Nexxen International Ltd (TRMR) 2017 Q2 法說會逐字稿

Hello, ladies and gentlemen, and welcome to the Taptica interim results 2017 call. My name is Josh, and I'll be your coordinator for today's event. (Operator Instructions) I'm now handing you over to your host, Hagai Tal, CEO, to begin today's conference. Thank you very much.

Okay. Good morning, everyone, and welcome to Taptica half year results conference call. My name is Hagai Tal, and I'm the CEO. Next to me is sitting, Yaniv. Yaniv Carmi, who is the CFO of company. And we're going to share with you our first 6 months of the year results and tell you about the things that are happening in the company and happened in the company. Overall, we continue to follow the strategy that we have for the past few years, which has obviously won the mobile activity on the demand side and also to be a global player. And what you're going to see with the numbers today. You're going to see the effect of that strategy and how we implement that strategy into the company. We are proud of the results that coming up for the first 6 months, and we are happy to say that we feel comfortable with the numbers moving forward, which are based on the same strategy that we have to grow globally and to grow into the mobile business. We'll talk later on about some acquisitions we did recently as well and their effects as well. We are functioning inside the mobile in-app business, which is a growing business. You can see many companies shifting their budgets into the mobile category. And we enjoy that growth, together with our technology and our ability to be spread around the globe. We're going to start with the numbers. And I'm going to shift it to let Yaniv talk about the numbers. But before we do that, I know some of you already asked some questions about Apple announcement, about the new operating system, which is more related to companies who run their business based on cookies to track activity of the user. Just for sake of discussion, most of our business is based on in-app mobile advertising. It's around -- more than 90% of our business is there. It means that the use of cookies is very minimal in our business. And we don't see any reason to think that it is going to affect our business. Obviously, we need to learn more about it. But right now, we don't think there's anything that will affect the business, maybe even the other way around.

Let me move to Yaniv, so he can take you through the numbers and give you some highlights about the numbers for the first 6 months of the year.

Well, hi, everybody. Thank you for joining. As Hagai mentioned, we're very pleased with the first year performance and the company delivery, ending the first half results with across-the-board growth and maintain our scalable business model, which basically benefit us materially with any growth of revenue. As you can see on the numbers, it says we were able to grow the revenue by 27% up to around $66 million, while the gross profit increased with 45%. So we have the growth on growth. We're able to increase our revenue, increase our spend with the advertisers. And saw beautiful revenue retention rates with our customers. So it's -- for us, it's the best proof for loyalty and that our solution works well for the advertiser and they get the benefit that they are willing to get and focusing to get. So as mentioned, this is basically our track record margin up until today from the foundation of the company. We've reached roughly 39.4% gross profit margins. Compared to the parallel period, it's 5% more. And this is the main driver to grow to the -- to the massive growth in our EBITDA compared to the parallel period. We also were very focusing this period of time on generating our cash. We always been a negative working capital company, which means that we were able to invest our cash from the operating activity into growing the business with new regions, investment, et cetera, et cetera. And we won't need to invest materially in working capital within the business. And it's a massive work to compare the amount of candidates with the advertisers and publishers as time goes by, but this is definitely our mission. And before we went into the acquisition, we made a huge push to generate as much cash as we can. So out of the $13.1 million EBITDA, we made $13.7 million cash from operating activities, with a significant SCF also $30 million. And honestly, we kept the foundation of growing the company. Before the acquisition at the end of June, we ended the period with roughly $32.5 million of cash and bank deposit through the growing of the cash in the first half, and the EBITDA increased by 42%. Hagai will talk about it later on about the spread of the business. We are now based on -- less focusing on one area, on one region, and we are pretty much across-the-board spread in terms of revenue and growth. And honestly, those are very encouraging results for us and very optimistic first half and give us the comfort to complete the year with our targets and to lay the foundation for the next year growth. Heading back to Hagai. And if you have, at the end, more questions regarding the financial, I'm more than happy to answer.

Yes. Thanks -- thanks, Yaniv. As we mentioned, one of the things that we are proud of this announcement is the spread of the global location, and we're happy to announce that more than 50% of our income is now coming from, not based in the U.S., which used to be in the past. So it doesn't mean that U.S. is not growing. It just means that the company is growing based on the investment we made in the past few years to have more locations. This is coming with the strategy and the rationale that if you understand the ad-tech space, you understand that most of the supply that we buy, most of the SSPs that we have, we need the publishers to buy media from, most of them are global players. And most of the media that we buy, most of the media that we serve through the advertising that we serve, most of them are local players. And this is exactly where we're sitting. We're sitting on getting more local advertiser. I'm talking about the local banks or the local retailers in specific region or in specific country. Second discussion in Korea, Japan, China and bring them to the global supply. And this is exactly where we sit. We sit between the global supply and the local advertisers. And this is for the rationale to be in more locations and to get to more local advertisers. Still, the advertisers are the main budget. It's still local. And this is the rationale of the strategy, where we're trying to achieve more locations around the globe. As of today, we have offices in Japan, we have offices in Korea. We have people in -- we have a office in China. We have people in India, Russia. Recently, we opened a U.K. office, which has been in mostly with the agencies in the U.K. We have a large office in San Francisco and people in New York. And obviously, the R&D is based here in Tel Aviv. Moving forward, we will try to get to more locations. This is part of our strategy. We know how to do it. We have the infrastructure in house. And we are focusing on continuing that strategy. And if I look at the things that we did during the first 6 months of the year is we established more relationship with more advertisers. And if you remember the nature of this business, the second half of the year is almost because of the retailer business. It is always the more successful from the revenue perspective in the first half of the year. And we feel very comfortable with the numbers we see for the first 6 months to say that we feel comfortable about the overall number for the whole year. We started the first 2 months strongly as well. And it is coming mostly from our spread around the different locations around the globe. And it's becoming easier for us to predict than previous year, where we're going to be ending this year. We did go to -- into 2 acquisitions recently. The first one is an acquisition that we did in Japan. This is a company called Ad Innovation. In Japan, specifically, we decided to take a different approach in other places. We decided to go and acquire a company just because from a culture perspective and also from the market perspective, it will be easier to get faster into the markets by acquiring a local player with 30 employees, then attending to employees that the relevant care is going to be long for them. The Japanese Ad Innovation business give us a short access to the Japanese market. We worked with the Ad Innovation as a partner for the whole year. So we did due diligence, but on the top of the due diligence, we already knew who we're dealing with and what's the potential. And we think this is a market that we have a big added value. And obviously, we are happy with the numbers we're seeing already. And the business is growing over there. And it seems like it is the right move for us as part of the strategy to be a global player. The second acquisition we went into, which is a bigger one, and that's Tremor. And here, what we bought, we a bought DSP, video DSP which is going to help us on the demand side, also going to help us with a strategy of being close to the Tier 1 advertisers. And the Tremor. What we find in Tremor is we find a lot of connection to the agency, the big agencies in the U.S. A lot of branded advertisers that want to cover the video ads. We find good technology that we can rely on that will allow us to engage it into the mobile solution that we have. We definitely looking into the technology that we have over there that to take them overseas to the global offices that we have. As of now, Tremor is focusing only on the U.S. market. And definitely, this was one of the rationale doing the deal is to take into more locations around the globe where we have already people on the ground. We are in a phase right now that we're working on the integration, and we're putting our people over there to make sure they're going to be in line with our plans. And we feel comfortable with the numbers that we put to the market on Tremor. We find very motivated people there and people that are waiting for some sort of freedom to go ahead and do what needs to be done on the video side when they were more connected to the FSP side of the Tremor before. And now that we have more people on the ground over there, and we feel comfortable about numbers is the set of things that we need to do in Tremor that we think can create an effect next year, even may be bigger than what we expected. But it's too early for us to say it right now. And I think moving forward, if I look at what will come. We're seeing growth for the whole overall market of the mobile. We're seeing companies shifting budget into the space. And we're seeing the offices that we're putting in place. We start to see the fruits over there. And we expect more growth is going to come from there as well. We're seeing that the database or the solutions that we have are putting an impact in the market. And we're seeing a lot of consolidation in the market. But companies that used to be -- a lot of companies in the space are shrinking to companies in the region, providing added value. And we think that putting our strategy and our focus on being on the demand side, we feel one advertisers in the global market, continue that focus will give us the lead to be -- the ability to be one of the leaders in this space in the next few years. And I think, those numbers that we can see today are representing our goal, and this is why I think we are happy. I think I'm ready for questions.

(Operator Instructions) So our first question comes from the line of Lorne Daniel from finnCap.

Very quick question. Obviously, we saw the gross margin improving to 39% in the first half. Just wonder if you could give us some of your views of where that margin could proceed to over the next few years and as you improve your targeting of the advertising?

Okay. So now, on the same time that I'm happy with the margins, and it's also some sort of a concern. Okay, because what we're trying to focus is, we're trying to focus on the profits, not necessarily the margins. It means that we're willing to sacrifice from time to time, some profit, in order to make sure that we're making more revenue and more -- in a higher market share. The reason is that as long as the business is growing, and we collect more user information, we're becoming more -- we have more capabilities to do cherry picking and choose the people we want to show them the ads. So based on the data or the technology we have, we have the ability to increase the margins. But on the same time, we're putting a pressure on the team to buy more media in order to get us more revenues to increase the profit. So it's kind of a internal conflict, which is a good conflict. But it's -- I'm just sharing with you the business. I don't think -- I think the margins are high. I don't think we should expect the margins to grow higher than that. I think we should expect the profit to go higher than that.

So our next question comes from the line of [Ben Sherlock] from RT Research.

So I have a couple of questions about the impact of GDPR and ability to use data to targeting. I was wondering how that would impact your business?

Can you repeat the question? We didn't get the sort of (inaudible) bit.

Sorry. Do you want me to repeat the question?

Repeat the question, so I can leave something here.

Yes. Sure. What would be the impact of GDPR and your ability to use data to targeting?

Just 1 minute. If I understand your question correctly, you're talking about some sort of different rules about compliance, right?

Yes, yes. That's around GDPR in the European Union?

So we think it's a good thing. We think it's a good effect to the business. The fact that regulation will come into the space, and we'll clear the people that -- it's unclear exactly what they do. And this is exactly what we want because we want to be in a position that we don't put too much effort to make sure that we are buying the right media for the right user. Right now, we have so much effort to do in order to be able to make sure that we see -- we're seeing the right user. And if the company -- if everyone will obey the compliance that will make us easy life, and we will be the first one to join those rules because it will give us net advisory in the market. I have to say that I'm waiting for those regulations to come in place.

Okay. So will it not hinder your targeting abilities?

I think as being a public company and we're investing a lot of time to meeting all the regulation and as we said it's growing every time. And basically from day 1, we are obeying to the privacy rules of across-the-board regulation. It's gossips already in the U.S.A., and we're calculating really down all across the world. And honestly, we are keeping the privacy authorization very strict, and we're investing a lot of time and effort to make sure our data analytics and the information we store about the user is basically meeting the requirements of the law. So as Hagai said, for us, it's a good time because other players that are not that obeying or using data that they cannot versus the privacy rules will be now -- will be forced to do so or there will be under legal investigation or something around that. So it will make the competition even more even for companies that obey to the rules against other players.

Okay. And a couple of other questions. Like who are your main competitors in mobile, especially the app-in stores? And how are managing with Play Store Google's dominance and what are your source tools then?

So the main competitors that -- listen, we knock on the door to companies and maybe some of them are here. So I won't tell you exactly what the solution is, but we're hearing millennials here. We're talking and we're seeing people using AppLovin, AppLift. Those are the companies that we're hearing. And that's together with Play Store in Google, right. So that's looking at a whole market. I think the difference is most of the cases is the data, is the ability to look at the user level. That's the difference between us and the rest of the players that we're hearing. And together with the global appearance, we have the ability to take the clients and put them in different locations around the globe is the main difference.

I think that what is important to understand about our business that it works almost 99% on the performance base. And it means that the advertisers that work with us are basically looking for their KPIs and their positive ROIs so as we do investment in marketing. So for us and those big players, we work with several players and we'll allocate their budgets based on the performance of the campaign. So we don't have any, like, our commitments from any advertiser and everything works on economically base. The competition is always out there, and we always need to think about what is behind the curve and to be always innovative and upgrading our SKUs and capabilities. But as long as we will be functional, the way we are, we were able to maintain our margins and to grow our business. And it's not coming from locking the advertiser, it's the other way around. Every advertiser has 24 to 48 hours outflows with any campaign with us. And the fact that they are choosing year after year to spend more money with us and grow their business with us means that they are satisfied with their performance, results and effectively, at the end, we are becoming more and more sales channels for them and less marketing channels. I don't know -- we made on our presentation, we gave a lot of case studies with companies like the taxi application or companies like HBO or Starbucks that worked with us. And everyone has his own KPI metrics. So it will be HBO. They will have a specific cost per new subscriber. It will be a taxi ride. They will be happy to pay extra amount to the -- for every new user that's installed the device and doing first ride and everything around that. So as long as we will performance well, we will use our data, do the cherry picking for the users and work best for our clients versus their spend on marketing and market share, we'll be able to grow the business and win the competition.

Okay. Great. And then another quick question about your revenue. How much of the revenue increase that you saw this half was organic growth as opposed to inorganic?

So it depends how you define inorganic. Because if you look on the portion of the business relying on mobile. Basically, we bought Taptica in 2014. It was a loss-making company, with less than $20 million of revenue, gross margin of roughly 16%. And we basically did the old shift. We moved our best teams to work on the mobile. We shifted the whole focus of the business. So we're pretty much seeing like almost 100% organically. There's another addition in 2015 for AreaOne that contribute roughly $80 million for last year. But I would say that more than 90% of the business is pretty much organically.

Okay. And then, finally, what...

Same story. Coming from the Tremor and the ABI, it will be included also material revenue figures from Tremor as well.

Okay. And then, finally, what is the split of mobile web and in-app ads? Which one you're seeing more?

What's the difference between the 2?

The split?

The split?

Between mobile web and in-app.

Yes. That one.

In terms of inventory?

Yes.

I need to check for you. But it's -- the majority of it is in-app. So I'm talking -- definitely, we're talking about more than 80%.

Okay. And you see that increasing or staying the same, or why do you see that kind of split progressing?

We see the in-app increasing. The mobile -- the quality of the users on the mobile, I'm just sharing with you. The quality of the user on the mobile web is less than the quality of the user in in-app. It's just a different process to convince them to download an app. So the quality, in general, is less. So more than 80% of our business in-app, and that's going to continue in that direction. We're less focusing on mobile web.

We currently have no further questions in the queue. (Operator Instructions) Okay. So our next question comes from the line of Edward James from Berenberg Bank.

Going back to the questions earlier on...

I'm sorry about that Edward. Your line is very, very quiet. Is there any way for you to put your line up at all?

Yes. Sorry, can you hear me now?

Yes, that's better.

Sorry. Going back to the questions on Apple and GDPR, and let it be good to just run through then what avenues and how exactly do you gather the user data through the apps? And just what mechanism you do use, given that you don't use cookies?

So cookies, first of all, cookies for definition. Cookies is something that's been used on the browser. So traditionally, used to be on the PCs. There's also some sort of use on the browser, on the mobile in certain cases. Taptica is leveraging on what we call user device. It means that we look at the device itself and every device has a unique ID. We have no knowledge at all who the user is. We just can identify the device itself and then can start to store information based on the device. And that's become the one key identity that we look at the user. And based on that, we make an assumption to -- even to show an ad to that user again or not. So it's not based on cookies. That is being controlled by the operator in the U.S. So the operator is the one who's generating the user device ID. I think according to a rule, every 6 months, they have to change it. And we base all our assumptions based on that. We don't use the cookies, which I think, the announcement of Apple is more talking about host devices through the browser that most of them are based on cookies. And that's the difference. Most of our business is in-app as we said, and that's the way we store the unique ID of the user. This is why the effect from Apple on us, there's no effect. We just trying to swallow some time to understand maybe the market effect, in general. If some companies will shift campaigns or cancel budget or things like that may be to other businesses, to see if, maybe, we will enjoy sort of something like that. We don't know the effect yet. But we can say that at this point that there's no effect on Taptica, and we don't see any effects in the next year or 2 from today.

So we have no further questions on the lines. (Operator Instructions) Okay. So there are no further questions on the line. So I will pass back over to you, Hagai.

So I think, we demonstrate today that there's a strategy here in the company. We are thinking about building a big business. We're thinking about going further in the category. We feel comfortable that we have the knowledge of understanding the space. And we want to build a strong and scalable business. We want to do it through opening locations around the globe, which we've been successful doing that for the past 1.5 years. We want to go into the video category that we'll engage with the mobile again at the end of the day. And we're thinking further up in the next few years and putting all the infrastructure right now in the company to get there. And I think, those numbers that you see right now representing the goal and strategy we put to the companies. And I feel comfortable about the next announcement that we're going to bring related to the numbers of the whole year, in terms of where we're going in that path and we're focusing one thing, which is a DSP side, the demand side, together with Tier 1 advertiser and being global around the globe. And by that, I want to thank everyone who joined the call and listen to the Taptica journey. Thanks, everyone.

All right. Thank you.

Thank you very much for joining today's call. You may now replace your handsets.