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Edited Transcript of OPERA.OL earnings conference call or presentation 20-Aug-19 6:00am GMT

Q2 2019 Otello Corporation ASA Earnings Presentation

Oslo Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Otello Corporation ASA earnings conference call or presentation Tuesday, August 20, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Lars Rabaek Boilesen

Otello Corporation ASA - CEO

* Pedro Santos Ripper

Otello Corporation ASA - CEO of Bemobi

* Petter Lade

Otello Corporation ASA - CFO

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Conference Call Participants

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* Christoffer Wang Bjørnsen

DNB Markets, Research Division - Analyst

* Henriette Trondsen

Arctic Securities AS, Research Division - Research Analyst

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Presentation

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Lars Rabaek Boilesen, Otello Corporation ASA - CEO [1]

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Good morning. Welcome to Otello Corporation's Second Quarter 2019 Presentation.

Today's agenda, I will do an executive summary. I will also do an operational review on AdColony.

Today, we have in person, the CEO of Bemobi, Pedro Ripper, he will do an update on Bemobi. Then Petter Lade, our CFO, will do a financial update. And then at the end, we have time for a Q&A session.

Executive summary. Revenue came in at $56.2 million, which was up from Q1, where the revenue was 51.5% and down from last year's same quarter, 72.2%. Adjusted EBITDA, $3.9 million, up from $1.4 million previous quarter and up from $1.7 million same quarter last year. So revenue in both AdColony and Bemobi were up approximately around 10% in both companies. And strong margins and long-term focus on costs drive stronger adjusted EBITDA compared to Q1 this year, but also compared to same quarter last year.

Operational review. So when it comes to AdColony, the turnaround is starting to show results. For a long period, we have been in a turnaround process. In AdColony, we have restructured the company, we have taken costs down, significant down, but we are struggling to get revenue to increase. And we're really happy to see that we had good growth from Q2 -- in Q2 compared to Q1. Even the Brand business grew more than 20% from Q1 to Q2 so very strong growth. And also in Performance, we see the revenues leveling out and we are expecting to get back to growth in second half of 2019.

On the cost side, we have reduced OpEx with more than 50% over the last 2 years, and we now have a target of an annual run -- we now have a target of OpEx for annual run rate of $60 million.

Cost savings on programmatic, where we have really strong growth now with the same cost level, enable us to invest into 2 things: sales force, in general on -- globally; but also into our centralized sales support and operations office in Turkey, which make us capable of hiring more people but at keeping costs flat at the same time.

We're also very happy to see that the strong momentum we have in programmatic now is continuing into Q3 and the start of second half of 2019. So we expect more or less the same growth from Q2 to Q3, as we saw from Q1 to Q2, around 10%. And also we're expecting EBITDA in Q3 to be around breakeven, maybe breakeven plus, small plus. And we also expect to have AdColony finally cash flow positive before end of the year.

If we look into the 2 businesses we have in AdColony, we start with global Brand business, we have 3 business segments. The first is the traditional brand where we have IO business, but also we have our PMP platform, our own programmatic platform where many of our supply/demand customers are starting to buy programmatic listed. That had a very good quarter. It was up 32%. This is very much driven by the programmatic platform, PMP platform, we have. IO was more or less flat, which we are pleased with since the whole trend is it's going towards programmatic. So very strong growth in that segment. On the Brand performance, it was also solid quarter, $5.7 million, up 7%. And then, finally, our third segment, Programmatic Open Marketplace, it was also a solid quarter. This is where we have both video and supply and we also deal with third-party supply, this was up 21.4%. So all in all, growth of 24% from Q1 to Q2 and healthy growth in all our 3 segments. And the good news is also that we see good trends into Q3 in all 3 segments. So we expect another 10% growth in Global Brand going forward.

We -- as I said, we had almost 84% growth on programmatic on our PMP platform, our own platform. So we see this very strong successful shift to programmatic and we see it continuous.

Some details. We now, compared to the same quarter last year, we actually have more than 60% active more PMP deals on our exchange. We also see an increase in pricing, global CPM was up 22% compared to last year. The reason there is that many of our partners are starting to buy more video compared to display from our own, it's called an SDK. So we had -- we used to have last year 50-50 between display and video; now it's 65%, 35%. And as a result, you can see that CPM is up 20%, more or less.

So it's very good for us to see that our strong efforts into investing into our own platform, our own exchange is starting to show success. It's also good to see that we're succeeding with our own supply.

Things that has been very positive and resulted in good development in the quarter is that we continue to focus very much on QPS optimization for all regions. Our infrastructure is definitely getting better. This is also reducing costs. We have managed to move many of our -- published over to our own PMP platform. So we have a very strict filter when it comes to that. So we have got rid of some of the blocking and we have more solid supply partners on our PMP platform, which is increasing revenue.

We continue to focus very much on our best partners. So we also have done a good job in removing unprofitable partners. So basically, we are focusing on getting revenue on daily basis up and also securing good margins.

We continue to invest heavily into header bidding/advanced mediation, and we are making good progress. We now are live on big platforms like Amazon and AppLovin and we're starting to see meaningful revenue there. The way we work there is we sign directly with the publishers and we also pay them directly despite we do our header bidding on third-party platforms.

We have successfully deployed Endpoints, particularly in APAC with selected partners, which has really improved our programmatic offering in APAC, reduces latency and our entire delivery has improved. As a result, we have got more revenue and we expect to have all our APAC partners on the new network in Q3.

We continue to fight fraud. If you are an advertiser and you advertise on our platform, you're guaranteed that we are taking fraud very serious. We have implemented some new automated features against fraud in the quarter. GeoEdge, InValid traffic blocking is now fully live. And also we have an update from Pixalate where we have supply-side fraud pre-bid filtering, which has also improved our offering.

And in general, we continue to be extremely focused on how we optimize supply/demand on a daily basis, which is also helping our trend that our employees' organization's very stable now and their very strong focus on optimizing supply/demand every hour, every day.

If we move on to Global Performance, we saw a marginal decline in revenue of 4%. Gross margin revenue continues to be positive, a little bit up compared to Q1. And in general, we actually see quite some improvements in the underlying health of the platform. There's very good stability in both demand and supply on the Performance platform now.

Some key highlights. We have quite a fragmented customer base when it comes to -- so we definitely see a need to become bigger with our biggest partner. So good to see that we had very strong growth with our key advertiser accounts. So we have double-digit growth in Peak, Playtika, Kabam and Vizor, which was positive and also another trend we saw from Q1.

We are adding, for the first time in a long time, more apps to our platform. So our efforts towards new publisher is going well. We continue to develop tools for our sales force so they can act very quickly if we have supply on the platform that works really well. So we launched the supply-side deal tool, which has really helped our team to secure that they can make quicker deals with our supply partners. We continue to focus very much on creative on the Performance side. So we have new creative ad units out such as overlays and suggested apps to improve IR and performance. And in general, we feel good about how we're executing on the platform now. We see strong momentum in how we can continue to underline the improvement in the platforms so we can secure growth going forward, which will, of course, be -- also help the output for our advertisers and our publishers.

This is just to show that we have established a team in AdColony now who is only focusing on getting new supply on the platform. And we're not only working on the top 500 apps, all these apps is -- some new apps we have got in via the launch of an advanced monetization program we launched beginning of the year. So we have got a lot of new apps onto the platform and many of these apps are outside the top 500. Many of them will improve, but this also shows that we're now not only focusing on top 500 now. We're also thinking about the long tail of the whole ecosystem here to get more impressions, more supply on our platform. And it's -- we've shown really good results.

So what to expect going forward is that we continue to have extremely high focus on execution to drive growth in Q3. We hope Q3 will be the turning point on performance, so you will see growth compared to Q2. And this will happen at a pace where margins will remain stable. We continue to make a lot of improvements into the platform into header bidding, and we have some really exciting new core models that we are just finalizing and are showing good results. So we look forward to basically launch the new algorithms to the platform in the coming weeks. We're also launching a new AdColony SDK where we are again focusing on display basically just to take that part of the revenue as well. So we are reaching out for just Display supply going forward. And all this will help to grow our supply for Performance, and in general, the overall business.

So just in general. So we hope that AdColony will be another strong quarter, will be growth going forward to Q3, not only in Brand, but also on the Performance side.

Before I give the word to Pedro, I just would give a small update on Opera TV. As previously communicated, there's an ongoing legal dispute with a majority shareholder, MFC. We were -- we had a favorable verdict granted on liability and that judgment was not appealed by MFC. MFC was ordered to pay a substantial part of our legal costs. That money was received and we have now restored the proceedings in order to have the court to decide the value of our shares. So MFC will have to buy back our shares based on that value. So that will happen beginning of next year in Q1.

Then, Pedro, to you.

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Pedro Santos Ripper, Otello Corporation ASA - CEO of Bemobi [2]

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Good morning, everyone. Good to be here again. So before we go into the numbers, I thought it was worthwhile to maybe step back and look a little bit about the basics of Bemobi because we had some very interesting more recent developments. But in order to dive deeper into those, I think it's worthwhile taking the big picture first.

So at the end of the day, our business is about 2 pillars and they have to walk hand-in-hand in order to have a sustainable business model and growth. So as you understand, the core for business is selling small tickets -- small-priced tickets as subscription services in developing countries. So the price point is to be just right. The content needs to be high quality because regardless of where you are, you also crave for the best apps and games. But you also have -- you need an effective way to distribute these services so that the cost of acquisition and the lifetime value of these customers, they are compatible. And that's one of the, let's say, the tricky things about serving developing countries, not about only pricing, but how you make this profitable by being able to acquire consumers on an ongoing basis at a marginal cost.

That's why we say we have 2 pillars. In one hand, we have to have compelling services. Our services are most about bundles of the leading apps and games, which we call this kind of Netflix of apps. We have different flavors depending on price point and depending on the type of content. Gaming and kids-oriented services are the killer ones, although there are a few others. So that's one dimension.

This dimension, one of the things that we measure is the size of our addressable market. And the way that we the final addressable market is whenever we do a partnership with a mobile carrier, which typically is the companies that we use to help us with the billing and distribution, we define that -- the subscribers of that given mobile carrier, they become addressable meaning anyone from that carrier in that specific country can buy our service. So that doesn't mean they are subscriber, but that means that they are available, they are within the reach of these consumers. So the more services/carriers that we launch, the bigger the addressable. So that's one dimension.

The other dimension is now assuming that we have a large addressable, we need ways to reach out to these consumers, promote our service and convert them to actually subscribers. That comes the second dimension, which we call the channels, different ways that we can touch these consumers.

The combination of both, meaning a large addressable and having ways to effectively touch these consumers is what's been driving growth for us.

With that in mind, in terms of services, not much has been changed, so we've been consistent with our service offering. Number one, the Apps Club, let's say, service family with all these different flavors that are described, is still the majority of our subscribers and that's what we are planning for the foreseeable future. We've been working just for the past 2, 3 years with some stand-alone apps, apps which they carry enough value on themselves not to require a full bundle. So we are, let's say, a distribution/billing partner. So we get apps, which they typically do very well in developing countries, but they struggle to penetrate emerging countries, and we couple billing together with distribution channels to boost their penetration. So that's, again, nothing new. And we had this service, which was from the regional Bemobi prior to the Opera days, which was specifically local to Brazil, a mobile coupon offer, which we're now experimenting to CIS countries. So too early to say if that's something we're going to be scaling globally. So that's why I'm putting this as kind of a little bit great. As of today, it's not something we are fully committed to go global.

The other two, it's evolving constantly both from a technology platform as well as from the content perspective. We need to keep the content evergreen. So every -- pretty much every week, there's something new coming to the platform so there is reason for people to stay.

So from that dimension, you can say business is pretty much the same. It's evolving in the sense that the platform, to be competitive, needs new content and new features.

As a side note here, maybe by Q3, we have more news about that. As you might be aware, because Brazil is our biggest market and where we have, let's say, the long-standing relationship with carriers, that's typically our lab. So whenever we have hypothesis of new services or new dynamics, it's easier for us to test the waters and test these concepts in Brazil. If they truly work, then we take this more internationally. So in Brazil, we started to experiment with other services such as credit advance and some other voice services. But as of now, they are less than 1% of the revenues and it's too early to say if we're going to scale them globally. Suffice to say that right now, they seem very promising. Maybe in a quarter or 2, we're going to have more news on that dimension. So not many changes here.

However, on the second I mentioned, remember the 2 pillars, is the distribution one. And here, things evolved quite substantially. As you might recall, the way that typically we go about acquiring new customers is a combination of 3 different ways, which the one on the right, the third one being what we think as a strategic. So the typical playbook, we go to new country with a new carrier, we typically rely on the first 2 ways to acquire consumers. First way is the carriers. As part of the broader partnership, they commit to promote this service themselves, which they not always deliver, or if they do, typically more in the first phase when there is something new. So it's very good because it's very cost effective. It doesn't cost anything to promote that. It's on the part of the -- it's within the original deal that we have with the carriers. But on the negative side, we don't have much control and it's more volatile. But it's a good way to kick-start.

The second way we go about is we go to the market and we buy media. Again, we don't go to the Facebooks and the Instagrams and the Googles of this world because the cost of acquisition is not compatible with these users. It's trickier because you need to find channels, which on one hand, have good quality and good price, but it helps to bump a little bit to get, let's say, the service traction going. But where 90% of our focus is, is in the third one, which is, I think, is one of the things that made Bemobi quite successful in becoming and growing and growing profitably at the same time and this is critical for the long-term sustainability of the model, which is we figured out many years ago, the large carriers, they have so many touchpoints with consumers but they were lagging behind both in terms of leveraging these touchpoints as well as the technology and how to do it in a smart way. While companies like Google, Facebook they are so, let's say, precise in knowing what to offer to who at what moments, carriers were still almost in the stone age of leveraging these channels.

So pretty much from that, we had one channel, and I will explain this slide in a minute, which we repeated a while ago, which we called the No Credit, No Data portals. Initially, they were quite simple. They were just sort of a smart captive portal, which leverage the fact that most prepaid consumers every now and then they run out of airtime and instead of being blocked, they would be redirected to a portal, this captive portal, where we could provide custom-tailored offers for them at a point which they have nowhere else to go. So typically, we'll sell this as a trial period. So even if they don't have credit, they could subscribe to try the service. And this channel, they've been proven quite effectively. As you might recall, we've been using this as a main priority for scaling internationally. So in the beginning, we had this proven as kind of a scalable model in Brazil. Since then, we have about 17 carriers outside of Brazil, which we have already this in place.

More recently, we evolved this concept even further, and this is kind of where I'm most excited these days, because if you look from the -- if you go back to this kind of the 2 pillars, our addressable market today is already quite large. So we touch about 2.3 billion, 2.4 billion people. We could certainly still grow this a little bit further to maybe 3 billion, but it's not something drastic, right? So we already kind of already covered and touched, I would say, the bulk of the developing countries with the exception of China. If we look what is our penetration out of this addressable market, it's still quite small. In our most mature market, Brazil, we actually increased our penetration from the 7.8% to about 8.3%, which is good news. Even in a mature market, we're able to grow penetration. But the biggest opportunity internationally, our average is 2.3%. So that's kind of where the bulk of the opportunity is. And to get there is not so much grow and address them any longer, although, as I said, we still can probably grow 20% addressable, but it's how we penetrate further.

So we started experimenting about a year ago and now things are really shaping up in additional channels beyond No Credit and No Data. So we created a similar version of that based on voice. Believe it or not, voice is still heavily used, and the scenario is quite similar. So you run out of credit, you make call. Instead of just being blocked, you are going to be directed to a smart portal, which, again, provide the alternatives ranging from top up your phone to actually services you could buy. Believe it or not, voice, for this type of channel, is still 3x bigger than the equivalent portals that we had.

So we had one experiment with one carrier for about a year and the last 2 quarters we decided to double down and see if we could acquire new platforms and new carriers to see if this would scale as well as the first one we had. And the good news is this is working quite well. So out of the 4 big carriers in Brazil, we already have 3 of them live. And very likely before the end of this current quarter, Q3, we should have the 4 of them live.

So this is kind of on the right. We are starting to leverage more touchpoints beyond No Credit No Data. We leveraged yet a third one, which, again, is something very, very simple, but it's quite effective is you missed a call because your phone was off or you're in a, let's say, a void zone where there is no cell signal. Typically, carriers send you a message as well. We also see that this message is a trigger point that we can use to up-sell services related specifically to that.

So in a nutshell, we're evolving in 2 directions here. We're adding a few more channels. Some of these channels, they have the potential to be 2 to 3x bigger than the ones we are using today. If things work out well, that will translate into higher penetration, hence, more subscribers and overall growth. But even more interesting, before, when we had one channel, our ability to be targeted and put some, let's say, "intelligence" in what to offer was more limited. As you have more touch points with the same users, you start getting more intelligence on the users' behavior.

So I mean, here's a very basic example. Given user runs out of credit, goes into this portal, No Credit portal; sees 5 or 6 different services; gets interested in a gaming or a music service; goes through the process, but doesn't buy. This same user, very likely, less than 24 hours later, is going to try to make a call and going to get into this voice portal. Instead of showing exactly the same standard offers, I already know that the user just a while ago was very interested in a given service, but didn't finish the purchase process. So we are able to kind of look back the behavior information that we just got from like 2 minutes ago back into that channel. So we have been calling this Loop, which is the more information, the more touchpoints that we get from users, the more insights that we have into what users are looking for and we think that we can now double conversion by kind of putting this information together.

So what we've been developing almost at the same time is not only we are kind of getting more channels, but we are building this kind of core platform which gathers all the information, mixes it with information that the carrier already has and it becomes sort of an offer engine. So we know what -- in the industry of carrier services, there is something called NBA or NBO, which is Next Best Action or Next Best Offer, which is a concept that you always know what's the best next thing to up-sell or cross-sell to someone. Typically, this is only done for voice and data. We are kind of extending this concept for digital services and it's been really well received.

So in a nutshell here, there's been a lot of development in the channel piece for the past 3 or 4 months. It's enough now that we have initial proof points to show that this is scale. So this kind of give us as kind of a reinforcement belief that a penetration could go higher and eventually faster than we anticipated.

So with that, let's talk a little bit about the results and we'll talk a little bit also about prospect for next quarter. So first half of the year, it's been a difficult first half. You might recall, I was not here in Q1, but Petter and Lars kind of give you, I think, the landscape. Q1, there was 2, let's say, external factors, which affected this to grow less than what we wished for. One is one of our biggest carriers migrated the platform where it impacted our ability to bill customers as effectively as they used to and we estimated that we will be able to go back to our same performance maybe 1 month or 2. Reality took 5 months. So this has affected all the way through May. Good news, June was already -- we are back on the performance levels that we were before and although we are -- July is already part of Q3, July has also been fairly good. So I think that we are behind this first thing that's really affected us in the first half, so we had to compensate growth everywhere else where we're to compensate for this kind of overall effect.

The second thing that affected us, and I think -- well, for the good or for the bad, it might be behind us, is currency. Whenever we are comparing year-over-year, we had a big currency fluctuation last year after Q2. So this is probably the last quarter that we are comparing year-over-year against a big FX devaluation, both in Brazilian reais as well as a little bit in the basket of international markets.

That's why we've been, for a while, showing 2 sets of results. On the dollar basis, we only grew 1% year-over-year and we grew a bit at 14%. By the way, the reason why we're a bit better than revenue, it has to do with the channels piece again. As you might recall, the more that we do acquisitions in the third type, our own channels, the cheaper than it is because they don't have incremental costs, hence, the better our margin and the better our EBITDA. That's why, again, it's so strategic to have more of our channels. If we want to grow more, but in a significantly less profitable way, we just buy more media. But long term, that's not really sustainable. That's why we're able to get a mismatch and we've been growing EBITDA at a faster pace than revenue.

If you adjust for FX, which is to see what is the underlying dynamics, even in a quarter that we don't think was our best quarter, we grew 10%, so it was not bad at all, it's 2 digits; and EBITDA almost 24%. So the results were quite good despite having the initial 2 months of the quarter as very difficult. So we had a very strong end of quarter.

In terms of the other KPIs, subscribers are running healthily. We're still growing to more carriers. There are still some carriers there that will increase our addressable, but more importantly, they increase the addressable as sort of we want to make sure that we have our flags in most of the places to kind of prevent new competitors to get in and eventually create critical mass. So for us also, it's very important that we still keep the leadership in scale. And scale is important because it gives us the ability to drive and attract the best apps and games to our platform.

The other thing here and this is kind of -- it's kind of this in a more, let's say, quantitative way what I was describing more conceptually about channel. Let me start from the left. So the No Credit No Data, it's gaining well. We have now 13 plus the 4 in LATAM, so 17 portals already up and running. We have 3 that we expect to close by next quarter. So that's kind of -- actually 2 of them are already live. So they actually started in July, which is going to be good for Q3.

The new voice interactive portal that we described back in our previous meeting where we're just rolling out Claro, which was on one of the big carriers, now we are live with VIVO and we already were live with Oi. So we are live with 3 of them. Now I think it's enough to know that it's not a one shot. This model really works and it performs quite well. The big bet here, obviously, is to try to replicate this everywhere.

And last but not least, the platform where I described this Loop, we have a simple version already live, but the version that really captures most of these dynamics of users, we expect to live -- at least 1 or 2 cases live by -- before the end of this year.

The other KPI that I like to track a lot and taking a look only in the international markets because in Brazil, the mix is already much higher than that. This is the mix of how we acquire consumers. So the No Credit No Data portals, which represents this third bucket, used to be 17% of the subscribers we used to get a year ago, now it's up to 37%. What I would like to see this number is in a year time frame, we need to be above 50%. That would mean that more than 50% of our new users, they would come for channels that we do control and they have pretty much almost 0 incremental cost. In contrast today, it's about 37% and it was 17%. All the other ones in one form or another with the exception of the operator promos, operator promos is the first time, right, the carriers promote the services so there is no cost. But again, we don't have much control. So this is where we expect the mix. If these 2 things happen as we expect, the 2 effects is this should not only drive growth, but the profitability improves a little bit in the sense that the cost of acquisition -- or the blended cost of acquisition goes down.

So in a nutshell, Q2, despite the very, let's say, difficult beginning of the quarter, it's been a good quarter of underlying 10% growth and 24% EBITDA growth. We're very excited about the Loop. That's a constant, the carriers get it because they do similar things for their core offers. So it's a natural extension for them to understand for all these digital services, they need to have a layer of intelligence. There is no one offering something similar today. So for now, it's sort of a, let's say, blue ocean, but I don't expect this to be the case for too long. Once you get a new model right, typically new competitors come in.

We are expanding variations of Apps Club, especially in international, because the more channels that we have, then we need to have offers to occupy the channel. And in Q3, we expect to have at least 10% growth quarter-over-quarter and over 25 -- 20% year-over-year growth compared to last year. And EBITDA is going to be higher both quarter-over-quarter, higher than these numbers, and even year-over-year. Again, same reasoning, the more that we have our own channels kicking in, the less we have cost of acquisition, hence, better profitability.

And we're still exploring different -- separate listings of Bemobi as a way to maximize shareholder value. And this is still a discussion, an ongoing discussion.

With that, I call Petter Lade to speak about financial results and we'll be back for Q&A.

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Petter Lade, Otello Corporation ASA - CFO [3]

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Thank you, Pedro, and good morning, everyone. So let me take you through the financials for the quarter. So as both Lars and Pedro talked about, Q2 was pretty okay. We had 9% revenue growth from Q1 and we believe this is the turning point. So it's good to be able to deliver on the quarter as we expected.

Overall, as you can see, year-on-year, costs have been coming down significantly. And quarter-on-quarter, cost is relatively stable.

This leads to an EBITDA that expands -- it's double what we had a quarter ago and double the profit that we had a year ago.

Below the line, of course, you're still impacted by depreciation, amortization and FX, in particular. As you can see here, we had an FX loss of $2.5 million this year. Last year, we had a gain of $5 million. So clearly, these numbers kind of distort the profit at the very end.

If you look at the trend, and I think this is key, we have been on a path going down in revenue for quite some time. As I said, we believe Q2 is a turning point. We've guided for very strong Q3 with continued growth over Q2. And by Q4, we expect to be back to year-on-year revenue growth. So that would be -- optically look a lot, lot nicer.

On the cost side, we've been taking out costs very aggressively in AdColony in particular. And we're now at a cost base where we're comfortable and we believe where we can be profitable.

On EBITDA, it's been volatile, but it's good to see that this quarter is well ahead of where it was a year ago despite revenue being lower.

Digging into AdColony, which is kind of where we see the turn has happened as Lars described. Overall, our Performance business has shown 7 quarters in a row with revenue decline. We believe this Q3 is going to return to growth and it's going to stay there. This, of course, has been up until now pulling down the overall revenue while actually our Brand business has performed pretty well for quite a few quarters. And if we look at this quarter, all 3 segments within Brand were growing from Q1, and all geographies, North America, EMEA and APAC, were all growing over Q1. So that's very encouraging.

On the cost side, as I said, we've been really aggressive on cutting costs. We started with an OpEx space of close to $150 million 2 years ago. Now we're getting close to $60 million. And we believe that the OpEx space that we have now kind of around $15 million per quarter is an area where we can start to scale and we can start to have profitable growth from. So the excitement now will be more about revenue growth as opposed to cost savings.

Of course, at the same time, we're going to continue to be focused on cost. I mean we've taken out and reorganized the tech organization. We've reduced the way -- the cost we deliver our services and we've been moving heads to a lower-cost location, but this has enabled us to invest into salespeople, into programmatic, into our partnership programs, which we've been expanding. So actually, if you look at head count from a year ago, the head count is not down that much. So we haven't lost the ability to drive revenue.

Gross margin in the quarter was very strong, 34.5%. Just to explain a little bit with gross margin. So clearly, the highest gross margin we have in the managed IO Brand business and we have then relatively lower margin in the Brand programmatic business. So if you look at margin going forward, some of the growth that we're seeing is coming in Brand programmatic. So you just need to be aware that if we are very successful on Brand programmatic, which it looks like we are into July and August, that will pull down the overall blended margin by a bit. I mean we're not talking big numbers here. We still expect to be in kind of the 33%, 34% gross margin range. But there's no changes kind of like-for-like on gross margin.

On EBITDA in the quarter, negative $1 million. Of course, not happy with that, but we believe this is the last quarter of red numbers. So we'll be -- expect to be back in black in Q3 and we expect to stay there.

So for Bemobi, Pedro took you through Bemobi in detail. So I won't add much. But clearly, it's a -- first half was a little bit challenging, but Q2 was actually okay. We report 1% growth, but underlying we had 10%. On profit, we report 14%, but underlying, 24%. It's not bad. But of course, we do really look forward to get into Q3 because when we get to Q3, then all the FX headwind that we had will go away. If FX rates stay where they are today, we'll put 10% revenue growth on the number that we see now and we compare it with 12.4%, which is what we delivered in Q3 last year. So then we'll show more than 20% real growth.

OpEx is relatively stable. Of course, there's some distortion here from Q2 to Q3 last year as we moved, you can see a little note underneath, we moved the costs from OpEx to COGS. So that also changed the gross margin.

But overall, what you really have to look at here is the underlying gross margin, which was close to 75% in the old measures, which kind of compared to 72% what we had a year ago. So really, the gross margin has never been stronger than it was now in this quarter.

And of course, EBITDA, $6 million reported, would have been $6.6 million, a very, very solid -- a very solid quarter. But still Pedro is unhappy with it. I think we have much more to -- we can do much more.

So turning over to cash flow. This is an area where I believe we can do better. The operating cash flow for the quarter was negative, close to $3 million. We do have some headwind building working capital as we grow. So it's just something to be aware of. If you continue to be successful and grow, both in Bemobi and AdColony, we will tie up some working capital. But still, I'd like to see better cash collection in the second half than we did in Q2.

The second part here is the cash flow from investment activities. So we have the normal kind of capitalized R&D and CapEx, which is about $2.5 million. And the other $3.5 million here is linked to a small acquisition that we did of some assets and kind of a voice interactive platform done by Bemobi to give us a wider, wider reach and more channels with the same customers that we have. So I think it's a great way to expand our portfolio, gives us more contact points, more services to the operators. So it's a great way to grow. The $1.4 million in financing is split about half and half between share repurchases and the impact of lease, basically the IFRS 16. Overall, we end the quarter with about $16.5 million in cash, so down 10% for the quarter because heavily impacted by things that are kind of won't repeat itself. I expect operating cash flow to be better and the acquisition of assets by Bemobi as kind of a one-and-done deal.

So overall, with -- if we look at our financial position, we have over $16 million in cash. We have no debt. We have no earn-outs. It's a comfortable position to be in. But of course, I also want to highlight that we have $100 million credit line that was unused by the end of the quarter. So that gives us a lot of additional cushion if we wanted to be more aggressive.

Finally, my last few slides, the most important slides, the outlook. So if you remember, last year, from Q2 to Q3, AdColony revenue went down 10%. This year, we're guiding it up 10%. So obviously, something is different. I do not believe Q2 was a fluke. I believe Q2 was the start of a new trend. I believe we're going to grow from here. We see now that going into Q3, that Performance is growing for the first time in 7 quarters. Brand IO, Brand Performance, Brand Programmatic, they're all growing. So it's not one thing that's going well. It's a lot of things that has improved.

Gross margin, as I said, is going to be flat year-on-year, so maybe down 1 percentage point where we are now but that's because we are more successful in the programmatic delivery, which carries lower gross margin with very, very nice contribution to EBITDA because it's very cheap for us on the OpEx side.

OpEx, I've explained already. We're going to continue to focus on cost, but at the same time we need to dare to invest because we're now -- we're hiring salespeople in San Francisco, hiring salespeople in Atlanta. This is a way for us to grow. We're expanding our partnership programs. We recently signed a deal in Germany to expand there. So we -- I wouldn't say we're done with cost cutting, but we're going to extend where we can see revenue growth as well.

And finally, EBITDA. We expect Q3 to be up and we expect Q3 to be positive.

And full year guidance. There's no change with 2 quarters in and well into August, we feel more comfortable about the full year guidance.

Final slide, outlook for Bemobi. Pedro alluded to this, we had an okay Q2, but we saw strength through the quarter and actually for the international business. Now July is the strongest month we've ever seen. So there are some underlying strength in the international business showing itself as well in Q3. So we expect revenue to continue. We grew about 9% last quarter. We expect to grow 10% this quarter. And of course, that means that by -- when we then report Q3, we expect to show 20% year-on-year growth compared to -- yes, compared to last year. Same stable gross margin means that EBITDA will also be up about 20% year-on-year.

Also here, the full year guidance is unchanged. We do have some cushion here. We just keep it the same. We expect revenue to grow from last year and we expect profit to grow from last year.

That concludes my slides, and we'll turn to Q&A. So Pedro and Lars, I'm sure we're going to have some questions.

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Questions and Answers

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Petter Lade, Otello Corporation ASA - CFO [1]

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Yes, Henriette?

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Henriette Trondsen, Arctic Securities AS, Research Division - Research Analyst [2]

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Yes, Henriette Trondsen, Arctic. First is on acquisition for Bemobi in this quarter, are you paying $6 million for -- to take this again, Henriette Trondsen, Arctic. First on acquisition for Bemobi this quarter in May. If I understand, you're actually paying $6 million for customer contract with unexpected life -- remaining lifetime of 2 years. Is that right? Correct? Or...

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Pedro Santos Ripper, Otello Corporation ASA - CEO of Bemobi [3]

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No. It's slightly different. So the price paid was $3.5 million. So the -- in that slide that was shown, there was 2 different things. There was $2.5 million of capitalization, which is pretty much the run rate of the group. And there's specifically $3.5 million for the acquisition. So what was acquired to be specific, so what's behind this $3.5 million?

So as you might recall, we've been flirting with this voice portal for a while. We have one case and one carrier for the last 2 years. The organic path was going to buy the infrastructure ourselves and build these portals and expertise in voice, which is something that we originally lacked. The opportunity that came up is Novitech, was a local company, owned by a multinational called Nuance Communications. Nuance is a global company listed on the NASDAQ. They recently decided to divest some of what they call the noncore assets. So they're selling 2 or 3 of these businesses and they decided to discontinue this business in Brazil. So for us, that was a really big shortcut, enabled to have all these IVR expertise and have the platform in all the 4 carriers is 0. So at the end of the day, pretty much what that buys us into is instead of having to put that as CapEx in the next 2 or 3 years, we have one shot, bought the infrastructure at a very good discount already integrated with the carriers. And we were able to absorb about 40 people that we were in the process of hiring. So at the end of the day, I think the upside is we accelerated significantly our channel piece. So that's kind of the core rationale. Obviously, the idea is to use this expertise and this platform then to expand everywhere beyond Brazil despite the fact that what the infrastructure that we acquired today is mostly in Brazil and 3 small countries in Central America. So that's kind of the backdrop on this one.

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Henriette Trondsen, Arctic Securities AS, Research Division - Research Analyst [4]

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And on Bemobi, you are drafting in your presentation that the plan for IPO of Bemobi is progressing. So I was wondering if you all saw this quarter for the IPO to happen. I guess you don't want to comment on valuation, but do you also, this quarter, aim for valuation at least at the level when you convert the earn-outs to ownership to progress with that goal?

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Pedro Santos Ripper, Otello Corporation ASA - CEO of Bemobi [5]

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Sorry, I didn't quite catch the last question.

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Henriette Trondsen, Arctic Securities AS, Research Division - Research Analyst [6]

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For the IPO of Bemobi to happen, I guess you don't want to comment on valuation, but do you at least aim for a valuation at least at the level when you converted your earn-outs to ownership in Bemobi?

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Lars Rabaek Boilesen, Otello Corporation ASA - CEO [7]

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Well, I think -- so we're still in the process of doing the groundwork for the IPO, so we don't have any time line for that. But clearly, if you both look at the Otello investors and the original Bemobi investors, then we have expectation at the minimum level where the earn-out was done. So we will see as part of the groundwork we're doing, but we do not plan for any valuation below that.

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Pedro Santos Ripper, Otello Corporation ASA - CEO of Bemobi [8]

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Yes. Let's put it in another way. If we reach a valuation at the same level, we did a really bad deal. So if I'm committed to kind of swap what I would call a sort of a sure thing in terms of cash flow and earn-out, although it's hard to predict what our valuation would be, but the expectation is clear, it to be higher. Otherwise, the swap that we did in terms of earn-out for equity would be a bad choice. So again, hard to make predictions, but yes, the expectation is it should be significantly higher to justify the whole effort of doing the swap and going through the work of a different structure for Bemobi.

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Henriette Trondsen, Arctic Securities AS, Research Division - Research Analyst [9]

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For guidance on Bemobi, adjusting for FX, what will be the underlying growth into Q3?

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Pedro Santos Ripper, Otello Corporation ASA - CEO of Bemobi [10]

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I would say the same as we described. The difference though is if you see the last 2 quarters, we'd be communicating 2 numbers, right? The numbers in dollars, which are the official ones. But just for the sake of having a better understanding of the underlying growth, we adjust for FX. The fact -- now that we are already halfway through Q3, the fact of Q3 this year, they're pretty much in most of the countries we are in, the same as we were Q3 last year. So in that sense, the number that we showed, it should be without FX adjustments. If we were to have an FX adjustment, maybe -- it might be, for the first time, in the opposite direction. The numbers might be slightly corrected down because, again, FX, the biggest devaluation happened more than half a year ago. So unless something drastic comes -- happens in some of our key countries, which we'll never know, the expectation is no FX adjustment and that guidance should be on the dollar basis.

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Lars Rabaek Boilesen, Otello Corporation ASA - CEO [11]

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Christoffer?

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [12]

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This is Christoffer from DNB Markets. Just continuing on the acquisition that Bemobi did during the quarter. Could you comment a bit on the financials, Pedro?

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Pedro Santos Ripper, Otello Corporation ASA - CEO of Bemobi [13]

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Yes.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [14]

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What kind of revenues should we expect and...

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Pedro Santos Ripper, Otello Corporation ASA - CEO of Bemobi [15]

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So -- it's difficult to predict yet. So let me -- a little bit more background, the more you understand, hopefully the more you'll be excited just like I am. So in the end of the day, the business model that the company had with this infrastructure was totally different from ours, and hence, that's the opportunity. They had a well-established voice, well-integrated infrastructure with all the carriers and they used to get a small commission from selling top-ups, which didn't provide good margins and that's why kind of they decided to get away from that business.

We're pretty much, by the end of the day, we don't really care about those contracts. They are very small and they don't provide margins. It's just a matter of kind of phasing out that, but we do care about the integration and the infrastructure. So this deal is more about buying assets and expertise in contrast to buying any actual revenues. I think the only exception is something, which hopefully in a quarter or 2 we will come back to, they had one service which sounds very promising which is sort of a credit advance. But again this is like 1% of their revenue today so it's not really something material. But I believe there is a global demand for that and this could be big.

So for us, the economics of this is if we were to build it ourselves, would probably cost significantly more than what we paid for the acquisition and would probably take a year more. So at the end of the day, you could argue that we are advancing this kind of expense compared to if we were to have to build this infrastructure for the next 1.5 years.

One last caveat just to manage expectations. So even though we accelerated a lot in terms of doing the acquisition, in order to replicate what we acquired in Latin America for international markets, realistically speaking, I don't expect a bump in revenues for another 6 or 7 months. But this is -- depending how you see, this is actually good news because we expect a really strong quarter for Q3 and probably a very solid Q4 on this year based on 2 underlying trends: the new channels, which already kicked in, in Brazil and the organic growth in international. If we execute well in replicating the standards that we just acquired and even if it takes 8 months, that puts us in a good position for next year so that then we have another wave of growth. So think about this as a way to speed up Brazil now and put us in a good position for international probably 6 to 8 months from now. So we're kind of already thinking through it a year ahead.

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Lars Rabaek Boilesen, Otello Corporation ASA - CEO [16]

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I just want to add and that's why we asked Pedro to spend a few slides in the beginning of his presentation today because what really makes Bemobi stand out is the fact that we have very unique channels compared to our competition. We have a great range of different services, all very successful in Brazil. And we have successfully taken Apps Club, which is like our flagship product to international. And this year, we'll take more services from Brazil to international. But the reason why we can do that very efficiently is that we have unique channels in Bemobi. And this whole -- this small acquisition is actually very strategic for us to basically build up a new global channel for our services.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [17]

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Just a quick follow-up on that just to be direct on the question. That was helpful. And then during Q3, of the growth that you're expecting there, 20% year-over-year plus, is there any significant effect there at all from this acquisition? Is there any percentage points or...

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Pedro Santos Ripper, Otello Corporation ASA - CEO of Bemobi [18]

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Indirectly, yes, because of the channels. It's the same dynamics, right? The more gross adds, the more subscribers that we bring, the more revenue that we come in. So not from the acquisition itself in the sense that we don't carry existing revenue so much from them. But the fact that we're going to be able to have these channels live, this channel is going to bring more subscribers to Apps Club, yes. Part of the growth, it's accelerated by that, only in Latin America. The international, which has even a higher growth, is not profiting for anything related to the acquisition yet. As I said, my expectation is then the same kind of headwinds that we are getting -- tailwind that we getting for Brazil, we're going to be -- hopefully be able to get in international probably 8 months from now.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [19]

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Sure. Okay. Then on AdColony, you're still investing quite a lot in terms of capitalized R&D. Going into second half, could you talk a bit about when you say you're going to be cash flow positive by the end of the year, is that based on cutting those investments $2.5 million per quarter to a smaller number? Or is it purely based on increasing the growth rate of the business?

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Lars Rabaek Boilesen, Otello Corporation ASA - CEO [20]

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It's very much based on that. We have, of course, big expectation for Q4 where we have seasonality on -- particularly on the Brand side. Also we see that the Performance, we expect that to be up. This, I believe, is the first time we actually have growth quarter-on-quarter in Performance. We're hoping that trend will also continue into Q4. So the whole AdColony story is about getting into growth. Now it's taking a long time. But if it goes as we hope, we, of course, will have core -- we have growth from Q1 to Q2, Q2 to Q3. We feel comfortable about Q3 to Q4. And then, of course, we'll also be cash flow positive on that. But we will not be that in Q3. So based on -- but we'd get help from seasonality in Q4, that's why we're confident about that.

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Petter Lade, Otello Corporation ASA - CFO [21]

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I can -- just to add to that, to be specific on the number. So if you look at our capitalized R&D in Q2, if I recall, it was $1.8 million. And that's been going down every single quarter and it will go -- continue to go down because we reorganized our tech organization, meaning we have fewer employees there, so we capitalized less off their salaries. So that's a number that will go down. On top of that, of course, we have IFRS 16 cost of about $0.5 million or so.

So if you say around $2.5 million, that's kind of the EBITDA that we need in order to be kind of cash flow breakeven. So if you look at -- if you look at where EBITDA need to be to going to be -- to make money, around $2.5 million.

Timing of payment, you don't know exactly. That's why we say -- we don't say it's going to be in Q4, we say towards the end of the year. But we believe that our EBITDA in Q4 kind of on a longer term would basically be cash flow positive. If you do that level of revenue and profit, we would generate cash in the quarter.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [22]

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Okay. And then sorry for jumping a bit back and forth here, but going back to Novitech, could you just say a bit in terms of how that would affect your kind of medium-term outlook for Bemobi in terms of growth. How much more growth would you expect now after you've spent this month?

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Pedro Santos Ripper, Otello Corporation ASA - CEO of Bemobi [23]

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Difficult to say as, but my expectations, and again, the whole reasoning of why doing that is that -- so let me reframe it in a different way. In Brazil, we have 8.3% penetration on the addressable. As I said many times before, I don't think this is achievable or -- in most of the countries. Brazil, it's a peculiar case in the sense that we've been there many, many years. We have deeper integration, so on and so forth. On the other hand, we are at 0.3% average in most of the other countries. So I think this acquisition put us in a very good place to bump this 0.3% to something much higher. What this number is 2%, 3%, 4%, hard to predict, but although I don't think 8% is achievable, I think 3% or 4% is definitely achievable. That means that if we execute well in the next few years, we should be able to multiply international by 10. Again, many challenges, many uncertainties.

And just to comment, aspirations are based on numbers that we have done as before. Having yet another channel and having kind of a little bit more intelligence, I think, bring us a few advantages compared to what we were a while ago. First, I think the obvious one is it's more gross adds, therefore, more direct growth. But the result's a defensive mechanism as well. As you can imagine, whenever you do something which really works, people start copying it. So while we were the only kids in town doing things like No Credit No Data, now there is at least 3 or 4 companies knocking the door of the same customers and saying, "Oh, I can do something similar." Now that we're adding more and more channels together and mixing them up and showing there is yet another layer of intelligence to replace us, now we need people to go 2 steps further and say, no. I'm not only going to have to replace Bemobi doing these captive portals. They're going to have to replace them on their core voice interactive portals. They're going to have to replace them on the deep integration, understanding client behavior, which becomes then a big barrier to entry. So at the end of the day, there are different aspects to it. Growth, of course, is the main motivation. So I do believe international can be 10x what it is today. But I think equally important is if we don't kind of evolve our offer, it's natural that more competition will come. And as a result of competition, either 1 of 2 things would happen, right? Either the margins will go down or would be replaced. So that's kind of the 2 reasonings before that. I have to say we were somehow lucky because a big corporation decided to get out of this business. I think they did a poor job in evaluating how that would be -- could be leveraged. And I think we did our part in terms of convincing other carriers that we'd be the natural partner to absorb that and that's why we were able to buy these assets at a really discounted price.

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Lars Rabaek Boilesen, Otello Corporation ASA - CEO [24]

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I mean, it's really a long-term investment. We believe we can -- this could be a way to do No Data No Credit for voice, but we need to work long term here. It's a long-term investment. It's really strategic because here, we will actually have to sell hardware to convince operators to get hardware into the network to make it work. We do have the expertise to do that. So that's another reason for really executing on this. But it is, more than anything, really a long-term strategic channel development for our services in international as well.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [25]

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And just jumping back to that comment again, a quick last one. You're right in the presentation that you're launching display and a new SDK and -- for the Performance business at least. Can you talk a bit about how that business has kind of been in size previously and how big it can be when you can now turn it back on again.

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Lars Rabaek Boilesen, Otello Corporation ASA - CEO [26]

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Well, I mean we made a decision to really focus on video. It was not a very smart decision like some years ago and this has -- so this -- we're definitely a video network today. We're known for video. If agencies are thinking about doing integrated campaigns where they also need to do mobile video, that's where AdColony comes up. But that's a big opportunity for us to also do display at the same time and many of our customers are buying display as well when they do these campaigns. So it's simply -- we're just correcting this error we did like 1 or 2 years ago and we're committed to also do display for revenue reasons. This is the reason.

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Petter Lade, Otello Corporation ASA - CFO [27]

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And kind of -- it's not really just to talk about numbers here, but clearly, if -- we focus on video, but if you can add on 10% revenue because you can also serve display, that's nice gravy.

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Lars Rabaek Boilesen, Otello Corporation ASA - CEO [28]

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Yes. It's not very strategic. Strategic is video, it was the right decision. But it's just that many customers like to buy display as well. And we used to have a lot of display and we are known in the industry so it's not so hard for us to get display supply into our SDK.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [29]

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Does it add any cost? And what is the gross margin?

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Petter Lade, Otello Corporation ASA - CFO [30]

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Gross margin is very similar. The CPMs are lower. I mean, as Lars showed, I mean when you move to video, you increase CPM. It's still something we want to push our customers in. But if we get customers in on display, we can move them later to video. We can give them both if they want to have more reach for a lower price point. We can do it. It doesn't require new people. It's the same -- because that was the tricky thing. We had the same people going out to our customers and we can sell the video, but we couldn't sell them display. Now of course, the same person can sell both. So it doesn't require an extra cost.

Okay. Thank you so much.

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Lars Rabaek Boilesen, Otello Corporation ASA - CEO [31]

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Thank you.

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Pedro Santos Ripper, Otello Corporation ASA - CEO of Bemobi [32]

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Thank you.