Verve Group SE (VRV) Earnings Call Transcript & Summary

Welcome to the Media and Games Invest Q1 2023 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Remco Westermann, CEO. Please go ahead.

Thank you very much. I would like to welcome our investors, our other stakeholders and everybody who is dialing in here to our Q1 presentation. Yes, we are pleased to announce that we were able to grow at 4% despite continuing headwinds in the advertising markets and divestments of smaller nonstrategic assets and games in this [indiscernible] space. I would like to start first with quickly introducing Paul, our CFO, who most of you know; and myself, Remco, the CEO. Some of the key numbers for Q1 revenue, LTM at EUR 327 million. In the first quarter, it was EUR 69 million, which was growth versus last quarter -- the first quarter last year. First quarter last year was still a very strong quarter because it was before, let's say, the things hit the market. Ukraine war started on 24 February till advertising budgets reacted. It was a bit later. So we're pretty happy with this quarter. Adjusted EBITDA, and that's what you see also, we were really doing well on profitability, so EUR 95 million adjusted EBITDA for the last 12 months, EUR 19 million for Q1 around roughly, let's say, numbers of employees roughly stayed the same. Overall, 4% revenue growth. We have done more in the past, I know, but in this market circumstance, we think we did pretty okay. 550 software customers that are driving the majority of the revenues and we did 8% growth in our core business, programmatic revenue. So coming to the next slide. Going a bit into detail what happened in the last quarter. Yes, I mentioned already with 8% growth in our core business, mostly driven by the demand side. I mean, the demand side, as we have said in previous presentations is the one that we want to push more because the more equal our demand and supply gets, the more efficient the whole company gets. Then strong performance on the user acquisition DSP with contextual iOS campaigns. To explain, we do, for larger companies, gaming companies, but also non-gaming companies, we help them to create app installs or also to sales. That was a data set, an acquisition that we did 3 quarters of a year ago, and that's developing extremely well. Then the game streamlining has successfully concluded. We announced that what happened at the end of Q4, beginning of Q1, we concluded it now, yes, which will reduce our overall cost base. Also, yes, it's roughly EUR 10 million revenues less. So that means that the base that we compare against last year is higher, of course. But even though we were able to grow. Then 160 new casual games launched in Q1 2023 so to make that very clear, gaming is still focused. Gaming is extremely important for us for the data, for all the other assets that it brings, also to the advertising side. But the main growth driver now is really advertising, as you also see in the numbers. Then yes, coming to that Europe, and that is what we're proud at, in the in-app, let's say, exchange field, we achieved 12% market share and we announced market leader, comes to that a bit later in the presentation. Then what we're also doing, we are working on increasing profitability. We have done a lot of acquisitions in the past. So we're further consolidating the tech stacks. But on the other hand, we are also doing a lot of feature development to just create growth. And then successful and prudent refinancing of the 2024 bonds. Not an easy market environment, but really happy that, that's worked out very well, giving us a much better profile on the financing side. And then ESG further a core focus and also luckily leading to nice improvements in our ratings, MSCI and also S&P/ESG ratings. So those are, let's say, some of the main things that happened, a lot more happened, of course. It's a substantial company, but this is just short summary. Coming to the next slide. Going a bit more into depth. Yes, we have been developing ourselves starting on the left upper corner. We have been developing ourselves from a gaming company. We did full gaming, let's say, before 2018. Then started the advertising part to improve or strengthen the gaming part, but really find out it's selling. The shuffles is easier than digging for gold, if I may say so. And we have really been very successful with building up our advertising part. It's all programmatic advertising, so all digital. And yes, you see that in Q1 2023, actually, we had 81%, so the share was further increasing. Then the main driver of the revenue are our larger customers. Also here, we were able to increase the number, Q1 2022, EUR 479 million, versus now EUR 557 million, which is an increase by 75 software clusters. Then looking at the ad impressions. Prices have been under pressure because of the market. People are in these kind of, I'd say, cyclical periods of lower economic situations, spending less per ads, also reducing budgets. But we are happy to really show that also our volume has been growing, so which means that we have been gaining market share from 156 -- let's say, 1 billion ad impressions, we have increased to 166 billion. And if you then look at the bottom a bit more in detail, what has happened, our existing customer base, which we measure quarter versus the quarter last year -- the same quarter last year had an 89% extension rate, which means that we actually, let's say, lost 11% of revenues. That was not due to losing customers because you see there's a 95% retention rate, which is really good. But that means also that, let's say, the existing customers have spent less. And if you then take together volume growth, current customer base is spending less which automatically leads to the conclusion that we have won a lot of new customers, which you see on the left side, which has been driving our revenue growth. Coming to the next page. The market is, how to say it, in cyclical markets, depending on the economic environment. And what you see on the left upper side in the picture is the forecast of analysts in regards to ad spend for the full year 2023. In June last year, they were still very positive within, let's say, almost 10% growth. And we see that each quarter or let's say, each period, they have been bringing their forecast down. And if you look on the right side also, that's a comparison of our peers, the median of growth was in Q1, 2% as far as numbers have been early so far. So minimal to 0 growth for the ad market in the first 2 quarters. That's basically what's happening in the market, but the market is expected to show signs of improvement in the second half year of this year. Coming to the next page. So this is the environment that we're working in. Then going a bit into our channels, where have we been growing? Where didn't we grow? Yes, Mobile has from start, been a very strong part. Why mobile? Because mobile is a very how to say it, mobile is growing. Mobile is super important for data. Your mobile phone is the one that you have with you all the time and yes, used most of the day. And that's where we also have seen strong growth. That's what we are focusing on. So mobile is one of our core segments, and we've been growing with 8% year-on-year. CTV, which is, let's say, traditional TV gets digital. The whole connected TV is growing. It's a hot market, a lot of interest in the market. And also here, we have been able to grow actually with 10% versus last year. Then desktop, which is a smaller segment for us, if you see, also less of a focus, It's lower margins and especially also in this, yes, more difficult economic situation. Margins were already low on desktop, they have become lower. So that's also the reason that we just do less on desktop to also protect our margins. And digital out-of-home with some larger campaigns, so we really were able to show very nice growth there, but it's a very small part of our total business. Then coming to the next slide. Yes, this is a report that was just released by Pixelate last days, which is showing a bit of market share positions in the market. And here, as I said before, in-app for us, mobile is super important and really proud that, yes, when starting this business 4 years ago with the attack that we have been able really to bring ourselves to a very nice position. So we are #1 in the Google Play store in the U.S. with 12% market share. And we are #1 in the Google Play store in EMEA with 13% market share. Also in iOS, we're doing pretty nicely, not on the top position, I hope yet, but we're working on that. There we are #4 in Europe and North America with 6% and respectively 7% market share. So this is really an important part of our business and one we're really excelling. Reasons for that are, yes, having good systems, but also really our data part is super important to drive our revenues here. That brings me to the next page. Talking about data. Yes, we have been investing a lot in innovative targeting products. AI is very important to do targeting. If you have data, if you know where a user is interested in, if you know what environment he's living, it's, of course, easier to target and you get better results. And there are so many data they can need AI for that. We're focusing a lot on contextual. Contextual is the world without identifiers. Apple has, yes, duplicated IDFA. Google has also announced that they will do that on their mobile services. They already have done it actually on their web services. So what is the world that we're living in or let's say that we're focusing at? It's no personal data, AI-driven, no use of identifiers and future proof targeting. That's what we have been investing in. And some of our products we have developed by that this Moments.AI, which is contextual targeting solution, Visual Intent, which is a contextual targeting solution, which is a cooperation with Getty Images. So next to each image of Getty and Getty has a lot of images out or let's say, a lot of Getty images are used in the market. And next to each of those images, we can sell the ads. So you have a very good environment to place the ads, high quality also. And then at anonymous targeting on mobile device, where we're also able to target users without any personal data leaving the device on their mobile device. And then we have our own first-party data, which are identified data, but there we get the full consent of our users and are able to also use those to test our, let's say, to AI routines to test our algorithms and to improve our contextual results. So this together is one of the big drivers of our revenue growth and also of our market share growth in these markets. Coming to the next slide. Yes. Then on the demand side, as I mentioned before, we have the strongest growth. What is driving this growth? First of all, supply. Having a good supply makes also the demand drive. So that's what we always said is an integrated platform as a huge advantage because you have much more control, there's less middleman. So that makes a lot of sense in there. Then our first-party data coming from Axes In Motion, our racing game -- games provider. Then being Omnichannel, so being a one-stop shop where advertisers and agencies can really run campaigns on different platforms. Supply path optimization, so taking out a middleman, very important, just makes it more efficient, but also much more transparent. And then, as mentioned before, privacy-compliant AI-driven product solutions. So those have really been driving our demand side. So from having a very strong base on the supply side, we are now really pushing much more on the demand side and see here 35% year-on-year growth. Coming to the next slide. And that's the financial part, and I would like to hand over to Paul, our CFO. Paul?

Thank you, Remco. So starting here with the first quarter financial highlights, and we saw stable growth in the first quarter 4% with actually very strong growth of the programmatic advertising revenue stream of 8%, outperforming the market here very nicely as well as a minus 6% from the game side, which is also following some divestments and game closures in Q4, which -- but also came with a very strong increase in profitability. And so we see a 9% EBITDA growth versus a 4% revenue growth and a 12% EBIT growth, which means we also improved our EBITDA margins now to 28% versus 22% EBIT margin. And overall, we see that we have a very strong profitability and cash generation while we have a stable solid growth in the first quarter. That brings us to our long-term financial development. And here, we see that we have grown on an LTM basis now to EUR 327 million revenues, 95 million EBITDA and EUR 78 million in EBIT. We maintain our strong EBITDA margins of 29%, which is at the upper end of our 25% to 30% financial target. And as mentioned earlier, so we saw a 4% growth in the first quarter, which is above the median for our peer group, and therefore, consider that despite the headwinds and the game closures as a solid revenue growth. That brings us to the segment performance. And here, we see it on the left side, the demand side segment, which has grown now with 35% in the first quarter. And here, we see that the investments of the previous years really pay off. And that also our contextual UA DSP, which is doing user acquisition, especially for games companies without any reliance on identifiers shows very good results, and we also improved our EBITDA margin now from 2% to 13% and also expect to further grow the share of the demand side in the coming quarters. While on the supply side, we see a stable quarter with a 2% growth and that is also following some discontinued nonstrategic smaller games as well as some lower budgets from existing customers but we're also adding -- constantly adding new customers here and also expect some further growth in the coming quarters. But also here, we see a further improvement in profitability from -- with an EBITDA margin of 28% to 29% as well as almost EUR 1 million more in EBITDA year-on-year. Then coming to the operating cash flow and CapEx development on Page 18. On the left side, we see the operating cash flow development, which were coming in at EUR 109 million on an LTM basis, which means very strong high free cash flow despite increased interest expenses. We also saw a seasonal working capital effect of minus EUR 26 million, which is due to a lower use of the securitization. So the selling of receivables as well as some publisher payouts, but that's rather a seasonal working capital effect, and we also expect that to become positive again in the coming quarters. And we also see on the right side, less focus on M&A. It has reduced the expansion CapEx quite a bit, and we also expect that to further decrease. And we also see that the maintenance CapEx have been reduced following also the streamlining of the games business to now EUR 8 million, and therefore, we generate a very strong free cash flow. That brings us to the net leverage and interest coverage ratios. On the left side, we see that we are coming in at higher end of the net leverage target of 2 to 3x but that's in the end, due to the working capital effect, which is expected to flatten out during the year. And by taking that out, we would already be at 2.7%. So we are very confident that we also further delever over the coming quarters but also the interest coverage ratio on the right side was 3.5x remains very strong. And therefore, we consider these as very strong and solid credit ratios. And as said already also expect to further delever in the coming quarters. That is bringing us to our revenues and EBITDA guidance for the year in 2023. And here, we are guiding on EUR 335 million to EUR 345 million in revenues, which would actually by adding back the games divestments as well as assuming a stable FX rate, the EUR 350 million to EUR 360 million in revenues, which means an 8% to 12% pro forma growth, which is compared to the overall market growth from our perspective, actually a very solid and strong growth number, which also provides some outlooks for the future. And looking at the EBITDA guidance of EUR 95 million to EUR 105 million, we see that actually EBITDA is increasing much faster than the revenues, and this also above the consensus numbers and that is also taken into account in the end due to our cost reductions, which we achieved in the first quarter and which we also will see in the coming quarters. And therefore, we have a stable growth with a very strong underlying profitability. That is bringing us now to our midterm financial targets. And we have discussed and talked a lot about the macroeconomic environment and some numbers for 2023. But we actually expect a very strong midterm outlook and remain confident that we can actually grow the company also in the coming years with a revenue CAG of 25% to 30% with very solid and high profitability compared also to previous years by keeping out our leverage between 2 and 3 and also investing further in our AI routines and to the overall growth of the business. And in the end, yes, it's a macroeconomic environment where we are in, but that will also improve over time. And therefore, we also expect much higher organic growth numbers for the coming years. And with that, I would like to hand over back to Remco, and I think then we are open for questions.

Thank you, Paul. And I would hand over to the moderator to arrange the questions organized.

[Operator Instructions] Our first question comes from the line of Fiona Orford-Williams with Edison Group.

First of all, can I ask you about the current situation in terms of ad volumes and pricing. On the [indiscernible] yesterday, they were saying that -- they were seeing a sequential improvement in Q2 and expected Q3 to build through the year. So some comments on that would be really helpful. And the other thing I wanted to ask about was that you mentioned consolidating the tech stack. How fast through the process are you on that? And how long to completion and what benefit?

Yes, I can take the -- and thank you for your questions. And I would like to answer them. From about ad volumes and prices, we had hoped, let's say, end of last year that's beginning this year would, let's say, become more positive. What we saw is basically a similar situation as last year. Customers still being hesitant, still looking very, I'd say, cautious at their advertising budgets, partly delaying advertising spend. So that's the situation that we had, and I would say, still have in Q2. But we see some, I would say, light at the end of the tunnel in the sense that we're talking to customers get -- there's more sense like, hey, markets won't dramatically change, but we need to get to our market share. We need to start doing more marketing again and things like that. So that's what we -- let's say, also if you look in the past at a certain point, you see people start spending again, has more confidence. So at the moment, just stability, and I think also in the interest front is very important. We are expecting to see, let's say, people to start spending more on the advertising. And that automatically will also have a pricing effect, of course, because unless demand means, yes, let's say, the answer there. So if there's less demand, prices go down, but with more demand, prices will go up. So that's expectation. I don't have a crystal ball. So it's really difficult to say. But it's also, if you look at analysts, they, let's say, yes, expect now, but it's after it's always easier, that the Q1, Q2 are low and Q3, Q4 will be better. Q3, Q4, of course, are always the stronger quarters for advertising. So that's basically what -- yes, I can say to that. I hope that answers your question. Then consolidating the tech stacks. We have done 2 large consolidations for a wireless platform that we acquired in the U.S., 1 of our earlier acquisitions, which is basically treating differently or let's say, 3 activities that we had separate. All 3 have been moved except for 1 customer now. So that means that basically all servers except for a few last ones have been disconnected and all the features have been developed on the other platforms. So in that sense, enabling us to do. So that transformation is fully done, I would say, the last customer will move in the next 1 or 2 months, then we can fully duplicate that stack, and it's done. The other large move that we have done is from liquid and [indiscernible] company that we acquired, that tech stack has been now almost fully moved to Smaato. Last movements are done now in Q2. Also a year story, let's say, in this sense, 2 large customers on the platform they are also preparing and moving. So we expect to close it by end of Q2, might run into early Q3, but then that's also done. So those are things that, let's say, were big cost savers. We are still working on consolidating on the data centers, on the cloud. So there's still a lot of things improvements going on. But I think the big work on bringing stacks together was basically duplicating those 2 stacks. And what we're looking now is indeed, how can we get more synergies between our 2 large exchanges, which are Smaato and PubNative, which is more joint feature development, all those kind of things, bring it down back to 1 stack doesn't make a lot of sense because the PubNative stake is much more on performance, Smaato is much more on brand, and that's also where we aim to further develop them and really bring them together, would get so much -- I mean, in theory, it makes sense, it would make it a bit more efficient. But it would also tie up so many tech resources that we rather at the moment used in for further feature development. In the future, maybe we will further integrate stacks, and we basically do it by joint feature development, which will bring the stacks closer together. So that's a bit of background. But if you look at it economically, I think a substantial part of it has been done, not ruling out that we will or let's say that we're are further working on further [indiscernible] integrations, but the big 2 stacks that we wanted to duplicate are almost done. I think over to the -- I hope this answered your questions. I don't know if you have more questions.

[Operator Instructions] We have a question coming from Edward Acklin with First Berlin.

Just a couple of things to follow up on. Paul, you mentioned you had some understandable seasonal effects on the cash flow. I was just wondering if you could share your expectation for the coming quarters in the full year, if we'll see similar cash conversion levels that we saw last year. And then it looks like you also -- a second question that you had a rather flat development with a number of your software clients. Quarter-on-quarter, if you could maybe give us a little bit of background on that development.

Thanks, Ellis. Let me maybe start and if you have anything to add, Remco, then just add in. In regards to the -- starting with the working capital development here, we had reduced use of the securitization line, so the sale of the receivables compared to the previous quarter of roughly EUR 20 million and also had some some larger publisher payouts following a strong fourth quarter. So that's more a kind of onetime effect, and we expect actually the working capital effect to become positive in the coming quarters again. So then we will also increase cash conversion. And therefore, we see it also as a more true view to look at the net leverage on the kind of pro forma base on the EUR 2.7 million, which takes out the working capital effect. So that's rather a seasonal thing, which will flatten out over the year and we would expect similar cash conversion rates like we saw at also. And there's also 1 additional thing to mention is that we had some accrued expenses for the restructuring and streamlining of the games division of roughly EUR 4 million, which were also part of the working capital effect. That's obviously a very clear onetime effect even that was a smaller number compared to the overall effect. And looking at the software clients, here, we see that we see an increase roughly of 7 large software clients. So that's, in the end, the clients doing more than USD 100,000 revenues per year quarter-on-quarter, a 75% increase in software clients year-on-year. And we also expect a further onboard more software clients and especially also -- so we onboarded many more software clients in the first quarter also quarter-on-quarter. I think it has been 50 or 60. The only thing is that we, first of all, need to scale them and that they're coming into the plus USD 100,000 basket. And here, obviously, the current market environment where you need to scale existing customers first before they become large clients, that's currently something which takes a bit more time as in the previous years due to the fact that also overall budgets have been decreased. But we're still further building a base and a strong base and getting more direct integrations also with publishers and therefore, also taking further market share. And I think that's also what is very nicely reflected in the pixelating part where we are actually very pleased that there is such a report which consolidates all the different sources now because that is one thing which we have always kind of reviewed on our own data internally. And as you might recall, always said, we are 1 of the top 5 mobile SSPs worldwide. And I think it's good to have some data sources now, which showing some transparency on that as well.

Yes. If I may maybe add one sentence to that. It's -- we see a lot of new customers coming in. But indeed, because of customer budgets overall being under stress, the over $100,000 per year, a definition here hurts us a little bit. But even though there is still growth, but a bit lower than because of this price and budget pressure from the customers.

Our next question comes from the line of Jorg Philipp Frey with Warburg Research.

I would like to post my questions one by one. I hope that's okay for you. And starting really with the Pixelate report. As I understand it is the first time that we have such a report. So what's your estimate of the market share you gained actually in the last year?

Yes, we have been growing on the in-app side with 8%, as we showed in this report. And we started, if I may say, the other thing 4 years ago with 0. But of course, acquisition driven, and we have built this position and also being able to organically grow it now. But to really -- we know that we've been taking position how much exactly is difficult to say. So therefore, we're happy that the report is there. And also next quarter, we will be able to, of course, show further developments in here in the market share.

And really looking at this market, which is a lot of players, which are a bit smaller than you but not yet extremely out distance. Do you see a level where you kind of get an escape velocity, where this market more or less consolidate into kind of, well, small holistic market let's say, something like 5 players or so? Or what's the general view how this market is going to develop?

Looking at -- let's say, I agree with you that there's too many players in this market and that we see on the demand side on the advertiser [indiscernible] side that they want to work with less parties -- so in that sense, there will be further consolidation alone driven by the demand. The larger parties will take more share. On the other hand, there's also, as I think, in most of the digital markets, people don't want to have a monopolist here. So I would assume that there will most likely be, I don't know, 4, 5 large parties that take the main market shares. And then the others that just are a lot smaller or really getting out of the market. But this is, let's say, my estimation on it. Not certain, of course, that that will happen, but it would make sense.

Yes, just to understand that we see it similarly. And then going a bit into more nitty gritty figures. I really liked your operating cost control in the first quarter. Is there anything that you want to particularly highlight there? Or can we assume that this is more or less a cost level that you are going to keep?

Yes, constantly...