Good afternoon, and welcome to the Azerion Q1 results presentation 2023. After the speaker's remarks, there will be a question and answer session. For those of you who are joining us via Zoom, if you would like to ask a question, please use the Raise Hand feature at the bottom of your Zoom window under the Reactions button. Once called upon, please unmute your audio to ask your question. For those of you who are watching on the webcast page, if you'd like to send a question through, please type it in the Q&A box on the right-hand side of the player. These questions can be sent in at any time during the presentation and will be addressed after the live portion of the Q&A event. I'd now like to turn over the call to Umut Akpinar for the welcome remarks.
Thank you. Good afternoon, everyone. I am Umut Akpinar, Co-CEO, and co-founder of Azerion. I would like to welcome you to Azerion's Q1 2023 results presentation. Today, I'm joined by our CFO, Ben Davey. Welcome, Ben. During today's presentation, we would like to look back on our performance in Q1 2023, and also to look ahead at the promising outlook of our business. Before I move on, let me pause for a moment to acknowledge the disclaimer. The first quarter of 2023 was about consolidation and integration of previous acquisitions for Azerion. In order to be fit to scale up our platform and grow profitably in Europe and beyond, we need to first simplify and optimize. That is why we increased our focus on consolidation and integration in the first part of 2023.
In addition, we continued expanding our offerings to advertising and publisher partners across the world. I am pleased to see that this effort starts to be visible in our financial results. We began the year with growth in our revenue and profitability across our Platform and Premium Games segments. Our revenue increased by almost 20% compared to the previous year, while adjusted EBITDA grew by more than 40%, and we believe there is more to come. Today, we have upgraded our annualized savings expectations from EUR 10 million to at least EUR 15 million, and this gives us confidence to reconfirm our previously provided guidance for 2023. While we focus on making our business extremely healthy, we monitor the market continuously.
The market remains challenging in digital advertising for some players, we believe this can bring opportunities for us, we want to be well-positioned to capture them. For Premium Games, we see a stable macro backdrop for revenues from in-game purchases. Our Metaverse products have growth potential, we see attractive synergies with our platform. Our social card games are more mature and generate healthy profits and cash flows. We will continue to manage those products for value. Q1 is typically slower, with lower activity compared to the rest of the year, we have still been able to grow our organic and inorganic top and bottom lines. We continue improving our offerings to advertisers and publishers while growing our profitability. We have confidence in our future because we believe in our fundamentals. Let's have a look to our strategy.
People spend more time online and do more things online. This is where brands also continue to focus their engagement efforts. To bring digital audiences together for our advertisers, we have an integrated model with non-game and game content. That is why we partner with over 300,000 publisher websites to reach around 400 million active users every month. We also reach another 100 million users, mainly through our casual game content. This way, we help advertisers reach the right audiences at scale through our integrated technology, creative ad formats, and local expert support. Let's have a look at how we delivered on this strategy in Q1. In order to become the go-to partner for advertisers, our platform value proposition is focused on ad sales, ad tech, and curated content.
Starting with ad sales, we have local experts across various markets working with advertisers and offering local support to maximize their results. Over the last few years, we have invested heavily in our local direct sales capabilities because we believe advertisers value this local expertise and support. For example, in Q1 2023, we consolidated our presence in the U.S. with a full offering of Azerion products. Of course, building on acquisitions from 2022. In ad tech, we offer efficient technology and creative ad formats. We are investing in integrating our technology, continuing to reduce complexity for advertisers and publishers, with a simple and competitively priced solution. In Q1, we launched two new products: Oneskin, an integrated rich media native ad format, and Performance by Azerion, which further develops our offerings in the digital marketing performance segment.
On curated content, our goal is to bring audiences together at scale so we can offer unique reach to advertisers. In Q1, we have expanded our non-game publisher network and have grown our casual games portfolio, focusing on puzzle and word games, which attract higher margin and mature audiences. Finally, in our Premium Games business, our strategy is to offer an expanded value proposition to advertisers. That is why we focus on partnerships with brands seeking to engage with their consumers digitally in innovative and highly engaging ways. In Q1, we expanded brand licensing partnerships to create engaging in-game branded content in our metaverses Hotel Hideaway, Habbo, and Woozworld. In the first quarter this year, we continued delivering on our strategy, and at the same time, we also made significant progress with the integration of previous acquisitions.
I would like to share more insights into how we have been consolidating and integrating, and what we see as next steps. Let me ask Ben to take you through some updates. Ben?
Thank you, Umut, good afternoon, everyone. M&A has been a key driver for growth in Azerion as a consolidator in a fragmented digital advertising market. Our buy and build strategy has served us well and enabled us to build a resilient business model. On this page, we intend to give you an update on the integration of some of last year's acquisitions. Through these acquisitions, we added valuable products and capabilities to our offerings. Those acquisitions also have significant synergies with our platform, which we are starting to realize. Through these strategic acquisitions, we've entered and further consolidated our ad sales presence across the globe, enhanced our portfolio of ad formats, such as audio, mobile video, and digital-out-of-home, and built on new ad technologies, such as performance management.
Furthermore, through these acquisitions, we gained access to an immediate pool of scarce talent, which historically has been difficult in the wider tech sector. Across all these integration projects, we've been able to achieve significant synergies by consolidating the technology and removing duplication of contracts, offices, functions, and legal entities, as well as merging data centers and directing advertising into our owned and operated SSPs. We further commercialize these businesses, creating new products and services to current and new clients. We also continue to train our sales and support teams in the upselling of new products and features to increase the revenue potential. By building on our geographic and product offering, we're able to attract larger campaigns as advertisers seek a single solution platform that can provide advertisers with the improved return on advertising spend.
That's why the integration and consolidation have been top priorities in our first quarter of 2023 and will continue through the rest of the year. Let's have a look at our outlook for the year and the medium term. With the progress that we've made in the quarter, we're confident to reaffirm our guidance provided at the full year 2022 results for net revenue and adjusted EBITDA in 2023 and the medium term. We expect to grow our top line from EUR 453 million in 2022 to around EUR 560 million in 2023. This includes the impact of acquisitions we made in 2022, as well as organic growth.
We remain on track to achieve our adjusted EBITDA guidance of at least EUR 75 million for 2023 and expect our adjusted EBITDA margin to further grow and be in the range of 14%-16% in the medium term from the 11.5% we reported for 2022. Let's now take a closer look at our financial performance. When we look at our financial performance, it's important to connect it with our value drivers, revenue streams, and the reporting segments. I'd like to use the graphic on screen now to take you through our business structure and how that translates into our reporting segments. Starting at the top of the chart, under demand, we have our clients, which are our advertisers and consumers.
Moving further down in the chart, through our proprietary technology, we connect these clients with supply, and by supply, I mean suppliers of digital content. Sometimes we are the suppliers ourselves, which means that we own and develop the content. In most cases, we partner with digital publishers that own the content. It's through our supply network that we reach about 500 million active users every month. Approximately 80% of that are non-game audiences, and 20% are game audiences. We have mainly three types of revenue sources: revenue from displaying digital advertisements across our publisher network, as well as across our own portals. Revenue from the sale of AAA game keys to consumers through our e-commerce portals. Revenue from our Premium Games, where consumers play for free but purchase extra features in the game. These revenue streams translate into two reporting segments.
As you see at the foot of the chart, our advertising and e-commerce revenue streams are reported under our reporting segment Platform, while our Premium Games business is a separate reporting segment. Let's see how this is translating into our financial performance for Q1 2023. We're very pleased with our financial performance in Q1, and as Umut said, our focus on consolidating and integrating previous acquisitions is already translating into improved underlying profitability, and this is starting to show in our numbers. Our revenue has improved by over 19% compared to Q1 2022, predominantly driven by a combination of organic and inorganic Platform growth. At the same time, our adjusted EBITDA has grown by almost 48% in the same period, which demonstrates significant improvements in our gross profit margin and our costs.
As a result of the success in consolidating past acquisitions, we are upgrading our cost savings expectations. Last quarter, we shared a number of initiatives focused on contribution margin, cost management, and organizational structure, leading to an expected annualized saving of at least EUR 10 million, which we are today upgrading to at least EUR 15 million compared to the January 2023 baseline. That is based on the initiatives we have already implemented or are under implementation. Let's now take a closer look at our financial KPIs for the quarter. As you can see in the top left chart, our business is seasonal, and the first quarter is typically the weakest one, mainly because advertisers slow down their budgets in the first months of the year.
Having said that, in Q1 2023, we delivered strong year-on-year adjusted EBITDA growth, and our cash conversion remains strong. We generated operating cash flow of over EUR 27 million in Q1, mainly through improved earnings and favorable working capital movements. This kind of cash generation, alongside our business outlook more generally, allows us to keep our net debt position stable as we look into refinancing our debt later this year. Let's now take a closer look at the operational and financial performance of our reporting segments. Platform is essentially digital advertising on non-game and game content, as well as e-commerce. Digital advertising accounts for approximately 80% of Platform revenue, while our e-commerce business accounts for the remaining 20%. We like to publish operational KPIs to provide greater color on the performance of our advertising business.
With a number of acquisitions made at the end of the past year, these KPIs are being reviewed. We're currently assessing which ones are the most meaningful to report, while also integrating reportable data and ensuring its integrity. We've temporarily discontinued the reporting of some operational KPIs for Platform. We decided to continue reporting gross revenue per processed ad request because we believe this KPI represents well our continued focus on making our platform more efficient. Let me explain what it measures. Essentially, every time we receive an ad request in our advertising auction platform, similar to a physical auction, we incur costs just to participate in the auction. We only generate revenue if we win the auction and display a digital ad from one of our advertising clients.
Unlike some of our peers that report total number of impressions, which is the number of requests, we like to report how much revenue we're generating on average per ad request we accept and process. This shows how the auctions that we win remunerate all the auctions we participate in. As you can see in the top graph, this KPI is highly seasonal, and we can see an improved trend in our efficiency and profitability. This operational performance is also reflected in the financial performance of our Platform segment, with higher revenue and margins in Q1 2023 as compared to Q1 2022. As we've said in the past, we remain really excited about the growth potential of this business and the value we can generate from benefits of scale and all the efficiencies that we can drive further in this platform. Moving now to Premium Games.
We have nine free-to-play titles consisting of social card games and metaverse, which generate revenue mainly from in-game purchases. In the metaverse, we expand and differentiate our value proposition to advertisers and unlock new ways for advertisers to engage with consumers digitally. Our social games, card games are profitable and value-generative assets. We continuously optimize these games to maximize user engagement, and we manage them for value. On operational performance, we focused on retaining, growing, and engaging our community of players this quarter, which has resulted in an increase in the time in-game per user to around 84 minutes per day, up by 6% compared to Q4 2022. We've also focused resource allocation towards higher-margin titles in our Premium Games segment, resulting in higher revenues and subsequent adjusted EBITDA.
For example, we reduced user acquisition spending for metaverse titles and reallocated resources to the development of in-game events with within the social card game portfolio for greater increased in-app purchases and monetization. This has led to a 30.8% increase in adjusted EBITDA compared to Q1 2022. let me now hand back to Umut for some closing remarks.
Thank you, Ben. Let me close our presentation today by recapping our key messages. Firstly, our increased focus on consolidation and integration is starting to show results. Our underlying profitability is improving, and I can tell you we will continue driving efficiency in our platform, so we can significantly scale up in the second half of the year. While we increased our underlying profitability, we also continued growing. Our results in Q1 show the resilience of our business model. We are also upgrading our annualized cost savings expectations to at least EUR 50 million from our original estimate of at least EUR 10 million, based on the optimization initiatives already implemented and the ones under implementation. We are confirming that our previous guidance remains the same. Our business is performing increasingly well. We are becoming the go-to partner for advertisers and publishers.
The quality of our products and services are more and more appreciated and recognized by our clients and partners. We are growing, and we are growing profitably because we are building a very strong, differentiated, and scalable platform. Thank you all for your attendance today. With that, let me move to Q&A. Operator, do we have any questions on the line?
Thank you. Just to reiterate, for those of you who are joining us via Zoom, if you'd like to ask a question, please use the Raise Hand feature at the bottom of your Zoom window under the Reactions button. Once called upon, please unmute your video to ask your question. If you have joined via a phone line, please press star nine to raise your hand. For those of you watching on the webcast page, if you would like to send a question through, please type it into the Q&A box on the right-hand side of the player. These questions can be sent at any time during the presentation and will be addressed after the live Q&A. I will now pause a moment to allow a queue to form. Our first question comes from Wim Gille. If you'd like to unmute yourself by pressing star six. Thank you.
Hi, Wim, can you hear us?
Yeah, I can. Can you hear me?
We can now.
Yes, very good. Yeah, basically, I have two initial questions. We'll make it three. First of all, to go back to the organic growth that you reported in the first quarter of this year. If I look at the Platform revenue development, you added about EUR 17 million in revenues. According to my calculations, M&A contribution was about EUR 23 million, which means that there is a high single-digit underlying decline in organic growth in the Platform business. Meanwhile, if I look at your outlook of EUR 560 million, it basically comes down to modest growth in organic growth in the Platform business for the full year 2023.
Can you confirm my math and basically follow up on kind of how we should look at the trajectory of organic growth as you are currently focused on, let's say, maximizing synergies and optimizing the cost base versus growing organically again throughout the rest of the year? The second question is related to the refinancing. What steps have been taken already and what steps are still to be taken and how do you look at that refinancing process? Are you gonna refinance through the bond market or do you have alternative refinancing options on the table? Lastly, no surprise, but it's about generative AI.
Obviously, generative AI has the capability to really make an incremental step change in the experience that users have in social games, or predominantly in your, in your premium gaming segment. Have you already looked into that opportunity, or not yet? If so, what are the key threats and opportunities that you identify from this new technology? Thank you very much.
Okay, great. Thank you, Wim. Perhaps I'd suggest I'll take the first two questions, and perhaps you can take the third question on AI. Okay.
Look, on the first question, which was broadly how do we think about organic growth in Q1 versus some of the pro forma calculations that you talked about, Wim. Look, I think the first thing to note is, as we've accelerated our integration of acquisitions, it increasingly becomes very difficult to separate out organic and inorganic. Just by way of example, we made a couple of acquisitions right at the end of last year. Each of them were represented in two or three different geographies, and in Q1, we've actually basically put those parts of the business into the geographical regions that they represent, so we don't report those acquisitions as a consolidated unit anymore. Having said that, I think there's two things to note on the math.
We did see organic growth in Q1, and I think the way to think about this is best described as in relation to the acquisitions, which you may remember, generally come at EBITDA margins below our own. As part of the consolidation and integration process, there is really quite a considerable amount of revenue optimization that comes with that. We are looking to focus on the higher margin revenue, and then obviously, integrating with the platform, and then position the combined platform for growth, and that's very much what we're doing. What you'll see is some level of offset, with that effect of the optimized revenue from the acquisitions being then offset by the underlying organic growth in the rest of the platform. It's in that context, I would sort of make two observations.
Over Q1 and for much of Q2, we're focused on the consolidation and the integration, and then we're gonna be super focused for the rest of the year on using that platform to continue to grow. It's in that context that we repeat, obviously, the guidance that we've given previously on both revenue and adjusted EBITDA. That's my answer to your first question. On the second question, that related to refinancing, what steps have been taken already and sort of what next? Look, in terms of the steps taken already, as you'd expect, we've been well engaged on a number of different potential options for refinancing. Yeah, I think as a company, Azerion has quite a long history now in the bond market, as you pointed out.
Very grateful and have some good support amongst our investor base in that part of the market. As I mentioned in the summary in the annual report, that remains very much a option for refinancing this time around. We've also explored and will continue to explore alternative sources of finance. What we're gonna do is, particularly now Q1 behind us and moving to a high level of visibility on Q2, we'll then obviously be really engaging with the market from this point onwards, talking about how we see the performance of the business for the rest of the year. Looking at how we generate internal resource off the back of that business model, and then circling around with those different choices in terms of refinancing.
Looking to make sure that we've also got that refinanced in an appropriate timescale before the end of April next year. We're pleased with the engagement that we've had so far, but I think off the back of these results, we can now really go to the next level of engagement around the refinancing process, and that's certainly gonna be very much a focus for me over the next few months. Your third question was for Umut. I think AI, and in particular, generative AI and its role that it can play in the gaming segment, what we see as the key threats and opportunities, perhaps more generally, Umut, also, how we already use it in our business and think about it as an opportunity for the future.
Okay. Yeah, maybe, general, we are using, of course, AI already from the start of the company in both segments, in our Premium Game segment and in our Platform segment. Your question was mainly about our Premium Game segment. We are already using AI for many years to track player behavior, check programming codes, write programming codes, and all kinds of things. Currently, what we are doing is also experiment with quality gaming and mainly in the art sector, and how we can use AI to create arts. Does this give a sufficient answer to your question, Wim?
Yes and no. Can you hear me? Yeah. Obviously, you're using AI already for a while, actually, since the inception of the company, which makes a lot of sense. Specifically looking at generative AI, I think it has the capability to really kind of bring avatars to the next level without having a human operator behind them, i.e., they can give a much more immersive experience in in social games like predominantly your metaverse applications. I was more thinking along those lines, whether you already experimented with the new technology that specifically generative AI brings to your opportunity, to your play group. Thanks.
Okay. Maybe to give also specific examples about that place, we have launched, probably you know it, more than a year ago, NFTs around Habbo. That was completely all the avatars were developed by using AI. Currently, we are also experimenting further in our Hotel Hideaway platform and also in Habbo, how we can optimize our avatar and their behavior in the game.
I think, just maybe just to add one comment, actually, Wim. Chatting to the person that leads this part of the business for us, one of the observations they made, which is an interesting one, is we've certainly been experimenting with the use of AI. I think at the, at the high end of the product, his observation was, at least for the time being, there's still a need to have humans and creatives involved to really generate the high-quality experience. That will probably change over time, that was certainly the feedback that we got. We're definitely experimenting. We've used it for some time, I think the good news for humans is that there's still a role to be played for the time being, in really developing that high-quality product. Wim, thank you very much for your questions.
Is there anything else before we move on?
No, all good from my end. Thank you.
That's great. Thank you very much. Operator, could we move on to the next question?
Yes, of course. As a reminder for those that have joined via Zoom, if you'd like to use the Raise Hand feature to ask your question, it's under the Reaction button on the bottom of your screen. We have a number of written questions coming in there. We'll hand back to Ben to follow these up.
Okay. That's great. Thank you very much. Yes, I can see on screen now the first question that's come in is an interesting one, which relates to some recent developments in the European Parliament. I'll just read it out so everyone can obviously follow the question: What's Azerion's view on the European Parliament's call for new, stricter regulation for the gaming industry? Okay. Look, as a starting point, we actually are very happy that the European Parliament is looking to develop and improve the guidelines for the industry in this space.
As Azerion, we've been actually involved in a number of the feedback groups for quite a while now, and we think it's very important that there's a combination of both regulatory and legislature focus on the guidelines and then obviously participation and feedback from the industry. As Azerion, we're super focused on, obviously, the consumer experience, and that relies on protecting and also the trust of our consumers. We very much welcome these initiatives, and we'll certainly remain very active in those discussions as they develop. Thank you very much for that question. There's another one popped up on screen. Why are you focusing on cost savings, and are your costs reduction sustainable? Umut, do you want to pick that one up?
Yeah, no problem. I mean, what we are doing is consolidating and integrating, and when you consolidate and integrate, the first effects, what is visible is of course, the cost effect. Our cost reduces. We are more interested in simplifying the platform towards our advertisers and our publishers. For example, last year, we bought an audio platform, and then you have two platforms, and by integrating and consolidating, we are moving it to one platform so that an advertiser can buy audio and can buy video. By doing so, we don't promote two platforms, but we concentrate on promoting one platform and make the life of the advertiser more simple and more easier. That gives also opportunities, of course, for cross-sell and upsell.
Okay, that's great. Thanks so much.
Okay.
I can see that we've got another written question. How do you think about the priorities for H2? Do you want to start with that one?
Well, I can come in. Yes, of course. Of course, the consolidating integrating work is continuing, and we see, as we have, as we have explained, challenges in the market, and that gives us an opportunity to take them onwards, Q2 and Q3. By simplifying the offering of our platform, we also see huge potential for cross-sell, upsell, mainly visible in Q2, but also continuing being visible in Q3 and Q4. Those are, let's say, the two strategic parts which I see, in Q2 and Q3.
That's great. Finally, could you explain why the gross margins improved in Q1? I'll pick this one up. This, I think, goes back to one of the initiatives that we talked about at the last results presentation. Alongside, the cost management program more generally, which clearly has had a benefit, we're also very focused on managing contribution margin, and in particular, the efficiency of the platform, which comes back to the metric that I talked about, the non-financial KPI that we talked about for the platform. Where you can see if the Average Revenue per Million process ad request is increasing, that tells you two things.
One is that we're hopefully making better and better choices, on the content that we're putting, into the auction process, but we're also driving, as a result, a higher margin and more revenue for those individual ad requests. I think you definitely see that coming through as part of the contribution and improvement that we've seen in the gross profits and the gross margin. Okay, operator, just, checking if there are any more questions for now.
Thank you, Ben. We currently have no questions in the Zoom room at the moment.
Okay. In which case, I'd like to thank you all for joining us today. Very much appreciate your time. We obviously look forward to engaging with you after the results today. In the meantime, thank you very much, and we'll close the call now.
Thank you very much.