OnMobile Global Limited (ONMOBILE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the OnMobile Q2 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Diwakar Pingle. Thank you, and over to you, sir.

Thanks, Vivek. Good evening, good morning to all participants on the call, depending on the geography you're in. Welcome to the Q2 FY '21 earnings call of OnMobile Global Limited. Representing the management today we have FC, the Executive Chairman; Krish Seshadri, the CEO; Sanjay Bhambri, the Chief Operating Officer; and then Sanjay Baweja, Chief Financial Officer. The call will start with a brief update about the quarter gone by and a business update, which will be given by Krish. This will then be followed by Sanjay Baweja who will give you a very brief detail about the financials. Post this, we will throw open the floor to Q&A session. Before we begin, I would like to mention that some of the statements made in today's call may be forward-looking in nature and may involve risks and uncertainties. For a list of such considerations, please refer to the earnings presentation. OnMobile Global undertakes no obligation to publicly revise any forward-looking statement to reflect future likelihood of circumstances. Having said that, I now hand over the floor to Krish. Over to you, Krish.

Great. Thanks. Thanks very much. Welcome to you all. It's a pleasure to speak with all of you today. Since our last interaction we had in August, that was just a few days after I joined OnMobile as CEO, I can say that this quarter has been a very stable and good quarter for us. The deals across all our different geographies and businesses are all coming together very well. So in that context, I'd like to touch upon some key business highlights, high level performance of our businesses and some key priorities going forward. So starting with our core tones business. While overall tones revenue is slightly down Q-on-Q, we continue to focus on digitizing that core product. And that work is already showing some very good results. So in that context, you can see that tones digital revenue grew about 6%, and it was aided by a very, very healthy 17% growth in the tones digital active base. Even though the overall base remained constant, the digital base grew by 17%. So that's a very healthy sign. So we continue focusing on this digital transformation journey in this business. On our -- RBT product, which we mentioned last time, that basically voice has to target the mobile consumer. It's been a 1 quarter delay on that due to COVID, but we've gone live with 1 operator in India with this RBT product. Coming next to our contest and digital content business, our goal has been to focus and grow revenues in this business, we mentioned that even in the last quarter, and also continue the digitalization of this product. In a very challenging environment, overall contest revenue has grown 4.5% Q-on-Q. And the digital contest revenue has grown about 10%. We did lots of deployment. Digital revenue as a percentage of overall revenue in this product has also gone up to nearly 7%. So once again, we see that growth in our digital contest product was aided by about a 38% growth in the digital user base, even while the overall user base for contest was flat in that quarter. So once again, both these businesses going through the digital transformation journey, and that's going to be a key focus for us. What I'm really excited about is something we didn't talk too much about in our last quarter. But in the digital contest space, we've got a product that we've built. It's internally code named Challenges Arena. But it's fundamentally in the gaming space, in the casual gaming space, but people usually call it trivia games. And that's a very attractive market globally, the key subsegment within the casual games genre. So that product is more or less ready. We'll be launching soon with an operator in India. And then we'll see which international markets to roll it out to next year. But once again, we continue to be really excited about this product and this space within the casual games space. So it's called Challenges Arena. That's an internal code name. We'll talk about it in a little more detail later. On the video and editorial business, revenues are fairly stable. They grew marginally about 2.5% Q-on-Q and over 5% on an annual basis. So that's very healthy. Coming to our B2C gaming business or gaming product. As I mentioned in our call in August, on mobile there are transformational point in our digital transformation and is completely focused on building out a cloud gaming platform. And this is in a very transformational huge market space. I mean all of you all know what is going on in the gaming space. There are lots of investments happening, both in India and globally. We know that gaming is the second most engaging product space outside of social media. And the great news is, over the last 3 months, we've had a lot of progress just testing our platform, optimizing performance, building out various key features. And the great thing is we've really come together as a company. Our teams in Canada, Sweden, Bangalore, all of them have been involved in this. And we've been investing heavily in these teams and hiring people from the top Internet companies. So I think we should be releasing a beta version of the product very soon. It was our intention to showcase it to you and give you a glimpse of the product, but we have a few global patents that are being filed. So unfortunately, we need a few more weeks to file them, and it's critical to do that before showing it publicly to anyone, so going through that patent and legal process. So once that's done, we are going to do an internal launch within our own company. And then we'll do a close beta launch after that and then showcase it to you all. So this beta version of the product has very differentiated and compelling features on 3 or 4 areas. One is cloud streaming. The second is the social and co-play. As you know, these are all very key developmental trends in the gaming space. And we'll be introducing battles and eSports as a monetization with the full product once the beta product is launched. So it's been a fantastic Q3 months just seeing this product come to shape, and we are all excited about what we've built. Quick update on the Q2 financial performance. We had a very good, stable quarter. Revenue has been flat, but COVID did push back some of the new revenues in regions like Africa. But operationally, as you can see, we've registered very healthy margins both on a quarterly basis and on an annual basis. So we are very bullish about maintaining that trend over the next few quarters. So besides that, we continue to emphasize on employee safety. As you know, all our employees continue to work from home globally. And we want to thank them for their incredible hard work, which has helped deliver these results in building out fantastic product in the midst of not being able to meet each other, but working together globally and virtually. And very excited, frankly, by the opportunities in gaming and in our trivia product that are ahead of us. Very encouraged by all the acceleration and momentum that we are seeing and launching this very soon. So with those key business highlights, I'll hand it over to Sanjay Baweja, our CFO, for his comments on the financial performance. Sanjay, over to you.

Yes. Thank you, Krish. Good evening, and of all -- welcome to all of you on the call. Let me quickly elaborate a little more on the financials. I know most of you would have already seen the investor deck, and -- that has been mailed to you as well as posted on our website and the exchanges. If anyone of you is not on our meeting list, please do drop in a mail to us, and we will add you to the distribution list. Our Q2 FY '21 revenue was stable at INR 146 crores, quarter-on-quarter with a decline of INR 1.5 million on a year-on-year basis. And the decline is primarily coming from Africa and Middle East region. As already alluded, we are focusing on the unprofitable Latin America business and are in the process of exiting some countries where we do not have the right pricing power. Our strategy is to shut down any business that does not measure up to our stated goals of revenue and profitability. This effort will be one of the big tailwinds in shoring up our margins towards the end of this fiscal and further. We are expecting to complete this process substantially during this fiscal as far as the operations are concerned, but the closure of the entities may take -- go into the next fiscal. From a product perspective, contests grew by 4.5% and videos grew by 2.3% quarter-on-quarter driven by tones, degrew by 2.1%. And games, which is still in its infancy and not in the form that we are about to launch, grew by about 2.4% for the quarter. As indicated in our earlier call last time, the gross margin remains stable at 52.2%. The sustained double-digit EBITDA margin at 11%, a decrease of about 300 basis points quarter-on-quarter. However, if we were to exclude a couple of onetime credits, which we had in the last quarter, EBITDA actually grew sequentially. In fact, on a year-to-year basis, EBITDA grew by 43.4%. It is our endeavor that from here on, we see margin improvements as our focus on cost optimization continues. Our operating profits also grew by 101.3% on a year-on-year basis to INR 12 crores for the quarter. The major factor driving profitability growth is our cost optimization efforts. We will continue to focus more on cost [ rationalization ] and create permanent savings to sustain double-digit EBITDA margins going forward. Our profit after tax was INR 7.8 crores as compared to INR 12 crores in Q1 FY '21, however, 7x more on a year-on-year basis. For H1, for the 6 months period, our revenue grew by 2%, EBITDA by 98%, operating profit by 348% and PAT grew by 522%. Clearly, a story of considerable improvement in profitability, which we are not only targeting to sustain but actually get better. Cash balances in the book stood at INR 232 crores, a reduction of INR 33 crores as compared to the INR 255.9 crore at the year of -- the end of Q1 FY '21. The reduction is primarily due to customer contract payments of INR 36 crores and a buyback of INR 0 -- INR 0.25 crores during the quarter. We will continue to invest, as Krish mentioned, in our gaming products, in the U.S., which is expected to launch within this fiscal. A lot of other operating matrices and data has been shared in the presentation deck. I'm sure that all of you have had access to the same. With this, I will now hand over the call to the operator to open the floor for Q&A.

[Operator Instructions] The first question is from the line of Anand Trivedi From Nepien Capital.

Congrats on a great set of results. I had 2 questions. Can you hear me?

Yes. Please go ahead.

Yes. My first question is regarding your streaming online gaming platform, which I'm assuming is a B2C platform, correct?

That's right.

So I guess my question is, in today's world, where given the Internet access to international games or games produced anywhere in the world is something that people can have access to, what is the differentiating feature of the platform? And how do you intend to draw people to come to your platform vis-a-vis going somewhere else?

Sure. I'll address that. It's Krish here. So yes as you said, games are available on multiple platforms. So just hosting games on a platform is not necessarily a differentiating feature. So the features on our platform are over and above just hosting casual games. So one main area I think I touched on in the call last time was on social and co-play. So playing games together online today is a very big deal. And people come together to play games which is a very offline kind of an experience, but they want to bring it online. The more they see their community and friends playing with them together, and if you give them the tools and the technologies and allow them to share stuff online over and above the games that they are playing, like an overlay, I think those are the key differentiating features, which will definitely make ONMO a very, very compelling and differentiated product. So I can't tell you too many things about very specific features. We've got patents that we are filing on at least 2 of those social features because you don't see them on any other platform today. And honestly, we haven't seen that being a focus for any of the companies in India at least, right, because you just see most of them posting games. So our platform is not just about hosting games, but enabling social connections, which, every single data point shows that when you have social connections and when you're playing with people, engagement increases, time spent increases, and obviously, that will impact revenue. The second differentiating feature, to a large extent, is cloud streaming, and that's what we are doing. So it's -- you don't have any frustrating installation process, no device dependency. The games can be instantly streamed on our platform. It's agnostic of any browsers that you use. So it's instant one-click play. So those are 2 key very, very differentiable features out there. There are a couple of more, but happy to take that -- yes?

Sorry. Please complete what you're saying.

Can you hear me?

Yes. I can hear you. So the cloud feature is something similar to what people like Google, et cetera, are trying out, right?

To some extent. But once again, ours is the first truly mobile cloud gaming solutions. Other cloud gaming solutions may stream large screen games on to mobile screens, but our product is built truly for mobile games. It's mobile first. So you don't have controllers. You don't have hardware and any of that stuff, no extra devices. So it's just native to the cloud.

Okay. My second question is that you've really improved your margins quite substantially in this quarter. Given that -- I mean, I guess one of the -- is it because the fact that costs have come down or have been contained quite a bit? How much of this is related to COVID? And how much of this will you think will be sustainable once we get past COVID? And a follow-on question to that is as you launch your cloud gaming platform, will there be substantial expenditure in customer acquisition, which will then eat into your margins?

So let me take the first part of the question. And then the second part, I'll request Krish to handle. So there hasn't been some help, if I may say, from the aspect of COVID in terms of cost and payment. But that's restricted mainly to, I would say, the [indiscernible] part. Other than that, most of the other expenses are continuing. However, we are doing things which will actually enhance that, say, for example, work from home, we've kind of decided that will be an ongoing feature as far as our company is concerned. In Bangalore, for example, we are giving up 2/3 of our office space. So we'll remain with 1/3 of our office space. And that saving will start happening maybe Q4 onwards. There was an incident, which we've given up because any of the [indiscernible]. That saving will start from Q3 onwards. We started giving up a lot more offices across the globe, also in other places in India. We are, like I mentioned in my call, in my opening statement, that we are looking at closure of some of decretive operations specifically in the LATAM countries, which will help us get better in terms of profitability. So we believe that this is the start of our profitability. I think things will only get better from here on, over the next 2, 3, 4 quarters. Krish, will you -- on the other part?

Yes. So on the customer acquisition, I can't tell you exactly what we are going to spend, but let me say that every country is going to be different because we are going to enter different international markets. Customer acquisition costs or the lifetime value and the revenues that you make from customers that risk profile -- risk/reward profile is very different, and some geographies have very, very high lifetime values. So I think it's too early for me to be commenting on that. But also you need to know that this is not just a B2C product because it's also going to go through the B2B telecom operators. So it's a kind of a two-pronged strategy over here. FC, do you want to add anything on that?

No. I mean -- and your point is right, Krish. Strategically, how much of the market do we want to capture in India at lower ARPUs because clearly they're lower ARPUs and the cost basis on that model, just to be clear, is pretty much the same. A cloud streaming a game in India or streaming a game in the U.S. is clearly the same cost, but clearly not the same revenues. And the number of subscribers, obviously, can be way bigger in India than the U.S., so then the cost can be higher. So those are the decisions we need to make and how much -- obviously, we'll be investing important sums of money, but we really need to decide in which market. So that's something I'd love to discuss with you all. Once we can show you the platform, you can understand what it does. And we can then have a clear discussion on where should we put the money on this one. And obviously, the challenge will be on many fronts. How do we preserve our margin while investing in this new service? One is more a VC play as we said. One is more like a steady business growing, especially with the B2B gaming. So I'm not excluding that we could eventually even separate the 2 projects, just to make sure that we get separate funding just to grow this kind of gaming play, which is very, very popular, as you know, in the market with venture capital at quite interesting valuations. So that's something we could think about doing also. But before we get there, let's first show you the platform and discuss the plan later.

Sure. And what's the time line for launching the platform in India?

So we are launching with all the employees in a couple of weeks. We just want to file the patents. And again, I would have loved to show you the platform today. It's [ working ] around with it. It's working. The problem is really the patents. And as you know, as soon as we make something public, the patents are void. Well, we don't want to void these patents. And ironically, our development team are going faster than the lawyers on this one. So now we're filing all the patents in November. We're doing the employee launch with all the employees in November, so mid- to end November. And right after we've done this, we're going to optimize the servers and deploy in India during probably the month of December. So we should be able to show you the platform very soon.

[Operator Instructions] The next question is from the line of V.P. Rajesh from Banyan Capital. Mr. Rajesh, we are not able to hear you.

Is it better now?

Your voice is breaking, sir, in and out.

All right. I'll get back in the queue and then try again.

The next question is from the line of Duby Rex from ithought Financial.

Just as with regard Q2 FY '21, you said that there was an expense regarding customer contract position costs of around INR 36 crores. Could you give us some more details on that and how it would affect P&L and the balance sheet in which line item? That will be great.

Can you please repeat your question? I [indiscernible]. Yes. Okay. I think you mentioned about the customer acquisition cost. So that is netted off from the revenue. So -- and it is taken over the period of the contract, and it is netted off from revenues.

And it happens once in a year? How is it?

No. It's an ongoing -- as for the duration of the contract, it is evenly netted off over the contract. It's a 5-years contract. It will appear in the balance sheet and also online. And then it's taken off through the period of the contract.

[Operator Instructions] The next question is from the line of [ Mithun Ashad ] from KEMA Advisors.

Yes. Just a question on the gaming platform. Could you just explain what could that business -- the business model of that platform be? Would it be largely subscription-driven? Could you throw some color on that?

Sure. So basically, there'll be 2 monetization models. One is tiered subscriptions, and also eSports, battles and competitions, so at least on the B2C side.

Right. And this would be targeted largely for the domestic market or are there any particular markets that you're looking at?

As I said, it's going to be both the Indian market and select global markets. So essentially, our target audience would be people, male and female, 18 to maybe 35, casual gamers, people playing eSports. But players with maybe good 4G connections can probably say, India, Spain, Sweden, Canada and U.S., France, Germany. I think those are all markets which we are definitely interested in. In what sequence they roll out and when they roll out, that's something that we are still planning. But India is something that we'll definitely test it out as FC said.

Just one last question. Can you mention the gaming platform you would have third-party games available on this? Or would it be your own original games that you would have created? Or how does this work? And how do you grow the user base in such a scenario?

It's called third-party games. We're not building any games per se. We are, as I said, hosting those games and providing tools, technologies to help facilitate interaction, social connections, sharing, cloud streaming, betting and things like that. So that's the way you kind of keep the audience engaged. I think the first person asked the question, are you just hosting games? I mean just putting games on our platform is not going to be differentiable, a lot of people do it. It's the technologies and the tools and the feature sets that we are building on top of that, which facilitate greater interaction and engagement. So essentially, we are trying to build a community, right, around this game, a very sticky community.

No, no. My question is mainly because you have such big platforms already available, how would you attract good games on to your platform was the key question.

How would you attract good games? See, we've already talked to -- so if you realize, we've had relationships with a lot of game developers through our Appland start-up. So we've been in touch with at least 70 to 80 game developers around the globe. That's not been a problem. They're all excited by what they've seen. So I don't see that as being a big challenge for us. While, yes, there might be 1 or 2 games, which you may not be able to get, but overall, that hasn't really been a huge challenge so far, at least in our initial conversations. FC, do you have anything to add to that?

No. The only thing -- and that was a key metric for us. As you know, game developers are well aware of all the other platforms out there, and they don't want to waste time. And throughout all the pitches that we've done to game developers, their feedback is, "Wow. We've never seen something like this. It looks great, and we want to be part of this." So that's exactly the feedback they have. So it should not be an issue at all to get the right games on the platform.

And just to add to that, and these are global games, right, so our team in Sweden has been very active in talking to game developers in Europe, in the U.S., across Asia. So we've got a kind of a good network out there, and they've been reaching out. They're all from the industry they've been talking to different game developers. Feedback has been good. So for the most part, we don't see that as a challenge.

Our next question is from the line of V.P. Rajesh from Banyan Capital.

Am I audible now?