Digital Media Services Inc (YOO) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the YANGAROO Inc.'s acquisition announcement of DMS. [Operator Instructions] I would now like to turn the conference over to Dom Kizek Chief Financial Officer. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Welcome to YANGAROO's first ever conference call, specifically our conference call in respect to the announcement of the closing of the acquisition of Digital Media Services business. Joining me today are Grant Schuetrumpf, YANGAROO's Chief Executive Officer; and Jeff Louisot, formerly Chief Executive Officer of DMS and now President, Digital Media Solutions at YANGAROO. After the prepared remarks, we will open up for questions. During this call, we will make forward-looking statements that are based on assumptions and, therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. We undertake no obligation to update these statements except as required by law. You can read about these risks and uncertainties in our acquisition press release issued earlier this morning as well as in our filings with Canadian securities regulators. With that, I will now turn you over to Grant.

Thanks, Dom, and thank you, everyone, for joining today. Nearly 6 months after transitioning to the interim and, subsequently, presidency role of YANGAROO, I'm very proud to announce the first acquisition in our company's history. We've been working with Digital Media Services, also known as DMS, for a number of years, both as competitors and in the capacity of DMS being our customer. And as such, we have known Jeff and the DMS team for quite some time. Given the relationship between the 2 businesses, our complementary customers and the synergies with this combination and a very attractive valuation, we are very excited to have acquired this business. I'll have Dom go into the financial detail a little later on this call. However, I wanted to provide a quick overview of the financials and why we feel this is a great first acquisition for YANGAROO. Please recall that the amounts we reference are dominated in U.S. dollars. The total purchase price consideration for the DMS business is $5.5 million. That amount is split between $2.5 million paid on closing in addition to customary post-closing adjustments and fees and $3 million to be paid as an earn-out over 3 years. The structure of the transaction made this acquisition very attractive for us because of its low risk profile, meaning a prudent responsible approach to the amount of debt we are taking on the ability to defer payments for the purchase price over 3 years and having those earn-out payments be linked to a revenue target metric. The final comment is the most important as we feel that the current revenue run rates during the pandemic period are not reflective of the business potential, meaning once and if those revenue run rates hit pre-pandemic levels, only then will we be required to pay the additional purchase price amounts. Next, I'll speak to the vision and strategy as to why we believe this is a great combination for YANGAROO and DMS. First, we believe our services and technology offering are highly complementary. Although YANGAROO is renowned to have a great North American presence, DMS offices and production facilities in New York and Los Angeles, along with a great sales team, provides a greater presence in the local ad markets. This combination of the 2 businesses now presents us with a compelling opportunity to significantly scale our advertising delivery business and service offering with local and national broadcasters across the U.S.A. We have strong conviction around the prospects and opportunities that will be created by combining YANGAROO and DMS within a single solution offering. Additionally, the combination of the 2 companies will create additional bench strength and resources to support customers and support further growth the stand-alone companies would not be capable of on their own. It's really a complementary joining of the forces. DMS has great local presence in the U.S.A. YANGAROO has a strong admin and software development. Finally, YANGAROO's vision is to be the modern spot and video workflow and measurement solutions through the use of cutting-edge technology, including artificial intelligence and big data analytics. Our mission includes keeping traffic teams, via managers, focused and informed on delivering and measuring performance of creative across broadcasters and publishers. Presence and growth are important to fulfilling this vision. And our ongoing R&D and M&A strategy, we are hoping to bring more innovation to our clients and the industry while working for more -- looking for more acquisition targets in the advertising and entertainment market. Although this is YANGAROO's first acquisition, we are hoping that this initial combination is the first of many in the near future. We believe there is significant opportunity in the marketplace to acquire other companies in the advertising space to complement our customer base, which we'll refer to as tuck-ins as well as opportunities to require technology that will complement and accelerate our existing technology offering. In context of YANGAROO's 3 business divisions, the DMS acquisition is advertising focused. However, we continue to look at opportunities in the awards and music industries as we believe those industries and music in particular, have some really exciting opportunities given the resurgence in the music industry and the success of do-it-yourself musicians. Finally, I'd like to summarize that we are also doing some really or very exciting work internally at here -- at YANGAROO on product development and customer acquisition that we hope will drive organic revenue growth, which means a top priority for us -- I'm sorry, which remains a top priority for us. Our technology group is developing some exciting projects that we'll hope to share with everyone in the near future. These include projects focusing on data analytics for advertising media customers, workflow clearance features for advertising customers and the introduction of artificial intelligence tools that will help our customers become more productive. I'll now hand over to Jeff for a discussion on the DMS perspective.

Thank you, Grant, and good morning to everyone joining us today. As Grant mentioned, YANGAROO and DMS have been strategic partners for several years. Our advertising platforms are integrated already via API, and we share the same values with respect to providing industry-leading customer service and being a trusted partner to our respective clients. From the perspective of DMS, it was very clear early on in our conversations that, together, we will bring a stronger product offering that is international, which we believe is going to better serve the marketplace. In addition to our advertising offering, DMS provides in-house close captioning production services for wide variety of both short- and long-term contents across all streams. So we felt the opportunity was really the right fit for DMS. We are excited to join YANGAROO, and we believe that our combined solutions will create value to our existing client base, attract new customers, partnerships and expand the product and service offering. I very much looking forward to working with Grant, Dom and the rest of the YANGAROO team. And I'd like to now turn it back over to Dom, who can share us some additional details on the acquisition.

Thank you, Grant and Jeff. We're all really excited to have closed and to announce the acquisition of the DMS business this morning. It's a really exciting day for us here. I will spend a little bit more time expanding on the financial terms of this transaction. As you have read this morning in the press release and as Grant mentioned a little earlier, total purchase price consideration, in U.S. dollars, for the DMS business is $5.5 billion. However, it is important to note that the total consideration amount is split between $2.5 million paid on closing, which has customary post-closing adjustments, and fees and $3 million to be paid as an earn-out over the next 3 fiscal years. The earn-out will be paid only if certain revenue targets are triggered. Those revenue targets are based on DMS' 2019 revenue. The actual amounts that will be paid are based on actual revenue achieved from the DMS business in subsequent years as a percentage of the 2019 revenues. That can either be 0, $500,000 or $1 million per earn-out year for total maximum earn-out payment of $3 million. As we had noted in the press release, the historical total revenue generated by the DMS business, again in U.S. dollars, was approximately $6.4 million in 2018, $6.3 million in 2019 and $4 million in the latest fiscal year being 2020. Similar to our advertising business, advertising sales were significantly impacted by the COVID-19 pandemic. Our YANGAROO business and the DMS business had achieved very similar sales decline and sales trends in 2020 and, more importantly, similar trends in the recovery of sales in the second half of 2020. The 2019 fiscal year revenue target is very important to us, not only because it is the year that forms the earn-out targets with respect to this transaction, but more importantly because it represents a revenue run rate before the onset of the COVID-19 pandemic that we believe we can achieve again in future years. We believe that the declines in the DMS advertising sales are transitory in nature, and we believe that the business will be able to achieve those levels once our economies and the advertising industry, in general, has fully recovered post-COVID-19. In echoing Grant's comments, we believe that the valuation inherent in this transaction are really excellent and fit very well within our risk appetite and goal of growing the business in a prudent manner. We are very proud of the work done over the past number of years and our ability to generate cash and build a strong balance sheet and how that was able to support this transaction. Our intention is to continue this path as we execute on growth while staying cash flow positive, generating strong earnings and building a strong balance sheet. Finally, I would like to comment on the relationship we have with our new financial partner on this acquisition, the National Bank of Canada. We have secured an acquisition financing package that is very attractive to us and one that we believe contains on excellent commercial terms. The National Bank facility is denominated in Canadian dollars, and I'll now switch back to referencing to those in Canadian dollars. As you may have read in the press release, the acquisition facility, in total, is approximately $5.5 million. That contains -- within the $5.5 million is a $3.3. million term facility that contains a repayment schedule of 72 months or 6 years, and a $1.8 million revolving loan facility or a line of credit that is linked to our accounts receivable balance. Please note that we have closed our previous undrawn revolving loan facility of $1 million, which will no longer be available to us. The third part of the acquisition has a $500,000 component that is made up of other day-to-day items such as credit cards, FX trading and equipment leasing capacity. We are very pleased and excited to have partnered with the National Bank of Canada and specifically with National Technology and Innovation Group on the acquisition of DMS. We truly believe the acquisition facility is a reflection of the work we have done over the past 24 months to strengthen YANGAROO's Board and management team, a reflection of our improved balance sheet and also a reflection of our renewed strategic focus on accretive growth through opportunistic acquisitions and through organic growth. The National Bank of Canada, we believe, is a really fantastic partner on this acquisition, and we look forward to developing the banking relationship on a go-forward basis. Thank you very much. And I will now hand back over to the operator.

[Operator Instructions] As there are no questions on the phone lines, I would now like to turn the conference back over to Grant Schuetrumpf for any closing remarks.

Okay. Thank you, operator. Thank you, everyone, for joining the call. I appreciate your time. We're very, very excited about -- very, very excited about this deal. And we'll be contacting our clients today and our new employees throughout the course of the day as well and welcoming everyone on a board, and we look forward to providing you with further updates in the coming months. Okay. Thank you again, and have a good day.

Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.