Verve Group SE (VRV) Earnings Call Transcript & Summary

Welcome to the Media and Games Invest Q1 Presentation 2024. [Operator Instructions]. Now I will hand the conference over to the CEO, Remco Westermann, and CFO, Paul Echt, please go ahead.

Good afternoon. I would like to welcome all our investors, analysts, and other stakeholders to our report of the Q1 2024. And we would like to guide you through the achievements of this quarter. Paul will do the financial part, our CFO; and I will do the more general part. Starting with the slide, first slide. Yes, we had a very strong first quarter. We indicated that already earlier in where we get out some quarterly numbers and indications after 2023 and also end of 2022, which were difficult periods for advertising, where we really saw that people were bringing down the advertising budgets. We had already good Q4 last year and even better now Q1 2024. We had 21% organic growth, so really happy with that. Yes, company is growing again, and this was organic growth. So that's really nice to see that happening in the market again where part of it was market recovery. But a big part also was really onboarding new customers. We'll get to some details later on that. Then another big achievement in Q1 was the partnership with Google Cloud and the AI partnership with Google, which we'll also further elaborate into. Then, yes, privacy, a lot of things happening on the privacy side. So our privacy focus, very strong, also helping us to grow our revenues. ATOM 3.0 release. I'll cover that also later in the presentation and a strong and increasing industry recognition. I think, this is a very important point. We haven't had that so much in before. But being in tech, a big part, of course, of our growth is that people recognize that we are a good and strong party in this market. And I think that's happening more and more, and we'll have some more details on that later in the presentation. Today, also time, like we always do with our Q1 report for the guidance for 2024. Here to say we are really happy to guide for a nice organic growth within -- up to EUR 48 million. Also a few words of care here. We are still in a world with a lot of geopolitical fix happening or potentially happening. So we are guiding very carefully. Last year, we had to bring our guidance down. I hope that we -- or let's say, I wouldn't like to do that this year again. So in that sense, we're guiding carefully. But as you see, Q1 is really nice. And there is more possible, but let's really look into a nice year with good organic growth, but it's even more possible. Going to the next slide. Our KPIs. Yes, KPIs that what drives our growth, our organic revenue growth, but also our EBITDA growth. Ad impressions went up very nicely, EUR 199 billion in Q1 '24 versus EUR 166 billion in Q1 '23, which is a 20% increase. Then our net dollar expansion rate. That's what the customers -- the old customers -- the customers that were there a year before in the same quarter, comparing the revenue that they did that quarter with the current revenue. Yes, here, a very positive news. Our old customers are growing again. And we had four quarters, as you see here, where the old customer base spent less, and this year where we really now see market recovery. Company is getting back to spend, company is increasing their budgets again and also shifting more spend towards us. So 10% growth versus a year ago, very nice organic growth with the existing customer base. We did more and that comes from new customers. And that's what you see on the bottom of the slide. We have over $100,000 software clients. Those are the ones that really bring systems that are big. We are changing our reporting a bit, but we want to be fully open on that and also show you what we are changing. So far, we have always been reporting the supply side partners that did over $100,000 as being strongly -- strongest on the supply side, but we have also communicated that we want to get more towards the demand side. So closer to the advertisers directly selling to advertisers and agencies, and that's what you see on the right side, which we have now included. So here, we see -- and that's really good to see that effect also that we are stronger growing at the moment on the demand side. So we have good growth on the supply side, which is our strong base, but we also show really nice growth on the demand side. So overall, our software clients are a bit, over $100,000 have grown to -- sorry, from 612,000 to 764,000, a 30% growth. So happy with those underlying KPIs and go to the next slide. Yes, strategic operation with Google Cloud. We had a press release out in that, but some of the highlights here, it's going to lead to a lot of cost savings over the next 4 years. What we are doing is bring all our cloud activities into the Google Cloud. So far, we were working with multiple cloud providers, that's less efficient because we really teams for different clouds. You don't get the same conditions, of course and we have agreed to do well that we will really shift to Google. They will also support us on the shift. And on top of that, we will really see some really nice savings in the coming years because of the shift already expecting for savings of that in this year. Then the second point is really -- and that's maybe even more important because that's helping us on the revenue side or indirectly helping us on the revenue side. We will get access to the AI capabilities of Google and that will help us also to further optimize our algorithms, our AI routines, which will further improve the way we target and also give us a better position towards publishers and advertisers just by doing better results. We're super happy with this. Then going to the next slide. Yes, ATOM 3.0 release. You know we have been talking about ATOM a lot. In hindsight, maybe we started talking a bit too early about it because it really took longer than we all expected, much more technically complex products, also, let's say, to really get it ready for scale to time. But yes, it's thereout. And in the world where privacy is changing, where identifiers are going away, I think, it really gives us the possibility to target on device, work also with AI on device, so we optimize on device. Yes, we started in '21, as you see here, and it's now, let's say, after a lot of testing, after a lot of optimization also and the 3.0 already shows that it's not the first version. We have been able to really now release the version. It's integrated in our hybrid SDK, which is one of the 2 SDKs that we have. And yeah, with that, it reaches over 10,000 apps, over 1.5 billion users. And it's good to be contextual, but it's even better to be contextual at scale. And that's what we are with it. We're very -- it's not -- let's say, it's -- I would say, it's a middle thing between contextual and targeting, but it's securing that no privacy data leave the device. It's -- yes, the way -- and also if you talk to regulators, the future way of doing advertising is on device, targeting on device, leaving the data on the device, and that's what we -- exactly what we do in here. The market is also there for it. If you look at iOS, then 75% of the users at the moment avoid tracking. So they say, no, I don't want to be tracked. And therefore, this is really something that will, in a market where also CPMs have been suffering, because if you can't identify who you're targeting, it's just less value for the app. But with this tool, with our ATOM 3.0, we are able to give in a blind world the possibility to target. And that's, of course, making also our partners happy, also to create -- sorry, the quality of life of one of our partners, but also at exchanger is really showing that they think we are on a good road here. So that's Atom 3.0 release. Go to the next slide. Yes. Then I mentioned already before when I started, very important for us that we are not working on good products and nobody is seeing that. But that really we, as Verve Group, which is the brand that we work with in the advertising side is getting recognition and recognition are those like AdExchanger which is saying that we are one of the top players. Taking with Pixalate, then we have also on the contextual side, the Digiday and TPA are really, yes, giving us rewards for this contextual part. That's super, of course, in a market where there's a lot of uncertainty because of identifiers going away. And then we have Jounce Media, which is also giving us the -- yes, the benefit for being one of the strongest players on the direct supply side, which in a market where people are cutting players. So intermediaries is, of course, also good. And also happy with Singular and that's going on the next page. Where, SKAN is the tool that Apple makes available for targeting in their way. So it's not fully blind. They have taken the IDFA out, but they are still giving signals. And also, that's another world which is important to the part where Apple gives at least partial signals. That's also where we have a strong position and where we are really showing the we do well. I think that's important to say in the world with privacy, where privacy is strong, you see different ways of targeting. I mean, everybody still wants to target and you need to be much more diverse as a company. You need to be able to do contextual targeting. You need to be able to use SKAN. You need to use all kinds of different ways of targeting. And I think that's what we really have shown in the past already and are further investing in, and yes, it's a very important part for us. Then going to the next part, and that's the financials. Handing over to Paul.

Thank you, Remco. So starting here with the financial highlights of the first quarter. And as Remco emphasized earlier on already, we showed a double-digit revenue and EBITDA growth. So 20% total revenue growth, where of 21% were organic. It's also good to see now that the organic revenue growth is very close to the total revenue growth, which means all the divestments and closures which we kicked off in 2022 to streamline the company and also as part of the transformation towards the media company is fully done now. So we're looking at very clean streamlined business and can also further grow from here and we were able to bring EUR 82 million in revenues with a very strong EBITDA of EUR 22 million, which relates to 16% EBITDA growth and the 10% EBIT growth. We also capitalized 3% as of net revenues less compared to the previous year, where we capitalized 11%. Now we are at 8%, which means basically 3% is less EBITDA. But in the end, this is still adding to free cash flow. And therefore, we have been -- become here more conservative on that side. Otherwise, the EBITDA growth would have been even stronger. Strong margin as well. So 27% EBITDA margin, 20% EBIT margin, both as well within our range and even a bit on the upper side of our midterm financial targets and what is really outstanding is also the very strong cash flow generation with EUR 24 million operating cash flow before change of working capital and a EUR 12 million investing cash flow. So overall, highly profitable and very good cash generation. Then coming to the more long-term view. And here, we see that we are able to really further scale revenues by achieving our EUR 363 million (sic) [ EUR 336 million ] in revenues, EUR 98 million, EBITDA, EUR 78 million EBIT, 29% EBITDA margin, which is at the upper end of our target of 25% to 30%. And what is really outstanding is that after 3 years of declining organic growth due to the current geopolitical climate, we are able to show very meaningful double-digit organic growth again. And we are also very confident that we can show this strong growth throughout the coming quarters and the periods, and therefore, looking forward also to the coming 9 months. That brings us to the operating cash flow and CapEx development. And here, we see that we have been able to further grow our operating cash flow on an LTM basis from EUR 69 million to EUR 87 million while the interest just increased slightly from EUR 39 million to EUR 41 million. So overall, we're scaling the cash flow is much faster than the slight increase, which we still see on the interest side. We also expect that the interest has seen its peak now, and there's also a positive outlook based on Bloomberg and other portals that interest rate cuts might be possible in the coming periods. So that would obviously further help also the cash flow generation. On the CapEx side, we are stable after we actually reduced our expansion CapEx over the last 3 years significantly. It's important also to invest into further organic growth, which is clear -- which was a clear part of our agenda for the coming periods to further build on our market-leading position. But in a nutshell, we have generated very strong operating cash flows driven by the strong organic growth and also have a very sound working capital management and, therefore, showing a very strong increase in operating cash flow on an LTM basis. That brings us to the leverage ratio. And here, we are on an adjusted basis being on 3.2x. The reason that it's increased on an LTM basis, basically that we had EUR 15 million seasonal working capital swings, which will balance out, and to the end of the year it will become positive. And in addition, we also decided, due to the very strong financial performance of the company instead of paying earn-outs, shares to pay them in cash and that has led to the slight increase on a normalized adjusted base, we would be below 3x, so taking out the one-time working capital effects and the earn-out payment, that say, until the end of the year, we are very confident that also on the reported level, we will be well below 3x again. And another important information also here on the right side is that we have significantly reduced our earn-outs on the balance sheet having now EUR 27 million as of end of Q1 with EUR 12 million payable in shares, all in cash at our sole discretion in 2025. So therefore, there is also no balance sheet risk from any future earn-out payments at the MGI balance sheet. That brings us now to the guidance for 2024. And as Remco mentioned earlier, we have been very prudent on this, guiding on EUR 350 million to EUR 370 million revenues, EUR 100 million to EUR 110 million EBITDA. I think it's still a very solid organic increase and there is no M&A planned. But at the same point in time, given the current geopolitical climate, we rather want to under promise and over deliver. But let's say there's definitely further upside also to the guidance coming from the very strong customer growth, which we see and which is further also going into the second quarter. There's also upside from increasing CPMs in the future, definitely additional political dollars from the U.S. elections, which makes -- make 70% of our revenues in the U.S. That's another growth driver and then also potential interest rate cuts in the U.S. but also in Europe, will free up more advertising budgets from advertisers and obviously also reduce the interest expenses for the MGI group. So overall, a very strong outlook. But again, we'd rather under promise and over deliver here and that's why we guide on EUR 350 million to EUR 370 million revenues and EUR 100 million to EUR 110 million EBITDA. And with that said, over to Remco for some closing remarks.

Yes. Thank you very much, Paul. Yes. I think altogether, we are building a great company here, which we've shown in the past. But looking forward, I think there's a lot to come. We continue to build a company when the budgets were lower, when everybody was negative. I think it's good that we continue to invest then even though we also, of course, looked at our operational efficiencies, where we did the cost reductions and the things that you know. But we're now really showing in revenues and EBITDA that, yes, we are really nicely coming back. But even more important, I think, is to emphasize our strong position in AI, data and targeting, which are strongly correlated or strongly related to each other. I think that's where we really have been investing and which will also drive future growth. So about the careful -- about the guidance, as Paul said it already. It's a careful guidance. Looking at Q1, I mean there might be much more of a possible, but we are in a dynamic world. There is, let's say, substantial potential downsides with all the geopolitical things that are happening in this world. So that's why we're careful and the reason that we're careful. There's also, as Paul already said, a lot of upsides. The market recovery, that's not just coming back, but also expecting that CPMs will be bouncing back towards the second half of the year. Then customer growth, a lot of new customers, especially because of our strong position in contextual, growing the supply and the demand side. Supply was always where we are very strong. And we said, let's say, let's also build a stronger demand side, which we're really working on, and you saw that on the customers. And yes, we will have some special effects like elections but also Olympics, football championships and the likes, which will really help us. So our mission is make media better. And yes, we want to profitably grow the company, revenue-wise, EBITDA-wise, and bring it forward. So thank you very much for tuning in. And I would hand over to the analysts or let's say, to the moderator first. Thank you very much.

[Operator Instructions] The next question comes from Jörg Frey from Warburg Research.

Hello, guys. It's Philipp. Well, nice to see your figures. A couple of questions from my side. I do it one on one, if it's okay for you, probably starting firstly with -- you mentioned ad impression growth of basically close to net revenue growth. And if I'm not mistaken, CPMs are still somewhat negative. Does this indicate that you are now in a position to more or less get some premium pricing? Or can you shed some more light of the driver of this development and potentially also your CPM outlook?

Yes, I can take this one. CPMs are -- thank you for the question, Philipp. CPM is a very difficult topic because it has a lot of, let's say, complexities behind it. What we overall see is that CPMs in the market are not yet bouncing back. When there's less spend, I mean, we have an auctioning system where at auctions, and it's likely the stock exchange, where there is less demand, prices go down, when there is more demand, prices go up. We are still in quarters that are the lower revenue quarters. I mean, the quarters get stronger during the year. And even though we see a recovery also with our customers, we don't see so much recovery that the CPMs are really bouncing back or going up substantially. That's, let's say, overall generally in the market. If you then look into more detail, CPMs for traffic, where there is no identifier upper definition, lower even. However, sorry, if you then, let's say, are able to put targeting on it like we do now with ATOM, for example, you can achieve a higher CPM than markets even though it can be a lower average CPM than -- lower CPM than the average CPM in the market. So it's a super complex topic, but what we do with the targeting -- with better targeting is indeed versus the market getting better CPMs. However, overall marketing recovery, we don't see. And we have the effect that we do a lot of targeting on non-identified traffic, where the CPMs, even if we increase them with better targeting, are still lower than the ones we're targeting. So I hope that answered your question.

Yes. Yes. Yes. Very helpful, indeed. And probably the next bit complicated question, what I really so was delighted, you've got some traction also in CTV rankings. And just wondering a bit how you manage that, I assume targeting or -- it's much more difficult in CTV to differentiate via targeting or have you found anything which you can do on CTV to target household members or anything like that?

In CTV, it was -- let's say, the first important thing was to build up enough reach. We're reaching over 60% of the households now in the U.S. with CTV, which is really getting connected and getting contracts with enough supply that you are able to reach, how to say, the target group that you want to reach. And then your question is exactly aiming in the right direction. It's about targeting and data, and that's a very nice thing that you can use data over different channels and that the data strength that we have built for in-app because that's where we basically have our strongest position that we also can use that on the CTV side. So in that sense, yes, you need to differentiate yourself. You need to be better on targeting than others. And that's actually the reason that people are moving from traditional TV to, I'd say, from linear TV, traditional TV to CTV, connected TV is that you can target people. And with our data, we are also very nicely positioned there. So we try to and I think that we had that in the last quarter's presentation, we tried to steer away from just mass marketing CTV, because that has very low margins, but really more in the value-add part where we have -- I'd say, where we can help with our data.

And last question from my side, really, is there anything you can point out in your old gaming segment, any launches or anything going on?

Yes, we have regular, I would say, changes, updates in the games. So we did a bit more than a year ago, we, I'd say, optimize the portfolio, so we took smaller games out. The games that we have now, which are Fiesta or Trove or Wizard101, for example. They all have regular game updates. It's really gaming as a service with -- on a regular basis, yes, bringing in new worlds or new features, new characters, those things. So that's more, I would say, launches as usual, even though some have been bigger than others. On the casual PC portfolio of games, we're still launching a lot of further more launches and a lot of new games. So that's third-party games where we have licenses, which are launched on a regular basis. And I think the -- let's say, the biggest thing that we're seeing now in our game portfolio is on extreme car drive simulator. The game from AxesInMotion, our biggest mobile game that we have that they are now implementing multiplayer features. They have started with them. And looking at the road map, it's also not one big release or so, but there's a lot of things coming there. So it's all in our existing games portfolio, new game launches, as you know, we are a bit afraid of that and said, okay, let's rather concentrate on growing the FX side. But let's say, the games that we have are solid games where we really invest further in and that are really show a very nice addition to what we have. And don't forget, it's not about, let's say, not only about the games themselves making money, but especially also the value adds they have for the advertising side which is the data and which is also giving us a testing environment for things like ATOM to really be faster when testing.

Sounds good. Well, all the best for the next couple of quarters, hopefully, we realized some more of this positive momentum.

The next question comes from Ellis Acklin from First Berlin.

Congrats on the good start to the year. Just two topics on my side. I'd like to discuss with you. I'll my two questions together. One that seemed to me, maybe I'm just imagining it, but there is maybe a bit more discussion about M&A possibilities on the last earnings call. Maybe you can share what is going on with there with multiples? If anything is so interesting, how you're assessing that situation? And then the second topic would be just maybe a bit more clarity on the guided range. What scenarios are behind the two ends of the range that you're guiding for this year?

Yes, I can take the first one, Paul, if you take the second one. Talking about M&A, we didn't talk about M&A today, which doesn't say that we are not further looking into M&A. We have been growing this company substantially also fire M&A, we hear because we did really some very nice acquisitions, which built the basis of what -- where we are today. With what we have today, we don't need to do acquisitions. I think also, as I said already earlier. Nevertheless, there is no such thing as a perfect company and so also on our side, there are still parts of the business where sometimes an M&A might be able to help us to grow faster. So that's the reason that we're further looking into M&A. M&A. We haven't done any M&A for the last more than 1.5 years because there were targets, but price expectations were too high and the other thing is also a company internally, we have, let's say, substantial leverage at the moment, where we also want to bring that down and not to increase it by further doing too much M&A. So it's about mingling between those, let's say, yes, we don't want to do any transaction, which is not really a super accretive transaction. So that makes us more picky. And on the other hand, as I said, the market still had some expectations, which were more from the times where the capital was cheaper and let's say, it made more sense to pay those kind of multiples. We see those multiples coming down. Yes, and I'm not ruling out that there might be some M&A in the future. But at the moment, yes, nothing concrete to say on that side.

And then yes, I would comment on the guidance. So yes, we have been very prudent on it and rather want to underpromise and overdeliver, especially as currently still the geopolitical climate is quite volatile, I would say, which could have also certain impact. And yes, we think it's very reasonable currently the trading rather in regards to the upper end of the guidance, and as also indicated on the last slide of the presentation, there is a lot of things and upside in the coming periods and quarters. And therefore, we are very confident also to show very good results. That said, what was basically last year that there was -- that we need to reduce it something similar. We definitely wanted to avoid, and therefore, rather underpromise and overdeliver, that's a clear target of this guidance.

Paul, how sensitive would you say that the guidance is to the actions of the Federal reserve in the coming months?

We have not catered in interest rate cuts. So that would definitely be another upside towards our revenue and EBITDA performance given that it would free up additional advertising budgets from our customers where we're growing the base very strongly as we saw now in Q1, but also in previous quarters. So that could increase our net dollar expansion rate quite nicely. So this year from existing customers, but also there, I think over the last couple of weeks and months, there were so many interest rate cuts expected and then it was always revised and revised and then we will see much less now, at least as of today, the expectation. So therefore, we were rather careful here while we definitely see a very nice upside from that.

The next question comes from Sebastian Patulea from Jefferies.

I've got three questions, please. First one, what's driving the excellent increase by 30% of new customers, please? Is it investment in tech? Is it better ROI? Is it investment in the sales force? What's bringing those customers to MGI, please? And I'll ask them one by one.