Opera Software's (OPESF) CEO Lars Boilesen on Q4 2016 Results - Earnings Call Transcript

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Opera Software ASA (OTCPK:OPESF) Q4 2016 Results Conference Call February 28, 2017 3:00 AM ET


Lars Boilesen - CEO

Petter Lade - CFO

Will Kassoy - CEO, Opera Mediaworks


Henriette Trondsen - Arctic Securities

Fredrik Steinslien - Pareto Securities

Aksel Engebakken - ABG

Lars Boilesen

Good morning. Welcome to Opera Software's Q4 2016 Presentation. A small agenda today is I'll give the highlights of the quarter, then Petter Lade, our CFO, will go through the financials, I will do an operational update after that, and then we have Will Kassoy, CEO, AdColony on a video link from L.A., before we will do a Q&A session in the end.

Financial highlights. Revenue came in at $143.9 million, down from 155.6 million, equal to a decrease of 9%. Adjusted EBITDA 17.6 million, down from 21.7 million equal to 18.9% decrease. So the big highlight of the quarter was, of course, that we closed the Consumer and the TV deal for a combined gross proceeds of $655 million. Cash was returned to shareholders through dividend and share buybacks. It was a challenging quarter for mobile advertising, but revenue came in as communicated earlier in Q4. And due to solid margin and strong cost control, we managed to lift adjusted EBITDA above the communicated expectations done in Q4.

Details of the Consumer-TV transaction which closed in the quarter, so total gross proceeds was $655 million, of that 185 million was used to pay down debts. We now have $100 million remaining. $260 million was spent on dividends, equal to NOK 15 per share. $7 million was spent on buying shares back equal to 1.4 million. And at the end of 2016 we had a net cash position of $120 million.

So the structure of Opera ASA now is we have four companies, AdColony, Bemobi, SurfEasy, Skyfire, and the focus for these companies are all the same. We are focused on revenue growth, increased margins, strong cost growth and we make sure that all these four companies has unique and relevant products in order to achieve scalable business going forward. And there is one clear purpose/target for all these companies, and that is to drive shareholder value going forward.

So now we will move to the financials. Petter?

Petter Lade

Thank you, Lars. So on the financial, Lars said the revenue is down a few percent from Q4 last year and came in very much as we said in the end of December, we had a trading update, 20th of December, where we be brought numbers down for the quarter. We came -- we said we would just below 147.2 million as implied by the full year guidance, and we came in just below that. On adjusted EBITDA, we also said that we would be below the range of 45 million to 55 million, but actually we came in above on the profit side.

Key triggers there were higher gross margin on Mobile Advertising. They were higher margins on Bemobi, and we were able to do some cost initiatives at the very end of the year in Performance & Privacy business. It lifted the overall profit higher than what we expected. Normalized EBIT of 9.2 million.

The EBIT number of $17.4 million is heavily impacted by impairment charges that we do in the quarter, and I’ll get back to that later. And operating cash flow, $9.9 million, pretty well aligned with the adjusted EBITDA for the year, for the quarter.

On a segment basis, maybe all three segments came in as expected in the quarter from a revenue perspective and Mobile Advertising down, obviously disappointing. We had a very strong Q4 last year, a very strong ramp from Q3 into Q4. That did not play out this year, which is disappointing. But from what we saw end of December, there were no change from then until now. On the Apps & Games, continues to grow, 45% growth in Q4. That’s very strong. And Performance & Privacy, it’s been a turnaround year, where we now see that we have a setup for 2017, which is much stronger compared to where we entered 2016.

Looking at a trend basis, clearly, we’ve been growing revenue the last two quarters, but if you compare Q4 this year to Q4 last year, it’s still down. If you look at the ramp Q3 to Q4 last year, particularly Mobile Advertising that was up 50%. This year, we did not see a jump like that, so that obviously impacts overall revenue. But of course, we saw revenue growth in Performance & Privacy and in Apps & Games.

On profitability, it down, with revenue being lower. The profitability on Advertising is down $9 million. That’s been compensated, to some extent, by growth in profitability from Apps & Games and from Performance & Privacy.

If you look at Q4 kind of in more detail through the P&L, a couple of things that I want to highlight. The gross profit in the Advertising business, if you follow it for a while, you can see that it’s been on a sliding scale. But actually now, we see that it’s leveling out. It’s been around 38% the last three quarters, and that is encouraging. If you look at the Apps & Games, obviously growing really fast, and we have adjusted EBITDA margin of 50%. So that obviously is very, very strong.

And as I said, on Performance & Privacy, big part of the year very disappointing, revenue still very soft in Performance & Privacy. But the action that we took in the very end of the year sets us up for a much stronger 2017 is a cost base being much lower. Corporate, we try to run a lean organization, so I think the number that we see here, kind of $1.5 million to less than $2 million per quarter, I think is a good number to use going forward.

So this is a little bit tough on the eye, but I’ll walk you through this on the cash side. So this is trying to explain where we started the quarter in terms of cash and where we end the quarter in terms of cash, and kind of what’s happened in between. So we started with $95 million in cash. We had $10 million in operating cash flow from the continued operation. The discontinued operation, that’s the part that we’ve sold, the Consumer business, in particular, had a very negative operating cash flow. But this is very much linked to FX. So it’s dollars that we exchanged into NOK before the transaction happened, the dollar strengthened, so we got a loss on that.

The gross proceeds from transaction, that’s the $80 million from TV, the $575 million from Consumer, combined $655 million. Then we strip out everything that happens with the transaction costs, with bonuses, insurance, everything we do around the transaction, which is $14 million. And the cash on the balance sheet of the entities that we sold were combined and aggregated $22 million. We also did in the quarter, we paid $15 million in earn-out, this is AdColony. So that's -- with that $15 million being paid, there's only $3 million left in the AdColony earn-out, which now is paid in Q1.

CapEx and capitalized R&D, $6 million, we bought back 1.4 million shares for a total of $7 million. We paid a dividend of $261 million, or NOK 15 per share. We repaid the majority of the loans that we have. So we now have, as Lars said, $100 million left in loan, and we're very happy with that. There's a small loan to related parties, that's a loan from the ASA entity to the Consumer business of $6 million. There's a finance lease liability of $1 million. And we got proceeds in -- when we exercise options and RSUs, we get money in. So that was proceeds in the quarter. So overall, we end up with $220 million in cash, but we also have $100 million in debt, which gets us to the $120 million in net cash for the end of the year.

So if you look at earn-out, there's a slight change on the earn-out liability that we have for the -- now compared to last quarter. So obviously, we paid down the AdColony, the majority of the remaining AdColony earn-out. So as I said, only $3 million left there. The big part of the remaining earn-out is linked to Bemobi. The good thing about Bemobi is that, that earn-out is very closely linked to their own free cash flow. So we don't expect to pay out more than actually they're contributing in, in cash.

Two things that happened here, since this number is up -- and you can also see this in the change in contingent consideration in the quarter. Bemobi is performing better than we expected, which means that we expect to pay out more in earn-out. So it'll be a hit on the P&L. In addition to that, we also had given the incentive for Bemobi to grow outside of Brazil. And we basically restructured the earn-out somewhat, so we expect to pay more earn-out, but they're now more incentivized to be successful outside of Brazil, which we expect to be the next growth leg. It's also extended a little bit the earn-out, and it's very much in the later years, so kind of from '19 onwards that we increased this.

The impairment charge that we do in the quarter is a total of $19 million. And kind of to explain what happens here, and we will get back to that later, is that we're now moving to One Platform on Advertising. That means that we have a few platforms that our non-U.S. Advertising assets still run. We find that the value of those are probably going to diminish as we move to the AdColony platform, so we want to be prudent when we want to write down the value of these platforms, so combined, that $16 million impairment charge that we take in the quarter.

Also, there's a small goodwill charge that we take in the Apps & Games business. This is non-Bemobi. This is linked to Handster, a company we bought quite a few years back, which runs the Opera Mobile Store, which, to be frank, is more closely related to the Consumer business than the Bemobi, because we're going all in on Bemobi for the Apps & Games business now.

On the OpEx side, this is encouraging. We've been -- as you saw revenue came in soft in the back half of '16, we spent a ton of time on the cost side. And it’s good to see that payroll cost now is down year-on-year. Other OpEx is flat year-on-year. Obviously, publisher and revenue share cost that is linked to revenues, is not really a very meaningful number on the OpEx side. But overall, we see now that we kind of contained the cost and we want to scale from here, not by growing more head, not by growing more costs. But driving more revenues, we drive more profitability.

Taking 2016 as a whole, again, a couple of things to note here. On the left-hand side, with the Mobile Advertising, obviously disappointed with the performance of that business particularly in Q4, we didn’t ramp as it did last year. Apps & Games, very strong. Revenues, up 100% year-on-year. Profit is up 150% year-on-year. So this is very, very strong. And as I said, Performance & Privacy, really a turnaround year where we had big losses in the beginning of the year, but we’re able to shrink down the organization towards the end of the year, single source around the Rocket product, which sets us up for a much leaner and better 2017. Corporate cost of $6.5 million, I think that’s a number going forward. We try to be a lean organization.

So that takes me over to the outlook for 2017. So I’ll do kind of each of the three segments. So with AdColony being – and Mobile Advertising being weak in Q4, that has a spillover effect into 2017. So we expect the first half to be soft. Still, we do expect revenue growth, but that will be in the second half of the year, which will more than make up, we expect, the lower first half of the year. This is very much linked to the launch and the success of the products that we roll out during the year, which Will will talk more about.

Gross margin, although it’s kind of stabilized now, around 38%, as we move more revenue over to programmatic, over to automated ways of delivering ad revenue, we expect gross margins to go down. But when it comes to EBITDA there shouldn’t be much impact. And then finally, on EBITDA overall, on AdColony, it is balancing growth and profitability. And kind of if you look at the year as a whole, we expect comparable EBITDA margin, adjusted EBITDA margin this year compared to last year, but of course, we will exit 2017 in a much nicer way as opposed to how we entered 2017.

Apps & Games, we expect continued solid growth. But we also acknowledge that the kind of next growth leg will have to come outside of Brazil. We’re now doing a lot in lower emerging markets, but only 12% of revenue is still international. So the next growth leg would have to be in the international markets. And as we roll into these international markets, we do expect that the adjusted EBITDA margin will go down as we kind of try to do more aggressive pricing to get subscribers in. But also keep in mind, we’re starting from a point of 50% EBITDA margin here, so it is a very elevated level.

And finally, Performance & Privacy, revenue growth both from Skyfire and from SurfEasy, again, balancing kind of the long-term growth that we see in these two businesses, at the same time, being prudent on the cost side.

So that takes us to the number outlook for 2017. As you can see, this is a pretty wide range. I mean, $550 million to $650 million, it is a big range on revenue. Not so wide on EBITDA, but of course, that has to do with the EBITDA margin that we have in the different businesses. I’d say here that's what makes the range wide is the fact that Mobile Advertising, of course, is the biggest contributor here. Where we end up in this range is dependent on the timing of the launches, the ramp of the launches and the success of the launches that we do of Apollo, which Will will address later in his presentation. Also, the second part is Bemobi, how successful will we be in the international markets.

However, I will note, that even at the low end of the revenue range, even at the low end of the profit range, we are making more revenue than last year and expect to make more profit than we did last year. So we expect to, again, to sum it up, a weaker first half, a stronger second half. And of course, this will set us up for, again, a stronger '18 and beyond. And that, of course, is something that we look forward to talk more about at the Capital Markets Day about a month from now that we'll have here in Oslo. So I encourage you all to sign up and hope to see as many as possible there.

Thank you. And with that, I turn it over to Lars again.

Lars Boilesen

Thanks, Petter. I will now do an operations update. If we look at the areas we have in operation now, mobile Advertising, of course AdColony came in last year on $484 million. Profitability was above $40 million. And 2017, the focus is on the Apollo launch the product -- the new product launches. We are live now from last week. So we have like -- we're doing functional testing now. During the next few months, we will start doing ramp-up. And then in the second half year, we will start proving scalability.

When it comes to Apps & Games, $48 million revenue last year, profitability more than $22 million. Our focus for next year is to maintain our market share in Brazil, LatAm, and continue the growth. And then we want to see very strong growth international outside LatAm-Brazil. Performance & Privacy, 9 million last year in revenue, a loss of more than 7 million in adjusted EBITDA. So going forward, the focus is on revenue growth and very tight cost control.

Let's take a further closer look on each business, AdColony first. Revenue growth in Q4 was minus 12%. There's kind of three reasons for that. Number one, in Q4 2016, we didn't have any global games being launched among our biggest publisher. If you compare with a 2015 Q4, we had several global launches there. So that had a negative impact on the growth from year-on-year. Also, for the brand business, we had a good year on brands in Mobile Advertising in 2016, but we had high expectations for the Christmas sales. And the December revenues didn't come in, in line with our, let's say expectations for Q4, so that had a negative impact as well. And then the Apollo launch was delayed from the beginning of Q4 until Q1 2017, so we didn't benefit from these products.

And finally, every year, we do a Core update, and we upgrade our SDK, which is installed with all our publisher. This year, due to some technical delays and the Apollo platform, we decided to postpone that launch to Q1 2017. And that means that we can see already now than when we look at our new Core algorithm on our platform that, that is much more efficient. So the fact that, that was not, that our SDK was not upgraded in Q3 2017 means that we didn't benefit from our optimized algorithm on the Core platform, but we will do that beginning from 2017, where we will upgrade all the SDKs we have out in our publishers partnerships.

Going forward, when we compare 2017 with '16, 2016 was, in many ways, a very big transition year. We moved from 12 different companies to 1 company. AdColony, 12 different management team, 5 different platforms, and many of these companies have their own earn-out. We now move to one company, one culture, and all the earn-outs are ending except the small earn-out we have with our Turkish company. And we're also moving to one platform with one SDK. And most important, all the earn-outs are over, so all employees in AdColony will be linked to revenue and profit when it comes to the incentive schemes. And also, the extended management team will be linked to the Opera share price.

And then finally, Apollo, which we will talk more about in a few minutes, that was supposed to be launched at the end of Q3. Now it went live last week with the first launch Apollo 7, which is the launch of the global bidding engine. And of course, when we sum up 2016, it was disappointing that we were delayed and we didn't launch as planned in Q3. But the good news is we are on track for launching this with our new schedule. We launched last week. And this is not a small product update. This is a product platform we invested significant, more than $10 million into in 2016. We had a very high number of engineers fully dedicated in 2016 [ph] to work on. And the good news is that it's being launched now. And we're doing functional testing now. We'll do ramp-up in first half. And in second half, we really believe that we'll see significant revenue stream for them platform going forward. So that's good news.

If we move now to Apps & Games. Revenue growth was 45% last year in the quarter. So strong revenue growth, strong EBITDA margins of 50%. And also, we continue to sign up new operators outside LatAm Brazil. The focus next year is very much on international growth. Today, 12% of the revenue is coming from operators outside LatAm Brazil. We will definitely increase that number. And the way we do that is that we leverage on the operator contracts we had from the old Opera days. The team working on the international business is the team who, in 2011 to 2012, signed up 150 operators for the Opera Mini products in probably 18 months. That team is intact, and they're now doing the international expansion for Bemobi.

And we are quite, we're very happy with the progress we have of Bemobi. When it comes to subscribers, we now have close to 14 million in LatAm, keeps growing. And we now have 3, more than 3 million subscribers outside LatAm Brazil. We have more than 38 operators live outside LatAm Brazil, and we expect the numbers to increase in 2017.

When you sign up an operator, it takes a little bit time to go live because you need to do a lot of testing with billing. And then, of course, it takes time before you get the revenue, the recurring revenue through the subscriber model to grow, but it’s coming all together.

And if we took a little bit further look on the international expansions, then, in the biggest market we have is India and Russia, we actually expect 100% coverage there, meaning all operators will launch the service in 2017. When we look at the 38 operators we’re live with, we see the operational metrics are actually growing quarter-by-quarter, so that’s positive when it comes to the recurring revenue. One of the most popular, one of the most important features we have in Brazil is something we call NDNC portals. It basically means no credit, no data portal. So in emerging markets, when a user is out of data, which is a very common use case, then, in Brazil, they forward the user to a portal which is operator by Bemobi on behalf of the operator. And they basically offer the user new data packages. If the user do not have money to buy a new data package, they offer them free games from Bemobi. And then later on, you try to convert that into a subscription. That has proven to be very successful.

In Ukraine, which is one of the markets where we have launched with all the operators on Bemobi, we have now launched that portal with two operators in Ukraine and we see very good results. So one of the clear targets for 2017 is to launch a portal with all our operators outside LatAm Brazil. And another good news from Bemobi in Brazil is that two of the operators there are now also integrating Bemobi into all the digital services they’re selling, and this happened already in Q1.

Performance & Privacy, revenue growth in the quarter was 124% year-on-year. SurfEasy continue to have good growth, and we will be focused on further growth in 2017. When it comes to Skyfire, we have basically closed down all projects in Q4 except Rocket. This has resulted in a $5 million plus annualized cost saving in Skyfire, and we now have a very lean and single product organization. We expect that Skyfire to go breakeven in 2017, and the focus is on growth.

If we look a little bit further on Rocket, one of the reasons why we’re more optimistic about Rocket going forward is that in recent years, a lot of the data traffic and also media traffic in the carrier’s network is encrypted data, and we find a way to very efficiently optimize bandwidth reduction also in encrypted traffic. So many operators are starting to be interested in the Rocket solution due to we can reduce bandwidth also on the encrypted data. And we do this with a very high user experience through our cloud-based technology. And we can prove this through our live networks with operators in both U.S. and Asia, and this help us a lot when we are testing with partners that we can prove that.

And the main reason for why we probably have a better pipeline on Skyfire than we had for many years is that our partnership with Huawei. Huawei has designed Rocket into several products, with our video compression and the Rocket technology, and the pipeline is quite strong. They also signed a couple of operators already in Q4, one in Africa and one in Asia. And the biggest win we had in the quarter was another new Tier 1 group operator now live in Q1 with one country, and will follow-up with several more countries in second half of 2017.

When it comes to SurfEasy, we have good growth on users in Q4, 32%. Strong growth both from the consumer uptake, but also from partners, business partners who are launching branded version powered by SurfEasy. And particularly, one of these partners, a leading security -- a worldwide-leading security company are actually integrating SurfEasy into many more products this year, and we expect good revenue growth from that. So SurfEasy is going well, and the focus there is on revenue growth in 2017.

So this sums up my presentation. Now we will switch over to Will Kassoy, CEO of AdColony, and he will give an update.

Will Kassoy

Thank you for joining us today. I couldn't be there in person for today's earnings call, but I'm excited to be there in 4 weeks for Capital Markets Day on March 30, together with key leaders of my leadership team.

Now let's get into the presentation. 2016 was a challenging year. While we delivered revenue growth and we see strong demand for our products, we are disappointed that we missed our EBITDA goal. 2016 was a year of integration, R&D and investment into Apollo. A lot of hard work, but we believe our next-generation platform will position us both for revenue and EBIT expansion both this year and into the future.

First off, on January 1, 2017, we officially rebranded from Opera Mediaworks to AdColony. This made sense due to the recent sale of the browser and Opera brand. We had strong equity in the AdColony brand globally, so it made logical sense to leverage this equity going forward. For today's presentation, I'll organize my thoughts in three sections. First, I'll start with the full year 2016 recap; then we'll review Q4 results, with a deeper dive into both Performance and Brand businesses; and finally, I'll close with some updates on 2017 trending.

2016 was a record revenue year, delivering 484 million in revenues on over 15% growth. Our Brand business grew over 10% versus full year 2015. These results were driven by strong Q1 through Q3, but offset by a soft Q4. Our Performance business grew over 20% year-on-year, also driven by strong Q1 to Q3, but offset by a softer Q4. Q4 was a very difficult comp quarter for us. We were truly operating on all cylinders in 2015 Q4. Whereas this year, we faced some headwinds, which I'll explain further shortly.

On EBITDA, we delivered 40 million for the year, which was significantly below our plan. The EBITDA miss for the year and Q4 was driven by two key factors. First was gross margins, we declined from 43% to 38% year-on-year as the business shifted away from older business models like standard display and SSP and towards transparent, programmatic and longer-term sustainable business models. The second factor was lower-than-expected revenues that impacted us particularly hard in November and December. We had two big global advertisers in 2015 on the Performance business who are not in the market as aggressively in 2016. We also saw some Brand advertising softness this Q4 relative to Q4 2015.

In addition to these market factors, we also suffered from our own late execution. We underestimated the time and cost of reorganization and tech integration work. These impacted delays on the new SDK, our new Core version 2 data science algorithms, that were supposed to release in August/September but actually didn't launch until November. November is not the time to introduce code to app developers, so they both effectively became soft launches. So we didn't get the opportunity to scale these over the holidays. The good news is that, despite these product delays, these new revenue-generating products have now had several months of hardening and we have clear line of sight to launch the Gold Master, the new SDK, in March; and new LTV algorithms in late March, early April. Our plans are to scale these in Q2, positioning us for growth in the second half of 2017.

Now while we are late with new products that would've helped drive financial performance, our Mobile Advertising platform continues to grow. The biggest highlight, hands-down, is our SDK penetration, which grew faster than any other year in the history of the company. We experienced an 87% increase in the number of active apps using our SDK, that's almost a doubling of the platform, and that was already on a very high base. App developers know the AdColony brand today as the must-have video SDK, and it's fueling our strong position, second only behind Google, among the top 1,000 apps globally.

We have also hit a major milestone with our reach, now passing 1.5 billion unique devices. And while we're disappointed with Q4, you should recognize that we delivered our sixth consecutive year of revenue growth. We have a CAGR of over 100%, and the growth in 2016 was organic not through acquisition. In 2016, we also delivered for our clients. For the largest Fortune 100 brand advertisers, we delivered a record 76 creative awards around the world. And in Performance, we're consistently ranked number 2 only to Facebook in delivering high-quality installs at scale from key attribution partners.

And finally, 2016 was a year where we had to strike a delicate balance between growth and investing in the platform for the future. We delivered growth across most of our lines of business, including video, which is over 2/3 of our revenues and continues to be a towering strength for the company. The growth in video, however, was not big enough to overcome some weakness in display. And finally, we couldn't be more excited about the Apollo. Apollo is a state-of-the-art programmatic buying platform that supports all new revenue-generating products, unifies our supply and demand under one platform, allowing us to leverage our data science and AI for ad serving decisions globally. It will not only drive new revenue streams, but will also drive significant operational and cost efficiencies. In 2016, we invested over $10 million into the new platform and employed approximately 100 people to develop this platform. We couldn't be more excited as we roll it out in 2017.

Now let's move on to Q4 results. In Q4, despite our 2016 full year accomplishments, we were disappointed with our financial results. Q4 was down almost 12% versus Q4 last year. The reasons for the decline are slightly different by business unit, so I'll explain these for both Performance and Brand businesses. The Performance business was down 16% year-on-year. Part of this was industry dynamics, where there were fewer new AAA app launches and big launch buyers in the marketplace in Q4.

The second factor impacting these results is due to our own execution. We were late to market delivering our new AI algorithms, which we call Core v2. As a result, our install rates and published eCPMs were less competitive, which allowed competitors higher placements in the advertising waterfall. Deploying algorithms into the market is a staged process. When we began deployment in November, it was too late in the quarter and we missed the key holiday window. These models are now being deployed in Q1, together with our new SDK, to ramp up in 2017.

The Brand business was down 8% year-on-year. From a market perspective, we saw some advertiser apprehension in Q4 due in part to U.S. elections and, in some cases, political uncertainty. Most international regions had a soft quarter except for Germany and Nordics, which had good growth. Offsetting these declines were strong growth in programmatic, private marketplace deals and brand performance. What we’re seeing today is that some standard display is simply now being purchased programmatically on mobile, so it’s a shift. But we’re also seeing the market move to richer display ad units and, of course, to video.

In terms of highlights, in the Performance business, we saw a reverse in the trend of declining install rates, fueled by our Core v2 data science algorithms. We had 33% growth in the number of advertisers and 39% growth in the number of advertiser campaigns year-over-year. And while we didn't see very many new global app launches in Q4, we have clear line of sight to a strong pipeline of new global launches for 2017. And we’ve been in the marketplace sharing with key advertisers our new products, which – for which there’s strong demand.

Highlights for the Brand business include over 2x growth of programmatic revenues, which is now on a $50 million a year revenue run rate. We’re also seeing growth in private marketplace deals, which is now over $2 million per quarter. These deals are deals that we strike with agencies, trading desks and brands that leverage our custom data, creativity, ad formats and get bid priority over the open marketplace. Brand performance is also an area of high growth where major fortune 100 brands like Starbucks, Intuit and Nissan are leveraging their platform and targeting to deliver outcomes specific to their business that drive sales.

And finally, despite not releasing some of our new innovations on video, we saw a deal sizes increased 27% year-on-year. In the quarter, we ran campaigns with 65 of the Top 100 brand advertisers.

Now I’ll turn to 2017 trending. We want to be cautious in the first wave of the year as we come out of 2016 with a lower run rate, and we’ve seen that continue into Q1. However, we’re seeing proof points that our investments in the data science, artificial intelligence with Core and our new Aurora SDK, and the work to unifying all our technologies with Apollo paying off.

First on Core, we’ve already seen improvements to our AI engine in algorithms, which have shown market improvements in published eCPM and install rates since they were first introduced in November. This chart shows the lift we saw when we deployed our Core algorithms on 1/16 of our inventory over November. Our Core v2 algorithms are now on 50% of our inventory and resulting in a 15% increase in revenues versus Core v1 on the same supply.

Our next-generation SDK is very exciting. We're bringing back innovation to our ad units for both Brand and Performance businesses. These ad units deliver a level of interactivity and engagement that we believe will lead to a strong success and increases in conversions, outcomes and, of course, revenues. We soft launched the SDK this fall with the launch of iOS 10. And now, after several months of hardening, we're ready to release the Gold Master in March.

And finally, we've made tremendous progress with the Apollo, and I'm happy to announce that we went to live with Apollo VII, the first stage of Apollo, just last week. We plan to share a deeper dive into Apollo and provide you with some exciting demos at Capital Markets Day in four weeks, so stay tuned. At a high level, the Apollo platform will roll out in 5 different stages. The first three stages all feature new revenue-generating capabilities. Apollo VII allows us to tap into incremental supply for our Performance business. Today, our Performance business is largely video-based. Apollo VII allows us to bring our demand to display and new placements outside our SDK.

Apollo VIII allows better bidding in mediated environments, which we think will help maximize revenues. And finally, Apollo IX will allow us to deliver rich, full-screen interstitials to our existing SDK base of advertisers who only use us for video today. It also introduces our next-generation playable ad unit. The last 2 stages of Apollo are more internal, but allow us to be more operationally and cost-efficient. Apollo X will consolidate the capabilities on AdMarvel, Moolah Media and AdColony platforms into one. This represents over 80% of our revenues today. Apollo XI will finish the remaining 20%, so that we can end up with one integrated platform.

So let me conclude the following key takeaways. We delivered our largest revenue year in the history of the company, the sixth consecutive year of revenue growth. And today, we're among the largest independent advertising platforms in the world as measured by revenues and profitability. Our advertising SDK penetration in the top 1,000 apps is second only to Google worldwide, giving us a powerful market position. We expanded this position dramatically in 2016 behind 87% growth of the SDK and hitting a new milestone in reach of over 1.5 billion uniques. Despite missing our EBITDA goal, we delivered 40 million in EBITDA while investing over 10 million in Apollo, our next-generation platform that will enable new revenue products and drive cost efficiencies long term.

We hit a major milestone with the launch of the first stage of Apollo. SDK Gold Master and new LTV algorithms are set to release this month, and we'll be ramping this up in Q2. While 2016 was a challenging year, we invested for the future and are now starting a new phase for the company that couldn't be more exciting. We have a leadership market position and a powerful SDK footprint that is rapidly growing. We're coveted by advertisers and publishers and are passionate about delivering high-quality products that drive outcomes, add scale for our clients.

I look forward to joining you in person, together with my leadership team, to share more details about our 2017 plans, Apollo and the market trends at Capital Markets Day on March 30. See you then.

Lars Boilesen

Okay, so we open up for Q&A. Any questions?

Question-and-Answer Session

Q - Henriette Trondsen

Henriette Trondsen, Arctic Securities. Can you give roughly OpEx savings when you have unified your mobile ad platform? And also, when will you launch of the iOS version of Bemobi?

Petter Lade

Yes, okay. I can take the, on the OpEx side, I can't give you affirm number. I mean, obviously, on the Investor Day, we have the opportunity, on Capital Markets Day, rather, we'll have the opportunity to look kind of beyond 2017, and the detail, we'll share more details on it. So it's not a fixed number. But I mean, obviously, as we move to One Platform, there are significant opportunities to scale. So again, sorry, but I can't give you a number.

Lars Boilesen

Yes. So I know obviously, Petter is now located in headquarter of AdColony and leading the cost, the task force for cost savings. So obviously, it's not a small cost-savings amount we are working on. We'll get more back to that specific number at the Capital Markets Day. When it comes to the iOS version of its, we do not have concrete plans yet. It's very hard to get impasse with an iOS version in app store, except being get distribution from that. Also, iOS is quite a small distributor in the markets where we are. So right now, we don't have a date for that. The focus is on Android.

Fredrik Steinslien

Fredrik Steinslien from Pareto Securities. Can you indicate, list on what share of the cost savings do you see realized in 2017?

Petter Lade

Well, if you look at the staging, so Apollo VII through XI, with VII to IX being revenue drivers, this will have more of an impact in '17. The Apollo X and XI, which is the automation going over to one platform, is going to happen very late in the year and probably more into 2018. So the savings from going to one platform will be more after 2017, which is also reflected in our guidance. But of course, we do exit '17 on a much nicer note compared on where enter '17.

Fredrik Steinslien

And then can you indicate somewhat on the revenue growth per business segment, elaborate a bit more details there, including your guidance for 2017?

Petter Lade

Yes. So I guess it is a wide range. So obviously, the outcome is pretty wide. But the way we worded it is that we say revenue growth for the Performance business, revenue growth for Mobile Advertising business and solid revenue growth from Apps & Games, basically indicating that Apps & Games will grow faster. So that's kind of one indication. If you look at the, what we delivered in '16 of kind of 537 million of revenue, clearly, the low end of the range of 550 million doesn't really give you a lot of growth. However, if you end up with 650 million, you could have a very nice growth across the board. But overall, SurfEasy and Skyfire should both show growth, advertising, we expect the show growth and then Apps & Games, a higher gross in that again.

Fredrik Steinslien

And last one for me, can you say something about seasonality of the growth rates for Mobile Ads during the year? I understand that the first half is lower than the second half, but can you indicate some of the relative differences?

Petter Lade

Well, what we see on the Brand side, which is about half the business, that is very seasonal, so that is when Coca-Cola or Procter & Gamble and Johnson & Johnson, when they spend. So that is seasonality. So what we saw last year, revenue really jumped in Q4, and of course it goes down again in Q1, same as we expected to do this year. When it comes to the Performance advertiser, these are the big game developers, whether it’s Machine Zone or SuperCell that kind of tried to launch a game, they don’t really care that much about which month it is, whether January or December. For them, it’s when are the games ready, when is a good time to launch the game. So if you look at Q1 last year that was very strong on the Performance side, which was actually up. So Performance revenue was up from Q4 into Q1, so basically no seasonality. So of course, what happened in Q4, we didn’t get the ramp from the brands and on top of that, the Performance advertiser weren’t there with launching new games. What Will said is that we do have a good pipeline and good visibility into these game developers in terms of launches that they're going to do this year and we noted Q1, there are not going to be any launches really of any size. We noted, for the second half of the year, is going to be strong. But we could see some launches in Q2 as well. Kind of Brand is a seasonality, with Q4 being strong, Q1 being down, and then Q2 and Q3 relatively flat and then Performance, linked to the success and launch of games. Any other questions?

Aksel Engebakken

Aksel Engebakken from ABG. I just have a question on the guidance range and specifically the EBITDA adjusted guidance range of $50 million to $70 million and the assumptions going into that range, because it seems like you’re now showing a very solid improvement in the Performance & Privacy segments saying that you expect to breakeven levels in 2017. Apps & Games is showing a good trajectory, and it seems that if we assume breakeven Performance & Privacy, a mere 10% improvement in EBITDA for Apps & Games and no improvement in Mobile Ad, you're at the midpoint of $60 million in EBITDA. Can you talk a little bit about the specific assumptions going into that range?

Petter Lade

Yeah. I mean, obviously, if we end up at the lower end of the range, we’re going to be very disappointed. I mean, we obviously, that’s not where we’re going, going forward. And clearly, the -- what Will said in terms of the investment that we’re making in Apollo now, the latest status, so we have 85 engineers working on the Apollo product, of which we do capitalize some of it, but we do expense a lot of that right away, so it’s hitting the adjusted EBITDA. And even though we kind of launched the first phase of Apollo now in last week, there’s a ton of development ahead of us, of which a big chunk of it will hit adjusted EBITDA. So that’s why that will kind of keep the EBITDA margin lower. And with the revenue being down in the first half of the year for advertising, that will also give us a pretty tough setup for the full year, full year number second. And then, of course, you had to kind of build in the corporate costs as well, which we expect to be relatively flat. But of course, in order for us to hit the low end of the profit range, we also need to be at the low end of the revenue range. So again, the numbers, they match. We've run the calculation, but obviously, we'll be very disappointed if we end up at the low end of the range that we provided today.

Aksel Engebakken

Okay thank you.

Petter Lade

Any other questions? Okay, a question from the web audience here on discontinued operation. What we've done is that, with the transaction happening in the quarter and in order to give you as clean a number as possible, we've taken out everything that's been linked to the transaction in the numbers that we provide and in the guidance and, of course, in the comparable numbers for '16?

So we, on purpose, try to make it easier to read, but of course, there are a lot of moving numbers with transaction and transaction happening. And the reason the discontinued business was soft is all basically FX. They're doing okay. It's just that when you carry a lot of NOK in a quarter where the dollar is getting stronger, you get hit by FX. Okay, thank you.

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