Nexxen International Ltd. (NEXN) Earnings Call Transcript & Summary

Good morning. I'm Laura Martin and welcome to the first day of the Needham Growth Conference. I think this is our 24th this year, and I am the senior media and Internet analyst. And our format today is a 40-minute fireside chat. [Operator Instructions] So let me maybe start with an introduction. I'm happy to welcome to the stage, Ofer Druker, the CEO of Tremor International. Ofer has been Tremor's CEO and member of the Tremor Board of Directors since April of 2019. He joined Tremor in November of 2017 as the Executive Chairman of the Tremor Video division, serving in that position until assuming the CEO role. Prior to Tremor, Ofer founded Matomy Media Group in 2007, which was a data-driven digital advertising company, and he was its CEO until 2017 after building its revenue base to $280 million. He also graduated from Tel Aviv University in 1993 with a BA in Middle Eastern and African studies. Okay. So I think the best place to start, Ofer, is at the beginning. Why don't you give us a quick interview of the Tremor story, including some maybe financial metrics and how Tremor fits into the ad tech ecosystem?

Thank you, Laura, also for having us and good morning, everyone. So Tremor operates in the fastest-growing segments of programmatic advertising with an ecosystem highlighted by video, CTV and data. Core to our performance is the strength of our Tremor end-to-end technology and business platform, which covers the 3 pillars of business, which is demand side platform, the data management platform and the supply side platform. And our end-to-end technology platform provides simplicity for our customers, better data empowerment for advertisers and publishers, and it's supportive of the industry trends towards SPO. Video, representing our business 80%, and it's growing. It's the most engaging format, and it's being the bridge between TV advertisers as they move into digital and programmatic. COVID-19 obviously accelerated the shift of digital advertising as well as trends in the CTV. Toward the end of Q3 2021, CTV represents 26% of our contribution ex-TAC. In the first 3 quarters of 2021, we grew faster than many of our peers. Our Q3 '21 contribution ex-TAC increased organically by 40 -- 54% compared to Q3 2020 and by 93% over the first 9 months compared to the same period in 2020. Being end-to-end also supported unique profitability. Over the first 9 months of 2021, we generated $107 million of adjusted EBITDA, which represents an organic growth of more than 400% over the same 9 months period of 2020. We presented a very strong balance sheet with $333 million of cash in the end of Q3. That, I think, summarized a little bit of what we are doing and a little bit about our financial profile.

Perfect. Let's stay -- one of the differences we have in the ad tech investment space is Tremor is an ad tech company, and you operate an end-to-end platform rather than specializing in either being an SSP or DSP. Can you talk about what the benefits are of having both the sales in SSP and a DSP in under the same corporate umbrella? And can you talk about whether you think other companies -- the advantage is that whether other companies are going to move that way from being pure-play SSPs or DSPs?

Sure. The advantage on the -- of the end-to-end platform is -- for us is clear. And I think that all the sides in the formula are enjoying from it -- from that. Simplicity for customers, better data empowerment for advertisers and media partners, and we are accelerating the already present trend towards supply path optimization. Advertisers want to get closer to the source of their -- of them and is no better way to achieve that by partnering with platform that combine end-to-end solution like we do. Efficiencies and supply path optimization results in better ROI for clients, maximization of revenues for media partners and improve margin for us also. We at Tremor saw these trends coming years ago, which is why we very strategically acquired companies and partnership that offered us the ability to service our customers. Basically, from 2019, when I joined the company, we acquired RhythmOne in April 2019, and we basically added -- built this end-to-end platform. And yes, we are seeing other attempts to follow us now, which is -- give us a conviction that we are in the right spot and we are moving to the right direction. And we believe we maintain an advantage versus these attempts since we have been operating as end-to-end platform since 2019, and we are already in 2022. And of course, we keep building the edge compared to our peers.

And how do you handle conflicts of interest that come up with being both a demand and a supply side platform?

So I would like to share some important insight about the way our platform was intentionally set up, and it's giving basically ability to -- of course, to run with our DSP and SSP altogether. But also, it's enabled people to use our DSP but to connect to other SSPs that are not ours or to connect other DSP to our SSP. But -- so we are giving this flexibility. We are not forcing people to use only our platform. We are not trying to build a walled garden. But we see more and more people are using our end-to-end solution because it's giving them a lot of advantages, the advantages of pricing, efficiency, data, simplicity and all that, that I just mentioned. And I think that today, what you see something interesting is that people are basically able to check very quickly if the results that they are providing them is -- what is the rate compared to the industry. And what we see is that basically, we are growing faster than the industry, which means that shows that people prefer, and we believe that the indicator is that client and media partners are pleased with our performance basically.

Okay. So you're not a walled garden. So you allow them to do an independent DSP to check -- like 100% of your SSP, but they can use Trade Desk. And so they can do an A/B test. And so if yours is more efficient, they give you more money end to end. And if the Trade Desk is more efficient, you can use the Trade Desk to access your SSP's inventory.

Agree.

Okay.

So we are basically enabling 4 types of deals to come in. We have our managed business. We have -- we license our technology in order to run campaigns on our DSP. We are enabling, of course, OMP, which is online marketplace. And we are, of course, enabling PMPs. But as you said, we are basically enabling everyone to connect to everyone. So any DSP can connect to our SSP and our DSP is connected already to a lot of SSP. So if people are -- they want to choose and work with another SSP, they can easily do that through our DSP.

Okay. And that -- and then you're saying that you're growing faster, which means people are deciding to use your end-to-end platform after doing the A/B test. That's the point you're making -- the advantage of end-to-end platforms.

Yes. I think that in the end of the day, when we are talking about the better performance and so on, you need to measure in performance, you can measure it through performance. And if we see that we grow in the first 9 months of this year by 93% organically compared to last year and most of the industry is not growing at this rate, it means that we are doing something, which is serving the clients, meaning serving the customers and publishers in a very good way, so they are choosing to work with us. Yes.

Okay. Let's go to -- you said earlier in your opening comments that Tremor derives 80% of its revenue from video formats. And CTV I think is about half that. And CTV is all the rage on Wall Street, as you know. That is the fastest-growing area within ad tech and the format that generates the most investor interest. So let's go to a couple of questions on CTV. Can you talk about the current state of the market and where you see the CTV connected television market going? And how do you view Tremor's positioning in CTV now and its path going forward? How do you -- what do you think about the mix of direct PMP and open marketplace? How do you see that shifting? And where do you see yourselves as best positioned? And then third, there's been this trend of device makers in CTVs, like VIZIO and Samsung, forming their own DSPs in kind of a walled garden. And doesn't that -- or how do you think that plays with the open Internet? And will the CTV landscape allow open Internet players like yourself to actually participate or will end up in walled gardens? So let's spend some time on CTV.

So you asked a lot of questions in one shot.

Yes.

So I will try to answer them in some -- tell me if I didn't answer one of your questions, but I will try to touch all these points.

Okay. Okay.

So basically, we believe very strongly in CTV. And the deal that we've done in 2019 was basically in order to serve CTV because we acquired RhythmOne that included under it also unique that was basically putting a lot of emphasize for many, many years in CTV, and they build a lot of knowledge and a lot of capabilities around that. And all the companies that we acquired in the last 3 or 4 years was about basically video. So if you're looking at that, we bought Tremor; we bought RhythmOne, that was majority of their business was video; and we acquired Unruly; and lately, we acquired also Spearad. All of them are dealing with video and they have attached to CTV. What we saw in the COVID basically is that everything was accelerated to the extent that we saw like growth of 44% in consuming content through CTV in 2020. And in 2021, it's even accelerated even more because of COVID. And also, what we see is that the growth of CTV, I think that what -- we are many years in this industry and what we see here is that there is a combination of interest of the users, of the media company, of the advertisers to support CTV that's why it's growing, that's why it is so interesting on NASDAQ, that's why it's interesting in the business because it's basically share -- it's like share the interest of -- sharing interest of so many elements that are basically pushing CTV going forward. And we were prepared for that, as I mentioned, from 2019 that's why, for us, video is more than 80%. We know all the algorithm that we built on the DSP, SSP. It's basically supportive of video and supportive of CTV. And we built it very strongly over the last few years. Now if you look on CTV and what you asked about PMPs and self-serve and so on. So of course, we believe that in the end of the day, what we see is that there is a growth of what we call the programmatic activity of the open marketplace, PMP, self-serve that is growing immensely. And we are building tools for that, and we can touch it in a few minutes, but we are building tools that can serve this industry. And of course -- but there are still clients that will want to want that -- what we call white-glove solution, that's people will hold their hands and help them to build the campaigns, which is very complicated to run CTV sometimes. And we see all this mix growing. I think that what we evident in the last 2 years is that there is a growth, of course, of the programmatic side. And even that there is a need also of the manage, the growth, the immense growth is coming from PMPs and from self-serve or what we can say hands on keyboard of the clients that they want to push their campaigns through our platform. Our system and our platform is basically so robust that it can basically serve all these needs. So basically, we are enabling all these elements like I indicated before, and we are doing that also going forward. And we did 2 major steps in the end of last year, which we basically acquired Spearad, which is a CTV ad server and header bidder, and we did a deal with VIDAA, which is basically, their major shareholder is Hisense, one of the biggest manufacturers of TVs in the world that will provide us the ACR data. So we are aiming all our efforts to CTV. 26% of our ex-TAC at the end of Q3 was about CTV. And we believe that CTV is something that we will keep encouraging the usage of that, keep building solutions like we did, and we are going to talk to them -- about them today. About the walled gardens and the open web that you mentioned, my philosophy around that is people are not trying -- the advertisers are not trying to buy certain television or certain manufacturer audience. They are trying to buy audiences. So I think that basically, what will happen, there is like always like movements in the industry between walled garden and open web. I think that the open web around CTV is very big. There is a lot of media companies, a lot of demand that is coming to the open web. Of course, the walled gardens will always be there around us, but I think that there is a lot of room to grow in the open web and more and more companies will move to this direction. And we are representing the way that we think, as I mentioned before. We are not trying to build a walled garden. What we are trying to build is basically a platform that will be very efficient and we'll be able to serve publishers and also advertisers in their best way for them in order to achieve their targets. So in general, I think that in CTV compared to other fields of business, there is a lot of room for the open web, and we will see the growth of this industry in the next couple of years. And I think that the walled garden in this extent is -- will be more and more limited.

Okay. That's interesting. That's sort of a non-consensus view. So that's interesting. How do you see the balance of AVOD versus SVOD playing out in 2022? And what's the impact of the increasing supply on your CTV business?

I think that AVOD will grow because people are looking to get more and more content and not to pay for that, but they willing to be tolerant to get it through -- to pay for it through viewing advertisement. So I think that this is something that we will see growing all the time. And we saw it also in many cases on the Internet. I'm 24 -- next month, I will be 25 years in this business, so I saw it all. And I think that what you see here is a clear path also in the CTV that people will basically favor to run and to see -- to consume content and to pay for it by watching ads basically. I think that when you are looking at CTV in general and you're looking on the volumes that are happening in CTV growing and growing all the time, I think that we will increase the volumes, of course, because the media partners, as I mentioned before, also recognize the potential of the CTV and they are moving their content to streaming and to CTV and to AVOD platforms. And I think that basically what will happen there will be also a performance advertising growing -- growth in the CTV space. Right now, we see a lot of branding and we see less performance. But I think that in the coming year or 2, we will see more and more newcomers that are basically moving what they are doing on TV to CTV. And there is a few gaps there that needs to be closed, but I think that it will happen in the next 24 months.

So you see video advertising as substitutable to CTV. What you just said is you think your online video piece will actually move into CTV. Is that what I just heard?

No. Not precisely. Maybe I was not clear enough. What I said is basically, what we see in general is that, again, AVOD is growing because we believe that people will like to consume content and to pay for it with their time basically by watching ads. But you asked me also about the impact of increasing supply of our CTV. So I said that what we believe that will happen is that there will be also a growing performance element in CTV of advertisers that will join, that will come and their -- and basically, their goal will be to generate performance out of their campaigns and not just spreading an awareness.

Okay. Yes. That is quite different. And I do think it's one of the unique things about CTV is it can do top of funnel and bottom of funnel. So you're agreeing with that point. Okay.

Yes.

Yes. No. That's helpful. One of the points you brought up in your opening comments when we were talking about the end-to-end, the factor end-to-end is supply path optimization. You used those words a couple of times. And that's sort of code in Wall Street for price cutting or fees under pressure, take-rate pressure. Those are all sort of synonyms for supply path optimization and specifically the guy, the CEO of Trade Desk, has been really hammering away on how there's too many fees in the ad tech ecosystem and therefore, fees need to come down. So the key thing for us, could you talk about how being end-to-end, you're uniquely positioned to benefit from this trend? And so far, how is supply path optimization benefited Tremor? And how do you see this playing out in 2022?

So I think that -- as I mentioned before, I think that when you have an end-to-end solution platform like we do, you can basically save a lot of the costs. And -- but it will not -- it will less affect us because basically, we, from the first place, cut some of these costs that were associated with duplication of when you are running on both sides. But I think that people will be able to save a lot of their additional costs if they will work with one platform because there is a lot of additional costs that are coming from, for example, if you are doing screening to the media, if you are using data, if you are connecting things together and now you have everything in one platform. And this is even apart from the mediators in between when you're talking about media sources and so on. So I think that our solution is basically giving like -- it's enabling us even to take higher margin than the industry, but in reward to that, it's even given like better pricing and better efficiency to our publishers and advertisers, which is, of course, very important in this business operation in order to keep growing and keep flourishing. So I agree that there will be a lot of costs that will be structured. There will be a lot of pressure on the industry, but it's not coming from -- it will not come on companies like us. It will come more of the mediators that are not basically -- some mediators that are not adding additional value in between the chain. And basically, the Trade Desk and other companies are moving a lot of efforts in order to minimize this effect of these mediators and to run the supply path optimization that will provide the advertisers the best solution for their money that they are investing in advertising campaigns. And I think that we can play a very big part in this game because basically, we are already doing that for the last 2 years. And that's why we think that we are so successful and growing because we are basically able to offer simplicity, data empowerment. And so the supply path optimization, and we didn't spoke about pricing, but of course, pricing is part of that and efficiency.

Okay. Also earlier, sort of harking back, you talked about the COVID pandemic and how it accelerated trends that were already in place. I would say, sort of -- what we're trying to figure out on Wall Street is what are the long-lasting trends that got accelerated by COVID? So could you sort of highlight your top couple of trends that you think are here to stay? And what -- how Tremor is positioned to benefit from these trends that are going to -- that were accelerated by COVID and will continue?