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Edited Transcript of OPERA.OL earnings conference call or presentation 13-Nov-19 7:00am GMT

Q3 2019 Otello Corporation ASA Earnings Presentation

Oslo Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Otello Corporation ASA earnings conference call or presentation Wednesday, November 13, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Lars Rabaek Boilesen

Otello Corporation ASA - CEO

* 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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Welcome to Otello Corporation's Q3 2019 Presentation.

Today's agenda, I will do an executive summary, follow up with an operational review, then our CFO, Petter Lade, will do a financial update. And at the end, we have time for Q&A.

Executive summary. Revenue came in at $63.1 million, up from $56.2 million Q2 this year, an increase of 12.2% and little bit down compared to same quarter last year. Adjusted EBITDA, $6 million, up 53% from $3.9 million in the previous quarter and up 4x from the same quarter last year. Revenue in AdColony and Bemobi was both up around 10% compared to Q2 this year. We saw an all-time high adjusted EBITDA for Bemobi. And also, finally, AdColony turned positive in the quarter on adjusted EBITDA. And we are on track to deliver on our targets we communicated at the beginning of the year. Petter will come back to that later.

Operational review. AdColony, we definitely think that the turnaround we have been through during the last 18 months are starting to show signs of success, starting to show some results. Our Brand business, which is 2/3 of the business, is having great momentum. We had a very strong Q3, and it was actually up more than 20% compared to Q2, which was not a bad quarter for brands. Performance still flattish, volatile. It's 1/3 of the revenue, and it was flat compared to Q2, 2% down. Cost OpEx has been reduced more than 50% over the last 2 years. We now have an annual run rate of $60 million. And we will continue to -- focusing on making the company more efficient. The fact that we are growing very fast on programmatic is helping us. And we are currently investing into sales in the brand organization. But the fact that we are moving more to programmatic and we have successfully moved all our support and centralized that in Turkey is making it possible to invest into sales and, at the same time, keep costs flat.

Going forward, we are expecting another quarter in Q4 with growth. This year, we started AdColony with a revenue in Q1 of $38 million then Q2 was $42.5 million. This quarter was around $48 million. And we expect another quarter in Q4 with around or more of 10% revenue growth. So that will be the fourth quarter with growth in AdColony. So AdColony is definitely back to growth in 2019.

We also see, from our Brand business, that it's off to a very strong start in Q4. Our programmatic revenue has been -- has had a really good start in Q4. And also, we will have another quarter in Q4 with positive adjusted EBITDA, and it will have a size of positive adjusted EBITDA, which will make the entire year positive for AdColony.

Brands is really where we stand out in AdColony. This is where we have a unique offering, and particularly on the demand side, working with agencies and big brands. And we continue to have over proportional growth on our Brand business. This -- the supply we have for both Performance and Brands is -- we are definitely prioritizing that for our Brand business. So this means that in certain situation, our Performance business is suffering from not having access to the same supply because we are prioritizing Brand for 2 reasons: because Brand has higher margins and also that we are very focused on delivering more than our advertisers our brand is expecting from AdColony. So we will always prioritize to fulfill campaigns with big brands over performance, just so you see there is some cannibalization of the Performance business because we are prioritizing overproportional growth in our Brand business.

And let's take a look -- a further look at the Brand business, which is really going well. We had growth in all our regions, particularly in America, which is the steady part of our Brand business, where we had almost 30% growth from Q2 to Q3. If you look at the 3 segments, we have IO business and our Private Marketplace. It had 8% growth, which is actually really strong results, up to $16.8 million. Brand performance $7.4 million up 30% from Q2. And then finally, where we really are scaling our business right now, our programmatic business, where many of our advertising has started to buy campaign from AdColony programmatic and not only through IOs, and that business had 55% growth from Q2 to Q3, ended up on $7.9 million. And as a total growth for business, 22% compared to Q2.

We are successfully transitioning our biggest client to programmatic on the Brand business, and it's really scaling nicely. Strong start to Q4. Also another thing we did which helped the business in Q3 was that we, on our exchange, are focusing on deeper partnerships with selected DSPs. This is actually also the fact that we are working with less DSPs now is also reducing our hosting costs. And if you take a look, it's paying off. We had 76 DSPs live in Q3 compared to 110 in Q2. Revenue went from $5.1 million to $7.9 million, but more important, we more than doubled the revenue with partners. And some of the partners -- DSP partners, where we really have a close relationship, we even had bigger growth than just doubling the business in the quarter.

So let's take a look on why we are growing on the Brand business. Why are we gaining market share in the mobile video brand markets? We have become much better on our platform to prioritize Brands over Performance, which is very important because the Brand business really where we stand out, where we are unique. And we've done that both for supply and demand. And we're just much better at sending the right ads at the right place. We have added formats. We are now focusing on display again. We are launching Interstitial Display product. So our sales force just has more products to sell, paying off.

We are focusing very much on transparency, measurability for our partners. Particularly, we have got a lot of help from 2 technologies, sellers.json and SupplyChain technologies where we -- these technologies enable us to identify buyers and sellers on our platform. And this is something you can really benefit from if you have your own supply. And we are one of the networks which has very strong SDK footprint, so that has really helped the revenue on exchange. Another thing is that accordingly, in 2019, has really become known for fighting fraud. We're never compromising on that. We're always working really hard to fight fraud. And we also see that the fact that we added partners like GeoEdge and Pixalate has attracted new and strong advertisers to AdColony on mobile video.

And while we are seeing strong growth, we are also increasing our sales force again. We have added many sellers this year, particularly in the U.S., but also in EMEA and APAC.

If you take a look at EMEA, it's going really well, 49% revenue growth from Q3. We have -- we're growing in our -- all our 3 segments, Instant-Play, but also in LinkedIn here in the Nordics where we're the exclusive partner of LinkedIn on advertising. It's going fantastic. And so we have very strong growth around EMEA and LatAm. We used to have multiple number of offices in this. We closed them all down. And we're only working through partners. So that basically means that every time partners are selling, we are making money. So it's a very strong model, and it's going really well and very low-risk model.

In APAC, we had 12% year-on-year growth from same quarter last year. We have more than 50% our sales in APAC on programmatic, so it's scaling really well. We are opening up more markets in Asia, Japan, New Zealand, Myanmar markets we opened up in 2019. And we're building a very strong plan for 2020, working very close with many of our leading Asia Pacific advertisers, also focusing particularly on next summer's event in Tokyo Olympics 2020.

And just to show that we really stand out on our Brand business when it comes to mobile video, then we were selected as the Best Ad Network Mobile for Adweek. We won this award in front of Google and Unity, 2 very strong players also in the Brand business. So I think this is just showing that when agencies win big advertiser, big brands are planning big integrated campaigns. When they come to mobile video, they really have AdColony in top of mind. So this is something we're really proud of and definitely an award that's also a big, big achievement for all our employees on the Brand business and a big boost for the morale and the plans for next year.

If you look at the global performance business, it's a very competitive market, but we see that our revenue has stabilized. It was only down 2% in Q3 compared to the previous quarter. The margins was a little bit down. This is due to the fact that we have to find more supply for our Performance business. We are -- we have been taking a very clear decision to prioritize our Brand business on supply. So we need to access more slides to make the Brand Performance business grow again. It's actually going really well. We have a very strong team now working out of Turkey in our support center, and they have added 42 apps in the top 100 in this year. And this is also starting to make an impact on our revenue on the Performance business in the quarter. These new apps we have accessed was 10% of the revenue, up from 2%, and this will also increase in Q4. So this is really the way to make the Performance business grow again.

We have some -- we have a good action plan for the Performance business. We are launching SDK 4.0 for AdColony where we also opened up display as part of our revenue for Performance going forward. Continue to focus very much on advanced bidding. We see revenue increased there as well on the Performance business. And we'll continue to focus really hard on getting more supply into the business. We will continue to prioritize Brand -- our supply for Brand in the quarter. So additional supply is important for our Performance business.

We are experimenting also with our platform. We have, during the last 5, 6 months, been working on a new Core together with a data science company in Poland. That engine is starting to show really good results. So we will start testing on a new Core in the coming months, and we have big expectation for that, that, that can increase the performance revenue as well. This -- the focus here has been IR and return on ad spend, and the lab test is now showing very competitive results compared to our existing Core.

Opera TV. No big news there. We have a positive adjustment in favor of Otello Corporation. We have restored the court proceedings. We are scheduled to meet in court again, end of March, where the valuation of our shares will be determined by the court. And then MFC will have to pay the amount decided by the court.

Bemobi. Very strong quarter as well, all-time high. Let's just recap a little bit what is unique about our Bemobi business. There's basically 2 pillars in the Bemobi business. You have a big range of services, which are all based on subscription, all very proven in Brazil to be very popular among our consumers. And then in Bemobi, we have a big focus on our distribution channels. These 2 things combined are necessary to have a successful business in -- if you're working with good operators. If you only have successful apps, it's almost impossible and too expensive to get distribution. There's only a handful of apps in the world who can create their own distribution from word of mouth, et cetera.

And when it comes to services, we have, of course, our flagship product, Apps Club, which we have -- which is the only service we have launched outside LatAm, and we have very good traction with that. In addition, we have some third-party companies who is coming to us because we have very strong distribution like TRUECALLER like busuu cetera. And this has turned out to be a very good business for us in Brazil. We will also launch these services international in 2020, which will open up some more revenue in international.

And then finally, we have other services like mobile coupons, apps within health, fitness, security, education, a full range -- full portfolio of services, which has proven successful in Brazil, LatAm. And all these services will now be launched international in the coming year.

Distribution channels, absolutely key. We have now 67 operators outside Brazil live. And when we launched these -- Bemobi with these operators, then the mobile operators agreed to promote the services, and they agreed to launch these services in their own channels. This is, of course, outside our control but a very important channel for us as well. Then we are successfully also using paid services. We're working with different apps like the Opera Mini product. We're working with different portals, different properties on promoting our services. And we have become better that we are better at selecting high-quality services and avoiding, let's say, low-quality online campaigns. This has also been important for us. We have control to a certain extent with these channels because we simply have become better at avoiding, let's say, low-quality channels.

And then finally, the most important channels where we have full control, where we own the channels are the No Credit No Data portals, also now with the new IR product where we have voice portals as well. These channels we own 100%. We cooperate with the carriers, and we help them to boost their core business. So half of the real estate on these portals belongs to the carrier. We operate on their behalf. And half of them are purely Bemobi services. And this is really where we have the unique part of Bemobi with our own channels, and then we can push our own services on these channels. And we have full control.

So just to show that you need to have strong services, but it's simply not enough. You need to have your own channels. And that's why we are now seeing very strong results on Bemobi because we have developed our own channels. And these channels are also in place for our growth in 2020 for international. I'll come back to that later.

On the revenue and adjusted EBITDA side, it was an all-time high quarter in Q3. Revenue at $14.8 million, up from $12.4 million, 19% growth; EBITDA -- adjusted EBITDA up from $5.2 million to $6.2 million, also 19%. The currency was a little bit against us in the quarter. So if we adjust for that, then the growth in revenue was 21%, and EBITDA was 20%. Good growth on user subscription growth, 17% year-on-year. We are now live outside LatAm. In Brazil, we are live with all the operators. Outside Brazil, LatAm, we now have 67 operators live, and we have more operators going to launch in this quarter.

The channel mix is definitely improving. It's so important to have our own channels. As you could see, our No Data No Credit, our -- also our new voice portal, No Credit voice portal, grew from 27% to 34% in the quarter. We have now 13 portals which are live international, so very strong growth on that channel side in international. And we have 2, 4 more operators planned to go live with both No Credit No Data portals. We have tested our new IVR product with international, and we see a big potential for 2020 and also a big interest around the TV voice portal.

So when it comes to the omni-channel platform where we also did the small acquisition, we have now -- we're now live with that product with all the major operators in Brazil, and we are starting to focus very much on rolling out that product also international. And that will be in big scale from next year.

We're very pleased with the growth we have on co-owned channels in connection with the operators, and we expect that to hopefully be more than 50% of the channel mix next year. We are very excited about launching many of the services, which has proven successful in Brazil in selected international markets already in Q4 and at full scale in all our markets in international markets in 2020. And despite we had our best quarter in Q4, we expect both revenue and adjusted EBITDA to be up compared to Q3 in Q4. So the growth will continue.

We are still planning to list or spin out Bemobi. Due to the Brexit situation to second half 2019, listing in U.K. is not possible despite we did a lot of groundwork for that. So as a result of that, we are considering other exchanges in Europe. And this has been going on for quite some months, and we are already -- we will already conduct new investor meetings before year-end this year.

So that ends the operational review. Petter Lade, please take over.

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Petter Lade, Otello Corporation ASA - CFO [2]

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Thank you, Lars, and good morning. So let me take you through the financials for the quarter.

So as Lars said, we had a good quarter. We guided revenue growth of 10%. We actually delivered 12%, so slightly above what we set out to do.

On the cost side, cost is very much under control. The only increase in cost is really the publisher cost, which is linked to the revenue growth that we see in Bemobi comparing to our Q2 numbers. And overall, of course, cost has come down significantly over the last couple of years.

This revenue growth from Q2 and cost being the same gives us an increasing adjusted EBITDA, which is up significantly, actually, 4x compared to Q2 last year and up a couple of million from last quarter. Below the line, we have a big FX gain in the quarter. This is because the dollar is getting stronger versus the NOK, which gives us a positive net profit and EPS positive also for the quarter.

If you look at the trend line, clearly, we believe that we saw the revenue bottoming out in Q1 this year. We saw nice revenue growth from Q1 to Q2. That continued into Q3, and we expect that to continue also into Q4. And at the same time, we have our OpEx really coming down quite significantly. The only kind of little increase you can see here in OpEx versus last quarter is because we are investing also in Bemobi international and also in the IVR product. So we look really forward to delivering our Q4 numbers because that's the first time that we, for some time, will show -- expect to show, I should say, year-on-year revenue growth.

So on adjusted EBITDA, we delivered $6 million in adjusted EBITDA in the quarter. Actually, that is the best we've had in almost 2 years. So that's strong and is, of course, it will be even stronger going into Q4.

Okay. Let's dig into the financial performance for AdColony. So the Brand business for AdColony has done well for quite some time. It grew 20% from Q1 to Q2, another more than 20% from Q2 to Q3. And particularly glad to see the strength on programmatic. Actually now in Q4, we're doing the same revenue in 1 month in programmatic now as we did all of Q1. So this is really starting to scale, and a lot of this revenue will flow directly down to the bottom line at a very healthy, healthy margin.

The Performance business is still -- is starting to level out, but it's still a little bit volatile. And as Lars alluded to, we do have cases where we actually take Brand dollars instead of Performance dollars. If we wanted to keep the Performance number higher, we could take it as Performance revenue instead, but we're going to take what's best for AdColony and best for Otello. So going into Q4, we're going to see that impact. As Brand becomes stronger, they do, to some extent, cannibalize some of the Performance revenue.

On OpEx. OpEx has been relatively or actually very flat the last 3 quarters. But there are big swings within this OpEx line. We are moving a ton of cost out of our holding centers. We are saving a lot on our back end. We're saving a lot on our tech side and on operations. That also gives us opportunity to invest. So we're hiring salespeople, and we're investing into our programmatic delivery. So actually, the OpEx base we have now of around $60 million, that gives us the opportunity to invest into the growth that we expect to come in Q4 and into 2020.

Gross margins continued to be strong and actually stronger than we anticipated. This was also a little bit of a mix -- result of the mix where we get more Brand dollars, which comes in at marching closer to 40% where you have Performance more in the mid-20s. So that's also a positive contribution in -- overall for the gross margin in the quarter. And adjusted EBITDA, it's good to be -- have EBITDA in positive again in black, and the goal is to remain in the black in every quarter going forward.

For Bemobi, this is really the first clean quarter. And by clean, I mean we've had almost a year now with FX working against us. The Brazilian currency, the Brazilian real is where we have the majority of revenue still, and that has become a lot weaker versus the U.S. dollar. So that's really been masking the underlying performance, strong performance that we had in Bemobi now for quite some time. Q3 this year, actually now, the FX rates are very similar to Q3 last year. So finally, we can see the underlying performance, and that's the revenue growth of nearly 20% in the quarter.

OpEx is up slightly. This is because we are investing into our international business, and we are investing into a new IVR product. Gross margin is a record high at 70%. This really is because we're able to move the distribution from paid channels to our own channels, which means that our gross margin had been very strong, and actually, we expect it to remain very strong as we are successfully launching kind of No Credit No Data portals also internationally.

And finally, adjusted EBITDA, another record quarter. EBITDA margin, well over 40%, which is very comfortable.

Moving over to cash flow. So operating cash flow improved quite a bit from last quarter but is still slightly negative with down $0.9 million for the quarter. And of course, we are delivering $6 million in adjusted EBITDA, which is more than enough to have a positive operating cash flow. But what we do now with revenue growth and continuing to grow, we are tying up some working capital. We do this both in Bemobi and in AdColony. So you can see the -- on the text here, particularly in AdColony U.S., we tied up another kind of $4 million in working capital or accounts receivable. The simple reason is that we have to pay our publishers before we get paid from advertisers. So there's a lag in terms of when we receive the cash.

Investment activities. This is capitalized R&D. This is the investment that we do, particularly on the tech side. And the vast majority of this $2.5 million come from AdColony. So about 2 of those are related to AdColony, and then the other half is from Bemobi.

So we expect -- we grew as expected or slightly better in Q3. We expect to grow more going into Q4. And we want to make sure we have the working capital available to do that growth, to go out and acquire customers and get publisher deals where we need them. So we have access to a credit line of $100 million and RCF, and that's for us relatively cheap financing. So we tapped into that in the quarter, draw down $20 million of that. That's why you see our cash balance is jumping quite significantly.

Still with $31.5 million in gross cash, $20 million in borrowings, we're still in a net cash position of $11.5 million and a balance sheet that we are very comfortable with.

Last 2 slides is the outlook. And the outlook for AdColony is basically more of the same. We guided 10% revenue growth for Q2. We did the same for Q3, and we'll do the same again now for Q4. We expect the Brand business really to accelerate and continue to accelerate into Q4, so probably grow by around 20%. But it will be somewhat offset by our Performance business. So as I alluded to, there's some cannibalization of revenue. But we will take the highest dollar amount, whether it's Performance or Brand. But in many cases, that is Brand, and we also want to honor the Brand agreements that we have.

Margins continue to be relatively flat. I mean if anything, I expect them to go up because we do more Brand revenue. But also, we do more programmatic, which is a slightly lower margin again. So on the balance, I don't expect gross margin to change in Q4 much from Q3.

OpEx. I think we can scale revenue much, much more from the OpEx level that we have today. We still have opportunity to take out cost on hosting and move to lower-cost location, and we can still invest within the OpEx base that we have.

EBITDA, we expect to be up significantly in Q3 into Q4, and we expect it to be up enough to make the full year profitable, which is what we had as a goal going into the year.

Finally, on Bemobi, again, the positive trend will continue, revenue up in the quarter, profit up in the quarter. And for the full year guidance, we're already well ahead of where we were last year at the same time. So we expect to hit the -- both the revenue target for the year and the profit target for the year.

That's my last slide. Let's take some questions. Henriette?

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Questions and Answers

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Henriette Trondsen, Arctic Securities AS, Research Division - Research Analyst [1]

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Henriette Trondsen from Arctic. Yes, first, on Bemobi, can you quantify your expected revenue growth for Q4 compared to Q3 more than just up quarter-by-quarter?

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Petter Lade, Otello Corporation ASA - CFO [2]

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Well, I can give an indication. If you look at what we say for AdColony, we say 10% revenue growth. If we were seeing kind of 10% or more, we would see the same. So when we say up, it just is going to be in the range kind of between 1% and 10% is kind of a good indication. Just keep in mind, we had a really, really strong Q3, which is why we don't want to overpromise. But it's on a really nice path.

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Henriette Trondsen, Arctic Securities AS, Research Division - Research Analyst [3]

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And also back to Q3 for Bemobi. How much of your sequential revenue growth was due from the acquired assets last quarter, the estimates?

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Petter Lade, Otello Corporation ASA - CFO [4]

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Well, we haven't provided any specific numbers on that. But clearly, if you look at the context, this is an acquisition that cost us about $3.5 million. It is a relatively small acquisition. And it is really a bolt-on, and it just complements what we're already doing on IVR, interactive voice. So it's really hard to carve out the exact impact, but it's no doubt that it is some contribution, but the underlying performance is very strong.

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Lars Rabaek Boilesen, Otello Corporation ASA - CEO [5]

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We also replaced existing IVR business with that new solution as well. So taking over some of our existing business as well.

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

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Okay. And also on Bemobi, your subscriber numbers show LatAm fell slightly, but international was up compared to Q2. Can you give more color on where you see the subscriber growth in international? Which regions?

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

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I think the main markets here are Russian-speaking countries, Belarus, Ukraine, Russia. Very strong growth in Bangladesh and some other selected markets in Asia like Vietnam and Myanmar, et cetera. And then also, we are now focusing on Africa as well. So we had good growth on Africa despite we have just started our penetration in Africa.

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Petter Lade, Otello Corporation ASA - CFO [8]

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And just to add on the -- in terms of Brazil, the reason why the subscriber number is down, there's actually more -- there's more details in the report. But what we see is that some operators are bundling their services. So where we have typical -- we would count that as 2 subscribers in the past, the bundle of service, so we now have 1 subscriber. That's the reason that number is down slightly.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [9]

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Christoffer from DNB Markets. If I can continue on Bemobi. So significant year-over-year growth in Q3, and you expect, it seems, double-digit growth in Q4 as well. So just following up on Henriette's question, could you just kind of try to explain to us what is the expected -- the underlying growth in Bemobi year-over-year as we look, for example, 2020? Is this business that should grow 10% plus? Or what is your outlook there?

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Petter Lade, Otello Corporation ASA - CFO [10]

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I mean this is clearly a double-digit percentage growth business, particularly now with the success we're starting to see international and with IVR. Obviously, solid double digit, the percentage growth expected.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [11]

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And on the cost side, what should we expect in 2020 as you kind of continue to grow in international markets? Should we expect the cost base to come up significantly or?

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Petter Lade, Otello Corporation ASA - CFO [12]

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I mean from the level now, about kind of just over $4 million per quarter. I don't expect it to move much. I mean this is -- it's similar to the -- to where we believe we are in AdColony where we can do a lot with the cost base we have now. On programmatic and AdColony, I wouldn't be surprised if we can do twice the revenue at the same OpEx base. Same goes for Bemobi. I mean with 67 operators online, the incremental cost of doubling that in terms of subscribers and revenue wouldn't really take much out on the OpEx side.

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Lars Rabaek Boilesen, Otello Corporation ASA - CEO [13]

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And just to add, international, we're seeing a much stronger second half compared to first half. We were too focused on just expanding with more operators, more markets, international. Now we are very much focused on the channel, international. So on our own co-operated channels with operators, which basically is channels we own by ourselves. We will continue to increase our budgets on paid online campaigns, but that will go hand-in-hand with revenue. So we will never throw money away there. So we think that for the international growth on Bemobi, we have a model which really scales in terms of OpEx.

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

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All right. Great. And then jumping over to AdColony. So continued sequential growth, which is super. But then looking into next year, how should you kind of expect this business to develop year-over-year compared to this year when it's kind of a fresh start, and you should see year-over-year growth in AdColony? Maybe a bit slower sequential growth?

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Petter Lade, Otello Corporation ASA - CFO [15]

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Well, so I mean if you look at how we started here, I mean, I guess we started the year with year-on-year revenue growth of negative 30%. Now in Q3, we're down 8% year-on-year. In Q4, we need $53 million basically to have it equal to last year, and I think we can do more than that. So I think we can turn year-on-year growth positive in Q4. And then I expect Q1 next year to be significantly stronger than Q1 this year.

So I think it's fair to say that the bar for next year is pretty low in terms of the numbers that we're comparing against. And the underlying traction that we see now, particularly on programmatic, there's no reason why that should stop going into 2020.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [16]

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So when would you then be expecting kind of free cash flow from AdColony to contribute rather than to consume cash?

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Petter Lade, Otello Corporation ASA - CFO [17]

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Well, I think if you look at our revenue of -- if we do around $45 million in revenue, we have an adjusted EBITDA, which is breakeven. If you go to just over $50 million and $52 million, $53 million on a normalized basis, then we're free cash flow neutral. So in Q4, we'll be basically be pretty close to that. Of course, you do have some working capital changes that impact it. But at the revenue base of just over $200 million, this business is generating cash.

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Lars Rabaek Boilesen, Otello Corporation ASA - CEO [18]

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So -- and I think one of the reason why the cash flow is as it is now in Q3 is simply because we have grown so high on our Brand business. So we have to pay publisher before we get the money in from our advertisers. So short term, our ambition is to grow the business. Going forward next year, we certainly see big improvement in cash flow, and we will continue to reduce costs in AdColony also next year. So that breakeven point around $50 million will not increase. It will probably go down.

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

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Great. And then you mentioned that as you're still investing quite significantly in AdColony in the new Core, could you just remind us then what these new investments will enable you to do? And when you expect that to kind of -- when in 2020 do you expect that to materialize?

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

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So I mean despite we have been through this extreme big turnaround in AdColony, we have never really had big savings on our technology. So we're all the time looking to improve our platform. And we basically decided to go out and see if somebody can do this better than us when it comes to the core engine of the platform, also because our platform is quite old. It's a lot of legacy. So a lot of things has happened in technology. So right now, they have been working on this, let's say, not so intensive, but we have made an agreement where they'll work really intensive now over the next few months. Already now, it's up to par with the existing Core. So it's really hard to judge how much better it will become. But I think we can say that we will start having light traffic on this Core just to test it up against our own Core in the coming months. It's -- we certainly believe this can be an improvement. It will also be a much more efficient Core when it comes to costs, hosting costs, et cetera. So just taking advantage of all the new technologies we have in the market, it's been hard for us to do this in-house because we only have 1 Core, and that's a lot of legacy in that. So that's -- so simply, it just made a lot of sense to do this outside.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [21]

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Okay. And then it's interesting to see that you limited a number of DSPs that you're working within that. Still positive to revenues. But could you just also give some color on what you've done on the sales side in terms of how the kind of mix between how much of the business is coming from third-party inventory sources and how much is from your own mix?

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Lars Rabaek Boilesen, Otello Corporation ASA - CEO [22]

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Petter, maybe you can comment on the numbers. But I think when you look at our Brand business, think about it, where we're unique is really how we go out and sell mobile video, right? How we attract demand into our exchange. And even if we use third-party supplier, it goes through all our criterias and fraud, security, et cetera, before -- and this is a big part of how we manage to get demand in. Do you have a number for mix?

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Petter Lade, Otello Corporation ASA - CFO [23]

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Yes. No. I don't have a specific number. So -- but keep in mind, it differs. If you're a brand, you care very much about kind of where your ad is being shown because they pay on CPM. So they pay per viewing. If you're a game developer, you care about the download. And if you get the download and download works, you don't really care where it came from. So if you look across our customer base, it differs a lot if they care about being first on inventory or third on inventory. For the -- a lot of the programmatic business, we use our own inventory, but we can also tap into third-party inventory. If you look at our performance business, we do a lot through SDK because we can do it on -- outside of our SDK as well. On top of that, in EMEA, we have a LinkedIn business, which is doing now $4 million a quarter, which is all LinkedIn. So you can say that that's third party. So there's not kind of 1 number that I can give you, but a lot of the strength, and Lars alluded to this in his part, a lot of the strength that we're seeing now from the big brands is because we are -- I mean we have a pure kind of measurability. So they can see how the transaction happened and where it's happening. And being fraud-free and on own inventory, that one is a strength.

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

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Regardless if it's our own firsthand supplier or third-party supplier.

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Petter Lade, Otello Corporation ASA - CFO [25]

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So actually, we have -- we're actually taking some traffic from third parties, letting it through our technology, so verifying it in terms of being fraud-free.

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

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So long as you can measure third-party supply, I mean the customer and the brand is comfortable. That's what matters.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [27]

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Okay. And then there's been a lot of consolidation in the industry during the quarter, and some of your competitors have been picked up by financial investors like private equity plans. Can you comment a bit on how you fit into all this? Do you foresee any interest particularly for AdColony during the quarter?

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

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Our focus has been on turning around this company. We think we have seen signs of good results there. So that has been our entire focus. But we are -- it differs a bit from some of the other players you were saying that we are mainly focusing on brands, where the others are, I mean, very concentrated in performance play. But we've just been -- and that's been a clear strategy for us to stand out on brands. We now have several consecutive quarters in a row. And the focus is just to continue this development. Then we'll have to see, if anything strategic can happen.

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

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Okay. Then one final one, and I'll let you go. You already commented on Vewd, but could you just give some color on what you kind of expect to be a potential solution there? I think you have a few alternatives, but as far as I understand, the majority owners don't have too much, how can I say, financial capacity to compensate you that way, so will they have to sell the business? Or what's kind of the most likely outcome there?

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Lars Rabaek Boilesen, Otello Corporation ASA - CEO [30]

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We cannot comment on -- all we can say is we are pursuing alternative remedies in that case, and the court is scheduled for 22nd of March. That's where we'll -- that's where I'll focus.

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Petter Lade, Otello Corporation ASA - CFO [31]

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Any more questions? Excellent. Thank you.