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

Good morning, everyone, and welcome to the Sabio Holdings Earnings Call for the First Quarter of 2024. 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 is Aziz Rahimtoola, Founder and CEO; and Sajid Premji, Chief Financial Officer. We will start today's call with Aziz and Sajid discussing our Q1 results, and we will then follow that up with a Q&A session. Before we begin today's call, 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 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 stated otherwise. With that, I will hand it over to Aziz.

Thank you, Aideen. Good morning, everyone. We are excited about the quarter we just delivered as it relates to setting us up for bigger opportunities later this year. We continue to see growth in our CTV OTT business, and this is intentional. We made the intentional decisions back in October of '21 when we started shifting our business from traditional display from mobile display into CTV, OTT and we continue this forward march. It's also giving us improved operating leverage with 21% sequential decrease in Q1 OpEx narrowing adjusted EBITDA loss by close to $1 million and over 85% revenue from repeat customers. And this also has to do with our rev reach, engage and validate technology stack. And then finally, we're excited about this political upfront year as we've talked about on previous calls and really are set up for an extraordinary year. Having said that, I'm going to hand it over to Sajid Premji, our CFO. Sajid?

Thanks, Aziz. For the 3 months ended March 31, 2024, Sabio generated USD 6.4 million in sales, essentially flat with USD 6.5 million in the same period in 2023. The 2% decrease in sales was primarily driven by declines in mobile display advertising offset by a return to double-digit growth within our Connected TV and OTT business. Connected TV and OTT sales once again outpaced the estimated 16.2% growth rate for the U.S. CTV industry at large as we continue to take market share. Connected TV and OTT sales grew 29% to USD 4.9 million compared to USD 3.8 million in the same period last year. Connected TV and OTT streaming was once again our dominant sales category, accounting for a company record 77% of our overall sales mix versus 59% in the first quarter of 2023. The continuing double-digit growth of our ad-supported streaming business evidence as Sabio's ability to segment our sales in the market by leveraging proprietary data to generate valuable insights through our noncookie based platform. These insights drive a more powerful connection to target audiences, helping brands and political advertisers effectively reach, engage and validate audiences and a fragmented media ecosystem. Our differentiated offering positions Sabio well in the quarters to come as we expect to continue to outpace industry trends. First quarter mobile display sales were USD 1.3 million, down 50% from USD 2.5 million in the first quarter of 2023. As Aziz mentioned, our legacy and mobile display customers continue to shift their spend with Sabio for mobile display and mobile OTT streaming, which is recognized under our Connected TV and OTT streaming category. Sabio CTV OTT sales feature a lower OpEx and higher customer retention rates as demonstrated by over 85% of our first quarter sales coming from repeat customers compared to 79% in the first quarter of 2023. Meanwhile, 20% of the brands who've been with us in the first quarter were new logos presenting new opportunities for us to expand our sales base in the quarters to come. On a trailing 12-month basis, our Connected TV/OTT business now represents a record 70% of our sales mix as we continue to capitalize on 1 of the fastest-growing channels in advertising. Within a span of just 3 years, we have completely transformed ourselves from a company that generated just 13% a trailing 12-month sales from CTV OTT at the end of the first quarter of 2021. During the quarter, we continued to build on the material improvements in operating leverage that drove an expansion of adjusted EBITDA margins in the fourth quarter of 2023. The inherent cost efficiencies and transitioning to a Connected TV/OTT streaming sales model for 1 dependent on mobile display resulted in continued gains in operating leverage in the first quarter of 2024. Operating expenses decreased 18% for the first quarter of 2023 or 21% normalized for sales commissions and bonuses. Meanwhile, despite certain rate concessions made to secure larger upfront commitments that will provide a more predictable stream of revenue, we maintain healthy 59% gross margins. This was down from 52% in the same period last year and consistent with the 50% of margins we have come to expect over the last 3 years. All of this resulted in material improvements in operating leverage is our first quarter adjusted EBITDA loss narrowed by close to USD 1 million to USD 1.3 million from USD 2.2 million in the same period last year. Our reduced operating infrastructure is complemented by several near-term growth pillars. We continue to have over USD 10 million in remaining upfront branded campaign commitments and USD 15 million in political and advocacy orders between Q2 and Q4 for an aggregate of over $25 million. We continue to expect double-digit revenue growth in 2024 over both 2023 and our record 2022 midterm election year with a return to adjusted EBITDA profitability for the year. After quarter end, Sabio leveraged its improved operating model to execute a term sheet on a multiyear asset-based lending credit facility with a new lender to replace its existing facility with Avidbank. Subject to final credit approval and the finalization of loan documentation, the material terms of a new facility are comparable to the company's existing one. The new facility is expected to provide greater balance sheet flexibility and stability as we drive towards continued growth on both the top and bottom lines. At quarter end, we had 50 million shares outstanding, 3.42 million options outstanding and convertible debt -- convertible to 1.74 million shares at an exercise price of CAD 1. Insiders continue to own 60% of the company with high alignment between our management team and the interest of our shareholders. Now I'll turn things back to Aziz for our closing remarks.

Thank you, Sajid. And really, the success that we are seeing in terms of retention of customers and what we're going to see later this year is driven by our reach, engage, validate capacity and the capabilities. And this is our end-to-end stack, which is we wanted to once again highlight the fact that this is a noncookie-based tech stack, 1 that does not rely on cookies and is not subject to change with the change of the deprecation of cookies in the ecosystem. And that is driven by our App Science household graph, where we use mobile devices and now CTV and OTT devices, cross-reference to help identify the customers and insights across the ecosystem of 55 million. Now give you some context, the U.S. consumer the erosion of cable households last year was around 10% of cable households. There's about 121 million cable households left in the U.S. And so that erosion continues to happen. We, as a company, now have 55 million household reach across our ecosystem. And this is validated households with a lot of deep insights and data that is really driving the success in the renewal rates that you're seeing. And that really sets us up, as we've mentioned before, for a great full year 2024, expect record top line revenue in '24, improvements in adjusted EBITDA, as you already -- as we've already started demonstrating based off of a Q3 -- Q4 and Q1, material improvements in balance sheet and finally, the launch of our streaming TV programmatic offerings, which is very much on track to start testing later this year. We feel very positive about the year ahead and have already demonstrated our ability to increase our operating leverage along the way. All in all, it's going to be incredible 2024, and we're excited about what we see ahead. Thank you. On that note, I will hand it back to Aideen for questions.

Thanks, Aziz. Thanks, Sajid. We will now open the call up for Q&A. [Operator Instructions]. First up, we have Kiran Sritharan from Eight Capital.

Congratulations on the quarter. Now to start here, a lot of business comes from repeating customers, but you called out strength with new logos. Are there specific verticals or business lines where that's contributing to this strength. Just trying to understand where this new business is coming from this environment?

Yes. We're seeing a lot of great traction in the quick service restaurant category, as well as in retail. And so those 2 categories have been strong as well as some interest in additional opportunities in pharma. And all the while, we're starting to see the strength of automotive come back. And automotive, as you can see, the consumer has been healthy, has been buying cars but the time on lots for cars is increasing, which means carmakers are now starting to bring incentives back. And so -- all of this bodes well for us for the year. But to answer your question, Kiran, for the most part, we're seeing a lot of great momentum in that QSR business in addition to our existing automotive category.

That's helpful, Aziz. And then it looks like there was some upfront, there were some moving parts to the upfront commitments that you reported last month. Did you see some of that backlog flush through. And how would you say the political spend has tracked in Q2 so far against expectations?

Sajid, do you want to take that? You're on mute, Sajid.

Sorry about that. Yes. So I think that at the end of the year, we had reported over $27 million upfront commitments for the year, including political and a couple of million of that was recognized during the first quarter. So that we still have the vast majority, $25 million we're talking about -- over $25 million between Q2 and Q4. So expecting a very strong year this year. Obviously, political and advocacy, that $15 million that we can't disclose last quarter, that remains intact. And in fact that actually continues to grow day by day as new agencies come on board. And these are new names to Sabio as well. So we -- they present great opportunities for us, not only make some great traction this year, but also bodes well for future election cycles as well. So I think that we're expecting a great year this year. As you disclosed in our MD&A and in our transcript, we're expecting very healthy double-digit growth, not only over last years, but also over 2022 record sales performance.

And if you can imagine the backdrop up again -- if you can imagine the backdrop being the noncookie-based platform in a world that's changing rapidly. So that really is benefiting us in this election cycle as well.

And then for my final one here. Can you comment on some of the working capital dynamics we saw last quarter? It looks like the seasonality with receivables benefited cash flow and it was good to see the debt paydown as well there. How do we look at payables and other items into next quarter and beyond? And I'll leave it there.

Yes. Yes. So I think that's a good point, Kiran. And we really took this as an opportunity to rightsize our balance sheet, following a strong Q4, where we did over $2 million in adjusted EBITDA. And so you are right that our debt line with Avidbank was reduced during the quarter, we're able to maintain healthy cash balances while doing that. And we will expect the working capital differential between payables and receivables scenario. And of course, they come as they enter really into our cash flow positive part of the year. The hard part of the year is always Q1 and that part is over now. That's in the rearview mirror. So our best days for 2024 are all ahead of us. And as we kind of mentioned as well in the release, is that we've signed a new term sheet with an alternative lender as well. So it's an important point to hit home on. Now we were banking with Avidbank. We do very much like the team at Avidbank and would expect to maintain some sort of banking relationship going forward. So it wasn't an easy choice, but quite frankly, the Avidbank is a California-based regional lender and as we've seen stalling the class of Silicon Valley Bank that the terms offered by regional weren't -- aren't as advantageous if they were 3 years ago. So putting that into context, we have to receive a couple of very, very competitive term sheet from a couple of other lenders. And all the key terms were in line with what we currently have, if not more -- if not better in the lender that we signed a term sheet with actually had some additional accommodations that our current line with other bank does not have. So that, coupled with a longer-term commitment, a multiyear commitment and made this offer compelling. So we're going through due diligence right now with them. That's how we cut our audit. We expect to be presented with final loan documentation by the end of June. And once we -- we basically are expecting to have this done before the end of Q2, and we expect to do a press release based on the close with some more details.

Thanks, Kiran. Up next, we have Daniel Rosenberg from Paradigm Capital.