BBTV Holdings Inc.

Good afternoon. Thank you for attending today's BBTV Holdings, Inc. to host fourth quarter and fiscal year conference call. My name is Hannah and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Nancy Glaser with BBTV. Please go ahead.

Welcome to BBTV's year-end and fiscal fourth quarter 2022 conference call. I'm Nancy Glaister, Chief Legal Officer for BBTV. During the course of this conference call, we may provide forward-looking information and make forward-looking statements within the meaning of applicable securities laws. These are statements regarding the company's current expectations, goals, and beliefs about future events relating to or which may impact the company, its business and results. These may include forward-looking statements regarding our position, growth, diversification, expansion, operations, plans and objectives. Forward-looking statements are statements about the future and are inherently uncertain. Any financial or other goals discussed are goals only and are not to be taken as future-oriented financial information or guarantees of future results of performance. Certain financial outlooks in particular are provided to aid in understanding management's goals and expectations regarding future financial matters and may not be achieved. Such financial outlooks may not be appropriate for other purposes. All of our forward-looking statements are necessarily based on a number of assumptions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements. These include the risk that our assumptions may not be accurate, as well as the risk factors contained in our press release and MD&A issued today, as well as in our latest annual information form filed on CDAR.com. We undertake no obligation to update these forward-looking statements, except as required by law. You could read more about these assumptions, risks, and uncertainties in our press release and MD&A issued today, as well as in our AIF dated March 29, 2022, and our prospectus dated October 22, 2020, filed with Canadian securities regulators at CDAR.com. Also, our commentary today will include adjusted financial measures and ratios, which are non-GAAP measures. Although the company believes these non-GAAP financial measures and ratios are useful in evaluating the company, These should be considered as a supplement to and not as a substitute for financial information prepared and presented in accordance with IFRS. Reconciliations between the two can be found in our earnings press releases and our MD&A, which are available on our website and on CDAR.com. Lastly, we also report on certain metrics, such as views and RPMs. A further description of these metrics, which are also non-GAAP measures, can also be found in our earnings press release and our MD&A. I now turn the call over to BBTV's Chief Executive Officer, Sharzad Rafati.

Hello, everyone, and thank you for joining me and our new CFO, KB Brinkley, on this conference call to discuss our Q4 and full year 2022 financial results. We're excited to have our new CFO join me on this call and benefit from her experience and background in the senior management team as we go forward. For the first few minutes, I will review some of the market conditions and our operations. And after that, KB will review our financial results. And then I will close with our outlook before we take analyst questions. BBTV is the largest professional creator network worldwide, from individuals to global media companies, Professional content creators rely on BBTV to generate meaningful revenue for them while they focus on their core competency, content creation. Our roster of 5,000 creators continues to grow and over 600 million viewers interact with their content monthly. Included in our monthly viewership is nearly 32% of YouTube Shorts views, for which monetization started at the beginning of February. This is an important milestone for BBTV. YouTube Shorts monetization does not show up in Q4 results. However, our creator acquisition teams work really hard during the quarter to increase YouTube Shorts viewership from 26% of total in Q3 to 32% in Q4, which means 1.6 billion YouTube Shorts views to monetize going forward. Initial monetization will be modest as we work through the process. We agree with Alphabet that monetization rates on views should be mature at similar RPMs compared to long-form video content over time. Viewership retention was an exceptional 98% for Q4 2022 and 92% for fiscal year 2022. This is similar to customer retention as views times RPMs equals revenue, which gives us a great line of sight to our future revenues. Subsequent to quarter-end, we announced a four-year term loan for approximately 21.5 million Canadians. The objective of this loan are to add to available liquidity. With this transaction completed, management and the board believes that the company's current cash on hand, combined with receivable financing, cash flows for operations, cost management, and access to additional resources will provide sufficient liquidity to meet all of our working capital requirements, as well as our financial obligations for the foreseeable future. KB will go into further details on the terms of the new loan and other balance sheet information during her review, but we are positioned to execute our growth and profitability plans with enough cushion to withstand future macroeconomic uncertainties going forward. In our filings, you will notice an IFRS accounting write-down that KB will also discuss later. This write-down has no impact on our performance, our cash flows, or our future. Plus Solutions now represents 13% of total revenue and 35 to 40% of total adjusted gross profit, up from 8% of total revenue and 20 to 30% of total adjusted gross profit in Q4 2021. Management sees this continued growth as a strong indicator that the company's investments in Plus Solutions are paying off. And BBTV will continue to invest in growing these revenue streams because they consistently deliver higher gross margin than our current base solutions revenue. This quarter, our direct advertising sales increased by 71% compared to last year. Although it's still a modest plus solutions revenue stream, we see continued momentum exiting the quarter. Content management continues to be our largest plus solutions revenue stream and grew by 22% quarter over quarter and by over 31% year over year. We added features to our offering over the past two quarters, which has resulted in a strong uptake by the market and our largest pipeline ever. Subsequent to the quarter end, we signed one of the largest content management deals yet with a major media conglomerate. And over time, it could become the largest. We have several similar opportunities that we're negotiating now. We're confident that Plus Solutions will continue to reduce the impact of market volatility on BBTV's overall performance, enhance the company's overall margins, and continue to help maintain creative retention going forward. BBTV Signs several new content management clients in Q4, including Lionsgate, Combata Global, Wondery, and subsequent to the quarter end, we also signed one of the largest clients in BBTV's 18-year history. BBTV is currently working with some of the largest blue-chip clients in the industry, including Sony Pictures, the NBA, Paramount Global, Fox, Univision, PBS, and more. During the quarter, our cost optimization and revenue diversification initiatives helped us to report a nearly identical adjusted EBITDA loss for the quarter of $0.77 million compared to last year, despite a 21.8% decline in base solutions revenue. Sequentially from Q3, expenses declined by approximately $1 million, and we expect operating expenses to fall further in coming months. Revenue diversification has been an emphasis to improve overall margins. Currently, plus solutions represent about 13% of total revenue and 35 to 40% of total gross profits. Based on our data, it appears that Q3 2022 was a trough quarter for base monetization. While overall views were slightly lower for Q4 compared to the same period last year, revenue grew by 14% sequentially compared to Q3. We believe the return of sequential revenue growth in Q4 is an encouraging development entering 2023. We're also pleased to say that following our acquisition of Outlook Media in October of last year, integration continues to progress well across the board, from the creators we brought on board to the employees and infrastructure that we welcomed into BBTV. Once integration is complete, this unit becomes the centerpiece of our multi-platform strategy to extend our creators' reach to new platforms, starting with Facebook. Based on the metrics that I outlined, we believe that this will also have a positive impact on base solutions margins. We are at early stages, but the strategy and the results appear promising. I can't wait to talk to you about our outlook in a few minutes. However, I'm very pleased to hand the call over to KB, BBTV CFO, to discuss the quarter and year-end-to-date performance in more detail.

Thank you, Sharzad, and good afternoon, everyone. I'm really pleased to be able to join my first quarterly earnings call with BBTV. Before I begin, I'd like to take a moment to quickly thank Ben Groot for the great work he's done on the previous earnings calls. The fourth quarter represents continued progress towards our goal of achieving sustainable profitability at the adjusted EBITDA line. Although the current macroeconomic recessionary trends are a short-term headwind, I'm encouraged by the success we've been seeing in growing our higher margin plus solutions to improve our revenue mix while maintaining tight control of our overall operating expenses. Total revenue for the fourth quarter was $108.5 million, a 14% increase from Q3, but still 22% below the same quarter last year due to the shift in consumption patterns towards short-form content, which only commenced monetization in February this year, plus a modest scaling back of advertising spending with the recessionary slowdown, as well as the fact that our viewership still remains below the levels it reached during the COVID pandemic. The impacts of this were mainly reflected in our base solutions revenue. Our total views were 101 billion for the quarter. We continue to see positive momentum in our viewership trend with a 5% improvement sequentially from Q3 compared to the typical 3% decline we've seen from Q3 to Q4 in the last three years. We see this as an indication that our audiences are returning to more normalized viewership patterns and the post-COVID impact is subsiding. Also, as we ramp up our acquisition of YouTube Shorts content, we expect further viewership and revenue improvements now that Google has begun monetizing Shorts. Since we began actively onboarding new micro content creators last year, our Shorts viewership has grown from 20% of our total views to 32% of the total. Meanwhile, our viewership retention rate remains very strong at 98% for the fourth quarter and 92% for the full year. While RPMs were down 21% in the quarter compared to a year earlier, if we exclude shorts viewership, the decrease is only 7% year over year. While this decrease reflects the recessionary environment, it also highlights the resilience of our platform for monetization despite a softer market for ad spending. Our Plus Solutions revenue continues to improve up 22% year over year to $14 million as we have been finding success with key enterprise accounts. Content management grew by 19% and direct sales improved 71% year over year. The growth in Plus Solutions is directly related to the investments that we have been making in the segment. Gross profit for Q4 was $9.6 million, representing a gross margin of 8.8% for the quarter and 8.7% for the full year, both of which are improvements from the prior year. This is due to the increasing proportion of Plus Solutions, which now represents 13% of total revenue and 35% to 40% of adjusted gross profit in Q4, up from 8% of revenue and 20% to 30% of adjusted gross profit last year. The plus solutions consistently deliver three to four times higher gross margins than our base solutions, so we expect our overall gross margin to trend upward as we continue to invest in growing these higher margin revenue streams. BBTV share, which is revenue, less content creator, and third-party platform fees, was $10 million for the fourth quarter, and our adjusted gross margin was 95.7%. Operating expenses were $12.9 million for the quarter, representing an improvement of 7% or $1 million sequentially from Q3. The cost optimization program that the company undertook last summer, which included a 14% reduction in total headcount, has contributed to the cost savings. We will continue with our cost optimization efforts. Due to ongoing cost optimization and revenue diversification, the fourth quarter adjusted EBITDA was a loss of $0.8 million, which was a comparable level to Q4 2021, despite the temporary headwinds for base solutions monetization, which was 26% lower than the same quarter last year. Included in our results for the quarter was a $157 million goodwill and parent charge that arose from our usual annual and parent testing process. Management elected to take a more conservative approach versus what our external auditors were recommending, given that this goodwill was related to the acquisition of Broadband TV Corp. by BBTV Holdings immediately prior to our IPO in 2020. Specifically, it reflects a decline in the fair value for accounting purposes of our cash-generating units due to changes in the macroeconomic environment, including a higher weighted average cost of capital and lower projected cash flows as a result of the behavioral shift towards micro-form content such as YouTube Shorts. But I would like to remind everyone that this is an accounting item only and it is a non-cash charge. We ended the year with $19.5 million in cash and utilized $11.7 million of our $15 million bank overdraft facility, which we have since repaid with the proceeds from the $21.5 million secure term loan that we announced last month. Our long-term debt balance was $46.8 million as of December 31st, with maturity substantially in 2026. Based on our current trends and forecasts, access to resources, and adjusted EBITDA break-even timelines, we are comfortable that BBTV has adequate liquidity for the foreseeable future. I will now turn it back to Charzette.

Thanks, KB. The key elements of our strategy for 2023 and beyond remain a focus on improving our margins, becoming EBITDA positive, and generating cash flow. Based on our recent bookings and building pipeline, we believe that momentum in content management revenue growth should continue with similar momentum as in fiscal 2022. As a reminder, content management has been our fastest growing solution for several quarters, which has helped to drive growth in Plus Solutions. As I mentioned previously, Plus Solutions now represents about 13% of our total revenue contribution and between 35% to 40% of gross profit contribution in Q4. Although base solutions revenue continued to decline relative to the fourth quarter of the previous year, with the start of YouTube Shorts monetization, we anticipate that the decline in base revenue should abate. We don't know yet what the uptake on YouTube Shorts will be in the short term, but in the long term, we agree with Alphabet that the monetization rates on views should mature at similar RPMs compared to long-form video content over time. We believe that the long-term incremental revenue associated with YouTube Shorts should be meaningful for the business as the format monetization matures. We can now open it up for questions.

Certainly. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to answer that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of Adir Kodve with eight capital. You may proceed.

Hey, guys. Good afternoon, and thanks for taking my questions. And KB, congratulations on the new role. Looking forward to working with you. Um, so maybe just my first question is going to be on monetizing YouTube shorts, obviously early days here, but do you kind of have a sort of a timeline as to what, uh, when that would kind of become a meaningful part of the, of the base solutions revenue and kind of what are the next steps that you guys are kind of awaiting from out of it in order to kind of get there?

Uh, hi Ed here. Uh, thank you so much for your question. It's always great to have you on the call. I'll just go first, and of course, KB, feel free to jump in. As we mentioned during the call, it's really still early days when it comes to YouTube Shorts ad revenue. Google is really now monetizing YouTube Shorts as of February 1st this year, which should cascade to BBTV in parallel. And once it becomes monetized across our entire library, it could actually represent incremental revenue of over $90 million annually across our base solutions at the current market race over time. And, you know, we very much right here think that investors should see this as a good sign for positive future performance, given that YouTube Shorts monetization tests have already started and Google also in alphabet expects to see, of course, comparable RPMs as regular YouTube content over time.

Okay, great. So maybe, again, I know early days, but any trends from your end that you'd like to call out or have they kind of shared any sort of data with you that could kind of get us to kind of help us model that out?

I would say out here at the end of the day, what Alphabet mentioned during their conference call is that over time, the RPMs are going to be comparable. but it's really early for us because the monetization started as of February 1st. So there's definitely a significant opportunity and upside for the company, but we're not necessarily sharing any future trends at the moment.

Fair enough. Okay, then maybe just kind of switching gears to plus solutions, revenue growth, obviously strong growth in both content management, direct sales. Specific to direct sales, 71% growth. Can you kind of just touch on what drove that Was it just you hired more salespeople or just kind of any color surrounding what drove the 71% growth?

Yeah, when it comes to ad sales, and I just wanted to also add to the previous question out here, we're very much focusing on growing the viewership and also the future revenue opportunity. When it comes to plus, as you know, this is an area where the company very much is focused on diversifying its revenue stream and focusing on higher margin revenue streams with ad sales and content management. And with ad sales, we're very much so focused on really closing larger transactions and, of course, growing the size of the team, you know, and having recurring business with existing accounts. And I think we're seeing that across the board, the average campaign size has increased significantly. And we also have many more case studies with existing clients that would allow us to have recurring business, whether that is GM or Procter & Gamble. So that's really the key driver. And of course, with content management, this is really the biggest portion of PLOTS which we've seen, you know, great growth rates and we'll continue to see similar growth rates moving forward. And subsequent to the quarter end, we closed the largest account, you know, enterprise account with a media conglomerate. And it was also a great quarter as far as the signings that we had with obviously large media companies. And we have a strong pipeline as we look to the future as far as the growth of content management. And this is why, as we look at the impact on the gross profit and the gross margins for the business, you're seeing that continuous growth with respect to our gross margins.

Okay, and then maybe just for my last question, you know, from a cost optimization standpoint, you guys have obviously adjusted EBITDA close to break even here, and you kind of mentioned some additional work to be done there. Can you give us a sense of how you're thinking about that adjusted EBITDA line heading into 2023?

For sure. I mean, the company, we are greatly focused on driving bottom line. And that comes from two factors. One, doubling down on our plus solutions, which have higher gross margins. If you think about it with respect to plus, you have three to four times higher gross margins than our current base solution. And of course, CPMs are higher. And when it comes to specifically OPEX, OPEX optimization, we had a 14%. reduction in our OpEx. And we'll continue to actually apply OpEx optimization as it relates to base. So again, with the goal of getting closer to profitability. So that's really, we're very excited about that. The company management is very focused on bottom line, as KB mentioned during the call. KB, would you like to add to that?

Yeah, no, I think that, you know, you were spot on. We are focusing on optimizing our costs and just stretching every dollar and just making sure that we prioritize our higher margin products going forward. Okay.

Thank you very much, guys, for your time. I'll pass the line.

Thank you so much, Antje.

Thank you, Mr. Kaveh. There are no additional questions waiting at this time, so I would like to turn the call back over to Sharza, for any further remarks.

Thank you so much, everyone, for joining. We're very much so excited about the future. And as we discussed with YouTube Shorts, there is great upside as far as both viewership growth and revenue and gross profit growth. And again, as I said during the call, you know, really our investment in Plus Solutions is paying off. And as a company, we're very happy to see that 35 to 40 percent of our gross profit is coming from our Plus Solutions. So have a Great quarter ahead. And thank you so much, everyone, for joining. Thank you.

That concludes today's BBTV Holdings Inc. to host first quarter and fiscal year conference call. Thank you for your participation. You may now disconnect your lines.