Adcore Inc. (ADCO) Earnings Call Transcript & Summary

Admitting everyone in from the waiting room.

Yes. So we're still admitting people from the waiting room. But I think we should start because we say in 9:00 a.m. ET. And it might as well be 9:00 a.m. ET. So my name is Omri Brill, and I'm Adcore's CEO. And together with me in the room is Barak Frank, Adcore's...

Corporate Secretary.

Corporate Secretary, right, of course. And together with us also remotely, Martijn, our new GM of Adcore North America is actually in Toronto, speaking with you from Toronto. And from his home is Yatir Sadot, Adcore's CFO. So it's a quite a global call and a global operation. And maybe Barak, you want to take the lead, and tell them what to expect from today's call.

Yes. Thank you, Omri. Good morning, everyone. As we said, my name is Barak Frank, and I'm the Corporate Secretary of Adcore, Inc. Happy about the turnout with everyone here online to start your day or mid-day for us here over at Israel. So during the call, Adcore's management will present the financial results for Q3 2020. And we will just give an outline of how this conference call will be led. We'll start with the financial review of the Q3 2020 financial results by Yatir Sadot, our CFO. And it will be followed by an intro of Martijn, our new -- the new GM of Adcore North America. And followed by short statements from Omri Brill, Adcore's CEO. And we'll conclude with the Q&A session. So yes. So without further ado, I think I'll pass the mic over to Yatir Sadot, Adcore's CFO. Yatir, please lead the way.

You're on mute.

Yatir, unmute yourself, please.

Thank you, Barak, and good morning, everyone. First of all, I would like to thank all Adcorers around the world for delivering such an amazing quarter. This is a great comeback from the uncertainty of Q2. It's effect now with almost 15 years of experience, if you wish for a positive ROI, you should reach that goal. Guys, 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. Let's start with Q3 profitability. Revenues of $4.1 million versus $4 million in prior year, an increase of 3% compared to 2019. Revenues more than doubled compared to the last quarter, $4.1 million versus $2 million, a 105% increase. Our quarterly gross margin came in at 60% compared to 64% in prior year. Now let's move to Q3 operational expenses. Research and development expenses for the quarter were at $334,000 or 18% of revenues compared to $314,000 or 8% of revenues in the prior year. Sales and marketing expenses and general and administrative expenses for the quarter were $1.4 million compared to $1.2 million in 2019, an increase of 17% year-over-year. Our operating profit for the quarter was 717,000 or $17,000 (sic) [ 17% ] of revenues compared to $1.1 million operational profit or 27% of revenues in 2019. The decrease was largely attributed to, first of all, an increase in cost of revenue and the company's global expansion, including the opening of the offices in Toronto, the incorporation of the subsidiaries in Melbourne, Australia and Hong Kong. Moving to net profit for the quarter. Net profit for the quarter was $408,000 or 10% of revenues compared to $788,000 net profit or 20% of revenues in 2019. Now I'll discuss our adjusted EBITDA. Adcore's non-GAAP results reflect adjustments for the following items. The first one is depreciation and amortization totaled $213,000. The second component was share-based payment, totaled minus $5,000. And the total adjustments were $208,000. Adjusted EBITDA was $925,000 compared to $1.46 million for the same period in 2019, a decrease of 37% year-over-year. Moving to liquidity and cash flow. So we generated additional $1.2 million of cash and cash equivalents in the last 9 months. We started the year with $4.9 million. And as of September 30, 2020, the corporation's cash and cash equivalents were $6.1 million, an increase of 25% in cash and cash equivalents. Also, net cash provided by operating activities for the 9 months was $1.5 million compared to $300,000 in 2019. Again, this is a bullish fact that the company continued to generate cash and cash equivalents, even under those uncertain times. This is my summary of the 9 and 3 months ended September 30. And now I'll give the talk back to Barak. Thank you, Barak.

Thank you very much, Yatir, for going over the financial results for Q3 2020. And I'd like to ask now Martijn, if he could kind of introduce himself as the new GM of Adcore North America, talking from Toronto, Canada.

Thanks, Barak. Good morning, everyone. Nice to meet you. My name is Martijn van den Bemd. As Omri and Barak already mentioned, I'm recently appointed as General Manager for North America at Adcore. Actually, I just moved here. So I'm based in Toronto. I have been working in digital marketing industry for over 14 years. The last 2.5 years, I was managing a digital marketing agency in Asia Pacific based in Singapore. And I'm very pleased to join Adcore. I think it's very exciting times to what are happening, and we're in perfect spot to leverage on the digitalization in the economy. The right of e-commerce, which is all great. I'm very much looking forward to expand the business, and specifically being close to our investors, our Adcore stakeholders in Canada and the broader North American region. I also like to stipulate will be a point of contact for any related questions on Investor Relations capital markets. So please feel free to reach out to me anytime. I'm happy to meet in person or via virtual meetings like Zoom. So please reach out to me if you have any questions. And I'm looking forward to meeting you all. Thanks, Barak. Back to you.

Thank you, Martijn. We're speaking for myself and I think for everyone at Adcore, we're thrilled to have you aboard and very excited about the added value that you have for our team and for our company worldwide. Moving on to the next portion. Omri, would you like to provide your statement -- short statement about Q3 and the results.

Sure. So first all, thank you so much, Yatir and Martijn. Well presented a brief and intro regarding the financial statement and Martijn for your outlook of vision for the company operation in North America. Like Barak mentioned before, I'm super excited to have you on board, and have worthy confidence in the world for your ability to deliver true value and growth for the company in the next coming year from this region. And Martijn is on the ground in Toronto. He is more than willing and eager to meet any one of our value investors face-to-face, or via Zoom if it's still not safe enough. And hopefully, the fact that is Martijn is in Toronto will make everybody easier on the communication level with the company will grow even stronger. And that was one of the main goals why we decided to bring Martijn on board. So growth and operation obviously is #1, but investor in a relationship and communication is equally prudent for us as well. So welcome, Martijn, and all the luck in the world. Your luck is the company luck, and all the shareholders luck as well. So as of -- for the Q4 (sic) [ Q3 ] results, like Yatir mentioned, the first thing that come into my mind is we did it. So in a sense, especially after Q2, which was kind of a rough and an unexpected quarter because everything that's going on with the pandemic. And there was ton of uncertainty in the business world, and we truly didn't know where the company is heading and more importantly, where the entire world is heading. and then we learned in Q3 did not -- the world didn't stop, not only it didn't stop, actually, Adcore is starting to see some true benefit from everything that's going on. There is a major digital transformation in the world, a lot of businesses understood now the only way to survive is to go live. And Adcore actually starting to capitalize from this major trend. And we believe and we already see it start to believe. We already see this trend is actually getting stronger in Q4. And we believe it will be even stronger in 2021. So even if hopefully, the pandemic will be beyond us somewhere in mid-2021, we still believe that a lot of the trends, the state of the economy, digital transformation and everything will remain with us and Adcore is in excellent position to benefit from this trend. So again, we could announce for a better bounce back report in Q3, both top line, bottom line, middle line. All the metrics are moving in the right direction again, and the company is back on the rolls again. And for us, it's like -- take it back into our long and say, okay, whatever we've been doing in Q2 and Q3 prove itself, the company have the right strategy moving forward. Doubling down on e-commerce and technology, and we're just starting to see the fruits of this strategy. So we believe Q4 will be a strong quarter as well. And obviously, we have high expectations for 2021 and beyond as well.

Okay. Thank you very much, Omri, for those positive words about a very good quarter indeed. Moving forward to the Q&A session. I'd like to thank everyone who sent in their questions ahead of time, definitely gave us a lot of material to think about and process and get some more insights from external sources. So thank you, everyone, and we'll start going through the questions that were sent. First question from [ Lindsay Leese ]. Is it fair to say that the reduction of EBITDA year-over-year is due to the company investing in satellite offices, such as Asia, to position the company for further growth? Are there any other factors at play? Omri, would you like to address this question?

Yes. So thank you, [ Lindsay ], so much for the question. And I would say, yes, the company is heavily investing in our satellite offices. Toronto is a relatively new office. Now with Martijn, we hope to build a renewed momentum over there. And obviously, the Adcore office that's recently launched in the second quarter of 2021. So yes, we are still investing, but we're already starting to see the first fruit in Q4. And we think like Q4 would be like a surprise for how fast we already start to see some true results from these regions actually.

Great. Thank you. Moving on to the next question from [ Eric Landa ]. To sum up the question, he asked if in the customer B in 2019 was the IGAA, the Israel Government Advertising Agency (sic) [ the Israeli Government Advertising Agency ]? And if this contract was renewed as well? Omri, would you like to address this?

I don't know I can I reveal customer B name?

I'd say you could probably say, if it is or if it isn't, since we know the answer already.

Maybe I'll blink. No, I'm not. Yes. Jokes aside. So actually, [ Eric ], thanks for the question. And the customer B is not IGAA. And in fact, IGAA is important as it is, is not in our major client list. So it is an important client, but it's not in our major client play, at least. And with regard to the renewals. So actually, the deep renew contract for an additional sale during February 2020. The only reason we didn't launch an official press release for this because it was, I guess, already in the midst of the COVID-19 pandemic, and budget was already reduced. So we thought it's not going to be significant in 2020. So we might as well -- so there's no big news or drama over there. Having said that, we have high expectations from 2021. And hopefully, we're going to see announce a nice rebound in 2021 for the IGAA budget rather. And like everybody, everybody hopes they can resume travel again in 2021.

Indeed, no doubt. Moving on to another question from [ Eric ]. Asking about customer concentration and specifically customer A, which is accountable for 50% of the revenue. And specifically asking if it is a single customer or an aggregator of many businesses? Omri?

So again, [ Eric ], thank you for your questions. So customer A is indeed an aggregate though. Having said that, I would say that if the company is to lose customer A, it's going to take us time to recover some of the -- or to go after the customer A clients directly. So you can consider customer A as a customer and not aggregated because the company would need some time in order to win the clients directly in that regard. And I see client -- I don't know if Barak mentioned. But also, I guess, David asked a similar question regarding what's the company plan regarding to how the company is compared with customer concentration and looking forward that...

Yes. 2 to 5 years.

So I would say, obviously, nobody want to find himself in a position that is ever rely on a single client or a single few clients. And the customer -- and Adcore well understand it. Also Adcore is undergoing major, let's say, a shift in the company strategy. We would like to operate -- to increase our customer base, operating more geolocation, offering more technology solution as well. So I strongly believe that if you're going to look 2 years and 5 years down the road, we won't see the numbers that we see today. Having said that, even with this numbers still the company is being able to present a record quarter after record quarter. So that's also something that we need to take into consideration, I would say.

Okay. And a follow-up question about customer A. About Note 7, regarding the negotiation of the renewal of that agreement.

Yes. So the company is still -- we talk with customer A regarding the renewal of the agreement. And obviously, once we have when used to share, then we'll be sure to share the news. But we're in a constant talk with the customer A.

Okay. Moving on to the next question. Did the company acquire more direct customers to increase top line revenue during this quarter? Omri, would you like to answer this one?

Yes. So generally same. We see major, I would say, a shift in growth from e-commerce-related direct advertisers. So like we said, digital transformation, the rise of the state home economy. So there's more and more activity coming from this type of clients. And this is already reflected in the Q3 report. And for sure, I can say it's going to be even more reflected in Q4 and moving forward. So our shareholders can anticipate that it's going to be more and more significant as we move along because we see major boom in this activity, all across the board, different geos, different sub inter-cities. So we see a major growth coming from these sectors.