Strong marketing technology recovery play
Adcore is a global digital advertising technology company providing Software-as-a-Service (SaaS) solutions for marketing via search engines and social media. The company is focused on delivering advertising solutions for e-commerce enterprises. This is a fast-growing segment of the digital marketing space, and we expect the segment to continue growing as the retail industry continues to migrate to e-commerce in the coming years. We believe the market sell-off over the last 18 months provides adventurous investors with an opportunity to invest in a proven growth business at a knockdown price.
Despite a 37% decline in the first half of 2022 (H122) revenues to C$9.9mln, the gross profit margin has risen by more than 800bp as the group refocuses on the higher margin indirect channel. Cash slipped by C$5.1mln to CS$9.0mln over the six months, partly reflecting the high level of investment as well as a stock buyback. We highlight in this report a number of positive underlying factors that we believe investors should consider, and we note that Q1 is typically Adcore's quietest quarter while Q4 is its busiest.
Adcore offers four SaaS products, bundled together under the Adcore Marketing Cloud platform, which apply advance algorithms and machine learning to enable advertisers and agencies to make automated data-driven decisions and to achieve improved performance from their advertising campaigns. The Adcore product suite offers scalable solutions which are suitable for enterprises of all sizes as well as for agencies.
The company launched its Adcore Marketing Cloud platform in September 2021, bringing the four product offerings together on a single cloud-based platform, which provides Adcore with the architecture to seamlessly expand the product range going forward. Adcore has extensive global reach, with five offices covering four continents. Revenue growth is supported by strategic partnerships with search engine and social media partners which allow the company to provide more effective support to its clients.
In addition to its ad-tech business, in 2021 Adcore launched Amphy (www.amphy.com), a new platform for live online learning. This gives Adcore exposure to a growing global market for live educational experiences, and provides an additional route for revenue growth.
A leading mar-tech company for e-commerce enterprises
The share price decline leaves the stock trading at a small premium to its C$9.0mln net cash position and an enterprise value of C$7.0mln. The group suffered a free cash outflow in the last two quarters due to investment. However, if management meets its objectives, the picture will have swung around by Q4. In our view, given the group's strong track record of entrepreneurial growth, the current share price provides a tremendous opportunity for adventurous investors looking for a long-term recovery play.
Adcore is an e-commerce advertising technology company which offers digital marketing solutions to manage and automate e-commerce store advertising. Founded in 2006, Adcore has offices in Toronto, Melbourne, Hong Kong, Shanghai, and Tel Aviv and has more than 60 employees. It has a global customer base of over 500 advertising agencies and 10,000 advertiser accounts. The company joined the TSX Venture Exchange via a reverse takeover of County Capital One which completed in May 2019, and it graduated to the Toronto Stock Exchange in 2021.
Adcore has a strong growth track record and has headroom to grow within its existing geographic customer base as well as expanding more in the US (currently managed through Toronto), Asia, and other geographies. Adcore launched a US subsidiary in 2021.
Digital advertising from e-commerce companies has been strongly outgrowing the overall advertising market in recent years, and this trend accelerated during the COVID pandemic as more retail volume has moved online. In recent months we have seen a deceleration in e-commerce and downturn in retail in general. Nevertheless, in our view, the growth in e-commerce is a permanent shift in the retail industry, and we believe that e-commerce advertising remains a highly attractive growth segment within the ad-tech market. Adcore offers a highly scalable technology solution that can deliver results for businesses of all sizes, as well as for advertising agency customers.
In addition to the group's mar-tech products, Adcore also offers a unique platform for online learning, through a platform called Amphy. This educational technology (or ed-tech) business provides the company with revenue diversification and an additional growth opportunity and has already achieved strong growth in user numbers.
Within the mar-tech space, the company has four products which are delivered through its Adcore Marketing Cloud platform. These products provide customers with tools for optimizing their online ad campaign in terms of viewership and sales generation as well as providing automation functionality to make the campaign management more efficient for the user. The following table summarises the core ma-tech product suite:
Company background
Product suite
Source: Adcore presentations
Market blowout creates an opportunity
Investment summary
Adcore offers investors exposure to the growing demand for advertising for e-commerce as well as exhibiting a rapidly increasing market share within this space. The growth strategy is supported by a global geographic presence and a strong network of strategic partnerships with distribution channels. The company has a track record of good profitability and has a solid net cash position on the balance sheet.
In spite of a strong track record, the Adcore stock price has drifted down over the last 14 months. In our view this reflects a number of factors:
- The recent selloff in the broader market, which reflects the weakening global economic and geopolitical backdrop.
- A larger selloff in technology stocks, which reflects the discounting impact of the rising yield curve on future distant cash flows.
- A hangover in the broader e-commerce segment, which has seen a major selloff in stocks like Shopify and Wix, as well as retail-focused players such as Amazon, eBay and Ocado. This reflects a view that some stocks over-expanded their cost base in anticipation of a new paradigm environment. Meanwhile, traditional retailers have also been suffering, noting the recent profits warnings from Target.
- Fear over holding illiquid small cap stocks in a volatile environment.
Nevertheless, at the current share price level, Adcore has an enterprise value of a modest C$7.0mln. This looks considerably oversold in relation to last year's revenues of C$35.7mln and EBITDA of C$3.8mln. However, the group suffered a 26% decline in Q2 revenues and recorded an operating loss of C$0.6mln (see income statement below). We also note that Adcore is going through a transition period, shifting to higher margin indirect sales in its core mar-tech business while rolling out its new ed-tech business.
We conclude that Adcore offers shareholders exposure to:
- A versatile ad-tech platform, exposed to the growing e-commerce advertising sector, and gaining market share rapidly
- Strategic partnerships with leading social media and other distribution channels
- A global geographic presence
- A track record of strong profitability, prior to the current transition period
- A healthy net cash position on the balance sheet
Gross margins jump from 23% to 43%
Second quarter 2022 (Q222) and first half 2022 (H222) results
At first glance, H122 results look like a wipe out, with revenue falling by 37% to C$9.9mln and adjusted EBITDA sliding by 97% to C$0.1mln. However, Q2 revenue grew 10% sequentially over Q1 and, after excluding the top two clients, revenues were broadly flat on the corresponding period in 2021. Cash slipped by C$5.1mln over the six months to C$9.1mln, which is a disconcerting high burn rate. This largely reflected an increase working capital, including investment in the Amphy platform, as well as some seasonal expenses. The underlying cash burn for the core MarTech business is much lower, eg, the second quarter included C$0.5mln investment in Amphy and C$0.5mln for a share buyback. We note the group's SaaS business model is cash generative, with payments made in advance.
Note: the numbers presented in the text and in the two tables below are in C$, reflecting the fact that Adcore is a small Canadian company, while the tables at the end of the report are in US$ as the group's official reporting currency is US$.
Q2 income statement and reconciliation to adjusted EBITDA
Source: Company results and presentation
*Estimated from similar exchange rate as used for translating revenue
14 new client wins
However, there are plenty of positive underlying factors. We highlight the following:
- The revenue decline was predominantly due to a slump in revenue at the top two customers from the corresponding period. When excluding these two customers, group revenue was broadly flat at C$3.5mln.
- Despite the decline in revenues, gross profit has been on an improving trend, and the first half gross margin increased by more than 800bp to 42%. This reflects management's goal to refocus the business on higher margin revenues, with the long-term goal for margins in the 40-50% range.
- Profitability has been held back by the establishment of the Amphy business, which was not in operation in the corresponding period. When excluding Amphy, group adjusted EBITDA was C$197k higher at C$167k.
- The group won 14 news clients across all regions in Q1, including two big brand names in Australia - Best & Less and Candlefox. In addition, tourism budgets are being reignited after the COVID-19 closures. Adcore has some very large customers in the tourism sector, including the Israeli Tourism Ministry.
- There was an increase in higher quality revenue - indirect revenues trebled and North American revenues quadrupled.
- Q1 is the quietest quarter for Adcore, with business typically ramping up over the year, culminating in the busiest period in Q4. This is a fairly typical seasonal cycle for a technology business as customers spend their budgets at the end of the year.
- Amphy was only incorporated in Q2 of 2021, and we believe revenue is likely to ramp up in the second half of 2022 and into 2023, while management says its expenses are under control.
Q2 revenue breakdown
Source: Company results and presentation
*Estimated from the data given
Focus on quality revenues, improving margins
Outlook.
Management has given specific quarterly guidance for the first time and expects the business to generate revenue of C$6.1mln - C$6.75mln in Q3 with gross profit in the range of C$2.9-3.2mln and the gross margin exceeding 45%.
On the conference call, management was optimistic and gave a bullish assessment for H2. It expects a stronger tailwind from the important travel sector, with the potential to drive back to the level that it was from the group in 2019. Q3 is the strongest quarter for travel spending while Q3 and Q4 are historically the strongest quarters of the year for online advertising.
The company took a strategic decision in the last part of 2021 to focus on quality over quantity and drive the indirect revenue stream which has a higher gross margin. There is also an improvement in revenues coming from North America, both direct and indirect channels, which is part of this plan. Q4 will be the first quarter to compare like-for-like since the new strategy began in Q421. Longer-term, the goal is for gross margins in the 40-50% range.
Key performance indicators
Source: Company presentation
Share buyback plan
In May, the company announced a buyback plan to purchase up to 5% of the outstanding shares (around 3.2mln shares) over a period of up to 12 months. It has already announced the purchase of 2,171,400 shares from a former executive at the price of 20c, along with a further 274,500 shares, reflecting a cost of C$497k.
We also note that the CEO, CFO and a lead director all made small purchases of stock during the second quarter.
57% revenue growth in 2021
Long-term financial track record
The company delivered continued strong revenue performance in 2021, with 57% growth (C$ terms) to C$35.7mln. This reflected growth in the e-commerce advertising market as well as a significant market share gain for Adcore. Adjusted EBITDA grew by 19% to C$3.9mln and the group ended the year with C$14.1mln of cash and has no financial debt (it has a small amount of lease liabilities). The decline in EBITDA margin reflected the ongoing high level of investment in the business. The cash position fell to C$11.1mln at the end of March, as discussed above.
We argue that strong growth drivers remain in place for 2022. In particular, the Marketing Cloud platform was launched in September 2021, and the company will benefit from a full year in 2022 operating with the Adcore Marketing Cloud. This allows the company to offer its four products through a single platform, with the infrastructure to add new products as they become available and potentially integrate third-party solutions. However, this is tempered by the weakening economic backdrop.
The following chart summarizes the group's annual revenue growth trajectory.
Group revenues
Source: Company results presentations
Strong historic growth market since year 2000
Mar-tech market environment
Digital advertising technologies are the main focus of Adcore, and are currently the dominant revenue driver.
The digital advertising market
The digital advertising market has taken a hit recently with profits warnings from Snap (weak advertising backdrop) and Shopify (swing to loss despite continued growth due to heavy investment).
Digital advertising globally has been growing at a much faster pace than other media such as television or print. Within the digital advertising space, one of the fastest growing sub-segments is advertising by e-commerce enterprises.
The following chart shows the growth trends for overall digital advertising and advertising for e-commerce. However, the recent weakening backdrop, in conjunction with the rising interest rate environment, suggests a near-term slowdown.
Global digital advertising spend, overall market versus e-commerce
Source: Proactive Research, from various market sources
E-commerce growth decelerating
US e-commerce growth remained solid at 6.7% in Q122, in relation to the corresponding period that was inflated by the pandemic, according to data from Digital Commerce 360 (see chart below). However, the picture also shows a continued deceleration and growth and Q122 was the slowest since Q3 2009, during the global financial crisis when e-commerce growth was just 3.0%. Nevertheless, the numbers are 56.8% higher than in Q120 and 88.7% above Q119, prior to the COVID-19 pandemic. In Q122, online sales represented 21.0% of total retail sales, according to data from Digital Commerce 360, up from 16.6% in Q120 and 14.6% in Q119.
US online sales growth, Q1 2019-Q1 2022
Source: Digital Commerce 360 analysis of US Department of Commerce data; May 2022
Recurring SaaS business model
Adcore is focused on advertising solutions for e-commerce, with technology solutions specifically tailored to help online stores to maximise the efficiency of their advertising spend. This sector focus is an important differentiator for Adcore within the ad-tech space, and has been one of the reasons for Adcore’s 57% FY21 revenue growth.
The business model in mar-tech
Adcore’s suite of products provides customers with tools for optimising their online ad campaign in terms of visitors and targeting their viewership to maximise sales generation. The products also include automation features which make the campaign management more efficient for the user. The products are applicable to advertising via search engines, social media platforms, or shopping sites.
Adcore’s technology solutions are offered as Software-as-a-Service (SaaS) with revenues related to the volume of advertising managed through Adcore systems for the customer. This allows for a scalable solution which is suitable for enterprises of all sizes.
The technology solutions are sold directly to e-store operators to manage their campaigns, or to advertising agencies which can apply Adcore’s solutions on behalf of their clients. Typical fees are 10% of managed ad spending for a direct customer (e-stores) or 5% for an indirect customer (agency). Indirect customers typically bring a higher volume of managed ad spend through a single relationship.
The following chart show Adcore’s growing exposure to higher quality indirect revenue.
Revenue mix
Source: Adcore presentation
Google, Facebook and Microsoft are partners
Adcore has strategic partnerships in place with key digital advertising channels to market, sell, and service their products as a trusted media advisor. This enables Adcore and its clients to benefit from high levels of support and access to the latest ad tech products and technologies. Adcore is a Google Premier Partner, Facebook Marketing Partner, and Elite Microsoft Advertising Partner. The following graphic provides an overview of Adcore’s strategic partnerships.
We argue that Adcore’s business model provides a robust and scalable revenue-generating model, supported by a strong base of recurring customers and a network of value-enhancing partnerships.
Strategic partners
Source: Adcore
Exposure to online learning
Ed-tech (educational technology) segment - Amphy
In addition to its digital advertising business, Adcore has exposure to the fast-growing market for online learning, through its Amphy platform, which was founded during the height of the COVID pandemic in 2020, and has around ten employees.
Amphy is a marketplace for live online classes, with a focus on recreational learning experiences. These include fitness, cookery, languages, and other popular categories. Demand for ‘live’ classes, as opposed to pre-recorded tutorials, has increased dramatically since the COVID pandemic, as consumers have become accustomed to approaching interactive learning through a virtual medium.
The Amphy platform was launched in beta form at the start of 2021, with a full launch in July 2021. By December 2021, the platform was offering over 1,400 different classes, with almost 8,000 students participating. Amphy receives a 27% take, which compares to around 19% for comparable websites.
The chart below outlines the growth trajectory so far, which has been consistently above management's targets. However, the ed-tech segment, in which Amphy sits, generated only C$20k in revenues in FY21, up from zero in the prior year.
Amphy has a clear strategy for growth, which includes expanding into new verticals - B2B, e-commerce, experiences, live events and a TV app.
Amphy business model comparison
Source: Amphy presentation
Sellers on the platform are the content providers; individuals or companies offering online courses. The platform allows sellers to set their own pricing and schedule and provides them with access to a global audience base. The platform also automates administrative functions such as collecting payments and sending reminders for classes. Amphy generates fee income as a percentage of the fees charged by instructors to their students.
We believe that Amphy provides Adcore with exposure to a fast-growing market, and a significant additional avenue for revenue growth.
Amphy growing sharply from low base
Growth in student numbers on Amphy
Source: Adcore
Amphy growing from a tiny base
Amphy suffered an EBITDA loss of C$243k in Q122 and C$272k in Q222. Q1 saw a 136% increase in visitors and a 162% jump in students signing up, while, most importantly, revenue-generating transactions rose by 77%. However, the revenue numbers remain small with total revenue of just US$18k generated in Q2, up from US$10k in Q1. Interestingly, around 40% of orders in Q2 came from the B2B channel, up from zero in Q1. The focus in Q2 was the launch of a new version of the Amphy website, outlined below.
Amphy new website
Source: Adcore presentation
Strong management team
Management
The company’s growth strategy is driven by an executive team with extensive experience in technology, marketing, and business management. The following summaries provide an overview:
Omri Brill, Chief Executive
Brill has 20 years of experience in the online advertising technology industry. As a leading expert in the field of digital advertising, Brill combines his expertise with a strong computer science background and a BSc in Industrial Engineering from Tel Aviv University.
Roy Nevo, Chief Operating Officer
Nevo is responsible for the daily operations of the company. He has 10 years of experience in the online advertising technology industry, and he combines his expertise with a strong business background and both L.L.B and MBA degrees from the Ono Academic College.
Vadim Malkin, Chief Technical Officer
Malkin has over 20 years of experience in software development and research. Before joining Adcore, he spent 15 years at Comverse Inc., finishing his tenure there as Business Applications Development Manager. Malkim holds a BA degree in Management from Moscow State University of Economics, Statistics, and Informatics.
Yatir Sadot, Chief Financial Officer
Sadot, CPA, is experienced in building the financial infrastructure and driving growth of multinational companies. Sadot has experience in planning strategies, initiating financial solutions to business practices and implementing internal controls for fast-growing technology companies. Sadot also holds an MBA in Financial Management and Accounting from The Hebrew University.
Solid growth record
Financials
Adcore delivered revenue growth of 57% in FY21 to C$35.7mln. In US$, the group's reporting currency, the growth was 65% to $28.0mln. This growth was entirely organic. Adjusted EBITDA grew by 19% to C$3.9mln, which reflected a margin of 10.6%, down from 14.2% in the prior year. The decline in margin reflected the acceleration of investment in the business.
We believe that Adcore remains on a solid trajectory of revenue and profit growth over the long term.
The following chart illustrates the recent quarterly progress of the group. While revenues stepped up from late 2020, EBITDA margins have pulled back due to international expansion, development of Adcore Marketing Cloud (new apps, features), investments in marketing and investment in Amphy. Nevertheless, the group remains profitable, operates a cash-generative recurring revenue business model and is geared for margin expansion as the group grows.
History of profitability
Revenue and EBITDA development
Source: Company presentations
Strong cash position
The group ended December 2021 with C$14.1mln in cash (US$11.1mln) on the balance sheet and has no financial debt other than a small amount of lease liabilities. By the end of June, the cash position had slipped to C$9.0mln (US$7.0mlm). Cash balances were on a rising trend through 2020 and 2021, supported by a capital raise in June 2021. However, the cash balances slipped into 2022, partly due to the pace of group investment in its core platform. At the same time the group is transitioning into higher margin indirect sales and investing in its new ed-tech business. Also, Q421 media budgets payments slipped into the first quarter and there was C$0.5mln outlay for a share buyback in Q2.
We believe that the company has sufficient resources to finance its current growth plans and to provide significant headroom for contingencies.
The following chart shows the evolution of the cash position.
Cash balance
Source: Company accounts and presentations
Knock down valuation
Valuation
After peaking at C$2.70 in February 2021, the stock has suffered a sharp decline, which reflects a combination of factors, including the recent fall in the markets with a larger slide in technology stocks. It also reflects a hangover in the e-commerce space following the COVID-19 pandemic-inspired boom and shunning of small-cap growth stocks.
Nevertheless, we believe there are compelling reasons to consider investing in Adcore at this point.
- Low valuation. With an enterprise value of just C$7.0mln, the stock trades on just 0.2x last year's revenues and 1.9x EBITDA
- Strong balance sheet with C$9.0mln of cash and C$0.4mln of lease liabilities. We believe this should get the group back through to profitability unless there is a major economic downturn. Management is clearly confident it has sufficient cash resources, in that it has carried out the buyback
- Proven entrepreneurial track record
- Exposure to the growing e-commerce advertising sector, and, until the latest quarter, a rapidly increasing market share within this space
- Global geographic presence and a strong network of strategic partnerships with leading social media and other distribution channels
The following table presents the EV/revenue's ratio of some of Adcore's listed peers.
Peer analysis
Source: Company websites, regulatory news and market sources. Priced on August 16, 2022.
Accounts are in US$
Financials
Adcore presents its financial statements in US dollars while its presentations reference the numbers in Canadian dollars, since Adcore is a small Canadian company listed on the Toronto Stock Exchange.
Profit & loss
Source: Company accounts
Financial position
Source: Company accounts
Cash flow
Source: Company accounts