BBTV Holdings Inc

TSX:BBTV

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon. Thank you for attending today's BBTV Holdings, Inc. to host Second Quarter 2023 Conference Call. My name is Hannah, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions]

I would now like to pass the conference over to our host, Nancy Glaister with BBTV. You may go ahead.

[Nancy Glaister, Chief Legal Officer]

Welcome to BBTV's second quarter 2023 conference call. I'm Nancy Glaister, Chief Legal Officer for BBTV.

During the course of this conference call, we may provide forward-looking information and make forward-looking statements within the meaning of applicable securities laws. These are statements regarding the company's current expectations, goals and beliefs about future events relating to or which may impact the company, its business and results. These may include forward-looking statements regarding our expected or anticipated financial position, growth, diversification, expansion, operations, plans and objectives.

Forward-looking statements are statements about the future and are inherently uncertain. Any financial or other goals discussed are goals only and are not meant to be taken as future-oriented financial information or guarantees of future results or performance. Certain financial outlooks in particular, are provided to aid in understanding management's goals and expectations regarding future financial matters and may not be achieved. Such financial outlooks may not be appropriate for other purposes.

All of our forward-looking statements are necessarily based on a number of assumptions and are subject and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements. These include the risks that our assumptions may not be accurate, as well as the risk factors contained in our press release and MD&A issued today, as well as in our latest annual information form filed on sedar.com. We undertake no obligation to update these forward-looking statements except as required by law. You can read more about these assumptions, risks and uncertainties in our press release and MD&A issued today, as well as in our AIS, dated March 31, 2023, and our prospectus dated October 22, 2020, filed with Canadian securities regulators at sedar.com.

Also, our commentary today will include adjusted financial measures and ratios, which are non-GAAP measures. Although the company believes these non-GAAP financial measures and ratios are useful in evaluating the company, these should be considered as a supplement to and not as a substitute for financial information prepared and presented in accordance with IFRS. Reconciliations between the two can be found in our earnings press release and our MD&A, which are available on our investor website and on sedar.com. Lastly, we also report on certain metrics such as views and RPMs. A further description of these metrics, which are also non-GAAP measures, can be found in our earnings press release and our MD&A.

I now turn the call over to BBTV's Chief Executive Officer, Shahrzad Rafati.

[Shahrzad Rafati, Chief Executive Officer]

Hello, everyone, and thank you for joining me and our CFO, KB Brinkley, on this conference call to discuss our Q2 2023 financial results. For the first few minutes, I will review our operations and current market conditions. After that, KB will review our financial results, and then I will close with our outlook before we take analyst questions.

BBTV is the largest professional creator network worldwide. From individuals to global media companies, professional content creators rely on BBTV to generate meaningful revenue for them, while they focus on their core competency, which is creating content. Our roster of thousands of content creators continue to grow and over 600 million viewers interact with their content monthly.

In Q2, YouTube Shorts views represented 52% or approximately 59 billion views of the total 114 billion views for the quarter. In total, views were up 20% compared to last year and 1% compared to Q1. This is the second consecutive quarter with a year-over-year increase in views, which is positive for our outlook.

Although for YouTube Shorts, it is in early stages, which means the revenue per thousand views, which we call RPMs, is a fraction of the value for regular-length content. Over time, Google has publicly stated that Shorts monetization should have similar RPMs as regular content and RPMs are trending in that direction. However, in the meantime, at least for 2023, Shorts monetization should depress overall RPMs during the ramp up stage. For approximately 55 billion standard content use calculated at $1.14 RPM, which is about 2% less than last year. That is pretty stable considering the overall market conditions.

The second quarter overall RPMs were down approximately 43% to $0.54 due to the impact of Shorts. Investors would probably be concerned that YouTube Shorts becomes the dominant form of viewership, which would reduce monetization rates further. It's the creators' and YouTube's best interest to focus on standard long-form content entirely. We believe we are near peak short-form monetization now. With RPM's monetization increasing for Shorts and with viewership plateauing at just north of 50%, we believe that Q1 was an RPM trough with a 2% uptick in RPMs this quarter, even with higher levels of Shorts views. To compensate for short-term monetization gaps, we are starting work with our creators to produce more long-form content to help improve overall monetization for our creators and for BBTV while YouTube Shorts RPMs scale over time.

Overall, the revenue performance in the second quarter was in line with our expectations for the whole year. The softness in Plus Solutions revenue, we believe, is temporary as we signed several new major content management contracts in both the first and second quarter, which were still being deployed. As a result, we're still confident that Plus Solutions revenue will demonstrate growth for the full year. It is probably a good time to remind investors that BBTV is currently providing content management solutions to some of the largest blue chip clients in the industry, including Sony Pictures, Warner Music Group, the NBA, Paramount Global, Univision, Lionsgate, Universal Pictures, and more.

Notwithstanding, we continue to manage expenses and focus on improving our margins to accelerate performance to sustainable positive adjusted EBITDA. As a result, we were able to reduce expenses by 34% compared to Q2 of the previous year and by 28% for the first half of the year. KB will go into more details momentarily. Although actual performance is winding up in range of our forecast, we are positioned for further cost optimization across the entire business during the remainder of the year. We will continue to align our operations to capture more Plus Solutions opportunity as we mentioned in our Q1 call. We began deploying a major content management contract with a global brand, and we announced two additional major contracts in Q2. Although Q2 Plus Solutions revenue was flat compared to the previous year, we are comfortable that Plus Solutions revenue will demonstrate growth in the second half of the year. During the quarter, we announced that we benefited from an $18 million loan forgiveness option for RTL related to our go public transaction. Part of the loan was used to pay off a $15 million revolver. Overall, our goal was to improve our liquidity and we believe that this transaction helped to accomplish our objective.

With that said, I now hand the line over to KB.

[KB Brinkley, Chief Financial Officer]

Thank you, Shahrzad, and good afternoon, everyone.

The second quarter results reflect the continuation of the industry trends that impacted our Q1 results. While our views growth has been strong, our RPMs are still being affected by the ongoing shift in consumption patterns to short-form content. The monetization of YouTube Shorts remains at a much lower rate than it is for regular content. Yet despite these pressures on revenue, we continue to make good progress towards our goal of achieving sustainable profitability at the adjusted EBITDA level.

I'm encouraged by the success we've been seeing in closing some major content management deals as we remained focused on our higher margin Plus Solutions. Looking ahead, our sales pipeline is strong and momentum is building for this recurring and higher margin revenue stream. We are also maintaining very tight control over our operating expenses.

The total revenue for the quarter of $72.8 million was down 27% from the same period last year, which is consistent with what we saw in Q1. This is primarily due to the decrease in our Base Solutions revenue, reflecting the combined impacts of the shift in viewership towards YouTube Shorts and the decision we made in Q1 to not renew a number of our larger unprofitable Base Solutions creators. Our total views were 114 billion in the quarter, which is a 20% improvement from Q2 last year, driven by the growth in popularity of short-form content, and it's a further 1% improvement sequentially from the first quarter this year. 52% of our views were from Shorts compared to just 20% in the second quarter last year. Meanwhile, our natural viewership retention rate also remained very strong at 90% for the quarter.

With the higher proportion of Shorts views, our Q2 RPMs were down 43% from last year. If we exclude Shorts, our RPMs would have declined 2% year-over-year as the advertising market is showing signs of recovery from the reduced spending levels. Google continues to emphasize Shorts as an area of focus for it to drive its own revenue growth. And as it does that, the monetization rate on Shorts should continue to improve in long term. We expect this will benefit our overall RPM growth in the future.

Our Plus Solutions revenue also declined, down 18% year-over-year to $10.7 million, which we believe is a temporary decline due to the timing of new contract deployments, signings, and solutions mix. But with the recent successes we've had with the new content management signings and with our potential new deals in the pipeline, we expect an improving trend in the second half of the year. Our overall revenue mix is continuing to shift in the direction of our higher margin Plus Solutions, which were 15% of total Q2 revenue compared to 13% a year ago.

The adjusted gross profit of $5.8 million excluding PPA amortization represents a gross margin of 8%, which is in line compared to 8.3% a year ago. But our Plus Solutions continue to ramp up and become a larger portion of our total revenue mix. We still forecast our gross margin to improve year-over-year on an annual basis and move towards double digits.

Our operating expenses continue to trend lower as we remain laser focus on cost optimization. The total OpEx for the quarter of $10.6 million is a 34% improvement from last year and a 12% sequential improvement from the first quarter this year, which reflects the hard work by each of our teams to contain spending as much as possible. Going forward, we are still pursuing a number of opportunities to further reduce our cost base in order to accelerate our path to profitability.

With the benefit of these incremental cost savings, our adjusted EBITDA loss improved by $2.7 million from the same period last year despite the lower revenue. We continue to converge towards profitability at a faster rate, even with a temporary headwind in the macro environment.

Included in our results for the quarter was an $18.3 million gain arising from a favorable amendment to our promissory note agreement with a subsidiary of RTL Group, which granted us the option to retire this debt early at a significant discount under certain conditions. This is discussed in more detail in our financial statements. This one-time gain resulted in our positive bottom-line results for the quarter, but I would like to remind everyone that this is a one-time accounting item only.

We ended with a cash balance of $14.4 million on June 30, and total long-term debt of $44.3 million, with maturity substantially in 2026 and 2027.

I will now turn it back to Shahrzad.

[Shahrzad Rafati, Chief Executive Officer]

We're excited about content management for the second half of 2023. Content management has proven to be a sticky solution for enterprise customers with resilience, high margin, reoccurring revenue streams. As we have mentioned earlier, during the second half of the year, we will continue to be deploying the large content management deals that we've signed during the first half of the year. To put this into perspective, four of these are amongst the largest that we have ever signed. We're encouraged that the pipeline for content management continues to grow, and we are confident that we'll continue to convert large enterprise deals out of that pipeline in the second half of the year.

As KBR articulated earlier in her prepared remarks, cost optimization will continue to be a primary operational focus for BBTV in the second half of 2023. Since the second quarter of 2022, we have been able to gain $5.6 million of optimized expenses, which as of Q2 has reduced total expenses by 34% compared to last year. We are intent on getting adjusted EBITDA profitable as soon as possible. With further cost optimization plans and growing higher margin revenue in the second half of 2023, we have put ourselves on a solid path towards positive adjusted EBITDA.

Although our operational focus remains on efficiencies and cost reductions, the market conditions for monetization are steadily improving. Views are up year-over-year for two quarters in a row, which indicates a return to historical trends in viewing behavior. Although overall RPMs have declined due to early stage monetization of YouTube Shorts, which now represents over 52% of total views, we have seen growth in Shorts RPM for the past few months. We're encouraged that the natural increase in RPMs is beginning to occur as Google has previously indicated. Seasonality usually means that the second half and in particular, the fourth quarter generates the highest RPMs for the year. This should boost both long-form and short-form RPMs for full year, which should grow revenue in the second half across key lines of business.

Although macroeconomic conditions have been challenging for our industry, I'm proud that BBTV team has worked hard to improve our efficiencies, while also positioning us to thrive as the market recovers. With content management leading the way, BBTV has enormous opportunity in front of it, and we have never been as prepared to capture it as we are now.

With that, I will turn it over to the operator for analyst questions.

[Operator]

Certainly. [Operator Instructions] The first question comes from the line of Adhir Kadve with Eight Capital. You may proceed.

[Adhir Kadve, Eight Capital]

[Thanks for taking] (ph) my questions. I just wanted to talk about the OpEx. It continues to trend down. So, congrats to the team on achieving that. And KB, you mentioned that you'll be extending some of the cost optimizations here. I'm just wondering how much more do you think you will need to kind of get to a steady state and when do you plan on kind of getting there. Thanks.

[Shahrzad Rafati, Chief Executive Officer]

Yes. Maybe I can jump in here, and if you want to add...

[KB Brinkley, Chief Financial Officer]

Sure. Of course, go ahead, Shahrazad.

[Shahrzad Rafati, Chief Executive Officer]

So, Adhir, a great question. I mean -- thank you, KB. Cost optimization is very much the top of mind because obviously we want to accelerate our path to profitability. We kind of -- in the first half of 2023, we very much so concentrated on very much aligning our operations to focus on high-margin opportunities and to really further automate our lower-margin Base Solutions.

Now in addition, we also further optimized our costs across Base Solutions and then the overall business to accelerate performance to persistent positive adjusted EBITDA. And, if you look at the operating expenses, they were about $10.6 million for the quarter, which is about -- kind of they were 34% improvements when you're looking at the same period last year. And this was very much so due to the cost optimization programs that we apply it across base.

As we continue to look at the cost optimization exercises moving forward, we will be looking at that across the whole business, including shared services. And we are very much so excited about not only looking at further automating our solutions, leveraging technology, including generative AI, but also leveraging economy of scales as we actually scale our Plus Solutions.

[Adhir Kadve, Eight Capital]

Okay. Thank you. That's very helpful. Just maybe then on the latest on the content management progress, you said you saw several deals in the pipeline. I think last quarter you also mentioned one of the largest deals. How long do those generally take to ramp up? And when do you think that would really kind of start impacting? Will it be more into Q3, Q4? Are we thinking more into Q4, Q1? Just kind of thinking about how the rest of the year is going to really shake out when it comes to Plus Solutions revenue.

[Shahrzad Rafati, Chief Executive Officer]

Yeah, for sure. I mean, as KB mentioned, if you look at the actual Plus Solutions decline, it was temporary and it was primarily due to the timing of the new contracts, the deployment, the signings, and the solution mix. And the ramp up is going well. Adhir, they are complex deployments that once they're finished, they will generate strong incremental and profitable revenue. And then, we are still very much so confident that Plus Solutions revenue will demonstrate growth for the full year.

And, again, as we highlighted, for the quarter, we closed CBS and Universal Pictures, that have potential to become actually amongst our top 5 largest content management deals. And in addition to that, this is also closing Warner Music Group as you mentioned in Q4. So -- and a lot of these, as we highlighted, deals that we're signing very much around 360 deals that we have and that type of deals that we work on content management that includes anything from rights management to channel management to content deployment to creator integration.

And it's also important to highlight that, look, we work with some of the largest blue chip clients in the industry from Sony Pictures to Warner Music Group to the NBA, Paramount Global, obviously, Univision, as I mentioned, and Lionsgate and others. So very much, we're still confident that Plus Solutions revenue will demonstrate growth for the full year.

[Adhir Kadve, Eight Capital]

Okay. And then last one for me. Just at the end there, you were mentioning some of the -- you're seeing higher RPMs in YouTube Shorts. Is that a fair comment? Sorry, can you go through the YouTube Shorts commentary that you went through towards the end of your preamble there? Shahrzad, that'd be really helpful, I think, on [indiscernible]. Thank you.

[Shahrzad Rafati, Chief Executive Officer]

Yeah, for sure. I mean, the RPMs increased sequentially by 16%. And then, if you look at the average sequential increase over the last three years, it was 12%. So really RPMs are showing signs of growing sequentially at the faster rates than they have in the past. And as we said, if you look at Shorts viewership, Shorts viewership has increased significantly. If you look at it just within one year, we increased the percentage of views coming from YouTube Shorts from 20% to 52%. So I think the best way to kind of look at this is to remove the actual YouTube Shorts and look at actual pure RPMs based on regular content. And when you look at that, obviously, we're seeing obviously good trends.

And also sequentially, when you're looking at particularly RPMs, quarter-over-quarter, we also saw an increase for YouTube Shorts. And as you saw, Google also stated publicly that over time, they expect to close the monetization gap between YouTube Shorts and regular content. And we're very confident that, again, RPMs will begin to improve once monetization of YouTube Shorts actually matures, of course, across the entire library. And depending on the uptick, of course, it could represent significant incremental revenue for the company.

[Adhir Kadve, Eight Capital]

Excellent. Thanks, guys. I'll pass the line.

[Operator]

Thank you. That concludes our question-and-answer session. I'd now like to pass the conference back to Shahrzad for any closing remarks.

[Shahrzad Rafati, Chief Executive Officer]

Thank you everyone for joining. We appreciate your time, and have a wonderful day. Thank you.

[Operator]

That concludes today's conference call. I hope you all enjoy the rest of your day. You may now disconnect your lines.