Ladies and gentlemen, good day, and welcome to the Affle India Earnings conference call hosted by Dolat Capital. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Rahul Jain from Dolat Capital. Thank you, and over to you, sir.
Thank you, Diksha. Good morning, everyone. On behalf of Dolat Capital, we welcome you all to the Q4 and 12-month FY 2022 conference call of Affle (India) Limited. I take this opportunity to welcome the management of Affle (India) Limited, represented by Mr. Anuj Khanna Sohum, who is MD & CEO of the company. Mr. Kapil Bhutani, who is CFO and COO of the company. Before we begin with the discussion, I would like to remind you that some of the statements made in today's conference call may be forward-looking in nature and may involve some risks and uncertainties. Kindly refer to slide 25 of the company Q4 earnings presentation for a detailed disclaimer on the same. I will now hand over the call to Mr. Anuj Khanna Sohum for his opening remarks. Thanks, and over to you, Anuj.
Good morning, everyone, and thank you for joining the call today. I trust all of you are keeping in good health. Affle delivered another quarter of landmark performance to conclude FY 2022 as our strongest growth year, anchored on our entrepreneurial culture, tech innovations and sustainable value creation, powered by our Affle 2.0 consumer platform stack. I'm incredibly proud that in the last five financial years since FY 2018, since our initial DRHP was filed, our team has delivered over 6.5x growth in top line and profitability, a fact which stands further grounded, given it was a consistent YoY growth across the quarter. Our cash from operations increased by over 100% year-on-year in FY 2022, a CAGR of 63% since FY 2019.
We delivered revenue growth of approximately 123% year-on-year this quarter, and achieved Q4 revenue CAGR of 73.3% over the last three-year period, much ahead of the industry growth trend. In spite of the Q3 to Q4 seasonality, our CPCU business noted a strong momentum, delivering 56.5 million conversions during this quarter, an increase of 91.1% year-on-year at an INR 51.1 CPCU rate. This took the total user conversion delivered in FY 2022 to 195 million. Powered by our ROI-linked CPCU business model and unique position in the industry, we continue to grow as the preferred mobile marketing company across global emerging markets and beyond. We continue to witness a robust, broad-based growth in advertiser spend towards mobile marketing, coming across our top industry verticals and India and international markets.
Thus we achieved overall 45% year-on-year revenue growth in Q4 across India and international markets, and this is significantly above the average industry growth trend. Our business is in high growth momentum with our product proposition and tech IP aligned to leverage upon the tremendous digital adoption ongoing globally, offering a significant opportunity for further scale. Global tech ecosystem is experiencing a paradigm shift driven by the ever-evolving consumer trends, accelerated towards adoption of connected devices and now beginning to lean towards emerging technologies such as Metaverse. Affle being one of the industry pioneers and thought leaders, we'll continue scaling up on our deep tech-powered connected consumer platform stack to enable futuristic use cases. We will continue to invest to achieve our collective vision of reaching 10 billion connected devices in the decade ahead and further augment our global market leadership.
Historically, our India and international contribution balanced at about 50-50 each, shifted in Q2 in favor of international on account of our successful integration of Jampp and our efforts to build a local on-ground presence in newer international markets. The contribution stood at about 67% international and 33% India in this quarter. For FY 2022, it stood at about 65% international and 35% India. Our focused execution, powered by the Affle 2.0 strategy, anchored on our two wheels, vernacular and verticalization, and two O's, OEMs and operator-level partnerships, has enabled us to drive deeper verticalization for our advertisers across the E, F, G, and H industry verticals. This has strengthened our moat, and our direct customer contribution has grown to 74% of our revenues in FY 2022. We also continue to unlock innovative vernacular consumer experiences for the advertisers.
To reflect upon our strength, we have also included three case studies in our earnings presentation focused on health tech, vernacular, and omni-channel retail growth solutions. Affle platforms have been consistently recognized in the industry as top performers. We recently celebrated a record milestone of winning a total of 114 recognitions across categories and geographies in the fourteenth edition of the AppsFlyer Performance Index. Affle's Appnext platform demonstrated exceptional growth results, continuing its number one rank as an independent non-self-reporting network platform globally across the retention index and the IAP index non-gaming.
We also had our Jampp and RevX platforms participate in the index, where they also featured amongst top platforms across various categories and geographies. We were also recognized as the best technology platform for advertising and won several other top awards at the prestigious India Digital Awards organized by IAMAI, fortifying our industry thought leadership position. I'm extremely proud of Afflers for achieving these milestones and consistently delivering on all-around profitable and sustainable growth. Our proactive adoption of ESG and initiatives towards enabling a sustainable ecosystem reinforces our commitment towards holistic value creation for all our stakeholders. We enter FY 2023 with optimism and are well-positioned to further capitalize on growth opportunities ahead of us. With that, I now hand over this discussion to our CFO, Kapil Bhutani, to discuss the financials with you. Thank you, and over to you, Kapil.
Thank you, Anuj. Trust all of you are keeping in good health. Continuing our growth momentum of clocking over 120% year-on-year growth in last two quarters. Our quarter four FY 2022 revenues stood at INR 3,151 million, a strong growth of 122.6% YoY. We concluded our financial year with a revenue of INR 10,870 million, a growth of 109.3% year-on-year, driven by robust contribution from organic growth as well as from contribution from Jampp. Our reported EBITDA for the quarter stood at INR 587 million, an increase of 70.2% year-on-year, while for FY 2022, the EBITDA stood at INR 2,135 million, an increase of 63.8% year-on-year.
Kindly refer to our note on hyperinflation accounting with respect to our step-down subsidiary in Argentina, given in slide five of our earnings presentation. In regards to that, our adjusted EBITDA for Q4 stood at INR 607 million at a margin of 19.3%. As you are aware, that our third quarter in any year is the highest quarter due to seasonality. However, the cost of operations in Q4 is generally equal to Q3, and EBITDA is highest in Q3. In this quarter, our inventory and data costs sequentially was stable at 63.4%. Our employee costs increased by 14.5% quarter-on-quarter. This included approximately 3.2% impact on account of hyperinflation adjustment and 1.8% incremental due to resources versus Q3. Rest was on account of our investment in human resources of the company.
Our reported profit after tax for the quarter was INR 685 million, and our FY 2022 adds to that INR 2,139 million. Previous year quarter, i.e., quarter four FY 2021, included a higher other income primarily on account of one-time gains of about INR 306 million on account of divestment of an asset. Our normalized profit after tax was INR 537 million, an increase of 98.7% year-on-year, after adjusting one-time gain on fair valuations. Please refer to slide four and five of our earnings presentation for the same. We remain focused on working capital management, continuing to see a robust cash flow growth from operations. Our collections were robust, and the ratio of our cash flow from operations to profit after tax stood at 112.3%.
This shows quality of our customer and robustness of our operations. With this, I end my presentation. Let the floor be open for questions. Over to you, Rahul.
Thank you so much. We will now begin the question and answer session. Anyone who wishes to ask a question will press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you will press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We take the first question from the line of Mr. Rahul Jain from Dolat Capital, p lease go ahead.
Yeah, hi. First of all, congratulations on very strong performance in Q4 as well as for the year fiscal 2022. Just wanted to understand, Anuj, from you the potential of the growth going forward, specifically in the light of pain that you may see from the funding of startups in the near future, as hinted by inputs from some of the large investors such as SoftBank and Tiger Global. Any input on that would be great.
Well, I think the outlook overall when we look at growth, I think there are two perspectives that one should be taking in mind. One is the historical growth performance of our own company. In most recent quarter, even if I look at just purely organic growth, we have grown 45% overall, India and international. That is well above the average industry growth trend. If you look at the historical growth trends of our company as well over a five-year, four-year period, you'll find that we're consistently beating the overall industry growth trend. Now, where is this coming from? It is coming from clearly a differentiated business model, having the Affle 2.0 Consumer Platform Stack, which is aligned for the future use cases that the advertisers are looking for.
Our focus on emerging markets, on emerging verticals, and verticalizing deeply for that. All of these multi-pronged approach and strategies anchored on our tech innovations, anchored on our unique strategies and business model, are powering our consistent growth over several, you know, years as well as if you look at it on a quarter-on-quarter basis as a complete consistent trend of beating industry average growth trend. When you see it over a five-year period. You also find there are multiple times where in this period there were, you know, startups where there were funding issues and so on. Now, one of the things that we deeply care for our company, and that's reflected in the way our cash flow from operations has performed, specifically noting the operating cash flow to CAC ratio of 112.3% this year versus last year.
If you compare that and you say that, okay, this company's quality of revenue is anchored on customers who are there for the long term. It is not, you know, quality of revenue which is dependent on the next round of funding of these customers. I think we are very, very careful on what kind of customers we onboard and how much credit exposure we take with any of those customers on a month-over-month or quarter-over-quarter basis. Therefore, our quality of revenue is reflecting in the way the operating cash flow of the company is proceeding. Even from that lens, right? I mean, working with, let's say, startups is important, but what kind of startups are you working on? How much credit risk are we ready to take from there?
Even if they come with a bigger budget, sometimes we decline and we say, "No, we can only take based on our credit risk management framework, we can only take X value of a campaign from certain types of customers." We are very, very careful about it. In that sense, I would think that we will continue to deliver superior growth versus industry average growth rate, and we'll keep up with the growth momentum that the company has been seeing over the last five years, and more specifically what we have already seen in the last quarter, where the macroeconomic factors, I would say, were already quite tested. I mean, given the various factors, whether it is the geopolitical tensions around the world, specifically in India or even otherwise in Europe.
All of those factors taken into account, I think what we have delivered last quarter is, perhaps, the best validation of the resilience that one should expect going forward.
Right.
Just to add to what Anuj said, we should also keep in mind the amount of the funding which have been raised in last one year due to IPOs or the Series C and D investments in our customers. I think so there is a lot of gunpowder available for next two years with the clients. If that is the concern, I don't think so there is nothing immediately because a lot of funding has been raised in the previous year. It is not a big question at the moment with us.
Right. Thanks on that. Just an incremental thought on some of the comments made by Anuj. Like, I'm sure given the situation we are in, we can do better than the industry, but also trying to get a perspective, you know, from some of the commentary that we are hearing from the large companies like the likes of Facebook and many more like Netflix or Unity that this entire Apple policy impact has also been quite significant for them in terms of the new customer addition. There are also certain comments related to that potential slowdown in the budgets that companies might have on their ad spends given the macro situation that we are seeing.
Are we seeing any potential impact of these things coming to us at some point of time? More importantly, if you could share what kind of industry growth that you're seeing in some of the key markets that we operate in.
See, when we look at, you know, the likes of Facebook, Google, Netflix, Unity or the others who are deeply anchored on developed markets with respect to their business and the revenue contribution of developed markets is substantial for these companies. iOS or Apple device-linked revenue for some of these companies is very, very high. Compare that to, let's say, last year, Apple's overall exposure to developed markets or iOS is a very small percentage of our business, and therefore the base effect is already, you know, I think we still on a low base, and we can continue to grow disproportionately better than industry average growth rates is also a factor of that. Our exposure to iOS has been nominal in the previous years as well.
Therefore, when we look at the iOS opportunity, even in the FY 2022 year, in fact, it turned out to be a very strong growth opportunity for us because we went in there with a fresh proposition, telling the advertisers in developed markets that, "Look, we are very, very strong on the Android ecosystem from emerging markets." So if their budgets were shifting from iOS to Android, we're saying, "Hey, you know, we were beneficiaries of that trend." Even on iOS, we went in with a differentiated proposition which was already aligned with the new dramatic shifts on iOS ecosystem. In fact, last quarter in Q3, we presented a case study on that as well.
On the investors call that we had, the analysts and the investors day that we did in December, we also talked about that with a lot of emphasis that this is actually a growth opportunity for our company because the base of, you know, the iOS revenue that we had prior to all of these things was very, very small. So we've gone in fresh. We have seen that as a growth opportunity. Any budgets which are shifting from iOS to Android, we're also beneficiaries of that trend, which may not be the case for these bigger players who had, let's say, 50% of their revenue or more anchored out of developed markets where 50% of the devices were like or you know the contributing devices were iOS anchored.
They may have seen a lot more turbulence, whereas for us it was all a growth prospect, quite strongly. Now, in terms of budgets getting reduced, I beg to differ. The advertising budgets on digital across emerging markets and across emerging verticals in both emerging markets as well as developed markets will continue to increase. There is no other option for the advertisers but to shift budgets significantly to digital and mobile connected devices because of the way the consumer trends are going. This is not just a COVID phenomena. I think even post-COVID situation is clear. The consumer's attention and, you know, the transaction adoption on digital devices has grown up disproportionately.
The percentage of advertiser spend on digital and mobile will necessarily grow significantly in the next three to five years, especially in emerging markets and emerging verticals, which is where Affle's focus. Now, if you look at the India-related reports, there are enough industry reports out there that are saying that India's average digital growth rate would be above 30%. Within that, if you were to take out some of the emerging verticals of our E, F, G, and H category, you'll see that the growth trend is 35% or above. The same kind of growth trends, in my opinion, we will see across emerging verticals globally. Therefore, I wouldn't be particularly on the back foot with respect to how the advertiser trends are going, and we should be optimistic about how Affle will continue to deliver growth going forward.
Sure. Sure. That's quite comforting. Just lastly from my side, if you could share more color on, you know, how the CapEx, tech capitalization and FCF has played out in this year, and also input on the plans going forward.
Kapil, over to you, please.
Right. Our investment in innovations was about INR 6.9-7 million for the last year, which was as per the plan. There was no overshooting of the expenditure there. We expect good results coming from those innovations. Our plan for the next year is about 4% of revenue to be invested in innovations. Around 4% ±25 basis points would be the plan to invest in innovations of the top line.
Right. As I said, any more in terms of what kind of free cash flows, how it has played out this year and how we plan to do going forward?
Our free cash flows have been to the tune of INR 153-154 crores. If you see that, in the investment in innovations was about INR 53-54 crores and about INR 2.5 crore rupees was investment in the hardware. That is what is the investment into the CapEx. Investment into the CapEx and the cash flow is coming out of the acquisition accounting of about, say, $2 million+, which is about INR 15 crore rupees and the cash flow is coming out of the acquisition accounting. That needs to be taken out for the calculation of free cash flow.
Got it. That's it from my side. I'll fall back on the queue.
Thank you. We take the next question from the line of Mr. Mayank Babla from Dalal & Broacha. Please go ahead.
Hi, thank you for taking my question. Am I audible, first of all?
Yes, you are. Please go ahead.
Yeah. Thank you. Congratulations on the great set of numbers. My first question is around the organic and inorganic components. Anuj, sir, I think you mentioned there was 45% growth in the organic business. Can we just derive from that, the organic revenues would be around INR 205 crore-INR 203 crore odd. Am I right?
Yes, that is correct.
Okay. Balance is from CAN, right?
That's right.
Okay. That was my first. My second question to you is, so as we are hearing also in the IT industry, there's a lot of, you know, talent crunch in the tech space. So part A of that question would be that, are we facing a similar kind of heat in our business also? And part B would be that, given, if at all we are facing that heat, does our margin aspiration over the next two years remain the same as per our previous commentary?
See, first of all, the overall tech stack of Affle is anchored by our tech teams, which are based not only in India but also based in Madrid, in Spain, in Argentina, in Israel, and so on and so forth. Globally, sort of distributed, you know, innovation capability that we have. If one particular market in India, for example, is in the IT sector, is talking about facing challenges, we are at the moment seeing a very sensible utilization effect of that. Because not only are we compensating our teams on, you know, fair market compensation in terms of cash terms, but we also, as of last year in October, have given out stock options of the Affle India stock options to quite a number of employees.
Close to, if I'm not wrong, 100 employees have become beneficiaries of that. There are multiple ways in which we incentivize and retain our talent and inspire them with good quality work, good career satisfaction, good career progression, you know, fair market compensation in cash terms, stock options and so on. All of these taking into account, we believe that we are actually one of the rare companies where not only entrepreneurial talent but also tech talent, not just in India, but globally, would be attracted to in these times. Given the kind of resilience that we have shown as a company in the last one year against tough and ever-changing, you know, dynamics, whether it is on geopolitical issues or there are data privacy issues and so on.
I think the kind of execution and strategy that we have delivered with our company has inspired a lot of confidence. Importantly, this is in our industry. What's happening is that the employees of our competitors or, you know, even people who are in the industry are looking at us with a lot more respect. There is a lot of pull factor, you know, to attract talent. You know, people would want to work for a company like Apple, and I think that will help us to build pride internally within the employees to stay on. Also to, you know, find a fair way of bringing in more talent into the company as we expand.
I don't expect any dramatic changes with respect to our ability to earn a bottom-line sensible margin growth performance for the company.
Okay. Sir, as per the previous commentary that we could, over the next two years, scale up our operating level profitability to 20+% . That remains same, right? As it is.
Yeah, I would take a 24-month view to it, and the reason for that is that the contribution of Jampp is significant, and it is still in a, you know, mid- to high-single-digit% EBITDA performance at the moment. I'm looking at the next 24 months very, very closely to transform it to high- to, you know, mid- to high-teens% in terms of its bottom line performance. That alone should actually impact the overall bottom-line margin performance of the company into the kind of numbers that we hope to achieve.
Sure. Just last question, sir. If you could share the number of user conversions in Jampp, if possible.
We haven't split that out, but I think what's important overall is that when you look at this quarter and you see 122% growth year-on-year from the Q4 FY in the previous year, we would find that we have achieved that at the back of 91% growth coming in the number of conversions itself overall. The fact that we have grown our CPCU rate by about 25%, from 40-odd INR to 51 INR. Overall, when you look at these two sort of factors contributing over 90% of our revenues, you'd find that that's where we derive the growth comfort from. It's a fairly balanced growth that we are seeing in terms of organic as well as inorganic.
I mean, you know, even on organic growth of 45% growth that we have delivered in this quarter is something, you know, quite a record-breaking growth that we are seeing overall on a broad basis, both in India as well as international. It's all anchored on conversions and the CPCU pricing. Jampp's contribution is, you know, lesser on conversions and more on the CPCU price increase because the international markets have a slightly higher CPCU rate.
Oh, okay, sir. Thank you so much, and best of luck to the entire team for the coming years.
Thank you.
Thank you. We take the next question from the line of Vikas Mistry from Moonshot Ventures. Please go ahead.
Hello, am I audible?
Yes, sir. Please go ahead.
Yes, you are. Thank you, Anuj, on the good set of numbers. I have a couple of questions. My first question is that what is the net revenue retention in the clients and the customers, and what's the churn rate, and how much of that is coming from VC-funded customers?
I think my response to that is that, you know, based on, you know, the kind of data that we've already shared with most of you. I think the way to look at our revenue from a customer lens perspective is not so much, you know, just the retention percentage, because we've not quite disclosed that. What we have absolutely shared is that the direct customer revenue that is coming from ESG categories primarily is already 74% of the revenue. Which means that there is no middleman involved in that revenue coming into us, and we are able to have a direct sort of control on how much revenue we take from a particular customer and, you know, what kind of a risk management and sustainable growth sort of trajectory that we take on that basis.
In terms of the further aspect that we look at, you know, the industry verticals, which are obviously having disproportionate contribution to us in ESG category, where 90% of the revenues are coming from there. These are our high growth industry verticals, emerging verticals. These are not just, you know, startups with series A or B funding. I think we're talking about enterprise-grade customers and the ability to predict that these customers would definitely be continuing to be spenders and growing their spending for at least the next two to three years. That's the kind of self-selection process that we typically follow. Can I split this into saying what percentage of these are government funded or, you know, or VC funded or large enterprise? You know, I think we don't necessarily have the data available for you at the moment.
I think the quality of revenue is clearly there, and the focus of our company is not just on margin profitability, but on operating cash flows will give you a sense that, you know, we are deeply grounded into financial fundamentals of every unit economics of per campaign, per customer. We watch it really closely. I think you should not have any risk factor concerns with respect to quality of revenue or the ability to retain these customers or to continue to grow on these customers. I'm sorry I'm not able to provide you specifics of what you asked, but from the data that we publish, I'm trying to give you a qualitative sense of the quality of our revenue.
That's helpful. Anuj, my second question is that the cost of data inventory, because we are using CPCU model and we show some impressions and then our algos do something.
Yeah.
The thing is that we haven't seen some decrease in data inventory cost. Till now, we might have done that good of, but DMB is quite strong. We must have seen some decrease in data and inventory cost. How we look forward the data inventory cost going forward, whether they decrease or they keep elevated at this level?
I think there are two things to this. One is when you look at data and inventory cost, I mean, the word cost comes where, but it is also having an investment element to it, right? The kind of intelligence that you build. That is clearly helping and forward-looking, continuing that the data, insights, and capabilities of what verticals are performing well, which consumer cohorts and segments are likely to, you know, convert for one vertical or the other. All of these deep insights that are already there, these don't. They are all fully expensed out on each reporting period fully as a cost, right? The investment angle of it, what percentage of it is actually carrying forward investment that will help the company over the next two years is not shown in the financials, right? Our policy is very conservative.
We expense this out fully for each reporting period. There are efficiencies that are already there. From an organic perspective, you know, not only is our revenue growing 45% organically in this quarter, but we have also seen that the profitability, the margins have expanded on an organic basis, right? Consistently. Much to the extent that even Jampp, which is a single-digit EBITDA contributor and a, you know, over 30% revenue contributor, is still on an average consolidated basis, we are still driving very healthy bottom line financials of our company. Why is that happening? It's because the inventory and data cost efficiencies organically are already leading to higher margins, higher profitability in the business. Of course, we are still yet to achieve that kind of efficiency in Jampp.
How will we move Jampp from where it is today over the next 24 months to a higher level of efficiency? A big part of that would come from inventory and data costs, as well as the scale-up-based efficiencies that we will see across our verticals and the, you know, platforms working together and creating the synergies. There are efficiencies there, and we have to see it from the lens of that if we were completely splitting up PNL into two parts, you know, organic and inorganic, you would perhaps see it a lot more clearly. You know, at the moment, given the level of reporting that we're doing, this is a sufficient indicator that data and inventory cost is one, expensed out fully. It is an asset element to it as well. It doesn't show in the financials.
There are efficiencies organically, which are clearly there, and that is why our organic margins are growing faster than the organic revenues, clearly. The inorganic, because of Jampp being less than a year old into our system, there's still a lot of efficiency to be derived there over the next 24 months.
Okay. My clarification is that in call you have said that we are finding hard for conversion of Jampp to higher EBITDA margins, which are listed in maybe 12 months, but now we are guiding for 24 months. From that perspective, can we rule out that we will be doing any acquisition in near future, big acquisition in near future? Because if we do so, then it will be quite a drag on our financials.
Well, not at all. In fact, I don't know where you derived from the commentary that we're finding it hard. On the contrary, I think, Jampp has been one of the smoothest integrations. Within the first year itself, for the kind of scale that they had and the fact that, you know, we haven't really traveled and met enough due to the restrictions of, you know, travels around the world, we have done phenomenally well in terms of what we have achieved with Jampp in year one. Our goal, our stated goal on any acquisition has always been that within the first year we'll bring it to single-digit profitability, and we have already delivered that with Jampp. In the second year and the third year, we will inch it upward.
There's no magic wand straightaway that, you know, we can shorten that cycle. We have typically seen that what our guidance has been on any acquisitions, that we'll take a three-year view to transform them to the same quality of bottom line margin sensibility that we have enjoyed with Affle's organic business. Each inorganic will have its journey, year one, year two, year three. What we have done in year one, in less than year one with Jampp is already quite fantastic, and I'm super proud of it. What we will do in year two and three is a very clear roadmap to that. I think we are on track on our stated model.
Thank you. We'll take the next question from the line of Arun Prasad from Spark Capital. Please go ahead.
Thank you. Thanks for the opportunity. Anuj, thanks for your explanation on what is happening in Jampp is good to hear, and hope there will be a turnaround in the Jampp story. Just wanted to understand, when you say turnaround, what exactly do you kind of do it? If you can take us through a very, very top level view when you are doing turnaround, what exactly you do at the acquired companies?
Well, I think the first thing is focus on deeper data science and insights, and integrating the full muscle of the tech stack and platform to benefit not only the advertisers and customers, but also enhance the margin and scalability of our business and platform. That is one. Second is the discipline. The discipline and focus on not just growth, but on unit economics of that growth. How much do we charge on CPC rate? What is the data and inventory cost? How do we, you know, make sure that our all line items of the financials are handled with great discipline and good governance? I think these are the kind of things that are already happening in each of the acquired assets.
That is how we have delivered great outcomes, not only with MediaSmart, Appnext, and now with Jampp within the first year itself. The emphasis is on clearly leveraging the strategic capabilities of the platforms, as well as on the discipline with which we have always run our company, right? I mean, which revenue do you accept and how much of that you accept, quality of revenue and the credit checks on that, the discipline on collections. All of this is not something that every organization is born with, and I think Affle has it as part of its core DNA. When we acquire an asset, we make sure that we bring it up to speed on all of those elements, both strategic as well as on the discipline of the organization.
I think we're doing really well with that, and the Jampp founders and the management team has responded and embraced it very, very naturally.
Thank you. When you said that, by the end of year one, you would bring the acquired companies up to, say, single-digit profitability margin, you are referring to EBITDA margin or PAT margin?
I think both, I would say. I mean, referring to EBITDA margin, PAT margin, and also I'm looking at cash flow clearly. I wanna make sure that every single part of our organization achieves the same level of unit economics that we are enjoying in our organic business. We're not compromising on any level. EBITDA, PAT, cash flow from operations as a percentage of PAT, all of these metrics have to add up and inch upwards to where the overall Affle group is.
Just to be a little bit clear, when you said that the Jampp margins are high single digit, mid-to-high single digit, that is EBITDA margin you are referring?
Well, yeah, it is. Go ahead, Kapil.
Yeah, this is EBITDA margin. Yeah, mid single digits on the higher side, right? Around, say, I would like to say it's maybe about 7% is the EBITDA percentage from Jampp business at the moment. We have been stating this thing that is, we have a turnaround time of about two years to take it to mid-teens from where we acquired from almost zero EBITDA levels, and we are happy with the progress. On the EBITDA front.
7% EBITDA margin, and if it is at the end of year one, you said clearly in the year two you wanted to take it higher. Any internal targets for the Jampp at the end of the year two?
It has been. [Prateek] clearly said mid-teens is the target.
Okay.
Actually, I just want to say that we don't give specific guidance for the future, but when we do any acquisition, what we have definitely shared is that in any acquisition that we do, especially if they are breaking even or 0% EBITDA at the time of the acquisition, we will absolutely work only on acquiring those assets where we have the clear execution path that we know with conviction that within year one we will bring it to mid-to-high single digit margin performance on EBITDA. Within year two, we'll bring it to the mid-teens, and by the year three, bring it closer to 20%. That is our strictest model and thesis for justification of inorganic transactions which are at a break-even level at the point of when we meet them and acquire them. This is not Jampp specific.
It is not a specific guidance on a particular unit for your modeling purpose. It is a complete sort of thesis of how we are justifying any inorganic investment into assets like this.
That's very helpful, Anuj. My second question is if you remember mid-February this year, Google came out with the announcement. They are extending the Privacy Sandbox to the mobile as well. Any thoughts on that, how it is different from our original thoughts on how Google will implement the privacy-related regulations and how you are internally preparing for this?
Sure. What we always expected that Google would come up with some announcement to that effect, and I wasn't surprised at all, first of all. Secondly, what Google has announced is that our interpretation of that announcement is that they are going to do some tests over the next couple of years, and then third year from now, they will actually go ahead and implement and roll out something which I believe will be a significantly diluted version of what we have seen happen in the previous financial year on the iOS platform.
Now, the fact that we have already negotiated the change on iOS platform in developed markets like North America and found a winning strategy on that with customers makes me very confident that when such a change eventually happens in a very diluted watered-down way on the Google platform, it will happen two to three years out, and it will be a easy-to-maneuver, you know, transition for us. What I want you to take comfort out of is this: That irrespective of any changes on data privacy laws or any changes with respect to any platform level changes, one fact that is not going away from any of us is that you and I as consumers are going to be deeply married to our smartphone touchscreen devices for many years to come. Consequently, the advertisers' budget are going to increasingly gravitate towards digital, mobile, and connected devices.
Now, if the advertisers' budgets are deeply gravitating towards this and the consumers are gravitating towards that, the relevance of the growth momentum of a tech platform like Apple is established out of those two mega trends that do not change and will not change over the next three to five years. Now, what may change is how these tech platforms eventually tweak and deliver. On that, we have shown a track record over last 17 years, because our company has only been focused on mobile marketing and nothing else since our inception. We have negotiated all changes, whether it's Nokia and BlackBerry going down from 2005 to 2010, 2011, to the changes in the ecosystem that have happened over the last five years.
I think you can see consistently that Apple has the agility and the leadership and the agility to address all the changes and transform such changes into opportunities like we did last year as well on iOS in North America and developed markets. We are very confident that whatever we know of the industry today and what we predict of the industry today with respect to Google and the latest changes over the next two to three years will not lead to any dramatic change in how we expect growth from Apple for our sort of business across emerging markets and emerging verticals. Because the advertisers on one side are not going to spend lesser, and on the other side, the consumers are going to continue to transact and convert more on digital experiences.
Okay. That's very helpful. If I can sneak one more question.
Sorry to interrupt. This is the operator here. Sir, I request you to get back in the queue as we have other participants waiting in the queue.
Sure. Okay. Thank you.
Thank you. We take the next question from the line of Aniket Pande from ICICI Securities. Please go ahead.
Hi. Thank you for the opportunity. I have one question for Kapil actually. Just wanted to get a sense of employee cost outlook. Going forward, will ESOP cost impact will come in Q1 also? Secondly, any outlook on the employee cost in subsidiary in Argentina, because right now the inflationary environment is quite high in Argentina.
Thanks for the question. First of all, the impact on Argentina was there in the Q3 also, but the impact was higher in Q4. That is why we segregated. However, we'd like to mention the impact is nullified by the counter accounting into the foreign exchange gains, and thereby, on the PBT level, the impact is nullified. If you see the employee cost line item, there will be on EBITDA line item, it changes the ratio of EBITDA. On the PBT line item, the impact is minuscule. It doesn't make any. It is not say 0.1%, 0.2% up and down would be the impact. It's on the expense line item, if you compare it, expense to expense, there can be some differentials on that.
We will keep on giving the guidance if there are material changes or there will be disclosures if there are material changes. We expect that the inflation would move in the same line as the whole year last year. The Q4 inflation was higher and had a higher impact. To give you an example, if there was an impact of about 3.2% from last quarter, it was based. It was half of, not even a half, it was about a third of the impact in Q3, right? It is variable to the general price index, and the counter impact goes into the foreign exchange calculations on the other income side, which is not taken into the EBITDA calculations.
On PBT level it doesn't make any difference, but only changes the dynamics of EBITDA calculations. Can you repeat your second question?
No, no. These were the two questions, sir. My third question is, can we get a sense on your margin trajectory going forward in FY 2023 or in FY 2024, actually? Basically my sense is that will your inventory and data cost remain elevated above 60% of your revenues, or it will come down in FY 2024 a bit?
We don't expect any dramatic changes in the margin profile. As we have already stated many times that the unit economics as well as the financial metrics we are keeping, all the efficiencies we draw from inventory cost are redeployed in investment in growing the businesses. You can say that they are indirect investments in growing the geographies and verticals and the emerging verticals. The investment is used to grow the other verticals which are emerging into the data. This is marketing on a CPCU basis.
On the employee cost, I believe that as we grow at a scale of, say, what has been stated, at a 63% CAGR, I believe that there will be increase in employee cost because you need human resources to run the business also.
Correct. Secondly, one last question from my end actually. Like in the last six months, we saw Google changing its advertising and privacy policy and bringing up FLoC in the advertising medium. Did we saw any changes in the behavior of customer advertising spend? Similarly now, as Netflix is also planning to get into advertising. Basically in our connected TV network, what can be done to gain more market share in that area?
Apple would get access to the inventory directly if they are not getting, we are not getting it from the SSPs or Google, ad platforms. These inventories will find a way of getting the advertisements through different SSPs or different ways of engaging with us. We don't think that the access to inventory will be blocked for us. There will be new ways of connecting to the users of these tech platforms.
Okay. It's exactly
Can I interject?
Yeah. Sorry. Sorry.
Sorry to interrupt you. In fact, if I may add that, what we're seeing with Netflix has been one of those platforms which is always charging the subscriber to pay for the content on a subscription basis. This is an extremely positive statement from Netflix, where they are now saying that they will have a version where it will be more ad monetized rather than subscriber paying. This is what we want to tell all our investors that this fundamental trends where the consumers are on the digital screens and devices, and the consumers are increasingly willing to spend more on digital devices.
Yet you're finding trends from companies like Netflix are saying, "Instead of charging the consumer, I'm gonna make money from advertising." Because after a certain point, the willingness of the consumer to pay for, let's say, content or subscription services will be for just a few select apps. For the long tail of apps and the long tail of consumers, there is only one model that seems to have thrived over the last two decades, which is that advertising subsidized content, advertising subsidizing apps, advertising subsidizing websites. That is what you're seeing even for the most premium platforms like Netflix. They will need to come to that because the consumers, especially across emerging verticals and emerging markets, are going to demand that, even the affluent consumers.
I mean, you know, even for somebody like me, you can give me, like, 10 apps that you can choose from, I'll say, "Okay, fine. For one of the apps I'll pay, but for the other nine I'll take the ad-funded model." This trend of advertising and the consumers accepting those advertising-linked business models from even the premium service providers is the biggest reassurance that the investors can have that the ad-tech digital business model is here to stay. While dealing with it with the responsibility of data privacy, which is where regulations come in. It's a much better ecosystem for the future, for the consumer, for the advertisers, and therefore I am very confident that you will see the continued growth in digital advertising as an investor. Yeah. Okay.
Thank you, sir. Thank you very much.
Thank you. We take the next question from the line of Anmol Garg from DAM Capital. Please go ahead.
Hello. Hi. I assume that I am audible.
Yes, you are.
Thanks, Anuj, for the opportunity. Just had a couple of questions. Firstly, just wanted to get an outlook. Is, from the changing Google policy, can we expect any changes in the CPCU rate once the policy is implemented? That's one. Secondly, just wanted to get an outlook on the different geographies that we are operating in, U.S, LATAM and Europe. What is your outlook on the demand in those geographies? Also, now that, we have been saying that we expect 30%-35% of growth, industry growth into the Indian ecosystem, what can be the growth that can be expected from LATAM and U.S? Can a similar growth be expected from these, geographies as well?
Right. I think the first question on outlook with respect to Google, I think this is a question which is, in my opinion, two to three years forward question. Now, on that, my take is that there will be a lot of adoption from consumers accepting consciously and giving permission and consent to ad-funded apps that they trust. Okay? Companies like Netflix or, you know, all kinds of apps which will be there, some will be big, well-known names, some will be lesser-known names, and there are millions of apps out there, but the consumers will selectively give consent to quite a number of apps that they will try and use on their devices. Because the first thing that the consumer wants to do is try the app, find it is ad-funded, find out if you're concerned.
If I like the app too much, maybe I will agree to pay on the non-ad-funded premium experience. There, I think the Google policy is not necessarily going to change the larger consumer trends and behaviors on digital adoption and digital consumption. In that respect, I think the CPCU rate for us will continue to see upward trajectory and growth as we continue to grow our business, not only in emerging verticals and emerging markets, but also emerging verticals in developed markets. Very importantly, as we see the Indian economy continue to grow over the next several years, we will find that the advertisers will have a better willingness to pay for even conversions that are happening in India. I expect the CPCU rate to trend upwards even with or without the Google changes over the next three to five years.
Your second question was about demand across geographies. You know, while I have industry reports that are talking India-specific average growth of 32%, specific verticals-based growth of even 35% CAGR for next few years, there are lesser sort of fragmented industry reports for, let's say, other emerging markets in the world. My outlook overall for other emerging markets and specifically the verticals that Affle is focused on, and that is our own internal view, that should also be in line with the kind of growth we are seeing in India. These markets will include Indonesia, Thailand, Malaysia, Philippines and Southeast Asia. It will include Middle East and Africa. It will include Latin America, LATAM markets, and so on and so forth.
When we look at developed markets, we would see a significant shift happening also in emerging verticals in favor of deeper growth in visitors over there as well. I am quite bullish that when we see it holistically overall, the industry trend should be north of close to 30%-35% for the next couple of years at least. That gives me a lot of confidence to say that while Affle has historically been beating, or even in this quarter, we have organically beaten the growth trends by achieving 45% revenue growth in Q4 year-over-year.
It gives me a lot of confidence that, look, I mean, even with tough macroeconomic conditions, geopolitical risk factors which are there, because our business is so broad-based across so many geographies and so many verticals, we should be able to keep up the growth momentum.
Sure. Thanks. If I can add just one more. If you can highlight what is our policy regarding acquisitions and particularly are we looking to acquire companies in India or outside India right now?
We don't want to give any indicative, you know, competitive advantage to our competitors, nor into our acquisition strategies. What I would want to say here is that inorganic growth has been a core part of the strategy, while organic growth has been clearly very robust. When we look at it with that lens, Affle through organic growth alone will exceed expectations of most stakeholders in this ecosystem, whether it's internal employees, you know, investors, analysts. I mean, any stakeholder in the ecosystem you look at, our organic growth alone, backed by the fact that the industry across emerging markets and emerging verticals is gonna grow fast, is going to exceed most internal and external expectations. Therefore, there is no pressure to necessarily go and do something inorganic, right?
I mean, now when we find a strategically well-fitting inorganic target at the right price point, which the next one to two years the markets will certainly provide, because some of you alluded to the fact that funding will be harder. It's not necessarily going to be easy for the entrepreneurs who may not necessarily have scaled up to a certain level. We will find very attractively priced inorganic targets in the next one to two years. When we keep a strong balance sheet, we keep our financial discipline of generating good cash flows internally, so our cash reserves on the balance sheet will only grow.
When we find the right target without any pressure, right strategic fitment that we see will help the company, whether in India or internationally, we will certainly have the wherewithal to execute very sensibly and carefully, like we have always done. Am I giving you any guidance on the short term whether we are going to acquire something or not? Not at all. There is absolutely no pressure, and we will do a sensible inorganic growth plan. We will certainly do it, but we will time it to our advantage.
Sure. This is really helpful. If I can add just one-
Dr. Garg, this is the operator. Sir requests you to get back in the queue as we have the participants.
Okay. Okay, sure.
Thank you.
Thanks.
Thank you. We take the next question from the line of Pritesh Thakkar from Asian Markets Securities. Please go ahead. Participants are requested to restrict their questions to two per participant. Over to you, sir. Mr. Pritesh, you may go ahead with your question, please.
Am I audible now? Hello?
Sir, you may go ahead.
Yes. Audible? Yes. Thanks for giving the opportunity. I just have one question. Any progress on targeting or penetrating any emerging markets that you highlighted on your last call that could be another margin lever in terms of realization? Any color on that participants call?
Sorry, Pritesh, you were not very audible, but it seems like you're asking about our strategy in emerging markets. Is that correct?
Yeah, that's right.
Okay. To the extent that I can understand your question, and I would like to build the answer towards the larger understanding of most of us on this call today, is that Affle is one of the only companies in the marketing tech ad tech space that is so deeply anchored on emerging markets and emerging verticals as our strategic and business focus. If any investor anywhere in the world wants to invest in the emerging markets, digital connected devices linked growth plan, there is no other company that I know of that is so deeply focused on executing and winning in these markets as a strong competitive advantage for the future.
Most of our competitors, which are listed companies or privately held companies that have access to funding or have already raised funding, are not as deeply focused or anchored on emerging markets, and therefore our competitive moat across emerging markets is one of the strongest. Perhaps, if I may qualify that based on my knowledge, there is no other listed company in the world that is as deeply focused on emerging markets as we are. Therefore, that creates a scarcity value as well, because a lot of the investors have understood digital advertising over the years in developed markets. If they believe in the thesis of emerging markets, they will absolutely find that there is really no other strong credible player that is executing well across emerging markets.
Our view on emerging markets is strong, and we extend that view by focusing on emerging verticals even in developed markets where we have shown good success and track record so far. Sorry, Pritesh, I could only hear this much, and I've tried to answer it for the benefit of all the people who are attending.
Yes. It was more on the investment side rather than focusing on the emerging markets. Anyways, the second question on this year again, I mean, our target in specific on MEA is, are we planning to, you know-
Sorry, Thakkar .
Sorry to stop you.
Your voice is not really audible, sir.
Can I request you to email your question to us, Pritesh, and if we can, message it to the organizer, and we'll try to take it up later?
Yes, wonderful.
Thank you. We take the next question from the line of Rishabh Sisodia from Concept Investment Please go ahead. Mr. Sisodia, you may please go ahead with your question.
Yes. Hello, sir. Am I audible? Yes, you are.
Yes, you are.
Yes, sir. Just a small two questions. First thing, if you could give me the color on the organic growth for the full year FY 2022.
I think for the last three quarters or all the quarters in our commentary, we've always given clear indication on quarter-on-quarter, year-on-year basis, growth in organic. I don't have that statistic as a published report. It will be fair to say that the organic growth has consistently been above industry average growth trends that we have seen. In that sense, the fundamentals of our business are deeply, clearly anchored. In every single reporting period that we have talked about, I would say that the organic growth has been above industry average growth rate consistently, especially in the last financial year.
Okay. Thank you. Just the last one. This is during the last acquisitions that we have had, Jampp and Appnext. I remember the management saying previously where we are also looking at, you know, increasing our stake in Bobble AI and, you know, deeply interconnecting our platforms. Any color on that? How are we looking at it going forward in the emerging and developing markets? How do you see all our businesses getting connected and maybe as a one stop solution to the end consumer?
That's a great question. In fact, if you find the presentation that we shared of the Investor Day or the Analyst Day in December 2021 itself, we had all the. We unveiled how the entire strategy, the culture, the tech platform backbone, and all the different platforms that sit on top of that backbone, how they coherently deliver a unique strategy and execution to the customers. We call it the Affle 2.0 consumer platform stack. As part of that stack, of course, the 100% acquired businesses and the integration of that into that stack has already happened. We are obviously leveraging that into our execution as we go along.
Even for the inorganic, or let's say the minority investments that we have done through commercial partnerships, strategic partnerships, integration of our SDKs or server to server integrations, we are able to leverage those into the overall stack as well. So I think the question about how it offers one integrated Affle 2.0 consumer platform stack, I think we have already unveiled it in our detailed, I think it was almost a two and a half to three hour discussion and presentation with all the investors in December. We will continue to do that. We'll do it once a year as an event, and later this year as well, we should have that, and we will take the opportunity to elaborate it in a much more detailed and descriptive manner, so you can also see the customer testimonials.
You can see the much more deeper case studies. You can see the demo of our platforms and the capabilities of our platforms, you know, with much more deeper deep dive than what we can do in an earnings call. We should look forward to that again later this year.
Sure. Thank you.
Thank you. We take the next question from the line of Bharat Shah from ASK Investment Managers Limited. Please go ahead.
Yeah. Hi, Anuj. When you talk about organic and acquisitive growth, in terms of your formal, kind of, structured methodology, how long do you treat an acquired business as acquisitive growth? And at what point of time do you start, kind of, labeling it as inorganic growth? And both in terms of your, structured formal methodology, as well as in your mental model, how do you look at that issue?
Is your question about for how many years we expect to focus on acquisition as a growth strategy as well as organic growth? Did I get to the essence of your question again, Bharat?
No. What I meant was when you acquired something, it's at a relatively incipient stage in its journey. Therefore, the growth which comes from inorganic revenue or profit may be little in a stage of evolution. Therefore you'll label, like you said, in the last quarter, almost about 65% of our business, it comes from organic activity that we've done over a period of time, and about 35% has come from acquisition. In your mental mind, up to what kind of a stage an acquisition in your mind is like an acquisition and when it is kind of fully integrated? Plus formally when you define that INR 205 crore is organic revenue, and it is grown at a rate of 45%, which is very impressive number.
In terms of your formal guidance, like these numbers, for what period of time do you typically? Or by what criteria do you label something acquisitive? At some stage then it stops being labeled as such and it becomes like potential dilution.
Sure. I understand your question now. Typically for us, within the first year itself, we would see that the acquired business has become an integrated part of our Affle 2.0 Consumer Platform Stack. Post the first year, we would treat it as part of an integrated platform and execution. With respect to, you know, the extent that we wish to do that, I think all the hooks and the necessary integrations have to be mandatorily completed within the first 4 quarters of the acquisition. We have done that sensibly for almost every single acquisition that we have done. Post that period, we would see and define its overall growth trajectory as part of our own organic growth plans.
We would no longer be seeing it, you know, as an acquired sort of a, you know, separate affair. As far as the reasonableness of that year one assumption is concerned, I think we back it on the track record that every single acquisition that we have done, we have managed to achieve that within the first year itself. If ever in future that were to happen, you know, taking a bit longer, we will certainly advise on that. At the moment, I think it is absolutely sensible for us to not only work on that template, but also to commit towards delivering that internally to the acquired effect.
Because, you know, the employees, the integration, all of that and the culture and the strategy and the platform level has to be absolutely taken care of within year one itself. Otherwise, chances are that it will become a failed acquisition, and so far we have had the good fortune of not seeing anything like that.
To put it lightly, the year one is an engaging affair, and thereafter it consummates into marriage.
Exactly. Yeah. By the way, typically even before we get into the engagement, if you see in almost all our investments, which have been 100% acquired or are being 100% acquired, the courtship period before we sign even an MOU, has been a multiple year-long courtship period before we go deeper into the marriage. By the time we actually sign the contract, there's a lot of things have been taken care of. Then the first year is just the actual execution on that, you know. I think that is very carefully assessed by us.
There's never a case of speed dating that we meet someone and say, "Okay, let's just go ahead and do something." You know, it's been three to eight years long courtship period before we even sign a non-binding MOU on an acquisition target.
Understood. My second question is on unit economics.
Pardon the interruption, Mr. Bharat Shah. This is the operator here. Due to time constraint, we require to close the call now.
I'm just raising the second question.
Anuj, can I go ahead?
Go ahead.
Yeah, yeah, please go ahead, Bharat. Let's take the second question, and we move on to the next question.
Yeah. Unit economics, or at least what I have understood so far, your gross margin typically has been about 40%-44% range, and operating expenses have been about close to 16%-17%. Therefore, at operating level, about 25%-27% margin. Clearly, acquisition will distort that picture. That economics in your opinion is robust, except that acquisition may change those numbers for a given length of time.
That is absolutely correct. I think what we want all our stakeholders to deeply be conscious of is that as the management of the company, as the leadership team of the company, we are deeply cognizant and caring about bottom line sensible, sustainable, profitable growth as a DNA of the company. I have built this company for 17 years with that DNA, and nothing in our execution plans is going to allow that to change. Therefore, any acquisition that we do or the organic unit economics of the company, very, very important for us to run a sensibly profitable, cash flow positive, sustainable growth mechanisms are absolutely key to our financial performance. This is not something that we are saying because we're a public company now, and that's what you would like to hear.
We have been doing this even before we went public all along. That is the main reason why the management team of the company, the promoter group of the company, is still able to retain almost 59.9% ownership through the promoter group holding company in Singapore. Otherwise, we would have been deeply diluted if we were not capital efficient. This unit economics even for inorganic, yes, it distorts it a little bit. That distortion is a necessary investment to create much greater scale and much greater value creation for the stakeholders. Because when we acquire the assets, we are breaking even. Of course, the value at which we acquire therefore is sensibly placed for where we need them.
When we transform them to a much more valuable unit over the 36 months, first 12 months, and the next 24 months period, it is really unlocking value for all our stakeholders and shareholders. This is, I mean, please don't see the distortion as a, "Oh my God, it's like bringing the margin down and affecting the financials." We will see it as what a great investment if Affle can transform them successfully like they've already done for, you know, most of the acquisitions that we have already done. It's a brilliant thing to happen if it can keep on happening consistently. So far our track record shows that, you know, we're doing it consistently.
No, that's well known and deeply appreciated, Anuj. Thank you and all the best.
Thank you, Bharat.
Thank you. Due to time constraint, I now hand over the conference to the Affle management for closing comments. Over to you, sir.
Well, thank you so much everyone for attending and for all your questions. They were very insightful questions. I absolutely enjoyed the earnings call and the Q&A session today. I wish all of you well. As I've always mentioned, Affle is built to last. We are here for the long term, and you will hear a lot more from us as we go along and evolve this company into a great corporate citizen that it already is. You know, we continue to strive to build Affle into an institution, and I look forward to all your questions, support, and I wish all of you really well. Take care.
Thank you.
Thank you.
On behalf of Dolat Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.