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

Good morning, and welcome to Sabio Holdings Third Quarter 2023 Earnings Conference Call. The financial statements and MD&A have been filed and they can be accessed through the SEDAR website. My name is Sam Wang, as VP of Strategic Finance. And joining us on the call today are Aziz Rahimtoola, Founder and CEO; and Sajid Premji, Chief Financial Officer. We will start today's call with Aziz and Sajid discussing our financial results, and we will then conduct a question-and-answer session later in the call, which will be restricted to analysts only. Before we get started, I would like to remind everyone 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 risk and uncertainty involved, please refer to company's MD&A and the periodic filings that are also available on the SEDAR website. Finally, please note that all figures discussed today are in U.S. dollars, unless specified otherwise. With that, I'd like to turn the call over to Aziz.

Thank you, Sam. Good morning, everyone. This quarter was challenging, not only because of last year's strong comps driven by election advocacy spend, but also simultaneously fall off from the UAW and SAG strikes. While dealing with reduced CPG spend connected to high commodity prices, all those factors were challenging and that we had to deal with this quarter. Despite that and more, we sharpened our pencils and delivered positive adjusted EBITDA. We did this through aggressive well-thought-out cost-cutting measures that were designed not to affect our growth in CTV/OTT this year or the opportunity in the next year's political advocacy business presents. Sabio today is more diversified business, gaining market share by becoming an authority on how brands, agencies, political and advocacy campaigns can better reach diverse audiences in ad-supported streaming space. Our complete end-to-end non-cookie-based tech stack not only helps clients effectively reach diverse audiences on ad-supported streaming apps, it also validates the use, reach ROI via our app science analytics platform. In addition, this quarter, we launched Sabio TV, a creator-first platform that provides brands an opportunity to be associated with some of the best social influencer content, serialized for TV. This technology-driven multi-touch CTV/OTT strategy is working, helping us close a record number of nonpolitical upfront commitments for 2024 with more expected. Sajid will now dive into the numbers. Sajid?

Thanks, Aziz. As Aziz mentioned, our third quarter results faced the challenging comparable to last year period, a period that was boosted by the 2022 U.S. midterm election cycle, the one that we significantly outpaced our key peer group. Despite these challenges, we are pleased to have once again delivered positive adjusted EBITDA for the third quarter. This was driven by the aggressive implementation of cost reduction initiatives targeted to drive operational efficiencies and the core connected TV/OTT streaming business that continues to grow at double-digit rates. CTV/OTT represented 70% of our sales mix for the quarter, up from 56% in the prior year. Moreover, customer retention remains strong. For the 9 months ended, approximately 78% of consolidated revenues came from repeat customers. The Sabio retained 90% of our top 20 brands, leading to cost efficiency gains within our sales model. For the 3 months ended September 30, 2023, Sabio generated USD 8.8 million in sales, down 26% from USD 11.9 million in the prior year, with CTV/OTT sales declining 8% from USD 6.7 million to USD 6.1 million. The decline was driven by a decrease in political and advocacy spend compared to the same quarter of last year. Third quarter mobile display sales, meanwhile, were USD 2.6 million, down 49% from USD 5 million in the prior year. Aligned with our sales strategy, our legacy mobile display customers continue to shift their spend with Sabio from mobile display, the higher-margin CTV/OTT streaming, including streaming on mobile devices, which is recognized under our CTV and OTT streaming category. Additionally, category-specific events such as the auto workers strike led certain mobile display customers to shift campaign launches to the fourth quarter of 2023. Drilling down the decline in connected TV and OTT sales was driven by a decrease in political and efficacy spend compared to the same quarter last year, where the category benefited from the 2022 U.S. midterm election cycle. Excluding political advocacy sales, CTV/OTT revenues were up 29% as we continue to see strength across several verticals, including CPG, finance, agriculture, food and beverage and quick service restaurants. The core business continues to outpace market growth rates and on a 24-month basis, that represents [ 37 ]% of our sales mix. Despite the challenging comparable with the election cycle and category-specific [ headwinds ] discussed, we are pleased to have delivered positive adjusted EBITDA for the 3-month period, added through strong gross margins of close to [ 50% ] and cost and operational initiatives to optimize our operating infrastructure. While some of these initiatives, including several headcount reductions, did not take effect until the beginning of September 2023, they nonetheless contributed to a sequential 19% decrease in OpEx spending compared to the second quarter. These initiatives are expected to yield close to USD 4 million in annualized cost savings. Our ability to quickly capitalize under associated benefits is a testament to our ability to rapidly adjust our operating infrastructure in response to changes in market dynamics. The impact is even more stark we're looking at it on a sequential basis, led by a 19% decrease in sequential OpEx spending and the 10% increase in revenues, we were able to turn a $1.7 million Q2 adjusted EBITDA loss into a positive adjusted EBITDA third quarter. [ Its ] political and advocacy spending once again [ keeps ] up and will lead up to the next year's U.S. presidential election cycle, we are well positioned for material adjusted [ event gains ] for the quarters ahead. We expect to benefit from a more diversified sales mix that includes over USD 10 million in upfront secured for 2024, strong gross margins, a reduced breakeven point and better operating leverage. We ended the quarter with USD 2.2 million in cash on hand. Subsequent to quarter end, we also [ finalized ] a short-term extension with Avidbank on our credit facility for up to 6 months or May 2024. The bank will assess for a longer-term renewal by February 21, 2024. At quarter end, we had 46.9 million shares outstanding, 4.2 million warrants outstanding and 3.8 million options in RSUs outstanding with insiders owning 64% of the company. Subsequent to quarter end, our [indiscernible] entered into with [indiscernible] third-party warrant holders, to exercise 2.8 million warrants of these ones that are outstanding. Once these are affected, insiders will still own 60% of the company, demonstrating strong alignment between our board, our executive team and the best interest of shareholders. Back to you, Aziz.

Great. Thank you, Sajid. So once again, record upfront commitments going to 2024, continue to optimize our operating infrastructure, meaningful adjusted EBITDA gains in '24. Advocacy, we're really excited about advocacy and political [ upsides ] in 2024. So we have a better structure. We're positioned well moving forward into the 2024 cycle political and advocacy cycle. And on top of it, we have commitments, a record number of commitments that we didn't have going into this year. So overall, we feel great about where we're positioned and how we're moving into '24. On that note, I'm going to hand it back to Sam.

Thanks, Aziz, and Sajid. [Operator Instructions] So first off, we have Kiran Sritharan from 8 Capital.

Can you talk about some of the recovery triggers in your key customer verticals would appreciate any minutia you have on next year's election dynamics or new auto models that should probably like impact your top line?

Yes. I think the first recovery element was this settling of the UAW strike. Automotive has consistently since we started the company, been one of our key verticals across multiple years. I mean since we started the company. And so that hanging over us, specifically as it relates to domestic spending was concerning. Now we're past that. The strike was settled, agreed to -- terms are just agreed to this week. And we already started seeing some benefits of that settlement. So that's number one. Number 2 is the SAG strike, that had effects on -- although entertainment is not a significant part of our business, it still contributes to it. So that was the other driver that were passed. And finally, as we're all seeing, the inflation elements are coming down. So the cost of goods are starting to drop. And that had an effect on consumer product good expenditure, specifically as it relates to Q3. We're starting to see recoveries there as well. And so the point being is the consumer is healthy, some of our challenges were year-to-year comps. We had obviously a great, as we talked about political [ advocacy ], a lot extra spend, additional spend for the midyear elections last year. That, combined with these factors, really played a key role in some of the challenges. But having said that, as you could see, we really optimized our business model, thanks to the leadership of Sajid Premji, our CFO, and we're in a much better place. And then going into the next year's election cycles, once again, if you can imagine, we're positioned as -- we're starting to being positioned as the go-to for understanding and reaching diverse consumers on CTV-OTT, connected TV in over the top. And so because of that, this election cycle is really going to be decided by margins, we think, in a lot of cases, whether it is obviously, Hispanic voters, Black voters, Asian voters, suburban moms. These are the factors that we understand better than most. And so because of that, we're having a lot of great conversations and we're already submitting some initial proposals going into the '24 cycle. And so a lot of great momentum there overall. This is probably, and by the way, I'll say we are further along as it relates to the '24 election cycle than we've ever been as a company. And so we've never been positioned the way we have because of all the things. And because obviously, we continue to execute well. Sajid, anything you want to add to that?

Yes. And I think that was well said Aziz. I think one thing that on to add to that, there's another recovery element to that is, Aziz had mentioned, is [indiscernible] as well is that we have secured now over USD 10 million [ not ] from commitments to 2024. So for some perspective, that's close to 25% of last year's revenues that have already been secured for next year. For some context, entering into the 2022 election cycle in the fourth quarter of 2021, we had $0 secured for that year. Last year, we had about $4 million entering 2023. So we're already in a much better place going to next year. And all those are upfront, by the way, are non-political and advocacy. So that's just with our core business. These political and advocacy spend will add additional tailwinds to that growth.

That's helpful color guys. For a second here, how do you see capital preservation and allocation priorities over the next few quarters? I mean, any early thoughts you have on how the budget should look next year? Should we model more operational efficiencies coming through? That will be helpful.

Yes, I think the efficiencies is a key priority of ours. We are very focused on being a self-sustaining company and being a profitable company year after year. I think that the efficiencies that we talked about that we put in place to yield USD 4 million of annualized cost savings. As I kind of mentioned, a lot of those efficiencies were put in place at the end of August, early September. So we are expecting the full benefit of those efficiencies to take hold in the quarters ahead. So the answer to your question, yes, we are expecting a stable operating infrastructure that will be more conducive to more efficiency while we grow our top line.

And keep in mind, we are moving to Q4. And Q4 has been historically our best quarter, and this year is no different. And so we have basically consumed the first 2 quarters, we tend to obviously run losses, and that's what we have set this up. And in Q3, we will pull that back and we'll start becoming as we have adjusted positive EBITDA this quarter. And then next quarter, we'll really start delivering free cash flow. And structurally, what we have done now is we have now rightsized the ship. And so we believe that moving into Q1, Q2, Q3 next year, which are traditionally some of our more challenging quarters, we're positioned much better. As Sajid mentioned, over 20% of commitment going into a quarter or a year is pretty significant. On top of that, we have a better structure in general. So we're feeling good. We're not so concerned about capital preservation. We're considered about focus on efficiency, maintaining that efficiency and really kind of we're going to once again have free cash flow next quarter that will add to our position. And look, I'll call it out right now. Some of the concerns that some of our analysts have had is the balance sheet situation. And we believe it's improving. It's going to start improving. Elements of it will start improving next quarter, and we will add to that as we go through the election cycle.

And for my last one here, can you talk about the CTV adoption in the broader industry? I mean I appreciate your ability to shift customers on your own CTV platform there. But from a growth perspective, how are the ad dollars heading to CTV meeting expectations? Or do you see brands and all weathering the storm with legacy channels? Like how do we think about CTV growth in general?

Yes, it's going to continue accelerating. And Sajid, I think you have some stats on that. Well, at the bottom we have, U.S. CTV spend has a 5-year CAGR 10% growth of $25 billion in 2023 and $41 billion by 2027. So going back to the adoption of CTV, we're still seeing that. And so we're positioned uniquely in that space. And so what you saw, there was some pullback with some of the macro environment challenges that took place in the last couple of quarters. But that pullback, as we even stated in terms of how we execute was not happening in CTV/OTT. And so, other forms of business in terms of advertising has been cut back. But we believe CTV and we're positioned well for it. Not only are we positioned well in CTV, but CTV in general, in terms of consumer consumption is the most diverse level of consumption in terms of diverse consumers that anyone has ever seen. It's more diverse than linear TV. So we are not only positioned well in the growth of CTV. From a reaching perspective, I talked about briefly about SabioTV and the opportunities that presents. But then obviously, the App Science analytics. So we're uniquely positioned in a really quickly growing marketplace, and that's going to continue on. Nothing is really going to pull it back and by the way, you should know that advertisers are hitting maximum points of how much they can use at Roku. We've been told us numerous times over and over again. There is Roku, is hitting a saturation point. They can't spend more on YouTube because they've already spent a maximum amount that they've allocated towards it. So that opens up an opportunity for other platforms such as ourselves to gain from the exposure, the loss coming from linear TV.

[Operator Instructions] Up next, we have Daniel Rosenberg from Paradigm Capital.

Thomas here fill in for Daniel. I was just wondering if you can give us a little bit color on Sabio TV. That was something that you guys were excited about earlier. Maybe just some color on the strategy and what that means for you in the long term?

Yes. And just to be very clear, we are not in the production game. We are simply in the technology game. And so what we're doing is we have worked with, and now we have along the lines of 20 to 50 influencers that we have lined up, and there are various phases that can reach essentially 10 million consumers across the U.S. today. And what we're doing is, we are taking content they have produced, serializing it for CTV/OTT with our various technology capabilities that includes using Vidillion to insert do ad insertion that includes Sabio to monetize it and includes app science and provide analytics to it. And so we're serializing that, and we are looking to -- we're in the process of launching a few apps. But separately from that, as we were in the process of launching apps, so we've got an interest from OEMs. Think of the top TV makers in the world, and they have their own streaming platforms. And so we're in discussions with them as well. So our strategy there is twofold. It is to serialize create this content that is exclusive coming through us, distribute that content, be able to provide ad spots within that content for our brands and agencies that we work with and then have a dual revenue stream. So that is something we're super excited. And this touches were unique in the sense that we are touching the creator economy and we are touching CTV simultaneously. So we're taking, obviously, this existing content that has not been serialized and with certain specific characteristics we're looking for, taking that, serializing and now being able to provide that as another opportunity. And specifically, one of the things I should mention, these are diverse influencers. And so that really is kind of once again, sitting with what is Sabio-driven by has always been driven by its ability to reach diverse audiences. So we're excited about it. You will hear more in the coming calls, but we are in conversations right now with multiple platforms and we expect to have a wider distribution as well as our own apps. So the strategy there is distributed through platforms that already have eyeballs and then separately launch our own apps on all the platforms, including Roku, VIZIO and Samsung and all these other platforms as well. Does that make sense, Thomas?

Yes. Great. I can't wait to watch it on my Apple TV.

Yes. You could actually sample it today on if you have an Android device, I believe we're going to be putting that up just as a beta fairly soon. So some of these apps are ready, we've just been fine-tuning it. So we'll get some information around that. Do we have any more questions?

You have Jason Zandberg from PI Financial as well.

I just wanted to ask about in your press release and in your comments, you talked about your extension of your credit facility. Just wanted to get an idea of sort of why the 6-month extension, not something longer? And sort of what are your long-term options in terms of debt facilities, if you could comment on that?

Yes, thanks, Jason. It's a good question. So I mean, I guess, take a step back, as you can imagine, it's a bit of a difficult environment in the regional U.S. banking sector right now and Avidbank, being the regional bank is one of them. And they want to see how we perform in the next couple of quarters under our new operating infrastructure. [ Aziz ] kind of mentioned, we have streamlined our cost base a significant adjusted EBITDA gains that we're expecting moving forward, including in the fourth quarter and beyond and that were helpful in getting us a swing to profitable this quarter. That said, they wanted to see how we react [indiscernible] infrastructure over the next coming quarters and then discuss a potential longer-term arrangement in the first quarter of 2024. So we started to do a short-term extension for now until the next assessment date on February 21. But that said, even [indiscernible] with Avidbank, we have had a [ competitive ] process and we have some other options that include other banks and if it did come to that. But that said, we do have a very good relationship with Avidbank right now. I think that they are showing confidence in us. Just want to kind of see how we perform over the next couple of quarters so that we can kind of define the exact terms that a new longer-term [indiscernible] would entail.

Great. Well, I think that might be it for the question-and-answer session. Thank you, everyone, for joining us once again. We are excited about the quarters ahead. We believe the worst is behind us from a macro environment and just individual challenges, both the UAW strike, SAG strike and some of the inflation issues and we are positioned well going into next year. So we're beyond excited and looking forward to the next call to further demonstrate that. So thank you, everyone, and have a good rest of the day.