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

Good morning, everyone. And welcome to Sabio Holdings earning call for first quarter of 2023. The financial statements and MD&A have been filed, and they can be accessed through the SEDAR website. My name Aideen McDermott, Investor Relations Associate. And joining us on our call today, we have Co-Founder and CEO, Aziz Rahimtoola; and Sajid Premji, Chief Financial Officer. We'll start today's call with Aziz' and Sajid's prepared remarks. And after that, they will take questions. Please note that certain statements made today may contain forward-looking information that is subject to both 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 disclosure filings that are also available on the SEDAR website. Please also note that all figures discussed today are in U.S. dollars, unless otherwise stated. With that, I will hand it over to Aziz.

Thank you, Aideen. Good morning, everyone. Q1 was probably one of our most challenging quarters we've had since becoming a public company. Not only did we have to deal with advertiser delays caused by uncertainty in the macro environment, but in also -- but also, in some cases, request for additional third-party analytics integrations with Google, which our engineering team did at lightning speed, providing us another unique offering relative to some of our peers. Despite those factors, we were still able to not only deliver strong year-to-year growth, organic top line growth, but also deliver our Sabio [ first ] in being adjusted EBITDA positive for 1/3 of Q1. As many of you know, we have a seasonal business. But even in our record year last year, we didn't manage to deliver monthly positive EBITDA until Q3 2022. While this doesn't mean we will be positive adjusted EBITDA from here on out, we do believe that this demonstrates that we have the levers to deliver on our goals of making 2023 the fourth straight year of positive adjusted EBITDA and double-digit top line organic growth, while continuing to outperform our peers in CTV/OTT market share growth. Speaking of CTV/OTT, the transformation of our business that we started 2 years ago, from one focused on mobile display into one of the fastest-growing players in the high-growth CTV/OTT marketplace, continues to provide strong momentum with 63% year-to-year growth, helping us secure a historical high amount of dollars from new top 50 U.S. nameplates in Q1, all while continue to maintain a very healthy renewal rate of our existing brands. Overall, we feel the worst is behind us. And although the recovery in the ad market is slow and uneven, the fact that one of the most complete end-to-end tech stacks in the ad-supported streaming space, along with the fact that we have a strong foundation of repeat customers delivering strong organic growth, positions us well in one of the only areas of the market that continues to see overall growth in the ad market. I'm going to now hand it over to Sajid Premji, our CFO, to dig deeper into the numbers. Sajid?

Thanks, Aziz. Despite planning cycle delays and macro volatility that had a pronounced impact on the first 2 months of the quarter, we were, once again, able to post double-digit revenue growth for Q1 on the back of a strong turnaround in March. For the 3 months ended March 31, 2023, Sabio generated USD 6.5 million in sales, up 16% from USD 5.6 million in the prior year. And further evidence of the stability of our sales model, 79% of sales were generated from repeat customers. The turnaround was led by our growing Connected TV and OTT business. Connected TV and OTT sales, once again, outpaced the competitive growth rates of our peers in the estimated 21% growth rate for the U.S. [ CTV ] industry at large. Connected TV and OTT sales grew 63% to USD 3.8 million compared to USD 2.3 million in the prior year's quarter. For the third straight quarter, Connected TV and OTT streaming was our dominant sales category, accounting for 59% of our overall sales mix versus 42% in the prior year. This growth was substantially organic, with the Vidillion acquisition contributing approximately 10% of our first quarter CTV/OTT sales growth. First quarter mobile sales -- mobile display sales were USD 2.5 million, down 23% from USD 3.25 million in the prior year's period. Aligned with our sales strategy, our legacy mobile display customers continued to shift their spend with Sabio for mobile display to higher-margin mobile OTT streaming, which is recognized under our CTV and OTT streaming category. On a trailing 12-month basis, the shift for mobile display, the Connected TV/OTT has contributed to a 45% increase in average deal sizes, with CTV/OTT as a category representing 61% of our overall sales mix on a trailing 12-month basis. Our quarterly adjusted EBITDA loss of USD 2.2 million was fully incurred in the first 2 months of the quarter as labor shortages within our partners contributed to a delayed start to the 2023 planning cycle. In a testament to our ability to quickly adapt our operating infrastructure that changes in market conditions, Sabio was able to quickly implement cost efficiencies, both above and below the line. These measures, in addition to the return to significant top line growth in March, cumulated in Sabio delivering positive adjusted EBITDA for the month of March. Digging in deeper, gross margins increased to 62% from 61% in the prior year's quarter, aided by greater use of Vidillion supply, while our closest peer group experienced year-over-year margin compression. As part of our supply path optimization strategy, approximately 70% of our CTV supply came through direct supply integrations. Meanwhile, operating expenses, normalized for higher Q4 commissions, declined on a sequential basis as our cost efficiency initiatives had an expedited impact, with further returns expected to be realized over the next quarters. While we expect some monthly variability, our ability to post monthly positive adjusted EBITDA at the earliest point in our company's history, despite the infrastructure investments in Vidillion overhead added since the prior year's period, positions us well for the rest of the year. Consistent with prior years, over 85% of our annual revenues are expected to be generated over the next 3 quarters. We ended 2022 with USD 3.3 million in cash on our balance sheet and USD 2 million still available under our line of credit without a bank. We intend to renew the line when the renewal negotiation period commences this summer under bank policy. Early discussions under the intention to renew have been positive, with no renewal concerns communicated. At period end, we had 46.9 million shares outstanding, 4.2 million warrants outstanding and 3.3 million options and RSUs outstanding, with insiders owning 64% of the company. Now I'll turn things back to Aziz to discuss our 2023 outlook.

Thank you, Sajid. As mentioned earlier, we feel good about the acceleration of our business in the second half of the year, driven primarily through the market share gains in our CTV/OTT business. In addition, our expansion of supply path efficiencies provided by our Vidillion business, as Sajid mentioned, having 70% of our CTV/OTT supply directly from end source, one of the highest in the industry, gives us additional efficiencies. That, combined with momentum and interest in deeper analytics that our App Science business is providing, provides us a good stable of options as it relates to second half growth, all while maintaining our strong renewal rates and our cost discipline, so we can aim to achieve our fourth straight year of positive adjusted EBITDA and another year of strong top line organic growth. On that note, I'm going to hand it back to Aideen for any questions. Aideen?

Thanks, Aziz, and thanks, Sajid. We'll now open the call up for Q&A. Analysts have been given speaker's permission. So please raise your virtual hand, and we will take your questions.

Aideen, you could go and turn on the camera for Sajid and I. All right. Let's go and ask questions.

Okay. We will turn it over first to Neehal Upadhyaya from iA Capital Markets.

I just wanted to ask about the average deal size growth. I know you provided some color last quarter in terms of annual growth. Is that something you'd be willing to provide for this quarter? Or at least any information regarding the [ ACV ] for the quarter?

Yes. Yes, Neehal, I can take that one. And so our average deal size did continue to increase. So on a trailing 12-month basis, that's the way that we kind of view the average deal size that increased 45%. In the quarter itself, it was also double-digit growth.

Got it. And then can you talk about the expansion in the U.K. and the European region? And what the timeline looks like? What you hope to accomplish within, say, the next quarter or the next year? And then, what do you think -- or when do you think that region will start providing meaningful contribution?

Sorry, what was that question Neehal?

Yes. Can you talk about the expansion in the U.K. and the European region? And then what the timeline looks like in terms of what you hope to accomplish within the next quarter and then the next year? And then finally, when do you think that region starts providing meaningful contribution to the top line?

Yes. Literally, it's in the early stages of -- we literally are just starting to understand the market. And keep in mind, when you go into a new market, like especially in a new region that has all types of additional regulatory requirements, it takes a little while to really set up our systems, get everything going, make sure we're compliant in all those aspects before we could even start booking deals, which we expect to start happening in the next 2 or 3 quarters down the road. I mean we think by the end of this year, Neehal, that we'll start seeing some revenue coming in from U.K., but we don't expect -- in Europe, we don't expect significant amount of growth this year. We do expect to start seeing some momentum next year. But really, like I said, it's not so much that we don't feel that there's a need there, it's just in the EU, there's different regulatory requirements and setups. And so we are literally just being very cautious in making sure we cross all of our -- cross all the paths in terms of making sure we're compliant in every way before we do that. So to answer your question, sorry, is, towards the end of this year, we'll start seeing some revenue. We expect at the end of next year is when we'll really start scaling up EU and U.K. and global markets.

Perfect. That helps. And maybe one last one for me against a compound question. In regards to App Science, I was just wondering, I know you've said previously that platform is completely industry-agnostic. But what patterns, if any, are you seeing in terms of interest from particular industries and verticals? Like has it been random? Or has there been more interests from a particular industry in working with the App Science analytics? And then, can you provide some color on what the percentage was of brands who spend 100,000 or more that had an App Science component to their deal?

Yes. And I think we have that stat. In terms of what we're seeing from an App Science industry perspective and where we're seeing a lot of interest there, what we're finding is, since we have this unique household graph that is -- has a foundation of mobile IDs that provide a lot more personalized information, especially as it relates to diverse audiences, we are finding a lot of interest from agencies and, of course, brands to help them understand -- validate that they're reaching these audiences effectively. Now keep in mind, 49% of all consumers today under the age of 18, are diverse in the U.S., and that number is growing. And so these brands are really interested in figuring out: a, are we reaching the right people that our platforms are telling us reaching, validating that option? And b, help us understand them a little bit better and more. And so where we're seeing a lot of really interest and traction is from the agencies and brands that are now trying to grapple with this diverse audience element within their marketing spend. So that's really where we're seeing a lot of really interesting -- and some of them, in fact, we had a situation where one of the agencies involved, asked all of their vendors who they use to be integrated with App Science. So we're in the process of starting to get integrated with different platforms because it is actually coming out of -- and this is a major brand that is asking this agency to do this. And so we're seeing a lot of great traction there. Now as it relates to the percentage of App Science deals in Sabio, Sajid, do you have that info?

I think we can actually take it back to Neehal with that number. [indiscernible] a bit more.

Yes. We'll get back to you on that number. It was -- obviously, it's a fairly -- I mean last quarter, I believe it was 40%, something in that range, but we will get back to you.

Correct. Yes. That's correct.

Yes. We will get back to you in the current number, but that number continues to grow. And those are -- obviously, we're starting to see stand-alone deals with App Science, and we're excited about that.

And next up, we have Gabriel Leung from Beacon Securities.

Aziz, can we spend a little time just talking about sort of the demand environment? Just curious if the momentum you saw in March has sort of continued into April and into May? That's the first question. The second question is, as the year-over-year comparisons, I think, on the CTV business are going to get increasingly a bit more difficult as we go through the year, I'm just curious, what sort of visibility you have into your customers' expected ad spending to give you confidence that you'll be able to grow off that base from last year on the CTV side?

Thanks for the question, Gabe. From a recovery perspective, we're seeing very uneven growth across the months that we saw in Q2. And overall, as I mentioned in my prepared comments, the worst is behind us. Q1 was by far one of the most challenging quarters we've dealt with. Having said that, we do see a little bit of an uneven growth in Q2, but positive relative to Q1. So it's going to be -- we believe that what's going to happen, Gabe, is that at least for the next quarter or a half, there's going to be a little bit of this unevenness, but we do see a solidification of the business. We're starting to see a lot more confidence. And of course, we have this debt ceiling situation still hanging around or -- over our heads, which is causing concerns for advertisers as well. How is that going to impact the economy? How is that going to impact the market? But we do believe we're seeing an overall simplification and a little bit more confidence. And we believe that this debt ceiling bit is going to be kind of -- we're going to pass that fairly soon, and that will continue to provide momentum. But we're seeing more positive momentum from an advertiser as it relates to Q3 and Q4. Q2 was just -- it was really uneven all over the place. And then in terms of the business as it relates to CTV/OTT and then the year-to-year comparisons, keep in mind the backdrop is that linear TV, traditional TV and cable continues to lose -- continues to deal with cord cutting at an ever-increasing rate. And so in recessionary environments, in environments where people are now traveling more, they're traveling into historic amounts, they're getting out of their house, they're doing all these things, that's going to be a big issue for traditional TV. And so in that backdrop, we do believe we could still sustain this type of growth rate as it relates to CTV/OTT growth. And we think there's just a lot of upside. We're in the early innings of this growth opportunity that CTV/OTT platform provides. And I'll tell you, the numbers -- the most recent cord-cutting numbers, which we could share with you, separately speak to that. So we see there's a lot of opportunity still ahead. Sajid, anything you want to add to that?

I think that was well said, Aziz. I think one thing that's worth pointing out as well is that we do have a great deal of insulation compared to a lot of our peers, and that's the fact that the majority of our revenues do come from existing customers. So there is a lot of stickiness and dependability there.

Got you. And maybe on a similar note, I think in the second quarter, we've seen the mobile revenues decline on a year-over-year basis. And I understand that it's customers shifting their spend to CTV. But generally speaking, how should we think about that mobile revenue line, going forward? Do you view it as an ongoing year-over-year decline in business? Do you expect there to be sort of a baseline revenue figure? Just curious to your thoughts around that.

We made a strategic decision 2 years ago, and we started actually putting our -- even our comp packages for sales connected to this. We made a strategic decision to basically start shifting away from mobile. And that -- so in that same vein, you will see that number -- we expect that number to continue to kind of decline. Because we have so much demand, I mean when I say demand, there is advertiser appetite. There's a lot of planning going on. I'm not saying everything is coming in tomorrow in terms of deals closed. But what we're finding is there's just so much interest in CTV/OTT, both from an education perspective and a [ planning ] perspective, that it's taking a lot of bandwidth. And that really is our focus. And so with that being the focus, we're basically [ ceding ] ground on the mobile side to other companies. And we're fine with that because this is a strategic decision to go after this high margin, huge opportunity overall. So in terms of an actual aggregate number, I can't -- we're not sure what that looks like. And we certainly can do some modeling and give you some expectations, but we do believe that -- and keep in mind, when we say mobile, Gabe, some of that mobile spending is sitting in OTT, right, of the CTV/OTT portion, over-the-air portion. So we do have mobile components, but they're now mobile streaming components relative to mobile display. So that mobile display business, in our minds, we're fine with it continuing to kind of shrink. As Sajid even pointed out, and I just mentioned in my comments, 70% -- we have supply path optimization now. 70% of our supply for CTV/OTT is direct, and that number has continued to grow, which means that also provides us bigger margins. That's not the case in mobile. So this is a competitive advantage for us. Because of that Vidillion acquisition we made a little bit more than a year, that we really are honing in on in a bigger way.