Affle India - Q2FY25 Revenue grows 25.9% y-o-y & Profit up 37.7% y-o-y
Company expects the Topline to grow at 20% and the profits to compound at a CAGR of 25% for next 5 years. GenAI, Privacy laws and Antitrust rulings to give tailwinds to the company!
Affle India posted some good numbers with their Revenue expanding 25.9% y-o-y, EBITDA up by 29.9% and PAT growing at 37.7% y-o-y.
Although, the results beat the street estimates, yet we saw the stock price getting discounted heavily. Although, it looks like this is a result of broader sell-off that we are witnessing in the Indian markets.
If you’ve not already, considering reading the deep dive we published on Affle as we would be drawing upon references from that article:
Financial Highlights and Earnings Guidance:
EBITDA Expansion: During the latest earnings call, the company pointed out a noticeable 3.3% dip in employee costs compared to the previous quarter. This is the result of deliberate past investments in human resources and cohesive team strategies. Over the last three quarters, these efforts have paid off, making Affle’s workforce more efficient and allowing them to operate at a leaner cost base. This as a result has boosted the EBITDA margins to 20.9% which stood at 20.2% during the same time last year.
20% CAGR Topline Growth: The company has given conservative guidance of 20% Revenue growth and 25% of PAT growth for next 5 years. The company believes that on the basis of recent acquisitions, boosting of productivity through GenAI and Industry tailwinds, they would be able to achieve this guidance comfortably.
Earnings Quality & CPCU Growth:
Average Cost Per Converted User (CPCU) inched higher to Rs. 57.1 which is more than welcomed in this era of high interest rates where advertising budget are getting slashed across all markets. Higher CPCU along with increase in No. of conversions is giving us a comfort that the company is able to grow at a sustainable rate.
The management in the earnings call has given assurance that they are chasing business with higher CPCUs only. Comfortable with their offerings and confident on the ROI that they are able to give to their customers, Affle at this point is in a position to turn down business that would bring down the average CPCU. However, at the same time, the management has warned that CPCU growth does have a ceiling to it and depends on two factors:
Competitive Rates: Even with a differentiated business model, Affle will have to remain competitive and hence needs to be within a range of what the other non-walled garden providers.
ROI for Clients: The company believes in win-win for itself and the client and hence CPCU would be theoretically bounded by the ROI that the customer is able to earn out of the converted user.
On the trend growth for CPCU, we can expect the CPCU marching higher as users in the emerging markets inch towards premiumization where they are buying iPhone and Samsung and as a results conversion value would see a growth.
Strong Vertical Performance, Especially in E-commerce, Fintech, and Gaming:
A Glance at the Key Verticals:
E-commerce: Leading the pack, E-commerce remains a core vertical for Affle both in India and on the global stage. The company believes that with the recent tailwinds in E-commerce and Quick commerce industry, Affle can be a key winner as these e-commerce companies will be spending heavily to acquire more users as they grow.
A case study from the latest earnings presentation spotlights Affle’s collaboration with Fetch, a U.S.-based rewards app, where they helped drive a 220% jump in new user conversions and a 13% increase in sign-ups. This success story is just one example of how Affle’s platform supports its clients in maximizing engagement and conversion.
Fintech: Fintech is another bright spot, particularly in emerging markets. Through three case studies, Affle highlights how it’s helping fintech clients like Bajaj Finserv in India and JULO in Indonesia and Brazil ramp up user acquisition, improve conversion rates, and boost loan amounts. The company’s data-driven approach and tech expertise are fueling growth in the digital finance space across these regions.
Gaming: Affle’s presence in gaming is equally impressive. A case study with Big Huge Games demonstrates Affle’s targeted approach in reaching high-value gamers. Affle’s strategies delivered a 117% return on ad spend (ROAS) by Day 30 and spurred a 5.4X growth in monthly re-attributions, proving the company’s ability to connect with gamers and drive in-app purchases. Company acknowledged that their recent acquisition of YouAppi is paying off as it as increased the company’s stronghold in Gaming space.
Management's Perspective on Privacy Laws and Antitrust Cases:
Navigating Privacy Laws
Strengthening Non-Walled Gardens: With tightening data privacy laws around the world, Affle sees an opportunity to shine as a player outside the “walled gardens” of tech giants like Google, Meta, and Twitter. Management believes that these privacy regulations, which increasingly scrutinize the data practices of big platforms, could actually benefit companies like Affle. Unlike the giants that are under the microscope, Affle operates in a more open digital environment, making them a potentially more attractive choice for advertisers looking to diversify.
Data Privacy as a Differentiator: Affle is going beyond basic compliance by positioning data privacy as a competitive edge. With an ISO 27001:2022 certification in hand, the company is showing its commitment to robust data security and privacy measures. This proactive approach reflects a belief that data privacy isn’t just a regulatory box to tick—it’s a valuable differentiator in a market where advertisers are increasingly concerned about data protection.
Antitrust Cases and Shifts in Ad Spend
Benefiting from Spending Shifts: Affle’s management is keeping a close eye on the antitrust actions facing large platforms. While they haven’t commented on specific cases, they recognize that advertisers are growing wary of platforms under regulatory scrutiny. This caution could lead advertisers to spread their budgets more widely, potentially benefiting companies like Affle that are outside the antitrust spotlight.
A Segmented Market: Affle is also positioned well within a segmented market, where advertisers tend to have separate budgets and teams for Google and non-walled garden platforms. This division means Affle isn’t directly competing with the biggest players for every ad dollar. However, if advertisers start pulling back from walled gardens due to antitrust concerns, it could indirectly open up more opportunities for Affle in the digital ad landscape.
Affle's Use of Generative AI: A Multifaceted Approach
Vernacular Content for Wider Audience Reach:
• Affle is leveraging GenAI to create content in local languages, expanding its ability to connect with diverse linguistic markets. Their GenAI tool, “Newton,” is designed to generate vernacular ads, keywords, and content, making it easier for advertisers to engage with consumers in their native languages.
• This approach not only improves engagement and effectiveness but also allows advertisers without language expertise to easily create targeted assets, opening up new opportunities for more localized and impactful campaigns.
Building a Strong Patent Portfolio:
• Affle is actively establishing a competitive edge in GenAI by building a solid patent portfolio. With several GenAI-related patent applications already filed, the company is committed to protecting its innovations as it anticipates the transformative impact GenAI will have on digital advertising.
• Affle’s recent wins include two new patents in the U.S. this quarter, one of which focuses on enabling user interactions with live streams, such as podcasts, through machine learning. This strategic investment in intellectual property shows Affle’s determination to lead in the GenAI space and secure its role as a future-forward player in the industry.
Valuation Update:
I am comfortable with the numbers reported by the company. The company has already clocked in 50% of the revenue and profit that I forecasted in my DCF model mentioned in my deep-dive. Historically, Q3 has been the strongest quarter for the company owing to the festivities in these three months. The management in their earnings call mentioned that October has been the best month they have seen so far and Q3 to be on track to be the strongest, I re-iterate on my BUY call. I believe that it’s a good time to start accumulating given the recent correction. I think the stock has the potential to reach around 1800-1900 levels in next six months owing to strong Q3 results, rate cuts across central banks and advertising budget increasing.