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

Good morning, everyone, and welcome to the Sabio Holdings Earnings Call for the Second Quarter of 2024. The financial statements and MD&A have been filed and they can be accessed through a SEDAR website. My name is Aideen McDermott, Investor Relations Associate at Sabio. And joining us on the call today is Aziz Rahimtoola, Founder and CEO; Sajid Premji, Chief Financial Officer. We will start today's call with Aziz and Sajid discussing our Q2 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 are 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 note that all figures discussed today are in U.S. dollars, unless stated otherwise. And with that, I will hand it over to Aziz.

Thank you, Aideen. Good morning, everyone. Thank you for joining Sabio's Q2 quarterly financial call. We're excited to share with you results of the quarter it demonstrated our commitment to profitable growth. Despite the seasonal nature of our business, with more than 70% of our revenue coming in the quarters ahead, more specifically Q3, Q4, we delivered the lowest Q2 adjusted EBITDA loss since going public. Our company is at an inflection point that is starting to see the benefits of combining a focus on cost efficiencies with top line growth. Our teams continue to prove we cannot only compete, but win in the highly coveted ad-supported Connected TV/OTT marketplace, which now makes up 77% of our revenue mix and growing. In fact, our 39% year-to-year increase in CTV/OTT ad sales outpaced the estimated growth of overall $30 billion CTV/OTT advertising marketplace. In addition, despite an unusual presidential campaign cycle, our teams delivered double-digit top line growth through the strength of our core brand business, along with contributions from our growing international business. In fact, similar to what was disclosed by our U.S. public peers, the presidential campaign cycle actually had little impact on our first half revenues. This was due to, number one, the movement of some brand and advocacy spend to later in the year during nonelection months, which also transpired during the last election cycle of 2022; and two, a delay in political spend from Q2 to Q3, as campaigns reoriented themselves to a new candidate. Now that the presidential candidates are firmly in place, we expect the political spend to accelerate and be accretive to our year-over-year revenues in the second half. Our proven strategy of increasing share of voice by providing additional differentiated product offerings to our top customers, while maintaining our 90-plus percent reoccurring rate is working. A proof point in our strategy is the fact that our average deal size increased from 60,000 per customer pre-RTO, when we were primarily mobile display to above 100,000 today, as we continue our expansion into CTV/OTT globally. Later in today's presentation, we will discuss new products we are on track to launch this year, which will continue to provide the positive momentum for the remainder of 2024 and help deliver a strong 2025. I will now hand it over to Sajid Premji, our CFO, to dig further into the numbers. Sajid?

Thanks, Aziz. We are pleased to report Sabio's best second quarter results as a public company, on both the top and bottom lines. For the 3 months ended June 30, 2024, Sabio generated USD 8.9 million in sales, up 11% compared to USD 8 million in the same period in 2023. The increase in sales was primarily driven by the second straight quarter of double-digit growth within our Connected CTV and OTT ad supported streaming business and robust 91% recurring revenue rates. Connected CTV and OTT ad supported streaming sales grew 39% to a Q2 record of USD 6.9 million compared to USD 4.9 million in the same period last year. Connected CTV and OTT streaming sales, once again, outpaced the estimated [ 68% ] growth rate for the U.S. CTV industry at large, as we continue to take market share. Connected TV and OTT asset for streaming continues to be our dominant sales category, accounting for 77% of our overall sales mix, identical to the first quarter of 2024, and up from 62% in the second quarter of 2023. It is worth noting that due to unusual events in the 2024 U.S. election cycle, political spend in Q2 was cautious, with the heavy spend expected to take place from Labor Day to the November elections. Therefore, the continuing double-digit growth of our ad supported streaming business was led by our core branded one. This is a testament that Sabio's sustainability to segment ourselves in the market by leveraging proprietary data that generate viable insights through a non-cookie-based platform. Further filed by record upfront commitment in our digital media business and expectations of robust political spend, Sabio is well positioned in the second half for double-digit growth over the prior year's period. Second quarter mobile display sales were USD 1.9 million, down 36% from USD 2.9 million in the second quarter of 2023. Our legacy mobile display customers continue to shift their spend with Sabio for mobile display to mobile streaming video, which is categorized under our Connected TV and OTT ad supported streaming category. Sabio's CTV/OTT sales feature lower OpEx and predictable and sustained growth through high customer retention rates. Over 91% of first half sales came from repeat customers compared to 74% in the first half of 2023. 70% of our top brand customers increased their spend with Sabio from the prior year's period. Meanwhile, 28% of the brands we spent with Sabio in the first half of 2024 were new logos presenting new opportunities to expand our revenue base in the quarters to come. On a trailing 12-month basis, our Connected TV/OTT ad-supported streaming business now represents a record 74% of our sales mix as we continue to capitalize on one of the fastest-growing categories in advertising. Within a span of just 3 or 4 years, we have completely transformed ourselves from a company that generated just 4% of trailing 12-month sales from CTV/OTT in 2020. Meanwhile, the inherent cost efficiencies and transitioning to an ad-supported streaming sales model, from one more dependent on mobile display continues to drive gains in our operating leverage. Operating expenses decreased 13% from the second quarter of 2023 normalized for sales commissions and bonuses. Our end-to-end technology stack, powered by our proprietary App Science cross green graph, continue to support strong margins, which improved to 61% from 60% in the prior year's quarter. All of this resulted in material improvements in operating leverage. It's our second quarter adjusted EBITDA loss, narrowed by over USD 1.4 million to a loss of under $300,000 for the quarter ending June 30, 2024, versus a loss of $1.7 million in the prior year's second quarter. This was our lowest second quarter loss since going public, and it is worth noting once more, that we ended the quarter within striking distance of adjusted EBITDA profitability with little clinical-related spend. Sabio entered the second half of the year, where historically, close to 70% of annual revenues are typically generated, armed with record upfront commitments, high recurring revenues, our lowest first half adjusted EBITDA loss as a public company. With the heavy political-related spend still to come, management expense expects accelerating revenues to a lower cost infrastructure to accumulate in the quarters ahead to the return to meaningful adjusted EBITDA profitability for the year. After quarter end, Sabio leveraged its improved operating model that closed a multiyear asset-based lending credit facility with SLR Digital Finance, a former lender to Sabio under an earlier iteration. We expect the $10 million U.S. facility will provide Sabio with greater balance sheet flexibility at a similar cost of capital to our previous line. Moreover, the new facility has several advantages from our previous arrangement, including increased liquidity and long-term stability through a 3-year term. At quarter end, we had 50 million shares outstanding, 3.4 million options [indiscernible] 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 closing remarks.

Thank you, Sajid. And before we get to the closing remarks, I thought it would be important to re-highlight the key differentiation that really helps us not only win new business, but retain recurring business at a 90% renewal rate, as you can see. It is our approach to data integrity and data fidelity, and that is the cornerstone of App Science. And App Science, once again, is a household graph, a proprietary household graph that is cookie less and really make benefits from all the years of experience in both mobile and CTV, combining those 2, to really bring about a differentiated ability to reach consumers, both diverse and non, and understand them better through insights and analytics. And once, again, the core of App Science are 2 key elements: data integrity and data fidelity. And you're going to hear more about that in the coming months and years as brands and agencies are interested in ensuring they're reaching the right audience and validating those audiences effectively. And in conclusion, key elements of today's call, and as we have spoken about in previous calls throughout this year, expect record top line revenue in '24. Improvement in adjusted EBITDA profitability and operating leverage material improvements in balance sheet. And finally, we're launching new products this year and are on track to do some -- starting to do some testing in Q3 and Q4 of a new stream TV programmatic and performance products that will add further to our top line without affecting our bottom line efficiencies. On that note, I hand it back to Aideen.

Thanks, Aziz and Sajid. We will now open the call up for Q&A. [Operator Instructions]

Okay. First up, we have Gabriel Leung from Beacon Securities.

Congrats on the progress. Aziz, just curious, can you provide a little bit more color on that last topic you were talking about? Some of the new offerings that you expected to launch in Q3 and Q4 and sort of your expectations around those?

Sure. Thank you for the question, Gabe, and good to see you this morning. Really, programmatic continues to take a hold in the advertising space. More than 70% -- it's estimated between 50% and 70% of all CTV/OTT advertising is now conducted through programmatic. And so what we have done, and we have -- as a company, we did some initial programmatic campaigns in mobile around the 2017 time period. And so we have experience in programmatic. But what our core business has been focusing on, especially as we moved into the CTV/OTT space, has been on managed service. Well, now this new offering is going to allow us to not only continue to keep these customers who are interested in managed service campaigns, but expand the share of wallet with them through an additional offering of programmatic. So it is not going to be a situation we believe, and obviously, we're going to start doing some testing later this quarter and early part of Q4, we believe that it is going to be additional revenue, not cannibalizing our existing business, and that is what we've been told by our clients. So it's simply the ability to reach consumers, helping agencies and brands reach consumers through a platform -- through platforms they prefer using, which is programmatic, through some of the key players in the space, including Yahoo and DV360 and others. Does that answer your question, Gabe?

No, it's perfect. And then just talking about political strength in the second half. I mean you guys talked about expecting a ramp-up, I guess, sort of Labor Day into -- leading into the election day itself. Have you seen some of those dollars start to flow in or additional commitments yet, leading up to this event?

Yes. I think to answer your question, Gabe, we have -- we've seen we've made a lot of positive traction. I think that what a lot of our clients were telling us that post-convention through the election day, that's when we expect the heavy postal spend that happen. And I will say that we still have a month more to go in Q3, but we've already had more postal spend this quarter than we had in all Q2. So we would definitely see that ramp up.

And we've had more political spend than all of '22. We had advocacy spend in '22, and we've already seen more political spend this cycle than we did in '22. So a lot of great positive momentum forward.

Got you. And just one last thing. As we look into calendar '25, what sort of data points have you seen so far on conversations that you had with your existing customers that you're going to be able to repeat sort of the x political spend anyways, the sort of growth and the improvement you've seen in '24? And what sort of -- what's the confidence do you have going into next year?

Yes. We're feeling really good about what we're seeing initial signs for next year. And the reason being is first which is and I was actually -- I'm here in Chicago right now, and I was speaking to a political client last night. And really what they were telling me and what we're seeing is the fact that there seems to be some sort of momentum shift. This client specifically, was telling me that they were averse to booking a lot of prebooks, and now they're going to get in and their view was that the market will be softer. And I quite honestly told them, I think the market is changing very quickly. We've seen really interesting dynamics where some brands were holding back on some spend because they were unsure about where the economy was going. And there seems to be a level of optimism that is taking place with our advertisers. And so that momentum now is starting to pick up for Q3 and Q4, which will then, we believe, will carry on into next year. And so that -- it's about consumer sentiment. And if the consumer is feeling -- overall, they start feeling better about the way things are heading, and I think it's -- we don't know with [indiscernible], but all indications are the Fed is going to reduce interest rates in September, which will further reduce the debt load on consumers, or the interest rates associated with their debt loads. And so I think it's shaping up -- it's going to be shaping up. And what we've been told by clients, in some cases, they have told us that there might not be as many upfront commitments. Although, that's not what we're -- the conversations we're having, but they've told us the upfront commitment cycle might not be as big, but that's a scatter market, which is when they come in and target away will be much bigger next year. So -- and then you add to it, Gabe, as we talked about, we're going to be launching a new programmatic offering, which -- as I mentioned, some stats are between 50% and 70% of all Connected TV and OTT now is being transacted in programmatic. And so not only are we positioned well with our core customers with 90% reoccurring rate, but now we have an additional offering, which has been the core of how we have won new business and continue to sustain business. We're constantly evolving. And add to that, the App Science differentiation. It's key. And that fidelity and integrity of our data and how we look at that and how we have, unlike platforms who just our platforms. We have a differentiation. Clients know it, they see it in their back-end metrics and we're excited to add that to our programmatic capabilities going into '25. Sajid, anything you want to add to that?

Yes, that was well said, Aziz. I think that -- just to add to that, what's going to make 2025 a good year are the same fact May 1st of '24 -- 2024. I could start. I mean, just to recap, we ended Q2 within striking range of positive EBITDA profitability, and that was with very little political dollars, right? So we do a couple of quarters with election -- without election spend appear to be. Well, I mean, we just had an adjusted first half, right? That was driven by our core business. And how do we do that? How do we do this? It was actually driven by a conscious effort that we made internally to risk our business from seasonality and by changing our sales model to be more predictable and sustainable. Looking at our business metrics, 91%, again, of our -- recurring revenue rate of 91%, 70% of those repeat customers increased their spend with us over the prior year. As Aziz touched upon, we have the record upfront commitments, we have a diversified sales mix. No single logo in Q2 more than 15% of our sales for the quarter. And all of these metrics had very little political impact. So the same trends that made this first half of 2024 solidly would be just invalid in 2025.

And we're seeing -- just to add to it, we're seeing 2 categories that are starting to show some real -- some positive signs is automotive, who had cut back spending in the early part of the year, simply connected to interest rates and consumer sentiment is now having longer -- their cars are on lots longer. They're going to increase spend, especially as we get into the end this year and beginning of next year. So that category and then finally the quick service restaurant category, which has had some challenges recently. And the challenges associated with the consumer cutting back on spending. And so both those categories, we've seen very positive signs, in addition to what we talked about political and adequacy coming in. So a lot of good stuff, a lot of good momentum overall.

Got you. Maybe one last question for Sajid. So in terms -- on the operating expense side of things, I saw there was some additional restructuring charges this quarter. I'm curious are you pretty much done in terms of the heavy lifting on the restructuring side? So this is sort of the baseline operating expense base, and you sort of grow it from here?

Yes. I think a lot of that the heavy lifting of that is complete. I think that we switched from a mobile company to a streaming company. And as we [indiscernible] touched upon, we ended back in 2020, less than -- around 4% of our sales is from CTV/OTT, and that was well over [ 25% ]. And so with that kind of drastic change, obviously, means to reoriented our staff to kind of reflect that. And I think that a lot of that heavy lifting is complete, but we're always going to be fine tuning the tooling. So we'll always continue to pivot ourselves as a business that is the environment for this too, right? But that to answer your question, Gabe, I think a large part of the heavy restructuring is complete.

So next up, we have Kiran Sritharan from Eight Capital.

I think I'll start with where you -- good to see the new credit facility locked in. Can you talk about some of the capital allocation plans for the year with this improved flexibility and maybe provide more color on what some of the growth spending requirements are with those new products?

Yes. So I think the facility provides good insurance. We don't -- we have a number of growth pillars as Aziz just touched upon, including programmatic. We don't need to finance through debt. I think that's important, first of all, to get across, is that we view this facility as more insurance. But we -- as we touched upon, we expect to be even profitable in the second half of this year, and we expect to be profitable for the full year. A lot of these growth initiatives will be funded through our own operating performance. And I think that, as Aziz just touched upon it, I think programmatic will play a large part in that.

That's good to hear. And then maybe you called out some of the benefits from your own inventory contributing to the strength in the gross margins in the quarter. How do we think about this going ahead? And also maybe an opportunity to touch on some CPMs, the competitiveness between the supply and the demand dynamics there?

Yes. So I think, on the margin front, and I'll allow Aziz to have any additional context. But as we go into programmatic, what we typically expect is some pressures on that gross margin. But the benefit of programmatic is that it's less OpEx intensive. Your EBITDA margins tend to be stronger. And so I would expect is our programmatic offering is launched in the quarters to come, and it's against continued good traction. We'll see that gross margin being pressured, but we'll see gains falling more to the bottom line.

And I echo Sajid's sentiment on that, and the fact that we will see some pressures on inventory margins. But having said that, the differentiator, once again, comes back to App Science. And the unique ability to reach those customers, both from a reach perspective and then an analytics perspective, really sets us apart, and that continues to be a key element of defending our margin position and helping us with the renewal rate. Because if you were simply just selling inventory, and the Netflix -- folks like Neflix continue to reduce their price offering in a lot of cases to take market share and Amazon is in the same boat, then you're left with not a whole lot. So I think, in our case, we're fortunate enough in thinking ahead for many years, by building this App Science differentiation and continues to be not only valuable in reaching consumers, but has been prudent on back-end metrics. So we feel good about our opportunity to defend our margin based off of that.

And I guess on the last question, I'll actually end with that one on App Science. It looks like there's some growing adoption with your top customers there. Have you made changes to the go-to-market or maybe the technology to drive this penetration?

We continue to look at all the strengthening in ensuring that we are on the -- making sure it is making use of most recent technology. Obviously, machine learning has been a core attribute of App Science. We're implementing some new elements of AI in that. We haven't changed it substantially. What we have done is -- and we do this periodically, making sure it is pertinent for the time, and making sure it is updated. And going back to data integrity and data fidelity, making sure we have a quality product in those 2 elements because without integrity and fidelity, you don't have a great product, both on front and back end. So to answer your question, no, we haven't made a lot of changes, but App Science accounts for 100% of our top advertisers use App Science for reaching audiences. Not all of them necessarily use it for analytics and insights on the back end, but 100% of our customers use App Science to reach the consumers they're looking for. So it is a core element of our product offering.

Next up, we have Daniel Rosenberg from Paradigm Capital.

Good morning, Aziz and Sajid. My first question was around the new logos that you signed. I know you mentioned strength in quicker restaurant and automotive, but I'm wondering, is that what you're seeing in terms of the new logos? Or are they around different sectors?

Our focus -- Daniel, thank you for the question. Our focus continues, as you're seeing the 90% plus, 91% in this quarter, but 90% plus overall reoccurring revenue is really share wallet. We are -- certainly, we do get new logos coming in all the time, and we're always interested in having those conversations and certainly, especially in the automotive and quick service restaurant category, which we do well. But really, our focus has been to increase share wallet with some of the biggest brands in the world. That's who we work with. So that's been our strategy and continues to be our strategy to focus in on that share voice overall. Anything you want to add to that, Sajid?

No, I think that's perfect.

Okay. And then just turning to the political spend. I think I heard you say that you're seeing more traction than you saw in 2022 in terms of the recent demand. So how can we parse that into what Q3 looks like in terms of how much demand you think you can generate from the election cycle?

Yes. So I think what Aziz have talked about is that we saw in 2022, a lot of that spend that came in the second half of the year was from the efficacy side of the coin, not political. This year, we're seeing both political and efficacy come in. So that's a differentiation there. I think looking at the second half of the year, you are correct, Daniel, we've had more political business so far in Q3 that we've had in 2022 and more than we had in the first -- in the second quarter of 2024. So I think it's -- how do you kind of parse that out? Well, I mean, it's definitely going to be accretive and helping to make our double-digit growth over last year in Q3 and Q4. We don't provide guidance as a company, but we are expecting broadly double-digit growth to happen on the top line in Q3 or Q4.

And Daniel as we talked about what has been remarkable in Q2, as we talked about in the call, is the strength of our core business. We're seeing -- while political and advocacy is great and advocacy is certainly comes in -- stays in nonelection years, like next year, political is only obviously focused on this year. But our core business is really what is really starting to -- once again, starting to see acceleration and efficiencies. I mean we're -- we've fine-tuned the business and continue seeing growth there. So I think the combination of our growth of our core business, combined with this political and advocacy opportunity that Q3 presents, is really going to be a -- really a great second half for us overall.

Yes, I think that's an important point that you touched on Aziz, is that even without political, we still expect double-digit growth last year -- over last year and last is due to the strength of our core business. We -- political [indiscernible] added bonus.

Okay. Good to hear. Then turning to OpEx. As you're dealing with this demand, is there any incremental OpEx associated with -- dealing with the demand? I know you're benefiting from more operating leverage, but maybe in absolute terms. And then as well, as you think about standing up programmatic offering, is there any incremental investment required?

Yes. I mean there's a bit more incremental investment for the political season, just as far as some temporary stopping these that we have to optimize our campaigns. But I wouldn't call this anywhere in the realm of material. So we are still expecting a very stable OpEx structure [indiscernible] Q3 and Q4.

And we have done a lot of reorganizing to position ourselves, including on the product side. So without requiring additional -- a lot of additional cost to go into it. And so it's more about efficiency, reallocating resources to the key areas of growth. And so you're not -- to Sajid's point, you're not going to see the huge increase in OpEx because of a huge increase in -- what we're seeing in political and advocacy. So -- or even on the programmatic side. We continue to be very focused on moving resources into areas of growth and out areas of -- that are not growing.

Thanks, Daniel. That concludes it for today's questions. So I will hand it back to Aziz for closing remarks.

Great. Well, thank you, everyone, for joining call this morning. We're excited about the second half of the year and look forward to speaking with all of you again soon. Thank you again for joining.