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 overview by Adcore's CFO, Yatir Sadot of the company's Q2 2022 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 information and forward-looking statements including statements about the company. Forward-looking information may relate to the company's financial outlook and guidance, including revenue, gross profit, gross margin and adjusted EBITDA and anticipated events or results and may include information regarding the company's financial position, business strategy, growth strategies, addressable markets, budgets, operations, financial results, taxes, plans and objectives, particularly information regarding the company's expectations of future results, performance, achievements, prospects or opportunities or the markets in which the company operates, the achievement of advances in and an expansion of the company's technologies and platforms, expectations regarding the company's revenue, gross margins and future profitability, the future impact of the COVID-19 pandemic and the Russian invasion of Ukraine and reactions thereto is forward-looking information. 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 and forward-looking information. These statements reflect management's current beliefs and are based on information currently available to management as of the date hereof. In addition, any statements that refer to expectations, intentions, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts, but instead represent management's expectations, estimates and projections regarding future events or circumstances. 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. Such risks include the factors discussed under the Risks and Uncertainties section in the company's quarterly and annual MD&A. Other factors that could cause actual results or events to differ materially include, but are not limited to, lots of major clients and ability to acquire new clients, significant changes to policies and guidelines of media partners and any significant change to the global business environment and/or in specific territories in which the company operates. These factors should be considered carefully, and listeners and readers 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 and readers that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this conference call, and the company assumes no obligation to update or advise 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 so much, Barak, and good morning, everyone. Let me share my screen [ with you ]. Okay. So let's jump right into it. So when we look at the quarterly results of Q2 2022, we can see that the top line revenue was CAD 5.2 million compared to CAD 4.7 million in Q1 2022. That represents an 11% growth quarter-over-quarter, and gross profit was CAD 2.1 million in the second quarter compared to CAD 2 million in the first quarter. This represent a 5% quarter-over-quarter growth. So overall, if you look at the quarterly metrics or the quarterly growth, we should be quite happy with the result, obviously, you need to compare it to what we had last month. So last year, that can be EBITDA more negative. But again, the company believes that starting Q4 2021, the results should stand by itself. And the only let's say, comparable quarter should be the next Q4. And equally important, when we look at the gross quality KPIs that we indicated many times before. Then if you look at the indirect revenue, we saw that Q2 2022 reached almost CAD 1.9 million compared to less than CAD 1.4 million in Q1 2022. And then if you look at the entire year-over-year growth, it's almost 200%. So the company is continued to grow in this very important revenue stream, which come with higher gross margin and better gross profit as well. And that's something that we are really, really happy to see. And that's, by the way, far exceeding the growth that we see the quarter-over-quarter growth that we saw, let's say, in the overall revenue of the company. So this important revenue stream is actually growing faster than the rest of the revenue streams of the company. And if you look at an important geo for us North America, then yet again, we can see this was the of the [indiscernible] quarter in Q2 2022, almost CAD 1.5 million in total revenue compared to less than CAD 1 million revenue in Q1 2022. And again, far exceeding the -- I would say, the average growth that we see. So in these 2 very important KPI for us, we can see that actually, the results for Q2 was really good, and basically, the momentum is there and not only there, it's actually getting stronger. That's something that we are happy to report and happy to see as well. When we look at working capital, then you will see and also later will touch it in his review as well. The total working capital in the last quarter actually went down by CAD 1.7 million. And the company is looking more on working capital than cash because cash for us is basically fluctuate a bit because of media buying and stuff like that. So when we look at the CAD 1.7 million working capital lost in the quarter, then one should ask himself where this capital loss come from? And the clear answer is, I would say, the 2 major factors are: a, almost CAD 0.5 million buybacks that the company did in Q2 and we're going to touch that in the next slide. So there's a massive buybacks that we did during the second quarter. And obviously, the continued investment of the company in the Amphy project as well, which is another CAD 0.5 million. So I would say from this CAD 1.7 million drop CAD 1 million is in investment, and let's say, CAD 0.5 million is at least onetime investment as well. So the company is quite bullish actually regarding being able to maintain more healthier working capital in the next quarters. As I mentioned before, in Q2, the company and also not only the company also insiders within the company, including myself, bought almost 3 million shares during the quarter, totaling almost CAD 600,000 in the money, average price was around 20 20 something a cent when we bought it, and I think that's maybe the stronger indicator about where the company believes the current -- how the company see the current share price and where we believe the company is heading for in a sense like actions speaks louder than words. And this is, I would say, maybe the strongest signal that you can get from a company and also from insiders within the company regarding what we believe the company direction is and what we think about the current share price. So we bought shares, and we'll continue to buy shares if you see this still like fluctuation or difference between where we think the share price should be and where the share price is and the company is lucky enough to have enough cash in this book in order to support this effort as well. If you're going to talk about Amphy. So actually, during the quarter, we saw launch all new version of the Amphy website. This is something massive for us. And this is, I would say, the biggest change that we did in Amphy since Amphy was incorporated, I think, so that's something big that we've been working on for the past 6 months and even more. And basically, we'll be publicly announce it in September, that's the plan and especially been just around it. But just to give you a few highlights, and obviously, you can go to the Amphy website and see for yourself. I would say the biggest thing that we changed in the new version of Amphy is, a, instead of only 1 app, which is classes or online process, now we support 3 different apps, which is clusters, hits and places. So you can do virtual tools in cities, in museum using Amphy take a kids classes and activity online. And basically, you have much more variety than just online classes and process. And if you look, let's say, on the Amphy UI and UX, we did a major effort to make it much more user-friendly, but not only that we put a lot of effort to also on media. So we create 4 of the most important process trailer, so when you go online, you will see for the important courses, you will see a trailer like Netflix, for example. So you have a video of somebody speaking about the course, speaking about himself and extending exactly what you're going to do during the course. So this is one thing. And other things that we did, we launched for a mobile, what we call a story view. So basically, you can like in stories, you can go and swipe between different classes. And last but not least, we also introduced exploration [indiscernible] exploration so basically when you scroll the website, you're going to see like classes loading all the time, so you can never like stop getting new content and new classes as well. So there's a few highlights, I would say, about the things that they change in the Amphy but encourage everyone, especially people that didn't visit Amphy lately. To go online, visit Amphy and see it in first hand. And like I say, we are planning to do a big event around it in September and officially launch the new version. And other things that we started to do in Amphy is focusing more on B2B activity and B2B sales, and I'm happy to report that in Q2, already 40% of the Amphy revenue actually came from B2B orders, and this is compared to 0% in Q1. So this is actually the fastest-growing segment for us now in Amphy and we have high expectations from these segments moving forward as well. When we look at the report, and I understand the results are mix, especially if you need to compare them to last year. But for us, obviously, the half glass is more full than empty and I would say equally important when we already bypassed the middle of the year and look forward for the second part of the year. And actually, our outlook for the second part of the year is actually very bullish and these few factors that I would like today that basically supporting our bullish outlook. Some of them are the fact that in the second part of the year, we expect much better or stronger tailwind, travel activity, for example, resume now to the level that it was for us in 2019. So basically, there was a big sector for us that basically was underwater for the past 2 years, and we're glad to report that is now come back in full force. And obviously, the third quarter, which is the summer holiday is maybe the stronger quarter for travel spending as seasonality. Again, third quarter in 4 quarters historically for online advertising are the strongest quarter of the year. Obviously, some spending and then the holidays in Q4. So we are turning into the better part of the year in that end. We also do -- still doing some I would say, measurement in order to keep our expenses under control. We look at, let's say, high-level salaries, especially B level salaries, which seems like currently are too high basically, maybe we can replace the current position with, I would say, [indiscernible] have come, maybe more [indiscernible] and willing to work for lower salaries. So basically, there's one thing the company is doing and also when we recruit now, we are more -- I wouldn't say that we stop recruitment, but we still recruit, but we are now asking ourselves, let's say, twice or sometimes even 3 times before we're publishing a new position because we understand, okay, this is not exactly business as usual but -- and the company needs to also to reflect that as well. And not only that, when we look on expenses, we try now to authorize for new special expenses. So it's not essential, we don't like to approve it anymore. And again, that should come down to lower expenses there when we're moving into Q3 and Q4 as well. But I would say I'm generally saying like the philosophy of the company is something that we're learning during COVID actually, that if you're going to be too aggressive cutting cost of cutting people and talent, then actually, when it's going to up, the [indiscernible] is going to be as strong. We're going to be -- because we're going to have lack of resources. So we want to keep it under control for one hand. But from the other hand, we know this is a business to run, and we are very optimistic regarding, let's say, the coming quarters. So for us, we want to maintain the current, I would say, expense maybe cut it down a bit. But again, we don't want to cut it too much because then when they are going to come, we're not going to be able to enjoy its fruit. And other things that I would like to see and that's why it would make us very positive regarding future quarters. The company invested a lot in the last couple of quarters in bidding more quality growth. If you remember, we talk about that we aim to be at around 40% to 50% gross margin. And basically, we would like to focus on, let's say, not only quality by any cost, but also the quality of the growth. And we saw that, let's say, the 2 main KPIs that the company look at the indirect revenue stream and let's say, [indiscernible] that there are revenues are coming from North America, both of them actually are now accelerating and growing more strong than they have before. So that's something that help us to be a bit more bullish regarding the following quarters. And last but not least, some of the new activities in the company, again, invested a lot of time and effort during the past quarter starting to bear fruit that this is going to contribute to the, let's say, top line, bottom line and middle line as well of the future quarter results. So if you're noticing the PR this was the first quarter the company give a revenue guidance for the second quarter. Usually, companies in [ concise ] don't give revenue -- sorry, for the third quarter. So usually, company in [ concise ] don't give revenue quarter, but we seem -- we've been around public long enough and the company is established enough, and we have a solid financial teams that can help us binding now revenue models, then we can start doing that. We're not going to give an early revenue guidance because we think it still can fluctuate a lot but we are happy to give now at least quarterly revenue guidance, and this is like, again, that's the first quarter that we're going to do it. So when we look at the [indiscernible] outlook actually is quite bullish. We believe the revenue is going to be in the range of CAD 6.1 million to CAD 6.75 million. That's a big increase if compared to the CAD 5 million or CAD 5 and a change million that we did in Q2 gross profit trend should be around CAD 2.9 million to CAD 3.2 million. That's again a big increase, if you need to prepare it to the current gross profit now there and gross margin as well, we expect them to improve to around or exceed 45%. So the company is quite bullish regarding Q3. And I would say equally [indiscernible] mind that the best is yet to come. Q4 should -- is always be the best quarter for us. And this is like everybody that are in the online advertising business is the same concept, I would say. So that actually concludes my remarks. Again, I want to thank everybody to join us today. Obviously, we'll take any questions that you guys might have. But for us, especially the guys that have been working very hard during the last quarter or so, I would say, yes, it wasn't the best quarter in comparison but overall, we are very happy in the direction the company is going. And I can say, I'm much more happy now than I was in the beginning of the year, for example. And I think next quarter will prove us right. So we'll see you guys in the Q&A section, and I'm going to hand it now to Yatir.

Thank you, Omri, and good morning, everyone. Before beginning the financial overview, I would like to remind you that the following discussion include GAAP financial measures as well as non-GAAP results. All amounts will be presented in Canadian dollars. Q2 was characterized by a continued acceleration of the strategy we started in mid-2021 to focus on higher-margin indirect revenue, we continue to focus on the more scalable and durable indirect channel revenue, which we believe in the long run will result in a more sustainable and profitable business. Now let's discuss in more detail. For the 3 months ended June 30, 2021, we delivered revenue of CAD 5.2 million compared to CAD 7 million in 2021, a decrease of CAD 1.8 million or 26%. Indirect sales were CAD 1.9 million or 37% of sales compared to CAD 274,000 or 4% of sales in Q2 last year. Indirect revenues increased by CAD 1.6 million or almost 600% year-over-year. Cost of revenue decreased by 16% to CAD 3.1 million compared to CAD 3.7 million in the second quarter of 2021. Gross profit was CAD 2.1 million compared to CAD 3.2 million, a decrease of CAD 1.1 million or 34%. Our gross margin was between the expected range of 40% to 50% as discussed earlier this year. We expect to see an even higher gross margin in Q3, like Omri mentioned before, and even exceeding the 45% gross margin. Moving to operational expenses. Research and Development expenses for the quarter were CAD 0.4 million or 8% of revenues compared to CAD 0.3 million or 4% of revenues in the prior year. Sales and marketing expenses and general and administrative expenses for the quarter were CAD 2.3 million or 44% of revenues compared to CAD 2.6 million or 37% of revenues in 2021. We saw 2 different trends. On the one hand, we saw an increase in salaries and Amphy's investment year-over-year. On the other hand, we didn't have financing-related costs during this quarter compared to the same period last year. Bottom line, SG&A decreased by CAD 0.3 million or 12%. Operating loss was CAD 0.6 million compared to an operating profit of CAD 0.3 million, this increase was mainly driven by the decrease in direct tech clients revenue and increase in research and development expenses. Net loss was CAD 1.2 million compared to a loss of CAD 0.7 million, a loss increase of CAD 0.5 million or 76%. On the next slide, you can see that we exited the second quarter with a strong cash and liquidity position. Total working capital of CAD 10.2 million compared to CAD 12.9 million at December 31, 2021, a decrease of CAD 2.7 million or 21%. Cash and cash equivalents of CAD 9 million as of June 30, [indiscernible] compared to CAD 14.1 million at December 31, 2021. The decrease in cash and working capital was mainly attributable to, first of all, purchasing shares as Omri mentioned in his part. So the first purchasing of shares was from a former officer and through the company's buyback plan that we announced last quarter. The company sees this is a too strategic and important investment in the company in order to drive more value to Adcore shareholders and investors. The second reason was Amphy's investment. We continue to support and invest in Amphy's project. And the third reason related to media payments related to 2021 that were paid in the first quarter of 2022. Bottom line total assets of CAD 17.3 million compared to CAD 22 million in 2021, a decrease of 21%. You can see that the company continues to be a debt-free company on the balance sheet. And on the next slide, I would like to discuss the revenue breakdown. As I previously mentioned, the most significant revenue trend we saw during the last quarter was the increase in higher margin in direct sales to CAD 1.9 million for the 3 months ended June 30, 2021, compared to CAD 0.3 million in the same period in 2021. This has been a key strategic focus of our as we look to drive long-term shareholder value. Thus far, we see that this strategy is working, and we reported improved gross profit on an intentionally much lower revenue base. Our gross margin target range for the second quarter was between 40% and 50%, like I mentioned before, which we met that goal and we expect to exceed the 45% and even more during the third quarter of this year. Now I would like to present to you the revenue mix strategy that we start pushing from Q4 2021. So as we can see in these 3 charts, since Q4 '21, we've been experiencing an ongoing increase in the indirect revenues portion of the total revenue from 24% in Q4, 21% to 36% in Q2 '22, leading to a higher-margin revenue mix. Adjusted EBITDA, our quarterly non-GAAP results reflect adjustments for the following items: Depreciation and amortization totaled CAD 0.3 million. Share-based payment totaled CAD 0.1 million. Other adjustments totaled CAD 0.2 million. And for the 3 months ended June 30, 2021, adjusted EBITDA was minus CAD 30,000 compared to CAD 1.5 million for the same period in 2021, a decrease of 100%. Excluding Amphy from the MarTech activity, adjusted EBITDA, as you can see, was CAD 167,000 compared to CAD 2 million for the same period in 2021, a decrease of 92%. So on an intentionally lower revenue basis, we transition to an enhanced revenue model, we were still able to report a positive adjusted EBITDA on the MarTech activity, as you can see under this slide, as our more robust and higher margin revenue model scales and as [ Amphy's growth ] we are confident that we will be able to drive even better results in the next quarters. Now with that, I will turn the call back to Barak.

Thank you, Yatir. With that, we will turn the call over to questions. So Omri, first question from [indiscernible]. Do you intend to start providing quarterly or yearly guidance?

So actually, I discussed it in my remarks. And yes, the answer is yes, the company will start and we already started this quarter to provide quarterly guidance. And hopefully, that's something that we done, we can also increase it too early. But for now, we feel comfortable with providing -- starting at least to provide quarterly guidance.

Great. Second question, also from [indiscernible]. As you continue to grow your indirect customer base, are there plans to report on other metrics like ARR or MRR, customer retention, et cetera?

Yes. So the company believes that currently, like we already have like a complex reporting system with MarTech, EdTech, Amphy and other activities. So we don't want to complete a segment even further. So for now, we are feeling comfortable with the [indiscernible]. Obviously, if it's something that we would need to report or we think it's going to contribute value to shareholders, and we're going to consider adding it in the future as well.

Moving on to more questions that were sent over. What is your plan going forward with your repurchase plan? Do you anticipate continuing to purchasing shares?

So the short answer is yes. And the longer is yes, it depends. So yes, I mean, like we have enough ammunition in our pocket to buy more shares if needed. But it very much depends where the stock price is going to be and where the stock momentum is going to be. But if the company will believe this opportunity and the price of the stock is undervalued, then yes, we will purchase more as we needed.

Will it be profitable in Q3 based on your targets?

We should be profitable in Q3 or at least breakeven, around breakeven in Q3 based on our targets. But yes, like as you saw, we don't feel comfortable enough to report, let's say, profit or adjusted EBITDA and guidance but to [ think ] like top line and midline is something that we are already comfortable enough to report, and we think that's a good starting point. But if you do the math then the answer is yes, we should be profitable or at least breakeven during Q3.

Question that we just received from [indiscernible], what is the future for Amphy?

So Amphy is going under lot of changes lately. We recently launched an all-new website to Amphy, I would say, more or less say, focused vision regarding where do we want to take Amphy. There's a lot of focus on B2B activity as well. And I think for us, we're doing a lot of preparation in order not to grow the activity stronger in Q3 and equally important, I would say, even in Q4. So Q4 is going to be a very important quarter for us in Amphy, once see that everything, all the books that we put or, let's say, the R&D time and the different efforts that we put during, I would say, the past 6 months or so are starting to bear fruit. But ideally, we still have like -- we still believe Amphy is a good investment for the company and should be, let's say, should start driving like value for shareholders, hopefully sooner rather than later.

Question for Yatir, what percentage of revenue is direct and what is indirect?

So as I mentioned before, and let me jump again to that specific slide. The mix between indirect and direct for the second quarter this year was 36% for indirect and 64% for the direct.

And while I have you, I'll ask you another question. Did you have any revenue in Russia?