Adcore Inc. (ADCO) Earnings Call Transcript & Summary

Okay. Thank you all for your patience there. As mentioned, this is Adcore's Q1 2024 earnings call. We have a very exciting update for you today. Today, your host will be myself, Nick Campbell. I'm the Head of Investor Relations here at Adcore. You'll have Omri Brill, CEO and Founder; and Amit Konforty, CFO. The agenda for today is we'll begin with some forward-looking statements, followed by the CEO opening remarks and then the CFO financial highlights and finally, Q&A. [Operator Instructions] So before we begin, these are the forward-looking statements you should be aware when listening to this call. Please note these statements that are made today are forward-looking in nature. They may be projections about the business' future performance and plans. But please bear in mind that these statements are inherently uncertain as they are subject to various factors outside the business' control. At this time, I will give you about 30 seconds to a minute to review the statement before I move on. So I'll let you do that now. Okay. And with that, it's time for the call to begin. I will pass the floor to Omri. Omri, the floor is yours.

Thank you so much, Nick, and good morning, everyone. It's my pleasure to discuss today the company results for Q1 2024. And let me start by sharing my presentation. So all in all, I don't know if you had a chance to view the results already. We issued a PR and the results are already out there. But I would say that operational efficiency boost the company gross profit and gross margin for this quarter, and we are all in all, very happy with the results we've been able to achieve during Q1 2024. And just to discuss some key metrics from today's -- from this quarter report. Top line revenue were $6.9 million, almost $7 million compared to $6.8 million in the previous year, and that represented 1% increase year-on-year. Gross profit increased by 13% to $3.1 million compared to $2.7 million in the previous year. And gross margin improved as well to 45% compared to 40% in the previous year. That represents 13% increase in gross margin as well. If you recall, this is one of the important like what we call quality KPIs that we are monitoring. Another quality KPI that we are monitoring is revenue coming from North America, which is an important region for us, and we are happy to report a nice increase of 30% year-on-year in this important region. So good results, both in gross margin and in revenue coming from North America region. And all in all, just like to recap and summarize some of the quarter highlights, I would say gross profit grew by 13% year-on-year. We saw a nice increase in gross margin from 40% in the previous year to 45% this year. We saw a strong revenue growth in North America by 30%. We saw a very nice jump in adjusted EBITDA of almost 200%. We had a positive shift in cash flow from a usage of almost $1 million in cash from operation in Q1 2023, we're now flat in Q1 2024. So this means it's a big improvement in net cash flow in this quarter compared to the previous year as well. And client concentration also improved from 56% that we had in the previous year to 42% this year. So I think like all in all, a lot of very good metrics across, I would say, almost across the board, midline, bottom line, balance sheet, all the metrics look very positive for us in this quarter. If you recall in the previous call that we had, to summarize 2024, we discussed what should be the company goals or focus areas that we want to focus in 2024. And we say, a, maintaining a strong balance sheet with focus on increased cash reserve. So we're happy to report cash reserve remained almost the same compared to the previous quarter. And if you historically compare Q1 to Q4, usually, we see a drop in cash reserves. So the fact that we've been able to preserve cash reserve in Q1 compared to Q4 is actually a very strong indicator for us regarding company ability to preserve cash. We discussed keeping the gross margin within the 40% to 50% range, yet again another check with regard to 45% like what we've been able to achieve, 45% in this quarter. And as I mentioned, it's a 13% year-on-year improvement. We discussed achieving double-digit growth in revenue, gross profit and operational profit. Again, revenue remained more or less. So we saw moderate growth, but both gross profit and operational profit, adjusted EBITDA, we saw a significant improvement, and that's a very solid result for us. And we discussed expanding the company marketing -- technology and marketing solution offering, and I encourage everybody to visit the company new website and see all the different, I would say, technology offerings that we have and the marketing solutions that we have, to see that the company is expanding a lot our offering. So all in all, again, very positive quarter for us. And bear in mind, Q1 historically is the slowest quarter for us in the year because of seasonality. So the company ability to present a solid quarter in Q1 is a very good indicator for what we believe 2024 can look like. And that's also a good opportunity for us to discuss the company, I would say, 4 strategic pillar. Again, what we discussed in the previous call as well, just a quick recap. So the first pillar is technology and AI. It's obviously continuing to develop our own proprietary technology and making sure that we are embedded and implementing AI solution throughout the different technology and application and obviously, using AI in our day-to-day operations as well. The second strategic pillar that we discussed is shift the company focus towards enterprise and aggregators. So this is larger type of let's say clients that represent bigger opportunity for the company to scale. We discussed focusing on low touch, do-it-yourself type of activity and service offering, again, scale and efficiency, that's the main reason behind this strategic decision. And last but not least, is focus on synergies, so making sure the company is doing multiple things in multiple areas. We want to make sure that we have synergy between the different efforts the company is doing. And again, every new, let's say, venture that the company is doing, any new developments the company has announced, you need to know whether it's going in hand or going in line with these 4 strategic pillars. If the answer is yes, that means that we are doing something in the right direction. And if the answer is no, then it means something is wrong and maybe we should look again whether we should do it or not. Another thing that we discussed in the previous quarter is, is there, I would say, some improvement in the stock price, if you look at, let's say, from the patterns that we saw in $0.17 to now, we saw almost 40% increase. Three months, 30% increase or so, almost 30%, so is 6 months as well. And all in all, we see a positive trend in the stock price, but we still believe it's fairly, fairly undervalued. There is still a lot of money to be made in the Adcore stock. That's at least the company point of view. And this point of view is also backed up by the comparable table, so we put peer companies, companies that are within the martech, the adtech space like Adcore. And you see, if you're talking about gross profit, for example, that you see, it represents a very high potential of almost more than 700% compared to the peer as a potential for the stock to go up. Again, we're not only talking about it. We're also doing stuff around it and the company, both in Q1 2024, more than 80,000 shares for cancellation. And all in all, in the past 2 years, we bought more than 4 million shares for cancellation and invested almost CAD 1 million into it. And we believe that once the market is going to see like a more massive uptick within the small-cap industry that Adcore basically can lead this trend because, again, we put a lot of effort in order to cancel lot of shares, and basically, that should be able us to grow more aggressively once the market condition will turn better. And last but not least, we discussed about it in the previous earnings call as well as is the company's social responsibility. There's a lot of actions that we are taking in order to support evacuated community, now also soldiers wounded by the war as well. And all of them are, I would say, bike related and cycle related, and we encourage everyone to visit the company social responsibility page and also, obviously, keep an eye on the company keep on providing initiatives that are along this important, I would say, goals. So that concludes my remarks for the quarter. Again, all in all, we believe it's a very strong quarter, a very solid quarter and a very good start for 2024. And now back to you, Nick, and to Amit.

Thank you for your comments, Omri. We'll now move to the CFO financial highlights. Amit, the floor is yours.

Thank you, Nick, and good morning, everyone. Just one moment. Okay. 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. In the first quarter of 2024, we achieved 45% gross margin and have kept on generating positive cash flows, showing our financial resilience and operational strength. Now let's review in more detail. For the 3 months ended March 31, 2024, we delivered revenues of $6.9 million compared to $6.8 million in the same period of 2023, an increase of $0.1 million or 1%. Gross profit was $3.1 million compared to $2.7 million, an increase of $0.4 million or 13%. Gross margins for the 3 months ended March 31, 2024, were 45% compared to 40% in the same period last year. As for operational expenses, R&D expenses for the quarter was $0.6 million compared to $0.4 million in the prior year. The main reason for this increase is we started amortizing additional intangible assets in the 3 months ended March 31, 2024. SG&A expenses for the quarter were $2.7 million compared to $2.6 million in the prior year. Operating loss for the 3 months ended March 31, 2024, was $0.2 million compared to $0.3 million in the same period last year, a decrease of $0.1 million or 31%. Net loss for the 3 months ended March 31, 2024, was $0.4 million compared to $0.6 million in the same period last year, a decrease of $0.2 million or 39%. Moving on to total revenues and gross profit. As you can see on the left side of the slide, in Q1, there was a moderate increase in revenues. However, we see a significant 13% increase in gross profit accompanied by a significant rise in gross margins from 40% to 45%. As for geographical revenue breakdown for Q1 2024, we see a significant growth of 30% year-over-year in North America, which is mainly due to acquiring new clients. APAC revenue saw an 8% year-over-year increase, which is similarly driven by acquiring of new clients. EMEA revenue experienced an 18% decrease mainly because one client significantly reducing its activity. Despite this setback, we were able to increase revenue levels and even enhance gross profitability. Now let's discuss about net cash flow from operating activities. In the 3 months ended March 31, 2024, we kept on generating cash from operating activity in the amount of $13,000. This is a significant improvement from over $1 million used for operational activity in the same period in 2023. This improvement in cash flow is mainly caused by improved profits and improved collection from clients. In terms of financial position, we had cash and cash equivalents of $8 million as of March 31, 2024, compared to $8.1 million at December 31, 2023. Total working capital amounted to $7.5 million compared to $7.6 million at December 31, 2023, a decrease of $0.1 million or 1%. As for the liability side of the financial position, we can see that the company is still debt-free. Regarding adjusted EBITDA, the quarterly non-GAAP results reflect adjustments for the following items: depreciation and amortization and share-based payment. For the 3 months ended March 31, 2024, adjusted EBITDA was $201,000 compared to $68,000 for the same period in 2023, showing a significant increase of $133,000 or 196%. With that, I will turn the call back to Nick.

Thank you, Amit, for those comments. We will now move on to the Q&A session. We have had a number of questions submitted. So let me just see here. We'll begin with the first one. This question is from Ryan. He says cost of revenue has dropped year-over-year on the same amount of revenue. What is driving the cost savings?

It's a good question. And as I mentioned before, the company, starting 2023, put a lot of emphasis on operational efficiency and cost of revenue like other type, of course, are still cost. So the company ability to save on cost, to be lean on cost is across the board and cost of revenue are no exception in that regard.

Thank you, Omri. Another one from Ryan here is the North American region has shown strong growth this quarter. Is this expected to continue?

The short answer is yes. We put a lot of emphasis on this important market. We recently recruited another salesperson within this market that come with a lot of experience. So literally, the sales force in this specific region grew by 100%. And then we continue to put focus and emphasis on this market. And yes, we have our expectation of what we can achieve, and we believe we still didn't even really get started yet in this market. So there's still far more potential for the company than what we see right now.

And conversely, another question from Ryan, he says EMEA revenue decreased by about 20%. What's the reason for that? And is it expected to continue?

Yes. So Amit actually have a note regarding this decrease in his remarks. It's mainly still due to slowdown in one of the client activity, a top client activity in this specific region. So we might see some challenges with this specific region. But I would say, all in all, we don't see any, I would say, jetlag regarding EMEA or any other region. In the end of the day, even if we have some fluctuation, that can be seasonality or maybe some large clients shifting some field activity, in the end of the day, I would say EMEA is positive for us as well as, obviously, the rest of the region as well. And we have a similar incident in APAC, if you remember in 2022, and we saw a nice rebound in 2023. So the company is resilient enough and we know like even if one client, let's say, is scaling down, obviously, there are other clients or new clients that can scale up as well.

Very good. A question from Robert. What are the steps Adcore is taking to attract institutional investors?

It's a very good question I would say. We recently onboarded Nick as a full-time IR Manager for the company, you know. So the company is obviously looking at investor relationship, as you know, as a focus area for us in 2024. And one of Nick's, I would say, goals is obviously introducing the Adcore story to more of these institutional investors as well. Obviously, it's going to be conducted by in-person meeting as well as conference that the company can attend or are relevant through this type of forums and other means as well. But I would say, yes, investor relations in general is a focus area for the company in 2024 because we believe the market condition are actually turning better and now it's time to be a bit more aggressive again. And obviously, institutional investors are critical for us as well, and we understand that.

Very good. Another question from Robert. What is Adcore doing specifically to increase value for investors? And is $1 billion market cap still a realistic goal for the company?

It's a good question. I would say there's multiple efforts that the company is doing on a daily basis, obviously, to increase the company attractiveness, I would say. I can count some of them. Obviously, we discussed about the operational efficiency. Being able to present positive cash flow, positive operational profit as well is something that we believe we've been able to achieve in the previous quarter, this quarter as well. So that remains a focus area for the company as well. We are entering into and introducing a lot of new initiatives as well. We mentioned some of them, you know in the previous quarter as well. We are now becoming more and more aggressive in terms of sales capabilities and marketing capabilities. So obviously, that will take time to see the full effect of it, but we literally almost double up our sales force, not only in North America, but across the globe. And obviously, marketing is still -- is yet another focus area for us. And we mentioned IR, having you, Nick, as a full-time employee, only focus on IR as part of the Adcore team as well. Like I mentioned before, there's multiple efforts the company is doing. With regard to $1 billion market cap, I know it may sound a bit like out of context right now, but trust me that once the market condition going to turn better for us, you can see a very nice uptick in the Adcore stock. Adcore was trading with $200 million, $250 million market cap I would say 3 years ago when we were not as good company that we are today. So there's still a potential and once the market condition were to turn better, and obviously, we can have new access to capital, then you can see the company can scale up quite fast, and that's the important thing, I guess.

Very good. A question from Amit. Top line revenue was relatively flat this quarter. Can you give information as to the reason for the lack of growth?

Yes. So I would say the following: if I need to choose between, let's say, almost flat top line revenue and a nice increase in gross profit, like we saw in this quarter and vice versa, let's say, a nice increase in top line revenue, but let's say, gross profit will remain flat, then I would choose the first option any given day. Bear in mind that media companies like Adcore, some of the revenue of media buying associates and basically, so gross profit is a more, I would say, accurate indicator regarding the company ability to generate real growth, and we've been able to do it during Q1 2024. But I think like some of the, I would say, top line revenues that were cut off are part of the, let's say, cost of revenue as well. So they are media-related revenue and the fact that we don't have them, it's not, I would say, a big deal for the company. Again, ideally I would say I would like to see double-digit growth across the board. But again, if you need to choose, then this scenario is far better than the other scenario I mentioned.

A question from David is with Adcore's operating cash flow positive or close to it, the need for large cash reserve on the balance sheet is less critical. What is the plan for the cash that Adcore has?

It's a good question. I would say like, we achieved, let's say, the start of operational efficiency in the last 2 quarters or so. So let's wait and see that we can maintain it for, let's say, another 1 or 2 quarters before we can become more aggressive. Also, it very much depend on the market conditions. Once we see the market is reopen and we can have better access to capital if needed, obviously, stock price needs to be much higher, then the company can say, okay, maybe it's time to drop the defensive mode and become a bit more aggressive. But I think like we need to wait a bit before we say, okay, it's spring already, and we can enjoy the sun.

Very good. A question from Karan. Industry-related here. Can you comment on the potential TikTok ban in the United States and if or how this could impact Adcore and more broadly, the advertising market?

That's an interesting question. I would say the future is still to -- we still need to see the future before its open, but I would say the following. It's not necessarily a best thing for Adcore, a, because we might have some of our existing partners that are part of, let's say, the new U.S. TikTok group. So this is one. So we can utilize existing, let's say, existing relationships that we have under the new group. This is one. And b, I guess it will make the entire market a bit more competitive. And competitive market between the different channels is actually good news for a company like Adcore that sit in the middle and can enjoy this type of competition.

Very good. A question from Natalie is some of the leading players in the industry such as DoubleVerify, Shopify have really tempered their expectations for remainder of the year. Is this the same for Adcore?

Not necessarily. We don't see any indicators today that say that 2024, we need to be a bit more cautious about it. Obviously, 2023 was very positive for us if you look at, let's say, the numbers we've been able to present. And currently, let's say, especially after the strong start of Q1 2024, we are still optimistic about what we can achieve in 2024. Having said that, we still have a good 3 quarters in today. So it's still a bit too early to determine, but I would say, if you ask me today, if I'm positive about 2024, and I believe that we can, let's say, copy the results that we achieved in 2023, then I say it would be yes.

Very good. Another one from Natalie is CTV is becoming a dominant trend in the digital advertising space. How is Adcore establishing themselves in this area?

Actually, that's a very good question. And we recently announced a whole new division within Adcore, which we call Brand Awareness division. And under this division, we're going to offer CTV, we're going to offer programmatic advertising, we're going to offer digital outdoor advertising as well. So all of that becomes a focus area for Adcore. We're already having, let's say, established relationship with leading players within this industry. Some of them can be, let's say, Microsoft invested or the entire inventory of, let's say, CTV for Netflix, for example, other can be players like DV360 owned by Google. So we understand the importance of this, let's say, segment within all our advertising. We understand the potential, and we are very active in making sure that we are going to be a big player in this, let's say, fast-growing segment of our advertising.

Very good. Just one final question here is what marketing initiatives are you taking in North America to help with new client acquisition?

Yes. So that's a good question, and we discussed it a bit. We discussed onboarding a new salesperson within the North America market that come with a lot of experience in this specific market, Canada in specific, but also I would say North America in a broader view. And so that's one initiative that company took. And another initiative is double down on marketing efforts that are related to this specific region in order to quarterback and help in all the sales initiatives that we are taking. So marketing, let's say, lead the way of quarterbacking the salesperson and then obviously, the salesperson take it from there.

Very good. Thank you, Omri. That concludes the questions we have for today. If you do have any questions, please feel free to send the e-mail to investors@adcore. We thank you for your time in joining the call today. Have a great day, and thank you.

Thank you, guys.

Thank you.