Stingray Group Inc.

Good morning, ladies and gentlemen, and welcome to the Stingray Group Inc. Q3 result call conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, February 8, 2023. I would now like to turn the conference over to Mathieu Pelletier. Please go ahead.

Thank you very much. Bon matin. Good morning, everyone, and thank you for joining us for Stingray's third quarter conference call for the period ending December 31, 2022. Today, Eric Boyko, President, CEO, and co-founder, as well as Jean-Pierre Terrain, CFO, will be presenting the Stingray financial and operational highlights. Our press release reporting Stingray's third quarter results for fiscal 2023 was issued yesterday after the market closed. Our press release and DNA and financial statement for the quarter are available on our investor website at stingray.com as well as on CEDR. I will now provide you with 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 operation 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 Statewide Annual Information Form dated June 7, 2022, which is available on CEDR. The Corporation specifically defines 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're 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.

Okay, merci, Mathieu. Good morning, everyone, and welcome to our third quarter conference call for fiscal 2023. Stingray raised its performance in the third quarter by delivering record adjusted EBITDA of $34.5 billion on unprecedented revenues of $89.2 million. The adjusted EBITDA for the broadcasting and commercial music division was up by 54.8%. We achieved these milestones mainly due to the success of our Stingray advertising offering fueled by the in-store audio network acquisition. We are also seeing the benefits of our renewed focus on our key growth initiative and also our streamline operation. Indeed, in the last five months, we have realigned our resources to high-growth areas like Stingray advertising, which remain mostly immune to the economic downturn based on its large consumer base of grocery stores and pharmacy chains, while trimming down other segments to improve profitability. The end result is that our restructuring efforts, partially offset by strategic investment, have generated a cost saving of approximately $12 million on an annual basis. And I guess we will see these numbers really coming more in Q4. Turning to our reporting segments. Broadcasting commercial music revenue grew 25% to $54.2 million in the third quarter of 2023, primarily driven by in-store audio networks acquisition, revenue increase of our key growth initiative, and a positive foreign exchange on the U.S. dollar. Key achievement in this segment in the quarter includes hiring sales resources to further grow our U.S. retail media business, launching free ad-supported TV channel with Amazon FreeVee, and Samsung TV Plus to increase our presence in the fast channel space. Releasing the Stingray Karaoke app with 100,000 licensed songs on Samsung Smart TVs to elevate our brand exposure worldwide. And finally, introducing our wellness-driven comm live streaming service on Comcast and Cox to expand market share in the subscription-based video-on-demand business. In terms of sBot, our subscriber count rose 16% 16.4% to more than 805,000 subscribers, with B2C revenues increasing by 20%. Total SBOT revenues also increased year-over-year on a net revenue basis as we opted to reduce unprofitable investment in B2C apps to focus on better margins and lower operating expense with B2B partners with large installed customer base. Moving on to radio, revenues improved by 0.4% to $35.1 million in the third quarter on higher digital sales. Although this represents a modest growth, we remain pleased with the overall performance and the cash flow generating business. As the automotive industry gradually resolves its supply chain issues, we anticipate that once again becoming one of our top revenue generation for our radio business. Looking ahead to the fourth quarter, we are optimistic about our multiple growth opportunities despite an uncertain economic environment. Our quarterly focus on debt reduction while maintaining investment in key strategic areas. Strong customer traction at the recent Consumer Electronics Show, CES, in Las Vegas has reinforced our confidence that we have pivoted in the right direction with market-driven focus on retail media, fast channels, in-car entertainment, and B2B-driven subscription video on demand. I will now turn the call to Jean-Pierre for a financial review. And thank you, Jean-Pierre, for a good quarter.

Thank you, Eric. Good morning, everyone. Revenues reached a record high of $89.2 million in the third quarter of 2023, up 18.9% from $75 million in the Q3 2022. As Eric mentioned, the growth was primarily due to the in-store audio network acquisition and a positive foreign exchange impact. In fact, revenues in the United States grew 111% to $26.6 million in Q3 2023. Finally, revenues in other countries remained stable year-over-year at $13.2 million. Looking at our performance by business segments, broadcasting and commercial music revenues rose 35.1% to $54.2 million in the third quarter of 2023. Again, the increase was primarily driven by in-store audio network and a positive foreign exchange impact. Radio revenues improved 0.4% year-over-year to $35.1 million in Q3 2023 due to the higher digital revenues. In terms of profitability, Consolidated adjusted EBITDA reached a peak of $34.5 million and an adjusted EBITDA margin of 38.6% in the third quarter of 2023, compared to $28.5 million, or 38% adjusted EBITDA margin, or 35.8%, excluding the SUES subsidies in Q2 2022. The increase in adjusted BDA was primarily due to the acquisition of in-store audio network and OPEX efficiencies, partially offset by the Canadian emergency wages subsidies in Q3 2022. It should be recalled that our third quarter is a seasonally strong reporting period, so we're reiterating our adjusted BDA target of 35% for fiscal 2023. By business segment, broadcasting and commercial music adjusted BDA increased 54.8% to 22.6 million in the third quarter of 2023, mainly due to the contribution from in-store audio network and OPEX efficiency. Radio adjusted BDA meanwhile was relatively flat year over year, excluding the Canadian government subsidies, but decreased 11.5% year over year to 13.3 million in the third quarter of 2023. if we account for this incentive. In terms of corporate adjusted EBITDA, which represent head office operating expenses, less share-based compensation, as well as performance and deferred share unit expenses, it amounted to negative $1.4 million in Q3 2023. Stingray reported a net income of $12.9 million, or 19 cents per diluted share, in the third quarter of 2023 compared to 12.5 million or 18 cents per diluted share in Q3 2022. Adjusted net income total 16.5 million or 24 cents per diluted share in Q3 2023 compared to 17 million or 24 cents per diluted share in the same period of 2022. Turning to liquidity in capital resources, Cash flow generated from operating activities amounted to $24.6 million in Q2 2023 compared to $24.8 million in Q2 2022. The decrease can be attributed to a negative change in non-cash operating items and higher restructuring and other costs partially offset by improved operating results. Understood free cash flow total $18.1 million in Q3 2023 compared to $14.7 million in the same period in 2022. The increase was mainly due to improved operating results, partially upset by higher interest rates. From a balance sheet standpoint, Stingray had cash-in-cash equivalent of $12.3 million at the end of the third quarter, sub-debt of $25.5 million, and a credit facilities of $366 million, of which approximately $65 million was available. Total net debt at the quarter end stood at $379 million, or 3.34 times the profile of my adjusted VDA. It should be noted that we paid an additional $6 million in tangible benefits during the third quarter, and $13.6 million in this fiscal year so far. Finally, we repurchased $241,000 share for a total of $1.6 million under a normal course issuer bid program in the third quarter. Going forward, our number one capital allocation priority will be lowering our debt level. This ends my presentation for today. I will now turn the call back to Eric.

Okay. Again, on behalf of the entire Stingray team, thank you for joining us on this conference call. We look forward to speaking with you again following the release of our four-quarter results Have a great day, everyone, and again, thank you for the whole team. Now I think we're ready for the questions. I think Mrs. Operator.

Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledge your request and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press the star followed by the two. If you are using a speakerphone, please lift your hands up before pressing any keys. One moment, please, for your first question. Your first question comes from Matthew Lee with Canaccord Genuity. Please go ahead.

Hi. Good morning, guys. Congrats on the good quarter. My first question is in regards to the regulatory change in radio. now allowing networks going upwards of four stations per geography. Does that create any opportunities for you to build that business? It just seems like adding assets in Ontario would make a lot of sense given the potential synergy.

The ruling is a bit more difficult than that. They're really giving us one more radio per city, the opportunity. I must say, everybody's talking. There'll be a lot of trading in 2023, so it's always good when there's a trading market. everybody was waiting for the radio review to decide what to do. So it's going to be very interesting. So I'd say 2023, I'm not talking for us, but I'm talking for the whole market of radio will be very active. But right now, everybody is analyzing their strategy. And what we told the board yesterday is we're trying to figure out the different opportunities or not of this, buying or selling certain regions. So it's a Right now, we're still in the analyzing point. So we said the same thing to the board yesterday. We are just analyzing and seeing what also the big players are going to be doing.

Okay, great. And then maybe swapping to the music broadcasting side, your digital auto home asset seems to be performing very, very well. You've always done a very good job of building inventory, but Can you maybe talk about the demand you're seeing from advertisers for digital out-of-home? I mean, how quickly do you see that inventory kind of reaching a filled position?

As you saw, advertising, not only with the retail media, but the advertising also on our fast channels. We went from $1.4 million last year to $14 million. For sure, adding the retail network was a big plus, but I think we're really seeing the trends there. I think for us, the pharmaceutical and the big brands are coming in. We're still individualizing the market. We're the biggest audio retailer in the world right now, but also being number one and the first one, you also have to explain the advantage and the studies. We're excited. This year, sales on the retail media are are up 50%. I think we'll see a good growth also for next year. It's a strong year for retail media. And also the fast channels are growing well. But just to benefit all of our key projects of growth, the car business, the fast, the SVOD, all the stuff that we've been focusing on for the last few years, we're finally seeing the result. Because last year we were running, the broadcasting commercial was running at $14 million. a quarter of EBITDA, and now we've hit 22. And I think we're very comfortable as a management team to say that the broadcast commercial division has hit a point that we're comfortable with $20 million of EBITDA per quarter. So we've reached that milestone. So I think it's exciting for Sengre. We're looking at a broadcasting commercial to be around $80 million a year of business right now at a run rate basis. Was that clear, Matthew?

That's very helpful. I'll pass the line. Yep, that's great. Thanks.

Thanks, Matthew. And I love the title, by the way.

Your next question comes from Adam Schein with National Bank Financial. He loves the title, by the way.

Okay, thanks. Hi, Eric.

Hey, Adam.

Hi, how are you? Good. So the growth you just stated in terms of retail media, you know, year one with ISEN was obviously a success in terms of you know, elevating the growth profile. Can you elaborate maybe, you know, just a little bit further in terms of some of the strategy going into year two, if it changes at all in terms of pursuing additional mandates and opportunities in the U.S. to the extent that you can highlight, you know, a range of growth potential for ISEN in 23 calendar would be great. And maybe just remind us, you know, in terms of how you're pacing

uh in terms of the canadian retail media business thanks absolutely so um you know like i said retail media growth last year was 50 percent uh in canada it's unlimited because we had zero the year before so it's a google uh whatever return um so but i think this year again we're seeing it's going to be a high double digit and you know more than the 20 because it's a really growing division on on the on on both together so If you look at our investment, we were able to cut $12 million in the cost while investing $3 million in retail media. We've hired a total of close to four new person in the team in the U.S., five in Canada, so we've added nine new headcounts, just focused on selling the inventory. Right now, we're only selling roughly 10% to 20% of the available inventory. We think on TV and radio, I don't think there's another media in the world that, when they become to maturity, doesn't sell 100% of their inventory. I think we've got a lot of work to do there. Also, I want to say the SVOD, the fast channels. We launched on Google SVOD, which is very exciting. Finally, all of the growth strategy is coming in play.

Do you want to just elaborate a little bit on SVOD? Because obviously, you know, you did say in the release that it's more of a flattish revenue context, but there is some nuance in regards to, you know, how some of the accounting works in terms of B2B versus the prior B2C context, correct?

That's a good question, and I have the same question with the board. So, you know, when you do it quickly, when you do a B2C product under accounting rules, let's say you sell it at $10, you generate, you put $10 of revenue, and then you put your commission that you have to pay Apple and all that, and you generate net revenues of five. When we work with a B2B player, they sell it at 10, but we record only five. So the more that our product mix is going to B2B, we see technically that gross revenues are flat, but if you look at our net revenue basis, they're up. So I know it's a bit complex for the... but maybe I can explain that more in one-on-one, but our net revenues are up compared to last year.

That's good. Appreciate it. Thanks for that.

Thanks, Adam.

Your next question comes from Scott Fletcher with CIBC. Please go ahead.

Thanks, and good morning. I just want to ask on the margin levels for the BNC business. I guess you sort of touched on it there, but given that sort of we're seeing what sounds like a seasonally strong quarter, with that sort of nearly 42% margins, is that, for the full year in 24, is it sort of, are you thinking north of 35 into sort of like maybe high 30s? Is that reasonable for 24?

Yeah, absolutely, for sure. The big advantage that we're seeing in broadcast and commercial, and I like the BGC or whatever you call it there, we're thinking about the name because the name is becoming complicated, but for broadcast and commercial, We're going to see higher margins because of the cost savings. When you do cost savings of $12 million in a unit, it really improves your EBITDA margin. I'll have to get back to you, but it's going to be higher than radio, so I'll have to get back with a range of where we see it for the next few quarters and for next year. But again, I can reaffirm that management now feels comfortable with a $20 million EBITDA per quarter. on the broadcast and commercial. So we hit that run rate. It's not like we got lucky one quarter and we're going to go down by half next quarter.

Okay, thanks. And then I wanted to ask on the contribution of FAST revenue. I know you guys don't disclose the exact amount, but could you sort of provide a ballpark, whether that's relative to the total or relative even to the SVOD numbers, how much FAST is contributing?

Yeah, FAST has been a bit of a disappointment in terms of rollout. It's been longer and more difficult than we first imagined. So this year we're going to do about 4 million. So it's very immaterial. If you think that we're going to be doing 320, 350, once we're back, it's less than 1%. So right now, in our models and your models, SaaS is not something that I think will affect the pricing or the EBITDA Materially. We're making money. It's growing. It's a nice marketing project to add to all of our consumers to help us get more retail media stores. But right now, financially, it's not material.

Okay. That's really helpful. Thanks. I'll pass it.

Thanks, Scott.

Your next question comes from Jérôme Dubreuil with Desjardins. Please go ahead.

Merci. Bonjour tout le monde. Thanks for taking my questions. Two for me. First, in terms of the savings you've achieved this quarter, first of all, congratulations. I want to check what were we seeing in the quarter. We're seeing this pro forma EBITDA adjustment of 5 million in the numbers. I wonder how this 5 million compares to the 12 million annualized saving we're seeing. Does that mean we're the only seeing 40% of the savings in the quarter?

In Q3, we have very little savings because we started the project of looking at cost alignment in May and June. The good news is I think a lot of our investors and our board says we were really one of the first companies to start looking at the focus on projects and cost allocation. So we're really going to start seeing the true savings next quarter. Next quarter, you're really going to be able to see the $3 million in the quarter because we finalized our projects at the end of November. So in terms of that, I'll have to get back to Zach, because technically speaking right now, we have $12 million coming forward because we just achieved our project. But let me get back to you on that specific question, Jerome.

Thank you. And another one, I don't know if this one would be more for GP, but I wonder, like, we've seen a positive FX impact in the quarter. I wonder what portion of the costs related to the U.S. business are actually in U.S. dollars, just to try to figure out what's the margin impact from the FX.

You know, most of our revenue comes from the U.S. more and more, but the cost is limited. It's commission and rights, but it's not that big.

We have stated our free cash flow from the U.S. right now to be around $35 million. That's the free cash flow after COGS, after costs. So that's the net inflow of free cash coming from the U.S. And if our sales keep on growing, it's going to be closer to $45, $50 next year. But the impact this quarter was only on EBITDA was a million. It was a million EBITDA for this quarter. which is good, but I thought it was going to be more important. But we're happy. A million EBITDA more, we'll take it. And for sure, Stingray right now, we do have a hedging policy that the board has voted on. So we are hedging 75% of our cash flow for this year and 50% of next year because our U.S. sales have become material. This year we'll achieve 80 million of U.S. sales. And next year, based on growth, we should be closer to 100 million. So... For sure, we have to be, and we have very little U.S. OPEX. We have a lot of COGS, because we pay our cost of goods sold in U.S. dollars. But in terms of employees living in the U.S., it's... It's Montreal, it's Canada. In the U.S., you probably only have less than six to eight employees. So we're really Canadian-based cost. Great. And then one last... And also, generally, we don't even have a real office in the U.S. We have presence, but we don't have a small one. We don't have an office in New York or in Miami, so our team is all over the country.

Great. Last one regarding retail media. I know you had a significant amount of hires there to try to sell the inventory and what have you. I wonder what portion of this new sales force was already ready to hit the ground running during the quarter, Are we seeing already a lift from those recent hires, or we should be expecting a more material impact from these hires in the coming quarters?

Most of these people started in November or mid-November. Good news, we already have one person that's already sold a campaign between one, we know, to six million this year. So it goes fast, so very exciting for the next year. And the impact, I'm just saying the investment here that I'm looking for, you know, roughly in OPEX that we invested this quarter was $1 million, and it's roughly the same in Q4. It goes from $944 to $1,093 per quarter of investment. Is that clear enough? That's pretty clear. So pretty flat, you know.

Your next question comes from Tim Casey with DMO. Please go ahead.

Thanks. Good morning. A few for me. Eric, on the BNC advertising, I mean, as reported in the quarter, it went from a little less than $2 million to about $14 million. Is that all ISAN, or is there any other buckets of advertising?

No, that's it. It's ISAN. The name is, we call it retail media now. But ISAN plus what we do in Canada, because we're selling Canada retail. So it's US, retail media, Canada, retail media, fast channels. So the fast channels are growing by 8% to 7%.

And the big difference, though... You just told us your material. No, no.

Oh, I got mixed up. I thought that the question before was fast. Oh, it was fast. Okay, no, no, sorry. No, no, the fast. Oh, no, no, sorry. I thought fast. I thought he was talking about chatter. So I got mixed up. Sorry about that, the question, Jerome, before. No, Scott. No, no, so the fast channels. No, the fast channels are growing by 87%. It's really, we'll have to get back to you. I could disclose this more one-on-one with you guys, the analysts, what the numbers are. And this is based on a net basis. So if we sell with a partner 100,000 a month and we get 50,000, we only report the 50,000 again. So the fast channel also reported on net, and that also is going to increase our EBITDA margin and our overall margin because we record on net. So I'll get back to you, Tim. Sorry, I think I got a question.

I got mixed up. Okay, so let's go back. The $2 million to $14 million, as reported, that's not just ISAN. There is a meaningful component of fast channels? Let me get back to you to what that number is. Okay. You talked about the continued shift from direct-to-consumer to B2B, and you mentioned there's some accounting issues. So have you stopped all DTC marketing and operations, have you turned all those taps off, or are you still tinkering to some degree?

No, no, we're really focusing on the products that work well. We're able to measure a return on investment. Some products on B2C were not working as well, so we diminished our user acquisition. We've also stopped investing in certain products because every app is very expensive. An app that does a $20,000 a month, and another one that does $200,000 a month is the same cost. So we focus on focusing on the bigger apps and cutting the smaller apps. But by cutting smaller apps, there is less of a focus on B2C. And for sure, with the B2B growing so fast, the B2C by nature is becoming less and less material in our business model.

OK, perfect. Two more. One, the $20 million a quarter run rate Is the cost savings already in that number when you say you're comfortable with that $20 million quarter? Yes. Okay. That includes sales.

Starting in Q4, all of the cost savings are going to be included. The only offset would be that if sales are going so strong in retail media, we need more salespeople, then for sure we'll reallocate our investment towards units that we need more. And also, if we get a lot of car business deals, then we'll hire more R&D people to service all our customers. But we would hire people because they're generating a high return on investment and a quick return on investment.

Okay, perfect. And last one, can you remind us where your targets are now on leverage and when you expect to get there?

Absolutely. So our goal is to go down to 2.5%. As you know, as analysts, by increasing EBITDA, you've got a three-to-one advantage there. We continue to see our EBITDA growing. Last year, Q4 was not a very good quarter at 21 million. We're very confident this year that, again, that we should have a good quarter. We will, again, improve our LTM, improve our EBITDA margin, and our focus absolutely right now is to decrease that. We'll get back with our goals to be down to 2.5, and it's our first priority as a management team and also reaffirmed by the board yesterday. So our number one goal is to bring back our debt a bit down to 2.5. Thank you. Thank you, Tim.

Your next question comes from Drew McReynolds with RBC Capital Markets. Please go ahead.

Hi, it's Sylvia sitting in for Drew. Just three quick questions today, if I may. First one, what is the contribution of digital advertising to radio revenue?

Oh, sorry, what was the question again?

Yeah, what is the contribution of digital advertising to radio revenue?

To radio? Digital, oh, I must say the mix is getting more important. We're probably about, I would say, 12% of our sales are coming from digital sales and radio. So I think we're doing very well. It's increasing. But I think, you know, it's a nice add that we're doing to the traditional side. And also the good news also that we don't see in the results is the radio team is selling on the retail media in Canada. But those numbers come on the broadcasting and commercial team. So we officially have all of our over 100... salespeople in Canada that sell radio also selling the radio in the stores. So we're really seeing our first synergy. We're starting it slow, but we're able, you know, I think Stingray on the radio side has a very strong local sales team, and I would even say I think we have to look at our margins compared to our peers, our EBITDA margin. I think we're the most efficient management and sales team in the country to sell audio ads. And Stingray is a specialist of selling audio ads.

Great, thank you. And then the second one is the higher ISAN or retail media contribution in this quarter due to seasonality. And if so, should this be recurring in Q3-24? And what should we assume for what is likely a seasonally lower Q4-23?

Yeah, there is seasonality and for sure October, November, December. We're very strong. It was a very strong quarter. But again, it's not as seasonal as radio. But because this quarter was so strong, I don't think we can expect to be having those numbers for the rest of the year right away. And it's really because we got some huge orders that came in. So hopefully things are looking good. And like I said, we did 50% organic growth last year in retail media. And this year we expect a high organic growth, no higher than the 20%, because we're really launching new retailers and we're becoming more and more efficient.

Great, thank you. And then the last question is just on the audio channels. To what extent is the pressure due to cord cutting accelerating? And how do the headwinds compare between Canada, the U.S., and international?

Yeah, so the audio channel business for us, so we'll do $350 million. I'm keeping a round number here just to We'll do 350 million Stingray. The audio channels represent less than 30 million. It's less than 10% of our sales now. We really did the pivot. It's 10% of our sales, and because of work, we're worrying the other side of the business so much. It's less and less material. For sure, we're much stronger in Canada, but the business in Canada is very stable. because we're protected by the regulator, and we're protected because all of our partners are virtually integrated, and we're one of the few independents. And even with the Shaw-Rogers deal, if you look at the conditions, they're protecting even more of the independents. So I think that we're very well positioned in Canada to maintain our revenues, and even in the rest of the world, because they're small numbers, But in Canada, we're very well protected by our position with the CRTC and the regulator.

Great, thank you. That's helpful. I'll pass the line.

Yeah, and it's also, I did like Drew's title. You can tell Drew I like the title also. There is sunshine in Montreal today.

There are no further questions at this time. Eric Boykle. Please go ahead.

Yeah, again, thank you very much. I appreciate all the analysts. You guys are really supportive of giving us a lot of good guidance and highlights. And we're lucky for a small company to have so many of the firms and the banks and you guys personally involved. So we really appreciate your time and energy. And you guys are great partners. Merci. See you guys there. Bye, everybody.