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

All right, everybody. Welcome to the continuation of RBC day 1. So excited to have everybody back in person here. I'm Matt Swanson, a software analyst here. And we are super excited to have Ofer Druker, CEO of Tremor International here to join us. Welcome to the conference. It's nice. Last time we were virtual, I remember, and this is our first time actually getting to meet each other. This is like a very unique pandemic situation. You know someone for 2 years, you don't shake their hand. It's great.

It's funny because sometimes you don't recognize people when you meet them after talking to them over Zoom.

Yes. And we don't have to go through this here, but you're taller than I thought. And that's always the first thing when you get off Zoom. You have no perception of how tall anybody is.

Speaking of pandemics. I mean, you've obviously had a ton of history in the world of ad tech. But going from a pandemic into a recession was a new experience for everyone. Could you just talk about Tremor's growth over the past 2 years and your performance? And then maybe what you've learned about the company and the industry by kind of stress testing the model here?

Of course. So when you're saying that maybe I saw many things already, I just want to say that I'm 25 years in this business of ad tech, so I think the better perspective in some ways. Our philosophy and strategy always was to be a profitable company and to manage our business in a way that we are balancing between growth and profitability because of the situation that we are facing now. So every few years, you have this situation and you want to basically run a business that is independent and not dependent on any cash that should come from the outside. So we are managing all the time our business in a profitable manner and growing. In 2021 compared to 2020, we grow 64% in net revenue. We achieved $300 million of net revenues and EBITDA grew by 166%. We generated $160 million of EBITDA last year. Conversion to cash was very high, more than 90%. So we know how to basically not just grow but also generate growth on the EBITDA side. This year is more challenging, I think, but we are still profitable. We generated, until now in the first 9 months of the year, more than $100 million of EBITDA. And we used this year in order to grow the business. So we made a few acquisitions that I'm sure that we'll talk about and investments. But in general, I believe in our capability basically to grow and to keep profitable basically. This is the key element that we are basically balancing. When I'm looking at the industry, I must say that it's encouraging to see that more and more companies are responsible as they know how to manage their business. And I think that there is a lot of skilled managers and boards that are driving this business. And I'd like to see that and people are aware that things are not just going up, they already used, that sometimes it's go down. So you need to be ready for that. And of course, this is part of the ad tech in so many ways in the last few years.

Yes. And you really highlighted the most differentiated part of the model is the profitability. But when thinking about the actual infrastructure, it's the end-to-end platform, and obviously, those things kind of go hand in hand, right? But can you walk us through the advantages of being end-to-end when most of your peers are not? And what trends you've seen from your customers that tell you this is the right strategy? And success breeds copycats. You think we'll see more end-to-end platforms over time?

Sure. We chose to go by the end-to-end solution in 2019. In April 2019, we acquired -- basically we were on the DSP side, and we acquired -- merged or acquired a company called RhythmOne that also incorporate into the end-to-end, YuMe if you remember them. They were a traded company in Nasdaq. And we basically created the end-to-end solution. I remember that the people from the ad-exchange who sat in my office and said to me, are you crazy? What are you doing? Everybody is specializing and you are building everything together again. But when you look at our performance, you can understand that from every dollar that is passing in our platform, we can keep much higher margins. We are around 50% margin and our EBITDA is very strong because of that. And also our efficiency per employee or productivity per employee is very high on net revenues because of that. And I think that it's supporting our capability to say what I said, to be resilient and to grow even in difficult times. When I'm looking at the market, I will tell you honestly that people, advertisers and also, for example, other people in this industry, they don't -- they're looking now for more simplicity. They don't want to deal with about 5, 7, 8 different entities in order to run a campaign. They want to choose less numbers of people that they can work with and trust to deliver the results. So I think that we offer simplicity in the market. That's one. The second thing is when you're looking at the data sync between the SSP and the DSP, usually people because if they are using 2 different platforms, they can use -- lose up to 50% of the data and reach in the market. And when you're sitting on one platform, it's not an issue. Installation from privacy issues like cookieless world, also protecting us because when you're sitting on both sides, you are less dependent on cookie in order to conduct targeting. Pricing, of course, that you can offer better pricing to clients. That's why we grow, I think last year, 64%. And the last point is the SPO that we are blessing on that element. And we are connected directly and we moved most of our spend from DSP to our SSP, and this is making the money work better for the advertisers basically. And we like the fact that now the market is going to this direction because it's supporting our model. When you are looking at the market in general, I think that people are moving to our direction sometimes but without naming it as an end-to-end. So it's interesting to see it all the time. I'm sensitive to words and I'm listening to all the earning calls and so on. So when you're looking at SSPs, most of them are now building sales teams that are basically reaching out to agencies and to clients and bringing their demand to their SSP, which is the right way for them to do because at the end of the day, they don't want to be dependent on other people in order to bring their meals. So they are sending their people and building the sales team. And we see the big DSPs that are also reaching out to the other side of the media and building their bridges in order to increase their support, increasing their margins and so on, which makes sense. The advantage -- or the major advantage that we got is that we are doing that on a technological platform. They are doing that from operational perspective, but not only -- they don't have the technology and the platform that we do. And this is giving us a very big edge and advantage that we are going to utilize more and more in the market basically.

Yes. No, absolutely. And that resonates in this idea that there's an increasing gray area between the SSP and the DSP. And it seems like a lot of the macro themes we're focused on right now between SPO or worried about Google cookie phase-out and universal identifiers, that they're all just directed at trying to fix the problem that the SSP and the DSP are separate, right? And that's -- they're being full staffed kind of remove half the issues of the market.

Agree. I agree. Also productivity, if you look at productivity of the teams and so on, when you're looking at productivity, there was a research. I will not make a publicity to one of the other banks [indiscernible] basically issued a word that she's done about productivity in the market, then we were second to the trade desk in a very small difference because again, this end-to-end solution enable us to do that, and she even forecasted that we will do better than that in the future. I'm not sure about that. But I think that we are trying to be very efficient and to build a company that is efficient and profitable and growing in a smart manner, basically.

All right. And building on the idea of building a company and building on the idea of doing it in smart manner, you have a long history of successful acquisitions. And throughout that 23 years, I'm sure there's even more of that or less visible at Tremor at this point, the most recent big one being Amobee. And can you just talk us through like what made this an attractive asset when you were evaluating it? And then a little bit more about their self-service DSP and what that brings to Tremor and then the ATV technology that we talked about on the earnings call yesterday.

Of course. So yes, we made a lot of acquisitions already. In the past few years, we did a few big ones, but this is by far the biggest project we did until today. And when I looked at -- when we looked at Amobee, we looked at a few things that catch our eye and attention. One of them is the ATV, and we'll start from there, if you don't mind, because from the view of the advertisers, this is the first station. So basically, what's -- Amobee didn't create it that they acquired Videology, if you remember them, a few years ago. But Videology created a very interesting solution platform, but I think that they came a little bit too early into the market and they basically went to bankruptcy. But basically, what it's doing is allowing the advertisers, the agency, the broadcaster to plan if he wants to reach this type of audience, what type of shows it needs to run on, that's one. The second thing is how not to duplicate the reach to other digital assets. So it's a spend if you are showing twice or 3 times the same ad on different parallel platform and you're trying to avoid it. That's what basically the ATV is. And it's being adopted by a lot of leading broadcasters already in the world. And I think that what's happening now in the market will just enhance it. What I mean by that, still linear is my estimate, you can correct me if I'm wrong, Matt, but it's like 10x bigger than CTV. So I think that most of the advertisers that we are trying to push to CTV, they are linear advertisers. So I think that what catch my eye is that basically, when you're looking at Amobee, they were not able to enjoy from that. What they did, they charge very little on the planning but they couldn't do the activation. That's why they basically lost a lot of money. What we can offer is activation also in digital to these clients, and we can increase our margins and make much more money from that, which also enable the advertisers to get a better product in the future because we are going to invest more in the development of this product in order to grow them and make them more attractive for them. But this is something very big. And I think that people don't realize it, but because we are always thinking about digital and about CTV and some which we strongly believe in. But in general, linear is still 10x bigger and advertisers are there and they want to shift to digital, and we can help them to do that in a smart manner, and that's what we are doing now. That's first. The second thing is their DSP. So when we look at their DSP, we saw that they spend -- invest, let's say, not spend, spend is when you are not getting a return, but invest in their DSP is so much for so many years, and they built a very good product when we look at it, it's them. The DSP was acquired from a company called Turn basically. They built a very powerful DSP that is for enterprise use. It's fully omnichannel solution and a very good for performance also. We know because we use it for performance also ourselves because our DSP is less performance-oriented. And I think that when you are basically connecting these 2 DSPs that we got and they got, we are strong in CTV. We are strong in programmatic buying. They're strong in omnichannel. They are strong in performance. And we'll -- basically, we are going to move the qualities of one DSP to other and sunset one of them. I think that will get a superior product in the market. So when you look at that, I think in general, I think that we acquired a very strong company that basically escorted their clients from their planning tool to the activation tool. And we are going to shift a lot of their spend to our SSP in order to increase our net revenues and profit around that. And we move fast, so we already integrated the companies. I will tell you why because we are dealing with people at the end of the day. You have to remember that. And when you're making an acquisition, it's not -- I'm always telling people. We are not in real estate. We are not building an empty building that we can destroy and build a new hotel there or something like that. It's not. It's about the talented people that created it, and you need to find these people in order to be the agent of change when you are buying the company and turning it around. When we look at Amobee, we saw that they have a lot of talented people that served in the company for a long time, and they can be these agents of change. So it makes our life much easier to acquire the company, basically integrate it into of operation.

Yes. When you said you were moving fast, I thought you were going to refer to the $50 million cost synergies you achieved in 18 days. That was the original projection for the year.

Yes. So when we are talking about people, people don't want to be with a doubt. When you are keeping a very big cloud that you are going to because the market is asking for a number, how much you will be able to cut basically from a cost perspective. And when this cloud is above the people, they are looking for another job, they are smart. So what we -- what I said to them and we are very transparent. I said to them in the first discussion that the first call that they have with the employees, I promised them that we are going to build our reorganization plan and we are going to issue it very quickly. So they will have no doubt. And unfortunately, we need to say goodbye to a big number of people, but we -- the Board cannot hold them basically. If you look at Amobee, they had close to 1,000 employees, and they drove about -- we gave this number, about $150 million of net revenues. We are driving -- we drove the same time, $300 million, and we owe 600 people. So it means that they are not efficient. So we basically reorged the company. We released the people in good terms, in good faith and we basically moved forward. And we, of course, give our blessing to the employees to be successful in the rest of their career. But I think that in general, we prefer to do that quickly. And in order to let the people have confidence that they are part of us and they can continue working with us in the future, which is very important. We already recognize additional $50 million of savings that we can do that is not related to human. It's related to platforms and other stuff that we can basically cut and reduce the cost, and we are going to do that in the near future.

Yes. And I guess putting a finer point on why Amobee was the right choice for you, and when you think about how efficient your platform is, we've talked about best-in-class margins. Is it become more attractive when you see a company who has picked up a lot on the demand side but maybe it's not operating efficiently? And there, you can kind of feed demand into this margin machine that you've created?

Yes. I think that one thing that you cannot have a shortcut to get is clients and build relationship with clients. So when we acquired Amobee, we acquired basically additional 500 global clients that are working with you now, which is very important. And I think that this is the key. When you are connecting this demand side to our platform, suddenly, instead of doing a 15% to 20% margin, you can do up to 50% margin on the same dollar that is passing through the funnel, and it's making a big difference in everything about this company. So we looked for -- we are looking for this type of companies, and we believe that all these one-side companies will eventually need to connect or build their solutions in order to be end-to-end. That's our belief. And I think that we are a few steps ahead because we started doing that around more than 3 years ago and we have a platform to do that. So that's why we can enjoy from that and generate higher margins and faster profitability basically.