Adcore Inc. (ADCO) Earnings Call Transcript & Summary

Hi, Everybody. My name is Barak Frank. I'm Adcore Inc.'s Corporate Secretary. Very thrilled to have everyone with us today. We are going to wait a few more minutes to get some more people some time to join in, and we'll start in a few. Okay. Thank you, everybody. We will start now. This session will be recorded as well, and it will be free for everyone to see on our website after. So like I said, my name is Barak Frank. I'm Adcore Inc.'s Corporate Secretary, and we're here to -- for management to present and discuss the Q2 financial results of Adcore Inc. And we will start with a financial review of the quarter, led by our CFO, Mr. Yatir Sadot; and followed by a short statement from Adcore's CEO, Omri Brill, right here next to me. And we'll conclude this session with a Q&A session. Some of you have already sent questions ahead of time, which is great, but please feel free, and we encourage you to also type in more questions in the chat as we go along. And with no further ado, I'd like to pass the mic to Yatir Sadot, our CFO, which will go over the results from Q2 2020.

Thanks, Barak, and good morning, everyone, and thanks for joining us on the call today. We hope that you are all keeping safe and healthy. 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. All amounts will be presented in Canadian dollars. And I will start with Q2 profitability. So the revenues for the quarter were $2 million versus $3.6 million in prior year, a decrease of 45% compared to 2019. Our quarterly gross margin came in at 83%, a record gross margin compared to 58% in prior year. The increase in gross margin versus last year was driven primarily by the following reductions in cost of revenues: first, the company's effort to reduce expenses as a reaction to the impact of the COVID-19, including a reduction in employees' compensation and mainly in higher management's compensation; second, by the lower media budgets of the company's customers, mainly those in the travel and leisure industries due to COVID-19. Now let's move to Q2 operational expenses, and I will start with the R&D. Research and development expenses for the quarter were $269,000 or 14% of revenues compared to $189,000 or 5% of revenues in the prior year. Sales and marketing expenses and general and administrative expenses for the quarter were $1.1 million compared to $1 million in 2019. Sales and marketing expenses and general and administrative expenses decreased by 24% compared to the first quarter of this year. This increase was attributable mainly to the reduction in employees compensation and mainly, like I said before, in higher management compensation and by improving business terms with strategic vendors. Our operating profit for the quarter was $264,000 or 13% of revenues compared to $1.2 million operational loss or minus 33% of revenues in 2019. The increase in operating profit is attributed to the company's listing in the TSX Ventures in 2019 and with $2 million of listing expenses, which occurred in prior year. Net profit for the quarter was $191,000 or 10% of revenues compared to $1.3 million net loss or minus 36% of revenues in 2019. Next, I discuss our adjusted EBITDA. Adcore's non-GAAP results reflect adjustments for the following items: first is depreciation and amortization, totaled $127,000; second adjustment, share-based payment, totaled $65,000; and the last adjustable item is relocation expenses, totaled $77,000. Total adjustments were $270,000. Adjusted EBITDA was $534,000 compared to $1 million for the same period in 2019, a decrease of $552,000 year-over-year. Moving to cash flow. We generated additional $800,000 of cash and cash equivalents in the last 6 months. We started the year with $4.9 million. And as of June 30, the corporation's cash and cash equivalents were $5.7 million, an increase of 16%. Net cash provided by operating activities for the quarter was $877,000 compared to $916,000 in 2019. Another highlights to take into consideration, e-commerce clients increased by 50% compared to the same quarter last year. We are confident enough in business outlook for second half of 2020 and into 2021 as well. And at this point, I would like to turn the conference call to Barak Frank to update on the operation of the business, with the CEO review by Omri Brill.

Thank you very much, Yatir. So one more comment before passing the mic to Omri. Please feel free to add any more questions. This is the time, to the chat. Since it'll -- any -- that's what we're here for, to answer all the interesting questions that as our valued investors, you might have. And Omri, you like to present your statement?

Absolutely. So thank you, first and foremost, for Yatir, for a very enlightened presentation regarding the company's financial result in Q2 2020. I would actually like to start with a bit more maybe a personal note. I've been managing or even founded this company for almost 15 years now, when this company was found literally as a garage business with too many operations, just myself and the CTO, Albert Bentov. And we managed to grow this company to the global public company it is today. And never in the history of the company, we encountered such, I would say, dramatic times and drastic times, like everybody now see due to the COVID-19 pandemic. So we all live in very unusual times, I must say. In a sense, this like, unfortunately or fortunately, there is no like, handbook, what you should do as a CEO of a company if there is a pandemic happen. And every manager, every CEO need to take a decision, what he would do? How are we going to navigate the ship through very stormy water? The company revenue in Q2, dropping almost 50%. It's not a small drop. But say the following: This maybe would sound a bit silly to some of you, but I couldn't be more proud in Q2 results. I'm more proud in Q2 result 2020 than I am, let's say, in any other record quarter that Adcore did. And Adcore did a lot of record quarter after record quarter after record quarter in sales. Because it's an unusual quarter. And despite the very unusual quarter and despite the huge drops that we saw in the company revenue, we managed to finish this revenue with a profitable operating profit. And obviously, more than -- almost 600 million -- $600,000 in adjusted EBITDA. So that says a lot to me about the strength of, a, the business model and the robustness of the business model of the company, b, about the effectiveness story of the measures that the company took regarding expenses and saving expenses. And I'm very optimistic about -- obviously, we see a big, big, I would say -- so I mean the market conditions are getting better month-by-month, which is definitely a positive sign. We think that we know already that April and May marked in a sense the eye of the storm or the mid of the, say, crisis. And moving forward whether in June especially, July, August, we see like a steady improvement month over month in the business environment. And obviously, it's going to also be reflected in the business results as well. So this is an unusual quarter. This is not your standard quarter in sales. But I think this quarter, a, demonstrate that Adcore is a very strong company. And even if we hit such a big storm, the company managed to be profitable and remained profitable, that says a lot about the company. This is a. And b, I truly believe that Adcore is a much better company, and will be an even better company, thanks to this pandemic and thanks to this crisis because it's taught us a lot of lessons. The company is doubling down now on technology, is doubling down now on e-commerce as well. And we see huge opportunity for us in these 2 sectors. We see huge accelerating in everything, what we call the stay at home economy. And basically, I think if the company will know how to serve this new type of business correctly, then Adcore can become a clear winner from this crisis, and this is exactly what we're already starting to see. And I think we're going to see it more and more in the coming quarters and for sure in 2021 and moving forward. So that would be, I guess, my statement for this quarter. So yet again, not the best quarter, like if you asked me in the beginning of 2020, what would be my expectation for Q2? I would say, probably, we're going to increase revenue, and increase 25% to 30%. You will believe that's obviously wasn't the case. But I would say I'm even more proud in this quarter than I would be if it was a normal year and it would be still increasing revenue 25%. Because I know the crisis will gone, but Adcore will prevail and is a better, stronger company today than it was prior to this, say, crisis, which I think is the most important thing because Adcore is here to stay for many years, and Adcore is a stronger company nowadays.

Okay. Thank you very much, Omri, for those inspiring and optimistic words that we all are happy to hear. And we will -- with that, we will move to the next part of this conference call, and we will go over the different questions that were sent over. We'll start with a question from David Echenberg. So what are the anticipated economic benefits of the new Effortless Feed Shopify app for the company, in terms of current or future revenues and margins?

So thank you, David, for your question. As usual, I would say, and I would say, a, indeed, Effortless Feed is a new app. a new addition to the Adcore family of apps or technology solution. So actually that's the fourth app that we have in our inventory. And I would say the following: The way we structure it, Effortless Feed is the entry-level to the Adcore technology solution family. So basically, this app is currently available on the shopping -- in the Shopify app store. We intend to have it available also in the WIX app store and the WooCommerce app store, which is WordPress app store, or WordPress plug in, for that matter. And basically, the concept that you can see Effortless Feed is the entry level to the Adcore technology solution. So the app, going to be free plus. So this means that most of the features are going to be free. Some of the features going to be premium features. But basically, the idea is it's more of a marketing tool. So we would like to see more and more users download the app, start using the app, getting familiar with the Adcore technology solution. And once they are ready to move to the next level, to the more advanced app, then we have a line of apps that are a bit more advanced and obviously are more premium. So you can see Shopify -- sorry, Effortless Feed, as I would say, a hybrid marketing effort, plus, let's say, an entry-level technology solutions the company is saying. So it's going to take time to see the full fruit of this app can do for us. But I would say, at least the initial reactions that we get from the market is very positive. We get very positive feedback, and we're getting more and more download literally every week. So that's exactly what we anticipate to see in these early stages of the app release.

Okay. Thank you very much. Another question from David. What has been the motivation for the company to start being listed on the Frankfurt Stock Exchange? Yatir, would you just cover this one?

Thank you. So I think the answer is embedded on the DNA and the expansion of the company worldwide. The company, located in more than 1 continent, in Israel, Toronto, Hong Kong, Melbourne, Australia, and I think this is the main reason that we listed in Frankfurt. We wish to diversify our investor base and make it more accessible to different investors worldwide. I think this is the main reason for us to be listed in Frankfurt. And I can share, the investors that we are in the process of looking for the uplifting from the TSXV to the TSX in the following months. So keep posted.

Okay. Thank you very much. A question about the financials. In reference to Page 14 of the company's latest quarterly report, major customer B's contribution to revenues went from 19% in a 3 months period, ended June 30, 2019, to 0% in the 3 months period ended June 30, 2020. We would appreciate your comments on what is the reason for that customer not contributing to revenues in the latest quarter? Did he go out of business? Or did he just temporary suspend advertising activity? Or simply ended its contract with Adcore?

Okay. So good question. And I would say this is 100% COVID-19 impact. So thanks God, it's a strong company, and he didn't go out of business by no mean, and he didn't stop the relationship with Adcore by no mean as well. So we are pleased to tell you, to tell the investor base that in Q3, client B or customer B already resume activity. And basically, we believe that in Q3 and even more stronger in Q4, we will see a steady increase in the activity. But I would say the only reason that he dropped from 90% to 0% was pure COVID-19 and the fact that basically the specific country that this customer is operating was under lockdown. So that's the only reason. And -- but thanks God, we are back in business now in Q3, and we anticipate Q4 going to be even stronger.