Stingray Group Inc. (RAYA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Stingray Group Q1 2027 Results Conference Call. [Operator Instructions] Also note that this call is being recorded on Monday, August 10, 2026. And I would like to turn the conference over to Mathieu Peloquin. Please go ahead.

Good morning, everyone. Thank you for joining us for Stingray's Conference Call for the First Quarter of fiscal 2027 ended June 30, 2026. Today, Eric Boyko, President, CEO and Co-Founder; as well as Marie-Helene Fournier, Interim CFO, will be presenting Stingray's operational and financial highlights. Our press release reporting Stingray's first quarter results was issued today before the market opened. Our press release, MD&A and financial statements for the quarter are available on our investor website at stingray.com and on SEDAR+. Today, the corporation also filed its 2026 annual report, including audited annual consolidated financial statements and MD&A for the year ended March 31, 2026. The 2026 annual report is available on SEDAR+ and on the Investor Relation section of Stingray's website. I will now provide you with the customary caution that today's discussion of the corporation's performance and its future prospects may include forward-looking statements. The corporation's future operation and performance are subject to risks and uncertainties and actual results may differ materially. These risks and uncertainties include, but are not limited to, the risk factors identified in Stingray's annual information form dated August 7, 2026, which is also available on SEDAR+. The corporation specifically disclaims any intention or obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable law. Accordingly, you're advised not to place undue reliance on such forward-looking statements. Also, please be advised that some of the financial measures discussed over the course of this conference call are non-IFRS. Refer to Stingray's MD&A for a complete definition and a reconciliation of such measures to IFRS financial measures. Finally, let me remind you that all amounts on this call are expressed in Canadian dollars, unless otherwise indicated. With that, let me turn the call over to Eric.

Okay. Good morning, Mathieu. Good morning, everyone. Welcome to our first quarter results conference call for fiscal 2027. Stingray opened fiscal 2027, where it left off in 2026, only on a larger scale, driven by robust revenue contribution from Tunein acquisition and FAST channel segment, we generated overall growth of 65.2% and organic growth of 27.5% year-over-year in the first quarter. The integration of Tunein has been seamless, creating a spillover effect on our entire advertising business with revenue synergies reaching a run rate of $45 million, 9 months post transaction. On the FAST channel side, Stingray's premium ad network continued to outperform with revenue rising nearly 70% in the first quarter, driven by our reselling of TV manufacturers, unsold inventory, including audio ads for some of our major OEM partners. Our unique ability to sell ads, both on platform and off platform places Stingray in a strong competitive position as we have demonstrated to our partners that we can help them enhance monetization of their FAST channels. Looking ahead, we remain confident that our TuneIn and FAST channel business will contribute to another year of double-digit organic revenue growth in 2027. That said, the margin on these strategic assets are modestly lower than our corporate average, which is why we are maintaining our optimistic outlook for the adjusted EBITDA margin for fiscal '25. In terms of retail media, we are excited about the opportunity to bring programmatic advertising capabilities to our in-store business. We are actively working to enable a market solution for a new audience-based multiplier model where one ad reaches a broader audience than one-on-one basis. We see this evolution in the business model as a key catalyst for Stingray, and we expect to make progress on this front during the current fiscal year. Finally, our in-car entertainment segment continued to gain traction, building on the earlier Nissan partnership announcement last Friday, last February, we continue to deploy new features to our cars, in Karaoke and audio services and to increase our footprint with existing car manufacturers. We remain optimistic, including new partnerships in the coming months. Altogether, Broadcast and Commercial Music or streaming division revenues more than doubled to $126 million in the first quarter of 2027, mainly due to higher advertising revenues from the TuneIn acquisition and greater FAST channel sales. Radio revenues, which were adversely affected by reduced betting and government ads year-over-year in Q1 declined 6.5% to $32 million in the first quarter, but has showed great signs of recovery early in the second quarter. We expect radio sales to improve in the second quarter, and we're pacing and to be above 5%. Before handing the call over to Marie-Helene for our financial review of the quarter, I would like to say a few words about our capital allocation and our leverage ratio. Some analysis will notice that our net debt EBITDA to pro forma adjusted EBITDA increased to 2.5x in Q1 2027, but this is largely due because we make a strategic decision to repurchase 1 million shares from La Caisse de depot for $15.5 million, the acquisition of RadioLine and Westport and because of customary timing difference in collection of advertising revenues. The share buyback will likely push our target of bringing our leverage Radio under 2.0 by the end of fiscal 2027 instead of the year-end calendar of 2026. Nevertheless, we believe it is directly aligning with our commitment to actively manage Stingray's capital assets and maximize value for our shareholders. In closing, our balance sheet remains healthy, providing us with the flexibility to invest in organic growth and pursue strategic acquisitions. With this, I will now turn the call over to Marie-Helene for our financial review.

Thanks, Eric. Good morning, everyone. Before reviewing our first quarter results, I am pleased to share that this morning, Stingray filed its 2026 annual report. The audited results are consistent with the preliminary figures previously reported, except for a $13.8 million reclassification related to the gross net presentation of advertising revenues, mainly arising from the TuneIn acquisition. This reclassification had no impact on adjusted EBITDA, net income or cash flow, but resulted in a favorable improvement to our adjusted EBITDA margin from 30.8% to 34.3%. No other material changes or restatements were made to the previously disclosed figures. We are glad to have this chapter behind us and to move forward. Turning now to our first quarter 2027 results. Revenues reached $158 million in the first quarter of fiscal 2027, up 65.2% from $95.6 million in Q1 2026. The year-over-year growth was mainly driven by higher advertising revenues from the recent TuneIn acquisition, along with greater FAST channel sales. Revenues in Canada decreased 1.7% to $48.7 million in the first quarter 2027. The year-over-year decline can be attributed to lower radio revenue. Revenues in the U.S. grew 180% to $98.4 million in Q1 '27, primarily due to higher advertising revenues from the TuneIn acquisition, improved FAST channel sales as well as increased equipment and installation sales related to digital signage and the acquisition of Singing Machine. Revenues in other countries remained stable at $10.9 million in the most recent quarter with greater FAST channel sales largely offset by a decline in subscription revenue. Looking at our performance by business segment, Broadcasting and Commercial Music revenues increased 105.2% to $126 million in the first quarter of 2027. The growth mainly reflects higher advertising revenues from the TuneIn acquisition, greater FAST channel sales as well as increased equipment and installation sales related to digital signage. For their part, Radio revenues decreased 6.5% to $32 million in Q1 2027, largely due to local -- to lower local and national airtime revenues and partially offset by increased digital sales. In terms of profitability, consolidated adjusted EBITDA improved 49.3% to $50.3 million in the first quarter of 2027. Adjusted EBITDA margin reached 31.8% in Q1 compared to 35.2% in the same period last year. The increase in adjusted EBITDA can be attributed to the TuneIn acquisition. The decline in adjusted EBITDA margin was largely due to lower gross margin on sales related to TuneIn and Singing Machine, combined with shift in product mix. By business segment, Broadcasting and Commercial Music adjusted EBITDA grew 75.7% to $42.9 million in Q1, primarily driven by the TuneIn acquisition. Adjusted EBITDA for our Radio business dropped by 15% year-over-year to $9.4 million in the first quarter of 2027. The decrease was mainly due to lower revenues, along with changes in sales mix impacting gross margins. In terms of corporate adjusted EBITDA, it amounted to a negative $2.1 million in the first quarter compared to a negative $1.8 million in the same period of last year. The reported net income of $6.6 million or $0.10 per diluted share in the first quarter of 2027 compared to $16.8 million or $0.24 per diluted share in Q1 2026. The year-over-year decline was primarily due to higher acquisition costs, increased amortization of intangible assets and unrealized loss on the fair value of derivative financial instruments in the most recent quarter compared to a gain in the prior year quarter. These factors were partially offset by improved operating results. Adjusted net income totaled $27.9 million or $0.40 per diluted share in Q1 2027 compared to $21.3 million or $0.31 per diluted share in the same period in 2026. The increase was due to higher operating results, partially offset by unfavorable variations in foreign exchange and fair value of derivative financial instruments as well as greater interest expense. Turning to liquidity and capital resources. Cash flow from operating activities amounted to $4.8 million in Q1 2027 compared to $19 million last year. The decline was mainly due to higher negative change in noncash operating items related to the timing of accounts receivable collection and advertising and greater acquisition costs. These factors were partially offset by improved operating results. Adjusted free cash flow totaled $32.5 million in the first quarter of '27 compared to $18.8 million in the same period of last year. The improvement can be attributed to enhanced operating results and partially offset by higher interest paid. From a balance sheet standpoint, Stingray had cash and cash equivalents of $21.9 million at the end of the first quarter and credit facilities of $569.5 million. Net debt at the end of the first quarter of 2027 totaled $547.6 million compared to $524.1 million in Q4 2026. As a result, our leverage ratio increased to 2.53x in Q1 2027. The increase in net debt primarily reflects the repurchase of 1.1 million shares during the quarter for $17.1 million, the settlement of long-term incentive compensation earned by our team in fiscal 2026, the RadioLine and Westport acquisitions and a timing difference in the collection of advertising revenue. This ends my presentation. I will now turn the call over to Eric.

Okay. This concludes our prepared remarks. At this point, Marie-Helene and I will be pleased to answer your questions.

[Operator Instructions] First, we will hear from Stephanie Price at CIBC.

It's Sam Schmidt on for Stephanie Price. I wanted to ask around the Q4 revenue restatement. How should we think about the revenue growth rate at TuneIn going forward and the gross versus net accounting? And does this impact the TuneIn revenue synergies target?

No. This revenue recognition is with the new rules and the new accounting rules and the fact that we're doing these programmatic sales, which are instant sales are very complex. So it was only impact for last year. We don't see any impact for this year, no impact for TuneIn revenues. It's really a reclass. It's a reclass that for us of $13 million on revenues of close to $500 million. So no impact on that.

Okay. That's helpful. And then could we also get an update on the run rate cost synergies with TuneIn. I believe last quarter, they were tracking at around $12 million. And are you still comfortable with the adjusted EBITDA synergy target that you've discussed in the past? And then I'll pass the line.

Yes. Right now, in terms of cost synergies, they're pretty much the same than last quarter. We haven't moved it. But for us, the most important number is the positive synergies. The fact that we hit $45 million this quarter, and we see that number growing month by month, we're easily going to beat our targets that we set ourselves for March '27. So we told the market USD 20 million to USD 40 million. Right now, we're sitting close to USD 35 million, but we'll easily beat the USD 40 million over the next few quarters because the synergies are growing on a daily basis on the positive synergy side.

Next question will be from Adam Shine at National Bank.

So maybe just building on Stephanie's first question, just to be very clear, Eric, we are not to extrapolate $13.8 million times 4 in the context of reducing F '27 current consensus estimates, let's say, right? Those still hold?

Yes. Please. Absolutely. Like I said, it was really reclassification of -- it's all about gross and net, and it's all about programmatic sales and how the contracts written. So it's a lot of detail. And now as you know, we have the auditors of the auditors. So you have the CPAP that audits the accounting firms. So accounting is getting complex.

The second point of clarification is just on the margin. I don't think you mentioned a specific margin number, but you have talked previously, I think, even going back to the prior call of trying to get to around 35% for F '27. Is that still the target?

Yes. Our target is still to go there. The 3 things right now that affected us in this quarter. Our gross margin on what we call the backfill. Our gross profit is low. We're working -- sales increasing fast. We're adjusting every day and that we're getting better and getting better margin on the backfill. But the backfill is not huge. We are doing, Adam, USD [ 200,000 ] USD 100,000 a day. So our run rate is $100 million that we are selling on Vizio, LG and Samsung's platform. Last year, we didn't even do $20 million. So that's where we're getting a lot of our growth. But the margin on that product because we're selling growth and the rev share is lower right now and we're getting better at it every day. The second thing that affected this quarter is Singing Machine. Singing Machine, we don't ship in Q1. So we have negative EBITDA, and then we'll have a positive EBITDA in Q2 that makes the big switch. So for sure, the Singing machine, because we sell to retailers, it affects our margin for this quarter.

Okay. No, that's helpful. I think going back to the prior quarter, you talked about trying to infuse some of the TuneIn programmatic advertising capabilities across the platform. You were starting, of course, with initial traction around FAST. And then ultimately, I think over the next 6 to 12 months, you're looking to do stuff within retail media and even the traditional radio business. So is that still tracking on plan? Anything you can share on those coming initiatives?

The first initiative that we're still the only one in the world to do. So we're the only company in the world that's doing audio ads on a CTV. So instead of having a video ad, you get a still image and you get an audio ad. And that really opens up the inventory that we can sell. And now we had one platform that agreed to it. And right now, in Q2, we already have our top 3 platforms agreeing to do audio ads. So that's really unique because we're the only one selling that product. So there's no competition. We're not bidding anybody else like we are in the video space. So very happy about that. Also, what's exciting is we hit in June, we hit our programmatic sales, TuneIn and Stingray together. We hit a high of $550,000 a day. So you do a run rate of that, that's $260 million a year. So we're really doing well. And the last part for the next few months that is exciting. So we have new platforms coming on board that we can do backfill. The platforms that have agreed to do audio ads, very exciting for us. And the third thing that's most exciting, we're learning this from the advertising market, but the football season is starting college football, mid-August, then the NFL is starting. And with the football season and the sports season, everybody in our space, everybody that works in programmatic sales. We expect to have August, September, October and hit the record in November with the U.S. Thanksgiving. So we see the next 2 quarters very strong because we finished Q1 so strong in June. It gives you a good momentum for the next 6 months. I mean, for us to achieve 27% organic sales is pretty incredible. And we're confident with the margin also will be improving. So we are very, very good momentum for Q2 and Q3 right now.

Question will be from David McFadgen at ATB Cormark.

A couple of questions. So first of all, just a clarification. On that 27.5% organic growth, is that a pro forma number? Or is that what you did last year and then you add in the TuneIn revenue?

No, no. It's really adding our revenue last year plus TuneIn's revenue and then the organic growth is on top of that.

Okay. So it seems like it's a pro forma number. And then -- so you talked about selling inventory from some -- or for some OEM partners. Can you tell us which OEM partners you were representing in the quarter?

Yes. So for us, we've always said this, we are partners with about maybe 25 OEM platforms on the TV side here. So -- but our top 3 -- the top 3 that we work with in the U.S. and it's public information, the top 3 in the U.S. is Vizio, it's LG and it's Samsung. So our goal for us is to do more backfill with them, sell more audio ads and be better partners. So we're very excited. Most of our programmatic sales still come from the U.S. right now. Europe is starting. Latin America is starting. Canada is doing well, but most of it is from the U.S.A.

Okay. And when you look at the backfill or the premium ad network, is the revenue growing because you're just representing more inventory? Or are you just getting better sell-through rate? Or is it both?