as well. So, again, high expectation for the company operational result in 2023. Number four, we would like to see continued expansion and global footprint in North America, so again very important market for us. We recently added a full-time salesman in this specific market and we have high expectation about the potential of expansion we can achieve in this specific market. So, again keep a close eye on what the company is doing in this specific market. Number five, I would say strengthen the strategic partnerships that we have and to drive mutual growth and increased market share.
So the same success that we had with Microsoft, we want to copy it and learn from it and basically take it to other networks as well. So, we have a successful also partnership with Google but now we are looking into expanding to other channels like behind Google and Microsoft as well. So, keep a close eye on new partnership announcement and what the company can do in this front as well.
And last but not least is obviously invest in R&D, so, this massive opportunity for the company and R&D especially now where there's a massive AI boom and the company would like to capitalize on it and monetize on it. So, we would like to see more innovation coming from the company, more AI integration into our tool and basically better product offering in 2023. So, keep a close eye on new product release, new product improvement, more AI to the product. So, this is something that I would expect to see at the present in 2023. So, just very short summary, strong balance sheet, keep an eye on the balance sheet. Strong margin of 40% to 50%, keep an eye on our margin.
Double-digit growth in all front, all KPIs, top line, middle layer line and bottom line. Again we would hope to deliver all of that in 2023, expand our footprint in North America. So, keep an eye on the revenue coming from this important region. More partnership and a stronger R&D and new product releases in 2023 as well. So, a lot of the plan, a lot to achieve, but I'm sure the company now is a far stronger, better company in the starting of this year, 2023 than where we were exactly a year ago. And I think Yatir can explain more in detail about what the company been able to achieve in 2022, which set actually a very good foundation to what the company is intended to achieve in 2023 as well.
So, thanks everyone, and I see you again in the Q&A session.
Operator
Thank you so much, Omri. I will now turn the call over to Adcore's CFO, Yatir Sadot to quickly review the fourth quarter financials in more detail, Yatir?
Yatir Sadot
Thank you, Gabe, and good morning, everyone. I would like to provide straightforward and comprehensible overview of our fourth quarter financial results, keeping in mind that we'll discuss both GAAP and non-GAAP measures, all presented in Canadian dollars.
In the face of challenging business conditions, our team has done an outstanding job in the fourth quarter. We have been focusing on higher margin revenues and more scalable, durable clients since mid 2021, which has contributed to more sustainable and profitable business in the long run.
Now let's dive into details. Over the three months ended December 31st 2022, we delivered revenue of CAD 8.8 million compared to CAD 9.7 million in the same period of '21, a decrease of CAD 900,000 or 9%. Cost of revenue decreased by 23% to CAD 5 million compared to CAD 6.5 million in the same period of 2021. Gross profit was CAD 3.8 million compared to CAD 3.2 million, an increase of CAD 600,000 or 19%. In the three months period ended December 31st 2022, gross margin was 43% compared to 33% in the same period last year. Gross margin also improved on yearly basis moving up from 30% in '21 to 43% in 2020.
As for the operational expenses, R&D expenses for the quarter were CAD 0.4 million or 5% of revenues compared to CAD 0.7 million or 7% of revenues in the prior year. Sales and marketing and general and administrative expenses for the quarter were CAD 3.3 million or 37.5% of revenue compared to CAD 1.8 million or 19% of revenue in 2021.
SG&A expenses increased mainly due to headcount increase, salaries-related expenses, partnership expansion expenses, and investments in Amphy. Operating profit was CAD 0.1 million compared to an operating profit of CAD 0.7 million in the same period last year. This decrease was mainly driven by the increase in sales and marketing and general and administrative expenses mentioned before.
Net loss was CAD 0.5 million compared to a profit of CAD 0.7 million in the same period last year. Now let's see the quarterly revenue growth. As we see in this flow chart, our revenue has been steadily growing since the first quarter of 2022 accompanied by consistent gross profitability above 40%. This growth indicates that our strategic focus on improving gross margin is working.
We have been experiencing an ongoing increase in revenue from CAD 4.7 million in first quarter 2020 to CAD 5.2 million in the second quarter 2020, up by 10%, another increase to CAD 7.5 million in the third quarter of 2020, up by 45% compared to the second quarter of 2022. And another CAD 8.8 million of revenues in the fourth quarter, up by 17% compared to the third quarter of 2022. We can see two significant trends, first, a substantial increase in quarterly revenues; second, the sustained achievement of gross profitability exceeding 40%.
Now let's discuss the geo breakdown. As for our geo revenue breakdown, North America and EMEA region showed the most growth year-over-year. As you can see in the slide are split into two, the quarterly revenue breakdown and the annual revenue breakdown. On a quarterly basis, you can see EMEA region grew by 27% and North America region grew by 144% from almost CAD 800,000 of revenue in the fourth quarter of 2021 to CAD 1.9 million in the fourth quarter of 2022. On an annual revenue breakdown, you can see the same trends with the larger numbers. So, for EMEA we went up from CAD 6.5 million to CAD 11.1 million, reflecting an increase of CAD 4.6 million or 71% of increase. In North America, we went up from CAD 2.6 million to CAD 5.9 million, reflecting an increase of CAD 3.3 million or 125% share growth.
In this slide you can see the illustrations of quarter-over-quarter revenues by regions. You can see that both quarters, Q3 and Q4, on both regions, EMEA and North America, grew dramatically in the last two quarters of 2022. And we can see the same trend; we keep growing on those key strategic regions.
In terms of financial position, we ended Q4 with cash and cash equivalents of CAD 8.8 million as of December 31, 2022, compared to CAD 14.1 million at December 31, 2021. The decrease in cash and working capital is mainly attributable to purchasing shares through buyback plan. The company sees this strategic and important investment in the company in order to drive more value to Adcore shareholders and investors. Another reason for the decline was related to investment in Amphy. And another one is payments to media partners in order to expand our global network, mainly in the North America region.
Total working capital of CAD 9.2 million, compared to CAD 13 million at December 31, 2021, a decrease of CAD 3.7 million or 29%. We believe to generate more cash and cash equivalents in 2023 compared to 2022 due to increased demand on the company's products and improved profitability. Total assets, of CAD 19.7 million compared to CAD 22 million in 2021, a decrease of 10%. Significant low debt; the company continues to be a debt-free, which is good mainly in this very challenging business conditions nowadays.
Now let's discuss adjusted EBITDA. Our quarterly non-GAAP results reflects adjustment for the following items. Depreciation and amortization totaled CAD 234,000, share-based payments totaled CAD 93,000, and other non-operational items totaled CAD 191,000. All together, the total adjustment amounted to CAD 518,000. And the adjusted EBITDA for the last three months ended December 31, 2022, was CAD 605,000. Excluding Amphy's expenses from operating profit, AdTech's operating profit was CAD 621,000 for 2022. And the adjusted EBITDA for the AdTech activity was CAD 2.6 million in 2022.
Now with that, I will turn the call back to Gabe.
Unidentified Company Representative
Thank you, Yatir. And with that we will turn the call over to questions.
Question-and-Answer Session
A - Unidentified Company Representative
At this point, participants are able to post their questions in the Q&A portion. So, I will give you a moment to do that.
Okay, we will start with the first question. If you can further elaborate on the decline in revenues?
Omri Brill
Yatir, would you like to answer this one?
Yatir Sadot
Sorry, Gabe, can you repeat the question?
Unidentified Company Representative
Absolutely. The first question is if you can further elaborate on the decline in revenues?
Yatir Sadot
Yes, for sure. So like I said, we've been focusing on higher margin revenues and more scalable, durable clients since mid 2021. This is the main reason for the decline in revenues. We discontinued the activities with clients that were low-margin profitability. And I think this is the main reason that the company hasn't had the desire to retain lower margin clients.
Unidentified Company Representative
Thank you. We have another question that came in. Why do you have recurring finance costs when you have no debt?
Omri Brill
[Indiscernible].
Yatir Sadot
This is basically related to the global operations behind Adcore. We have like seven different companies in five different continents, and basically currency translations. And we have the Australian dollar market, we have the U.S. dollar market clients, we have exposure to different foreign currencies. And this is mainly the reason for the finance costs, fluctuations between the foreign currencies and the U.S. dollar.
Unidentified Company Representative
Thank you, Yatir. Another question that came in is what was the impact on the bottom line of Amphy, and how does that compare to the impact in 2021?
Omri Brill
I'm not quite sure that I understood the question, sorry.
Unidentified Company Representative
I'll repeat again and we'll see how --
Omri Brill
No, I just said in which I can understand. I don't really understand the meaning of the question. So, if whoever wrote this can better elaborate about exactly what does it mean by the impact on bottom line?
Unidentified Company Representative
In the meantime, we'll move on to another question that came in. Please explain the loss of [Client C] (ph) revenue. How is Chinese market fares based on the China opening its market again after COVID?
Omri Brill
Okay, so actually that's two separate questions, but obviously related because the coming, so what we're calling the same region. So, I would say, yes, Client C is part of -- there I would say the company overall strategy to focus on clients that have been emerging. And Client C generated a lot of revenue, but was at very low merging. And strategically, the company decided that we don't want to continue working with this [indiscernible] client. There, Client C, big as it was, was part of this pile of clients that the company decided not to continue working with.
With regard to the Chinese market opening, I would say the following. I recently visited there our offices in Hong Kong, and also the opportunity to travel [indiscernible] and meet with our Google partner over there, and with clients that we had over there. And that's the first time that I was able actually to visit this region since the COVID. So, we opened these two offices during COVID, and I didn't have a chance to meet in person even the staff that we had over there. So, you're right, markets are opening. We see massive opportunity for us in this specific region. And we see tremendous momentum.
And we're recruiting people in this region, both in Mainland China, in Hong Kong, that we believe that, after COVID is finished, that now that we have much better understanding what's working for us and what is not working for us in this specific region, the company actually is very well-positioned, in 2023, to properly expand this region and make the most out of the investments that we did in 2021 and 2022.
Unidentified Company Representative
Thank you so much. I think we have a rephrasing of the previous question. They asked how much of a financial loss for Amphy in 2022 compared to the loss in 2021, and the expectations for 2023?
Omri Brill
Okay, so maybe Yatir can help with this one.
Yatir Sadot
Yes, so I'll give you the numbers, and I will leave you to provide the expectation for 2023. So, in regards to Amphy's loss in 2022, that loss amounted to $900,000. And in 2021, Amphy's loss amounted to $1.2 million of U.S. dollars.
Omri Brill
Yes. And I would say with regard to the company's plan of investment in Amphy in 2023, I would say the following. A, we have a plan or already executing on a plan to save at least 30% in Amphy costs year-over-year, if we need to compare 2023 to 2022. So that's already, by definition, 300,000 less in investment if we need to compare these two years. And hopefully Amphy revenue continue to grow in 2023 as well. So, I would expect our investment to land of anywhere between, I would say 700, 750 to 900, 950 in 2023. But still bit of early days into the year to talk about exact numbers. But this is high level estimation of investment needed during 2023.
Unidentified Company Representative
Okay, excellent. We have a few more questions here. The first one is do you believe that the general social unrest in Israel, the government versus Supreme Court impacts the government, excuse me -- impacts the company's business?
Omri Brill
Yes, it's an interesting question. I would say the following. [Indiscernible] is a very global company. So, most of the company revenue are generated outside of Tel Aviv, Israel. Yes, it's true that the ESCO is on Tel Aviv, Israel. So, I wouldn't see any big threat to the company's stability or anything like that. And hopefully things will come down a bit in Israel and democracy will prevail. So, I'm not too worried about what's going on, if any, I need to be worried more as a father of four kids or an husband or a son than a CEO of a company. But again, I'm not worried as a father and I'm not worried as a CEO as well.
Unidentified Company Representative
Okay, excellent. Another question is how many shares did you repurchase in 2022 and how many do you expect to purchase in 2023?
Omri Brill
Yatir, do you want to answer the first part of the question?
Yatir Sadot
Yes, can you repeat it Gabe, I didn't hear it well.
Unidentified Company Representative
Yes, so the question is, how many shares did Adcore repurchased in 2022 and how many do we expect to purchase in 2023?
Yatir Sadot
We covered it in Israel. We purchased -- 2022, we purchased over 700,000 shares. This is the number.
Omri Brill
No, that's the quarterly numbers.
Yatir Sadot
I don't have the full-year number right away, but I can check it for it.
Omri Brill
Okay. So, I think, like, just on the top of my head, we're talking about around, I think overall in market and off market, more than 3 million purchase, I think in 2022. And if you look at 2023, it's still a bit early to determine what will be the final number for few good reasons. A, it's very early to the year. B, nobody know what's going to be the stock price or the share price. So, obviously, if we continue to see a potential, we continue to buy and vice versa, the stock price is going to go up, and there's no need to continue to buy. And we don't believe this is a good opportunity. Then we can take a [recipe] (ph). I say in general, the company has the buyback plan until May this year, and we are planning to resume it for additional year as well. So, the company is planning to continue to be involved and continue to deliver your support to shareholders as long as it's going to take and as long as we believe there's going to be an opportunity for us in the market.
Unidentified Company Representative
Okay, great. I have another question coming in that are you moving away from APAC as a strategic sales region?
Omri Brill
Not at all. So, I already touched on what's going on in APAC and what's going on over there. I know, like if you need to compare APAC 2022 revenue to 2021 revenue, then obviously we saw a massive decrease. But if you were going to look at the gross profit numbers, then you will see it probably remain flat or not declined almost at all.
So, I think all-in-all APAC remain a very important region for us. Three of the company offices are actually located in this important region. So, obviously we have a massive operation and activity in Australia, two very successful branches also in Hong Kong and Mainland China and Shanghai. And we remain very committed to this region. We also see better collaboration between the different branches now in APAC or better collaboration between the Chinese entities and the Australian entity as well. And I think like if you need to compare 2023 in APAC compared to 2023, then you're actually going to see growth in this region versus the decline that you saw in 2022.
Unidentified Company Representative
Okay.
Yatir Sadot
Gabe, I want to provide the numbers behind the buyback plan for the full-year. So, we are talking about 3.6 million of shares in the earlier of 2022.
Omri Brill
How much 3.6?
Yatir Sadot
Yes, million.
Omri Brill
Yes, I wasn't so far away. There's also a question by Alex says that why we only bought in the NCIB, only 1.25 million if we can buy 3.1 million. So, actually, there's a gap between how much we can buy on paper and how much we can buy on a daily basis. So, basically, if you look at the daily basis, there's a limitation on how much the company can buy. Then usually, let's say throughout 2022, the company bought the maximum allowed amount, and this is what it came down to. Also, the company in 2022 purchased off-market very large sum of the former city of the company as well. Then I think that's another investment the company did. And like I said, the companies continue to supporting the stock, and we continue to do it throughout 2023 and we expect all shareholders to do the same, including market makers, Gabe?
Unidentified Company Representative
Fantastic. Okay, there are no more incoming questions. I will conclude the Q&A portion of this call. Thank you for joining us today and have a great rest of your day.
Yatir Sadot
Thank you, Gabe. Thank you, guys.
Operator
Goodbye.
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Adcore Inc. (ADCOF) Q4 2022 Earnings Call Transcript