Stingray Group Inc

TSX:RAY.A

Good day, and thank you for standing by. Welcome to the Stingray Group Inc. Third Quarter 2022 Results Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to Mathieu Péloquin. Sir, please go ahead.

Thank you very much. [Foreign Language] Good morning, everyone. Thank you for joining us for Stingray's conference call for third quarter results ended December 31, 2021. Today, Eric Boyko, President and CEO; and Jean-Pierre Trahan, CFO, will be presenting Stingray's financial and operational highlights. Our press release reporting Stingray's third quarter results for fiscal 2022 was issued yesterday after the market closed. Our press release, MD&A and financial statements for the quarter are available on our investor website at stingray.com and also on SEDAR. I will now give you 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 operations 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 June 2, 2021, which is 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 are advised not to place undue reliance on such forward-looking statements. Also, please be reminded that some of the financial measures discussed over the course of this conference call are non-IFRS. Please refer to Stingray's MD&A for a complete definition and 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.

[Foreign Language] Good morning, everyone, and welcome to our third quarter results conference call for fiscal 2022. I'm pleased with our financial performance in the third quarter as the ongoing return to normal commercial operations, combined with increased advertising revenues, generated revenue growth of 4.8% to $76 million. Our key KPI organic growth improved to 5% in Broadcast and recurring Commercial Music revenues, including an impressive 28% in the United States. Our investments in the U.S. markets, which are reaching nearly $1 million per quarter, are beginning to pay off with consistent double-digit growth in this key market. In terms of our bottom line, adjusted EBITDA decreased by 16% to $28.5 million in the third quarter. Adjusted EBITDA decreased year-over-year mainly due to a onetime gain from a settlement with SOCAN in the third quarter last year and significant incremental investment this quarter to support strategic growth initiatives in the U.S. and to accelerate the pivot to the digital streaming with results expected to be materialized over the next few quarters. From a pure operational standpoint, adjusted EBITDA would have been stable compared to the same period last year, with higher revenues of 4.8% mostly offsetting lower margin cost by increased investment in the U.S. and difference in product mix. During the third quarter of 2022, Broadcast and Commercial Music revenues grew by 2.3% to $41 million due mainly to higher advertising. As you know, Stingray is in the process of pivoting the business from traditional sources of revenues to high-growth, strategic digital revenues. This transformation will allow Stingray to deliver increased profitable growth and ultimately, improves the company's valuation based on higher margin profile of our growing digital business.One of the key assets that will enable us to achieve our goal is the recent acquisition of InStore Audio Network, the largest retail audio network in the U.S. and in the world, reaching 16,000 pharmacies and grocery stores. This acquisition, our second largest in the company's history, with a total consideration of nearly $60 million, complements our existing Retail Media Network in Canada with signed 2,300 locations with a positive outlook to double in the next quarter. By combining this strategic asset with our existing platform, Stingray Retail Media Network is well positioned to tap into the addressable market of 250,000 locations in the U.S. and Canada. The benefit of InStore Audio advertising offers quantifiable and compelling value to consumer product companies. InStore Audio Network, for example, plays audio ads from Pfizer across the digital platform, a network helping pharmaceutical companies capture additional market share during the COVID-19 pandemic.Closely tied to the success of InStore advertising is Chatter Research, our insight AI-driven SaaS solution that uses SMS messages with nonpurchasers and purchasers alike to provide better insight to retailers. During the last 6 months, we have secured contracts with several leading global brands including PINK, Victoria's Secret, Driven Brands and Nike. We also hired seasoned executive to bolster Chatter's go-to-market strategy and sales initiatives dedicated to customer experience and management. As a result, we are offering retailers a compelling value proposition with our digital media assets. In other words, we're telling CMOs at the retail companies, we'll take care of all your music, digital ads and consumer insight needs with our one-stop shop at Stingray. Another important segment driving our digital transformation is our SVOD. Subscribers increased to 692,000 in this quarter, adding 80,000 subscribers, an increase of 34% with the same period last year. Our bundled rollout, Amazon channels in Canada, Brazil and Mexico, contributed significantly to subscriber growth in the third quarter. Additional deployment of our SVOD strategy is going to happen in the Nordic countries, Australia and India slated in Q4 2022. Looking ahead, we expect to hit our 1 million subscription goal within the next 4 to 8 quarters.Turning our Radio business. Revenues improved 8% year-over-year to $35 million in the third quarter of 2022. This revenue growth, which outperformed radio peers in Canada, represents our strongest quarterly performance in the last 2 years. The outlook for our Radio business remains favorable, with end market recovery still not having reached pre-pandemic levels. In closing, our pivot towards strategic digital revenues is in full motion and gaining traction with the accelerated growth in new revenue streams outpacing the drop of our traditional source of revenue. We expect continued progress on all our growth KPIs in the coming quarters as we further leverage our content in new channels, our digital insight, our advertising offering and a worldwide relationship with top enterprise brands.With this, I will pass you to our friend, Jean-Pierre. [Foreign Language]

[Foreign Language] Good morning, everyone. The gradual return to normal commercial operations, combined with an increase in advertising revenue in Broadcast and Commercial Music segment generate year-over-year revenue growth of 4.8% to $76 million in the third quarter of 2022.In terms of our profitability, adjusted EBITDA decreased 16.1% to $28.5 million in the third quarter of 2022. As previously mentioned, adjusted EBITDA decreased year-over-year, mainly due to a onetime gain from SOCAN in the third quarter last year, and operating cost structure realigned with significant growth opportunity this year. From a geographic perspective, the United States became our second-largest market with 18% of total revenues in the third quarter, strong year-over-year growth of 28.1% in the U.S. was fueled by increased subscription revenues and organic growth in advertising revenues. Canada remained our largest market, accounting for almost 2/3 of total revenues with year-over-year growth of 4.2%. Revenues in other countries dropped 8.8% in the third quarter as lower audio channel revenues and unfavorable foreign exchange rate negatively affected our top line.Turning to our Broadcasting and Commercial Music businesses. Revenues improved 2.3% year-over-year to $41.1 million in the third quarter, largely due to an increase in advertising revenues. Adjusted EBITDA for this segment decreased to $14.6 million in Q3 2022 from $21.9 million in the same period last year. The $7.2 million decrease can be attributed to the large gain obtained from the SOCAN settlement in Q3 2021, higher costs related to the gradual return to normal business operations, increased U.S. investment and a lower gross margin impacted by product mix.Moving to our Radio business. Revenues increased 7.9% year-over-year to $34.9 million in the third quarter of 2022. As Eric mentioned here earlier, we're outperforming our radio peers across Canada, even though revenue are still below pre-pandemic levels. Adjusted EBITDA for our Radio segment grew 9% to $15 million in the third quarter, mainly due to higher revenues caused by the gradual easing of COVID-19 restrictions and return to normal commercial operations.In terms of corporate adjusted EBITDA, which represent head office operating expenses, less share-based compensation as well as performance in deferred share unit expenses, amounted to a negative $1.1 million in Q3 2022 compared to a negative $1.7 million in the same period last year. The improvement in corporate adjusted EBITDA year-over-year can mainly be attributed to a special bonus given to employees in Q3 '21.From a balance sheet standpoint, Stingray had cash and cash equivalents of $11.3 million at the end of the third quarter of 2022, sub debt of $25.4 million and credit facilities of $318 million, of which approximately $120.7 million was available. Total net debt at the end of the quarter stood at $374.6 million or 3.01x pro forma adjusted EBITDA.In summary, we have a solid balance sheet to support our strategic pivot towards becoming a high-growth digital-intensive distributor of audio and video music brands. This ends my presentation for today. I will now turn the call back to Eric.

Okay. Thank you, JP, for the quick summary. And this completes our prepared remarks. Thank you for your time and attention. At this point, Jean-Pierre and I will be pleased to answer any questions you may have.

[Operator Instructions]

We see Adam Shine and Tim Casey are waiting, so I'm not sure if you see them, and Matthew Lee.

We can't hear him.

But we can't hear Mr. Lee.

Mr. Lee your line is now open.

I don't know what just happened there. I wanted to first ask about the ISAN acquisition. Based on the figures in the MD&A, it looks like you expect the acquired assets to drive 25% plus growth in F '22 -- or '23 rather. Can you maybe talk about what's kind of driving that? And what trends you're seeing in the out-of-home music industry in general?

Yes. So when we did the acquisition last year, their numbers were roughly $18 million of sales, $10 million of EBITDA. And we do see a growth of 25% this year on our booked sales. The reason is a very simple more. More focus on vaccination with all pharmacies, not only for COVID, vaccination for shingles, vaccinations for pneumonia. And most pharmaceutical and even cable companies realize the importance of being able to do ads in the store. So nothing better for Pfizer to say, "We strongly recommend the booster shot. Ask your pharmacist. Brought to you by Pfizer," in the pharmacy. Same thing for U.S. Postal, same thing for a lot of different products, Campbell Soup. So we're very excited to see that. And we're launching in Canada. So beauty about Canada, everything is going to -- we just started in February with our retail network. So I think it's going to be very interesting growth because there were -- it's a small number increasing quickly.

Great. And then maybe on the Radio side. Did you guys see any challenges related to the COVID shutdowns in early Q4? Or has advertising largely remained pretty strong?

Yes. It's -- we're pleased with our results. We've managed well the business. But it's -- the core restriction has left the effect. It's still the supply chain. So we're not seeing -- the car business isn't back like it used to be 2 years ago. If you ask dealership, every car is presold so there's no -- don't need to do advertising. Every car is presold. So for now, we'll have to see, but we're not seeing the car business back, and that's about 10% of our sales usually. So that part, we're trying to replace. But for now, we're still seeing that negative wave against us.

Okay. Great. And then lastly on subscribers, I mean, a really strong net ad quarter. Can you maybe give us a breakdown of what propels that? And then maybe some color on ARPU for the quarter.

Yes. It's no -- roughly we added 80,000 subs. This quarter is a strong B2B and B2C quarter. Our ARPU is roughly around $7. So we're generating close to $5 million a month if you look at a run rate basis, so very happy about that. Our big -- for sure, the launch of Amazon, Canada, Mexico, Brazil, a big win, Europe, a lot of our B2C products, Calm Radio, Qello. And I must say we -- the SVOD are, as a macro are still growing and will grow by double digits over the next 4 to 8 quarters just by launching new countries. Like we said, we're launching in the Nordics. We're launching in Australia, India and other countries. So it's -- and really about the SVOD, it's the same product. So it's really leveraging the same units. So the margins are high. It's a product with a very high margin for us and good contribution.

And speakers, our next question, from Adam Shine from National Bank Finance.

Eric, it was nice to see organic growth per your calculation at 5%. You talked about perhaps some momentum percolating in the business going forward. Can you give us a sense as to where this metric might trend over coming quarters? Is it potential that we start heading towards higher single digits, let alone into the double-digit zone?

I agree. For us, the good news is that October, November, December, our Q3 did not include any Retail Media and still not much of Chatter and not much of the ISAN, which is our InStore Audio Network in the U.S., which only going to happen in Q4. All those 3 products are more than double-digit growth. So I think this will have a very good impact. And I think -- we expect organic sales to grow and I think that we're -- the pivoting is starting, and I think that the next few quarters will be instrumental to show the market that we're able to generate high organic sales.

If I go back to the other question on ARPU and SVOD, I am curious. Just in terms of the run rate. Is the run rate now sort of stepping up into that $58 million-type zone? Because it appeared to have been stuck for a while below $55 (sic) [ $55 million ]. So it sounds like you're finally broken above $55 million on a sort of annualized basis. Is that a fair comment?

Yes. Roughly, our run rate for the end of December was about $5 million a month, so $60 million a year. For sure, January, February, March, we lose a bit of subscribers on the B2C side on the Karaoke, but we're still gaining a lot on the B2B side. So we expect those revenues to continue growing. And we -- and we're confident that this business, in the next 4 to 8 quarters, should be generating close to $80 million a year, 1 million subscribers at $7.

Okay. And one question that you might need a little JP help potentially is when I look at Page 18 of the MD&A, and I see the $19.5 million as part of your leverage calculation, and this is sort of a bump to EBITDA, the $19.5 million, I think, relates to sort of 3 items: One, it's obviously pro forma M&A., so ISAN and maybe a little bit more of Calm in there. It relates to, I think, some assumption around synergies. And then it also has investments in associates. Can you just give me a little bit of help as to those 3 buckets? Because I'm under the impression that the M&A contribution is maybe somewhere in a $9 million, $9.5 million-type zone. And I'm curious about perhaps how the 2 other buckets break down.

So roughly, for the ISAN deal this year, we expect, with synergies, close to CAD 60 million of EBITDA and the other buckets are $3.5 million. So for sure, ISAN, we already see the synergies that are being done. We see the growth in sales because we're working together. So it's something that we're able to -- I think that the Q1 will be -- sorry, their Q1, but now our Q4. January, February, March is going to be, because their sales are booked, a very impressive quarter for Retail Media in the U.S. So I think that it will -- the numbers are looking fantastic based on our orders right now. And we're surprised how quickly we're able to create the synergies, both on the cost side and on the revenue side by working together.

And our next question, from Tim Casey from BMO.

Just, Eric, can you talk -- just going back to the subscriber growth in the quarter, which was quite strong. Are you able to give us a little bit more color in the cohorts and what they contributed? In other words, is most of that 80,000, is that Amazon launch? Or are you still growing in some of the other legacy channels? And maybe just a comment on how those legacy distribution channels are performing.And then on the Radio side, as we -- how should we think about the margin profile there? I mean are we completely past all the COVID noise with respect to costs and subsidies and whatnot? And should we -- where do you think you'll end up with kind of a normalized margin outlook for Radio?

Okay. Thank you, Tim. Good question. For the SVOD, no, we have a very strong quarter of Amazon. So out of the 80,000 subs, almost half of it come from just Amazon. So for sure, it's -- but we launched a bundle in Canada, which we call ALL GOOD VIBES. It's retail is at $9.99 or $10, so it's a very good product for us, good ARPU. So roughly, we maintain that ARPU should be around $7. The other -- and about this quarter, about 30,000 subscribers came from our B2C platform because it's a big quarter. But for sure, 80,000 is -- we did 30,000 last year. We did 80,000 this year. So that's why we're very confident we're going to hit the 1 million mark on subscribers with launch in new countries and with the help of Amazon. There's no doubt that it's a great partner.For Radio, I think we maintain our 40% EBITDA margin. This quarter, we had less and less COVID help. AI think for -- on the Radio side, we keep the cost side very -- I think, compared to our peers, we're good management team. But for sure, the 2 things that are not helping us is that people are still not going to the office in their cars in the morning. So the results are still perceived by the advertisers as we're not back until people start driving to the office. And B, it's the supply chain. So on that side, we need people to go back to their offices, and we need traffic in Toronto in the morning, but maintain a 40% EBITDA margin.

[Operator Instructions] And speakers, our next question, from Drew McReynolds from RBC.

Just following up on Tim's margin question, just shifting to Broadcast and Commercial Music. Is the 36% to 38% range still relevant? And I just got 2 others. I'll let you answer that one first.

Yes. For sure, our margin is being affected. We're investing right now, like we said $1 million per quarter in the U.S. market in Retail Media, in Canada, and with Chatter. So a large investment in sales force, in marketing. So if you put that, it's $4 million a year. So that has an impact of about 4% on the EBITDA margin. So I think closer to 36% for the next few quarters until we start realizing the return of these sales of our investment, which we feel is not a matter of years. I think that this quarter, in January, February, March in Q4, we will start having some nice revenues that we'll be able to show the market that our investment has been wise.

Got it. Got it. And then 2 others for me. In terms of following up on the previous COVID impact question. On the Commercial Music side is -- how much fully back to normal is that? Like, obviously, with some retail closures, there's still that. But assuming we're in the clear, and I know that's a big assumption, is there any material headwind from COVID on the Commercial Music or Stingray Business side?And then second one, following the ISAN acquisition, just where is your mindset here on additional M&A and opportunities? Because obviously, that was a little bit of a bigger one to digest.

Yes so a good question. So for, I'd say, commercial business, 99% back. So in January, February, a bit in Europe, but not material. And on the opposite side, on the good news is like we see with our retail business, our audio retail, pharmaceutical are aggressively doing marketing. More and more people are doing marketing in stores. So -- and people are doubling down on their investment in Chatter and in all our products. So no, I'd say we're probably back to 100% plus-plus because we're getting the investment that wasn't done in the last 2 years. And just for ISAN, which is the InStore Audio Network, that's our little acronym, last year's sales, they did was in USD 15 million, so CAD 18 million. But their inventory is $80 million. So there's $70 million for us to sell in the U.S. that it's not sold. So that's our first priority. But the potential of ISAN with the current 16,000 location is CAD 100 million. So we have a lot of growth there, just tapping the existing retailers in the U.S.And that's why we're very focused. And our number 1 priority at Stingray right now is selling those ads in the U.S., and we're doing North American deals. So we're talking to big brands, Procter & Gamble, Coca-Cola, Pfizer, and we're working on both Canada and U.S. deals. So the synergies are coming very quickly. And it's -- and the reason why it's so new and doing well, because all of our boxes are connected. And we're able to do ads just like we do, I guess, on the Internet or on mobile. So we're able to do targeted ads, change them every day at the time that the advertisers want to do it. So I think that, that offering is really getting traction. And we're seeing it in the January, February, March, in the Q4 sales. That's why we're so confident on our organic sales over the next few quarters.

Yes, that's great color. And then just on additional M&A in that pipeline?

Yes. So to be -- this one is a big M&A. I think we have a lot of synergies to attain both -- mostly on the revenue side, like I just mentioned. We have $70 million of unsold inventory that we want to capitalize on. So I must say we're -- and we need to deploy and change a lot of their machines to our system and all that. So there's a lot of IT work need to be done. So I would say for the next few quarters, we're digesting this acquisition unless something very interesting, like we're always open. Again, the ISAN deal was interesting. We met them. We closed this deal in 24 days. So we've been talking to them for 5 years and then, boom, in 1 month start. The timing was good. They wanted to close before December 31, and we did. There were 68 companies that were lined up with the bankers for ISAN. They chose us because we're strategic. I think it was a good fit. And I think you'll be -- the market will be very happy with the results of this acquisition and the return on equity.

And speakers, there are no further questions at this time. You may proceed.

Okay. So thank you very much for joining us today. I know it's an important quarter because it's a big acquisition. There's a lot of pro formas. So excited to show the results and some good news in the next few weeks, months about our deployment of all our new strategies and I think that will bring a lot of clarity to the market. And thank you for your time, investors, shareholders and analysts. [Foreign Language]

This concludes today's conference call. Thank you all for joining. You may now disconnect.