Adcore Inc. (ADCO) Earnings Call Transcript & Summary

Okay. So good afternoon, again, everyone. Everyone, sorry, we would like to start. So thank you so much for participating in today's conference call. And what we do, we do the usual routine. So first, Yatir Sadot, the company's CFO will highlight the financial results for the first quarter of 2020, and then we will have a short Q&A session. Obviously, we have some Q&As already sent to us and you are more than welcome to send us new Q&As during the chat of the conference call. So by all means, let's start.

Thanks, Omri, and good morning, everyone. Before beginning the financial overview, I would like to remind you that the following discussion will include GAAP financial measures as well as non-GAAP results. Also, all amounts will be presented in Canadian dollars. I will start with profitability. For the first quarter 2020, we delivered record revenue of $3.3 million, an increase of 3% compared to 2019. The company did not expect such a level of revenue in light of COVID-19. So this is indeed a record -- special record revenue this time. Our quarterly gross margin came in at 68% compared to 64% for the first 3 months ended 2019. The increase in gross margin versus last year was attributed to the company's profitability strategy. Moving to the OpEx items. Research and development expenses for the quarter were $199,000 or 6% of revenues compared to $138,000 or 4% of revenues in the prior year. Sales and marketing expense and general and administrative expenses for the quarter were $1.4 million or 45% of revenues compared to $781,000 or 24% of revenues in 2019. Our operating profit for the quarter was $573,000 or 17% of revenues compared to $1.2 million or 36% of revenues in the prior year. The decrease was largely attributable to the slowdown in revenues due to COVID-19, which was not in line with the company's expectations and the increase in selling, general and administrative expenses as described. Net profit for the quarter was $329,000 or 10% of revenues, compared to $935,000 or 29% of revenues in 2019. Next, I'll discuss our adjusted EBITDA. Our quarterly non-GAAP results reflect adjustments for the following items: depreciation and amortization totaled $149,000, share-based payment totaled $67,000, relocation expenses totaled $54,000, and the total adjustments were $270,000. Adjusted EBITDA was $843,000 compared to $1.3 million for the first quarter 2019, a decrease of $444,000 or 35% year-over-year. Moving to cash flow, cash and cash equivalents. We started the year with $4.9 million, and as of March 31, 2020, the corporation's cash and cash equivalents were $5.3 million, an increase of 8%. By geography, 50% of our first quarter revenues were generated from North America, 34% from APAC, and 16% from EMEA compared to 49%, 32% and 19%, respectively, in 2019. Guys, again, as we summarize the first quarter of 2020, it is a record revenue, record measurements in light of COVID-19 that Omri and myself will give you more guidelines and directions for the following quarters. Thank you, Omri.

Thank you, Mr. Sadot. So first of all, I'm very happy with the first quarter results, like Yatir mentioned before. Achieving a record quarter under the current market condition, that's an achievement that for myself. I would say, it's even a stronger or bigger achievement, than let's say the Q4 of 2019, a record result that we achieved. So being able to achieve a record result in Q1 2020 is for me even a bigger achievement. And also, we are very pleased to announce and we already announced that most of Adcore offices around the world, whether it's in Tel Aviv, Melbourne, Australia, Hong Kong are now working from the office. So we finished working remotely from home and the only outpost or office that is still working remotely is the Toronto office. Hopefully, it's going to be joining the rest of the Adcore offices and start work from office as well. But all in all, I can say that the -- hopefully, the worst is behind us, and we see a much better or a stronger business sentiment in May and for sure in June as well.

So for the Q&A question, we have some Q&As that's already been sent to us by some of the participants. And I would like to go over a few of them with you. Like I mentioned before, we have a chat in the Zoom conference call, so you can post new question if you would like to post them as well. The first question coming from [ James Skogstad ]. I hope I pronounced your family name correctly. And the question was how much did the COVID-19 pandemic affect Q1 results, which I guess is the golden question. Everybody would like to know what was the real effect? How much is pure business and how much is the COVID-19 effect? So I would say, our original estimation for Q1 2019 is revenue top line was $4 million. So that means if the actual results is $3.3 million. That means that the company estimates due to the COVID-19, it lost at least $700,000 in revenue in the first quarter. So from one end, it's a big loss from other end, it's still, we managed to do a record quarter and still a very profitable quarter as well. So I couldn't be more proud or pleased with the company's result for Q1 2020. The second question is looking away from the COVID-19 pandemic, can we expect revenue and net income to outgrow administrative expenses? And the short answer is yes. Adcore was already lean and mean company before entering to the COVID-19 pandemic. And post-pandemic, it will become even more lean and more mean company. Even post-pandemic, we announced a global salary cut of between 10% to 15%. So the company -- and the company is looking to other way it can also cut other expenses as well. So the expenses side now going to be more -- even more, I would say, carefully works. And basically, we believe that the revenue will come to normal [ around ] Q3 and Q4. And expenses are going to reduce by at least 15%, that's the company estimation. So yes, we understand the expenses are even more important now to look after. And another question that was posted to ask was how many Adcore's clients stay with Adcore once we sign them? or basically, what is the company's churn rate? And we already discussed it in detail, but I would like to further disclose or discuss this matter. So Adcore have 2 revenue streams, 2 types of clients. The first revenue stream is direct clients, and the second one is indirect clients, which is mainly ad agency, online advertising agencies. So for the indirect client, the average churn rate for 2019 was around 7%, which is below the industry average. So actually, the industry average is anywhere between 8% to 10%, and Adcore's average churn rate is around 7%, which is quite good. For direct advertiser, which is basically direct -- they buy the media directly through Adcore without an ad agency in the middle. The churn rate for 2019 was 20%, which is also quite good. So I would say anywhere between 20% to 7% or 8%, if you're direct or indirect. Another question from James. What is the long-term goal of the company 5 to 10 years from now? I would state the following, Adcore's vision and mission is effortless advertising. We've been able to achieve the state of effortless advertising and basically automate the entire advertising process. So we have still a way to go in a sense in terms of the technology capabilities, but we are getting there. So we already had good progress in the advertising side of the funnel, and now we are starting to look at the marketing side of the funnel. So not AdTech, but also MarTech capabilities, because we understand if their advertising funnel starts outside the site, then it obviously will continue in the site as well. Then ideally, the company 5 to 10 years from now want to become the biggest or largest technology provider for advertising automation globally. So -- and that's -- it's an ambitious goal, but it's a goal that we are working very hard in order to achieve. Does anyone have any other question to post? So another question that we had is, the company has grown rapidly since 2011, and when does the management think the organic growth will slow down to less than a 20%-plus? So yet again, another great question from James. And my answer would be, for us, when we look ahead, we still see a blue sky. So the potential of the company to continue to grow in 20% rates and even more for, I would say, at least the next 5 to 10 years, I would say it's still blue sky and there is unlimited potential for the company to grow, its huge market, and we don't even scratched the surface over there. So I wouldn't be worried about the company's ability to organically grow more than 20% year-over-year for at least the next 5 to 10 years. Any more questions, gentlemen? So since it's a very quiet audience, I would like to address maybe before we can close today's conference call. Maybe the trend of the potential we see post COVID-19, and how the company is positioned to benefit from this trend. So what we think is the most obvious trend, I mean, there's a lot of takeaways to take from the pandemic, and obviously, every company will have a lot of learning to do and a lot of adjustment to do. And a lot of new techniques, if we need to implement post the COVID-19 pandemic. But I think the biggest trend for us and the biggest opportunity, the way we see it is a major shift to e-commerce and online advertising that basically follow the e-commerce shift. And the company already had a lot of technologies built around e-commerce activity or e-commerce website. And the company's plan to even strengthen, let's say, this effort. And basically, we believe and we already see that all of our e-commerce clients either double up their activity from what they had before the pandemic pandemic or at least grow their numbers significantly. So we see a huge potential for the company in the e-commerce sector and we plan to have some very exciting announcement in the first coming weeks as well regarding new technology, fresh technology and the company effort in this regard. So I think with all the challenges and obstacles that the pandemic obviously raised to us as communities, to us as businesses as well, I think for Adcore, for the long-run, Adcore can emerge from this crisis, even as a stronger and a better company. And this is exactly what we plan to do and what we're working very hard to do as well. So this -- another question from [ Liz ] Why is the selling and general administration expenses so much higher at almost above $1 million compared to around $600,000 in Q1 2019? So that's a fair question. I would say it's fairly attributed to the rapid growth of the company had both in headcount and expanding to international offices compared to the previous quarter. Bear in mind that in Q1, 2019, Adcore was still a private company with only 2 offices. The headquarter in Tel Aviv, and the outpost in Melbourne, Australia. Fast forward 1 year, and we have 4 international Offices. We have the Toronto new office, the Hong Kong office, the Melbourne office, the Tel Aviv office, and also we rapidly growing headcount as well. So I would say that's the main attribute to the growth you see. Also, there's some option related cost that's attached to it, but I would say, mainly -- the main attribution is the growth in headcount in new offices. So we need to expand in order to generate the future growth of the company, the company will continue to invest more in order to achieve higher revenue. Okay. Another golden question, can we still expect a small profit in Q2? So that's a great question, and this is what the company is aiming for. It's going to be a challenging quarter. I don't want to mislead you. Having said that, Adcore is a great company, and we strongly believe that even with all the challenges that Q2 brought to us, then we can still be profitable even in Q2. The company took a drastic cost-saving measurement during this quarter and we strongly believe that even with everything that's going on, Q2 can be -- can still be profitable quarter. So another question from Jeff is, what is Adcore competitive advantage or sustainable competitive advantage? I would say, Jeff, that actually the fact that Adcore is very geared towards e-commerce. So it's an AdTech solution, which is specialized in performance and e-commerce. Then I would say, all in all, that's maybe Adcore's biggest competitive advantage over the years, and we strongly believe it will continue to be so because Adcore is investing more and more effort into e-commerce and to solutions that basically needed or required for e-commerce advertisers. So another great question is that we mentioned that at the end of April, advertising revenue suddenly stopped. Did we see any recovery? Yes. So we're glad to report that we see a major recovery, actually that already started in May and even a bigger trend in June. So it's not going to be -- I don't want to mislead you guys, and I said, June is going to be completely business as usual. But if we need let's say, to compare the eye of the storm, which is around April, and then we need to compare it to May and then to June, then we see a major recovery, and the trend definitely looks much, much more positive now. So Jeff asked, what type of barriers we are creating along the way to start being displaced by existing competitors and new entrants? So that's a fair question and a good question. I would say the fact that Adcore is integrating a strong integration directly to advertiser's website or back office. It's a unique selling point that allow Adcore to place itself, which is so closely integrated with clients that it's very difficult to replace because literally they need to replace not only us as a social provider, but also, let's say, the entire integration that comes with it. So I would say, that's quite a unique offering that Adcore has and it's one of the offerings that make the Adcore service more sticky. And let me see, that's a final question. If we had a silver bullet and we can shoot it to get rid of one of our competitors or who would it be and why? So, although we are Israelis, we don't like to shoot at people and our competitors. So we wouldn't shoot at any of our competitors, to be honest. If any, Adcore is a better company nowadays because of competition. So we see a lot of stuff that our competitors are doing and we try to learn from it as well. And I can't even point a single competitor, let's say, that's the biggest threat to Adcore, to be honest. So we don't like to shoot at people. We don't like to shoot at competitors. If any, we like to steal their ideas and build even better ones ourselves. So we would like to keep them and be better than them. Okay. So another great question, because we also mentioned in the Q1 results release that we are working on a Shopify app integration, and the question, what are other primary focus there for Adcore? So I would say after Shopify, probably WIX, an WooCommerce, which is a WordPress e-commerce solution would be next. So that's with regard, let's say, to integration to a major e-commerce player. Probably the next type of players will be Amazon or players that are more related to the Chinese market, which is a new market that Adcore is tapping into. So that's probably going to be the next on the table, but I would say the current effort is Shopify, WIX And then e-commerce, which is a WordPress plug-in for e-commerce. Gentlemen, if you have any more questions, please, please give them now. Yes. So we already discussed the retaining rate or the churn rate of the company. And as I mentioned before, that's the next question about the retaining -- the retention rate or churn rate of the company, which is quite good and better than the industry average. We're talking about 7% [ 8% ] churn rate for indirect advertisers or clients and 20% for direct advertisers. So assuming that concludes today's questions. So we want to thank everyone that took the time to participate in today's call. We know that things are still a bit more challenging in Canada and we hope everybody is safe at home. So stay home, stay safe. Obviously, we're sure we're going to see a better time and we have the chance to meet many of you guys face-to-face, hopefully, even before the end of this year. But for the long run, you can rest assure that Adcore entered this crisis as a great company. We're working very hard in order to exit this crisis even a greater company. And I think the Q1 result speak for themselves, and like I said, we see a lot of potential and a lot of new businesses can go or already going towards our way. Thanks to this pandemic and to the major shifts that we see towards e-commerce and online advertising. So Adcore is actually well-positioned to benefit and monetize from this trend and shift towards e-commerce and online. So good day, everyone, and enjoy the rest of the day.