Affle India Q3FY23 results: Lower international revenue plays spoilsport: Elara Capital

Elara Capital has released a report on Affle India's financial results. 

Here's what the report states:

Sharp decline in developed nations has played spoilsport

Affle India (AFFLE IN) reported revenue of INR 3,761mn in Q3FY23, a growth of 6.1% QoQ/10.8% YoY. 9MFY23 revenue was INR 10,781mn, up 40.6% YoY, whereas 9MFY23 organic growth was 24.2% YoY. In Q3, revenue from India wasINR 1,297mn (34.5% of revenue, up 14.0% QoQ and 22.1% YoY), with international revenue at INR 2,463mn (65.5% of revenue, up 2.3% QoQ/5.6% YoY). Enterprise platform revenue stood at INR 16mn (0.4% of revenue, down 36.8% QoQ/48.6% YoY) and consumer platform revenue INR 3,745mn (99.6% of revenue, up 6.4% QoQ/11.3% YoY).

Consistent margin improvement, key to driving upgrades

AFFLE has reported a muted growth quarter as developed nations played spoilsport (21% YoY dip, as per our assessment). But traction in emerging nations/India business (strong double-digit growth) was helped by increased penetration opportunity, despite ad budget cut by new age/commerce companies, as estimated. We continue to believe that players such as AFFLE that rely more on CPCU model have the potential to outperform on growth, as marketers focus more on ROI led campaigns. New customer acquisitions are larger revenue contributors in AFFLE’s CPCU segments, as repeat user/conversion will pick pace, medium term. We believe emerging nations will recover faster on digital advertising growth versus developed nations that may take ~12-14 months to recover lost ground. This in turn augurs well for AFFL as it derives 80% of its revenue from emerging nations. The management continues to focus on higher profitability, led by: 1) quality conversions and 2) stable pricing, despite an uncertain macro environment.

EBITDA margin up 142bp YoY to 21.4%

Q3 EBITDA stood at INR 803mn, up 13.5% QoQ and 18.7% YoY, led by revenue growth, though partially offset by increase in data and inventory cost (up 3.7% QoQ and 5.9% YoY), increase in employee cost (up 3.9% QoQ and 30.3% YoY) and increase in other expenses (up 11.4% QoQ and 0.3% YoY). Although data and inventory cost, as percentage of revenue, decreased 138bp QoQ/280bp YoY (60.7% of Q3FY23 revenue), EBITDA margin was 21.4%, up 140bp QoQ/142bp YoY. Q3 PAT was at INR 691mn, up 17.2% QoQ/11.0% YoY, led by operating leverage and increase in other income (up 28.6% QoQ/14.2% YoY), partially offset by increase in D&A cost (up 3.8% QoQ/37.2% YoY), rise in finance cost (up 10.6% QoQ/68.8% YoY) and increase in income tax (up 26.1% QoQ/35.7% YoY). Q3 CPCU revenue was at INR 3,454mn, up 4.9% QoQ/14.0% YoY. Converted users reached an all-time high of 67.8mn (up 4.8% QoQ, 15.9% YoY) in Q3. CPCU rate was the same QoQ at INR 51. Non CPCU consumer platform revenue was INR 291mn, up 28.0% QoQ but down 12.7% YoY. Despite global headwinds, top industry verticals for the company continued to be resilient, helping it register robust growth anchored on CPCU business model and disciplined focus – Higher profitability with significant margin expansion both QoQ/YoY.

Affle India – Q3FY23 conference call

▪ Affle saw robust growth in nine months and the highest CPCU revenue and conversions. CPCU business is resilient and has long-term business momentum. Strong focus on emerging markets enabled good performance.

▪ Macro headwinds can be a setback, especially in the US and Europe.

▪ Affle is actively evaluating inorganic growth opportunities as well and is looking at high-growth, sustainable volume expansion. Affle seeks inorganic growth without compromising on margin/profitability.

▪ Except for developed markets, global emerging markets were resilient.

▪ Affle has an extremely prudent customer profile and is well diversified on markets/customers. It is confident of long-term business prospects.

▪ Developed market contribution is smaller for Affle. There are headwinds in the markets but there are fewer customers too. Some have held budgets due to macroeconomic headwinds. FY24 outlook is positive. From an internal perspective, certain areas could be calibrated to increase revenues in developed markets. In the next couple of quarters, Affle may turn around developed market revenues.

▪ Affle is focusing on margin expansion, profitability, and quality conversions and not volumes. It was able to hold ground/pricing, which has reflected in margin as well.

▪ CPCU business is bulk of the total business and is resilient. It is ROI-led and verticalized for the advertisers. Affle has been maximizing its strengths. And the non CPCU business is good for maximizing margin going forward. There are many opportunities, and they continue to be long-term.

▪ In terms of growth mix, India market is expected to grow 23% (other global emerging markets in the same range as well) – 80% of the business is from emerging markets, including India. The focus has been on bottom line/margins this quarter. Resilient long-term growth is at 25%+. In the developed markets, there is a contraction given the small customer base that is holding budgets and activities. The addressable market in developed markets is still large, with better execution strategy that may help win customers. Expect good results in the next couple of quarters.

▪ Overall margins have improved because of highermargin CPCU business (also on revenue quality). The conscious strategy was to grow the margin in Q3.

▪ Affle is a fast-growing company, and its capital allocation strategy is as follows. The company mentioned earlier that it will not provide dividends for the first five years and will focus on growth. ▪ Affle is not pushing for topline maximization but is focusing on revenue. It is seeking CPCU projects with higher margins.

▪ Affle expects Q4FY23 revenue to be similar to Q3FY23 revenue

▪ In terms of India and emerging markets, competitive moat is strong. Affle will deliver similar or better growth in FY23 compared with FY22.

▪ CPCU pricing is better in other emerging markets than in India. Affle is ensuring pricing with delivering meaningful growth across emerging markets.

▪ Regarding Google Play policy for India, Affle thinks it is important for the industry to have a fair playing field especially when there are players who can have disproportionate control. The company feels that it is important to have balancing factors coming in it is happy to see Indian ecosystem moving towards that. Affle was able to negotiate growth well before the policy and it hopes that it will continue post the policy as well. Affle India 4 Elara Securities (India) Private Limited

▪ Affle is also focusing on important operators and OEM partnerships in the ecosystem.

▪ Emphasis is on new user/repeat customer acquisition. Demand from advertisers is always to acquire the next 100-200mn users. Affle is seeking more market share expansion. Many large traditional conglomerates are going to focus on digital. Even larger established digital companies with developed technologies need digital advertising while expanding in emerging markets. Expect large budgets from traditional companies. The margins for new and repeat user conversion are almost the same. In developed markets, there is an opportunity to drive repeat user conversion.

▪ As per Affle’s business model, its products work in all the scenarios. Technology stack is allowing deeper and wider access. Advertisers are focused more on profitability and ROI, hence are more cautious about spending advertising budgets.

▪ India is contributing ~35% to revenues, with other emerging markets at 45% and developed markets contributing the rest 20%. Hence, India and emerging market form 80% of revenue and Affle is delivering consistent growth in that segment.

▪ With margin expansion and pricing being defended, the outcome is positive.

▪ Data and inventory as % of decreased as Affle was able to command more meaningful pricing w.r.t CPCU rates and also due to better efficiency. The goal is to consistently seek overall margin expansion.

▪ M&A: Affle will find value-led appropriate transaction to compliment itself. Transactions would be in similar proportion and scale to Affle.

 ▪ Expect data and the inventory cost (traffic acquisition cost + data processing) in the range of 60-65% of revenues. International revenue (developed markets) declined ~21% YoY due to macroeconomic headwinds.