Otello Corporation ASA (OTEC) Earnings Call Transcript & Summary

Welcome to Otello Corporation's Q3 presentation. Today's agenda: I will do the executive summary, follow up with an operational review, and Petter Lade, our CFO, will do a financial review. And then at the end, we'll have time for a Q&A session. Executive summary. Revenue came in at $63.2 million, flat versus last year. Adjusted EBITDA, flat versus last year as well, $5.7 million against $6 million. Operating cash flow, very strong in the quarter, $4.2 million, compared to minus $0.9 million same quarter last year. So both AdColony and Bemobi, both came in, in line with expectations for the quarter. Revenue and adjusted EBITDA, virtually flat versus last year. But if we had adjusted for FX, it would have been up. And as mentioned before, strong operating cash flow of $4.2 million in the quarter. Operational review. I'll start with AdColony. So we saw revenue growth year-on-year and we also saw 20% increase Q2 versus Q3. So strong growth quarter-on-quarter, and all this, despite -- we still see COVID-19 impact. We see continued strong growth for our Brand business, up significantly from last year, up 20% year-on-year -- or sorry, quarter-on-quarter. And Performance revenue was stable for another quarter. So it's been stable for the last 4 quarters. The real highlight is, of course, that our Programmatic business, our open marketplace and our private marketplace, continue to see very strong growth. It's over 80% year-on-year, and it's now 57% of our Brand revenue. So clearly, our Programmatic business is now our biggest business unit within AdColony. So this is very positive. On the cost side, we have successfully merged our demand side, our Brand and Performance business, by expanding our Istanbul service hub. And this has given us cost savings of around $1 million per quarter also going forward. If we look at the global brand business, we now -- we had our fourth consecutive quarter of double-digit growth year-on-year: 20%, Q4 last year; 36%, Q1; 14% in Q2; and 20% year-on-year for Q3. We continue to see very strong growth in our Programmatic business. If you look at the Brand IO business, it increases 19% year-on-year, and this is very much due to the PMP business. Even though, despite COVID-19, we see good take-up in our IO -- classic IO business. Programmatic open marketplace, very strong quarter, $15 million, up 91%. So this has just continued to do really well. Brand performance, we think it will start increasing again. It's not the most strategic business we have, but it's a very profitable business so we are focused on getting that back to growth again. If we look at the different geographic areas. North America, up 10% year-on-year. I think this is a very strong result given the big impact we have from COVID-19 into verticals like entertainment where it basically just completely stopped. Again, our open exchange was really strong in North America. So all in all, good results. If you look at EMEA and LATAM, another strong quarter. They grew 47% year-on-year despite COVID-19, and we saw strong growth in particularly, Programmatic business, but also our Instant-Play business and also LinkedIn. Our business in the Nordics and Turkey had a strong quarter. APAC, more than 50% of our business in APAC is now programmatic, and the growth was 17% year-on-year. That's an okay result given that some markets in Asia has been more or less closed down due to COVID-19. If you look at the programmatic results, which, of course, is the highlight of the quarter. 5 consecutive quarters of strong year-on-year growth. We saw in March that our private marketplace, particularly in the U.S., was a complete stop. That is back on track in Q3. We had 112% quarter-on-quarter growth from Q2 to Q3. And in general, we can just say that our open exchange and our Programmatic business really developing well, $22 million in the quarter, very strong results. And we already see now that October is performing better than September. So we definitely have something going on programmatic. And I think if we look back over the last 2, 3 years, it's, of course, had been very troublesome turnaround in AdColony. And we're very pleased to see that we're back to growth, very pleased to see that we are back to a profitable business. But I think the most -- the best thing about the turnaround is that we have managed to grow a significant Brand Programmatic business. We have simply -- we still stand out compared to the competition that we have a global sales force that can go out and sell mobile video around the world. But the real, real unique result is that we have managed to get our agencies and our Brand customers to start buying programmatically in addition to become -- in addition to being IO customers. That's a real achievement, and it's great to see the results and it's continuing. If we look at the Performance business, the only positive thing about that is it's stabilized and we are now looking to growth there as well. We feel very good about the investment we've done in the data science team we have in Poland. We see the algorithm and the model they are coming out with will help our Performance business. And given our Brand business, we are now putting more resource into supply. This will benefit the Performance business as well. So the ambition is, here, not to just have a stabilized business, but actually to get back to growth as well. Okay. We move on to Bemobi. Just to recap, basically the pillars of the sustainable, profitable growth strategy we have in emerging markets in Bemobi is that we have some very unique services with the best-of-breed apps and games, which is priced for each emerging markets. And then we have distribution channels, which the combination of these 2 dimensions makes a successful Bemobi business. If we look at the subscription services, our unique service offerings, then we have 3 categories. We have the Apps Club family, which is -- which the most known app is Games Club, where it all started. We have Kids Club, but we also have games in different verticals like fitness, security, et cetera. Then we also distribute some third-party apps which would like to make use of our distribution system. And that is, for example, apps like -- popular apps like TRUECALLER, busuu, et cetera. And then finally, we also have developed some voice and financial services, which are quite new. They are mainly launched in LATAM with actually very big success. If we look at the other pillar, which is our distribution channels, then we have also 3 groups there. Number one is the mobile carrier promotions. It's becoming less and less because we have very little control on that. But every time we launch a new product or we launch the new operators, we also agree that we will launch some campaigns through their network. The other channel we have is paid online campaigns. This is -- this requires high expertise to use this in a very high -- in a very quality way where you avoid fraud. And I think this is really paying off now that we have, over the last 2 years, identified partners, portals, et cetera, which have high-quality traffic. One example is, for example, Opera Software, Opera browser in emerging markets. And this is just becoming more and more important for us. And then finally, the more strategic channel we have which is co-owned channels with mobile carriers, where we basically have a portal where we own half of the real estate for Bemobi services, and the other half is reserved for our operator partners where they will promote their core business like voice app and data services. And obviously, the control and the value of the channel increases the more you get to the right, where we have our own real estate. Okay. So revenue and adjusted EBITDA in the quarter. We got -- we had very negative impact from FX and COVID-19 in the quarter. Despite that, we feel good about the results since we have definitely outperformed our peers during the COVID-19 crisis. Revenue came in at $11.6 million, which was down 21%; EBITDA, 4.7%, down 24%. If we correct for FX, then the result was more or less flat year-on-year. So given COVID-19, we're very pleased with the results in Q3. We're very pleased with the growth we saw on both revenue and adjusted EBITDA, corrected for FX, from Q2 to Q3. So despite that COVID-19 is still a factor, it's encouraging to see that we did better in Q3 than we did in Q2. If we look at the subscriber growth. Total subscribers were up 6.8 million year-on-year: 5.6 million from voice customers in LATAM, 1.1 million from our international business. And we saw also there a strong growth from Q2 until Q3, 2.8 million. And we are live with 70 operators, so obviously, the addressable market is still huge here. If we look at the channel mix, we are live with 16 portals outside LATAM. We have another 2 free we hope to launch in the next 4, 5 months. And also, the voice portal we have launched in Brazil, we look very much forward to take them international. If you look at the mix, it was quite stable year-on-year. Our co-owned channels had the same percentage. Operator went down a bit because paid increases. So what are we focused on? We're very focused on to basically take our new voice-based channels and platform which has really big success in Brazil. We launched with all the 4 main carriers there. And we are looking very much forward to take this out to our international operators. It requires that we put some hardware into the network. Due to the COVID-19 situation, many carriers are very sensitive to do changes in the network in these times. That is delaying this launch. But despite that, we are having conversations with many interested carriers. If COVID-19 -- if we could have a solution to that, we think that could be a very big growth factor going forward. And also, we are constantly launching more services outside Brazil and LATAM into international, basically just taking some of the services we have in our home markets which are working, and then we're just basically repeating that success internationally as well. So more services going out to our international operators. We have made -- we have announced a preliminary filing for listing in Brazil, which -- where we're going through a local process in Brazil now with the authorities there. Obviously, COVID-19 is still a factor. We improved from Q3 to Q3. But obviously, we are not hoping for a second wave in emerging markets. If that happens, that will have a negative impact. So the rebound we have seen in Q3, we are relying on -- that COVID-19 will not bring us back to lockdowns. We've seen some lockdowns, for example, in Asia now, which are not positive. So -- but clearly, we feel confident about that. We are outperforming our peers, and we have rebound given that the market has opened up in many of our markets in Q3. So it's encouraging to see that when the authorities allow people to go to work, allow people to go to shops, the shops are open so they can top up their accounts, we see an immediate impact on the business. So that's very encouraging to see. Opera TV, as previously communicated, there's an ongoing legal dispute with our majority shareholder, MFC. We have a favorable verdict granted on liability that was not appealed by MFC. They will also [ bear ] the cost -- some portion of our cost in that process. And we have now restored the proceedings, and the trial went on last -- the first week of October this month. And we're now waiting for the final judgement, the final verdict from the judge, which we hope to get in November or December. All right. We move on to the financial review. Petter?

Thank you, Lars, and good morning. So as Lars said, we're happy with the results in Q3. We basically came in flat compared to last year, and we did it despite having negative FX impact, and of course, being in the midst of a global pandemic. If you look at the cost side, we have cost very much under control. The only increase in expenses are the publisher and revenue share cost, and that's linked to the growth that we're seeing in AdColony. All the other cost lines are down year-on-year. So very comfortable with the cost position we have now. If you look at adjusted EBITDA, it's $5.7 million versus $6 million or down 5% year-on-year. This is really heavily impacted by FX. If we adjust for FX, this actually would have been up 18% year-on-year. So it's all Bemobi and the impact that they get from -- negative impact they get from FX. We also have net financial items that typically move the result. This is the FX rate swings between the USD and the NOK. And now the -- in Q3, the USD was weaker versus the NOK, which gives us a financial item negative of $5.2 million. If you look at the trend, Q2 and Q3 tend to be pretty similar in terms of revenue. But we see a very nice uptick from Q2 to Q3, a revenue growth of over 17%, and we added $1 million in Bemobi, we added over $8 million in AdColony. So this is very positive and something we hope will continue into the fourth quarter. At the same time, we keep our costs down. So of course, this means that we are increasing our adjusted EBITDA, delivering $5.7 million, which is up significantly both from Q1 and Q2 this year. Digging into AdColony. AdColony had a very strong quarter. Lars went through the highlights of that. The Programmatic business just continues to do really, really well, and that really shows no stop going into Q4. It's also encouraging to see that our Performance business is stabilizing. It's been around $30 million now for the last 4 quarters, and I think that's a base from where we can recover. At the same time, we have been streamlining the cost in AdColony. We've been merging the Brand and Performance demand side. That give us a savings of about $1 million per quarter, which you clearly can see in the OpEx, which is down significantly from a year ago. We're still a little bit light on cost versus a normal quarter because we have less in travel and entertainment due to COVID-19. But we believe we can run this business now with an OpEx -- annualized OpEx of around $60 million and scale from there with growing top line. When it comes to gross margin, you'll see gross margin has been trickling down over the last few quarters. And this is really just due to mix. We do more programmatic revenue now, and our programmatic revenue typically has a margin of 25% to 30%. So it is somewhat dilutive to the blended margin. The managed IO Brand revenue typically have more like 40% gross margin. So the more we do programmatic, you'll see that the blended gross margin will come down. But it's also key to mention that the programmatic revenue scales extremely well. When it comes to bottom line, the more programmatic revenue we do, the more we can shift from over -- from managed service over to programmatic, the stronger the bottom line will become. And we saw -- we had an EBITDA of $1.9 million in the quarter, which is double of what we had a year ago, triple of what we had a quarter ago. So it's a very encouraging trend, which we expect to continue. Look at Bemobi. Bemobi also had a solid quarter. Clearly, the strength and the underlying performance of Bemobi has been masked by FX. We delivered $11.6 million in the quarter. This would have been $14.5 million, had FX rates stayed the same. The BRL versus the U.S. dollar, and BRL is the Brazilian reals, where Bemobi's home market and biggest market takes a big hit due to FX. But I think the most encouraging sign here is what we see happening from Q2 to Q3. Again, 2 very similar quarters, and we see we added nearly $1 million in revenue. We added 8% revenue growth. So things are getting back to normal, and that clearly helps us. At the same time, we're keeping costs virtually the same. But we have invested a lot into people and product to give us the next leg of growth in Bemobi. Gross margins, supportive in the quarter, nudging up from Q2 to Q3, also a positive sign in the midst of COVID-19. And finally, to adjusted EBITDA, virtually flat versus a year ago if you adjust for FX, and as you can see, up significantly from Q2. Moving over to cash flow. This is really a top priority for us. The positive EBITDA that we're delivering is showing up in the cash flow. We had $4.2 million positive operating cash flow in the quarter. This is a swing from negative $0.9 million a year ago. And that's a very positive development. The fact that we are generating this operating cash flow also enable us to invest into new products, into new services, into more technology. So we also spent $3.5 million, of which the vast majority is R&D, both in AdColony and Bemobi, to give us the next leg of growth going into the fourth quarter, but also going into 2021. We have $0.8 million in financing activities. That's really linked to IFRS 16, the majority of it. And there's $0.2 million linked to the expense we have on the RCF. So that means that we virtually end the quarter with the same cash that we started, so $33.1 million in cash. We have, in addition, an RCF, of which we've utilized $30 million out of close of the quarter, which still gives us a small net cash position and the balance sheet that we are comfortable with. So finally, over to outlook. So we are reporting a few weeks earlier than we used to, only a little over 3 weeks into the quarter. As Lars said, the development of the first 3 weeks of the quarter has been very strong, been very strong on programmatic in particular, so that bodes well for Q4. But of course, since we report so early and the fact that we have kind of a second wave, it seems, on COVID-19 cases, means there's more uncertainty just by reflecting on that fact. But what we've seen so far makes us believe that we're going to see an accelerating revenue growth going into Q4. We grew 7% in Q3. We expect this to accelerate to between 10% and 15% in Q4, and we're off to a good start. At the same time, the -- a lot of the growth will come from programmatic, which means the gross margin will be down. It also means that OpEx will be down. And those 2 are very close to offsetting each other, which means that the adjusted EBITDA will be up. And we expect to deliver our strongest adjusted EBITDA in AdColony all the way back to Q4 '16, so the strongest set of results in 4 years. This also means that we will keep the full 2020 guidance that we set out in February. We set it in February before COVID-19 hit, and we kept it in May, we kept it in August. And we stand firm by that guidance now, again, in October. So I think we've been fighting the global pandemic pretty well. When it comes to Bemobi, I really cannot say much. We have, as you know, last week, filed for an IPO, and it really prohibits us from making any forward-looking statements on Bemobi. So with that, I'll take any questions if you have.

No questions? Okay. All right. Thank you very much.

Thank you.