Sabio Holdings Inc. (SBIO) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Sabio Holdings Earnings Call for the Fourth Quarter and Full Year of 2022. The financial statements and MD&A have been filed and they can be accessed through the SEDAR website. My name is Aideen McDermott, Investor Relations Associate at Sabio. And joining us on our call today, we have Aziz Rahimtoola, Founder and CEO; and Sajid Premji, Chief Financial Officer. We will start today's call with Aziz and Sajid discussing the financial results, and we will follow that up with a Q&A session. Before we begin today's call, I would like to remind everybody that certain statements made today may contain forward-looking information that is subject to known and unknown risks, uncertainties and other factors. For a complete description of risks and uncertainties facing the company, please refer to the company's MD&A and other continuous filings -- continuous disclosure filings that are also available on the SEDAR website. Please also note that all figures discussed today are in the U.S. dollars unless stated otherwise. And with that, I will hand it over to Aziz.

Thank you, Aideen. Such a great quarter, you're getting pretty chocked up there, I could see. Welcome, everyone. Good morning. Great to have you. I want to start off with talking about the amazing quarter and year we had. Our ability to execute and deliver in a difficult environment is proven. It stretches back to the onset of COVID in 2020, and 2022 was no different for us. We grew full year top-line revenue by 75%, driven primarily by 144% of that in CTV -- 144% growth in CTV/OTT revenue, along with 22% increase in non-mobile video. We held gross margins flat despite deflationary pressures and scaling our business, all while delivering the third straight year of positive EBITDA despite having the added cost of being a public company. The net effect being an increased cash position. And we delivered a record year by taking market share across the board and more specifically in the CTV/OTT space, as I mentioned earlier. The CTV/OTT industry grew at -- grew between 25% and 30%, while we grew by 144% in that category. Drivers of our strength growth in CTV/OTT included having one of the most complete end-to-end tech stack in space, which combines supply path optimized inventory with differentiated targeting analytics. I'm now going to hand it over to Sajid Premji, our CFO, to dig deeper into the numbers. Sajid?

Thanks, Aziz. Our 2022 annual results are demonstrative of the structural consistencies in our business. In 2021, we grew our top-line sales by 84%, while in 2022, our top line grew a further 75% or a compound annual growth rate of 79%. Moreover, we have now held 60% margins for 3 consecutive years while generating positive EBITDA for 3 consecutive years. Thinking into our sales metrics, the consistency in our business becomes more evident. Approximately 72% of consolidated sales came from repeat customers in 2022 versus approximately 55% in 2021. While 75% of our top CTV/OTT customers for 2021 came back for recurring business in 2022. In simpler terms, Sabio continues to attract and retain customers at higher rates, particularly within our high-growth CTV/OTT business, bringing more stability to our sales model and increasing our cost efficiencies. Meanwhile, our average deal size grew 43% as we continue to leverage our end-to-end technology stack to upsell our legacy mobile display customers with new CTV/OTT and App Science offerings. Furthermore, our sales teams continue to become more efficient with sales per seller increasing 40% in 2022 versus the prior year. Turning our attention to our most recent results. The fourth quarter was the strongest financial quarter in Sabio's history, which was also our sixth consecutive quarter of record sales. For the 3 months ending December 31, 2022, we generated USD 17.6 million in sales, up 66% from the prior year. This was our seventh consecutive quarter of over 50% growth. Our Connected TV and OTT sales grew 144% to USD 12.7 million compared to $5.2 million in the prior year's quarter as we continue to outpace the competitive growth rate of our peers and the CTV/OTT industry at large and take market share. For the second quarter in a row, Connected TV and OTT streaming was our dominant sales category, rising to a record 72% of our overall sales mix versus 49% in the prior year. This growth was substantially organic with the Vidillion acquisition contributing less than 4% of our quarter 4 CTV/OTT sales growth. Mobile sales meanwhile declined 10% to $4.8 million from $5.3 million as we were able to entice more mobile campaigns. The shift from mobile display to higher-margin mobile video, which is recognized under our Connected TV and OTT streaming category, consistent with the prior year. It is worth noting that for the full fiscal year, we have now recognized more CTV and OTT streaming sales alone than we did across all sales categories in 2021. Taken in totality, we produced 66% revenue growth underpinned by our 144% sales growth in CTV/OTT streaming. We held consistent 59% of gross margins in the fourth quarter while our closest peer group experienced substantial declines. We protected this margin through our use of Vidillion Supply, our upside in service offerings and our ability to ship legacy mobile display customers to higher-margin mobile video. In our fourth quarter operating margin remained consistent despite the heavy sales investments we concluded in the first half of the year and the added cost of running a public company. All of this accumulated and the company record USD 2.4 million of adjusted EBITDA, up 41% from USD 1.7 million in the prior year's fourth quarter. We ended 2022 with USD 4 million in cash on our balance sheet. The highest quarter end cash position in the history of our company and over USD 3 million still available under our line of credit with other bank. At year-end, we had 46.4 million shares outstanding, 4.2 million warrants outstanding and 3.8 million options and RSUs outstanding with insiders continuing to own 64% of the company. Back to Aziz to discuss our 2023 outlook.

Thanks, Sajid. Great job. As we look at the year ahead, like many of our peers in the space, we did see delays in spending from existing nameplates in January and early part of February, which we suspected was attributed to labor shortages more than anything else. During that same time, we did see many new players are testing us, which is always a great sign. In addition, our existing nameplate started returning into Feb and into margin continuing their increases into Q2. On a category basis, we are seeing auto, CPG, retail and QSR spending in addition to travel, all showing positive signs with consumers continue staying healthy in the U.S. economy. The area we are the most excited about is the political advocacy space. Going into the election cycle of 2024, we should see a big bump later this year and going into next, and we are well positioned in that area. Our planning calls for above -- growing our revenue above industry revenue growth, which is what we have done for the last 3 years, continued taking market share gains, specifically in the CTV/OTT space, drive cost efficiencies while maintaining positive adjusted EBITDA in '23 that would make us -- that would deliver us the fourth straight year of positive EBITDA and we believe we have a pathway to get there while maintaining growth. Having said that, I'm going to hand it back over to Aideen.

Thank you, Aziz and Sajid. We are now going to move over to questions. So the analysts have been given speaker information. So please raise your virtual hand and if anybody else has a question, you can post it in the chat. Great. So first question is Daniel from Paradigm.

Congrats on a strong quarter in -- when you see a lot of competitors not putting up the same kind of numbers or anywhere near that. So my first question was on the sales productivity. Great to see 40% improvement there. I'm just wondering if you could elaborate on the factors that are driving that.

Yes, Daniel. Great question. Thank you for joining on the call this morning. Sales productivity is a function of time spent at Sabio. What we have -- what we know for a fact is it takes roughly about 6 months' time to ramp up for new sellers. And I think to about 6 months, and I think it's 6 months in a few days to get to their first deal. From that point, the second deal is reduced in terms of time line. In terms of time line, it takes for the second deal. And the second deal and Sajid, you might have this information in front of you. The second deal, I believe, is down to 2 months. Let me just...

Yes. That's correct. It's less than 2 months for the second deal. And it's -- and the velocity increases quite rapidly there afterwards. And other things that -- to that point, Daniel, that gives us a lot of hope for 2023 and beyond because as we ended 2022, where 25% of our sales force was there for under 9 months. And so we really expect them to start hitting the ground with meaningful revenue in 2023. And expanding rapidly thereafter into 2024.

Yes. And so that's contributing to efficiency. Also, what is helping us is once again, this ability to have a fully end-to-end stack. We are not providing one solution to clients. We're providing multiple solutions, and that is also driving our renewal rate, as Sajid talked about, above 70% for last year. So these -- both of these factors are contributing to that component.

And I guess what follows, I'm curious around the hiring strategy. How do you see the capacity of your current sales force? And where do you want to take that as we look at the opportunities ahead?

Yes. We feel pretty good about the hiring we've done. We've added not a whole lot of people this year. We've added a couple more this year in terms of the sales or apparatus. But for the most part, as we talked about in Q3 -- Q2 and Q3 of last year, that most of our hiring was done in the first part of last year. And then we started rolling down our operating expenses for the second half of the year. And that's really where we're at. We feel like we have all majority of the pieces in place. We feel very good about where we're at overall. And we don't feel the need to really do a whole lot of hiring to achieve our objectives for this year.

Okay. And then just switching gears, I was curious around the cost efficiencies as you think about next year, is it really the productivity that's going to keep you adjusted EBITDA-positive as you realize this growth? Or there -- what are the other levers that you might have to keep costs steady or moderately growing versus the revenue growth?

Sajid, I'm going to hand it to you as the Chief Cost Containment Officer.

Yes. I mean it's a good question, Daniel. I think there are definitely going to be some gains in sales efficiencies based on what Aziz has outlined before. Also, as you may recall, in 2022, we acquired a Vidillion business, and that took some initial investments to get that integrated. And we see -- we expect to see those costs moderate into 2023 and beyond. And looking at EBITDA in the general and cost containment, we're going to be thoughtful in putting or managing our expenses because there is a lot of variability in the marketplace. And we have dialed down as Aziz has pointed out, our non-sales hiring and nonessential T&E as well is another area that we have dialed down to a more moderate level. And we will continue to dial down or dial up investments depending on market conditions and market opportunities. Now if you see a big market opportunity that we need to go after with additional investments, we are going to make those investments, but we're also going to be mindful of the bottom line on profitability.

Our next question is from Neehal at iA Capital Markets.

Congrats on an excellent quarter. Very impressive to see. A couple of questions on my end. Firstly, the average deal size continued to increase, which is great to see. Can you talk about the specific reasons for the increase? Was it due to the increased scope in which customers want to utilize App Science? Or any color around that would be very useful.

Thank you for joining us, Neehal. Thank you for the question. So what is really driving the increase in deal size is 2 components. First of which is -- what tends to happen is clients will test us at a smaller sum initially coming out with. And they'll test us. We talked about it. It takes us 6 months usually a new seller to come on board. And I mean by time they come on board, we launch the first deal. And so what will happen is, the client will test us at a lower sum. They'll see the benefits of not only the cost efficiencies we bring by having an optimized supply path by having unique analytics insights and have differentiated inventory. But they also understand the metrics we're delivering independently and what they're seeing is effective. And so that then leads to an increased deal size overall. On the second subsequent deals, the deals then go up, and that's when we start getting the longer commitment. So really, it's a combination of a lot of things. It's clients testing us. We have an incredible track record in executing across various campaigns and categories, and we do that. We provide deeper insights with App Science, a deeper understanding of -- for the brands and agencies and then they come back with even bigger deals. And so it's just a matter of time and function of that. And then certainly, as they see the value of using all of our components together, we then get the opportunity to upsell upside opportunities, products and then unique inventory on Vidillion.

Perfect. That helps. And then maybe as a follow-up on the App Science team. Can you talk about some of the product developments that have been made over the quarter in terms of that offering? And then maybe what the product road map looks like for the next couple of quarters?

Yes. So we continue seeing a lot of opportunities, specifically in helping brands and agencies understand the streaming space from a lens of diverse audiences. In the U.S., diverse audiences account for more than 51% of the U.S. population. That's in general. For young adults, under the age of 25, that number goes up to 60%. And so what we -- what App Science has been is a conduit to help really bridge the gap. App Science is unique in the sense that we are not dependent on panels to get data. We're not -- and I've said this numerous times, I have never been a part of a panel and represented effectively to panel. And so what App Science allows us to do is to provide these brands and agencies a deeper understanding. So where the product is today is it's allowing brands and agencies to understand the opportunity of the streaming space enables specifically in general market and, of course, in multicultural. And what we believe App Science can go is to be really this [indiscernible] for understanding actual consumer behavior as it relates to complete conversion of it to understand beyond just the media scope of it and understanding what's happening in media, is to use App Science and the rich data components we have to help clients understand the consumers even better. And like I said, it goes back to the core element of diverse audiences. Diversity continues to grow in the U.S. population, and there is a real lack of understanding different audiences, and we believe we can be a conduit to that in the coming years.

Perfect. And then maybe a last one, and it's more in terms of acquisition. What type of product gaps are you looking to fill? And then there are plenty of organic growth levers to pull within Sabio itself. So can you talk about what it would take in terms of a target for you to say, okay, this is maybe too good to pass out?

Sajid, I'm going to hand over to you.

Yes. So thanks, Neehal for the question. I think that on the acquisition front, we see a lot of growth in the App Science business and particularly to expand its reach there. And so I think that it's something compelling that come back in that space that was complementary to our current offerings. That would definitely be appealing, something that we can bolt on to enhance these capabilities. At the same time, we have some standards. We're not going to be looking for a cash-burning target. We're happy being a profitable EBITDA company in having free cash flow. And so I think that's going to be part of our criteria. We're looking at certain M&A targets.

And next up, we have [ Kiran ] from ACE Capital.

Congratulations on that really strong print. Now to start off here, I'm curious, actually, some of the mobile business strength ended up in CTV, I'm just curious if you can talk about the targeted mix between the 2 segments. How do you suggest we model this trend?

Yes. Go ahead. Sajid, do you want to pick that?

Yes. And so I think, [ Kiran ] it's important to note as you have that the money is not leaving Sabio Holdings. The money is being shifted and our focus has been CTV, and we structured our -- in CTV we structure our commission plans, our pricing and pitches to encourage customers to switch from mobile display to mobile video. It's not only a more effective way of reaching the end user. It's quite frankly, a higher-margin business. And while our peers suffered some margin compression in quarter 4, we did not. And Vidillion was the reason, App Science was the reason and that shift was also a reason. And I think that as we move forward we would probably expect more of that shift to continue, that mobile display to continue to impress the mobile video to continue to enhance. Do you have anything to add to that, Aziz?

Yes. As Sajid mentioned, the idea is as you're thinking about modeling, really where we're playing a big role and becoming a bigger player is video. And the mobile display aspect of the business is -- continues to -- it will not play as big of a role. I mean, it certainly played a big role for the year. But in Q4, obviously, there were decreases there as we continue to shift people into streaming video. And so it's going to continue. Streaming video will continue to be the centerpiece of our focus and our strategy.

That's helpful. And next year, I've seen you made some investments in hiring in the political advocacy space. How is this year different? Like how do you expect to see, especially with the [ Senate bill ] coming up? Are there other levers that you expect could really push this growth on that vertical?

Yes. There is always -- we're still in the early -- we have made investments in political, but small investments relative to our competitors. California specifically and of course, nationally, but California specifically, as always -- there's always races and political changes going on in [ center rates ] that you alluded to as one. And we just think that there's a lot of opportunity that we're understanding the advocacy space a lot better than we did even just a year ago. And so because of that, we believe political inadequacy is going to be continued and the difference is -- one of the things that I want to make clear is political comes in every couple of years. Advocacy continues to stay consistent throughout. And so we're making some investments there. We do believe there's going to be a lot of upside towards this year and continue next. Did I answer your question?

Yes, that's helpful.

So we did have Gabriel from Beacon on the line. But some drops due to technical difficulties. I get sent on his questions. So I'll put these to you guys so you can answer them. So the first question from Gabe is, now many of our top 5 customers discussed reducing overall advertising spend in the first half of 2023, especially due to the macroeconomic environment.

So to answer that first question, we have not heard of any cutbacks because of the macro environment. What we have heard from most of our -- and all of our customers is the fact that spending is delayed. And it's not even delayed connected economy. It's just spending is delayed because of their shortened capacity. They don't have enough people in the mix. And I think that really is what's causing the delays. But we have yet to hear from advertisers telling us that they're looking to do cutback this year. In fact, we have had a number of new nameplates, a pretty large Fortune 100 company nameplates start testing us in Q1. So that's always a great sign. In the past, when we dealt with recessionary issues, we never -- we don't usually see brands testing in those kind of environments. So the fact that they're testing in Q1 really give us the thinking that it's all just simply delayed, not cutback.

And he also is looking for an update around Vidillion, specifically around the company's progress in signing exclusive publisher content and cross-selling into Sabio's existing base of advertisers.

Yes. So now Vidillion, because thanks to Vidillion, we have 75% of the inventory we use is directly integrated with the actual inventory source. And that number is going to continue growing. And so Vidillion has played a critical role in a couple of ways. First, which is allowing us to maintain our margins because of the fact that we are indirectly integrated with supply sources. It has allowed us to get a new set of valuable data flowing through to us. It has also provided us an opportunity to play in the programmatic space and continuing to grow that business because Vidillion is a supply source for programmatic partners. And so really, it's given us 3 different looks at advertisers from different places where there is direct supply for us, whether it's programmatic through other partners that we send it out to. So that integration has gone well, and we believe there's still a lot of upside for Vidillion as well.

Okay. Great. And last question from Gabriel. He was wondering about the key growth milestones that he should track as it relates to Sabio's U.K. and European operations over the next 12 to 24 months.

Sajid, do you want to talk about that?

Yes. Thanks for the question, Gabe. The U.K. operations are in the early stages that we are looking at it is an opportunity to learn and understand how to compete in European markets. Our focus has and has been and will continue to be the U.S. Canada will be a bigger -- as far as our expansion for back office support. for U.S. campaign with potential revenue down the line. But the U.S. will be our predominant focus in 2023. Having said that, we do expect to see some political efficacy spending from the U.K. in 2024.

Okay. Great. Thanks, Sajid. Thanks, Aziz. I believe that concludes our questions for today, so I will hand it back to Aziz for his closing remarks.

Thank you, Aideen. As we talked about today, we had an incredible -- another incredible year and an incredible quarter. And I wanted to really take a few minutes to thank the team we have the Sabio Holdings group across all 3 of our organizations. We are executing at the highest level we had, and we're just getting started. So really excited about what 2024 -- 2023 and 2024 have in store and thank all of you for joining us on the ride. That's it. Thank you, everyone.

Goodbye.