illumin Holdings Inc.

Good morning, everyone. Before we begin the official remarks, I will read the cautionary note regarding forward-looking information. Certain information to be discussed during this call contains forward-looking statements within the meaning of applicable security laws, including, among others, statements concerning the company's objectives, the company's strategy to achieve those objectives, as well as statements with respect to management's beliefs, plans, estimates, and intentions and similar statements concerning anticipated future events, results, circumstances, performance, or expectations that are not historical facts. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management and are subject to a number of significant risks and uncertainties that could cause actual results to differ materially from those anticipated. Please refer to the cautionary statements and the risk factors identified in our filings with CDAR and EDGAR for a more detailed explanation of the inherent risks and uncertainties that could affect such forward-looking statements. Following the presentation, we will conduct a Q&A session. I would now like to turn the conference call over to Tal Hayek, the co-founder and chief executive officer

Good morning, everyone, and welcome to our Q3 2023 podcast. investor presentation. Well, I like to start by the news that we already shared, that it is time for a new leader to take the lead here at Illumin. I will be taking the role of a vice chair of the board and will continue to work in the company and as an advisor role to the new CEO and of course in the board itself as well. We will be looking for a new leader to scale this company to a much, much bigger company. So somebody with experience in scaling a company. I have been doing this for 14 years now, and I think it's time for the next leader to come in and take it really to the next level. When I made this announcement, it was a sad and proud day for me, as I shared with the Illumin community. I co-founded this company many years ago, 14 years ago, and always feel like it's my baby. And... Just like the analogy I use is just like bringing a baby into this world. The baby becomes bigger and bigger and more mature. And one day they go to university. And when they go to university, it's a very sad day for the parents. But it's also a very proud day because they know that they prepped them to the world and now it's time for that baby to go and succeed on its own. I think that Illumine is in its best shape of its life. Illumine is now a very differentiated product. It has a product that allows marketers to create a consumer journey, something that That's exactly how they want to do it. That's how they design it. That's how they desire to do it. But until now, they couldn't have a way of doing it. The lumen, they have that. And we've seen the adoption of a lumen taking place. And we've seen the adoption of ourselves of a lumen growing very aggressively year over year. And we expect that to continue growing. We have some bumps around the road and we have to make some slight adjustments in order to make it grow on a consistent basis, but we do feel like we have the formula for success on that. I'd like to share that me and the other co-founders started this company in 2009 in a very small room. We scaled it very, very fast. We took it public first time in 2014, and we celebrated many successes and stood together through many hard times. And we do believe that Illumin is changing the world of advertising. I would like to thank my co-founder, the rest of the executive team, the management team of Illumin, and the entire Illumin community alongside with the investors for all the support they gave me personally along the time. I've been... receiving a lot of amazing thank you, a lot of supports for my decision. And it's just heartfelt to see what I've been getting. Well, till the time that we do find a new CEO, I will still be running this company. And we expect this search process that will take some time. So we do feel that sometimes in 2024, it will take place. And for that, we hired a search firm to help us search, and we will be looking for somebody that's aligned with our vision, which is to grow aggressively through self-serve and do it in a conscious way. Let's look at our Q3 financial results. So we delivered $29.6 million in revenue in Q3. Again, as I mentioned before, we would like to see higher revenues. Revenue growth year over year. We're still seeing revenue growth while many other competitors are showing that revenue is going down. However, there are two things that I would like to mention. Number one, we are seeing reduction in our managed service. This was always predicted. It's reducing a little bit faster than we expected. I think it's due to a couple of things. One is people are moving more and more into self-serve. And the economic situation, people are a little bit more scared about their budget. And so that's the reason we're saying that. With that, we are pleased that we're still seeing growth. Most importantly, what we've been tracking is our self-serve revenue. We would like to see the stacking effect every month on our self-serve revenue. And in Q3, we've seen that we're virtually flat from Q2. I want to remind everyone that it's a new journey for us. It really started Q3 of last year to start recruiting new customers, new logos. And we've been focusing on bringing in a lot of new logos. And we now found out that some of those new logos are not the right logos to bring in. So I would say that we're making great progress in bringing in that engine, the engine of growth on self-serve. But we do need to make some adjustments, and we started making some adjustments. And as you can see, we brought in less logos this quarter, and we're expecting the results from those less logos to be better in the future. We're already seeing the stacking effect back happening in Q4, and we're pleased by that. As far as Q4 is concerned in general, we're still seeing challenges on the managed side of the business. So again, Q4 is not going to be the results that we would like to see. And again, I think it's due to the financial situation. situation out there and due to the fact that more and more customers are moving into self-serve. Some of those customers are moving to our self-serve and it takes them a little longer to start spending to the same levels as it's something new for them. And I do believe we see the results in the future as well. And now I'd like to call on Nadim to share some of his thoughts about the sales side.

Thank you, Tal. I'm going to delve deeper into our third quarter numbers and give you a sense of how our pipeline and our self-service business overall is progressing. I really wanted to thank our incredible team and our wonderful customers. I'm so proud and lucky to be part of this amazing team and to be able to serve these truly transformational customers. As we had guided, we had a challenging Q3 with 2.4% year-over-year revenue growth. Quarter over quarter, our self-service business was flat, despite low seasonal spending and a longer time to ramp with many customers on holiday during August. We were happy with these results. Illumine continues to be a product that is resonating, has a unique and differentiated value proposition, and customers that will spend money through this platform. The business overall is coming into balance, while showing very moderate growth rates. Our strategy is to have a balanced business, given the durability of our self-service revenue, now comprising almost 40% of our revenue in Q3. On the last few calls, I've been talking about how important it is for us to track peak KPIs in our business. We'll delve deeper into a couple of those KPIs that we've been discussing over the last few calls. And you will continue to see what I see, that we're establishing the fundamentals of a great long-term sustainable business. Our late stage demo growth slowed a bit to 162 as we're looking to qualify poor quality spenders out of the business, out of the pipeline earlier, so we can focus on those customers and those deals that will bring us great revenue. They're what we call our ideal customer profile. I'm going to delve deeper into that in this call. We've learned a lot in the first half of the year relative to what target customers will spend, which ones won't spend, how they spend, how much they cost to serve, how much they cost to sell. While we saw a bit of a decrease in new logo growth in self-serve, it's as a result of our focus on the right, proper, ideal customer profile. Targeting the right ideal customer profile will provide a higher probability that a customer will spend on our platform, slowly increasing spending over time, and lower our total cost to serve. Last quarter, I mentioned we entered the quarter with 245 deals in pipe. We're entering Q4 with 316 deals in pipe. Continued momentum. While increasing the right customers, the ideal customers, make sure we narrow this to high-quality spenders. Our Q3 brand direct pipeline growth slowed as well due to seasonality as expected, yet continues to increase as a percentage of our overall total pipeline, again providing balance to the business and increasing our total addressable market, providing more predictability and more sustainability to the business. Looking at our self-service run rate number, we continue to see growth quarter over quarter coming in at $25 million. That's a $3 million increase from Q2. And again, that run rate is taking the final month of the quarter and multiplying it by 12. I want to remind everybody that we are a consumption-based model. We will have seasonal spenders. We will have companies that when they enter their fiscal year, they will take a little bit of time to ramp that spending as they enter that year. Over time, as we diversify across industries, that seasonality will decrease for our business. As we diversify across companies that have multiple year ends, we'll also decrease that seasonality in our spend. And it'll lead to a great business overall. Although we expect similar results in Q4, we are excited about the changes we're making. Changes that are going to transform our business, bring our business into balance, and materially growing our self-service business. I would now like to turn the call over to Elliot to update you on our business financials and thank everybody for their time today. Elliot.

Thank you, Nadim. Hello, everyone, and thank you for joining us today on our Q3 2023 earnings call. Today, we reported third quarter 2023 total revenue of $29.6 million, an increase of over 2.4% year over year, mainly driven by growth in our Lumen self-serve business, which was up 348% on a year over year basis. In addition to this top-line growth, we achieved positive adjusted EBITDA for the quarter and we're consistent with our commitment to remaining operating cash flow positive and to maintaining a solid balance sheet. Our top line growth continues to be driven by Lumen's self-serve offering, and our focus remains on expanding and enhancing our unique journey advertising platform. We made significant progress during the quarter by onboarding new self-serve clients, focusing on ramp up of existing and previously onboarded clients while increasing our product demos. This has translated to substantial organic Illumine sales growth, and we are thrilled with these results to date. Having said that, we believe this is just the beginning, and we maintain a more positive outlook on the platform's long-term growth prospects. This optimism stems from Illumine's groundbreaking technology and the extremely positive client feedback we received. With recent and ongoing advancements and enhancements, we expect this feedback will be even greater as we substantially improve and broaden the opportunity for our customers. With that, I'll now move to a more detailed review of our financial results for the third quarter. As noted earlier, total revenue for the third quarter of 2023 was $29.6 million, up 2.4% compared to $28.9 million for Q3 2022. For the nine months ended September 30th, 2023, revenue was $89.3 million, up 10.3% compared to $81 million in the same period last year. As mentioned earlier, this year-over-year increase was mainly driven by growth in our Lumen self-serve business. In addition to expanding our customer base, we also had increased spending from our current customers, thanks in part to their adoption of our Lumen platform. Breaking down our revenue results. Revenue for managed services was $17.3 million in the third quarter of 2023 compared to $20.4 million in the same period last year. This decline was expected and consistent with what we saw earlier in the year relating to weakening advertiser confidence around consumer demand. We see the similar trend continuing for the balance of the year. For the nine months ended September 30th, 2023, revenue from managed services remained unchanged year over year at $54.3 million. Revenue from self-serve for the third quarter grew 45% year over year to $12.4 million. while self-serve revenue for the nine months ended September 30, 2023 grew 31% to $35 million, compared to the same period previous year. Again, this year-over-year increase was due to growth in our Lumen self-serve business. Gross profit, or net revenue, which is defined as total revenue less media and related costs, was $13.9 million for the third quarter of 2023, compared to $14.8 million in the same period previous year. Net revenue margin for the third quarter was 47%, compared to 51% in the comparable 2022 period. The decrease in net revenue margin is largely attributable to an increase in self-service revenue, which has lower margins. For the nine months ended September 30, 2023, net revenue was $42.2 million, compared to $41.4 million in the same period prior year. Net revenue margin for the first nine months of 2023 was 47% compared to 51% in the same period last year. Again, this year-over-year change reflects the factors described earlier. Total operating expenses for the third quarter were $16.8 million compared to $16 million in the same period last year. As a percentage of revenue, operating expenses were 56.8% in Q3 compared to 55.4% in the prior year period. Total operating expenses for the nine months ended September 30th, 2023 were $52.6 million compared to $46.7 million during the same period in the prior year. As a percentage of revenue, operating expenses were 58.9% compared to 57.7% for the same period prior year. And this year-over-year increase reflects ongoing strategic investments in research and development, marketing and sales, both to use to support continued growth and enhancements of our Lumen platform. Adjusted EBITDA for the third quarter of 2023 was 194,000. compared to $1.6 million in the same period prior year, mainly due to the higher year-over-year operating expenses I noted earlier. For the nine months ended September 30, 2023, adjusted EBITDA was approximately negative $1.1 million, compared to an EBITDA of $3.3 million in the same prior year period. This year-over-year change reflects the factors mentioned earlier, as well as higher sales outside of North America, which typically have lower margins. Net income for the third quarter of 2023 was $762,000 compared to $3.2 million for the same period in 2022. And for the nine months ended September 30th, 2023, net loss was $8.4 million compared to net income of $66,000 in the same period prior year. This decrease in net income is attributable to the factors discussed earlier, as well as a foreign exchange impact and offsetting tax benefit from losses carried back within the company. Turning to our balance sheet, the company generated positive cash from operations of $1.3 million for the nine months ended, an improvement of $2.5 million from the prior year. As of September 30, 2023, cash and cash equivalents were $60 million compared to $86 million as of December 31, 2022. This decrease was attributable to approximately $15 million of share repurchases, strategic investments in our business of $5.5 million, $4.4 million of net loan repayments, and $2.4 million of lease payments, partially offset by the $1.3 million of positive cash generated from operations, as I mentioned. Effective November 13, 2023, and subject to TSX approval, the company intends to commence a normal course issuer bid to purchase and cancel up to $4.3 million of its outstanding common shares. As previously announced, on September 11, 2023, the company voluntarily delisted and ceased trading on the NASDAQ capital market. The reasons for this decision included high insurance and accounting and legal and compliance costs associated with a continued U.S. stock exchange listing. And given the current macroeconomic environment, we feel this prudent move will allow us to utilize our capital more effectively to enhance overall shareholder value. The company's shares continue to be listed on the Toronto Stock Exchange in Canada under the trading symbol ILLM. Looking at shares outstanding, as of September 30, 2023, Illumin had approximately 51.7 million shares outstanding compared to 56.8 million as of December 31, 2022. On July 27, 2023, the company commenced a substantial issuer bid to purchase for cancellation up to $15.8 million of its outstanding common shares. During the substantial issuer bid period that expired on August 31, 2023, the company had purchased for cancellation approximately $4.6 million of its outstanding common shares at a purchase price of $2.65 per share for an aggregate purchase price of approximately $12.2 million. In summary... We continue to be pleased with the growth and adoption of our innovative Illumine platform. Although challenging macroeconomic conditions are impacting advertiser spend, we remain focused on driving Illumine sales growth and building on our differentiated and unique platform solution. We will continue to maintain a prudent approach to capital allocation, carefully managing our expenses and making targeted strategic choices when choosing to deploy capital. Our strong balance sheet and solid cash position give us continued flexibility to be opportunistic in the current market. We continue to believe that one of the best investments we can make in today's market is in ourselves, and hence the reason we are continuing with our NCIB program. Additionally, we will continue to explore acquisition opportunities that are creative and aligned with our strategic vision for the future that we believe will ultimately build greater value for our shareholders. And with that, I'd like to turn it back over to Tal for his closing remarks.

Thank you, Elliot. Well, just to highlight a few items from Q3. Let's start with the cash balance. As you know, we have a very healthy cash balance at Illumin. And very proud of the fact that we have positive cash flow from operations. So not burning cash and having a great cash balance. It allows us to introduce a new NCIB. We do believe that Illumin is the best investment we can make. And therefore, that's why we're buying more of our stocks back. I'm also very excited that after talking about this for a while, about the roadmap of how to add more items into Illumine that is not programmatic, we launched Facebook and Instagram into it. So now we have social. In the future, we will add more things. But it's important for this to be an all-rounded system, not just on the programmatic side. I think we are the first company that brought those two together at the moment. Very, very proud of our team for doing that. And most important is the self-serve numbers. And I want to remind everyone that last year we had hardly any self-serve Illumin numbers. And this year we have quite a bit. We exited Q3 in a run rate of $25 million. which, again, is a great achievement, and we expect that number, the exit from the year, to be even higher than that. So that continues to be our focus. We are making adjustments, minor adjustments, in order to make sure that the engine is working well. But what's important is customers are signing up and the right customers are spending money on it and coming back for more and more and more. and loving the product. And this is what I'm most excited by. And this is what I'm focusing by. And I do believe that this will continue going on. With that, we will now open the floor for questions.

I would like to ask Rob Goff of Echelon Wealth Partners to join the stage. Rob, proceed when you're ready.

Okay. Thank you very much. And good morning, gentlemen. Morning. Morning. Morning. You know, first I'd like to start by saying, you know, extending thanks and congratulations to Tal on his stewardship and all the best in your transition.

Thank you, Rob. And thank you for all the support since we started this journey.

It's been quite the journey.

Yes. Like illumined.

Yes, very exciting. In terms of questions, I have two questions there. First being, can you talk to the significance of adding social? And then the second question to leave with you is, you did talk to targeting higher revenue clients on self-serve. Can you talk to the thresholds and how you are balancing there?

Yes, absolutely. I would say that from a social perspective, I would like to answer it in a way that's not just social, but everything well-rounded, so outside of programmatic. Obviously, we started with programmatic because that was our core business before. Then we added out of home. And now we added social and in the roadmap, I think next is gonna be email marketing. It's just a way of tying it all together. If you wanna do a consumer journey and you need to start using multiple different systems to do it, you cannot tie it all together. So that is the powerfulness of the system. And the more and more things that we add to it that are outside, of the core programmatic, then the more well-rounded it is, and then you can target your consumer in the journey of wherever it is that they're at. So I think it's very significant. It will change the way that advertisers use systems out there. And it's early days, and we're really, really looking forward to see how it impacts the entire campaign and the consumer journey. So that's about that. Regarding the targeting higher logos from a self-serve perspective, I would say this. A year ago, we virtually had no Illumine self-serve revenue. We had no long-term contract, and we had hardly any pipeline on the self-serve side. We ended up last year at $4.3 million in revenue on Illumine Self-Serve. And we now just exited the quarter at a $25 million run rate. So I would say that's really an amazing accomplishment. And at the same time, I would say that it's also been a transformational year for us and a learning year. So we loaded up a lot of logos on the system. And there was a lot of reasons for it. Number one was for learning, to understand what resonates, what works, what doesn't work. It's also a new product. The feedback that we're getting from the user is extremely important. And as we're getting that feedback, we have to make changes and fixes, but also improving the flow and the user experience and everything that goes with that. So... That was the focus. We also needed to get the buy-in from our own people that the change is real and the transformation is real. And it's a huge DNA change for the company. So I would say we're very happy about loading a lot of logos on. And, yes, a lot of the logos that we loaded on were smaller logos. And now it's about starting to fine-tune the growth engine. At the end of the day, we would like to see the stacking effect happen every month. And it did show that it's happening most months, but not every month. And we need to make the adjustment in order to have it happening every month. We're working on that, we're working on different sales methodologies into the larger accounts, different ones for the smaller accounts, and making changes for next year in order to implement all that. Once we have more results on that, we'll be able to share the results.

Very good, thank you.

Thank you.

Our next question comes from Laura Martin of Needham and Company. Laura, please proceed when you are ready.

Hi, guys. How are you doing?

Hey, Laura. How are you?

Turn up the lights. Like, you can tell it's dark in L.A. There we go. Okay, so my first question is on this flat logo thing. So our self-service was flat at around 5.1 million. My question is, and you said some logos sort of weren't ready for prime time. You had to learn. What's a logo that's not ready? for Illumine self-service. Can you explain to me why a logo isn't a good fit? What does that mean?