Adcore Inc. (ADCO) Earnings Call Transcript & Summary

Good morning, and welcome to Adcore's investor update conference call. [Operator Instructions] On the 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 the company's CFO, Yatir Sadot, of the company's annual 2020 financial statements. [Operator Instructions] I would like to take a moment to remind participants of the safe harbor statement. This conference call contains certain forward-looking statements, including statements about the company, wherever possible, words such as may, will, should, could, expect, plan, intend, anticipate, believe, estimate, predict or potential or the negative or other variations of these words or similar words or phrases have been used to identify these forward-looking statements. These statements reflect management's current beliefs and are based on information currently available to management as of the date hereof. Forward-looking statements involves significant risks, uncertainties and assumptions. Many factors could cause actual results, performance or achievements to differ materially from the results discussed or implied in the forward-looking statements. These factors should be considered carefully, and listeners should not place undue reliance on the forward-looking statements. Although the forward-looking statements contained in this call are based upon what management believes to be reasonable assumptions, the company cannot assure listeners that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this call and the company assumes no obligation to update or revise them to reflect new events or circumstances, except as required by law. I will now turn the call over to Omri Brill, Adcore's CEO. Omri?

Thank you so much, Barak, and good morning or good afternoon, everyone. It depends, I guess, in which part of the world you're located. So today is a big -- is big -- a big day for Adcore. Yesterday, we released the fourth quarter and year-end 2020 result with a dramatic increase of 220% a quarter year-over-year for fourth quarter and a 52% increase in revenue for the entire year. Revenue grew in the quarter to $13.3 million and yearly to almost $23 million. So when we look at the revenue, we would like to see where this tremendous growth is coming from. Then obviously, this is more than one factor, but let me try and address at least the key factors that we believe contribute demand growth. So first and foremost, obviously, is the fact that e-commerce is exploding. We see e-commerce activity of our direct clients, sorry, growing in 200%, 300% year-over-year, the pandemic pushes literally all the businesses online. The level of digital transformation we see in 2020 is noncomparable to what we saw before. And basically, the entire e-commerce level of activity grew dramatically. And this is already reflected in some sense in the Q3 result. For sure, were more expecting in the Q4 result. And even when we look forward to 2021 in the first quarter, we see the same momentum and the same growth continue well into the first quarter of 2021. So that's an important factor. Another important factor that as a result of this huge shift to online, in digital transformation, we see huge demand to Adcore technology and solution, and this is coming from across the board. So it's different all the different technology and apps, we see a huge spike in demand and basically, that's position Adcore as a key player in the martech or adtech for e-commerce industry. And I would say the last factor that we need to take into consideration is the international growth. In 2020, we appointed a new General Manager for North America, Martin, that he is doing a great job for the company. The Australian office is doing a great job as well. He was recently named as one of the winner of the APAC Search Award. So that's a great recognition to the effort that this team is doing. And in Asia, we are doubling down the activity. In the beginning of the year, we opened a new office in Hong Kong. And now in 2021, we announced opening additional office in Mainland China in Shanghai as well. So growth coming from across all regions, but I would say APAC and Asia in more particular is leading the way. And last but not least, we see tremendous growth in our direct client revenue stream. So direct clients now growing in a much faster pace than it used to grow before. And this also contributed to the fundamental resources that the company has been able to present in the fourth quarter and for the entire year as well. And I guess, finally, on a different note and other key milestones the company achieved was up listing to the TSX. Adcore was nominated as a TSX company, the big b bourse company, only a few weeks ago. We did it in a record time of less than 2 years from the time listing on the TSXV to TSX. Adcore is the first Israeli company to be able to [ up-list ] from the venture capital to the exchange. And we believe this type of achievement will only increase our access to capital and basically broaden our investor reach as well. So the company is very proud of the results we've been able to achieve in 2020. Bear in mind that the start very roughly and challenging in the beginning -- in the first part of the year because of the pandemic, and then we saw a massive rebound Q3 and doubling up the numbers from between Q2 to Q3 and now almost tripling up the numbers between Q4 to Q3. So what started as very challenging in the company turn out to be the best year ever for the company, and the company is equally optimistic when we look at 2021 as well. So I think maybe we should hand over it now to Yatir to present the number and let the numbers speak for themselves. Thank you so much, Yatir.

Thank you, 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. All amounts will be presented in Canadian dollars. And I will start with a brief review of Adcore's balance sheet as of December 31, 2020. Our balance sheet improved dramatically during the year. We started the year with $4.9 million. And as of December 31, 2020, the corporation's cash and cash equivalents were $11.8 million, an increase of 140%. We deferred almost $1.4 million revenues to the first quarter of 2021. The total working capital of $7.8 million compared to $5.5 million at December 31, 2019, an increase of $2.3 million or 42%. Another significant item that you can see on the balance sheet is the low debt. We don't hold any material debt on the balance sheet as of December 31, 2020, and compared to prior year as well. Total assets, as you can see, $17 million compared to $10 million in 2019, an increase of $7 million or 70% increase. Next, I'll discuss Adcore's profitability. For the full year 2020, we delivered $22.8 million compared to $15 million in 2019, an increase of $7.8 million or 52%. This was mainly driven by growth in our direct channel, as Omri mentioned before, and particularly strong growth in Asia. We saw a decrease in indirect sales, given the discontinuation of our partnership with customer A, as we announced back in December 2020. Moving to OpEx items. Research and development expenses for the year were $216,000 or 5% of revenues compared to $784,000 or 5% of revenues in the prior year. Sales and marketing expenses and general and administrative expenses for the quarter were $6.3 million or 28% of revenues compared to $4,307,000 or 29% of revenues in 2019. The increase mainly attributed to a increase in share-based compensation and Adcore continuously supporting the global expansion. Our operating profit for the year was $1,663,000 sixteen hundred and sixty three thousand or 7% of revenues compared to $2.5 million or 17% of revenues in the prior year. Net profit for the year was $866,000 or 4% of revenues compared to $1,751,000 or 12% of revenues. On the next slide, you can see we delivered $13.3 million revenues during the fourth quarter, an increase of 219% compared to 2019 and 224% increase compared to the third quarter of 2020. Looking at the cash provided by operating activities. The company consistently generates large volume of cash. On the slide, you can see that we generated during 2020 more than $7 million compared to $4 million on prior year 2019. Next, I'll discuss our adjusted EBITDA. Our quarterly non-GAAP results reflect adjustments for the following items. Depreciation and amortization totaled $662,000, share-based payment totaled $565,000, global expansion expenses totaled $172,000, and other nonrecurring items totaled $253 (sic) [$253,000] Total adjustments were $1,652,000 compared to $3 million in 2019. Adjusted EBITDA was $3.3 million compared to $5.6 million for the year ended December 31, 2019. And with that, we will turn the call over to questions. Thank you, Omri. Thank you, Barak.

Thank you, Yatir. And thank you, everyone, for sending your questions ahead of time and also those who send them over since the call began. So let's jump straight into the questions. Can management explain how Q4 2020 revenues were so incredibly high? And also why the gross profit margin was quite a bit lower than in previous quarters? Omri?

So thank you, Barak, for your questions. I guess, like we already answered most of the reason why the company was able to achieve such a tremendous growth in quarter 4 and this year so just to recap some of the key factors, a, e-commerce activity is exploding post-pandemic and during pandemic. So we see a massive shift for online advertising in e-commerce in particular. Strong demand to Adcore technology offering and solution offering as well. Tremendous international growth from across the region. North America, APAC doing an amazing job in Australia. And obviously, we see tremendous growth coming from the offices in Hong Kong and Mainland, China, now the new office as well. So that's I guess the main key driver for the tremendous growth that the company reported in the fourth quarter of 2020. And for the margin, Adcore historically have 2 main revenue streams. The first one was indirect that come with relatively high margins. And the second one was direct. What's happened now because of COVID and everything that's going on with the digital transformation that we see, direct clients are growing in a much faster phase. And basically, that's come [ or assisted with ] a bit lower margin. So in a sense, we are very lucky to generate more activity from direct clients, but it shift also the merging of the profitability of the company a bit, which is not the best thing because the company now can focus more on gaining market share, and basically, making sure that Adcore dominated the space of martech for e-commerce.

Thank you very much, Omri. Follow to another question here from one of our valued investors, [ David Eikenberg ]. We have witnessed in Q4 2020, a massive jump in revenue, both sequentially and year-over-year. Can you provide an idea of what percentage of the revenue increase was due to new clients as opposed to increased spending from existing clients?

Actually, it's a good question. So if you need to talk and that's not like the most accurate answer, but I would say, at least 50% of the growth that we saw in Q4 actually come from new client acquisitions. So the company saw growth both in same-store growth. So that's mean existing clients growing their level of activity tremendously in the fourth quarter of the year. Literally, clients double and even triple the budget if you need to compare year-over-year. But also bear in mind that 50% of the company year-over-year in this quarter was coming from new client acquisition. So this means that we're not only growing organically with existing clients. Also, the company has been able to acquire a lot of new business as well. Again, a lot of them come from the APAC region.

Thank you very much. How much seasonality is there in terms of sales in each quarter?

So that's a fair question. I would say, historically, especially if you're looking at the e-commerce segment or industry, then the quarter literally built up quarter-by-quarter. So Q1 is the lowest in the year. And the second quarter, it's getting a bit stronger because of the spring holidays. And then Q4, again, sorry, Q3 is growing even stronger because of the summer holidays and travel-related spending. And then Q4 is the biggest quarter -- is the biggest quarter of the year. So I would say, if you're only going to look at, let's say, seasonality and not new client acquisition and anything like this, and I would say Q1, it's the lowest quarter; Q2, a bit stronger Q3; and then Q4, basically, is like as strong as it can get.

Great. What is the likelihood of winning back business from customer A in 2021?

So actually, the company already was able to renew an agreement and actually in a better commercial term with client A for a very strategic region that we operate in. So we don't have the global agreement, but we do have a regional strategic agreement in place for the year 2020. And with regards to the global agreement, we're still in, I would say, communication with client A. So we don't have any update yet, but the company believe that even if we be able to renew the agreement, it's not going to be in the commercial terms that are equal what we used to have. So I think like what we have right now is all -- is better than nothing. And -- but I think like the company literally moved on and we've focused another revenue streams as well.

Great. What are the key differences between direct channel business and indirect channel business?

So we spoke on it a lot, and I think we might shed a bit more light about it. So let me start with indirect. So indirect, it's fancy name to ad agency, that means that our aggregators usually agencies that uses the Adcore technology and platforms to manage and run their own clients campaign on the platform. So basically, that can be an agency that manage 15 different clients and some large agency that can even manage hundreds of different clients on the Adcore platform. So that's the indirect revenue stream. And the direct revenue stream is direct-to-consumer type of businesses. Mainly, I would say, almost 90% of the activity is coming from e-commerce activity, but it's not only e-commerce. It's probably Adcore was also very strong in travel. Obviously, that's going to be coming back, hopefully, when the pandemic is going to go over some region, but I would say mainly direct-to-consumer e-commerce businesses that work with Adcore directly.

A question from José in the Q&A. How big is your R&D team? And do you want to increase margins with more features, better tech or products?

So a few questions, I guess, like in the same question. So the current R&D team is 10 people, obviously, in-house, and we have some supporting staff also outside of the company. But if we just looking at the headcount internally, it's 10 people. And when we look at merging or basically R&D innovation, so these few things that we look at, a, it's to be strategic to the core value offering of the company, which is effortless marketing. So if it's supporting the, let's say, the company vision and the long-term growth, that's something that we definitely would like to do. This is number one. Number two, which is a decision -- strategic decision the company took in 2020, is double down on e-commerce as well. So the technology offering and investment need to be e-commerce related as well. And I think it relates to merging, this is something that we're going to be worried about, but on a later stage. Now the opportunity is so big. We need to focus more on basically increasing market share and becoming the #1 player for adtech for e-commerce. I think this is a real opportunity for Adcore to build a certain name and to gain a lot of market share. And this is what the company plans to do over the next, I would say, 2 to 3 years.

Another question from the Q&A from Rob Goff from Echelon Wealth Partners. Could you discuss your margin outlook given your scaling?

So that's an excellent question from Rob. I would say Historically, Adcore, let's say, if you look at 2017, for example, result, the gross margin of the company was around 30%, basically, with more direct client activity coming, even indirect. And then in 2018 and 2019, we took a strategic decision, I guess, to shift more towards indirect and higher merging, higher profitability. So we've been able to grow the gross margins to 56%, I guess, in 2018; 65% in 2019. And again, now because direct revenue is growing much faster, the economy is now merging and then I would say, probably is going to be more similar to what the company used to do in 2017 than previously because, again, if we growing, we want to grow, we're going to gain more market share. And this is #1 priority for us. We'll only worry about gross margin and profitability on a late-stage as far as we're concerned.

Another question from Rob. Could you discuss your plans to ramp-up in North America?

Yes. We believe there's still a lot of untapped potential for the company in North America. So in a sense, like, a, we're growing much faster in the APAC region, for example, that we are growing in North America. Having said that, that's something that is definitely on the company radar for 2021. So we have more than one way to do it. Obviously, organically, we have a new GM in place [ Martin ] that is doing a very good job over here and basically come with new energy and spirit. So that -- we already see some improvement in the activity in North America. Having said that, I think like, again, I'm not sure it's going to happen in 2021, but we're looking to do some M&A as well in North America. So this can help us boost activity and gain market share in this critical region as well.

And one more question, just in from the Q&A. Could you discuss the impact of Google and Apple changing their audience tracking? How it may impact you versus your peers?

So if you remember, Barak, we already discussed it in the previous conference call because that's a question that keeps popping up. I would say the following. If you are a like -- Google and Apple changes the policy basically impacts third parties. So if you are a [ programmatic ] company, maybe like traders, [ actuaries ] this type of company, and you rely on third-party data from Google, from Apple, from Facebook, so you might have to face more difficulties now because of this change. But what Adcore allow clients to do -- our customers to do is to advertise directly on Facebook, on Google. So retailing, we'll not rely on third party data, we rely on first party data. So as far our clients are concerned Google is first party, and Facebook is first party. So if any, we don't see any negative impact to our clients, maybe a positive impact because the level of competition outside of this network going to be actually diminished to be.

Thank you. Going back to financials a bit. What adjusted EBITDA margin are you aiming for fiscal year 2021 and beyond?

So we discussed it a bit that, historically, the company was in 30%, and then we grew it to around 50% and 60%. So I think moving forward then we need to be honest like because of the fast trends, the direct revenue stream is growing and associated with slower merging that I wouldn't be surprised if it's going to be back to where it used to be in 2017 or even below because what's happened now is even faster. But I think this represent a true opportunity for the company as well. So Adcore is focusing now on growing, growing our market share and growing as a company. Adcore is still a relatively young company. And I think moving forward, especially as a public company, what our investors ask us to do and expect us to do is to gain more market share and grow as a company. So I think like we've got it moving on top line first in a merging and profitability later. I'm sure that the merging profitability will catch up as the company has been able to scale.

Great. With Q1 now is now over, can you provide color on what we can expect?

Yes. I would love to know it myself. No, but jokes aside, obviously we don't have the final numbers for Q1, but I can assure you, Barak, that the level of activities that we see in Q1 is not falling behind the level of activities that we saw in Q4. So the same level of momentum that was in Q4 is carried well into Q1 as well. So that should give you some kind of at least initial insight regarding how Q1 is going to look like.

Perfect. And what is the status or timing of a U.S. listing?

So actually, it's in motion. So hopefully, we'll have some positive news to share in the next 30 days -- I guess, to 60 days.

Great. And do you anticipate raising capital in the near term?

That's a good question. My first answer and my most honest answer, I would say, Adcore don't need to raise capital. We have enough capital. And actually, we've been able to generate capital even during a very challenging year in 2020. And I'm sure that's going to continue to be the case in 2021 and beyond. Having said that, this approach being approached from a lot of different firms with different offers. But if we think the opportunity will arise and we can get what we believe going to be a fair valuation, then we consider it. But for the time being, we don't have any concrete plans to raise capital.

And another -- we're running a bit out of time, but maybe 1 or 2 more questions here. With $11 million in cash, are you looking for M&A?

You want the short answer or the long answer.

The right answer.

So the short one is yes. And then the long one is, yes. So the company is looking on the M&A. Bear in mind that all the tremendous work that Adcore have been able to achieve up until now was 1% pure organic growth. So we didn't do any M&A yet. And in 2021, we're already building our pipeline for potential M&As. And hopefully, we are going to have some exciting news to share soon.

Sounds great. So that's all the time we have for questions today. Omri, let's move forward to your closing comments.

No, I think like, again, the numbers speak for themselves. You know like -- and so it was a tremendous fourth quarter and actually a tremendous year with what was started in a very challenging year ended up as the best year for the company ever. The company sees a lot of opportunities going forward. We're going to be much more focused on growth, much more focused on gaining market share. Again, Adcore is relatively a young company, and we have a lot of potential still to grow. And I think that should be the #1 priority. This is what our investors expect us to do, and this is exactly what the company is intending do. And we are in a good position right now to do that. And hopefully, 2021 going to be as good or even better than 2020 was.

Sounds great. Thank you very much, Omri and Yatir. And by that, I think we'll conclude this call. Thank you, everyone, for waking up this early in the morning or later in the afternoon or evening, depending where you are in the globe, and have a great day. Thank you.

Thank you, Barak. Thank you, Yatir. Thank you, everyone.