Adcore Inc. (ADCO) Earnings Call Transcript & Summary

Good morning, everyone, 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 Adcore's CFO, Yatir Sadot, of the company's Q2 2021 financial statements. After which, we will answer present 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 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 involve 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 and financial results press release are based upon what management believes to be reasonable assumptions, the company cannot assure listeners that results cost 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 would now like to turn the call over to Omri Brill, Adcore's CEO, to update you on the operations and strategy of the business.

Thank you so much, Barak, and welcome, everyone, to the Q2 earning 2021 conference call and basically I would like to start with a short brief about today call. So we had an extraordinary quarter basically for the company, this is the third quarter in a row that Adcore is able to present triple digit year-over-year growth. Revenue in Q2 grew by 250% to a record of CAD 7 million. Gross margin in Q2 grew to 46% and improved from 23% in Q1 2021. And adjust adjusted EBITDA also in Q2 grew by almost 190% to CAD 1.5 million. So basically, in this quarter, all metrics moved in the right direction and whether it was topline, middle line or bottom line, all matrices look very good this quarter. And again, third quarter in a row that Adcore is able to present triple digit year-over-year growth. And if you want to look under the hood and understand better where this growth is coming from then I would count in few factors: a, the level of e-commerce activities that we see continue to be very strong across all regions. So basically, post COVID or due to COVID, we saw a massive interest in e-commerce activity across the globe, massive digital transformation and search for marketing solutions that are built for e-commerce, such as Adcore have to offer. So I would say this's #1 factor. Secondary factor, obviously, is onboarding of new clients. Some of the names that some of you already know, MySale, a very large Australian e-commerce group, basically a public company that's listed in the U.K., actually, but they are based in Australia in terms of operation. And Hamashbir 365 which is a massive public company, [indiscernible] also a big e-commerce brand in Israel. And this is just 2 names, but we had much more new brands coming to the Adcore family in Q2. Also, the company saw tremendous growth across all regions: North America, Australia, Asia, particularly in China and Hong Kong. And basically, it doesn't matter where we look, we see strong growing from any region and direct channels, again, leading the way and basically more growth coming from this important revenue stream of the company. Another very exciting invention of the company announced in Q2 was Amphy. Amphy is the world's most diversed 24/7 live online learning marketplace. It's a complete new initiative that company started in 2020, and it was publicly announced by the company in Q2 2021. We still believe in ed tech, which is a tremendous market and represent a tremendous opportunity for the company moving forward. As we grow, Amphy is going to become a significant revenue stream -- I believe Amphy is to come to be a significant revenue stream for the company. But it's still in, let's say, the learning phase and there's still a lot of construction going on regarding the Amphy, but it's now publicly announced and it's already a success. Amphy is 7 months old but already grew into a massive marketplace with more than 200 active teachers, 800 live classes across 7 different categories from fitness to well-being, art related, music related, basically game, chess, you name it, we have it on Amphy. And basically, we already outpaced our original expectation in terms of how big this marketplace can grow to be and we're just getting started with Amphy. So to summary, this quarter result, basically, I would say the following: a, the company, although it was a very strong quarter, a record quarter Q2 for the company, we still focus on the long term. And we see a massive opportunity to grow this company over the next year to become a $1 billion company. And just, let's say, starting this past. So Adcore didn't go public or went public in order to be a [ $100 billion ] company. We have a much higher expectation from the company. And I think all the different moves that we're doing are moves in the right direction, and we see massive opportunities for the company to continue growing. And as we have a strong balance sheet and a very good, let's say, the balance sheet is supportive, and now we can be even more aggressive in supporting this growth even better. So as far as I concerned, and I couldn't be more happy with, obviously, this quarter results as they appear. The company's CFO can walk you in more details regarding the numbers. But let's say, high level, mid level and low level, it's almost as best as it can get the for the company. Yatir?

Thank you, Omri, and good morning, everyone. Before beginning, I would like to share my screen with you. Wait a second. Okay. Let me know when you see my screen, Omri. So again, 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 as usual, I would start with a brief review of Adcore's balance sheet as of June 30. So our balance sheet remains strong. Total working capital of CAD 13.1 million compared to CAD 7.8 million at December 31, 2020, an increase of CAD 5.3 million or 68%. We started the year with CAD 11.7 million of cash and cash equivalents. And as of June 30, 2021, we're CAD 13.9 million. The increase is mainly attributable to the capital raise the company completed in the second quarter and the ongoing business. Significant low debt. This is another highlight that I want to present today. The company repaid its loan during the second quarter. And as of June 30, the company doesn't hold any financial debt on the balance sheet. Total assets of CAD 19.4 million compared to CAD 17 million in 2020 is up 14%. Next, I will discuss the profitability. So the first 3 months of 2021, we delivered a record second quarter revenue of CAD 7 million compared to CAD 2 million in the same period of 2020, an increase of CAD 5 million or 250%. That was an incredible quarter. And this was mainly driven by growth in our direct channel, particularly strong growth in APAC region, but not only. Second quarter gross margin saw a significant increase sequentially to 46% from a gross margin of 23% in the first quarter of 2021. Moving to OpEx. Research and development expenses for the quarter were CAD 340,000 or 5% of revenues compared to CAD 232,000 or 15% of revenues in the prior year, an increase of 47%, which focused on further innovating our technological solutions. Sales and marketing expenses and general and administrative expenses for the quarter were CAD 2.6 million or 38% of revenues compared to CAD 920,000 or 58% of revenue in 2020. The increase was driven mainly to buy, sorry, the expenses related to the capital raise, the listing on the TSX and the commencement of trading on the OTCQX in the U.S. Our operating profit of the quarter was CAD 254,000 compared to CAD 201,000 in the prior year. During the quarter, we reported a net loss of CAD 1.3 million compared to profit of CAD 152,000. The loss was mainly attributed to finance expenses from [ wallet ] revaluation and translation differences. Now I would like to discuss about the segments. That was the first time we presented a segment disclosure on the financials. So during the second quarter, the company started to report and measure Amphy as a separated line of business. Amphy, I'm not sure if everyone is aware, but it's a marketplace of live classes connecting and reaching humanity through knowledge. Amphy's revenues in the second quarter amounted to CAD 5,000 compared to 0 in previous year. Amphy's total expenses in the second quarter were CAD 455,000. And after excluding Amphy's expenses, the operating profit was CAD 708,000 in the 3 months ended June 30, 2021. Next, I'll discuss our adjusted EBITDA. Our quarterly non-GAAP results reflect adjustments for the following items: Depreciation and amortization totaled CAD 211,000; share-based payments totaled CAD 267,000; offering listing and global expansion expenses totaled CAD 780,000 and other nonrecurring items amounted to CAD 32,000. Total adjustments were CAD 1.3 million compared to CAD 270 million in 2020. Adjusted EBITDA was CAD 1.5 million compared to CAD 534,000 for the quarter ended June 30. With that, I will turn the call over to Barak and Omri. Thank you, everyone.

Thank you, Yatir. With that, we will turn the call over to questions. First question, why did you raise money -- And why CAD 4 million?

There was a few reasons why we thought we should raise money and I would say the main reason was to support the Amphy project. The company has high expectation from this project, and we want to make sure that we have the right budget for it and we can support it, let's say, moving forward, at least 6 to 12 months as a separate project of the company, and that I would say was the #1 reason. Obviously, there's still other reasons like potential M&As and support the global expansion of the company that I would say the secondary reasons. And the CAD 4 million we raised because that's how much exactly we needed. We didn't want to over-dilute our investors, existing investors, and we thought that's the right amount, and this is what we're going to raise. Obviously, if we're going to need more money, we will raise it in the future, but that's not on the table currently.

Thank you, Omri. Moving on to the next question. Do you plan to become a filing U.S. company and list in the U.S.?

So I said it before, we have high expectation for Adcore. We plan to become a $1 billion company. And obviously, as a $1 billion company. I would say U.S. listing is in order. I wouldn't say it's something that's going to take place in 2021, but I say potentially in 2022 and beyond, that's something the company will look into.

Next question from Paul [ Lamberty ]. Please discuss your competitive advantage with Amphy and why this venture is superior to investing in and growing your core business?

So it's a good question. I would say the following: a, with COVID, a new market was born, and it's a massive market. We estimate it to be $0.5 trillion market for live online learning. I mean there was [indiscernible] COVID was unsynchronic. If you want to go online, it was pre recorded in YouTube, maybe MasterClass, Skillshare, this type of businesses, and nobody did live. If you did live, you used to go to yoga studio, to your private kid teacher, this was live, but in COVID -- and then COVID taught everybody that whatever we did offline, we could easily do it online, maybe even more easy. And the new market was born. So 1 of the company -- Amphy's biggest advantage is that we are the first movers. We currently are the most diverse marketplace for live online learning. So that I would say 1 advantage and the massive advantage that we have. Obviously, Adcore as a parent company has a lot of marketing experience. So we are well equipped in order to promote this business and grow it as we are the marketing expert, and we have the right technology. And obviously, as a technology company, we have the know-how and standing up to be a successful web business. So I'd say these 3 factors together create a very powerful offering for Amphy. And why Amphy, why we think Amphy as a superior business model. We don't believe that Amphy is a superior business model, we believe Amphy is a great business model, maybe 1 of the best out there. But for us, it's not a zero-sum game. It's not that either we do ed tech we [indiscernible] with Adcore B2B or we do Amphy. We can do both, and this is exactly what we are doing with Amphy.

Next question, why did you break out Amphy in your financials when it is still a small part of your overall business?

Good question. I would say, and maybe if Yatir, you want to touch it. We would like to do it because it's a different type of revenue stream and the company need to report it. I think revenue are relatively small, but we have some investors going into Amphy already. So we believe that, a, we need to do it. And b, I think it's going to give investors a better overview about the 2 business types and what to expect. And I think like moving forward, investors should look at these businesses as 2 separate businesses, obviously under 1 reporting roof of Adcore Inc.

So connecting on to that, what you just said, what are Amphy's potential margins like?

So currently, the platform tech is 19%. So we take 19% from each transactions that happen on or each class that happen on the platform. Having said that, if you look to our peer market places, market places like Fiverr and other, then we know that the platform take averages can be anywhere between 25% to 30%. So we believe that as Amphy grow, as we can grow the value we can to the teacher, obviously, the platform take or the margin can improve as well to around 25% to 30% even.

Well, moving on to some questions of participants before we run out of time. Do you see a continuing trend in adding new customers? How good is the retention rate of current customers? [indiscernible] has asked this question.

So obviously, client acquisition, it is always going to be on the company focus in order to grow, and this is exactly what the company is oriented to do or focused doing. We need to onboard new clients. So it's growing its [ simple ] growth, but acquiring a new client, and this is something that we continue doing it, and we're doing it very successful now across the globe in all regions: EMEA, Australia, China, North America, Israel. So that's something that is on the company focus.

And another question from [indiscernible]. Will the gross profit margin stay above 30% going forward?

It's a good question. We originally stated a few times before that the company's aim to be at around 50% gross margin. And we also estimate that it may take a few quarters for us to reach this point because we saw a massive increase in direct channel activities that come with relatively lower gross margin. So originally, we anticipate to be in the 50% range, let's say, somewhere in the beginning maybe of 2022 or middle 2022, but this quarter even caught us in surprise and now look even better than we expected. So we believe moving forward, we can see some fluctuations, but we are moving in the right direction and again, the long-term goal for the company should be around 50% gross margin.

So next question from [ David Kover ]. Why did margins increase?

So I would say there is few reasons for that. A, we saw relatively increase in the indirect activity as well. So that's come with the better margin as well. But I think it's mainly for the company being able to switch some the do-it-yourself clients to -- sorry, do-it-for-me clients to do-it-yourself clients, which come with better margin. So in a sense, we babysit the client, put them on the path to success, and basically let them start managing or use the technologies itself and basically we can improve our gross margin by doing that, and this is exactly what we plan to do as we're moving forward at least with some of these clients that we believe we can do it with them.

Two questions from Lindsey, Lindsey Leeds. It is nice to see substantial revenue from North America in Q2. Is it primarily 1 customer?

No, it's not just 1 customer. We have at least, I would say, 3 or 4 significant customers in North America. But I think moving forward, in 2021, North America is going to become even a more important strategic market for us. The company has big plans for North America as we move forward. But for now, we are happy with the results. We're happy to see growth in this region as well. But we're not even scraping the surface over there. There is much more business for us to be made in this specific region.

And another question from Lindsey. Should we expect revenues to increase in Q3?

I wish to know that as well. I mean up -- jokes aside, up until now, the 2021 was nothing but amazing. We have a record Q1 earnings result, record Q2 earnings results, and we have no reason to believe that the rest of the quarter is going to slow down. Bear in mind that as we progress with it, the quarter or seasonality is in our favor. So we have a tailwind now in Q3 and for sure in Q4. And basically, again, 2021 up until now was the best year for the company ever, and we don't see any reason to believe that the Q3 and Q4 are going to look different.

Last question. There is so much competition for Amphy, some of it free. How do you differentiate?

So again, there is a big gap or big difference between synchronic and unsynchronic learning. So unsynchronic is everything that is pre recorded. You can go to YouTube, for example, and watch yoga video, for example. But you're not going to become a yoga master student from watching a YouTube video, and it's not sticky in a sense. So yes, you can offer prerecorded materials for free even, and this is something that Amphy is planning to do as well. But if you're talking about live, if you're talking about live teacher and talking about the live learning magic, then this is not something you can do for free, and this is something that basically Amphy is gearing into doing very good. So there is competition, but it's not the same type of business exactly that Amphy is offering.

Thank you, Omri. It looks like that was our all the questions at this point right at the end of the time we have. So I will hand it over to you for some concluding comments.

So thanks everyone to join us today in this such an early time in the morning. Thank you, of course, Barak and Yatir. For me, as the CEO of Adcore, you know it's always Nice to speak with our investors, but it's always nice to report great results, and I couldn't ask for a better result in Q2 2021. As I stated before, the entire year look amazing. We see no reason to slow down. And actually, if any, the company is accelerating. We've very exciting initiatives such as Amphy. We're going to release a new initiative, a all new version of Adcore hopefully in this quarter as well, Q3 2021. So investors should expect more big news coming their ways. And again, the skies look blue for Adcore, and we see a massive opportunity for us to continue growing in a much faster rate than what we used to see before.

Thank you, Omri, and thank you, everyone, for coming out, and have a great day.