Otello Corp Asa (OTCPK:OPESF) Q4 2018 Earnings Conference Call February 28, 2019 8:00 AM ET
Company Participants
Lars Boilesen – Chief Executive Officer
Petter Lade – Chief Financial Officer
Conference Call Participants
Operator
Good morning. Welcome to Otello Corporation’s Q4 2018 Results. Today’s agenda, I’ll give an executive summary, follow-up with an operational review. Then our CFO, Petter Lade, will do a financial review. And then we also have time for some Q&A, in the end.
Executive summary, revenue came in at $66.9 million down from $99.2 million, same quarter last year, and revenue was up from previous quarter, Q3 2018, where the revenue was $64.9 million. Adjusted EBITDA, $5.5 million in the quarter up from $2.9 million, same quarter last year, and up from $1.4 million in Q3 the previous quarter.
So revenue was up in both AdColony and Bemobi versus Q3 2018 and adjusted EBITDA was up two times same quarter last year and four times from Q3 2018, mainly due to focus on costs and strong margins in AdColony and general strong performance from Bemobi.
Operational review. Let’s start with AdColony. The turnaround continuous, when it comes to revenue performance business is still experiencing volatile revenue. But gross margin has clearly stabilized at a significant higher level.
The Brand business had good growth in entire 2018 and also strong growth from Q4 versus Q3 in 2018. And we continue to see particularly strong strengths growth in EMEA. Cost, OpEx has been reduced more than 50% over the last two years. We had a target of 70 million annual run rate and that was achieved early in the quarter.
We will continue to tune cost base to ensure long-term cash flow profitability. On the short term though we have some specific investment which will mostly offset for the cost savings in the short term.
Gross margins, trends very positive for both Brand and performance. We also see that after we have merged the tech and the product organization, we have not only got a more speed of delivery we also starting to deliver things on time.
So that’s good support functions has all been centralized to Istanbul and we basically achieved two things we have better internal support and also we are – we’re seeing improve yields due to better at operation from Turkey.
And now the current cost base basically enables and adjusted EBITDA breakeven at around $50 million in quarterly revenue at 35% gross margin.
Let’s take a look at the global Brand business. The revenue came in at $35.4 million in the quarter, which was up from $31 million in Q3. All the three segments in Brand had growth. IO, very good growth, particularly due to seasonality, but also Brand performance and programmatic had good growth.
And in general, you can say that EMEA was very strong, particularly on IO. We continue to see a shift towards programmatic and we’re very focused on that. If you look at the revenue for 2018, you’ll see that we now have a run rate which is more than doubled that what we saw in beginning of the year.
We have good growth from our key DSP Partners, Trade, Desk, Aarki, Adelphic, which all had very strong growth in Q4. We continue to focus on this shift we see from our partners who is shifting towards programmatic and we have some very important launches in the coming months, one is first price auction which will basically make our auction dynamics more efficient and secure a higher price.
Multi creative object support, today our partners can only bid into one format, going forward, we will have support for all our different formats on the exchange we’re providing new tools go through secure a better match between supply demand on our exchange and we also improving our global footprint when it comes to servers, everything happens in milliseconds.
So we need to have servers very close to all our partners around the world and that has — that will improve in the coming months. We’re also very committed to display first party high quality display inventory. And as a part of that strategy, we are now in the process of integrating with Google and Amazon Advanced Mediation Integrations.
We continue to have very strong commitment towards fighting fraud. We have completed renewal all our tech certifications against fraud and we are getting access to more and more data which help us to basically fight in the lead traffic on the exchange.
If you look at the Performance business, after seeing — after we really try to take away many of the legacy deals, it had an impact on revenue, revenue went from $21 million to close to 18 in the quarter. But as you can see that the gross margin revenue was very stable. It only went from $4.3 million to $4.1 million. So clearly we have managed to stabilize margins in the business. Revenue growth is still a challenge, we see less and less big blockbuster gaming titles coming out.
And obviously the competition is also very tough in the Performance business. But we have very clear priorities on our Performance business. We are focusing on larger customers, we are optimizing our publisher deals and we’re very focused on getting access to more supply and also to continue to come out with creative at units.
So, just to look at the gross margins, as you can see from this slide, you’ll see that, during summer we hit an all-time low with 12% margin. Since then we have been really focusing on taking away publisher deals, which we are not really profitable. And in Q4, we had margins in two other margin around 26% and then we had specific reason for the margin was only 20% in November. But going forward, we definitely expect Performance margins to be in the range from 26% to 30% very stable.
Some of the key highlights from the quarter on the performance, we launched new creative ads, which actually increase the user experience. We also – our focus on our biggest customers like Rovio, Playrix, Supercell, Kabam, turned into bigger spent on these counts. We improved our yields for our publisher and some of the new ads we launched in the quarter also secure better results for our publishing in terms of monetization.
We continue to fight fraud in the quarter. So as a consequence of that, we also saw that was for advertisers went up. The Central Performance Hub in Turkey is fully operational, all [indiscernible] positions has been moved on the performance business to Turkey and internal service level has become better and also we see that our ad operations has become more efficient.
And in general, we’re very focused on supply on the performance side and we have now made a global team who’s very aligned and very focused which was a positive thing in the quarter as well.
In 2019, it’s very important to see revenue not only stabilized but also starting to grow. We will, we have the following action plans to make that happen. Number one, we’re very focused on still being very creative and innovative partners for our partners in the performance business. We are investing into sales and business development to drive new business.
We are coming out with the toolset which will — which has the target of increasing impression volume by supply side optimizations. We are getting access to more data and we are utilizing this data to basically improve was for our advertisers and we strongly believe in header bidding can be a way that we can improve our position with publisher where today we’re very stuck in this waterfall hierarchy.
So header bidding is the project we have been very productive throughout 2018 and will be very big focus also in 2019 and the [indiscernible] is of course to get access to new supply through a header bidding solution.
So that was AdColony. If we move on to Opera TV. Just a short update. As previously communicated there is an ongoing legal dispute with the majority shareholder. MFC in Opera TV, now called Vewd. We have a favorable verdict granted on liability and this judgement was not appeal by MFC. MFC was ordered by the court to pay a substantial portion of Otello’s legal costs to date and that cash has been received.
And now whatever has restored the proceedings in order to pursue alternative remedies, including number one, have the court require MFC to buy Otello shares at the higher of the current relation of those shares and the price that the buyer was prepared to pay earlier.
Number two, if MFC is unable to purchase the shares at such price, then we will require that all shares in the company will be sold and Otello to be paid the sum found to be due it out of the proceeds of such sale. And that’s — these proceedings will start already in March.
Okay, let’s move to Bemobi. Revenue was solid and adjusted EBITDA was also very solid in the quarter, particularly when we neutralized for FX. Neutralized FX, revenue was $15.7 million which was up 14.1 — 11% compared to same quarter last year. Adjusted EBITDA year-on-year went up from 5.3 to 6.9, an increase of 29%. So, good quarter for Bemobi.
We also see that the subscriber of growth is really driving revenue and scale. We now in Q4 had 26.7 million users using the apps club [ph] which is up from 20.3 year-on-year , 31% growth.
And as you can see from this slide, that we are still addressing enormous big market and we’re only addressing a very small part of that today, around 1%. We alive with 61 operators, 21 in Latham, nine in South Asia, 16 in South East Asia, nine operators in CIS and six operators in Africa. And we already are planning to launch another five in Q1 2019.
If you look at the channel, which is really the unique side of Bemobi, that we have this very unique channel where one of the best channels we have is our no data, no credit portals. We now live with 10, no data, no credit portals outside of Latham, Idea, Vodafone, Telenor Pakistan, Tele2 Russia and Vodacom Tanzania and we have eight more plant in the next two quarters.
We also are very excited about a new win, we did in the quarter with Claro in Brazil, we’re going to deliver an IVR, basically an interactive voice response platform. So it works in the same way as no data, no credit. It adjust with voice, if you run out of voice, you will be transferred to a voice portal where you can top up your data plans and we will also sell our services through this portal.
We think this can be a very new and important channel. We will be very focused on taking our IVR portal to all our customers in 2019. When it comes to other channels, where we have — where are we working with partners, Opera Mini, still going well, but we are less dependent on that channel for two years ago, it was our only channel, now it’s down to 20% of the traffic on a quarterly basis. No data, no credit portals has gone from 10% to 26%.
And then on the Digital acquisition, which we call CPA is now around 46% down from 58% same quarter last year.
So if you look at the Bemobi, we continues to have strong online growth in both revenue and profits. As we mentioned during our last presentation, we met we plan and we have done in the quarter, we met a limited number of international investors during the quarter for the purpose of considering whether an IPO on a demerger of Bemobi could represent realistic and value enhancing opportunities and the feedback from this small road show from investor meetings has been positive and supportive of a potential IPO demerger.
So based on that feedback in Q4 we have initiated a process with the intention to pursue a listing in the UK during second half in 2019. However, obviously this timing and completion of any listing subject to market condition further investor feedback.
So, that ends my operational update, Petter, please take over.
Petter Lade
Thank you, Lars and good morning. So Lars went through the operations, I’ll do the financial. So, well we are happy with execution in a quarter, we saw revenue up compared to last quarter up by $2 million. And at the same time we saw cost going down.
So that’s a good combination, which meant that we’re able to get $5.5 million in adjusted EBITDA. So about 8% adjusted EBITDA margin, not great, but it’s a step in the right direction. We had a financial gain due to FX in the quarter and then as you can see here, we had a write-down of goodwill linked to AdColony which impacts the net profit for the quarter. If we ever to exclude that write-down or actually would have walked away with a very nice profit in a quarter as well.
Little bit more about the impairment testing, clearly the vast majority of this is linked to AdColony, well over 90% and the AdColony business is a lot smaller now than it were a couple of years ago and we wanted that to be reflected in the balance sheet as well, so this is write-down have so many acquisitions that we’ve done in the past is customer contracts and these products that were no longer working on.
We also do a small write-down of Handster, this is a business in the apps and games division, so it’s not related to Bemobi at all, this has been the revenue here has been dwindling, so it’s actually been countering the solar growth that we’re seeing in Bemobi, now that revenue has been exhausted and we write that down to, see we can get off our balance sheet. So overall now the carrying value if you will of AdColony is around $200 million, just shy of $200 million, working into 2019.
So looking at the overall trend, revenue has been pretty stable throughout the year, a little uptick now in the last quarter as we expected. At the same time you can see our cost base, our OpEx has been going down significantly which means that we end the fourth quarter with a nice profit. Specifically for AdColony, 2018 has been a turnaround year.
And as Lars said, the Performance business is struggling and its continued to be volatile whereas the Brand business is doing really well and is profitable. The Performance business also coming down as a percentage of revenue which again is helping gross margin, which we see now is getting close to 35%. And I think into 2019, we’re probably going to see gross margin above that 35% threshold.
OpEx, we’ve been very aggressive on OpEx, as revenues being going down we’d be focusing on margin. Now, we’ve been focusing on getting costs down and in, — we set a goal to get the overall OpEx down to $70 million per quarter, which equates to 17.5 per quarter. So 70 million in the year and we achieved that in Q4. So that’s a good setup going into 2019.
What’s interesting here is that despite our OpEx going down by $2 million from Q3 to Q4, our actual headcount went up by 12 people. So we’re taking out costs but we’re not losing our ability to deliver revenue and this is very important. Where we’re being smarter about how we spend, we able to move our costs base from higher costs location to a lower cost location, predominantly in Turkey and its where close to a third of our employees sit now.
So overall, when we walked into the quarter, we said two things about AdColony. We wanted revenue to grow from Q3 to Q4, we delivered on that. We said, we wanted to see adjusted EBITDA profit in the quarter and we delivered on that.
For Bemobi, 2018 has been a very strong year. Clearly we’ve had a FX headwind throughout the year. So the reported number doesn’t look as strong as the real underlying trend. What we do here with the orange bar is basically put back what revenue would have been, if we did not have that FX headwind. So a reported revenue decrease of 3%, would it be an 11% increase in Q4. So it’s basically shapes of over $2 million of revenue.
When you look at OpEx and gross margin, those who have looked upon in combination, we did a change in Q3, where we take the user acquisition costs and move it out of OpEx and move it into cogs. So what you’ll see is that objects will go down and then gross margin also go down as cogs go up. Just for transparency, I put in the dotted line here you can see what gross margin would have been if we did not make that change.
So overall, it shows that OpEx actually would have been slightly down and gross margin would have been stable. In terms of adjusted EBITDA Q4 was strong, 10% up. But it would have been really strong if we did not have the FX headwind. So would have been up nearly 30% compared to a year ago.
Moving over to cash flow. So we started the quarter with just over $30 million in cash with solid execution and AdColony and good performance in Bemobi. Our operating cash flow was just over $3 million positive. If you strip out capitalize R&D and you strip out the CapEx of $2.5 million. We also had a positive free cash flow in a quarter and it’s been a while since we’ve been able to say that.
We were opportunistic in the quarter buying back shares and of course we also saw that the FX changes had impact on the non-US dollar holdings over balance sheet. So overall cash position went down a tad in the quarter, but key here positive operating cash flow, positive free cash flow.
That cash is very important for us, we in 2018 concluded all our earn outs and as a company we have no interest bearing debt. So we have a very sound financial position going into 2019. The overall balance sheet is shrunk a bit with the write-down but it looks very healthy going into 2019.
So finally outlook, for this quarter and this year, so I’ll start with AdColony. So what we know is that Q4 is seasonally very strong. We have proven that with revenue growth in Q4 versus Q3, at the same time we know that Q1 is seasonally the weakest quarter, particularly for the brand side of the business. So we expect to see it as seasonality also this year as we see in – has seen in a previous years. But due to some underlying strength we expect to see that trend from Q4 into Q1 to be less pronounced than it’s been in the last two years.
On gross margin, the strength we expect to continue, I think we’re going to go above the 35% gross margin threshold. This is because Performance business is doing better, but it’s also because the Brand is becoming a bigger portion revenue and in particular EMEA the region EMEA is showing strength and it also carrying a higher gross margin than some of the other regions.
On OpEx, at least in a short term, we expect it to be flat, at least for Q1, but of course what we proven is that we will take out cost if needed. So we will to in this costs to make sure that we are profitable.
So that take me to the to the full year 2019 based on the revenue that we see the gross margin that we believe we can deliver and the things we can do in OpEx, we expect adjusted EBITDA to be positive for 2019.
Finally, on Bemobi, 2018 very strong year and we expect more of the same in 2019. So we saw in local FX, we saw revenue growth and profit growth in ‘18, we expect to see revenue growth and profit growth also in 2019. So more of the same. The FX headwind that we faced in ‘18 have abated and that could actually turn into a tailwind this year. That would be good for our reported numbers .
Through a couple of things that’s specifically for Q1, we just want to know for Bemobi our biggest customer in Brazil, we’re moving over to another platform. So while we do that migration in Q1, there’s going to be some lost revenue. It’s not — it doesn’t have a significant impact and it’s more of a one-off, so we’ll be –we’ll snap back to the revenue growth again in Q2.
But I just want to note that you’re going to see a small dip in revenue in Q1 compared to Q4. The underlying business in terms of subscribers is doing really well both in Latham and International markets. That concludes my presentation and takes us to the Q&A.
Question-and-Answer Session
A – Lars Boilesen
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