Adcore Inc. (ADCO) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our 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 Q4 and full year 2021 financial statements. After which, we will answer pre-sent questions and take questions from participants. This conference call -- 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 press release -- in this conference 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, to update you on the operations and strategy of the business. Omri?

Thank you, Barak, and Good morning, everyone. Share my screen. Okay. So again, Good morning, everyone, and thank you for joining us for today's call. Today is a special day for me personally. At Adcore, not every day we have a chance to present the company annual results, and obviously, Q4 result, which is the strong quarter historically for us. And I hope that you're going to like what we have to show today. And me personally are very -- I'm very happy with the results, what we've been able to achieve throughout the year, and obviously, what we are able to achieve in Q4. I want to share with the shareholders and investors, my overview regarding the result, the way I see it. And obviously, the CFO, Yatir Sadot, will go into more detail on the exact numbers as well. So let me start with the annual results and top line obviously. So revenue grew by 57% from a bit less than CAD 23 million in 2020 to almost CAD 36 million in 2021. That's a major increase of 57%. Actually, that's the biggest increase the company achieved in its entire history. So CAD 13 million increase year-over-year. And this is equal more or less to what the company did in 2018 -- or 2019 during the entire year. So what we did just -- that we did this year was equal to what the company did 2 years ago, to be exact. And equally important, all the metrics in 2021 moved in the right direction. So revenue grew by 57%, midline gross profit grew by 17% and adjusted EBITDA grew by 17% as well. So again, that's exactly the type of report that we would like to see and this is exactly the type of result that we would like to see for 2021. We couldn't have asked for a better year as far as the company is concerned. And equally important, if you look at the working capital, we started the year with CAD 7.0 million (sic) [ CAD 7.8 million ] in working capital and ended 2021 with CAD 13 million working capital. So again, a large increase of 67%, CAD 5.2 million in -- like in total number. And that shows that the company in the end of 2021 is a much stronger company than it entered 2021. If you look at the quarterly result, then what we can see is that if you compare Q4 2021 to Q4 2020, actually, we had a decrease in revenue of 28%, but the entire decrease was because we shift media-related budget and we shift clients from a do-it-for-me type of business model to do-it-yourself type of business model, which has come with a better gross margin for us. So basically, revenue down 28%, but cost of revenue down even more in 40%. And that's why when we look at the bottom line and the middle lines, then we see actually improving the results year-over-year. Then gross profit actually grew by 5% to CAD 3.2 million in Q4 2021 compared to CAD 3 million in 2020. Gross margin, which was a major focus for us during the entire year, improved by almost 50% from 23% in Q4 2020 to 33% in Q4 2021. And we believe that we can continue to see this type of increase moving forward as well. So we did some shift in revenue, but again, middle line actually moved in the right direction, obviously. And if you look at the bottom line, operational profit and adjusted EBITDA, massive increase year-over-year. Q4 2021 was 760,000. And if you compare it to what we did in Q4 2020, then we see an increase of more than 300%. So that's again, major increase and that demonstrates that the quality params -- the growth quality params actually moved in the right direction during the quarter. And when we talk about quality growth, these 2 factors that I want to keep a close -- want the investors to keep a close eye on. And let me start by the first one, which is indirect revenue stream. If you remember, the company have 2 main revenue stream: indirect revenue stream which come historically with higher gross margin and direct revenue streams that come with a lower gross margin. And what we can clearly see is that if in Q4 2020 indirect revenue stream was a bit over CAD 200,000 in revenue, the company quarter after quarter being able to increase this important revenue stream to above CAD 0.5 million in Q1, CAD 666,000 in Q2, more than CAD 1 million in Q3 and double up between Q3 to Q4 to CAD 2.2 million in Q4. That there's a massive increase in revenue between Q4 to Q -- sorry, Q4 2020 to Q4 2021, almost 1,000% increase. So that's a big number we're talking about, and this is a very important KPI for us when we see the growth. And if you look at revenue from North America that we identified as a strategic market for us, as the market the company would like to grow, then again Q4 2020 less than CAD 200,000 in revenue and Q4 2021 almost CAD 800,000 in revenues. Then that's again more than 300% growth year-over-year. And we see that every quarter there is a buildup of this important revenue stream. So when we look under the hood, it's not only the top line, middle line and the adjusted EBITDA or profit, we also can see how quarter-over-quarter during 2020 the company been able to improve the important KPI of quality growth. And that's why we are so happy and pleased on today's result, what we've been able to show during the entire year of 2021 and especially in Q4. But as for investors, we understand, obviously, operational results are super important. But for us, 2021 was not only about operational result, which was as good as it gets, but equally important it was about strategic initiatives that we took during 2021. If you want to go by the time lines, in March '21, the company graduated to the TSX from the TSXV. We've been the first Israeli-based companies that have been able to achieve that. We opened a new subsidiary in China again in March '21. We commenced trading on the OTCQX in June 21, which was very much anticipated by our U.S. investors. We did the fundraising of above CAD 4 million in June '21 as well. We officially announced the launching of the Amphy Hi-tech platform in July '21, launched the Adcore Marketing Cloud on September '21 and opened a new subsidiary in the U.S. in September '21 as well. So that's a lot that was going on in 2021. And when I looked back and we were creating the presentation, I was specifically amazed how much we've been able to achieve during 2021. And that's, again, parallel to the operational resources we've been able to show. And for us, these important strategic initiatives are going to lay the foundation and set the right infrastructure for the future growth of the company in many years to time. So again, very important initiatives that only got started or been able to been set in 2021, but going to make a large impact for the company for many years to come as well. So a few numbers regarding Amphy annual and quarterly growth numbers. Then if you can look at, let's say, the year-over-year growth -- and Amphy actually just started in December -- around December 2020 as a beta stage. Then we can see that classes number, we grew up more than 3,000% and just the growth delta was more than 1,300 new classes that have been added to Amphy during the past year. Visitor numbers growing more than 7,000% by almost 200,000 visitors. Sign-ups grew by 8,000 total headcount, 13,000% transaction, again, 8,000% growth. So these are big numbers that we're talking about. But again, Amphy was just like -- not even a baby in the beginning of 2021. And -- but if you look at Q4 '21 -- and it's not -- that's a mistake, it's Q4 '21 compared to Q3 '21, then classes numbers grew by 53% and delta was almost 500 classes just in the last quarter that were added to the platform. Visitor numbers grew by 52% to 80,000 visitors total. Sign-ups grew by 100% to almost -- and almost 500 new sign-ups to the platform during the last quarter. And transaction, again, grew by almost 50%. And this is quarter-over-quarter growth. This is not year-over-year growth. So we can clearly see that in -- the last quarter, in Q4, for Amphy was equal to 50% for the entire year. And as we're concerned, like Amphy is definitely moving in the right direction. Amphy is still in a stage that we consider to be pre-revenue -- almost pre-revenue and premarketing. But we are laying the foundation, and we can see like a good organic growth quarter-over-quarter, and for sure, year-over-year as well over there. Another remark that I would like to say is regarding the current stock price. And I know investors, especially investors that bought the stock price in higher prices than what it is trading today have a lot of concern and have to say, like, "What's going on? And what's the company's plan regarding the current stock price?" A few remarks regarding that. Exactly 1 year ago in the end of February 2021, the stock price was $2.7 and the market cap of the company was over 150% (sic) [ CAD 150 million ]. And today, in the end of February 2022, stock price is almost CAD 0.50 and market cap CAD 32 million. So obviously, it went down a lot. And I want you to -- like I want to mention a few things regarding that. A, since February 2021, we saw a very big decrease in all the market caps of tech companies. You know it was across the board. And even from the beginning of -- let's say, for the last 6 months, even midcap companies went down a lot, companies that are much bigger than Adcore, have bigger market cap, trading on the NASDAQ, with better liquidity, obviously. Again, Wix, for example, went by 75% over the last 12 months. Shopify, which is a brand name in Canada and maybe Canada's best tech company, went down by 65%; Fiverr, almost 70%; AcuityAds by more than 82%, Adcore by 69%. And the average drop in the past 12 years was around 72%. And this -- again, all these names above Adcore are with much larger historical market cap and bigger brand names than Adcore trailing on the NASDAQ. So we can clearly see it's not just an Adcore thing. Unfortunately, we saw a very soft market overall in tech. And even big tech brand names, Facebook, Netflix, even Tesla are now -- went down more than 50% in the last even quarter or so. So again, the market is obviously soft. We see oversell in the -- across the board. And we believe actually that the current price is a buying opportunity. And we don't see it as something that is negative against the company. Important for me to emphasize that exactly 1 year ago that the company was trading -- the stock was CAD 2.7 and the market cap was CAD 152 million. We've been presenting half of the revenues that we are presenting today. We've been maybe half of the talent team or the headcount that we are here today. And basically, that was like -- maybe the company grew a lot in the past year. So if we got this evaluation 1 year ago, I would say that maybe Adcore should be traded at CAD 300 million market cap. And this is where I truly believe we're going to see it again. So again, this is a dip in the stock price. It's not an Adcore thing. It's an overall market thing and a tech thing. But the company is focusing is what's important for us, is growing the market share, growing the numbers. Obviously, we have very strong balance sheet to support even more than a down trend, like 1 or 2 years, if needed. And I think Adcore is actually in a good position. And I think like now that the market is oversold, maybe it's representing a buying opportunity. That's my personal belief. I bought Adcore shares throughout the dip, and I will continue to do so because I believe the share price is undervalued. A few remarks regarding 2022 road map and the company's focus and plan for 2022. So for us, 2022 is going to be an American year. We are planning to open a physical office in U.S. in the second part of 2022. We are considering NASDAQ listing as well. Obviously, the market now is soft, but that should be flat, hopefully, by 2022 or 2023. So that's one focus for the company, put more emphasis on North America. We believe there's a lot of opportunity for the company to continue growing in this important region. Another focus area is going to be the quality of the growth. So we're looking to continue improving our gross margin. Ideally, for the low run, the company wants to be at around 50% gross margin, which was the historical gross margin of the company pre-COVID. And we believe that 2022, the goal should be to achieve at least 40% gross margin. Increase indirect revenue stream, which, again, are more quality and more scalable and come with better margins. Expand our tech offering, which again will contribute to all the rest of params. And M&As. We are putting more and more emphasis on M&A, whether it's going to be tactical M&A to support geo-expansion or talent recruiting, or strategic M&A to expanding the offering of AMC and Amphy as well. So basically, these big plans for us for 2022, and I actually hope that we can achieve even more than what we've been able to achieve in 2021 in terms of strategic initiative as well and obviously being able, from the other end, to continue to show very strong results as well. So that concludes my remarks. I hope that's going to -- that helped to give a bit more context regarding the results, regarding the way management sees this current stock price, regarding what's the company plan moving forward as well. But again, Adcore was traded exactly 1 year ago at CAD 2.7 stock price is actually today much stronger and much better company than it was 12 months ago, and not like by small numbers, by almost double up the numbers that we did exactly 1 year ago. And that's my personal belief. And again, I see the current stock price, if any, as a buying opportunity. So thank you very much. Barak, back to you.

Thank you very much, Omri. I will now turn the call over to Yatir Sadot, Adcore's CFO, to quickly review the fourth quarter and full year financials in more detail. Yatir?

Thank you, Barak, 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 included in Canadian dollars. As you have seen in our results, 2021 was a very strong year, revenue of CAD 35.7 million, was up 57% compared to last year. During the year, we benefited from the continued significant shift to e-commerce in the digital advertising ecosystem, which resulted in continued strength from our indirect revenue stream across North America and APAC regions. With our strong top line performance throughout 2021, we achieved adjusted EBITDA of CAD 3.9 million compared to CAD 3.3 million for the same period in 2020, an increase of 17%. Now let's discuss comprehensive income. For the year ended December 31, 2021, we delivered record revenue of CAD 35.7 million compared to CAD 22.8 million in 2020, an increase of CAD 12.9 million or 57%. Gross profit increased 17% to CAD 10.8 million in 2021 from CAD 9.2 million in 2020. The increase in revenue and gross profit were mainly driven by growth in our direct channel, mainly with strong growth in APAC and North America. Focusing on the fourth quarter of 2021. For the 3 months ended December 31, 2021, we delivered revenue of CAD 9.7 million compared to CAD 13.4 million in 2020, a decrease of CAD 3.7 million or 28%. Cost of revenue decreased by CAD 3.9 million or 38% to CAD 6.5 million compared to CAD 10.4 million in the fourth quarter of 2020. Gross profit was CAD 3.2 million compared to CAD 3 million, an increase of CAD 200,000 or 7%. Although the company experienced a decrease in revenue, we saw an increase in gross profit as we switched direct clients to the do-it-yourself model, making them indirect clients. We started this trend during 2021 and its momentum increased, especially during the fourth quarter. With higher profit margins from a growing number of indirect clients compared to direct clients, we saw increases in both gross profit and operating profit compared to Q4 2020. Moving to operational expenses. Research and development expenses for the quarter were CAD 700,000 or 7% of revenues compared to CAD 400,000 or 3% of revenues in the prior year. The increase was mainly due to hiring more engineers in the 3 months ended December 31, 2021, compared to the same period in 2020. Sales and marketing expenses and general and administrative expenses for the quarter were CAD 1.8 million or 18% of revenues compared to CAD 2.4 million or 18% of revenues in 2020. The decrease was attributable mainly to the share-based compensation. Operating profit was CAD 700,000 compared to CAD 200,000, an increase of CAD 500,000 or 356%. This increase was mainly driven by the client shifting from direct to indirect model, as mentioned before. Net profit for the quarter was CAD 700,000 compared to a loss of CAD 100,000, an increase of CAD 800,000 or 800%. All right. Now let's move on to the balance sheet. We exited Q4 with a strong cash and liquidity position. Total working capital of CAD 13 million compared to CAD 7.8 million as of December 31, 2020, an increase of CAD 5.2 million or 67%. Cash and cash equivalents of CAD 14.1 million as of December 31, 2021, compared to CAD 11.7 million at December 31, 2020. The increase is mainly attributable to the capital raise the company completed in the second quarter of 2021 and the ongoing business. Looking at the liabilities side, significantly low debt. The company repaid its loan from government during the second quarter of 2021. And as of December 31, 2021, the company doesn't hold any financial debt on the balance sheet. Total assets of CAD 22 million compared to CAD 17 million in 2020, an increase of 29%. Now the next slide, you can see the revenue breakdown by geo. And the most significant revenue trend is the increase in indirect sales to CAD 2.3 million in the 3 months ended December 31, 2021, compared to CAD 238,000 in the same period in 2020. The growing number of indirect clients with higher profit margins compared to direct is what we refer to as a quality growth, as Omri mentioned before. Now I made the special slide and called it adjusted comprehensive income. This is not adjusted EBITDA. But I wanted to give you a look how the comprehensive income of the MarTech activity only is reflected. So excluding Amphy's loss and excluding the fundraising -- Amphy's total loss in 2021 was CAD 1.2 million and the fundraising-related expenses were CAD 1 million. Excluding those items and looking only on the MarTech activity, operating profit was CAD 3.3 million compared to CAD 1.7 million in 2020, an increase of CAD 1.6 million or 95%. Net profit for the MarTech activity alone in 2021 was CAD 1.8 million compared to CAD 800,000 in 2020. As you can see, MarTech activity grew rapidly both in volume and profitability in 2021 compared to 2020. Now let's move on to the adjusted EBITDA. Our quarterly non-GAAP results reflect adjustments for the following items: depreciation and amortization totaled CAD 248,000, share-based payment totaled CAD 158,000. For the 3 months ended December 31, 2021, adjusted EBITDA was CAD 1.1 million compared to CAD 996,000 for the same period in 2020, an increase of 17%. Excluding Amphy from the MarTech activity, adjusted EBITDA was CAD 1.8 million compared to CAD 996,000 for the same period in 2020, an increase of 80%, as you can see. Now with that, I will turn the call back to Barak.

Thank you, Yatir. With that, we will turn the call over to questions that were pre-sent and also some that were sent over during this call. We'll try to get to all of them. So Omri, how should we think about your gross margins going forward?

So I mentioned it before in my opening remarks. Again, historically, the gross margin numbers for the company was around 50%. The change during COVID because of shift or big increase in direct revenue streams that come with lower gross margin. And the company plans to move back to these numbers. Again, I will be happy if we're going to land it around 40% or maybe even higher in 2022.

Given your growth in North America, does that impact your thinking around the timing of a potential NASDAQ listing? Something you kind of addressed during the call, but still.

It's a good question, actually. Obviously, it's setting a better foundation for us to do a move and -- gradually to do a NASDAQ listing. Having said that, obviously, the markets are extremely soft right now, and we will need to wait for a better momentum in the market or better market condition before we're going to make such a move. Having said that, the fact that the company is growing strongly in North America is setting the right foundation for this type of move later down the road.

A few questions about Amphy. What were Amphy's revenue in this quarter?

Yes. So Yatir will be able to answer this question in more accurate. But I would say non-GAAP revenue was around CAD 50,000, maybe a bit less. And GAAP revenue, it's 19% of that. So it's around CAD 100,000, maybe a bit less. But again, Yatir will be able to answer this question better than I.

Omri, your numbers are correct.

Another Amphy related question. You invested in Amphy [indiscernible]. What do you plan to invest in Amphy in 2022?

So the company up until now has been able to maintain a reasonable cost of investing in Amphy. We can clearly see it in 2021 numbers. So with the investments that we did in Amphy, the company has still been able to show very positive report, strong middle line, strong bottom line as well. And we are planning to keep Amphy cost and investment in the same line that they were in around Q4, which is around CAD 650,000 quarterly. So that's going to be more or less the Amphy budget moving forward. That's the current plan. So it's still under control and very well managed.

You had previously expressed that the company would increase its focus on M&A. Is this still the case?

Yes, more than ever, I would say. So we think it's a good timing for the company to do some interesting M&As. Obviously, the company is now actively looking on more than one opportunity. And we have plenty to look for with these Amphy related M&As that we can do, these Adcore direct related M&As that we can do, these more tactical M&As that we potentially would like to do. Then I would say M&A is something which is now is definitely one of the company's biggest focus area.

Question. This one is from Daniel. I would like you to please give some color regarding the management fee to CEO and controlling shareholder in Note 18 of the SEDAR filed financial statements.

Okay. So a few remarks. Obviously, everything is noted in Note 18. I would state the following. A, during COVID -- in the beginning of COVID in 2019, me personally, the CEO, was given away 2 months of salary. And then after this, we cut our salary by 10%, and that remains to be the case today. So our base salary, both myself and the CEO, obviously remained even lower than where it used to be in 2019 before COVID. So that's one remark that investors would need to take into consideration. I think another thing that -- regarding Note 18 of this year is at least CAD 100,000 belong to 2020, but was reflected in 2021 reported numbers. So actually, if you look at 2021 compared to 2020, the overall compensation decreased and not increased, if you look it exactly on the real metrics. And I would say overall the compensation didn't go anywhere. It stayed the same, flat 2019, 2020 and 2021. Maybe I should ask for a raise. What do you think, Barak?

[indiscernible] maybe. I mean, I don't know.

Yes. I mean that was a strong result.

Another question. This is from the Q&A portion. Omri, could you please provide an update on any discussions about analyst coverage for your Q3 update?

So that's actually a very important question. I would say the following. A, towards the end of 2021, Canaccord did Around the Corner Report on Adcore. So this was a very positive report that Canaccord are doing. And usually, Around the Corner Report by Canaccord, it's a preparation for a full analyst coverage by Canaccord. And we hope that after they release the Q4 numbers, we can see like a full coverage starting from Canaccord analysts. So that's one remark. And I think like, obviously, now because the stock went down a lot, then analysts are a bit more hesitated. They want to see the Q4 numbers, which is historically a very strong quarter for us. And I think now once the result are out there, I'm a bit more optimistic of the company starting to get proper analyst coverage, both by Canaccord, potentially by Echelon as well and maybe by other independent analysts as well.

And another question from Daniel from the Q&A. Looking forward to the company providing guidance for Q1 2022 and for the full year.

Okay. So historically, the company didn't give guidance. Obviously, this is still a very volatile market during COVID or post-COVID. And the company don't give revenue guidance. We do, however, give some context regarding, for example, gross margin, where we would like them to be, or the company focus. And I think that can give investors more or less, let's say, the assurance where the company is aiming and where this boat is sailing to.

A question from the QA about Amphy from Nancy [ Gorton ]. What is the market differentiator for Amphy compared to Thinkific?

Yes. So unfortunately, I don't know Thinkific too good. So that's maybe something that the Amphy GM would need to answer. Having said that, I would say, Amphy is all about live learning and live streaming. So that's very much different from, let's say, a big company like Udemy and other companies even like MasterClass that are basically about [indiscernible] content, pre-recorded classes that basically you can watch. And Amphy, it's all about live. And that's a big differentiator for Amphy. The entire, let's say, live learning thing wasn't even there 2 years ago. So that's a new in a blue ocean that Amphy is now tapping into.

And I'm going to ask you a question, Omri, that's kind of a consolidation of a few questions, something that we've been getting feedback also from -- sent in from pre-sent questions and also from the QA here. Given the current low valuation and multiples for Adcore shares, are there any plans this year for a share buyback or a repurchase program?

So obviously, the short answer is yes. That's something that we can definitely -- or we are definitely considering. And that's part of, let's say, the overall consideration of capital allocation of the company. Obviously, the more the share price is going to continue to go down, the bigger the incentive is going to be for the company to announce a buyback plan. So we have enough money. We have the will and the ability to do it. And if we believe that's the right capital usage of the company, that's something that we definitely do. At the end of the day, we believe the company for the long run. So if we believe, for example, M&A is going to do better usage with the company capital, then we're going to announce M&A, for example. But it can be a combination of both. The company has more than CAD 40 million in cash. And that's something that we are definitely considering. The company is committed to bring strong result, but also to support the stock price. I'm the largest shareholder of the company, and like anyone else that Adcore is concerned, I would like to see the share price much higher than what it is right now.

Okay. So I think with that, we will conclude the Q&A portion and finish up with this call. So I'd like to thank you, everyone, for joining us on this call. Thank you, Omri. Thank you, Yatir. And have a great day, everyone.

Thanks.