Affle (India) Ltd
NSE:AFFLE
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Affle (India) Ltd
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Ladies and gentlemen, good day, and welcome to the Affle India Earnings Conference Call hosted by Dolat Capital. [Operator Instructions]
I now hand the conference over to Mr. Rahul Jain from Dolat Capital. Thank you, and over to you, sir.
Thank you Diksha. Good morning, everyone. On behalf of Dolat Capital, we welcome you all to the Q4 and 12 month FY '22 conference call of Affle India Limited. I take this opportunity to welcome the management of Affle India Limited, represented by Mr. Anuj Khanna Sohum, who is the MD and CEO of the company; Mr. Kapil Bhutani, who is CFO and COO of the company.
Before we begin with the discussion, I would like to remind you that some of the statements made in today's conference call may be forward looking in nature, and may involve some risks and uncertainties. Kindly refer to Slide 25 of the company Q4 earnings presentation for a detailed disclaimer on the same.
I will now hand over the call to Mr. Anuj Khanna Sohum for his opening remarks. Thanks, and over to you, Anuj.
Good morning, everyone and thank you, for joining the call today. I trust all of you are keeping in good health. Affle delivered another quarter of landmark performance to conclude FY '22 as our strongest growth year, anchored on our entrepreneurial culture, tech innovations and sustainable value creation, powered by our Affle 2.0 Consumer Platform stack. I am incredibly proud that in the last 5 financial years since FY '18, since our initial DRHP was filed, our team has delivered over 6.5x growth in top line and profitability, a fact which stands further grounded, given it was a consistent year-on-year growth across this quarter.
Our cash from operations increased by over 100% year-on-year in FY '22, a CAGR of 63% since FY '19. We delivered revenue growth of approximately 123% year-on-year this quarter and achieved Q4 revenue CAGR of 73.3% over the last 3 year period, much ahead of the industry growth trend. In spite of the Q3 to Q4 seasonality, our CPCU business noted a strong momentum, delivering 56.5 million conversions during this quarter, an increase of 91.1% year-on-year, at a INR 51.1 CPCU rate. This took the total user conversion delivered in FY '22 to 195 million. Powered by our ROI linked CPCU business model and unique position in the industry, we continue to grow as the preferred mobile marketing company across global emerging markets and beyond.
We continue to witness a robust broad-based growth in advertiser spends towards mobile marketing, coming across our top industry verticals and India and international markets, and thus we achieved overall 45% year-on-year revenue growth in Q4 across India and international markets, and this is significantly above the average industry growth trend. Our business is in high growth momentum, with our product proposition and tech IP aligned, to leverage upon the tremendous digital adoption ongoing globally, offering a significant opportunity for further scale.
Global tech ecosystem is experiencing a paradigm shift, driven by the ever evolving consumer trend, accelerated towards adoption of connected devices and now beginning to inch towards emerging technologies, such as a metaverse. Affle being one of the industry pioneers and thought leaders will continue scaling up on our deep tech powered connected consumer platform stack to enable futuristic use cases. We will continue to invest to achieve our collective vision of reaching 10 billion connected devices in the decade ahead, and further augment our global market leadership.
Historically, our India and international contribution balanced at about 50-50 each, shifted in Q2 in favor of international, on account of our successful integration of Jampp and our efforts to build a local on-ground presence in newer international markets. The contribution stood at about 67% international and 33% India in this quarter and for FY '22, it stood at about 65% international and 35% India. Our focused execution powered by the Affle 2.0 strategy anchored on our 2 Vs, Vernacular and Verticalization; and 2 Os, OEMs and Operator Level Partnerships, has enabled us to drive deeper verticalization for our advertisers across the E, F, G and H industry verticals. This has strengthened our moat and our direct customer contribution has grown to 74% of our revenues in FY '22.
We also continue to unlock innovative vernacular consumer experiences for the advertisers, and to reflect upon our spend, we have also included 3 case studies in our earnings presentation, focused on health-tech, vernacular and omnichannel retail growth solution.
Affle platforms have been consistently recognized in the industry as top performers. We recently celebrated a record milestone of winning a total of 114 recognitions across categories and geographies in the 14th edition of the AppsFlyer Performance Index. Affle's Appnext platform demonstrated exceptional growth results, continuing its number 1 rank as an independent non-self-reporting network platform globally across the Retention Index and the IAP index non-gaming. We also had our Jampp and RevX platforms participate in the index, where they also featured amongst top platforms across various categories and geographies.
We've also recognized as the Best Technology platform for advertising and won several other top awards at the prestigious India Digital Awards, organized by IAMAI, fortifying our industry core leadership position. I'm extremely proud of Affle, for achieving these milestones and consistently delivering on all round profitable and sustainable growth.
Our proactive adoption of ESG and initiatives towards enabling a sustainable ecosystem reinforces our commitment towards holistic value creation for all our stakeholders. We enter FY '23 with optimism, and are well positioned to further capitalize on growth opportunities ahead of us.
With that, I now hand over the discussion to our CFO, Kapil Bhutani to discuss the financials review. Thank you, and over to you, Kapil.
Thank you, Anuj. Trust, all of you are keeping in good health. Continuing our growth momentum of clocking over 120% year-on-year growth in last 2 quarters, our quarter 4 FY '22 revenues stood at INR 3,151 million, a strong growth of 122.6% year-on-year. And we concluded our financial year with a revenue of INR 10,817 million, growth of 109.3% year-on-year, driven by robust contribution from organic growth as well as strong contribution from Jampp. Our reported EBITDA for the quarter stood at INR 587 million, an increase of 70.2% year-on-year, while for FY '22, the EBITDA stood at INR 2,135 million, an increase of 63.8% year-on-year.
Kindly refer our note on hyperinflation accounting, with respect to our step-down subsidiary in Argentina given in Slide 5 of our earnings presentation. In regards to that, our adjusted EBITDA for Q4 stood at INR 607 million, at a margin of 19.3%. As you are aware, that our third quarter in any year is the highest quarter due to seasonality. However, the cost of operation in Q4 is generally is equal to Q3 and EBITDA is highest in Q3. In this quarter, our inventory and data costs sequentially was stable at 63.4%, our employee cost increased by 14.5% quarter-on-quarter. This included approximately 3.2% impact on account of hyperinflation adjustment and 1.8% incremental due to ESOS versus Q3. Rest was on account of our investments in human resources of the company.
Our reported profit after-tax for the quarter was INR 685 million and our FY '22 PAT stood at INR 2,139 million. Previous quarter -- previous year's quarter i.e. quarter 4 FY '21 included a higher other income, primarily on account of one-time gain of about INR 306 million on account of divestment of an asset. Our normalized profit after tax was INR 527 million, an increase of 98.7% year-on-year, after adjusting one time gain on fair valuations.
Please refer to Slide 4 and 5 of our earnings presentation for the same. We remain focused on working capital management, continuing to see a robust cash flow, growth from operations. Our collections were robust and the issue of our cash flow from operations to profit after tax stood at 112.3%. This shows quality of our customer and robustness of our operations.
With this, I end my presentation. Let the floor be open for questions. Over to you, Rahul.
[Operator Instructions] We take the first question from the line of Mr. Rahul Jain from Dolat Capital.
First of all congratulations on very strong performance in Q4, as well as for the year fiscal '22. Just wanted to understand, Anuj from you the potential of the growth going forward, specifically in the light of pain that you may see from the fundings of start-up in the near future, as hinted by inputs from some of the large investors at SoftBank and Tiger. So any input on that, would be great?
Well, I think the outlook overall when we look at growth, I think there are 2 perspectives that one should be taking in mind. One is the historical growth performance of our own company and most recent quarter, even if I look at just purely organic growth, we have grown 45% overall, India and International and that is well above the average industry growth trend.
If you look at the historical growth trends of our company as well over a 5-year, 4-year period, you'll find that we're consistently beating the overall industry growth trend. Now where is this coming from? It is coming from clearly a differentiated business model, having the Affle 2.0 Consumer Platform stack which is aligned for the future use cases that we advertisers are looking for. Our focus on emerging markets, on emerging verticals and verticalizing deeply for that, all of these multi-pronged approach and strategy is anchored on our tech innovations, anchored on our unique strategies and business models, are powering our consistent growth over several years, as well as, if you look at it on a quarter-on-quarter basis, as a complete consistent trend of beating industry average growth trend.
When you see it over a 5-year period, you'll also find there multiple times, where in this period, there were starters where, there were funding issues and so on. And one of the things that we deeply care for our company, and that's reflected in the way our cash flow from operations have performed, specifically, noting the operating cash flow to PAT ratio of 112.3% this year versus last year, if you compare that and you say that okay, this company's quality of revenue is anchored on customers who are there for the long term. It is not quality of revenue, which is dependent on the next round of funding of these customers.
And I think we are very, very careful on what kind of customers we have on board and how much credit exposure we take with any of those customers on a month-on-month or a quarter-on-quarter basis. And therefore, our quality of revenue is reflecting in the way the operating cash flow of the company is proceeding, and even from that lens, right, I mean, working with let's say, startups, is important, but what kind of startups that we're working on? How much credit risk are we ready to take from that? Even if they come with a bigger budget, sometimes we decline it, and we say no, we can only take based on our credit risk management framework, we can only take X value of campaign from certain types of customers. So we are very, very careful about it.
In that sense, I would think that we will continue to deliver superior growth versus industry average growth, and will keep up with this growth momentum that the company has been seeing over the last 5 years, and more specifically what we have already seen in the last quarter with the macroeconomic factors, I would say were already quite tested. I mean given the various factors, whether it is the geopolitical tensions around the world, specifically in India or even otherwise in Europe, all of those factors taken into account, I think what we have delivered last quarter is the -- perhaps the best validation of the resilience that one should expect going forward.
Right. Just to add to what Anuj said, we should also keep in light, the amount of the fundings which have been raised in last 1 year due to IPOs or series C, D investments in our customers. I can say there is a lot of gunpowder available the next 2 years with the clients, if that is the concern. I don't think so, there is nothing immediately because a lot of funding has been raised in the previous year. So it is not the question at the moment with us.
Right. Right. Just an incremental thought on the -- some of the comments made by Anuj like I'm sure given the situation we are in, we can do better than the industry, but also trying to get a perspective, from some of the commentary that we are hearing from the large companies, the likes of Facebook and many more, like Netflix or Unity that this entire Affle policy impact has also been quite significant for them in terms of new customer addition and there are also certain comments related to that potential slowdown in the budgets that companies might have on their advertisement side, given the macro situation that we are seeing. So are we seeing any potential impact of these things coming to us at some point of time? And more importantly, if you could share what kind of industry growth that you are seeing in some of the key markets that we operate in?
Sure. See, when we look at the likes of Facebook, Google, Netflix, Unity or the others, who are deeply anchored on developed markets, with respect to their business and the revenue contribution of developed markets is substantial for these companies, and iOS or Apple devices linked revenue for some of these companies is very, very high. Compare that to let's say last year's Apple's overall exposure to developed markets, or iOS, is a very small percentage of our business and therefore the base Apple is already -- I think we are still on a low base, and we can continue to grow disproportionately better than industry average growth rates, is also a factor of that. And our exposure to iOS has been nominal in the previous years as well.
And therefore, when we look at the iOS opportunity, even in the FY '22 year, in fact it turned out to be a very strong growth opportunity for us, because we went in there with a fresh proposition, telling the advertisers in developed markets that look we are very, very strong on the Android ecosystem from emerging markets. If their budgets were shifting from iOS to Android, we were saying, hey we were beneficiaries of that brand and even on iOS, we went in with a differentiated proposition, which was already aligned with the new dramatic shifts on iOS ecosystems.
And we in fact last quarter in Q3, we presented a case study on that as well, and on the Investors call that we had, the Analyst and Investors Day that we did in December, we also talked about that, with a lot of emphasis that this is actually a growth opportunity for our company, because the base of the iOS revenue that we had prior to all of these changes was very, very small. We have gone in fresh, we have seen that as a growth opportunity and any budgets which are shifting from iOS to Android were also beneficiaries of that trend. Which may not be the case for these bigger players who had let's say 50% of their revenue or more anchored out of developed markets, where 50% of the devices were -- the contributing devices were iOS anchored. So they may have seen a lot more turbulence, whereas for us, it was all growth prospect, quite strongly.
Now in terms of the budgets getting reduced, I beg to differ. The advertising budgets on digital across emerging markets and across emerging verticals in both emerging markets as well as developed markets, will continue to increase, and there is no other option for the advertisers, but to shift budgets significantly to digital and mobile connected devices, because of the way the consumer trends are going. And this is not just a COVID phenomena. I think even post COVID, the situation is clear. The consumers' attention and the transaction adoption on digital devices has gone up disproportionately, and the percentage of advertiser spend on digital and mobile will necessarily grow significantly in the next 3 to 5 years. Especially in emerging markets and emerging verticals, which is what is Affle's focus.
Now if you look at the India related report, there are enough industry reports out there that are saying that India's average digital growth rate would be above 30%, and within that, if you were to take out some of the emerging verticals of E, F, G, H category, you'll see that the growth trend is 35% or above. And the same kind of growth trends in my opinion, we will see across emerging verticals globally. So therefore, I wouldn't be particularly on the back-foot with respect to how the advertisers' trends are going and we should be optimistic about how Affle will continue to deliver growth going forward.
Sure. Sure. That's quite comforting. Just lastly, from my side, if you could share more color on how the CapEx tech capitalization in FCF has played out in this year? And also input on the plans going forward?
Kapil over to you please?
So our investment in innovations was about INR 6.9 million to INR 7 million for the last year, which was as per the plan, and there was no overshooting of the expenditure there. And we expect good results coming from those investments. Our plan is about -- for the next year is about 4% of revenue to be invested in innovations. So around 4% plus-minus 25 basis point would be the plan to invest in innovations of the top line.
Right. And as I said, any more, in terms of what kind of free cash flows, how it has played out this year and how we plan to do going forward?
So the free cash flows have been in the tune of INR 153 crores to INR 154 crores. If you see that -- the investment in innovations was about INR 53 crores, INR 54 crores and about INR 2.5 crores was investment in the hardware. So that is what is the investment into the CapEx. Rest including the CapEx and the cash flow is coming out of the acquisition accounting of about say $2 million plus, which is about INR 15 crore rupees is coming out of -- and the cash flow is coming out of the acquisition accounting. So that needs to be taken out for the calculation of free cash flow.
We take the next question from the line of Mr. Mayank from Dalal and Broacha.
Yes. Congratulations on a great set of numbers. My first question is around the organic and inorganic components. So Anuj sir, I think you mentioned there was 45% growth in the organic business. So can we -- just deriving from that, the organic revenues would be around INR 205 crores to INR 203 crores odd, am I right?
Yes, that is correct.
Okay. And balance is from Jampp, right?
That's right.
Okay. And so that was my first and sir, my second question to you is, so as we are hearing in the IT industry, there is a lot of talent crunch in the tech space. So part A of that question would be that, are we facing a similar kind of heat in our business also? And part B would be that given, if at all we are facing that heat, does that margin aspiration over the next 2 years remain the same, as per our previous commentary?
See, first of all, the overall tech stack of Affle is anchored by our tech teams which are, today is not only in India, but also, based in Madrid in Spain, and Argentina, in Israel and so on, so it's a globally sort of distributed innovation capability that we have. So if one particular market in India for example is in the IT sector, is talking about facing certain challenges, we are at the moment, seeing a fairly sensible utilization effect of that, because not only are we compensating -- on fair market compensation, in terms of cash terms, but we are also, as of last year in October, have given out stock option of the Affle India stock option to quite a number of employees, close to, if I'm not wrong 100 employees have become beneficiaries of that.
So there are multiple ways in which we incentivize and retain our talent and inspire them with good quality work, good career satisfaction, good career progression, fair market compensation and cash terms, stock options and so on. So all of these taken into account, we believe that we are actually one of the rare companies, where not only entrepreneurial talent, but also tech talent, not just in India, but globally, would be attractive to, in these times. Given the kind of resilience that we have shown as a company in the last 1 year against tough and ever-changing dynamics, whether it is on geopolitical issues or the data privacy issues and so on, I think the kind of execution and strategy that we have delivered with our company, we've inspired a lot of confidence and thought leadership in our industry.
So what's happening is that the employees of our competitors or even people who are in the industry, are looking at us with a lot more respect and there is a lot of pull factor to attract talent and people who would want to work for a company like Affle, and I think that will help us to build pride internally within the employees to stay on, but also to find a fair way of bringing in more talent into the company, as we expand. I don't expect any dramatic changes with respect to our ability to earn a bottom line sensible margin growth performance for the company.
Okay. So, sir, as per the previous commentary, that we could over the next 2 years, scale-up our profitability to -- operating level profitability to 20% plus, that remains same right as it is?
Yes, I would take a 24 months view to it. And the reason for that is that the contribution of Jampp is significant and it is still in mid to high single-digit EBITDA performance at the moment, and I'm looking at the next 24 months, very, very closely to transform it to high to -- mid to high teens, in terms of its bottom line performance, and that alone should actually impact the overall bottom line margin performance of the company, towards the kind of numbers that we hope to achieve.
Sure. So, just last question. So if you could share the number of user conversions in Jampp if possible?
We haven't split that out. But I think what's important overall is that, when you look at this quarter and you see 122% growth year-on-year from the Q4 in FY -- in the previous years, we would find that we have achieved that at the back of 91% growth coming in the number of conversions itself overall, and the fact that we have grown our CPCU rate by about 25% from INR 40 odd to INR 51. So overall when you look at these 2 sort of factors contributing over 90% of our revenues, you would find that, that's when we derive the growth comfort from.
And it's a fairly balanced growth that we're seeing in terms of organic as well as inorganic. I mean even on organic growth, the 45% growth that we have delivered in this quarter, is something quite a record breaking growth that we're seeing overall on a broad basis, both in India as well as international and it's all anchored on conversions and the CPCU pricing. Jampp's contribution is lesser on conversions and more on the CPCU price increase, because the international markets have a slightly higher CPCU rate.
We take the next question from the line of Vikas Mistry from Moonshot Ventures.
I had a couple of questions. My first question is that, what is the net revenue retention in the claims -- in the customers and what is the churn rate and how much of that is coming from VC funded customers?
Well, I think my response that is that, based on the kind of detail that we've already shared with most of you, I think the -- the way to look at our revenue from a customer lens perspective is not so much, just the retention figures, because we've not quite disclosed that. But what we have absolutely shared, is that the direct customer revenue that is coming from E, F, G, H categories primarily is already 74% of the revenue, which means that there is no middle man involved in that revenue coming into us and we are able to have a direct control on how much revenue we take from a particular customer and what kind of risk management and sustainable growth sort of trajectory that we take on that basis.
In terms of the further aspects that we look at these industry verticals, which are obviously having disproportionate contribution to us, the E, F, G, H categories and 90% of the revenues are coming from there. These are high-growth industry verticals, emerging verticals, and these are not just startups with series A or B funding, I think we're talking about enterprise grade customers and the ability to predict that these customers would definitely be continuing to be spenders and growing their spending probably in the next 2 to 3 years. And that's the kind of sort of selection process that we typically follow.
Can I split this into saying what percentage of these are government funded or you know or the VC funded or large enterprise? I think we don't necessarily have the data available for you at the moment, but I think the quality of revenue is clearly there and the focus of our company not just on margins, profitability, but on operating cash flows, will give you a sense that we are deeply grounded into financial fundamentals of every unit economics of per campaign, per customer, we watch it really closely. So I think we should not have any risk factor concerns, with respect to quality of revenue or the ability to retain these customers or to continue to grow on these customers. I'm sorry, I'm not able to provide you specific of what you asked, but from the data that we published, I'm trying to give you a qualitative sense of the quality of our revenue.
That's helpful. Anuj, my second question is that, the cost of data inventory, because we are using CPCU model and we show some impressions and kind of [indiscernible] do something. But the thing is that we haven't seen some decrease in data inventory costs. Till now we might have developed good of -- and [ D&B ] is quite strong. So we must have seen some decrease in data and inventory cost. So how we look forward, the data inventory cost going forward, whether they decrease or they keep elevated at this level?
So I think there are 2 things to this. One is when you look at data and inventory costs, I mean the word cost comes there, but it is also having an investment element to it, right? The kind of intelligence that we build so that is clearly helping in forward-looking, continuing that the data insights and capabilities of what verticals are performing well, which consumer cohorts and segments are likely to convert for one vertical or the other. All of these deep insights that are already there, these don't -- they are all fully expensed out on each reporting period, fully as a cost, right?
The investment angle of it, what percentage of it is actually carrying forward investment that will help the company over the next 2 years is not shown in the financials. Right? So our policy is very conservative, we expense this out fully for each reporting period. And there are efficiencies that are already there. From an organic perspective, not only is our revenue growing 45% organically in this quarter, but we have also seen that the profitability, the margins have expanded on an organic basis, right, consistently. So much to the extent, that even Jampp which is a single-digit EBITDA contributor and at over 30% revenue contributor, is still -- on an average consolidated basis, we are still delivering very healthy bottom line financials of our company.
So why is that happening? It is because the inventory and data cost efficiencies organically are already leading to higher margin, higher profitability in the business and of course, we are still yet to achieve that kind of efficiency in Jampp. How will we move Jampp from where it is today over the next 24 months to a higher level of efficiency? A big part of that would come from inventory and data costs, as well as the scale up based efficiencies that we will see across our verticals, and the platforms working together and creating the synergy.
So there are efficiencies there, and we have to see it from the lens of -- that if we were completely splitting our P&L into 2-parts, organic and inorganic, you would perhaps see it a lot more clearly. But at the moment given the level of reporting that we are doing, this is a sufficient indicator that data and inventory cost is one, expensed out fully. It is an asset element to it as well, which doesn't show in the financial. Then there are efficiencies organically, which are clearly there, and that is why our organic margins are growing faster than the organic revenues clearly. And the inorganic because of Jampp being less than a year old into our system, there is still a lot of efficiencies to be derived there over the next 24 months.
Okay. My final question is that -- in call you have said that, we are finding it hard for conversion of Jampp to higher EBITDA margins, which you have earlier stated maybe in 12 months, but now you are guiding for 24 months. So from that perspective, can we rule out that we will be doing any acquisition in near future -- big acquisition in near future, because if do so, then it will be quite a drag on our financials?
Well not at all. In fact, I don't know where you derived in the commentary that we're finding it hard. On the contrary, I think Jampp has been one of the smoothest integrations and within the first year itself, for the kind of scale that they had and the fact that we haven't really traveled and met enough due to the restrictions of travels around the world, we have done phenomenally well in terms of what we have achieved with Jampp in year 1, and our goal -- our stated goal on any acquisition has always been, that within the first year, we will bring it to single digit profitability, and we have already delivered that with Jampp.
And in the second year and the third year, we will inch it upwards. There is no magic wand straight away that you know we can shorten that cycle, but we have typically seen that, what our guidance has been on any acquisitions, that we will take a 3 year view to transform them to the same quality of bottom line margin sensibility, that we have enjoyed with Affle's organic business. Each inorganic will have a journey year 1, year 2, year 3, and what we have done in year 1 and less than year 1 with Jampp is already quite fantastic and I'm super proud of it and what we will do in year 2, and see a very clear roadmap to that, and I think we are on track on our stated model.
We take the next question from the line of Arun Prasath from Spark Capital.
Anuj, thanks for your explanation on what is happening in the Jampp, it's good to hear, and hope there will be a turnaround in the Jampp story. Just wanted to understand, when you say turn around, what exactly do you kind of -- if you can take us through a very, very top level view when you are doing turnaround, what exactly you do at the acquired companies?
Well, I think the first thing is focus on deeper data science and insights, and integrating the full muscle of the tech stack and platform to benefit not only the advertisers and customers, but also enhance the margin and scalability of our business and platform, that is one. Second is the discipline, the discipline and focus on not just growth, but on unit economics of that growth, how much do we charge on CPCU rate, what is the data and inventory cost, how do we make sure that our -- all line items of the financials are handled with great discipline and good governance. And I think these are the kind of things that are already happening in each of the acquired assets. And that is how we have delivered great outcomes, not only the Mediasmart, Appnext and now with Jampp within the first year itself.
So the emphasis is on clearly, on leveraging the strategic capabilities of the platforms, as well as on the discipline with which we have always run our company. Right? I mean, whose revenue do you accept and how much you accept that quality of revenue and the credit checks on that, the discipline on collections. All of this is not something that every organization is borne with. And I think Affle has it as part of -- part of its core DNA. So when we acquire an asset, we make sure that we bring it up to speed on all of those elements, both strategic as well as on the discipline of the organization. And I think we are doing really well with that, and the Jampp founders and the management team has responded and embraced it in a very natural way.
So, when you said that by the end of year 1, you wanted -- you would bring in the acquired companies up to say single-digit profitability margin, you are referring to EBITDA margin or PAT margin?
I think both. I would say, I mean this is referring to EBITDA margin, PAT margin, and also I'm looking at cash flow clearly. I want to make sure that every single part of our organization, achieves the same level of unit economics that we are enjoying in our organic business. So we are not compromising on any level, EBITDA, PAT, cash flow from operations as a percentage of PAT, all of these metrics have to add up and inch upwards to where the overall Affle growth is.
Just to be a little bit clear, when you said that the Jampp margins are high-single digit mid to high-single digit, that is EBITDA margin you're referring?
Well, yes, it is. Go ahead Kapil.
Yes, this is EBITDA margin, yes, mid single digits on the higher side, right? And I would say, I would like to say clearly about 7%, the EBITDA percentage from Jampp business at the moment. And we have been stating this thing, that we have a turnaround time of about 2 years, take it to mid-teens from where we acquired from almost zero EBITDA levels, and we are happy with the progress. on the EBITDA front.
7% EBITDA margin. And if that is, if it is at the end of year 1, you said clearly on the year 2, you wanted to take it higher. Any internal targets for the Jampp at the end of say, year 2?
It has been clearly said, mid-teens is the target.
Okay.
I just want to say that we don't give specific guidance for the future, but when we do any acquisition, what we have definitely shared, is that in any acquisition that we do, especially if they are breaking even or 0% EBITDA at the time of the acquisition, we will absolutely work only on acquiring those assets, where we have the clear execution path that we know with conviction, that within year 1, we will bring it to mid to high single-digit margin performance on EBITDA, within year 2, we will bring it to the mid-teens. And by the year 3, bring it closer to 20%. And that is our stated module and thesis for justification of inorganic transactions, which are at a breakeven level, at the point of when we meet them and acquire them.
So this is not Jampp specific, it is not a specific guidance on a particular unit for your modeling purposes. It is a complete sort of thesis of how we are justifying any inorganic investment into [ asset lines. ]
That's very helpful, Anuj. My second question is on the -- if you remember, in mid of Feb this year, Google came out with the announcement, they are extending the privacy Sandbox to the mobile as well. So, any thoughts on that how it is different from originally our thoughts on how Google will implement the privacy related regulations, and how you are internally preparing for this?
Sure. So what we -- we always expected that Google would come up with some announcement to that effect, and I wasn't surprised at all, first of all. Secondly, what Google has announced, is that our interpretation of that announcement is that, they are going to do some tests over the next couple of years. And then third year from now, they will actually go ahead and implement and roll-out something, which I believe will be a significantly diluted version of what we have seen happen in the previous financial year on the iOS platform.
Now, the fact that we have already negotiated the change on iOS platform in developed markets like North America, and found a willing strategy on that with customers, makes me very confident that when such a change eventually happens in a very diluted [indiscernible] way, on the Google platform, it will happen 2 to 3 years out, and it will be an easy-to-maneuver transition for us.
What I want you to take comfort out of it, is that irrespective of any changes on data privacy laws or any changes with respect to any platform level changes. One fact, that is not going away from any of us, is that you and I as consumers, are going to be deeply married to our smartphone touch screen devices for many years to come. And consequently, the advertisers' budgets are going to increasingly gravitate towards digital mobile and connected devices. Now if the advertisers' budgets are deeply gravitating towards this and the consumers are gravitating towards that, the relevance of the growth momentum of a tech platform like Affle, is established out of those 2 mega trends that do not change and will not change over the next 3 to 5 years.
Now what may change, is how the tech platforms, eventually tweak and deliver, and on that we have shown a track record over last 17 years, because our company has only been focused on mobile marketing and nothing else, since our inception, and we have negotiated all changes, whether it's Nokia and BlackBerry going down from 2005 to 2010-2011, to the changes in the ecosystem that have happened over the last 5 years, I think you can see consistently that Affle has the ability and the leadership and the agility to address all the changes and transform such changes into opportunities like we did last year as well on iOS in the North America and developed markets.
So we are very confident that whatever we know of the industry today, on what we predict of the industry today with respect to Google and related changes over the next 2 to 3 years, will not lead to any dramatic change in how we expect growth from Affle, for our sort of business across emerging markets and its emerging verticals; because the advertisers on one side are not going to spend lesser. And on the other side, the consumers are going to continue to transact and convert more on digital experiences.
We take the next question from the line of Aniket Pande from ICICI Securities.
I have one question for Kapil actually. So just wanted to get a sense of employee cost outlook. So going forward will ESOP impact will come in Q1 also? And secondly, any outlook on the employee cost in subsidiary in Argentina? Because right now the inflationary environment is quite high in Argentina?
First of all the impact on Argentina is -- was there in the Q3 also but the impact was higher in Q4 that is why we segregated. However, we'd like to mention the impact is nullified by the counter accounting into the foreign exchange gains and [ where ] at the PBT level, the impact is nullified. But if you see the employee cost line item, they will be called EBITDA line item, it changes the ratio of EBITDA. But on the PBT line items, the impact is miniscule. It doesn't make any -- it is not -- say 0.1%, 0.2% up and down would be the impact. But on the expense line item if you compare it expense to expense, there can be some differentials on that. That we will keep on giving the guidance, if there are -- or giving the disclosures, if there are material changes.
We expect that the inflation would -- moving in the same line as the whole year last year, that the Q4 inflation was higher, and has a higher impact. To give you an example, so if there was an impact of about 3.2% from last quarter, it was based -- it was half of -- not even a half, it was about a third of the impact in Q3 right? So it is variable to the general price index, and the counter impact goes into the foreign exchange calculations on the other income side, which is not taken into the EBITDA calculations. So on PBT level, it doesn't make any difference, but only changes the dynamics of EBITDA calculations.
Can you repeat your second question?
These were the 2 questions, sir. My third question is, can we get a sense on your margin trajectory going forward in FY '23 or in FY '24 actually? So basically, my sense is that, will your inventory and data cost remain elevated above 60% of your revenues, or it will come down in FY '24 a bit?
We don't expect any dramatic changes in the margin profile. As we have already stated many times that, the unit economics as well as the financial metrics we are keeping, all the efficiencies we draw from inventory costs, are [ refloored ] investment in growing the businesses. So you can say that we have indirect investments in growing the geographies and verticals and the emerging verticals. So that data is used, the investment is used to grow the other verticals, which are emerging into the digital marketing on a CPCU basis. And on the employee cost, I believe that as we grow at a scale of, say what has been stated at a 63% CAGR, I believe that there would be increase in employee costs, because you need [indiscernible] to run the business also.
Correct. Correct. Secondly, one last question from my end actually, like in last 6 months, we saw Google changing its advertising and privacy policy and bringing of FLoC in the advertising medium. So, did we saw any changes in the behavior of customer advertising spend? Similarly now as Netflix is also planning to get into advertising, so basically in our connected TV network, what can be done to gain more market share in that area?
Affle would get access to these inventory correctly, if they are not getting, we are not getting it from the SSPs or Google ad platforms. These inventories will find way of getting the advertisements through different SSPs or different ways of engaging with us. So we don't think that the access to inventories will be locked for us. So there will be new ways of connecting to the users of these tech platforms.
Okay. It means that your -- sorry, sir.
Sorry to interrupt you, in fact if I may add, that what you're seeing with Netflix, Netflix has been one of those platforms, which is always charging the subscriber to pay for the content on a subscription basis. This is an extremely positive statement from Netflix, where they are now saying that they will have a version, where it will be more ad monetized rather than subscriber paying. And this is what we want to tell all our investors, that this fundamental trend where the consumers are on the digital screens and devices, and the consumers are increasingly willing to spend more on digital devices and yet, you're finding sense from companies like Netflix is saying, instead of charging the consumer, I'm going to make money from advertising, because after a certain point, the willingness of the consumer to pay for let's say content or subscription services will be for just a few select apps.
But for the long tail of apps and the long tail of consumers, there is only one model that seems to have thrived over the last 2 decades, which is that advertising subsidized content, advertising subsidizing apps, advertising subsidizing website and that is what you're seeing even for the most premium platforms like Netflix, and they will need to come to that because the consumers, especially across emerging verticals and emerging markets, are going to demand that, even the affluent consumers. I mean, even for somebody like me, give me like 10 app that you can say, okay, fine, one of the apps I'll pay, for the other 9, I'll take the ad-funded model.
So this trend of advertising and the consumers expecting those advertising linked business models from even the premium service providers, is the biggest reassurance that the investors can have, that the Ad Tech digital business model is here to stay, and while dealing with it, with the responsibility of data privacy, which is where regulations come in. So it's a much better ecosystem for the future, for the consumer for the advertisers and therefore, I'm very confident that you will see the continued growth in digital advertising as an industry.
We take the next question from the line of Anmol Garg from DAM Capital.
So just had a couple of questions. Firstly, just wanted to get an outlook; from the changing Google policy, can we expect any changes in the CPCU rate, once the policy is implemented? That's one. And secondly, just wanted to get an outlook on the different geographies that we are operating in, US, LatAm and Europe. What have -- what is your outlook on the demand in those geographies? And also now that we have been saying that, we expect 30% to 35% of growth, industry growth into the Indian ecosystem, what can be the growth that can be expected from LatAm and US, can a similar growth be expected from these geographies as well?
Right. I think the first question on outlook with respect to Google, I think this is the question which is, in my opinion, 2 to 3 years forward question. Now on that, my take is that there will be a lot of adoption from consumers accepting consciously and giving permission and consent to Ad funded apps that they trust. Okay. So companies like Netflix or all kinds of apps it will be there. Some will be big well-known names, some will be lesser-known names and there are millions of apps out there, but the consumers will selectively give consent to quite a number of apps that they will try and use on their devices, because the first thing that the consumer wants to do is, try the app, find it is ad funded, find out with [ your consent ], if I like the app too much, maybe I will agree to pay on the non-ad premium experience.
So there, I think the Google policy is not necessarily going to change the larger consumer trends and behaviors on digital adoption and digital consumption. So in that respect, I think the CPCU rate for us, will continue to see upward trajectory and growth, as we continue to grow our business, not only in emerging verticals in emerging markets, but also emerging verticals in developed markets and very importantly, as we see the Indian economy continuing to grow over the next several years, we will find that the advertisers have -- will have a better willingness to pay for even conversions that are happening in India. So, I expect the CPCU rate to inch upwards, even with or without the Google changes over the next 3 to 5 years.
The second question was about demand. Demand across geographies, and while I have industry reports that are talking India specific average growth of 32%, specific verticals based growth of even 35% CAGR for next few years, there are lesser sort of fragmented industry reports for let's say, other emerging markets in the world. But my outlook overall for other emerging markets and specifically the verticals that Affle is focused on, and it is our own internal view, that that should also be in line with the kind of growth we're seeing in India. As far as -- and these markets will include Indonesia, Thailand, Malaysia, Philippines and Southeast Asia. It will include, Middle East and Africa, it will include Latin American -- LatAm market and so on and so forth.
When we look at developed markets, we would see a significant shift happening also in emerging verticals, in favor of deeper growth in digital over there as well. So, I am quite bullish that when we see it holistically overall, the industry trend should be north of close to 30% to 35% for the next couple of years at least, and that gives me a lot of confidence to say that while Affle has historically been beating, or even in this quarter we have organically beaten the growth trends by achieving 45% revenue growth in Q4 year-on-year, it gives me a lot of confidence that, look, I mean even with tough macroeconomic conditions, geopolitical risk factors, which are there, because our business is so broad based across so many geographies and so many verticals, we should be able to keep up the growth momentum.
Sure. And if I can add just one more, so if you can highlight what is our policy regarding acquisitions, and particularly are we looking to acquire companies in India or outside India right now?
See, we don't want to give any indicative -- competitive advantage to our competitors, nor into our acquisition strategies. But what I would want to say here is that, inorganic growth has been a core part of the strategy, while organic growth has been clearly very robust and when we look at it with that lens, Affle, through organic growth alone, will exceed expectations of most stakeholders in this ecosystem, whether it's internal employees, investors, analysts, I mean any stakeholder in the ecosystem, look at our organic growth alone, backed by the fact that the industry across emerging markets and emerging verticals is going to grow fast, is going to exceed most internal and external expectations.
So therefore, there is no pressure to necessarily go and do something inorganic, right? I mean now, when we find a strategically well-fitting inorganic target, at the right price point which the next 1 to 2 years, the markets will certainly provide, because some of you alluded to the fact that funding will be harder, the -- it's not necessarily going to be easy for the entrepreneurs, who may not necessarily have scaled up to a certain level, we will find very attractively priced inorganic targets in the next 1 to 2 years, and we keep a strong balance sheet, we keep our financial discipline of generating good cash flows internally. So our cash reserves on the balance sheet will only grow. When we find the right target without any pressure, right strategic segment that we see, will help the company whether in India or internationally, we will certainly have the wherewithal to execute very sensibly and carefully, like we have always done.
Am I giving you any guidance in the short term, whether we are going to acquire something or not? Not at all. There is absolutely no pressure, and we will do -- a sensible and organic growth manner, and we will certainly do it, but we will time it to our advantage.
We take the next question from the line of Pritesh Thakkar from Asian Market Securities.
I just have one question, any progress on strategy in [indiscernible] market, emerging markets that you highlighted on your last call, that could be another margin -- in terms of realization, any color on that particular [indiscernible]?
Sorry, Pritesh you were not very audible. But it seems like you're asking about the strategy in emerging market. Is that correct?
Yes, that's correct.
Okay. To the extent that I could understand your question, and I would like to build the answer towards the larger understanding of most of us on this call today, is that Affle is one of the only companies in the Marketing tech, Ad tech space, that is so deeply anchored on emerging markets and emerging verticals as our strategic emphasis and focus. If any investor, anywhere in the world wants to invest in the emerging markets digitally connected devices linked growth plan, there is no other company that I know of, that is so deeply focused on executing and winning in these markets as a strong competitive advantage for the future. Most of our competitors, which are listed companies, all privately held companies that have access to funding or have already raised funding, are not as deeply focused on anchored on emerging markets, and therefore our competitive moat across emerging markets is one of the strongest.
And perhaps if I may qualify that, based on my knowledge, there is no other listed company in the world that is as deeply focused on emerging markets as we are, and therefore that creates a scarcity value as well, because a lot of the investors have understood digital advertising over the years in developed markets, and if they believe in the thesis of emerging markets, they will absolutely find that there is really no other strong credible player, that is executing well across emerging markets. So our view on emerging markets is strong and we extend that view by the focusing on emerging verticals even in developed markets, where we have shown good success and track record or so far.
Sorry Pritesh, I could only hear this much and I have tried to answer it for the benefit of all the people who are attending.
Yes, so it was more on the investments part that you're making on the emerging markets. But yes, the second question on -- this year again, our target is still focusing on M&A activities [indiscernible].
Sorry to interrupt, your voice is not clearly audible sir.
Can I request you to email your question to us Pritesh, if you can message it to the organizer and we will try to take it up later.
We take the next question from the line of Reshab Sisodiya from Concept Investwell.
Sir, a small 2 questions. Sir, firstly if you could give me the color on organic growth for the full year FY '22?
I think for the last 3 quarters, all the quarters in our commentary, I think we've always given clear indication on quarter-on-quarter, year-on-year basis growth in organic. I don't have that statistic as published report. So it's fair to say that the organic growth has consistently been above industry average growth trends that we're seeing, and in that sense, the fundamentals of our business are deeply clearly anchored in every single reporting period that we have talked about. I would say that the organic growth has been above industry average growth rates consistently, especially in the last financial year.
And just the last one. Sir, given the last acquisitions that we have had, Jampp and Appnext, I remember the management said previously where, we are also looking at increasing our stake in Bobble AI and deeply interconnecting other platforms. So, any color on that, how are we looking at it going forward in the emerging and the development markets, how do we see all our businesses getting connected and may be as a one-stop solution to the end consumer?
So, that's a great question. In fact if you to find the presentation that we shared of the Investor Day or the Analyst Day in December, 2021 itself, we had all the -- and we will be -- how the entire strategy -- the culture, the strategy, the tech platform backbone and all the different platforms that sit on top of that backbone, how they coherently deliver a unique strategy and execution to the customers and because the Affle 2.0 Consumer Platform Stack, and as part of that Stack, of course, the 100% acquired businesses and the integration of that into that stack has already happened, and we are obviously leveraging that into our execution, as we go along. But even for the inorganic or let's say the minority investments that we have done, through commercial partnerships, strategic partnerships, integration of our SDKs, or server-to-server integrations, we are able to leverage those into the overall stack as well.
So I think the question about how it offers one integrated Affle 2.0 Consumer Platform Stack, I think we have already unveiled it in our detailed, I think it was almost a 2.5 hour, 3 hour discussion and presentation with all the investors in December. And we will continue to do that. We will do it once a year as an event and later this year as well we should have that, and we will take the opportunity to elaborate it in a much more detailed and descriptive manner, so you can also see the customer testimonials, you can see there much more deeper case studies, you can see the demo of our platforms and the capabilities of our platforms, with much more deeper deep dive than what we can do in an earnings call. So we will -- you should look forward to that again later this year.
We take the next question is from the line of Bharat Shah from ASK Investment Managers Limited.
Do you talk about organic and acquisitive growth? In terms of your formal kind of structured narration, so how long do you treat an acquisition businesses' acquisitive growth, and at what point of time we will start kind of labeling it as inorganic growth? And what in terms of your factual formal narration, [indiscernible] in your mental mind, how do you look at that issue?
Is your question about for how many years we expect to focus on acquisition as a growth strategy as well as organic growth, and can I just get to the essence of your question again, Bharat?
No, what I meant was, when you acquire something, it's at a relatively incipient stage in its journey. And therefore, the growth which comes from -- in the revenue or profit, maybe later in that stage of evolution and therefore you will label, like you said in the last quarter, almost about 65% of our business has come from organic activity that we've done over a period of time, and about 35% has come from acquisition. So in your mental mind, up to what kind of a stage in acquisition in -- your mind is like an acquisition, and when it is kind of fully integrated. Plus formally when you define the INR 205 crore as organic revenue, and which is growing at a rate of 45% which is a very impressive number, in terms of your formal guidance like these numbers, for what period of time do you typically -- or by what criteria do you label something as acquisitive and at some stage, then it stops being labeled as such, and it becomes like business as usual?
Sure, I understand your question now. So typically for us, within the first year itself, we would see that the acquired business has become an integrated part of our Affle 2.0 Consumer Platform Stack. And post the first year, we would treat it as part of an integrated platform and execution, with respect to the extent that we wish do that. I think all the hooks and the necessary integrations have to be mandatorily completed within the first 4 quarters of the acquisition and we have done that sensibly for almost every single acquisition that we have done. And then post that period, we would see and define its overall growth trajectory as part of our own organic growth plans, and we would no longer be seeing it as an acquired sort of a separate affair.
As far as the reasonableness of that year 1 assumption is concerned, I think we back it on the track record, that every single acquisition that we have done, we have managed to achieve that within the first year itself. If ever in future that were to happen that it is taking a bit longer, we will certainly advise on that, but at the moment, I think it is absolutely sensible for us, to not only work on that template, but also to commit towards delivering that internally, to even to with the acquired effect, because the employees, the integration, all of that and the culture and the strategy and the platform level, has to be absolutely taken care of within year 1 itself. Otherwise, chances are, that it will become a failed acquisition and so far, we have had the good fortune not seeing anything like that.
To put it lightly, the year 1 is an engaging affair, and thereafter it consummates into marriage?
Exactly, yes. And by the way, typically -- even before we get into the engagement -- before we get into the engagement, if you see in almost all our investments, which have been 100% acquired or are being 100% acquired, the courtship period before we sign even an MoU, has been a multiple yearlong courtship period before we go deeper into the marriage. So by the time we actually sign the contract, there is -- lots of things have been taken care of. And then the first year is just the actual execution on that. So I think, that is very carefully assessed by us. There is never a case of speed dating, where you meet someone say okay, let's just go ahead and do something now, it's been 3 to 8 years long courtship period, before we even sign a non-binding MoU on an acquisition target.
Understood. My second question is on unit economics --
Sorry to interrupt, Mr. Bharat, this is the operator here. Due to time constraints, we'll require to close the call now.
I am just raising the second question. Anuj, can I go ahead?
Yes, yes, please go ahead, Bharat. Let's take the second question and we move on to the closing.
Unit economics, that -- we -- what it is, what I've understood so far, your gross margin typically has been about 42%, 44% range and operating expenses, they've been about close to 16%, 17%. Therefore at operating level, about 25%, 27% margin. Clearly acquisition will distort that picture. But that economics in your opinion is [indiscernible], except that acquisition may change those numbers for a given length of time?
That is absolutely correct. And I think what we want to guide towards or what we want all our stakeholders to deeply be conscious of, is that as the management of the company, as the leadership team of the company, we are deeply cognizant and caring about bottom line sensible sustainable profitable growth as the DNA of the company. I have built this company for 17 years with that DNA, and nothing in our execution plans is going to allow that to change. So therefore, any acquisition that we do, all the organic unit economics of the company, it's very, very important for us to run a sensibly profitable cash flow positive, sustainable growth mechanisms are absolutely key to our financial performance.
This is not something that we are saying, because we are a public company now and that's what you would like to hear. We have been doing this, even before we went public all along. And that is the main reason why the management team of the company, the promoter group of the company is still able to retain almost 59.9% ownership to the promoter group holding company in Singapore. Otherwise, we would have been deeply diluted that if we were not capital efficient.
So this, the unit economics even for inorganic, yes it's distorted a little bit, but that distortion is a necessary investment to create much greater scale and much greater value creation for the stakeholders, because when we acquired the assets, they are breaking even, and of course, the value at which you acquire, therefore, is sensibly placed for where we made them. When we transform them to a much more valuable unit over the 36 months, first 12 months and the next 24-months period, it is really unlocking value for all our stakeholders and shareholders.
So this is -- I mean please don't see the distortion as a, Oh my God, it's like bringing the margins down and affecting the financials, we will see it as what a great investment if applicants transform them successfully, like we have already done for most of the acquisitions that we have already done. So it's a brilliant thing to happen. If it can keep on happening consistently. And so far, our track record shows that we are doing this consistently.
Due to time constraints, I now hand over the conference to the Affle's management for closing comments. Over to you, sir.
Well, thank you so much everyone for attending and for all your questions, they were very insightful questions, I absolutely enjoyed the earnings call and the Q&A session today. I wish all of you well, and as I have always mentioned, Affle is built to last. We are here for the long term and you will hear a lot more from us, as we go along and evolve this company into a great corporate citizen, that it already is. But we continue to strive to build Affle into an institution, and I look forward to all your questions, support and I wish all of you really well. Take care.
Thank you.
Thank you.
On behalf of Dolat Capital, that concludes this conference. Thank you for joining us and you may now disconnect your lines.