Audioboom Group plc (BOOM) Earnings Call Transcript & Summary

Thanks, Stuart. Hi, again, everyone. So we've got a couple of finance slides here. So I'll be giving further insight into OpEx trends, what we've done to reduce it in the first half of this year, give you more detail on that contract provision as well because there's been quite a few questions about that this morning. So we'll have some information on that. And then we've got some good updates on the working capital cycle and how that continues to perform well. So yes, we can see here our progression in terms of revenue and OpEx over the last couple of years. We can see that OpEx continues to be relatively flat, and this is adjusted OpEx before any depreciation, interest, share-based payments or any restructuring costs. This is -- this shows how the business is operating before those other costs. Stuart has given you a good overview of revenue, the contributions and the margins, but it's pleasing to see that Q2 is 6.5% up on Q1. Q2 was also higher than Q3 last year. It was 90% of the revenue reported in Q4. OpEx continues to be, as you expect, very well controlled, despite those wider inflationary pressures that we're all experiencing. And we've done very well, I think, to lower our OpEx cost by 11%, reducing it from $6.2 million to $5.5 million in the first half of this year. How have we done that? Well, main reduction has come from our material cost category, staffing and commission costs. At this point last year, we had 47 heads. We're now at 39. So we've reduced staff by 17%. The sales operation has been restructured. We've removed production heads and the associated marketing costs from Audioboom's studios. And as we move to focus on offering production as a service and we also removed a couple of heads from Sonic as well to make that more efficient. Staff costs and commissions have decreased by $1.1 million with $0.5 million coming from the reduced headcount and $600,000 from the lower commissions due to the lower revenue and the slight restructuring of that commission program. So that's worked well to restrict that cost. Other cost reducing initiatives, we focused on that technology cost bucket, which is the second biggest cost category in the main cost reduction there or the savings that we've achieved is on the rates that we pay for bandwidth and ad impression costs from our supplier as we're delivering a higher volume of those things, [indiscernible] impressions. We've secured more favorable rates. Had we not done this, then the cost would have been around $100,000 higher than what we've recognized. So again, we've done a good job to restrict that cost back in. We remain with -- sorry, 39 heads extremely lean, prime for further growth when the ad market is strengthened. No major investment is needed into the technology stack that we have or a significantly higher number of staff. So when the markets do return, we'll see that impact flow through both top and bottom line, obviously. In terms of the provision. So we've, today, we've announced that provision for the onerous contracts that Stuart mentioned briefly earlier. That was an individual contract that was signed during that buoyant part of the podcast industry, first part of 2022. So in line with accounting standard IAS 37, we're required to provide any contract, which is deemed to be loss-making. And I've detailed this further in Note 9 of today's announcement. So if you would like to read that and ask any follow-up questions, then please do so, it's Note 9 in today's announcement. The provision of $7.1 million created in relation to that individual partner contracts. Despite downloads of that contract continuing to increase as other shows have, the downloads continue to increase on that show, the ad rates have been commanded historically in the future, ad rates are likely to be lower than those modeled when the contract was signed due to advertising markets being more challenging as we've said. So in light of those revenue growth projections being lower, it is unavoidable the contract will generate a net loss through to its conclusion in July 2025. The contract recorded a net loss of $1.8 million in the first half of this year. And if you see the income statement, what I've done is treated that and the provision as an exceptional cost. So you'll see a number of $8.9 million on there, which is the loss in the first half of this year, plus the provision. And I've done that because I want to treat this contract separately and display the rest of the business in terms of how that's operating. So that's why that's been treated as an exceptional cost. So we provide a more accurate reflection of the performance in the period for the rest of the business. It's right that, that provision is created now. There are no other loss-making contracts in the company. And it's been created because we're incurring that loss on the contract by truing up to that minimum guarantee level. Creating a provision means that any future true-ups will not impact gross margin. That will be unwound against the provision. We've used different growth assumptions in terms of high, medium, low growth assumptions to calculate that provision, which has led to the provision of $7.1 million being created today. Looking forward to the end of the year, what we'll see on the end of year financial statement is that, that provision number will decrease between now and the end of the year because we've got 6 months there where the minimum guarantee true-ups will be unwound against that provision. So my estimate is that provision number will be around $5 million by the end of the year because you have 6 months of unwinding to go there. So yes, obviously, quite complicated. But look, there's a note in the, today's announcement, Note 9. If you've got any other questions, brad@audioboom.com, please contact me, and I can talk you through it. In terms of the working capital cycle, headline is that cash increased by $0.2 million in Q2 over Q1. So we end on $5.3 million. We've collected another $2.7 million from our customers in July. Good statistics through the first half of the year. So we collected just under $33 million, average of $5.5 million a month. We collected 103% of revenue versus our 3-year historic average of 94%. So collection is still good within the company, performed very, very well, which is fed through to the debtor day of 72, which is comparable to the 68 that we had at the end of December and at the end of June. So settling there around that 70 mark. We try and get it below 90 because we work with -- collect from advertising agencies, which typically pay on 90-day terms. Bad debt expense in the period, $127,000, 0.3% of revenue. So continue to have a very minimal level of any kind of write-offs or provision despite that challenging macro environment. So you're obviously concerned about the ability of customers to pay, but we're still collecting very, very well. But we have had that cash reduction in the first half of the year from the $8.1 million down to $5.3 million. We have paid $1.2 million of advances to retain talent in the first half of this year. We've also had that loss-making contract at $1.8 million in the first half of the year, plus we've also settled everything in relation to the seasonally stronger Q4 as well. So we have had some expected reductions in cash, but obviously to step up from Q1 to Q2, albeit marginally is encouraging. In terms of future cash utilization, we've got a further $1.2 million contracted for advanced payments in the second half of this year. And obviously, we've got to facilitate that onerous contract as well. We've recently renewed that $1.9 million overdraft with HSBC, which is a good endorsement for us. So that's there should it be needed as well. So that, in conclusion, business continues to do a good job on controlling the costs that are incurred. There's a cost base that flexes there as we start to see things revenue increase. There'll be more commissions incurred as downloads increase. That line will increase as well, but we're doing a good job in terms of controlling those and once this ad markets strengthen, we'll see that go through to top and bottom line. We provided for the onerous contract, which is the correct thing to do and allows the business moving forward to report its underlying performance, and that working capital cycle continues to operate as expected, delivering some good consistent metrics there across the last 18 months or so. Clear. Any other questions on any of that finance information, put them in a question box or e-mail me afterwards. But yes, back to you, Stuart.

Thanks, Brad. Just a reminder, we will try and get to as many of your questions as possible at the end. I think we have 3 or 4 more slides before we get to those. So you can go and submit your questions. Now before we get into that, I think this final stage of the presentation really is showing how our operational progress is coming together. We've made very good operational progress over the first half of the year. That hasn't been necessarily seen in the financial results, which is obviously frustrating to us. But in a handful or more of key areas we are demonstrating good progress, and I'll walk you through those now, and I'll walk you through the future focus of the business as well. So the first one really is something that I touched upon earlier, and it's the improvement in our advertising revenue shares. This is creating more favorable contracts for Audioboom, so we retain more of the revenue from each of those advertising campaigns that runs on the network. So network wide, our contracted advertising revenue share is now at 24%, up from 21% 2 years ago. We are increasing that network-wide revenue share because of the increased revenue contribution from Showcase that has a higher 41% revenue share attached to it. We're improving our contracts with podcast creators when we are reviewing those. We are doing those on more favorable terms to Audioboom, and also there's an enhanced Sonic contribution there from clients on the Sonic side that is improving the Sonic revenue share also. So that's a big step for us. What that really means, as I said before, is a clear pathway to improve our gross margin and the profit, obviously, when the advertising market improves. So you're not seeing necessarily that come through today because of that weak advertising market and that pressure on the gross margin because of those minimum guarantee payments that we make. But as we clear that, we will then go into a place where we are working on a higher gross margin because of this improvement in the advertising revenue shares that we have. So I think that's good progress. The second part of the progress is around audience. I've already kind of highlighted the download growth, to get to 135 million downloads in May from 103 million in the month of December is fantastic. We're doing that by adding more shows, by driving audience, by marketing across the platform using our large megaphone to cross-promote to audiences, and that's really highlighting, I think, the marketing platform that is sitting within Audioboom. We don't necessarily talk about it too much. We don't use it and highlight it as much as we should, but it's a very powerful marketing platform that can really drive audience and increase download numbers from within. And the same with the unique listener number. So we now, as of March 2023, reached a record 38 million unique listeners on a monthly basis. Again, big progress there from December 2022 when that number was just 28 million. So in a matter of months, we added 10 million unique listeners. So great consumption levels, great reach levels. The strength and the size of the network is in a really good place as we move into the second half of the year. And we're doing that, much of that growth in consumption and listening is because of the expansion and the consolidation of our creator network. I said at the top here that creators are really the heartbeat of this business. We look to sign and to work with the biggest and most creative podcasting talent out there. And already this year, we've signed a number of Tier 1 podcasts to the network. We've renewed our larger show partnerships as well like the Formula 1 partnership. Tiny Meat Gang is a very cool and very big group of podcasts out of the U.S. And we will continue to grow that creator network, and we'll continue to expand that which will increase the audience levels, which will then in turn increase the inventory and the advertising availability on Audioboom. So all of these fundamentals are moving in the right direction. Inventory, I just talked about, but that's a key point for us as well is how we expand the level of inventory that we're getting here. This is kind of an operational leverage point of view. We are creating now more than 7 available advertising impressions from each download on the platform. So from each of those 135 million monthly downloads, we now create 7 advertising impressions from each of those versus 5.3 per download a year ago. So that's a big change. We create more available impressions per download. That's more advertising for us to sell. And again, as we move out of this challenging ad environment, that will lead to greater performance in the future. How are we doing that? Well, in a number of ways. One is the renegotiation and the reworking of the contracts with our podcasters. We re-contract them to deliver a higher level of advertising within their shows, albeit with the mindset of making sure that the product for the audience is not too full of ads. If any of you have heard radio in the U.S., it's a pretty horrible product. It has around 23 to 28 minutes of ads per hour. As you'll see really from our 7 advertising impressions per download, that's a much, much, much lower level of advertising. It makes the products still very strong for the consumer and for the listener. So the contract shows to deliver higher ad loads. We've also further rolled out our aggregate inventory creation. So this is a very unique tool. No one else in the podcast industry has this. This allows ads, those host endorsement ads that are baked into the fabric of the podcast and delivered within the podcast. It allows those to be ripped out automatically with no effort from the podcaster at a later date and then replaced with brand-new advertising through Showcase. So the ad rip tool is very powerful, and it's leading to higher inventory numbers. And of course, we are always talking to our podcasters, we're educating them about the new tools that we have, about the ways that they can improve the monetization. And because of that, we will create more than 11 billion total ad impressions this year, which is a tremendous scale and really fantastic progress to go from that 5 per download to more than 7 in just a year. I talked earlier about us recognizing the core group of direct-to-consumer brand awareness start-up, disruptor brands that have been advertising in podcasting. They were suffering because of the economic environment, and we moved relatively quickly, I think, to launch a new team within Audioboom that is dedicated on finding those new customers, finding those bigger brands, those blue chip brands, those brand awareness advertisers who are less impacted by current economics, to become -- to expand our customer base effectively. And that piece of work is underway. First of all, the first step in there was restructuring all of our revenue operations to enable that to happen. And I was really pleased to bring Jenni Skaug who was leading Sonic at the time into a more expanded role as chief growth officer back in January. She's now responsible for all of Audioboom and Sonic revenue and is doing a fantastic job in pretty challenging conditions. Jenni oversees all of that revenue operation. And in May of this year to launch that new unit, we hired a really fantastic operator called Jim Lally. Jim is a very experienced salesperson previously at the New York Times, New York Public Radio and a podcast platform called Market Enginuity. He will lead the growth of our brand awareness revenue unit, and we're already seeing some good traction. It's a long project, and it takes a lot of education to get into those bigger advertising agencies, these traditional advertising agencies and educate them about why podcasting is so good for their brands but progress is happening there. We're seeing traction, and I look forward to updating you on the -- on how that is going in the second half of this year. And then finally, we talked about it many times in this presentation and previously, but Showcase, our automated ad product, our ad tech marketplace, that just continues to grow strongly, up 35% in terms of revenue from the same period a year ago. The contribution to the group revenue is almost double what it was a year ago. I think the key parts there with Showcase is, this is, it's a 2-sided marketplace and Audioboom is building out both sides. We're building out the supply side. There's record download numbers. There's record advertising inventory numbers. That's leading to some really strong supply in that marketplace. 660 million advertising impressions were made available to Showcase in the month of May, which is just some fantastic scale for brands to come in and to explore. And then on the demand side, the monetization side, we continue to build our partnerships on that side. Recently launched partnerships there with Bauer, a big media company, Bauer Nordics, Icon, Entravision is a Latin American media company. AudiOn programmatic or ad networks that all bring advertiser demand to that marketplace, and we match that up through the ad tech with the downloads, with the supply side, and that will continue to lead to strong Showcase growth over the coming year. So really pleased with the continuation there in Showcase. And I think you'll see from these improvements that we're making and the progress that we're making on the operational side that return to growth is really not far away at this point. And even if the advertising market doesn't roll back and it takes longer than expected to improve, we are still in a position of growth in the second half of the year. And this slide really sums that up all the things that we're doing at the top, we're improving and have improved our download metrics across the business, 20% at least download growth versus last year. So we have more downloads. We're then creating more inventory from those downloads. So we're now creating 7 available advertising impressions per download. Then we add more customers through that brand awareness launch in May. So we have more downloads, more available inventory and more customers to buy that inventory. Showcase continues to grow on both sides. So more monetization across Showcase. And then we're getting into the strong period of seasonal demand as well. We're very strong around the NFL season in the U.S., the football season in Europe, the holidays from Thanksgiving through to the end of the year. So those parts -- that progress all kind of comes together. That leads to increases in pricing, increases in demand because of the inventory and the customer levels that we're creating here. That will increase our e-CPM in the second half of the year. That key number for how we extract value from our network. And that, in turn, will lead to H2 growth on an annual basis. So we will return to meaningful growth in the second half of this year as we put all these pieces together. So I think to sum up, and this is the last slide for us before we get into those questions. Frustrating financial progress in this first half of the year that the advertising market is really stopping that operational improvement really being crystallized, but we continue with those operational improvements. We continue to build our model. Our model works has delivered 11x growth in the last 5 years. It will continue to work. We're now just amending it, adjusting and improving that model so that it delivers us growth in the future.

[Operator Instructions] While company take a few moments to review those questions submitted today, I would like to remind you that a recording of this presentation along with a copy of the slides and the published Q&A can be accessed via investor dashboard. Stuart, Brad, as you can see, we have received a number of questions throughout today's presentation. And if I may hand back to you and kindly ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you both at the end.

Thanks, Alex. There's been a number of questions on, I think, the health of podcasting. First one from Peter was around negative press about podcasting. Is it no longer as healthy as it once was? Is podcasting still a growing sector? I mean the answer is, yes, it's still healthy. It's still a growing sector. The first slide here, I addressed some of that the total addressable market is expected to quadruple over the next 7 years. So no change there. There was a recent study that was published around a month ago by Edison Research in the U.S. And they found that 42% of Americans now listen to podcasts on a weekly basis. That's up from 38% a year ago. So just in the last year, in the U.S. market, there's around 15 million new regular listeners to podcast. So audience continues to grow. And although we're in a weak advertising market, it's more -- what we need here is advertising demand and rates to return because the audience growth is still there. So that's the key. That's what we're continuing to look for signs that the advertising market will improve and when those improvements will take place. As with Audioboom, the wider industry is healthy from a listening and a consumption point of view. We just need the ad markets to come back. And then I think a similar question here, which is about Spotify. Having spent nearly $1 billion, much of it is on celebrity podcast have not worked out for them. Is this specific to Spotify? Yes, they spent a lot of money. Tens of millions of dollars on signing well-known celebrities to deliver podcasts for them. That's Harry & Megan. I think the Kardashians, the Obamas. Celebrities that are not podcasters, and that strategy hasn't worked out to them for them at this point. I think back on an earlier slide that Brad was looking at when we broke down that Audioboom model, I highlighted, I think, 3 key beliefs to the Audioboom model on that slide. One of those was really around our belief that this is an independent creator medium. So that's authentic voices from creative talent who have the ability to deeply engage with their listeners, and that belief kind of continues to be proven out. This is a great example of that. You cannot turn a celebrity necessarily into a podcaster. They need to be an authentic creator. They need to be an authentic podcaster. So podcasting, I think it's a hits business at this point. Those tiny percentage of large shows are continuing to drive high revenue or the biggest chunk of the revenue in the space, much like the music industry. And so we're all very much focused on finding those next hits and being the publisher that delivers those next hits because of that. For Spotify, they look to do that and to deliver those hits through giant celebrities and that didn't work out for them. For us, the way we do it, to find those hits, it's through recognizing and cultivating independent creators. And I believe that, that is the most efficient and most likely to succeed route to find those hits from authentic creators. Next question I have here is from Sarah who's presubmitted and says, how is AI impacting podcasting, and how is Audioboom using it? Yes, it's a good question. And in May there was a big podcasting event in London, and this was one of the key questions that was floating around leadership at that podcasting event. I kind of pick this question next actually because it kind of relates to many of the points I just made about creators and authenticity. And I think one of the things I don't believe in is that AI will play or should play a part in the content creation process. That's an art form that's left to the best creative talent in the world. But no doubt, AI does have a part to play in podcasting. We've built this business through a lot of automation in the platform, and that's been a key factor in why we've been able to scale with low head count, low cost base. That automation has been key, and I think AI will support those processes, those automation processes for us. And I think one early example of how we're experimenting within our -- is in our advertising business. Previously, the process to create ads was fairly time-consuming. It required access to recalling studios, a turnaround time to get ads recorded and delivered back to us ready for kind of publication or for campaign execution. But through AI, what we're able to do is receive a script from an advertiser. And then within moments, we can have an AI-generated voice create that 30-second ad that's ready to be used in showcase. So I think the key part here is that AI can improve our process as it can remove cost from the business. And I'm pretty sure that this time next year, I'll have some other examples for you, too, of how we're using AI at Audioboom. We've had a few questions on this one, and I'll throw it to Brad here. This is an example of one that came in today. Previously, we've been told shareholders will be getting a dividend. Is this still going ahead?

Yes. So yes, I'll take that one, Stuart. So Board previously indicated in January, early on this year, the intention to introduce a progressive dividend policy with a maiden dividend in respect of the current financial year, i.e., 2023, being declared and paid in 2024. Now given what we've published this morning and given what we've gone through in this presentation here today in terms of that more challenging advertising market going beyond what we expected when we announced that in the first part of this year, it's right that we say that we -- it's the intention to review that progressive dividend policy for the financial year and onwards. Obviously that's disappointing to say that, but I'm sure it's come across in the numbers today, the reality of what we're experiencing this year. So it's right that, that process goes forward and we review that from 2024 onwards.

Thanks, Brad. One more here. There's a few that's similar, one from Murray Jay, another one that was pre-submitted. What's the probability of more onerous contracts if the ad market doesn't improve? And similarly, can you give more details of how you've adjusted the approach taken to calculating minimum guarantee offers to podcast partners? Yes. I think 2 parts here. First one is that we're not expecting any further onerous contracts. Really, the one that we do have just relates to a very specific moment at the height of a very strong advertising market. And also with that, it was a 3-year contract that was signed. It was a very competitive process to sign that show, and it was a 3-year contract. Within those podcasts that I mentioned where the minimum guarantees were not being achieved and we were truing up, they were not loss-making contracts but we were truing up on those minimum guarantees and, therefore, that's impacting the gross margin. Those are -- we're not saying fully at the height of the previous ad market. And also they are shorter-term contracts. They have less time left on those contracts at this point. So they will be up for renegotiating over the coming months, in which case they can be pulled back to less risky terms for Audioboom. So I don't see a time or a place where there are further onerous contracts within this business. And then in terms of how we look to create minimum guarantees going forward, well, I think the way we calculate and look at those minimum guarantees is really based on the advertising market in the buoyant ad market of 2021 and then the first half of 2022. Advertiser demand was so high. It was high enough that we were -- we would be confident of filling more than 90% of the available advertising slots in a top-tier podcast. And so when we go through the process to sign those bigger shows, those Tier 1 shows, we will create a strong deal with kind of a punchy minimum guarantee attached to it based on advertisers' demand. We wouldn't do that at 90%, of course, but we would do it at a high enough level to win those deals. Once we saw the ad market decline, and I think I pointed out earlier in this presentation, we saw a 25% reduction in demand levels. So that's a big change. So now we're operating under very different conditions. We obviously calculate those potential minimum guarantees that we can offer to podcasters in a very different way. Demand is 25% lower. So it's simplistically, we're just using a much more conservative level of advertiser demand and pricing when we are calculating what those minimum guarantees can look like. But I think the key part is that we are also thinking beyond -- more and more we are thinking beyond those minimum guarantees. We're thinking about what we can offer those big podcasts purely beyond the financial guarantee. So that's our technology and distribution that many of our competitors don't own and operate. So we -- it's a really fantastic starting point for us is the technology and distribution that we have that we can offer those podcasters. Our marketing, I kind of talked about that megaphone that we have of 38 million unique listeners on our platform so we can enable our big podcasts to utilize that marketing megaphone. And then our production services as well through Audioboom studios, that's what we do for Formula 1, we have a very strong partnership with Formula 1, we coproduce their podcasts and enabling and helping support those big Tier 1 podcasters through Audioboom Studios on the production side will also add value to what we're able to offer. So that, I think our offers will be lower to podcasters moving forward. We were not in the same market that we were 18 months or 2 years ago. So those offers will be lower. But we'll also be able to offer further value because of the model that we have because of the technology that we have. And I would say here right now, our new business pipeline is actually stronger than it has been any time in the past 3 years. So I don't believe that the lower minimum guarantee offers will impact the growth of the network and the growth in the business and the partnership deals that we bring to the platform. I know we have 1 minute left. So Alex, I'll throw back to you.

Thanks. Thank you, Stuart and Brad. And I think you have addressed those questions coming from investors today. And of course, the company will review all questions submitted today, and we will publish those responses on the investor meet company platform. But perhaps before redirecting investors to provide you with their feedback, which is particularly important to the company, Stuart, can I please ask you for a few closing comments.

Yes. I think the key thing today is that we are all frustrated that the financial progress doesn't reflect the operational progress in the business. I think you've seen we've made strong operational progress in a number of areas over the past year and particularly over the last 6 months. And that progress is setting us up to emerge in a very strong place. It's setting us up to get back to a growth phase in the second half of this year. Our model, the Audioboom model has delivered 11x growth in 5 years. That model still works. That model is strong. We're adding to it. We're improving it. We're adapting it for this tricky and challenging marketplace that we're in. But the model works and that model will continue to work in the future. It will continue to keep Audioboom growing. And as I think we've shown today, we will get back to that growth in H2 of 2023.

That's great, Stuart, Brad. Thank you once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of Audioboom Group plc, I would like to thank you for attending today's presentation, and good morning to you all.