AcuityAds Holdings Inc

TSX:AT

Earnings Call Transcript 2019-Q4

[Operator]

Good morning, my name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the AcuityAds Fourth Quarter Results Conference Call. [Operator Instructions] Mr. Jonathan Pollack, CFO of AcuityAds, you may begin your conference.

[Jonathan Pollack, Chief Financial Officer]

Good morning, everyone. Before we begin, I will read our cautionary note regarding forward-looking information. Certain information to be discussed during this call contains forward-looking statements within the meaning of applicable securities laws, including, among others, statements concerning the company's growth objectives, the company's strategy to achieve these objectives as well as statements with respect to management's beliefs, plans, estimates, and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Such forward-looking statements reflects management's current beliefs and they're based on information currently available to management and is subject to a number of significant risks and uncertainties that could cause actual results to differ materially from those anticipated. I would now like to turn the conference over to Tal Hayek, the Co-Founder and Chief Executive Officer of AcuityAds to update you on the operations of the business.

[Tal Hayek, Co]

Thank you, Jonathan. Let's start by giving a huge thank you to the Acuity family. Altogether, we worked hard and smart which made 2019 a big year and a transformational year. In Q4 of '19, we delivered our biggest quarter yet, with $38.5 million in gross revenue and $19.5 million in net revenue. Most importantly, we are now clearly showing the financial leverage of our model with $6 million in EBITDA in Q4, which is the seventh consecutive quarter with positive EBITDA. In addition, we've delivered adjusted net income of $5.2 million or $0.11 per share, net income of $2 million or $0.04 per share and positive cash flow. Self-Serve revenue was $11.1 million in Q4, which represents 30% of our revenue for the quarter. Our annual EBITDA in 2019 was approximately $10 million. And we've done all that while still heavily investing in our technology. 2019 was a transformational year at Acuity. Dr. Nathan Mekuz and team were very busy launching a new iteration of the AI system. This one was the fourth iteration of the AI and has proven to be, by far, the most effective yet in increasing both ROI to our advertisers as well as our gross margins. We have seen its direct impact on our aggressive growth in both top and bottom line. We started the rollout of the new AI to the platform in a limited way in early Q2, more broadly in Q3 and platform-wide in Q4. We saw a sequential increase in margins every quarter in 2019. Our gross margin in Q1 was 45%; Q2, 48%; Q3, 49%; and Q4, 51%. We strongly believe that this is a long-term win. We believe that the new AI will continue to help us on this front throughout 2020 and beyond. In addition to increasing our gross margins, the new AI was instrumental in increasing revenue. Advertisers are making their investment decision based on data and ROI and programmatic offers the best way of measuring ROI in real time. 10 years ago, Acuity was born with a promise to deliver best-in-class AI system, an AI system that delivers the best ROI in the business. Over the past 10 years, we have done just that. We keep building our relationship with advertisers by delivering superior ROI and they reward us by spending more. For example, a global financial company spent $250,000 with us in Q4 of 2018. They were so happy with the ROI and committed to spend $4 million in Q1 of 2019. And as we were executing in that contract, they started shifting more budget to us and ended with a $7 million spend. A global hospitality company spent $100,000 in our system in Q4 of 2018, came back with $250,000 spend in Q1 of '19 and later committed to $5 million for the year. In 2020, they already signed a $6 million with deal and the year just started. As we rolled out the new AI system across the platform, customers saw ROI improvement that resulted in increased spending pretty much immediately. For example, in Q3 of 2019, a major U.S. bank saw a 30% increase in ROI and increased their spend by 75%. In Q3, we also saw a global travel company increase their spend by 14% after seeing an ROI increase of 35%. And an ad agency, which saw a moderate increase of only 5% to their ROI, increased their spend by 54%. We have countless examples like these. Bottom line is that advertisers closely measure ROI. We believe these examples demonstrate that we have best-in-class AI and anticipate advertisers will continue to trust us with more of their ad dollars in the future. 2019 was also a year of heavy investment in innovation. We invested in a new Self-Serve platform that we refer to as our advertising automation platform. We learned from industry research that marketers know and want to bring digital in-house. They also want to have control of their data as well as better control of their ad spend. And that they're afraid of the complexity and lack of talent to operate programmatic platform. We believe that our new platform will revolutionize the way programmatic advertising gets executed. It will be operated by average people without the need for extensive training. It is an intuitive system that uses Drag-and-Drop technology, connectors and condition, allowing anyone to plan and execute programmatic ad campaigns in minutes. Our advertising innovation platform is currently in alpha testing. We have a long list of major brands for data -- for beta, which is expected to start in March and fully release to the market in the summer of 2020. Throughout our journey, we have seen many companies in our space. Most started around 2010, VC-backed, grew aggressively until around 2016 and started dropping revenue, all while burning tons of cash. We are very proud to have done things differently. We have delivered 8 years of consecutive growth with revenue CAGR of 82%. For the most part, EBITDA positive and now cash flow positive. We attribute that to having best-in-class AI system, which delivered tremendous value to advertisers. We also think that size is important. Maintaining technology that process $110 billion transaction a day comes with certain fixed costs. This technology was built to handle much more revenue than we have today. We are now beginning to see the leverage of our business model. From Q3 to Q4, we have increased our revenue by $11.5 million. And $4.4 million of that increase dropped straight to the bottom line. Why? Because fixed costs do not change. Our gross margin is around 50%. And we have about 10% in variable costs. As a management team, we are planning to continue focusing on profitability, financing our continued growth from operating cash flow and reducing debt. Now let's talk about the market. Programmatic advertising started about 10 years ago with a promise to create a better way of buying and selling digital ad. It started with display ads by publishers selling their remnant inventory. Very quickly, grew to include mobile, video, CTV, digital radio and outdoor digital sign. It was also very clear from the beginning that it is a much more efficient way. Today, publishers are offering most of their inventory in the programmatic market space. Now TV is going through something similar. 30% of viewership hours are delivered digitally, but only 3% of ad dollars. This is a huge gap, very similar to the gap we saw years ago on the Internet, which we are confident will be closed. Our acquisition of Visible Measures in 2017 set us up very well for the TV advertising space. In fact, our total Connected TV revenue grew approximately 169% in Q4 versus Q3 of 2019. Compared to Q1 of 2019, our Connected TV grew by a factor of 15, and we have millions of dollars in our sales pipeline, specifically for Connected TV. The expectation is that the global advertising market is to become $1 trillion industry one day and that most of it will be transacted programmatically. Another issue to discuss is the impact of cookies. We get questions about cookies all the time. First of all, cookies are only related to a small part of our business. The rest works on device ID related to mobile phones and Connected TV. It also has a big impact on retargeting, which is less than 3% of our business today. In my opinion, the best way to think about this issue is like this. Currently, most content online is paid for by advertisers. And consumers get it for free. We believe that this is going to continue. And for the most part, continue -- consumers will not be willing to pay for content. If this is true, then the ecosystem will continue to be funding by the content -- funding the content by delivering ads to consumers. We also think that the worst-case scenario, if third-party cookies go away without a replacement, the big impact will be on publishers. This will happen by CPMs dropping as advertisers continue to use our system, NAI to make best choices for ROI. Remember, only a fraction of the input variables used by our AI is related to cookies. We, at Acuity, alongside the industry are already testing new potential solution that could replace the cookies in the next 2 years. We are extremely happy with the company's performance in Q4 and in 2019. We have delivered $10 million in EBITDA, all while investing in AI, building a large supply pipe and investing in a new advertising automation platform. Our new AI system delivers greater ROI to our clients and increased our gross margins. We are super excited about our new advertising automation platform. We expect this platform to change the way programmatic is executed and transform the company to mostly Self-Serve business. We see great future for Acuity in the fast expanding digital TV space. We are already seeing great start to 2020. With continued focus on profitability, we now have similar supply pipes as our bigger competitors, better AI system and about to launch the best, most intuitive Self-Serve platform in the market. With that, I would like to turn the conference to our CFO, Jonathan Pollack.

[Jonathan Pollack, Chief Financial Officer]

Thank you, Tal. I, too, am extremely pleased and excited with the results we achieved for both the fourth quarter and fiscal year 2019, as we generated record revenues, EBITDA, net income and operating cash flow. As Tal mentioned, we achieved a record $119 million in annual revenue with close to $10 million of total EBITDA. And for the fourth quarter, we achieved numerous records with revenue of $38.5 million, EBITDA of $6 million and net income of $2 million. These are significant improvements over previous quarters and years and shows the strength of Acuity and the success from all the hard work and commitment of the entire Acuity team. In particular, this is our seventh consecutive quarter of positive EBITDA. We strongly believe we are positioned for even better results in 2020 and beyond. As well, we are now generating positive annual free cash flow, which we think signifies another significant move forward for our business. This is also being driven by the continued benefit Acuity is seeing from strong industry tailwinds. With respect to the financial results for the fourth quarter of 2019, total revenue was $38.5 million compared to revenue of $32.9 million last year, an increase of 17%. Total revenue for the 12 months ended December 31, 2019, amounted to $119.1 million compared to $70.2 million for the same period in 2018, an increase of 70%. As I mentioned earlier, we continue to see strong industry tailwinds that are directly benefiting our sales team and the growth of new and existing customers. Revenue from our Self-Serve business totaled $11.1 million in Q4 2019 compared to $5.2 million in Q4 2018, an increase of 113% year-over-year. For the 12 months ended December 31, 2019, revenue from Self-Serve was $31.1 million as compared to $15.8 million a year prior, an increase of 97%. Demand for our Self-Serve technology continues to grow, and we anticipate even further growth in revenue as we officially launch our new Self-Serve platform later this year. Revenue from our managed service business was flat in Q4 at $27.5 million as compared to Q4 2018. Managed service revenue for the 12 months ended December 31, 2019, totaled $88 million compared to $54.4 million for the same period in 2018, an increase of 62%. We are very pleased with the strength of both of our Self-Serve and managed service platforms. This is being driven by our industry-leading AI technology, which is driving substantial ROI for our clients. Gross profit margin was 51% for Q4 2019 compared to 50% in Q4 2018 and 49% in Q3 2019. Gross margin for fiscal 2019 was 48% compared to 52% for the same period in 2018. We are very pleased with the sequential growth in gross margin from Q3 to Q4. And we are seeing continued margin improvement in Q1 2020, setting the stage for a positive trend this year. Operating expenses for the 3 months ended December 31, 2019, totaled $16.6 million compared to $17.3 million for the same period in 2018, a decrease of 2%. Relative to an increase in revenue of 17% year-over-year in Q4, we are pleased with the operating leverage we have been able to achieve this quarter. As we announced on our Q3 2019 conference call, the company is very focused on our operating leverage and implemented a cost efficiency program that reduced approximately $4 million of costs from the business. The entire management team reviews expenses every month to make sure we are on budget and also to find ways to get more leverage out of the business. This will not change and is a critical part of our focus on net income and free cash flow generation. Adjusted reported non-GAAP EBITDA, a positive $6.4 million in Q4 2019 compared to $3.3 million in Q4 2018 and $1.6 million for Q3 2019. As we have discussed, our operating leverage continued to prove it's important. Specifically, we increased revenue $11.6 million sequentially from Q4 to Q3 and increased EBITDA $4.4 million over the same period, representing a 40% contribution margin, with gross profit margins of 50% and about 10% variable costs, the model is working, and we expect this to continue. Continuing on this positive note, we are also very pleased to report that we generated positive net income in Q4 2019 of approximately $2 million or $0.04 a share. This is a true milestone for Acuity and is another testament to our solid financial performance and our solid financial position. While there is seasonality to our business, we expect to continue to generate annual positive net income going forward. In addition, on a non-GAAP IFRS basis, we also generated adjusted net income in the quarter of $5.2 million or $0.11 per share, a truly spectacular achievement. Adjusted net income adds back noncash expenses, including depreciation, amortization, foreign exchange, stock-based compensation, goodwill write-down and earn-out reversal gains and is a proxy for cash earnings. Please note that included in our Q4 2019 results is a $3.1 million noncash gain related to the reversal of the earn-out and a $3.2 million noncash charge related to the partial write-down of goodwill related to the 2018 acquisition of ADman. Furthermore, we are very pleased that adjusted free cash flow for the 3 months ended 30 -- December 31, 2019, totaled $4 million. And for the full year 2019, we achieved $1.6 million in positive adjusted free cash flow. Adjusted free cash flow includes all the cash payments for interest, non-finance capital expenditures, finance and right-of-use lease payments and amortization of our term debt. While there is seasonality to our business and our cash flows, we do expect to achieve annual positive free cash flows going forward. Cash on hand as of December 31, 2019, totaled $7.4 million compared to $8 million at December 31, 2018, and $5.9 million at September 30, 2019. Since September 30, 2019, we have increased our cash position by $1.5 million, reduced our operating line by $1.4 million and further reduced our term debt by close to $300,000 for a total improved financial position of over $3 million. In addition, we have improved our working capital position from a $900,000 deficit at September 30, 2019, to a surplus of over $1.7 million as at December 31, 2019. Today, Acuity has the strongest capital position in its history, with significant availability on its operating line, cash in the bank, reduced debt, improved working capital and positive free cash flow. And on that positive note, I'd like to pass over the call to the operator for Q&A.

[Operator]

[Operator Instructions] And your first question is from Gavin Fairweather from Cormark.

[Gavin Fairweather, Analyst of Institutional Equity Research]

I wanted to start out on Connected TV. We've seen definitely this proliferation of platforms that are operating. Can you just provide us with an update in terms of how many platforms kind of you're plugged into to access now? And maybe just some general comments on the availability and the amount of inventory within the market.

[Tal Hayek, Co]

Yes, absolutely. So look, our belief is that as this industry evolves, more and more of the publishers and the content of this world put the inventory on the programmatic space. You know so -- you know that there's a lot of companies who talk about the relationships that they're creating on their Connected TV. In our view, as a DSP, we are -- we already have access to all of it. So we're connected to pretty much all the different SSPs and ad exchanges out there. It's the job of the SSPs and the ad exchanges to have the relationship with the publishers and which is what they're doing, and we pretty much have access to anything out there. I think it's also important to know that just as we've seen years ago when the -- when programmatic started on the Internet. There was a lot of publishers that were afraid to put their inventory online because they were kind of competing against their premium inventory. And that was a gap that was closed very, very quickly as people saw the efficiencies into it. So this is what we expect to happen here. And as I said, today, we have access to pretty much anything on the programmatic side of things. And where do we see it go? It's really, really hard. I know that one thing is, from the consumer point of view, it's not a great situation today because you have to pay subscription for multiple players out there. And I think I'm personally paying close to $150 or $200 a month for less than what I used to get on cable for $60 a month. So we see that what's going to happen is eventually, there's going to be some -- somebody that would offer the full spectrum of $60 to $100 package, and we'll be able to -- as a consumer, we'll be able to access everything. That will put pressure down on subscription models, and we believe, elevate the ad-based model.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Okay, that's helpful. Just kind of shifting gears to the new Self-Serve platform. Or I guess -- sorry, your existing Self-Serve platform. So a bit surprised by the really strong growth of your Self-Serve platform in the Q4 kind of coming ahead of the new platform being on. So is that mostly kind of increased spend with existing customers? And I understand it is kind of the seasonally strong quarter there, but it's definitely a nice uptick.

[Tal Hayek, Co]

It's a combination of the new AI delivering better ROI. So therefore, the existing clients are seeing better ROI and spending more money on the systems, seasonality. There's a few new clients of the system as well. So a combination of all those things. We've also done a lot of fixes to our old UI. I mean, we didn't really invest a lot in it, but some low-hanging fruits earlier last year, just to make it more user-friendly, which helped as well. So all that has helped. But obviously, the major growth we're expecting from the new system we are launching.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Okay. And then your commentary on the cookie stuff was helpful. So when you think about this from, I guess, a high level -- and I understand it's kind of early in this process. But do you think that this is an area that kind of you need to invest in, in terms of next-generation of your decisioning engine, in terms of identification? Or do you see this as something that the industry is ultimately going to come up with some kind of resolution to, in terms of log-ins on the supply side or data providers in terms of coming up with some kind of identifications?

[Tal Hayek, Co]

I mean, we're already working with the industry about -- with a few solutions. We joined the consortium, where the -- where you come up with unique IDs. It's -- the belief is that if the worst-case scenario will happen then publishers who are the one that's going to get hurt the most from it, from lower CPM will start asking for e-mail addresses of people coming into their site. They're going to maintain their free content. And once they get that, they will be able to hash it, and then we all going to be able to get -- take advantage of that or be able to really to track that it's the same user. So the solutions are coming. I don't believe that we are going to be in an industry that you cannot target anymore. I mean, on a side note, a lot of what we bid on today, we don't always have cookie information. Even if it's web, we don't always have cookie information. So we still have a lot of input variables that are going to the algorithm, things like geographical location, we have a weather feed outside. We know the device you're on. We know what website you are loading right now. So that's very relevant to what you're looking at and there's a whole bunch of other things that we see on a bid request that doesn't necessarily depend on the cookie.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Okay. And then just lastly before I pass the line, we're kind of well into the election cycle down in the U.S. Seeing some headlines on that being definitely a positive driver for Programmatic spend money and more and more of ad campaign spending moving Programmatic. So do you guys feel that? Are you kind of plugged into that spending through the agencies that you're working with? Or not? Maybe some commentary there.

[Tal Hayek, Co]

On our more recent sales management meeting, it was shared with us that there are some RFPs that we're looking at. So we didn't budget anything for it, but it's all possible. I think we're probably going to get some, but we don't know for sure.

[Operator]

The next question comes from Daniel Rosenberg from Haywood Securities.

[Daniel Rosenberg, Analyst of Technology]

Congrats on a good quarter. I wanted to ask a follow-up on the strength in Self-Serve this quarter. I was wondering what the margin profile is between Self-Serve and your fully served business and kind of what impacts is that having on the gross margin line?

[Jonathan Pollack, Chief Financial Officer]

So the growth in Self-Serve in Q4 was driven by a bunch of factors that Tal already mentioned. One of them obviously being seasonality. So Q1, we expect the usual sequential drop in Self-Serve, however, our margins in Self-Serve, as we talked about our mid-30s and full serve is mid, call it, to low 50s. However, as we've always talked about and what we focus on is also our operating leverage and EBITDA. So while the growth in Self-Serve is definitely helping our revenues. It's also because of the decreased amount of SG&A associated, also driving more EBITDA. So we expect that to continue.

[Daniel Rosenberg, Analyst of Technology]

Okay, great. And you mentioned expecting to be net income positive. So with cash flows coming in, what are the priorities for use of cash? Do you have any balance sheet targets or priorities in debt?

[Jonathan Pollack, Chief Financial Officer]

Well, today, our definite goal for cash flows is to reduce the operating line and continue to pay down the term debt, which we have been doing over the past few years. It is continuing. I can tell you today that we continue to reduce our operating line, and we're in a very strong position.

[Daniel Rosenberg, Analyst of Technology]

Okay, great. And on the Connected TV, is there a moment in time where you'd say this is -- like, is this supposed to eclipse other businesses? Like do you expect it to be -- I mean, obviously, a meaningful part of the business? But when do you think it will be a focus or a more meaningful part of the ecosystem, I should say? I guess it's still early days in the shift to Connected TV.

[Tal Hayek, Co]

Yes. So it's -- every year, it feels like it's the year that it's going to pick up, but after last year, we started seeing more meaningful revenues coming from it. I think that the projection of the industry that this year is about $1 billion is going to flow that way. And then according to all the studies I'm seeing, it's starting to grow very aggressively after that. So there's a lot of things that are still being done the old way. There's a lot of networks with the distribution rights and government regulations and things like that, that still have to evolve. But look, at the end of the day, it's very clear that the viewerships are moving that way. So there's no -- there's really no other way.

[Operator]

At this time, there are no further questions. You may proceed.

[Tal Hayek, Co]

Okay. Thank you, everyone. So for closing, I would like to thank all of our investors and shareholders. You are a vital part of our success of Acuity, and we appreciate all your support. Another thank you to the Acuity family that made all this possible. We are looking forward to what already looks like it's shaping up to be another great year and to sharing more great things in the future calls later this year. Thank you, everyone.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.