Alpha Digital Design Consultants (Aust) Pty Ltd (XPN) Earnings Call Transcript & Summary

Hello, everyone. I'm Matt Forman, Founder and Group Managing Director at XPON, and I'm really excited today to be here with Matt Cooper, the Founder and CEO of Alpha Digital. And we're both here to talk to you about the acquisition that XPON's just done of Alpha Digital. Welcome, Matt.

It's good to be here finally.

Yes. It's been quite a journey that we've been on together. And I think we're about to build something even more exciting and greater together as we embark on this next phase of our strategy. So -- and we'll get into that in a little second. I've got Matt here today. We're going to do a bit of a Q&A with Matt at the end of the investor presentation. So make sure we stay around until the end to make sure we catch the Q&A with Matt. So let's get into the details of it. So highlights. Obviously, as I mentioned, we've acquired Alpha Digital. Alpha, a leading digital marketing business in Australia, been around a long time, 14 years, I think, almost to the day now. Alpha has been a very long-term and valuable channel partner of XPON. Our teams have worked very closely together on a number of customers, and Alpha have been very kind to introduce XPON into a number of their customers as well. And Matt and I have known each other for a very long time and we sort of worked together not just between XPON and Alpha, but in previous businesses that we're both involved with as well. So it's a long-term history there and a lot of trust that's been built up between both Matt and I and our teams as well. There's immediate value accretion. Last financial year, Alpha did $4.6 million in revenue and $0.7 million in EBITDA. And this acquisition also brings approximately $1 million cash at bank. So this will enable us to fast track our path to positive cash flow and EBITDA profitability, which is very, very exciting. The deal is very value aligned to both -- to make sure we get a win-win for Matt and XPON and make sure the deals aligned to shareholders as well. So at completion at settlement, there's $1.72 million. So $180,000 of that will be in XPON shares, and they're subject to a 12-month escrow. And there's a $1.54 million vendor loan, which will be paid back at 8% a year over 3 years and any standard settlement adjustments will come off that vendor loan. In addition to that, there's $891,000 in performance-based earnings, which is linked to EBITDA growth in FY '26 with an $800,000 EBITDA target and FY '27 with a $1.1 million EBITDA target. Very much focusing this on how do we use our award-winning AI skills and capabilities to really accelerate the AI transformation of Alpha and the offering that Alpha can take to its customers. So we're very, very excited, I think, about as we move forward and continue to integrate our offerings, the value that will quickly make for our customers, but also how it's going to empower our teams, both at Alpha and XPON to actually become more productive and more AI augmented in the way that they do their day-to-day activity. Very smart acquisition for XPON. Alpha has got a very good foothold with strategic blue-chip customers, particularly in the retail industry. And they work with clients like Target and KMart, QUT, Stone & Wood to name a few. And 87% of Alpha's revenue is from recurring contracts. And most of those contracts are 12-month recurring revenue contracts. So there's good revenue stability as well. And obviously, we're focusing on how do we maximize synergies and the most synergy that will drive from this will be through the revenue synergies. So like I mentioned, combining Alpha's offerings with XPON's AI offerings to provide this comprehensive integrated suite of sort of solutions under a single roof. It's going to really help simplify procurement for our customers and accelerate the ARPU per customer through cross-sell and upsell opportunities, both to XPON's customers and to Alpha's customers also. So the strategic rationale for it, like I mentioned, Alpha and XPON have worked together for quite a number of years. Both our teams are very aligned. We both have AI-first cultures and ready to embed the business capabilities. So there should be a pretty seamless integration process. I should mention that Alpha will continue to run independently. Matt will be continuing on as the Founder and CEO of Alpha. XPON will be integrating the back-end, finance, governance, legal, those areas, but Alpha will still continue to run independently outside of that. This is a repeatable acquire AI-enabled cross-sell M&A playbook, and this is the first of many acquisitions that we hope to do as part of our M&A strategy. And it adds scale to XPON without the heavy CapEx investment that's required sometimes to build scale. Immediate customer benefits. So we've got an immediate access to blue-chip customers. Alpha has immediate access to our blue-chip customers as well. Great cross-sell opportunities with Wondaris and also some of the other AI media tools that we can sell into accounts. And we have now the ability to cross-sell Alpha's organic and paid media solutions to our customer base, which is very exciting. And financial impact. So as I mentioned, there's $4 million in recurring revenue gets added from day 1, circa $1 million cash at bank and then FY '26 EBITDA of $0.8 million and FY '27 EBITDA target of $1.1 million. So a quick overview of Alpha at a glance, as I mentioned, founded in 2011, so 14 years today, independent, very data-driven business. There's 25 experts across Brisbane and Melbourne. They've got 40-plus enterprise and mid-market customers, and you can see the sort of sample of some of Alpha's customers there. And they're a top-tier partner with all the major platforms, which is Meta, Google, TikTok, Bing and Pinterest. And what does Alpha do? So Alpha provides a number of sort of AI augmented and will be further augmented with XPON's AI, performance media and social media, programmatic and video advertising, SEO and content marketing, which is organic content, conversion rate optimization, Asian and lifestyle marketing and analytics as well. So pro forma financials. So combined, this business -- the combined businesses are going to deliver substantial revenue growth and EBITDA improvement. This is a bit of a pro forma snapshot where we've got XPON's H1 FY '25 P&L that we released to market recently. And then we've combined that with the H1 P&L of Alpha. So you can see when we combine the 2 in that period, there was a 58% increase in revenue, 38% increase in gross profit and a 38% increase in operating EBITDA with a very clear path to ongoing profitability. So the deal structure, I touched on this at the start, so I'm not going to dive into it in much more detail. Probably a couple of things just to call out on the details though was with the completion shares, they'll be issued at a 15-day VWAP. The vendor loan, like I mentioned, it's 8% over 3 years. Any settlement adjustments will come out of the vendor loan. And on the performance-based earn-in, that $890,000 will be split evenly over 2 years, FY '26 and FY '27. Now that can be paid either as cash or shares. If it's paid as shares, it will be -- they will be issued at a 15% discount to the 15-day VWAP from when we release our annual audited accounts, with a floor price on those shares of $0.015. We will be going to seek shareholder approval to issue those shares, and that will be part of our 2025 AGM. If approval isn't obtained for the shares, the performance earning will default to cash. So the market that we're attacking here is huge and growing very quickly. Like we all know how fast AI is disrupting marketing. And we've used this slide at XPON in other investor presentations also. So that CAGR of 31% growth in AI marketing spend is significant. And by combining XPON and Alpha, it allows us to offer a more comprehensive suite of AI marketing solutions, so we can maximize value and growth from our existing customers. We can help attract new customers, and we increase the market share and wallet share of this very fast-growing and exciting market. So why does XPON want to acquire digital marketing businesses like Alpha? One, it's a very large industry, and it's still growing quickly. It's predicted to hit $22 billion in 2027 with a CAGR of 7.2%. That's just across Australia and New Zealand. It's a very fragmented market. I think there's about 1,600 midsized digital marketing businesses similar to Alpha across Australia and New Zealand. So this presents an opportunity, we think, for XPON to help consolidate the market and help empower that market with our AI solutions and becoming a leading player in that space. There's high technology disruption, got all the tech from data and cloud and AI, which means a strong customer demand for innovative solutions and business models like the one XPON offers. And XPON' got existing strength in here. We've already got a very strong foundation. We've got our award-winning AI. We're award-winning in our data capabilities and our data platform Wondaris, and we're very strong in the technology enablement of marketing. And you lay that on top of our public company infrastructure, we've got very strong capabilities to enable us to continue to find great opportunities like Alpha and make them part of the XPON growth story moving forward. So the combined offering moving forward. So really, what we're offering is there's 4 different areas that help our customers either acquire, retain or monetize their customers. The 4 areas are across data, technology. So the technology includes not just our Wondaris technology, but also the Google GMP marketing platform, AdTech and Google Cloud capabilities. And then across the media piece, which is where our Alpha's capabilities and offering come in. So really helping to offer much more smarter AI-optimized media buying and results from the media using AI to not only predict who to target and how to target them. But then once they've been targeted, using AI then to optimize on an ongoing basis to get better return on investment and drive better results. And then the fourth area there is content. Again, that's something new that Alpha brings to the business, and that's really around how do you fuel this organic growth and that could be across organic search or organic social or e-mail or even more progressively as we're starting to see emerge now across the large language models. So how do you optimize organic content for discovery and searchability within the large language models as well. So yes, very excited about this new offering, and there's lots of opportunities there for our customers. So how are we going to accelerate the value creation. So we really got a two-pronged approach to how we're going to maximize Alpha's value post acquisition. The first is around people. So how do we grow the people. So there's 4 things we focus on there. AI upskilling and really making sure everyone is really comfortable and confident with using AI as a copilot and to augment their capabilities. Prompts coding. So really, again, helping them understand how to use prompts to build agents to accelerate what they're doing and to provide better solutions for customers or higher levels of productivity. Leadership development to ensure there's great succession in the business and personal growth to ensure that there's value alignment between the individual team members and where the business is moving forward. And the second pillar there is transforming the technology. So it's really about integrating the data and systems, automation tools and AI agents to drive margin expansion and then AI-powered decision intelligence to help us make sure we're making the best decisions possible. So combining those things, grow the people, transform the technology, we grow the business, and we'll grow the business through revenue growth, margin expansion through those efficiency gains and having a highly engaged and motivated team. And like I mentioned, Alpha is going to retain its brand. It will continue to operate independently in the market with its specialized focus, but we'll have the opportunity to offer XPON solutions to their customers and XPON will take over all the back office and corporate functions, allowing us to unlock scale efficiencies from the existing corporate infrastructure that we've got. There's no more investment required from XPON. We can absorb this with no additional cost, which is great. And then positioning for future growth. So our business strategy moving forward is really focused on 2 core areas: AI leadership and industry specialization. So the AI leadership is how do we be an accelerant for the industry and for customers to adopt the AI, ensuring that it's done in a way that's obviously privacy compliant, secure and creates value. How do we continue to broaden and deepen our AI offerings, and that can be either through product innovation through our own products or through acquisitions through the M&A part of our strategy. How do we catalyze internal AI transformation? So how do we help our existing business? How do we help Alpha transform the way we work day-to-day using AI, using AI to drive margin expansion and productivity benefits? And then how do we build AI into our customer experience? So it's a differentiated experience from many of the other options that our customers might have. On the industry specialization, XPON has been very clear over a number of years around the core industries that we're focused on. Financial services and insurance, retail and travel, which Alpha brings us new suite of existing blue-chip customers, particularly in that retail sector. Education, Alpha has got great customers in education also. And so those industries, along with other ones, we will focus on. And again, either through acquisition or through organic growth strategies, will help drive that specialization around AI for this industry to drive marketing and growth. And all of that needs to be underpinned by world-class talent capabilities, hence, the focus on growing the people as a core pillar for how we integrate these businesses moving forward. So the AI approach for us is really around finding businesses that are tech-enabled digital marketing. So it can be businesses like Alpha that have a strong tech component to the people offering that they have or it could be marketing technology products as well. And really it's built on AI transformation. So how do we accelerate AI transformation, making sure that we're acquiring businesses that have very strategic customers in the key verticals that we're going after or very specific industry-specific offerings and making sure we continue to maximize the customer value and the customer growth by bringing in new offerings that add to the suite of solutions that we offer. So continually enabling our customers to buy more and more things and increase the wallet share that we get from our customers over time, making that a much more simpler procurement process for our customers. Okay. That's enough talking from me. I'll get you to unmute yourself, Matt and jump back on. Really huge welcome to you.

So 14 years in business, Matt, a big step for both Alpha and you personally. Why is now the right time? And why did you choose XPON to partner with?

Well, digital marketing is entering a whole new era, and we don't want to follow our competitors into it. We want to lead it and XPON gives us the ability to do just that. It's your AI-driven tech and client-first thinking that are a perfect match for Alpha. This partnership future-proofs our business, our clients and our team. And yes, we're all very excited about it.

What are you most excited about?

I would say unlocking the brand-new growth opportunities for our clients, previously hidden in messy platform data with platform biased attribution reports. And yes, we'll be able to unlock growth with smarter, faster, AI-powered strategies. We'll cut through the noise and surface the insights that matter, mapping how customers move from first touch to final action, so we can meet them with the right message at the right time, every time. And it's exciting to evolve with next-gen marketing tactics without losing what makes Alpha special. So we're going to continue to stay true to our values, but we've just got a lot more firepower behind us now.

Awesome. So what can your customers expect moving forward now that you're part of XPON?

Well, look, it's the same team, same service, just a lot more capability. We're bringing world-class AI tools into the mix. So campaigns are going to get smarter, insights go deeper and results come faster. So yes, it's the Alpha our clients know and love, but evolved for the future.

Awesome. And what about your team? What do you think they can expect as part of this new partnership?

Look, I want to make it very clear, there's no disruption to the team. There's just more opportunity. The day-to-day stay the same, but with the new tech, the training and growth pathways, we're giving our team the tools to lead the future of marketing. And again, like I said before, while still staying true to our values.

Very good. So culture alignment, it's crucial for success in any acquisition. Our teams and you and I have worked together for a long time. How do you see the cultures of Alpha and XPON being aligned?

Well, look, we're both built on transparency, trust, a shared obsession with doing great work. It's not a cultural shift. It's a cultural amplification, and that alignment made the decision very easy.

Nice, nice. All right. Any final comments or thoughts you'd like to leave our investors with?

I would say that -- well, I would hope your investors already know, but AI is rewriting the rules of marketing and not every agency is going to keep up. So Alpha isn't just adapting. We're shaping what comes next. And with XPON, we're ready to lead the industry into the future, and it's pretty exciting.

Awesome. I'm just as excited about being on the journey with you together, and I think moving probably create some really, really exciting and special stuff. So all right. Thank you, Matt. We'll leave it there. And thank you to our investors and everyone that's listened. If you've got any questions or you'd like to understand a little bit more about Alpha's business or our M&A strategy moving forward, feel free to drop them into the Q&A here on this webinar recording, and we'll do our best to get back to you just as soon as we can. Thanks, everyone. Have a great day.