Stingray Group Inc.

Good day and thank you for standing by. Welcome to the Stingray Group INC Third Quarter 2022 Results Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require an operator assistance, please press star zero. I would now like to hand the conference over to Matthew Felaquin. Sir, please go ahead.

Thank you very much. Bon matin. Good morning, everyone. Thank you for joining us for Stingray's conference call for third quarter results, ended December 31, 2021. Today, Eric Boyko, President, CEO, and Jean-Pierre Trin, CFO, will be presenting Stingray's financial and operational highlights. Our press release reporting Stingray's third quarter results for fiscal 2022 was issued yesterday after the market closed. Our press release, MD&A, and financial statements for the quarter are available on our investor website at stingray.com and also on CEDR. I will now give you the customary caution that today's discussion of the corporation's performance and its future prospects may include forward-looking statements. The corporation's future operations and performance are subject to risk and uncertainties, and actual results may differ materially. These risks and uncertainties include but are not limited to the risk factors identified in Stingray's Annual Information Form, dated June 2, 2021, which is available on CEDR. The corporation specifically disclaims any intention or obligation to update these forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by applicable law. Accordingly, you are advised not to place undue reliance on such forward-looking statements. Also, please be reminded that some of the financial measures discussed over the course of this conference call are non-IFRS. Please refer to Stingrays MD&A for a complete definition and reconciliation of such measures to IFRS financial measures. Finally, let me remind you that all amounts on this call are expressed in Canadian dollars unless otherwise indicated. With that, let me turn the call over to Eric.

Merci, Mathieu. Good morning, everyone, and welcome to our third quarter results conference call for fiscal 2022. I'm pleased with our financial performance in the third quarter as the ongoing return to normal commercial operations combined with increased advertising revenues generate revenue growth of 4.8% to 76 million. Our key KPI, organic growth, improved to 5% in broadcast and recurring commercial music revenues, including an impressive 28% in the United States. Our investments in the U.S. markets, which are reaching nearly a million per quarter, are beginning to pay off, with consistent double-digit growth in this key market. In terms of our bottom line, adjusted EBITDA decreased by 16 percent to $28.5 million in the third quarter. Adjusted EBITDA decreased year-over-year mainly due to one-time gain from a settlement with SOCA in the third quarter last year and significant incremental investment this quarter to support strategic growth initiatives in the U.S. and to accelerate the pivot to the digital streaming, with results expected to be materialized over the next few quarters. From a pure operational standpoint, adjusted EBITDA would have been stable compared to the same pair last year with higher revenues of 4.8%, mostly offsetting lower margin caused by increased investment in the US and difference in product mix. During the third quarter of 2022, broadcasting commercial music revenues grew by 2.3% to 41 million due mainly to higher advertising. As you know, Stingray is in the process of pivoting the business from traditional sources of revenues to high growth strategic digital revenues. This transformation will allow Stingray to deliver increased possible growth and ultimately improves the company's valuation base on higher margin profile of our growing digital business. One of the key assets that will enable us to achieve our goal is the recent acquisition of in-store audio network. the largest retail audio network in the U.S. and in the world, reaching 16,000 pharmacies and grocery stores. This acquisition, our second largest in the company's history, with a total consideration of nearly 60 million, complements our existing retail media network in Canada, with signed 2,300 locations, with a positive outlook to double in the next quarter. By combining this strategic asset with our existing platform, Stingray Retail Media Network is well positioned to tap into the adjustable market of 250,000 locations in the U.S. and Canada. The benefit of in-store audio advertising offers quantifiable and compelling value to consumer product companies. In-store audio network, for example, plays audio ads from Pfizer across the digital platform and network helping pharmaceutical companies capture additional market share during the COVID-19 pandemic. Closely tied to the success of in-store advertising is charter research, our insight AI-driven SaaS solution that uses SMS messages with non-purchasers and purchasers alike to provide better insight to retailers. During the last six months, we have secured contracts with several leading global brands, including Pink, Victoria's Secret, Driven Brands, and Nike. We also hired seasoned executives to bolster Chatter's go-to-market strategy and sell initiatives dedicated to customer experience and management. As a result, we are offering retailers a compelling value proposition for their digital media assets. In other words, we're telling CMOs that the retail companies will take care of all your music, digital ads, and consumer insight needs with a one-stop shop at Stingray. Another important segment driving our digital transformation is our SBOD, Subscribers increased to 692,000 in this quarter, adding 80,000 subscribers, an increase of 34% with the same period last year. On bundle rollout, Amazon channels in Canada, Brazil, and Mexico contributed significantly to subscriber growth in the third quarter. Additional deployment of our SBOT strategy is going to happen in the northern countries, Australia, and India, stated in Q4 2022. Looking ahead, we expect to hit our 1 million subscription goal within the next four to eight quarters. Turning our radio business. Revenues improved 8% year-over-year to $35 million in the third quarter of 2022. This revenue growth, which outperformed radio peers in Canada, represents our strongest quality performance in the last two years. The outlook for our radio business remains favorable with end market recovery, still not having reached pre-pandemic levels. In closing, our pivot towards strategic digital revenues is in full motion and gaining traction with the accelerated growth in new revenue streams, outpacing the drop of our traditional source of revenue. We expect continued progress on all our growth KPIs in the coming quarters as we further leverage our content and new channels, our digital insight, our advertising offering, and our worldwide relationship with top enterprise brands. With this, I will pass you to our friend Jean-Pierre.

Merci, Jean-Pierre. Merci, Eric. Good morning, everyone. The gradual return to normal commercial operations combined with increase in advertising groups and broadcasts and commercial news segments generate year-over-year revenue growth of 4.8% to $76 million in the third quarter of 2022. In terms of our profitability, adjusted EBITDA decreased 16.1% to $28.5 million in the third quarter of 2022. Previously mentioned, adjusted EBITDA increased year-over-year mainly due to a one-time gain from SOCAM in the third quarter last year, and operating cost structure realigned with significant growth opportunities this year. From a geographic perspective, the United States became our second largest market with 18% of total revenues in the third quarter. Strong year-over-year growth of 28.1% in the U.S. was fueled by increased subscription revenues and organic growth in advertising revenues. Canada remained our largest market, accounting for almost two-thirds of total revenues, with year-over-year growth of 4.2%. Revenues in other countries dropped 8.8% in the third quarter as lower audio channel revenues and unfavorable pouring exchange rate negatively affected our top line. Turning to our broadcasting and commercial music businesses, revenues improved 2.2% year over year to $41.1 million in the third quarter, largely due to an increase in advertising revenues. Adjusted EBITDA for this segment decreased to $14.6 million in Q3 2022 from $21.9 million in the same period last year. The $7.3 million decrease can be attributed to the large gain obtained from the Soquin settlement in Q3 2021, higher costs related to the gradual return to normal business operations, increased U.S. investment, and a lower growth margin impacted by profits. Moving to our radio business, revenues increased 7.9% year-over-year to 34.9 million in the third quarter of 2022. As Eric mentioned earlier, we're upperforming our radio peers across Canada, even though we are still below pre-pandemic levels. Adjusted EBDA for our radio segment grew 9% to $15 million in the third quarter, mainly due to higher revenues caused by the gradual easing of COVID-19 restrictions and return to normal commercial operations. In terms of corporate adjusted EBDA, we represent head office operating expenses, less share-based compensation, as well as performance in different shared unit expenses. It amounted to a negative $1.1 million in Q3 2022, compared to a negative $1.7 million in the same period last year. The improvement in corporate-adjusted EBITDA year-over-year can mainly be attributed to a special bonus given to employees in 2021. From a balance sheet standpoint, Stingray added cash-in-cash equivalents of $11.3 million at the end of the third quarter of 2022. sub-debt of $25.4 million, and a credit facilities of $318 million, of which approximately $120.7 million was available. Total net debt at the end of the quarter stood at $374.6 million, or 3.01 times pro forma adjusted EBDA. In summary, we have a solid balance sheet to support a strategy pivot towards becoming a high-growth digital intensive distributor of audio and music brands. This ends my presentation for today. I will now turn the call back to Eric.

Okay. Thank you, GP, for the quick summary. And this concludes our prepared remarks. Thank you for your time and attention. At this point, Jean-Pierre and I will be pleased to answer any questions you may have. Thank you, sir.

Go ahead. Thank you, sir. Just a reminder, everyone, if you would like to ask a question, please press star 1 on your telephone keypad.

I'm trying to...

We see Adam Schein and Tim Casey waiting, so I'm not sure if you see them. And Matthew Lee. We can't hear him. But we can hear Mr. Lee.

Mr. Lee, your line is now open. You may ask your question, sir.

Hi, guys. Thanks for taking my question. I don't know what just happened there. I want to first ask about the Eisen acquisition. You know, based on the figures in the MD&A, It looks like you expect the acquired assets to drive 25% plus growth in F22, or F23, rather. Can you maybe talk about what's kind of driving that and what trends you're seeing in the out-of-home music industry in general?

Yeah, so when we did the acquisition last year, their numbers were roughly 18 of sales, 10 of EBITDA, and we do see a growth of 25% this year on our book sales. The reason is very simple. more and more focus on vaccination with all pharmacies, not only for COVID, vaccination for shingles, vaccinations for pneumonia, and most pharmaceutical and even cable companies realize the importance of being able to do ads in the store. So nothing better for Pfizer to say, we strongly recommend the booster shot after pharmacists brought to you by Pfizer in the pharmacy. Same thing for U.S. Postal, same thing for... a lot of different products, Campbell Soup. So we're very excited to see this. And we're launching in Canada. So Beauty About Canada, everything is going to work. We just started in February with our retail network. So I think it's going to be a very interesting growth because it's a small number increasing quickly.

Great. And then maybe on the radio side, did you guys see any challenges related to the COVID shutdown in early Q4 or has advertising largely remained pretty strong?

Yeah, we're pleased with our results. We've managed well the business. But the COVID restriction has left the effect. It's still the supply chain. So we're not seeing the car business isn't back like it used to be two years ago. If you ask dealership, every car is pre-sold. So there's no need to do advertising. Every car is pre-sold. So for now, we'll have to see. But we're not seeing the car business back. And that's about 10% of our sales usually. So that part we're trying to replace, but for now we're still seeing that negative wave against us.

Okay, great. And then lastly on subscribers, I mean a really strong net ad quarter. Can you maybe give us a breakdown of what propels that and then maybe some color on ARPU for the quarter?

Yeah, roughly we added 80,000 subs. This quarter is a strong B2B and B2C quarter. Our RPU is roughly around seven, so we're generating close to five million a month, if you look at a run rate basis, so very happy about that. Our big, for sure, the launch of Amazon, Canada, Mexico, Brazil, a big win. Europe, a lot of our B2C products, Comradio, Coelho. And I must say, the SVOD, as a macro, are still growing and will grow by double digits over the next, you know, four to eight quarters, just by launching new countries. Like we said, we're launching in the Nordics. We're launching in Australia, India, and other countries. So it's a beauty about the SVOD, it's the same product. So it's really leveraging the same units. So the margins are high. It's a product with a very high margin for us and good contribution.

All right, thanks.

And speakers, our next question from Adam Schein from National Bank of Finance. Please ask your question.

Thanks a lot. Good morning. Eric, it was nice to see organic growth per your calculation at 5%. You talked about perhaps some momentum percolating in the business going forward. Can you give us a sense as to where this metric might trend over coming quarters? Is it potential that we start heading towards higher single digits, let alone into the double-digit zone?

I agree. For us, the good news is that October, November, December for our Q3 did not include any retail media and still not much of chatter and not much of the ISEN, which is our in-store audio network in the U.S., which is only going to happen in Q4. All those three products are more than double-digit growth. So I think this will have a very good impact, and I think we expect organic cells to grow. And I think that the pivoting is starting, and I think that the next few quarters will be instrumental to show the market that we're able to generate high organic cells.

If I go back to the other question on ARPU and SVOD, I am curious, you know, just in terms of the run rate, does the run rate now – you know, sort of stepping up into that $58 million type zone because it appeared to have been stuck, you know, for a while below $55. So it sounds like you've finally broken above $55 million on a sort of annualized basis. Is that a fair comment?

Yeah. Roughly our run rate for at the end of December was about $5 million a month, so $60 million a year.

Yeah.

Okay. For sure, January, February, March, we lose a bit of subscribers on the B2C side, on the karaoke, but we're still gaining a lot on the B2B side, so we expect those revenues to continue growing, and we're confident that this business in the next four to eight quarters should be generating close to $80 million a year, a million subscribers at $7. Okay. Okay.

And one question that you might need a little JP help potentially is when I look at page 18 of the MD&A and I see, you know, the $19.5 million as part of your leverage calculation, and this is sort of a bumpy, but the $19.5, I think, relates to sort of three items. One, it's obviously, you know, pro forma M&A, so ISAN and maybe a little bit more of COM in there. It relates to, I think, some assumption around synergies. And then it also has investments in associates. Can you just give me a little bit of help as to those three buckets? Because I'm under the impression that the M&A contribution is maybe somewhere in a nine, nine and a half million type zone. And I'm curious about perhaps how the two other buckets break down.

So roughly for the ISEN deal this year, we expect with synergies close to 16 million Canadian of EBITDA, and the other buckets are 3.5. Okay. So for sure, ISEN, we already see the synergies that are being done. We see the growth in sales because we're working together. So it's something that we're able to – I think that the Q1 will be – sorry, their Q1, but now our Q4, January, February, March, is going to be because their sales are booked. a very impressive quarter for retail media in the U.S. So I think that the numbers are looking fantastic based on our orders right now.

Okay. Thanks for that. I appreciate it.

And we're surprised how quickly we're able to create the synergies both on the cost side and on the revenue side by working together.

Okay. Great. Thank you.

And our next question from Team Casey from BMO. You may ask your question.

Yeah, thanks. Eric, can you talk, just going back to the subscriber growth in the quarter, which was quite strong, are you able to give us a little bit more color in the cohorts and what they contributed? In other words, is most of that $80,000, is that Amazon launch, or are you still growing in some of the other legacy channels? And maybe just a comment on how those legacy distribution channels are performing. And then on the radio side, how should we think about the margin profile there? I mean, are we completely past all the COVID noise with respect to costs and subsidies and whatnot? Where do you think you'll end up with kind of a normalized margin outlook for radio?

Okay, thank you, Tim. Good question. 4DS bought, no, a very strong quarter of Amazon. So out of the 80,000 subs, almost half of it come from just Amazon. So for sure, but we launched a bundle in Canada. which we call All Good Vibes. It retails at $9.99 or $10. So it's a very good product for us, good RPU. So roughly, we maintain that RPU should be around $7. And about this quarter, about 30,000 subscribers came from our B2C platform because it's a big quarter. But for sure, 80,000 is... We did 30,000 last year. We did 80,000 this year. So that's why we're very confident we're going to hit the 1 million... mark on subscribers with launching new countries and with the help of Amazon. There's no doubt that it's a great partner. For radio, I think we maintain our 40% EBITDA margin. This quarter, we had less and less COVID help. I think on the radio side, we keep the cost side very, I think, compared to our peers. We're a good management team. But for sure, the two things that are helping us is that people are still not going to the office in their cars in the morning, so the results are still perceived by the advertisers as we're not back until people start driving to the office, and B, it's the supply chain. So on that side, we need people to go back to their offices, and we need traffic in Toronto in the morning. But maintain a 40% EBITDA margin.

Right. Okay, that's good for me. Thank you.

Thanks, Tim.

And as a reminder, everyone, if you would like to ask a question, you will need to press star one on your telephone. And speakers, our next question from Drew McReynolds from RBC. You may ask your question.

Yeah, thanks very much. Good morning. Just following up on Tim's margin questions, just shifting to broadcasting commercial music. Is the 36% to 38% range still relevant? And I just got two others. I'll let you answer that one first.

Yeah, for sure. Our margin is being affected. We're investing right now, like we said, a million per quarter in the U.S. market, in retail media, in Canada, and with Chatter. So a large investment in Salesforce, in marketing. So if you put that at $4 million a year, so that has an impact of about 4% on the EBITDA margin. So I think we're closer to 36 for the next few quarters until we start realizing the return of these sales or of our investment, which we feel is not a matter of years. I think that this quarter, in January, February, March, in Q4, we will start having some nice revenues that will be able to show the market that our investment has been wise.

Got it. Got it. Thank you. And then two others for me. In terms of following up on the previous COVID impact question, on the commercial music side, how much fully back to normal is that? Obviously, with some retail closures, there's still that. But assuming we're in the clear, and I know that's a big assumption, is there any material headwinds from COVID on the commercial music or stingray business side? And then second one, following the iSAN acquisition, just where's your mindset here on additional M&A and, you know, and opportunities? Because obviously that was a, you know, a little bit of a bigger one to digest. Thank you.

Yeah, so a good question. So for, I'd say commercial business, 99% back. So in January, February, a bit in Europe, but not material. And on the opposite side, on the good news, is like we see with our retail business, our audio retail, pharmaceutical are aggressively doing marketing. More and more people are doing marketing in stores. And people are doubling down on their investment in chatter and all our products. So no, I'd say we're probably back to 100% plus plus because we're We're getting the investment that wasn't done in the last two years. And just for ISAN, which is the in-store audio networks, that's our little acronym, last year's sales they did was 15 US, so 18 Canadian. But their inventory is $80 million. So there's $70 million for us to sell in the US that is not sold. So that's our first priority. But the potential of ISAN with the current 16,000 location is $100 million Canadian. So we have a lot of growth there just tapping the existing retailers in the U.S. And that's why we're very focused. And our number one priority at Stingray right now is selling those ads in the U.S. And we're doing North American deals. So we're talking to big brands, Procter & Gamble, Coca-Cola, Pfizer, and we're working on both Canada and U.S. deals So the synergies are coming very quickly. And the reason why it's so new and doing well, because all of our boxes are connected and we're able to do ads just like we do, I guess, on the Internet and on mobile. So we're able to do targeted ads, change them every day at the time that the advertisers want to do it. So I think that offering is really important. is really getting traction, and we're seeing it in the January, February, March in Q4 cells. That's why we're so confident on organic cells over the next few quarters.

Yeah, that's great color. Thank you, Eric. And then just on additional M&A in that pipeline?

Yeah, so this one is a big M&A. I think we have a lot of synergies to attain, both mostly on the revenue side, like I just mentioned. We have 70 million of unsold inventory that we want to capitalize on. So I must say we need to deploy and change a lot of our machines to our system and all that. So there's a lot of IT work that needs to be done. So I would say for the next few quarters, we're digesting this acquisition. I'll let something very interesting, like we're always open. Again, the ISAN deal was interesting. We met them. We closed this deal in 24 days. So we've been talking to them for five years, and then boom. In one month, the timing was good. They wanted to close before December 31st, and we did. There were 68 companies that were lined up with the bankers for ISAN. They chose us because we're strategic. I think it's a good fit, and I think the market will be very happy with the results of this acquisition and the return on ISAN. on return on equity. Got it, got it.

Okay, that's great.

Thank you very much. Thanks.

And speakers, there are no further questions at this time. We may proceed.

Hey, so thank you very much for joining us today. I know it's an important quarter because it's a big acquisition. There's a lot of pro formas. I'm so excited to show the results and some good news in the next few weeks, months, about our deployment of all the new strategies. And I think that will bring a lot of clarity to the market. And thank you for your time, investors, shareholders, and analysts. Thank you very much.

This concludes today's conference call. Thank you all for joining. You may now disconnect. You excite me every time you speak.

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