Azerion Group N.V. (AZRN) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Azerion Q4 and Fiscal Year 2024 Interim Results Presentation. [Operator Instructions] Thank you. I would now like to turn the call over to Umut Akpinar for welcome remarks.

Thank you very much. Good afternoon, everyone. I am Umut Akpinar, CEO of Azerion. I am here with my colleagues, Mrs. Julie Duong Ferat, our Chief Financial Officer.

Hello, everyone.

And Mrs. Sebastiaan Moesman, our Chief Strategy Officer.

Hello, everyone.

And we would like to welcome you to today's webinar to present Azerion's Full Year and Q4 2024 Interim Results. Before we start, I would like to take a moment to acknowledge the disclaimer, and our forward-looking statements. Thank you. Let's please move on to the presentation. This has been a strong quarter for the company. We have focused on profitability, and we delivered our 2024 financial guidance. 2024 was a tough year for many of our peers, and this achievement reflects our commitment to sustainable growth and value creation for our shareholders. We have performed strongly, both financially and commercially. Our teams have worked hard to deliver relevant and highly engaged ad campaigns across multiple channels in Europe and America, and we also optimized the monetization of our publishers. For Q4 2024, this resulted in 16% growth in the group's operating profit compared to last year, leading to 14% growth in adjusted EBITDA for the group, excluding social card games portfolio. This focus on profitability led to a 21% increase in adjusted EBITDA for the full year, thanks in part to very strong performance from the Platform segment. Commercially, we signed partnerships with over 90 new publishers, SSPs and DSPs, as well as signing major campaigns to promote globally recognized brands such as McDonald's, Adobe and Jaguar Land Rover. Finally, we successfully completed a subsequent bond issue of EUR 50 million, and I would like to thank the new and existing bond investor for their continued faith in the Azerion business model. I would like to hand over to Julie for a more detailed look at our Q4 and financial performance.

Thank you, Umut. Let's start by looking at group financial highlights. For clarity, full year figures on the following slides exclude the social card portfolio divested in Q3 '23. Q4 revenue was relatively stable at EUR 168 million. In this quarter, we focused on higher margin revenue and driving synergies in eliminating redundant costs in the advertising platform. As a result, adjusted EBITDA for the quarter was EUR 30 million, up by 14% compared to last year. On a full year basis, revenue amounted to EUR 551 million, an increase of 13% compared to last year. This was mainly driven by the performance of our segment Platform that we will see more later in detail. Adjusted EBITDA grew 21% year-on-year to EUR 75 million. This is driven by 3 factors: higher advertising spend across the Platform segment; improved performance of Premium Games; specifically strong performance of Habbo Hotel Origins and product development across the social casino titles; plus cost saving and efficiencies from the integration of previous acquisitions. Moving now to our segment in detail. Platform. Our core Platform segment is a combination of advertising platform in dark blue and AAA game distribution business in light blue. The whole Platform segment generates revenue mainly by displaying digital advertisement in both game and general content, as well as selling and distributing AAA games. Basically, advertisers are sold through 2 models: one, the direct sales, which involve direct engagement between Azerion's commercial team and advertisers or their agencies in the placement of digital ads. And secondly, automated auction sales in which advertising inventory is purchased through the open market. In Q4, the total Platform segment delivered EUR 153 million compared to EUR 158 million last year, a decrease of EUR 2.9 million -- 2.9%, sorry, mainly due to slightly lower revenue in our AAA game distribution. You can see AAA game distribution in light blue generated approximately EUR 27 million in Q4 compared to EUR 32 million in Q4 '23, a decrease of 15%. This was mainly driven by: first, a lack of high profile AAA games releases in Q4 '24; and secondly, optimizing towards profitability rather than revenue drove business in selling smaller but higher margin titles. On a full year basis, revenue shows healthy growth of almost 14% compared to last year at EUR 497 million. This growth was driven by increased advertising platform revenue here in dark blue and especially in direct sales. In '24, the advertising platform revenue represents 83% of the total Platform segment compared to 80% last year. Regarding the total Platform adjusted EBITDA, it amounts to EUR 26.2 million in Q4 '24, an increase of 15%, largely due to several factors as a mix of advertising platform revenue with an increased share of direct sales and also an increasingly efficient delivery operation. On a full year basis, total Platform adjusted EBITDA was EUR 62.5 million, an increase of 17%. Moving on the nonfinancial KPIs presented in the right side of the slide. Average digital ads sold per month increased a little over 1% to EUR 14.1 billion in Q4 '24, reflecting the Platform given side growth through the integration of past acquisitions and the consolidation of Azerion's monetization techno into a single scalable media buying platform. The average gross revenue per million processed ad request was EUR 24.3 in Q4 to EUR 34.5 in Q4 '23 as we onboarded several new high volume but relatively low revenue publishing partner in Q4, which we will optimize going forward. Now, let's have a look on our segment -- second segment, Premium Games. Premium Games. Strong performance of the segment this quarter and also overall in '24. Indeed, in Q4, total revenue amounted to EUR 50 million, an increase of 5% year-on-year and on a full year basis, revenue was circa EUR 54 million, an increase of 9%. Basically, the revenue growth is driven by the increased number of paying users, especially in our title Habbo Hotel Origins combined with new social casino sales features, improved discount strategies and an increased partner user acquisition spend. Adjusted EBITDA for the quarter amounted to EUR 3.9 million compared to EUR 3.6 million last year, an increase of over 8%. Full year adjusted EBITDA was close to EUR 13 million compared to EUR 9 million last year, an increase of 41%. This profitability increase is mainly explained by Azerion's strong performance of Habbo Hotel Origins and also consolidation integration efforts resulting in an improved operational performance. If you look at our operational KPIs on the right-hand side, average daily active users around 230,000 in Q4 '24, slightly lower than Q4 last year, mainly due to lower user acquisition spend and an increased focus on the greater engagement with higher paying users. Indeed, as you can see with the Habbo, it increased by 26%, which has been driven by improving game sales mechanics in social casino features and events. Our average time in game per day continued to be high with an average of 89 minutes per day in Q4 '24. So that's the review of the segments. Now, I would like to make a focus on the realized operational efficiencies. In this chart, the light blue represents our FTE. The black line represents our revenue per FTE. This chart crystallize our actions and how we continue to integrate our previous acquisitions and optimize our staffing levels. Meanwhile, we increased our revenue per employee year-on-year. Indeed, the revenue per FTE grew from EUR 152,000 in Q4 '23 to EUR 167,000 in Q4 '24, which again shows our efforts and capacity to optimize our organization. These figures are highlighted here in the white columns. These operational efficiencies have obviously a meaningful impact in our cost base, which I would like to focus in the next slide. Okay. So the primary components of our cost base are service and materials and personnel expenses. This means that we have a highly variable cost structure with flexibility to reduce costs if needed. The cost of service and materials rose as a function of the revenues, but our focus on profitability and particularly our effort to optimize staffing levels has resulted in a regular reduction in OpEx as a percentage of revenue. Indeed, you can see here the 2 positive trends. Orange line represents revenue, where you show the revenue increase. Gray line representing HR costs and other expenses on total revenue, and it shows a reduction. Now, and to conclude on my side, let's have a look on the overall financial framework. As said, full year 2024 guidance has been achieved with EUR 551 million revenue and EUR 75 million adjusted EBITDA. On the 2024 cash flow, we had a net inflow from operating activities of EUR 8 million, a net outflows from investing activities of EUR 37 million and a net inflow from financing activities of EUR 81 million, mainly coming from the subsequent debt. Regarding the net interest-bearing debt, it amounts to EUR 204 million. After this focus on the figures, I would like to hand over to Seb for a strategy update.

Yes. Thank you, Julie. If we had to pick 1 slide that is going to be in every ad tech earnings call this season, then it's probably going to be the one about AI. So in order not to disappoint, I'd like to give you an update on our current AI and multi-cloud strategy. These 2 components are intrinsically linked for Azerion because the sheer volume of data that we process on a daily basis, which is almost 23 billion ad requests means that we are constantly optimizing our technical infrastructure and have had a machine learning and now also generative AI at the heart of our platform for almost 10 years now. Also, as we grow, the reliance and dependence on cloud solutions grows also, and we've been working for the last year to add additional cloud providers into our environment, and we're super happy to announce that we've recently completed the inclusion of Huawei as a partner. They bring both high-quality and low latency cloud services, but also they allow us to hedge our reliance on other providers and enable us to easily expand the necessary compute power needed for all of the machine learning and AI services we run. Like, for instance, our latest AI-enhanced creative benchmark and outcome intelligence tools. They allow us to produce more engaging ads through AI that also drive more of the results that our customers are looking for. The AI there is able to much better than humans, see what ads work best and in which environments. And so, it tunes the campaigns again towards those results. And because we have been doing cloud infrastructure and machine intelligence for almost a decade now, we're also increasingly able to help our European publisher partners to use our multi-cloud and AI infrastructure together to improve their own services and cost structures. And for example, we are currently migrating our partner Eniro onto the Azerion multi-cloud, which will save them EUR 1.5 million per year in cost only, but will also open up new opportunities for them to integrate new business models and AI-enhanced services also to their clients in the upcoming 12 months. So we're really looking forward to bringing more and more of those services and infrastructure to our partners in Europe. This constant investment in the future of our platform encourages us to look forward with confidence. And with that in mind, I'd like to share our latest guidance for 2025 and the midterm. With our full year 2024 net revenue at just over EUR 551 million, the closing of several partnerships we did in the last months of the year, including Goldbach and Moneytizer, our subsequent bond issue in December and the opportunities we see for the coming year. Our full year 2025 net revenue is expected to be in the range of approximately EUR 600 million to EUR 650 million, with annual growth thereafter in the medium term expected to be about 10%. Adjusted EBITDA for the full year 2025 is expected to be at least approximately EUR 85 million, with annual adjusted EBITDA margin thereafter in the medium term expected to be in the range of approximately 14% to 16% through further integration synergies and scale effects. So that's the guidance. And then I'd like to hand over to our Head of Investor Relations, Andrew Buckman, for the Q&A.

Great. Thank you, Seb. So before I go into the written questions, operator, do you have any questions that are lined up from people on the line?

[Operator Instructions] To start, we'd like to take our first question from Wim Gille at ABN AMRO.

I hope you can hear me. I would like to zoom in on the performance in the Platform segment with revenues down 3%. Can you give us a bit of an indication if at all there was any contribution from the Hawk acquisition you announced it in late October '23? Not quite sure since when you have been including it. So is there any M&A effect there? Likewise, also for the Goldbach acquisition, which you announced, obviously late last year, was it already concluded? And is there a contribution in the results there, i.e., can you give us a bit of a split or a feeling on what the organic growth in the Platform business was? That will be my first question. The second question is, if I look at the outlook for revenues for 2025, it's a bit of a range, 8% to 18% growth for coming years -- for the coming year, sorry. What is the contribution that you expect from Goldbach? And what's the contribution you expect from organic growth? And why should we see an acceleration in organic growth vis-a-vis Q4 that is required to meet the outlook for 2025? And then lastly, on the adjusted EBITDA outlook, do you have any feeling on where the adjustments in the EBITDA for 2025 are going to end up, both in terms of restructuring, as well as M&A, taking into account or assuming that we will not see further M&A, which obviously is not likely? But that will be my questions.

Great. Thanks, Wim. So I think the first 2 questions, which are really about sort of what is the contribution from our different acquisitions and the organic growth and what the strategy is around that and probably also linked with what's the outlook for the revenue of that. Maybe, Seb, if you could look at that because I know that's an area that you've been focused on.

Yes, of course. Wim, good to hear you again. Happy to take your question. So first, to fare properly, I think good to know that Hawk was in our numbers last year for Q4 as well. So there's -- let's say, there's not a gap in the revenues because it was later in the quarter or so. So it was a full quarter-on-quarter comparison. And what happens when we acquire a company is that, on the one hand, we are integrating, let's say, their business and their technology, but we also always get revenue with that, of course, and we are assessing every acquisition's revenue every time we do it to see whether the revenue is also, on the one hand, fitting our business. So if it's not profitable enough, we're trying to look for more profitable revenues, for instance. And sometimes the clients of the acquisition also decide to, after an acquisition, not work with us a little bit anymore. So it means that in general, we see a little decrease in the acquisitions revenue after acquisition. And then slowly, we are going to rebuild that again with more profitable revenue that is closer to the Azerion DNA. And at the same time, so that would mean a decrease. But then at the other side, we are growing organically and then that ended up almost flat on the advertising part in Q4 last year. So it's a mix of increased direct sales. And on the other hand, a little bit of the, let's say, removed revenues from last year. So that's on that side. And then in the other part of the platform is really in the AAA. So the actual decrease in revenue is mostly coming from AAA. And that's because in December, Sony had a very specific title, which they expected a lot of sales from, but that didn't come through. And therefore, they declined with 15%, making up for the biggest, let's say, chunk of the decrease in last year Q4. So that's basically the debt comparison on Hawk. And then we had the part on Goldbach. Goldbach came very late in the year and had a very small contribution back then. And for this year, we, of course, expect them to contribute. I don't have those numbers, so I'll have to revert that back to Andrew in a second. But what we see, and that was your second question, is that for the full year, our outlook as we have it now is mostly the combination of the already, let's say, transacted acquisitions and partnerships that we did at the far end of the year and then taking into account their performance over to full 2025 into the current outlook. So I think that's -- yes, you could call it organic again because they are acquired now, so they're part of the business. Let's say, for instance, Goldbach in Austria is a digital out-of-home publisher. So they have a lot of outdoor screens in Austria. They are now part of our sales network. So basically, the DACH team is selling audio, digital out-of-home, classic digital advertising, as well as a package. And that also then partly goes into the Goldbach business, which is now part of our organic. So those are the 2 questions. Andrew?

Yes. Thank you, Seb. And then I think your third question, Wim, was about the adjusted EBITDA and what that's looking for over 2025? I think I'll hand over to Julie for that one.

Yes. Wim, thank you for your question. So regarding the adjustment, basically, those costs are part of our ongoing integration programs that needs to be managed carefully, as you can imagine, to ensure long-term shareholder value. So there is no fixed model to manage these programs precisely because of the variable nature of the cost and the people and the business that come into that group through acquisition and partnership. So what as Sebastiaan said, we see an increased number of opportunities to accelerate our growth next year -- this year, '25 and the strategic partnership and acquisition in '25, we will still be active to reduce our cost basis. And let's say, I would say that the best example is the slide that I showed the cost base development where you saw that the OpEx percentage on the total revenue is decreasing year after year. So it's really how we demonstrate that our integration program, yes, is basically for the success. So we will continue to do that. We'll not stop trying to make it more efficient at the group.

Yes. Maybe I can add a few words, Julie, because the -- those integrations, as Julie says, are not like a straight-line mathematical model of integration. This goes over time. Sometimes you need to integrate the technology first. Sometimes it's about the people and the commercial teams that you're merging for synergies. So we did quite a few acquisitions, let's say, since 2022, 2023, and those are all in various stages of, let's say, ending the integration. But even at the end, there can be quite a significant adjustment as you move from, let's say, cloud provider or sunset specific technologies or no need for development teams in a certain area anymore. So we still see the effects of that. Of course, Goldbach and anything we do in 2025 will also bring their own adjustments as we are integrating them into the company. So it's a mix of the, let's say, the long tail of the acquisitions of 2022 and later and the new acquisitions that we did recently.

Can you put any specific number on what you expect for 2025 in terms of restructuring costs?

We do not have a specific number for that one because basically, so I said it's really depend about each acquisition or partnership that will continue. So there is no specific amount that we have in mind.

Great. Thanks, Wim. Any more questions from you?

There are no further questions at this time. So I'll hand back over to Andrew for written questions.

Thank you. So we've had 1 question that's come in really looking about our M&A strategy for '25. So I think, Seb, if you could sort of talk to what is our M&A strategy for this year going forward?

Yes, of course. And this is going to be an extension, of course, of what we said quite recently, end of November when we tapped our latest EUR 50 million bond issue. In that communication in that raise, we already said our investments are always going to be in the area of, on the one hand, publishing, so owning the advertising supply that we help our advertisers be successful with. Technology is the second area of interest. Of course, if there's new channels that we can advertise then technology to allow for that is super interesting. And we recently did this digital out-of-home, of course, with Goldbach, but previously also Targetspot and the audio platform. So every time there's a new and upcoming channel, then we will be looking for technology there. And the last part is geographic. So if we were to start in a new European country, for instance, probably we would acquire a company to do so and not start from scratch. This has always been the strategy. And in November, we highlighted about 8 very concrete potential partnerships to raise the bond and to the bond investors. We also executed since then a few of them, Produpress in Belgium. We have Moneytizer in Paris. We have Goldbach, of course, in Austria. So we did already a few there. And that list and the list is always growing and also changing at the same time as we are assessing the value add of these companies. But, of course, we'll be continuing the investment in that space through this year, making the most out of that bond raise that we did end of last year. So it's going to be a continuation of what we said last year and trying to accelerate our growth, specifically in these areas where we also see the high growth in the market like digital out-of-home, like the audio platform, like the connected TV, et cetera. So there's a lot still to do. The market is still very good for us. And yes, we're looking forward to capitalize on those opportunities in the next few quarters.

Great. Thanks. And that's all the questions that we have for today.

All right. Then I think this was it for today. Thanks, everyone, for listening in, and I hope to see you again next quarter.

Yes. Thank you very much for joining us, and see you in a couple of months.