Adcore (ADCORE), during its Q2 2024 earnings call, presented a mixed financial picture, reporting a slight decline in overall revenue and gross profit while showcasing a solid increase in North America revenue and improved gross margins.
The company, focusing on its strategic pillars, emphasized its dedication to technology and AI advancements, enterprise focus, and its low touch and do-it-yourself solutions. Despite a decrease in net cash flow and a negative adjusted EBITDA for the quarter, Adcore remains debt-free with cash and cash equivalents of $7.3 million.
Key Takeaways
- Adcore's revenue and gross profit saw a slight year-on-year decrease in Q2 2024.
- Gross margins improved from 42% to 45%, and gross profitability increased by 6% for the first half of the year.
- North America revenue grew by 22%, while APAC revenue saw a 6% increase.
- EMEA region faced a 27% decrease in revenue due to reduced advertising budgets.
- The company is debt-free with $7.3 million in cash and cash equivalents.
- Adjusted EBITDA for Q2 2024 was negative $173,000, a decrease from the previous year.
- Adcore emphasized the importance of CTV for brand awareness and advertising.
- Strong partnerships with Google (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) were highlighted as beneficial for Adcore.
Company Outlook
- Adcore expects continued growth in North America and a recovery in the EMEA region by late 2024 or early 2025.
- The company plans to focus on efficiency and profitability by reducing costs and enhancing revenue generation.
- Adcore aims to leverage CTV to improve brand awareness and seize advertising opportunities.
Bearish Highlights
- EMEA revenue decreased significantly due to lower advertising budgets.
- The company reported an increase in operating loss and net loss for the quarter.
- Adjusted EBITDA for the quarter showed a decline, reflecting a decrease in share-based payment adjustments.
Bullish Highlights
- Adcore reported a substantial 22% growth in North America revenue, driven by new client acquisitions.
- The company's strategic focus on technology and AI is expected to continue to improve operational efficiency and application quality.
- Partnerships with leading advertising platforms like Google and Microsoft are seen as mutually beneficial.
Misses
- The company experienced a decrease in revenue and gross profit for Q2 2024 compared to the previous year.
- There was an increase in operational expenses due to additional intangible assets and office relocations.
- Adcore's net cash flow used in operating activities declined, although it improved by 39% year-on-year.
Q&A Highlights
- Omri Brill discussed the growing importance of CTV in the advertising space, citing its efficiency and measurability over traditional TV.
- Brill also commented on the positive market impact of Google's decision regarding third-party cookies.
- The use of AI in day-to-day operations and technology development was emphasized as a key efficiency driver.
Adcore's Q2 2024 earnings call highlighted both challenges and strategic initiatives in the face of a fluctuating global market. The company's focus on technological innovation and market expansion in North America positions it for potential growth, while it navigates reduced advertising budgets in the EMEA region. Adcore's partnerships and AI integration remain central to its operational strategy, aiming to enhance its competitive edge in the advertising industry.
Full transcript - None (ADCOF) Q2 2024:
Nick Campbell: Thank you, everyone, for your patience, as mentioned. Today, we'll be going over the Q2 results. Today, hosting you out myself, Nick Campbell, I'm Head of Investor Relations here at Adcore. You'll have Omri Brill, CEO and Founder; and Amit Konforty, CFO. The agenda for today. Before we begin, I'll go over some forward-looking statements you should be aware of when listening to this call, followed by the CEO opening remarks, followed by the CFO financial highlights. And finally, we'll have a Q&A session at the end. If you do have a question during this call, please use the Submit a Question feature in Zoom (NASDAQ:ZM), and we will address those at the end. Now just before we begin, I'll go over some forward-looking statements, and you can have some time to review these, but these are statements about the business's future projections that are somewhat uncertain in nature. So, I'll give you a moment to review this, and then we'll move on to the CEO opening remarks. Okay. And with that, we'll move over to Omri Brill, CEO, for his opening remarks. Omri, the floor is yours.
Omri Brill: Great. Thank you so much, Nick. Okay. So good morning, everyone, and thanks again Nick for the intro. It's my pleasure today to discuss the Q2 2024 results. Obviously, we're going to ask any questions that might address from the report that we released today. And I can say high level that the Company is pleased with the results. Obviously, we did it so a significant increase, let's say, in revenue or in midlife. But I think all, you know, it was a positive report for us. And especially when you look at the six months because we always have some fluctuation between quarters in advertisement business, you say that yet, it's still a strong start of 2024 for us. So high level numbers. Revenue in Q2 2024 were $6.6 million compared to $6.9 million in the previous year quarter. And gross profit was $2.9 million compared to $3 million. So, it's almost flat to decrease a bit, but again, there's no big movement either positive or negative for this quarter. We discuss what we see is change in seasonality lately, and how the effect, let's say, the results in Q2 and what we can expect in the coming quarters as well. If you look at quality growth KPI and this is something we discuss almost every earning calls basically, these are KPIs that company put extra emphasis on. And we believe they are important to the Company and basically what the Company is looking to see that they are growing in the right direction and we can -- glad to report that actually, most of this important KPI for us, which are gross margin and North America market growth moved in the right direction. So, gross margin in Q2 2024 were 44% compared to 43% in Q2 2023. So yes, an improvement. And again, as we mentioned before, the sweet spot for Adcore should be between 40% to 50% and 44% mark more or less the middle. If we look at North America results, and actually, we saw a significant increase in this quarter compared to the previous year, 22% increase year-on-year to $2 million compared to $1.7 million in 2023. Again, we see a lot of traction in this market and the market that company put a lot of emphasis on, and we're glad that all these efforts that we put are bearing fruit. So, two very important KPIs, and both of them are actually were positive for the Company in this quarter. And just to sum up some highlights from Q2 2024 results and again, gross margins 44% compared to 43% in the previous year. North America, we discussed the 22% growth. APAC revenue grew as well you remember, APAC was a challenging region for us in 2022, for example, client diversification actually improved in this quarter to 49% and actually, operating cash flow was improved as well. We used 250 -- around $250,000 this quarter compared to 400 plus in the previous year as well. So, we see an improvement in cash flow used for the specific quarter. If we look at the six months, which give us better picture on the year, while they have started, then actually, we think it was quite positive. Gross profit actually improved by 6% year-on-year compared to 2023. Gross margin improved a lot 45% compared to 42% in the previous year. North America revenue grew by 26% year-on-year. APAC revenue grew by 6% year-on-year, and client diversification actually dropped from 57% in 2023 to 42% in 2024. And operation cash flow, maybe it's the most significant improvement from a cash use of $1.5 million in 2023. We managed to reduce it to $250,000 in 2024, so a very big improvement over there as well. So again, Q2 result was I would say fair, but when we look at the six months result, actually, we still see that it's a very positive start for the Company. And all in all, like I say, we are happy with what we had to report so far. When we're talking about the four strategic pillars of the Company, and this is area where the Company put extra emphasis on, I would start with the most important one will be technology and AI a lot of innovation, and there's something that I also had in my remarks on the earnings report PR that we mentioned at our recently innovation, medium last up reach an ARR of CAD1 million within the first 12 months. So, this is a very strong traction, a very strong start for new up in 12 months to reach an AR of CAD1 million. And we see a bright future for this up moving forward as well. Another strategic pillar for the Company is an enterprise. In aggregate, we want to focus on the larger type of clients and making sure that we are more profitable in doing so. Another strategic period is low touch and do it yourself. So, we want to make sure that, again, we are more efficient. We need to put less effort on onboarding and serving each client and basically focusing on do it yourself type of solution. And last but not least, is synergy, making sure that every different solution in the Company operating basically synergetic to other operation and other solutions the Company is offering. If you talk about the comparable company, then basically, what we can see from the comparable -- if we look at EBIT gross profit in the period multiple almost 4 versus 0.32 Adcore. So yes, a very big upside over there for the Company, and the same story goes to EBIT to adjusted EBITDA. So, if the peers multiple, we are trading at around four multiples. So again, a very big upside over there for the Company. And we believe that once the market tries to turn positive for small cap companies as well like Adcore, then we should see this basically drop in the market, the normality in the market pricing will change as well. The Company within the NCIB plan purchased 60,000 shares for cancellation in Q2 2024. And all in all, in the last two years, whether it's through the NCIB plan and other plans, we purchased for cancellation 4.1 million shares. And basically, that represents around 7%, give or take, from the overall outstanding shares of the Company and invested almost CAD1 million in this process. So again, we believe that one we're seeing an uptick in the market. The stock price can be -- go up a bit more aggressively because of this effort of share cancellation of the Company is in. So, that I would say, concludes my remarks regarding the first -- the second quarter, sorry, in the first six months of 2024. And with that, I will bring it back to Nick and Amit.
Nick Campbell: Thank you Omri for your comments. At this time, we will move over to CFO for financial highlights. Amit, the floor is yours.
Amit Konforty: Thank you, Nick. One moment. So before beginning the financial overview, I'd like to remind you that the following discussion will include GAAP financial measures as well as non-GAAP results. All amounts will be presented in Canadian dollars. Despite a challenging second quarter with lower revenues, we successfully improved our gross margins. For the first half of the year, both gross profitability and margins have grown, continuing the upward trend in profitability from previous years. Now let's review in more detail. For the six months ended June 30, 2024, we delivered revenues of $6.6 million compared to $6.9 million in the same period of 2023, a decrease of $0.3 million or 4%. Gross profit was $2.9 million compared to $3 million, a decrease of $0.1 million or 1%. Gross margins for the three months ended June 30, 2024, were 44% compared to 43% in the same period last year. As for operational expenses, R&D expenses for the quarter were $0.6 million compared to $0.1 million in the prior year. The main reason for this increase is we started a more design additional intangible assets in the three months ended June 30, 2024. SG&A expenses for the quarter were $3.1 million compared to $3 million in the prior year. This increase is partially due to the move to the new offices in Tel Aviv during the second quarter of 2024. Operating loss for the three months ended June 30, 2024, was $0.8 million compared to $0.4 million in the same period last year, an increase of $0.4 million or 92%, which was mainly caused by the increase in R&D amortization expenses. Net loss for the three months ended June 30, 2024, was $0.7 million compared to $0.5 million in the same period last year, an increase of $0.2 million or 32%. Moving on to gross profitability. As we can see on the left side of the slide, Q2 gross profitability saw a slight decrease of 1%. However, the six months results in the center show a 6% increase in overall gross profitability and an improvement in gross margins from 42% to 45%. This aligns with the full year trend on the right, indicating that we are on the right path towards the more profitable '24. As for revenue breakdown, for the geographical revenue breakdown for Q2 2024, we see a significant growth of 22% year-over-year in North America, which is mainly due to acquiring new clients. In APAC, revenue increased by 3% year-over-year. Our EMEA revenue decreased by 27% year-over-year, mainly due to reduced advertising budgets and stopped activities in this region. We believe this is a temporary setback and anticipate a recovery in the last part of this year or early 2025. Now let's discuss about net cash flow used in operating activities. In the three months ended June 30, 2024, we used cash in operating activities in the amount of $249,000 compared to $406,000 in the same period in 2023, a decrease of 39%. This improvement in cash flow is mainly caused by improved collections from clients. In terms of financial position, we had cash and cash equivalents of $7.3 million as of June 30, 2024, compared to $8.1 million at December 31, 2023. Total working capital amounted to $6.4 million compared to $7.6 million at December 31, 2023, a decrease of $1.2 million or 16%. This decrease is mainly due to a decrease in cash and cash equivalents and an increase in short-term lease liabilities due to the move to Tel-Aviv offices. As for the liability side of the financial position, we can see that the Company is still debt free. Adjusted EBITDA, the quarterly non-GAAP results reflect adjustments for the following items: depreciation and amortization, share-based payments and other non-operational items. For the three months ended June 30, 2024, adjusted EBITDA was negative $173,000 compared to $112,000 for the same period in 2023, reflecting a decrease of $285,000 or 254%. This decrease was partially due to a large adjustment in share-based payment made in previous years. With that, I will turn the call back to Nick.
Nick Campbell: Thank you, Amit. And that concludes management's comments on the quarter and financial performance. At this time, we'll move to the Q&A, which we've had a number of questions submitted in advance. [Operator Instructions].
A - Nick Campbell: But starting off, we have a question from Ryan who mentions the North American region saw a very significant growth this quarter in Q1 as well. Is Adcore expecting this to continue?
Omri Brill: So, the short answer would be yes. But to give a bit more context to this answer, then as we mentioned before, that we look at North America as a strategic market for the Company. We think there's a lot of potential for the Company to grow in this particular region, and we see a lot of demand also coming from this specific region. So, we are continuing to increase our footprint. We are recruiting more sales personnel and boost our marketing effort in this region, and we expect this trend and this, let's say, demand to Adcore Services & Solutions continue with the second part of 2024 and hopefully, well behind that.
Nick Campbell: From Ryan. Another question is about EMEA with revenue decreasing about 27% this quarter. What's the reason for that? And similarly, is that expected to continue?
Omri Brill: So, I think Amit also already mentioned some in his remarks, like the Company, look at the EMEA weakness. We see some weakness in this market. We believe this weakness is probably temporarily. We believe that we're going to see a rebound in the second part of the year or the latest in 2025. And I think that's something that we can see from time to time some different reasons. Like I mentioned before, APAC, we saw some weakness in 2022, and then it's managed to rebound and basically, we see in 2023 and 2022 as well good growth coming from APAC region as well. So, I think like the Company we diversified. We operate over three different regions globally. And if we see some weakness in some specific reason, we are lucky enough to have the, let's say, at least the other regions compensate.
Nick Campbell: Very good. Omri, I asked in Q1 during our call, you were somewhat optimistic on 2024. Is that still your view? Or have you changed kind of your expectations for the year?
Omri Brill: It's a fair question. I would say that a more realistic overview, you need to bear in mind in the advertising businesses the seasonality between different quarters. And sometimes, you can see budgets that was planned to go out in a specific quarter, shift to another quarter, sometimes the holidays can be quoted and then moving to another quarter and so on and so forth. So, it's not carving store. And you can see it in the numbers. Like I would say two remarks. When you look at the six months, six months resulted positive and the Company has no reason to believe that 2024 not going to be another positive year for the Company. Bear in mind, in the advertising business, traditionally, the second part of the year is almost a stronger part of the year. So also, that's, I would say, one remark, another remark that what we see lately, let's say, 2024, in more particular, because the Company is more divest now, we have a different type of company during COVID we've been very, I would say, e-commerce centric. But now we have a lot of region clients. We have a lot of e-commerce client and other type of clients. Therefore, region clients actually Q1 has become a stronger quarter, sometimes stronger than Q4 because of new year’s resolution, let's say, fitness-related clients and stuff like that. And what we see is that if historically, Q1 was the slowest quarter in the end. Then actually, now it became stronger, sometimes almost as strong as Q4 and then Q2 become relatively to Q1 a bit slower. So, I think we see a bit of a shift in demand between the different quarters. But like I said, lucky for everyone, the 12 months, and we still have a lot of time to make 2024 very successful.
Nick Campbell: Very good. And Mark asks, what specific strategies and innovations have driven the annual recurring revenue of $1 million for the media blast app that you just launched within the year?
Omri Brill: Yes. So that's actually a very good question. I would start with maybe the most important thing when you launch a new technology on your solution is the product market fit, right. If there is a good product market fit and basically, it is a demand for your product, then you're already in a very good position. And that's definitely, I can say that for media blast, it's been a bit of a wildfire effect since we last this up. But we still have a lot, let's say, I would say, challenges that we need to overcome, making sure that step and making sure it's secure, making sure that we can deliver and fulfill everything regarding it. So yes, we achieved $1 million ARR within 12 months, which is an amazing achievement. But we still have a way to go, but I think that's send a very strong signal regarding the potential of this app and where it can take us in the next coming years as well.
Nick Campbell: Very good. Nick asks with an adjusted EBITDA of negative $173,000, what steps is Adcore taking to improve efficiency and achieve profitability in the near future?
Omri Brill: So that's a good question, and that's something that, A, for us, being efficient and being profitable, it's, I would say, critical. If it's always posed the Company DNA that's going to be -- continue to be part of the Company DNA. The Company is already working on a plan, how we can save or reduce cost of $1 million -- between CAD1 million to CAD1 million over the course of the next 12 months. So that's something that we're already working in. We believe we have some areas that we are -- we can reduce part. Let's put it this way, not a lot -- but you also need to balance it up because Adcore still a small company where we have a large potential to grow. Now, we’ll make sure that you're not cutting too much at because you want -- you need still some part in order to support future growth as well. So, it's a balance. So, I would say, for one end, we can be more efficient and we will introduce the plan that will help us to achieve efficiency or to improve efficiency, I would say. And from the other hand, we need to double down more focus on what's generating revenue right now and make is sure that we are making more out of it. So that's, I think, the secret source from our end, double for book for the Company and making sure that we can at least. And from the other hand, being a bit more efficient. I think the magic will happen when we're going to do both of them.
Nick Campbell: And kind of along the same lines, Nick asked, why did gross profit for this quarter decreased by 1% compared to 2023?
Omri Brill: Okay. So that's a fair question. Having said that, when we're talking about 1% gross profit, we're talking about around $20,000, so it's not big numbers we're talking about. And let's say, literally, a single client that we win in a single month can generate $20,000 net revenue for the Company. So, that's something you need to bear in mind. And if we are talking 5% and gross profit growth, we're talking about $100,000, which is not big numbers as well. So, I think like I said before, there's some fluctuation between quarters, you know, like we see spending that maybe were historically related to Q2 now we have in Q1 and vice versa. This is one. Like Amit mentioned, we had some extra expenses in Q2 related to the office move in Tel Aviv, and basically, let's say, are not in the normal course of the Company business and once every 10 years, the last time that we moved offices was 10 years ago almost. So, I think like that, I would say, the two major factors.
Nick Campbell: Very good. Natalie asks CTV is quite an exciting area in digital marketing. Can you talk about your brand awareness solution you recently announced and how you're incorporating CTV?
Omri Brill: Absolutely. So, I think like CTV, I would say, in the center of brand awareness, right? When you're talking bonds, you're talking CTV first and foremost, since not a single, let's say, platform now be they don't offer a CTV solution, right? Whether it giants like Netflix (NASDAQ:NFLX), Paramount, but YouTube, but and many, many others, even linear TV nowadays offer some kind of CTV solution parallel to the, let's say, traditional TV solutions that they're offering. I think CTV is more efficient, people like it more. It's less costs and if you compare it to what was historically linear TV and obviously, you can measure it much better. So, I think we see a lot of demand. We see a lot of opportunity. Let's go up to move to this specific market relatively quick. And I think that's something that can generate a lot of growth for the Company for the next coming year because it's going to be massive. It's already big, but it can be massive.
Nick Campbell: Again, Karen, asked. Recently, there is a ruling from the DoJ and antitrust ruling against Google. What do you expect to be the impact on advertisers and searchers given this ruling?
Omri Brill: I think to be honest, I'm not a legal expert, nor an expert of government like we don't like government so much in Israel, but that's our personal, my personal opinion. But I would say the following. I guess, for this specific ruling, it's a bit too early to understand exactly what's going to happen and what's going to be the impact. I can comment on another thing that is related to Google that Google recently mentioned that are pulling back their attention to basically kill third parties’ cookies. That's something that Google announced almost two years ago, parallel to, I would say, up an announcement, Google took two years to prepare and eventually in the last moment have pulled back, which I think it's actually a positive thing for the market and for advertisers. And that will allow us to be more efficient for every advertising dollar that we are buying. And I think all in all, it's a very positive news to the market and put more certainty. The last thing that we want to see is another big chains like the chains that Apple (NASDAQ:AAPL) implemented to the market. So this is one remark. With regard to the latest ruling, like I say, it will take time to understand exactly what's going to happen, but I can comment high levels at the more diverse the market is going to be, the more competition we're going to see in the market. It's better news for Adcore, let me put it this way.
Nick Campbell: Very good. Richard asks, can you give an update on your partnerships with Google and Microsoft and how those work?
Omri Brill: Yes. So, I think like, again, Adcore has a very strong partnership, both with Google and Microsoft and many other advertising platforms as well. I can name few them [indiscernible] obviously, and other. And I think all in all, what we can see in this -- which is partnership is basically two-way street, right from one Adcore as a partner as the reseller sometime basically promoting this particular channel. And from the other, the channel benefit from Adcore from that client access the Adcore technology and from Adcore position as a global company in many different markets as well. So, I think that's something that's actually working quite well for everyone. It's been around for us. if you're talking Google for almost 10 years now and if you talking in Microsoft for more than 5 years now.
Nick Campbell: Okay. And we've got one last question. It's how are you going to use AI at Adcore?
Omri Brill: So, it sounds like a small question, but it's a big question, but I would say, I would split my answer to two. The day-to-day operations that is not even a technology related to that content or to that co-op, So, I say we use AI every day, multiple times a day, AI help us to do everything from making sure that the PR that we released are the best PR we can do, making sure we are ready for everything like -- we are using AI in any single almost operational action we do on a daily basis, and that's something that helps us a lot in making the Company more efficient. And basically, that can reduce manpower and another and basically allow to chip more and to be accurate with everything that we are doing. If you're talking within the technology and AI is a game changer as well. It's a game changer in our ability to write code if, let's say, a developer historically could write to just throwing a number, 200 lines of coding in a single day clients, and now we can write 400 clients of coding in a single day. The 400 lines of code, probably going to be in a better quality than what you used to write the 200 codes was of course. So, we can write more code, we can write more efficient code. We can use AI in order to make sure that our application, our technology is more efficient, it's more smart. There is a lot of stuff we can implement AI whether it's to enrich text email, whether it's to analyze conversation of users between the in the apps to understand, if this like, if this is distress, if this is something that we need to pay extra attention to and stuff like that. So, I think like AI is already changing the way it is doing business. And if you look in, let's say, fast forward one year from now and two years from now, to change even more. So, it's working in our benefit. And it's something that like every time that I use AI, I think guarantee exceeds that's what is way.
Nick Campbell: Me too, Omri. With that, that's all the questions we had today, and that concludes the call. I thank you for joining Adcore Q2 2024 earnings call. Any remaining questions can be sent to myself, Nick, my e-mail is nickc@adcore.com. Thank you all for attending today, and be well.
Omri Brill: Thank you, guys. Thank you.
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