Earnings Call Transcript - NEXN Q3 2021

Operator, Operator

Welcome to Tremor International's Third Quarter & Nine-Month 2021 Conference Call. At this time, all participants are in a listen-only mode with a question and answer session to follow at the end of the presentation. This conference call is being recorded and a replay of today's call will be made available on the Investor Relations section of Tremor's website, and will remain posted there for the next 30 days. I will now hand the call over to Billy Eckert, Senior Director of Investor Relations, for introductions and the reading of the Safe Harbor statement. Please go ahead.

Billy Eckert, Senior Director, Investor Relations

Thank you, Operator. Good morning everyone and welcome to Tremor International's third quarter & nine-month 2021 earnings call. With us on today's call are Ofer Druker, Tremor's Chief Executive Officer, and Sagi Niri, the Company's Chief Financial Officer. This morning we issued a press release which you can access on our website. During today's conference call, we may make forward-looking statements. All statements other than statements of historical fact could be deemed as forward-looking. We advise caution in reliance on forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those implied by these forward-looking statements. More detailed information about these risk factors are set forth in our filings with the U.S. Securities and Exchange Commission. Tremor does not intend to update or alter its forward-looking statements except as required by law. Additionally, the company’s press release and management statements during this conference call will include discussions of certain measures and financial information in IFRS and non-IFRS terms. We refer you to the company's press release for additional details, including definitions of non-IFRS items and reconciliations of IFRS to non-IFRS results. At this time, it is my pleasure to introduce Ofer Druker, CEO of Tremor International. Ofer, please go ahead.

Ofer Druker, CEO

Thank you, Billy, and welcome to everyone joining us on today’s third quarter earnings webcast. Let me start by saying this quarter has been a significant period of growth for the company. Today we reported our strongest quarter in corporate history, and we are encouraged by the momentum we have generated across verticals which I will cover in more detail on today's call. Afterwards, our Chief Financial Officer, Sagi Niri will review the highlights of our Q3 financial results, followed by a Q&A session. First, I would like to cover some brief performance highlights. For the three months ended September 30, 2021, we generated contribution ex-TAC of $76.7 million compared to $49.7 million in Q3 2020, a 54% organic growth. The adjusted EBITDA was $42.3 million compared to $19.6 million in Q3 2020, which is 2.2 times growth. This reflects our strongest growth reported today, highlighted by September being the strongest single month since the company’s inception. For the nine months ended September 30, 2021, we generated contribution ex-TAC of $213.4 million compared to $110.3 million in nine months of 2020, reflecting organic growth of 92%, and adjusted EBITDA of $107.2 million compared to $21.4 million during the period last year, resulting in five times growth. Our record growth generally comes from CTV services, where our revenues grew 115% in Q3 2021 versus Q3 2020, and 88% in the nine-month period ended September 30, 2021, versus the same nine-month period in 2020. We also achieved a 49% EBITDA margin in Q3 2021 on a reported revenue basis and a 55% margin on net revenue, which is higher than the median of our direct peers. I emphasize that a core of this performance is the strength of Tremor's end-to-end technology and business platform, which covers the three pillars of our business: DSP, DMP, and SSP. Our end-to-end technology platform provides simplicity for our customers and better data empowerment for advertisers and publishers, accelerating the industry's move towards supply path optimization. As we serve customers on both the demand and supply sides, Tremor obtains robust access to first and third-party data from both advertisers and media partners, enabling customers to generate better returns on ad spend and maximize their ad inventory revenue. Tremor's platform also offers customers key operational flexibility on who they choose as a path provider that best suits their needs. Our DSP, Tremor Video, is compatible with our SSP, Anomaly, as well as other providers. Well, our SSP can also be leveraged by other DSPs as well. Later in this presentation, I will touch upon the continued progress we are making in CTV, which is a key performance driver for Tremor. Tremor's consistent primary focus on Video and CTV is proving beneficial in the market, leading to meaningful growth across our exchange and positioning us ahead of platforms only recently evolving from this space. We have enhanced our offering further through the acquisition of Spearad, our exclusive global ACR data partnership with VIDAA, and our recent launch of the Programmatic TV Marketplace. I also want to comment on perceived headwinds in our sector related to challenges this year with IDFA changes and cookie interpretation that are impacting industry players. We did not anticipate a significant impact on our billings. Our end-to-end platform's presence across all streams provides us with key advantages that reduce Tremor's exposure to these issues. We believe this strategy is proving successful, and we will continue to advance and enhance this model as we look to the future. It's also important to note that while COVID-19 proved to be challenging, it also served as an opportunity for Tremor, accelerating growth in segments with which we have strong exposure, such as CTV and Video. Recently, many companies have been facing supply chain constraints attributable to the COVID-19 pandemic, negatively impacting the sector as advertisers have reduced budgets due to these constraints. While we have seen some evidence of floor advertising spend decline in Q4 2021 in certain sectors, particularly automotive due to chip shortages, we have seen strong demand in other segments, and the diversification of our customer base on both the demand and supply sides has helped offset any significant adverse impact on our business. I will now shift the discussion to our vision and some key developments that have occurred since last quarter. Our senior team set a plan four years ago to transform Tremor into a market-leading company focused on Video, Data, and CTV with the ability to capture users across all screens delivered through a full end-to-end tech platform. Our team has M&A execution experience and has successfully integrated companies in the past. We are constantly searching for strategic opportunities to acquire additional companies that can become meaningful contributors in Video, Data, and CTV, as we have accomplished with the recent acquisition of Spearad. We believe we have delivered on our promise to continue expanding and enhancing each element of our end-to-end platform, emphasizing CTV, and we will continue to do so going forward. One recent example of this comes from the previously mentioned acquisition of Spearad, a global CTV ad server featuring a robust user interface with advanced tools for ad monetization. Spearad was purpose-built for broadcasters to deliver a seamless TV-like experience in CTV and OTT environments. Spearad will be integrated into Tremor's Unruly, enabling CTV ad billing, channel inventory management, and ad modes management. This transaction is particularly compelling as the addition of a CTV ad server further expands our differentiation and strengthens our position within CTV, significantly deepening relationships with our media partners and complementing our end-to-end CTV offering. Media clients were previously reliant on either in-house ad servers or third parties, whereas now broadcasters with strong relationships with Tremor can utilize us for our ad server and other capabilities. We see this enabling us to maintain more of these relationships in-house and allow us to better serve our customers through our technology solutions. This will also allow us to potentially expand our revenue footprint with common customers and we expect that it will also attract future media partners seeking to utilize this advanced technology solution. Not all ad servers have CTV ad monetization capabilities like Spearad, which is why we are particularly excited about adding this technology built by savvy industry veterans to our end-to-end platform. We anticipate this technology addition will allow us to capture a greater portion of CTV inventory through both existing and future media partners and provide added benefits to help those partners better control their inventory and maximize revenue opportunities. We will also continue to evaluate future strategic exclusive global partnerships that expand our data reach and differentiation within CTV, such as the partnership we recently announced with VIDAA. The partnership gives us exclusive global access to VIDAA's automatic content recognition, or ACR, data pre-installed on most Hisense smart TVs and is also integrated into a number of premium original equipment manufacturers. This partnership gives us access on an exclusive basis to VIDAA's global ACR data, accelerating our U.S. and international growth. We will utilize this data for targeting purposes making us one of the only end-to-end technology platforms outside of the walled gardens with this type of data exclusivity. The agreement provides us access to Video distribution reaching approximately 20 million smart TVs globally, and we anticipate this reach could roughly double over the course of our partnership. The data will be available for activation for customers on both sides of the end-to-end platform, enabling the ability to offer proprietary measurement capabilities for TV Intelligence campaigns. I also want to highlight the recent launch of Tremor's programmatic TV marketplace, which enables advertisers to access a centralized platform for running CTV campaigns facilitating turnkey campaign activation and providing transparency into audience data. Our TV marketplace deepens the ability to take greater control over the planning, execution, and customization of CTV campaigns, coupled with a clearer view into the supply and audience targeting capabilities available to them. Within this marketplace, advertisers can activate views leveraging Tremor content to access audience-targeting solutions enabled by content attributes from direct media partners. Advertisers can leverage our detailed targeting solutions to tap into traditional and linear TV buying tactics in digital environments like CTV at scale. These expansions of Tremor's capabilities also address the growing market need for more precise, verifiable targeting solutions across CTV and Video. Tremor also achieved a number of important business wins during the quarter. In Q3, we signed 35 new supply partners across critical growth verticals such as sports, entertainment, and lifestyle. Our Unruly product team streamlined revenue opportunities for publishers by rolling out consolidated and enhanced header bidding adapters on both the client-side and server-side. Publishers can now access Tremor Video demand for all Unruly formats via a single adapter, rather than legacy versions. Additionally, in Q3 2021, Tremor Video observed a major increase in the adoption of our data-driven creative offering, Tr.ly, including significant expansion across CTV. There was a substantial increase in client usage of our custom QR code solution for CTV. Tr.ly continues to be a differentiator for Tremor, presenting a unique offering and advantage within our end-to-end solution. Tr.ly is our in-house creative studio and allows us to provide custom data-driven creative solutions for advertising customers to align with their complex global campaign objectives. Leveraging Tr.ly supports our strategy of being completely end-to-end where advertisers and media partners can utilize us in all key aspects of their advertising process across all screens, which offers us numerous growth trajectories and differentiation of revenue streams. Finally, our strong balance sheet and cash position give us a robust foundation from which to continue exploring future growth opportunities through additional exclusive strategic global partnerships or acquisitions. Tremor has a proud history and proven track record of successfully integrating new opportunities into our unified end-to-end platform, and we will continue to evaluate deals that can further complement and enhance our existing platform. With those comments complete, it's now my pleasure to turn the call over to Sagi to review our financial results.

Sagi Niri, CFO

Thank you, Ofer. Thank you everyone for joining us today. We are encouraged to see another quarter of recurring revenue and strong business momentum as we move into the fourth quarter of 2021. Today, I'll be discussing some of the highlights of our Q3 performance as well as the key financial and operational drivers during the quarter. Tremor International achieved outstanding record growth here in Q3. Our revenue and adjusted EBITDA were propelled by steady organic growth. Our net revenue grew 54% in Q3 year-over-year, resulting in $76.7 million for Q3 2021 versus $49.7 million in Q3 2020, all driven by strong organic growth. Our CTV revenues grew 115% in Q3 2021 versus Q3 2020, and we are poised to continue this growth as more business is increasingly being transacted through programmatic platforms. During the same period, our Video net revenues grew 68%. For the nine months ended September 30, 2021, CTV and Video net revenues grew 188% and 112% respectively. As a result, we achieved adjusted EBITDA of $42.3 million in Q3 2021, and $107.2 million in the nine-month period of 2021, which corresponds to adjusted EBITDA margins of 65% and 50% of net revenue for the same period respectively. For the nine-months ended September 30, 2021, Tremor generated $215.4 million in net revenue which is an increase of 93% year-over-year. We continue to generate very strong adjusted EBITDA, while investing in the critical areas of our business that can drive our future growth. Costs were lower than expected, driven by lower anticipated marketing events and reduced travel and entertainment costs. We saw very strong year-over-year growth in Q3 and the nine-month period of 2021, which increased our EBITDA by 2.2 times and 5.0 times respectively compared to the same period in 2020. We are focused on being highly competitive in the CTV space and entered the segment early. The enhancements we made to our offering during the pandemic resulted in 115% year-over-year CTV revenue growth in Q3 2021. Our Video net revenue increased 58% from $40.1 million in Q3 2020 to $63.4 million in Q3 2021, driven by our Video capabilities and a sharp focus on this segment. We delivered significant growth in the nine-month period of 2021, exceeding market expectations and proving once again that our strategy is working. Representing the latest milestone in the evolution of our end-to-end Video-first platform, and TV Intelligence solution, our recent acquisition of Spearad and our exclusive VIDAA partnership will enable more effective TV campaigns going forward for our partners in several important ways. Enhance our TV Intelligence solution not only by providing an exclusive dataset but also by providing real-time targeting capabilities. VIDAA has a global reach of approximately 20 million smart TVs, allowing us to provide our international partners with a scalable TV targeting and measurement solution across the premium supply which we didn’t have before. Spearad is purpose-built technology for broadcasters addressing the unique need of delivering a seamless TV-like experience for consumers that can benefit our media partners through operational and cost efficiencies, increased buyer power, maximized revenue opportunities, and advanced user interface. Our customers will gain access to three new global CTV and OTT supply and advanced ad targeting capabilities. We believe we have a competitive advantage with our omnichannel end-to-end platform versus our one-dimensional solution. We have developed a profitable business model with high efficiency around operating costs, leading to operational leverage, economies of scale, and strong productivity. Among our ad tech peers, Tremor is one of the highest in margin and operational profitability resulting in a 49% adjusted EBITDA margin in Q3 2021 on a reported revenue basis and 55% on a net revenue basis. Turning to our cash flow, we generated net cash from operating activities of $44.6 million for Q3 2021 versus $4.5 million in Q3 2020, which is an increase of around 900%. For the nine months ended September 30, 2021, we generated net cash from operating activities of $121.4 million versus $11.7 million in the nine months ended September 30, 2020, a 940% increase. As of the end of September, we had $333.3 million in cash and cash equivalents with no debt. We also experienced a 99% free cash flow conversion during the quarter. Non-IFRS diluted earnings per ordinary share is $0.21 for Q3 2021 versus $0.11 in Q3 2020, and $0.56 for the nine months ended September 30, 2021, versus $0.07 for the nine months ended September 30, 2020. Finally, I'll now turn to our outlook. As a reminder, we expect that a return to office marketing and travel costs will add an incremental $1.5 million to $2 million per quarter in operating expenses next year. For the fourth quarter of 2021, we expect net revenue to be at least $85 million, representing year-over-year growth of approximately 16%. In Q4 2021, adjusted EBITDA to be at least $42 million, representing year-over-year growth of approximately 7%. We also expect annual 2021 adjusted EBITDA to be at least $149 million, representing year-over-year growth of approximately 145% and an expected annual 2021 adjusted EBITDA margin of 50% as a percentage of net revenue compared to 33% in 2020. This guidance reflects anticipated full-year organic contribution ex-TAC and adjusted EBITDA growth of approximately 62% and 150% respectively, and underscores that our efficient end-to-end model focused on CTV is helping us achieve excellent growth and profitability. We believe that our growth profile, efficient end-to-end model, and healthy balance sheet positions Tremor to continue taking advantage of a rapidly growing digital advertising market. With my remarks completed, I'll turn the call back to Ofer.

Ofer Druker, CEO

Thank you, Sagi. To summarize, we believe we are well-positioned within the industry thanks to the key advantages we achieve from being completely end-to-end. Our unified platform provides advertisers and media partners with simplicity and better data empowerment while also accelerating the industry's move towards supply path optimization. We will build this platform with a heavy focus on CTV, Video, and Data, we're now customized relying on our deep expertise and actionable insights, which now accounts for 92% of our programmatic net revenue. We continue to believe that advertisers and media partners will rely on and allocate additional spend towards fewer companies with a diverse portfolio solution that can serve them across all parts of the buying process and across all screens, regardless of their service level needs. We will also continue to deliver on our promise to expand and enhance our end-to-end CTV capabilities for customers. Such growth was achieved through our recent acquisition of Spearad, which further complemented our end-to-end platform offering. We have also taken steps to further our U.S. and international footprint and accelerate our growth, while differentiating ourselves through global data exclusivity with our partnership with VIDAA. As we look ahead, we will continue to evaluate additional strategic acquisition opportunities while also continuing to invest in our products, R&D, sales, and marketing to propel future growth and increase our market share. Finally, on the investor relationship front, we anticipate being far more active with both U.S. and global investors. Through attending investor conferences, conducting roadshows, and participating in non-deal roadshows with firms covering Tremor. We will be very busy working towards garnering increased interest from current and prospective shareholders. We believe that we have a compelling story and value proposition, with strategic differentiation and advantages that more investors and customers will see the benefit of as we move forward. We look forward to speaking with current and prospective investors at the RBC Global Technology, Internet, Media, and Telecom Virtual Conference on November 17, and the Raymond James Technology Investors Conference on December 6, and the Needham Growth Conference on January 10. We believe that we hold a significant proven foothold in the industry and remain confident about our future.

Operator, Operator

Our first question comes from Matt Swanson with RBC Capital. Your line is open.

Matt Swanson, Analyst

Alright. Thank you, and congratulations on the results this quarter. Ofer, you mentioned supply path optimization as a kind of a growing theme and it certainly seems like there is no better way for customers to take advantage of that than going with the full suite Tremor. Can you talk about just kind of what sort of tailwind this has been for you during the quarter and during the year? Do you think there is a chance that that trend accelerates in 2022?

Ofer Druker, CEO

Thank you, Matt. Good morning. Yes, we started this process about 3.5 years ago when we acquired RhythmOne in April 2019 and connected RhythmOne to Tremor, creating an end-to-end solution platform that includes both DSP and SSP. We believe this approach is creating key benefits for both advertisers and publishers. The first is simplicity for them to buy the traffic they need to achieve their objectives. The second is robust data integration, which is also a significant emphasis for us. The third is supply path optimization, meaning improving interactions between DSPs and media buyers. We are seeing many companies, including advertisers and publishers, adopting this model, and we believe it will become a standard in the near future. So, we anticipate growth in this area in 2022, supporting our growth as well.

Matt Swanson, Analyst

Thank you. And then for Sagi, the profitable growth you're achieving this year is really noteworthy. When we think about the strength, particularly in adjusted EBITDA, it was great to get that additional color on the return of expenses next year. How are you thinking about balancing investments in growth for the opportunities in front of you compared to profitability when looking out to 2022?

Sagi Niri, CFO

Hey Matt, thank you. I think we are all aware that we want to grow the business organically and keep growing into 2022 and going forward. We understand that in order to do that, we need to invest more in marketing, R&D, sales, and product development. Having said that, we expect to maintain around 45% adjusted EBITDA margins out of net revenue as we continue to grow.

Matt Swanson, Analyst

Good, awesome. Thank you for the time.

Sagi Niri, CFO

Thank you.

Ofer Druker, CEO

Thank you.

Operator, Operator

Our next question comes from Laura Martin with Needham & Company. Your line is open.

Laura Martin, Analyst

Good morning. I have three questions. The first is on margins. Following up on the prior question, they are quite a bit higher structurally. You're at 55% in the quarter, while Jeff Green from Trade Desk did 41% in the quarter, but really all their commitments are around 30%. What is it about your business that is structurally so much more profitable than other ad firms? That's my first question.

Ofer Druker, CEO

Thank you, Laura. I would take maybe the third question that you asked about CTV and its potential for the open market to grow compared to the walled gardens. I agree with Jeff's statement that CTV is an opportunity for the open market to thrive. CTV allows other companies to expand their business without being controlled by the walled gardens. We believe that with our exclusive agreement with VIDAA, we are positioned uniquely in this area.

Laura Martin, Analyst

Okay.

Sagi Niri, CFO

Laura, I will answer the first two questions. Regarding profitability, yes, we likely have the highest profitability margins in our industry. This is due to a couple of factors: our end-to-end platform model, which caters to both media partners and advertisers, and our efficient tech infrastructure, which allows us to maintain low operational costs. Regarding the CTV growth versus Video growth, there is no cannibalism; CTV is the device, and Video is the format. Our revenue is primarily from Video, and we expect CTV to continue to grow, potentially outpacing the increase in Video going forward.

Ofer Druker, CEO

Just to add a point about the EBITDA margin, we are talking about increasing our cost investment by around 30%, while our income grows by 100%. This extra income flows down to EBITDA, which explains the growth we see in it compared to the market and our focus.

Laura Martin, Analyst

Thank you very much. Great results, again.

Ofer Druker, CEO

Thank you.

Sagi Niri, CFO

Thank you.

Operator, Operator

Our next question comes from Andrew Boone with JMP Securities. Your line is open.

Andrew Boone, Analyst

Good morning, guys. And thanks for taking the question. Two, please. Firstly, can you discuss the value that Tr.ly offers and how customers are responding to it, as well as its relationship with advertisers through their agencies? Secondly, on VIDAA, the international component of that agreement was highlighted multiple times. Can you step back and review how you are thinking about international growth and potential opportunities there?

Ofer Druker, CEO

Of course, good morning. So, I will start with the second question regarding VIDAA. Our main focus is the U.S., with approximately 90% of our revenues coming from there, but we still have a strong infrastructure in international markets such as the U.K., Germany, Singapore, Australia, and Japan. This was impacted by COVID, which limited our ability to train personnel internationally, but we see a big potential internationally. We believe our experience with ACR targeting in the U.S. can differentiate us in these markets. VIDAA is a major player internationally, particularly in Japan, Australia, and the U.K., and we see it as a differentiator that can help us grow our revenue from mid-2022 onwards. As for Tr.ly, agencies and advertisers are seeking unique and creative ways to enrich their offerings, especially in light of how the advertising landscape has evolved. They are looking for help to gather more information about their products or services. We are experiencing strong demand for Tr.ly, especially since agencies have downsized, which enhances its attractiveness. This agility means advertisers can focus on a one-stop-shop approach through our platform, allowing for a more seamless experience. The Creative is connected to our DMP, enabling data-driven decisions and adaptations based on user behavior, which is very meaningful for our clients.

Andrew Boone, Analyst

Can I just follow up on that last point?

Ofer Druker, CEO

Sure.

Andrew Boone, Analyst

Does this acceleration relate to the integration of having an ad server and the Creative elements combined? Can you talk about how these two aspects are intertwined?

Ofer Druker, CEO

Of course. The ad server and creative elements are indeed intertwined. The integration of Spearad enhances our capabilities and allows us to improve the effectiveness of ads shown to users according to a variety of parameters that matter to advertisers. We view Spearad as one of the most advanced platforms in the market, and its inclusion in our offerings will provide a comprehensive set of data and creative capabilities that increase our attractiveness in the CTV advertising space.

Andrew Boone, Analyst

Great, thank you.

Operator, Operator

And next question comes from Jonathan Beard with Panya. Your line is open.

Unidentified Analyst, Analyst

Thank you. Can you hear me, guys?

Ofer Druker, CEO

Yes.

Unidentified Analyst, Analyst

Great. I just wondered if you could give an update on the size of the billings you now have and give us a sense of what scale the annualized run rate is. Secondly, could you provide a breakdown of your net revenue so we can understand how you're getting paid by clients now, and how your revenue mix might be evolving? Then finally, on processes in terms of Unruly as well, I guess it's relevant for the wider group too. Could you share what you're seeing in terms of demand for guarantees on better quality?

Ofer Druker, CEO

I will take the first two questions. We changed our reporting basis in 2020 to focus on programmatic on a net basis and performance on a growth basis. In Q3, our programmatic revenues on a net basis accounted for 69%. The total for Q3 was $76.7 million, and performance accounted for the rest. We generated $192 million in programmatic revenue over the nine-month period. Regarding your question on guarantees, Sagi can help spring in those details.

Sagi Niri, CFO

Yes. Many companies are moving away from providing exclusivity now. Publishers are less likely to provide exclusivity given the current market dynamics. However, we have established a significant agreement with News Corp, one of the biggest publishers globally, which allowed us certain exclusivity in our deals for three years post-acquisition. Securing those kinds of guarantees is rare in today's environment.

Unidentified Analyst, Analyst

Okay. Thank you.

Operator, Operator

There are no further questions. I'd like to turn the call back over to Ofer for any closing remarks.

Ofer Druker, CEO

Thank you very much. We are very excited about the results and the progress as a company. We are looking forward to continuing our progress going forward. Thank you very much.

Operator, Operator

This concludes the program. You may now disconnect. Everyone, have a great day.