Earnings Call: Q2 2022

Nov 16, 2022

Quarterly report

Let's start with the earnings presentation. This presentation will provide information on Making Science in relation to financial results, forecasts, plans, objectives, and other aspects related to the company's current business and situation. In addition, information relating to future milestones or events is not a warranty of performance and is subject to changes in strategy or circumstantial changes. Finally, this presentation and any questions and answers may contain unaudited but public available information, and in any case, constitute an offer to buy, sell, or exchange shares. Lastly, I would like to remind you that you can ask questions through the Q&A module at the bottom of the screen, and we will answer them at the end of the session. With that, all yours, Jose Antonio. Thank you. Thank you very much, Monica, and welcome, everyone, and thank you for joining the webinar for the results of H1 as a result of the Revisión Limitada and the Q3 update for the results up to the third quarter of the year. I'm going to start with an overview of the company and what's our strategy, and then I will go through the financials. Basically, Making Science, we are getting more and more bigger and consolidating. We are right now more than 1,100 employees. We end up 2021 with 150. We have a presence in 13 countries and 20 offices around the world. And we end up the nine months with a revenue in the core business of EUR 142 million and EUR 7.8 million EBITDA. And with our objective of being present in the top 20 advertising markets in the world by 2025. Our strategy is being always to provide a 360 capability to our clients. We are able to provide all the services related to data transformation for two reasons. One is that we have more opportunities to get into clients. We have the opportunity to get into relationship with big clients, with different services. And once we establish a relationship, we have the possibility of cross-selling and upselling those services, and that strategy is work very well. And in fact, that give us our consultants a more 360 view of the business of the client, and we are able to deliver better results. Very important, we don't do just digital marketing, so we are a 360 digital consulting. Digital marketing actually is less than 50% of our business now. In digital marketing, we provide all the services, paid media, organic, and creativity and content. But we have very strong AdTech and MarTech business and technology and cloud and software. AdTech and MarTech, we basically do implementation of AdTech and MarTech platform like Google Marketing Platform, like Salesforce, like AppsFlyer, all the other technology platforms which are relevant for basically digital transformation. And in the technology cloud and software, we are able to develop the basic technology and software for our clients. And finally, we have investments in e-commerce and in our own products that help us to differentiate from our competition. With this integration of capabilities of Making Science, we have a flywheel. The fact that we have all the profiles inside the company allow us to be different. Digital marketing enables us to be exposed to a lot of clients and to a lot of business problems. Our technology and cloud people are able to develop solutions that are then prototyped as AdTech and MarTech solutions that enables us to get more and more clients and differentiation. This integration of data technology, software, and marketing enables us a virtuous cycle of flywheel. We work with big clients in Spain and internationally. We have been working with clients since 2016, and we keep working with them like Banco Sabadell, Mapfre, Rio, and we keep growing with them. Year on year, our revenue with those clients grow, and at the same time, we are getting more and more international clients like Max Mara, Bvlgari in Italy, and Louis Vuitton Moët Hennessy in France, and Lavage and GMF in France. Our strategy is to keep winning international clients and keep the cross-selling. In fact, we have enabled also to work in more and more countries with existing clients. Once we have the relationship in one country, we are able to expand our relationship to another market. Very important for our strategy is our relationship with global platforms. The global platforms, like the big tech, are critical for digital transformation of the companies because those are the companies that the big tech are the companies that are enabling the digital transformation. So having a very strong and premium relationship with them enables us to have access and understand the technology, which then we are able to implement in our clients. We need to have a very close relationship with all the global platforms. At the same time, it allows us a second benefit is the platforms are the same all around the world, so it facilitates our global expansion. Because when we are working, for example, with Google Analytics in one country and we want to expand to another market, basically what we need to do is same thing that we do in Spain in the different markets. Why clients choose us? One is because we are expanding our local presence, so that give us access to more clients in different countries. Now, this year, we expanded to the Nordics, so we are getting more clients in Sweden and Denmark. Our integration and one-stop shop, the integration of skills allows us to provide a very differentiated solution. At the same time, we simplify the buying process for our clients because it is one-stop shop. Very important, our technological capabilities that make us very different, especially when we are competing with companies more in the marketing side of the house. The fact that we are top partner in the main technologies, which qualifies us to bigger accounts. That is why our clients choose us to be our strategic partner. In terms of why Making Science it is a good investment. First of all is we have unique combination of synergistic businesses. With a strong organic growth, which we have been outpacing the sector, high growth rate over the last 6 years. We have been growing like 40% of compound average growth rate. At the same time, we have a very sound track record in M&A execution. In terms of acquiring companies. We have integrated more than 17 companies since 2016. Our business it is more and more diversified in terms of businesses. As I mentioned before, we have three businesses, digital marketing, data and tech, and software. It's not 33% in terms of the weight, but we don't have, let's say, 100% exposure to digital marketing, for example. It's just 45%. In terms of clients, we have a very diversified amount of clients in Spain and outside Spain, which make us very resilient to a potential slowdown or a loss of a client. Also in sectors. We have clients in all the sectors, in retail, banking, insurance, education, consumer goods, travel, and also in terms of geographies. When we listed, our 95% of our EBITDA was in Spain, now it's 60%. Our business model is based on recurrency and long-term engagement with our clients. We are an extension of their business, so in the end, our clients rely on us to execute many of their activities. Our digital native team allow us to really grow within this moment of transformation, our team, management team. It's very established. Many of them has been with the company for many years, and they are very aligned on what we want to achieve and our financial discipline, financial approach, which we are very demanding in terms of how we manage our financial objectives and also in terms of the cash conversion ratio. We're a business which basically invoice every month to all of our clients, and we are not very subject to projects and for projects failure. In the end, we have a company which is in a sector which is growing, which we've been consistently being profitable, and with not a lot of requirements in terms of investment to grow the business. Our growth strategy is being based on four pillars, basically organic growth. As I said, digital transformation keeps growing year on year. We've been basically beating that growth and growing faster than the market. We also are expanding globally with acquisitions, acquiring companies in different markets. We've done that in the U.K., France, Italy, Sweden, the U.S., and our intention is to keep doing that. Innovation and technology is becoming more and more important in terms of differentiate us against our competition, and we keep investing in our products. Finally, partnerships. We've been growing with partnerships since the very beginning with IKI Media in Barcelona and Carve in Portugal, and now lately with the Local Planet Association last year. Why do we want to keep growing? First of all, because the market is very global, and Spain is 1.5% of the global GDP, so the big business is outside. We need to have local presence to have access to clients. Being global improves our relationship with the big global partners because they are searching for global partners. Also, it give us opportunity to bring new business and increase our market share. We are able to become a one-stop supplier because we are bigger and we have more presence. Clients that want to give us service in different markets, we are able to provide that. Also being bigger and have bigger brand equity and bigger brand recognition allows us to get more business. Finally, cost savings, because we are able to basically divide all the cost among more revenue. Our diversification continues. As I said at the beginning, we are already in 13 countries with 20 offices and also expanding our hub strategy. We have delivery hubs in Bogotá, in Colombia, in Dublin, in Madrid, and in Tbilisi, in Georgia. Our intention is to keep expanding this strategy because allows us to have a cost-efficient operation, which is able to provide global delivery to our clients. This diversification we can see here in figures. As in 2020, our EBITDA in international was 5%. In the 9 months in 2022 is 39%. The number of employees, actually, we have more people outside of Spain than in Spain. The reason why it's bigger than the EBITDA is obviously because the cost per headcount is lower in many of our hubs right now. In terms of if we go through our 4 pillars one by one, first is organic growth. Our segment is growing. Digital transformation is going to continue growing at least the next 10 years. Both global advertising and also the data analytics markets and the cloud market is going to continue to grow. Right now there is a few question marks, especially around advertising and what is happening with the big global platforms. But we think of course, there is a bit of a slowdown in some sectors. Like fintech, crypto, on the sectors which grew a lot with the pandemic, now they are not growing that much. So there's a lapping effect plus the slowdown. Also advertising correlates a lot with the GDP growth. We work in the digital advertising, not in general advertising, and we work in the digital advertising, not in the branding side of the advertising, but in the digital performance advertising, which basically is less affected by economic growth because basically it's related to sales. We don't say that we are not affected because if there is a slowdown of economy, but we'll be less affected than most of the, let's say, more generalistic advertising. As I said at the beginning, digital marketing, it's 45% of our business now. Even in that 45%, not everything is advertising. We have creativity, we have content, we have other segments that we deliver. Global data analytics market keeps growing, and we think that even in a scenario of a slowdown, technology and data is going to continue to be a factor of efficiency in the company. So even though there is a slowdown, there will be continued investment in digital. Our acquisition strategy continue keeps the same. So basically we are acquiring digital companies and traditional full service agencies with a proven track record of growth. Also that we see in that target that Making Science can provide, accelerate the growth. Of course, the geographical complementarity. That's a key, and it's a fundamental criteria for the acquisition. Also that the team has experience in being a profitable company and wants to keep working in the company. Also synergies in the buying process that we are able to integrate more of our services and that the price, it's attractive from a multiple point of view. In that we have a strong track record. We've been doing, as I said, since 2016, we've integrated 17 companies in the group. We have experience and processes to identify, acquire, and integrate companies. Our intention is to keep doing that. Basically we've slowed down our acquisition during this second half of the year because we consider that is the best for the shareholders not to acquire companies now. We think that the valuations very likely will go down in the next 12 to 18 months. Basically we are waiting to see where the price is settled in order to continue our acquisition process and strategy. The history you can see in this chart. As I said, many acquisitions since we listed. Omniaweb in Italy, U.K., France, U.S., Georgia, then Sweden and Germany this year. In terms of technology is getting more relevant in terms of how we differentiate ourselves with our clients. In fact, last week we were presenting Gauss technology in Mountain View at Google in a lead gen event to more than 500 U.S. clients because Gauss is a technology that uses first party data. Its machine learning is able to improve the ROI of client campaigns more than 20%. We trust a lot in our technology and it's getting more and more important in terms of how differentiate both Gauss and also ad-machina, which is a company we acquired last year. It's getting a lot of traction in terms of automation of operations for clients in the advertising side of the business. The fourth pillar is partnerships. We joined Local Planet last year. We acquired 7%, then with the structural acquisition, we own 11.9% of the company. Basically Local Planet is enabling us to access to international opportunities of the network. Currently we are working opportunities with Effective Media Mexico, Horizon Media in the U.S., Nova Expressão, MediaTrack in France, Abovo Media in the Netherlands, Pilot in Germany, Media One in Austria, Media Italia in Italy. Tonic in Dubai. Basically Local Planet is enabling us to access to international accounts in the portfolio and it's also helping us in our process of getting global partner for Google Meta. It's enabling us to get more country certification. We just got certified in the U.S. and in Germany and the Local Planet presence is helping us a lot in that because it give us global access to clients. Partnerships, not just local partners. We created Pilot Ignite this year with Pilot in Germany. Basically, we are leveraging Pilot's strong presence in Germany, which is one of the leading agencies. Basically, with Pilot Ignite, we want to target different segments, and it's also helping Making Science in Germany because we also operate Making Science in Germany to grow in that market, going along to the market with Pilot. In terms of investment and products, we did the acquisition of Ventis from Iccrea Banca last year in May 2021 because there was an opportunity to do a carve-out with an attractive price and very good conditions from the seller. Basically, our intention is to turn around the business. We are in the process of turning it around, then looking for strategic options in the future. Basically, in the turnaround, what we are doing is applying the Making Science skills to make the company profitable, to grow more, and to be more efficient in their operation. Basically, we are working in all the areas of the company, like in marketing, product, technology, customer experience, supplier experience, and other economics, in order to make the company, as I said, more efficient and to grow more. We see here some of the operational metrics of the company. We compare H1 2022 with H1 2021. We are improving the company in all the lines. Of course, the current economic environment is not the best for e-commerce category, and many of the vertical players like Zalando, Westwing, Farfetch, or even Amazon are showing lowering growth rates or even negative growth rates in the case of some of these companies. We are adapting to the environment. We think Ventis will be a very good asset in 2, 3 years. Once we have covered the strategy of the company, we go for financials. A few highlights of H1. We surpassed the 1,000-employee mark. We started the year with 150. We are now 1,150, and we are growing with profitability. If we grow employees, it means we are growing our business. Successfully, we did the acquisition of Tre Kronor Media, which gave us presence in Sweden and Denmark. In our hub strategy, we opened our Alicante hub, where we want to have 100 employees there to deliver global services to our clients. We keep winning clients. As I said at the beginning, we keep our clients and we keep acquiring clients. Every week we acquire new clients with our strategy of new business and cross-selling and upselling. If we look at the financials, and this is the published results of H1. We more than double our top line from EUR 46.3 million to EUR 97.6 million. Also, our recurring EBITDA from EUR 3.3 million to EUR 4.3 million. If we look at the balance sheet, we keep always a very strong cash position. We want to always have optionality. There is a reduction of cash versus December of 2021 because also we have some seasonality. The second half of the year is always better in terms of working capital, so we end up having much more cash. We expect also that we will finish the year with more cash. The rest of the items in the balance sheet, they are growing as the business is growing. In terms of cash flow, the operational cash flow in the first half was minus EUR 2.7 million, and the big item there was the change in net working capital, which, as I said, is very related with the seasonality. We did CapEx less than 2021 because this year, the EUR 11.6 million is Tre Kronor Media acquisition and the payment of some earnouts. In terms of the, we have not issued any note of that, EUR 1.1 million, and what we did was the capital increase of EUR 9.3 million that we successfully did in May this year. In terms of net debt, we have increased slightly EUR 1 million, the bank debt, the bond amount, which is to October 2024. It remains the same one. We are paying the coupons, so it is EUR 11.8 million. The M&A-related, we have increased due to the Tre Kronor Media acquisition. We finished with a net debt of EUR 29.4 million compared with a very growing EBITDA. When we look at the maturity of our debt, spread in the following 3, 4 years, of course, we have the repayment of the bond, which is October 2024, which is the biggest repayment event. But then you can see in the slide in pink, they are not related payments, M&A-related, and in dark blue the bank debt. So we have actually most of our debt, with the exception of the bond, is related to M&A-related payments, which at the same time are related to the results of the companies, and basically, the earn-out payments are around 50% of the EBITDA generated by those companies. So basically, we try to make the earn-out payments to be paid by the companies themselves with the cash flow generated with those companies. Yep. Okay. So in terms of the shares, we increased the free float of the company with the issuance of new equity in May. It's 14% right now, but the companies are still very much controlled by people which is working in the company. Of course, our intention in the next few years is to being increasing the free float because I think it's very relevant for the company. As the company grows, we'll be increasing the free float of the company. In terms of Q3 was a very good quarter again. So we published the preliminary results. Gross margin grew 81% year-on-year compared with previous year. With a total EBITDA of EUR 2.5 million, recurring EBITDA growing 55%, and the organic growth rate was 31% year-on-year. So in Q3, we have not experienced any slowdown of our business. And in fact, October this year has been our record month in the history of Making Science, where we did more than EUR 20 million in total revenue. And Q3 was good also for international business. 44% of our gross margin came from international. In this slide, we can see a bit more how the revenue grew in the different variables in the core digital business grew. So revenue 86%, gross margin 81%, and recurring EBITDA 55%. And here we can see the bridge, which basically you can see here that coming from last year results, 31% was organic growth, 0.7 was basically the contribution of Trekkstor acquisition that got us to the total growth of the EBITDA. This is basically a negative, which is basically incremental integration, expensive relative integration of the companies. So we grow inorganically, but we keep growing a lot organically. The company has had, over the last six, seven years, already a strong organic growth profile growing above the market in all the segments that we operate. When we look about the e-commerce and products, as I said, this year has been very difficult for e-commerce since the Ukraine war and since basically since February, things are deteriorating, and also there is the lapping effect of the pandemic. But basically, we grew gross margin, but there is pressure on expenses, so we are very focused in the process of turning around Ventis and making in 2023 breakeven with the company. And since revenues in the category are not growing that much, we are focusing much more on the margin. So we are focused on selling profitably and also controlling expenses. So originally, the e-commerce was growing 20%. We don't think this year, basically, e-commerce, it's going to be flat or down. Next year, it will not grow 20%, probably will grow single digits. Basically, we want to grow with the market in top line and focusing on generating revenue will grow along with the market, and we will focus on generate margin and also controlling expenses. That way, we will achieve our objective. That's all for the presentation. As I said, Making Science is a stronger company every month that passes. We are a stronger company. We are bigger, more diversified. We are in more markets, we are more clients, and we have more people. We work in very good segments. Digital transformation is going to keep growing over the next 10 years at least, even in a slowdown. Technologies and data is a big factor of efficiency. We are convinced that this company will be much more valuable in the next three years. Thank you very much. I'm happy to answer any questions you may have. Thank you, José Antonio. Apparently, there are no Any questions? questions. Okay. No questions? All right. If there is not any question, we finish the webinar here. Thank you very much for joining the webinar, and we'll keep you updating with the company early next year. Thank you very much. Bye.