Stingray Group Inc

TSX:RAY.A

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Stingray Group Inc. Second Quarter 2022 Results Conference Call. [Operator Instructions] Before turning the meeting over to management, I would like to remind everyone that this conference call is being recorded today, November 10, 2021. I will now turn the conference over to Mathieu Péloquin, Senior Vice President, Marketing and Communications. Please go ahead, sir.

[Mathieu Péloquin]

Thank you very much. Good morning, [Foreign Language]. Thank you for joining us for Stingray's Conference Call for the Second Quarter ended September 30, 2021. Today, Eric Boyko, President, CEO and Co-Founder; Jean-Pierre Trahan, CFO, will present Stingray's financial and operational highlights. Our press release reporting Stingray's second quarter results for fiscal '22 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, also on SEDAR. I will now give you the customary caution that today's discussion of the corporation's performance and its 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 June 2, 2021, which is also available on SEDAR. The corporations specifically disclaim 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 our -- some of the financial measures discussed during 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.

[Eric Boyko, Co]

Thank you, Mathieu. Great to be here today. So good morning, everyone. Welcome to our second quarter results conference call of fiscal 2022. I'm pleased with our financial performance in the second quarter as we took advantage of improved market conditions to deliver robust revenue growth. Revenues increased 11% year-over-year to $71.4 million, reflecting higher advertising revenues, a gradual easing of COVID-19 restrictions and the progression to normal commercial operations. Organic growth improved 2.5% year-over-year in broadcast and recurring commercial music revenues, including solid double-digit organic growth in the United States. In terms of our bottom line, adjusted EBITDA decreased 17% to $25.6 million in the second quarter. The decrease is attributed to specifically lower contribution from the Canada Emergency Wage Subsidy program in Q2 2022 compared to the same period last year. A return to more typical expense level after last year's pandemic-related temporary and aggressive cost-cutting measures and higher investment to take advantage of long-term opportunities, including expanding in Stingray business footprint in the U.S. growing advertising revenues and building Chatter Research's international customer base. Looking at our business segments. Broadcasting and commercial music revenues were essentially flat at $39.1 million in the second quarter. We generated an increase in advertising revenue in the quarter, but was offset by a negative impact of $1.1 million due to FX. In terms of growth opportunities for broadcast and commercial music in Q2, we recorded one of our best quarterly growth results for streaming and subscription since the start of the pandemic and generated year-over-year growth of 27% and sequential growth of 7% to reach 611,000 subscribers. Expansion in Mexico, Brazil and Canada was largely responsible for subscriber growth, along with the recent Calm Radio acquisition, which provides Stingray with a strong foothold in the niches wellness and relaxation markets. Second, shifting to connected cars. Our latest success story with Stingray Karaoke in Tesla is widely regarded as one of the best infotainment offerings in the industry. It has triggered interest among many other car manufacturers. As a result, our best-in-class music solution for the connected car space represents a new growth opportunity for Stingray in upcoming quarters. Moving on to our commercial offering. It has admittedly taken longer than anticipated to secure enterprise brand contracts due to the slower-than-expected ramp-up following the impact of the pandemic. That being said, we remain excited about the long-term potential for significant growth, particularly in the U.S. market. We continue to be very excited with the progress we're making with our AI-driven customer insight platform Chatter. We have successfully launched Chatter in over 3,000 retail store locations with 16 partners, new partners in the last 6 months include [ PINK ], Metro, Rogers, Nike, Circle K and KIND Snacks. Weekly usage continues to increase as store locations are added. Partner satisfaction has been strong for this business, so we're anticipating the new brands and ongoing customer traction will deliver healthy revenue stream starting in Q4.Finally, turning into our audio retail media initiative, which is the link between our radio business and Stingray business. As you know, we have completed our test of retail media, also known audio out-of-home advertising in 30 metro store. The test was positive with positive customer feedback and retail feedback, we are now officially launched in over 300 stores in Ontario. Advertisers are interested in this market space as it allows them to reach customers at the point of sale, with digital dynamic audio ad insertions. This past October, COMMB, the Canadian Out-of-Home advertising and measurement bureau (sic) [ Canadian Out-of-Home Marketing and Measurement Bureau ], the trusted source for Canadian advertisers introduce a new place-based audio out-of-home measurement methodology. Stingray is proud to be the first COMMB member to bring this new measurement to the entertain marketing industry. Looking ahead, this business represents an exciting new growth opportunity for Stingray. We are seeing keen interest from our agencies and have already started our bookings for January. Turning to our Radio segment. Revenues improved 28.6% to $32 million as the Canadian economy gradually reopened during the quarter at varying degrees provincially. Although the business is now approaching pre-pandemic levels, global supply chain issues are impacting some of our larger advertisers like car dealers, who have little or no inventory available and therefore, are less interested in advertising their products. Finally, from a capital allocation standpoint, we recently increased our credit facility to $575 million and extended their maturity dates to 5 years. This initiative provides Stingray with more operational flexibility, drive power for strategic acquisition. Similar to the recent Calm Radio acquisition, we are looking for content that can be leveraged across our multiple platforms. So thank you again, and I will pass you to our friend, JP, for the financial overview.

[Jean-Pierre Trahan]

Thank you, Eric. Good morning, everyone. The return to normal commercial operation accelerated in the second quarter of 2022 with 11.1% year-over-year revenue growth to $71.4 million in terms of profitability. Adjusted EBITDA decreased 17.9% to $25.6 million in the second quarter. As previously mentioned, this decrease is mainly related to lower contribution from the Canadian Emergency Wage Subsidy program in Q2 2022, compared to the same period of last year and strategic investments to take advantage of growth opportunities. These items were partially offset by higher revenues. At the halfway mark of fiscal 2022, we have received approximately $14 million less in wage subsidies from the Canadian government compared to the first half of last year. Turning to our Broadcasting and Commercial Music business. Revenues were stable at $39.1 million in the second quarter, which was marked by an increase in advertising revenues, offset by a negative FX impact. Adjusted EBITDA for the segment decreased to $14.5 million in Q2 2022 from $18.9 million in the same period last year. The $4.4 million decrease can be attributed to lower CEWS, higher operating costs and decrease in gross margin related to product mix. Our radio business continued to recover in the second quarter as the Canadian economy gradually reopened. Radio revenues improved 28.6% year-over-year to $32.3 million in the second quarter. Adjusted EBITDA for our radio segment decreased by $600,000 to $12.5 million in the second quarter of 2022, mainly due to lower wage subsidies from the Canadian government as compared to last year and increased operation costs this year, largely offset by higher revenue levels. However, our operating cost base remained well below pre-pandemic levels and offer significant leverage going forward with a return to higher sales volumes. Looking at our balance sheet. We recently increased our existing credit facilities to $575 million. The credit facilities consist of a $375 million revolving credit facility, $68 million term loan, both maturing in October 2026, an incremental commitment up to $100 million upon request. The preexisting subordinate debt of $32 million, meanwhile, mature in October 2023. Total net debt at the end of the second quarter stood at $336.5 million or 3.02x pro forma adjusted EBITDA. We have a solid balance sheet to support our significant growth opportunities through a build-and-buy strategy. This ends my presentation for today. I will now turn the call back to Eric.

[Eric Boyko, Co]

Okay. Thank you, JP. This concludes 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, and very happy to be here.

[Operator]

[Operator Instructions] Your first question comes from the line of Adam Shine from National Bank Finance.

[Adam Shine, MD, Head of Montreal Research & Research Analyst]

Can you maybe just talk about how things are evolving in terms of growth going into the Q3? Are we seeing a bit better traction in regards to particularly the broadcasting and commercial music side of the business? And then, Eric, maybe just help us a little bit as we move out into a more new normal type of environment and the sort of cost structure resets that we get beyond all the subsidies. What sort of margin level or range should we be thinking about for the overall business going forward?

[Eric Boyko, Co]

Yes. Q3 is our best quarter in terms of -- for broadcasting. For sure for the SVOD market, we see a lot of progression, and we see also some -- bit increase on the B2C side for all our SVOD application. And our organic growth will continue to increase I think we're seeing the pivot. The pivot is accelerating. So we should be seeing an increase over the next few quarters in our organic growth. So very confident for this quarter that we will surpass the organic growth from last quarter. Regarding the margin, good question. So we're investing more on the Stingray broadcasting side, 4 big initiatives that we talk today. We're investing about $1.2 million in OpEx more per quarter or $5 million per year. And the 4 initiatives, as you know, is retail media. It's with our friends at Chatter. It's also growing the U.S. business. So we're investing a lot of people in the U.S. and number 4 is getting global deals. So I think we're making the right investment in our capital allocation to invest more in OpEx and the return on investment on these 4 products are very high. So our range of EBITDA, we used to say $38 million to $40 million. Now let's say, our range for the next few quarters will be more towards $36 million to $38 million.

[Operator]

Your next question comes from the line of Tim Casey from BMO.

[Tim Casey, Equity Research Analyst]

Eric, you mentioned you're getting -- you're feeling the impact to supply chain on auto advertising and radio. I'm wondering, is that -- are you seeing any push back from potential commercial customers or any of your retail growth initiatives from any categories based on the same thing that these retailers just can't get products. So they're sort of turning the taps off on a couple of cost things that may impact you? Or would you consider a more normal environment? And just broadly on radio, auto aside, how confident are you you'll get back to pre-pandemic levels in terms of revenue and EBITDA in the business overall?

[Eric Boyko, Co]

Yes. In Radio, good question. So last quarter, we were at minus 14.5%, to 2 years ago. So that gives you a bit of a feeling. So we're getting back, but we're still minus 14%. Our EBITDA was almost the same than 2 years ago, because, as you know, we cut about $12 million of fixed costs. So that's why I think the Radio, we did a great job. And no, it's going to be difficult to see until retailers and mostly the car manufacturers get their chips. So I think we're getting better each quarter. We're very strong in local sales. We're compensating with new ads, people like Amazon and all these new suppliers. But for sure, on the car side, I think it's going to take a few more quarters. So -- and for Stingray business, there is 0 impact. We're back in business, to be honest. This is the time because they've been sleeping -- not sleeping, but on a hold for 2 years and now everybody is investing. So this is a perfect time for us post-COVID. And also, we have to take COVID as, we can't say this in a bad way, but it's because we started doing messaging in commercial business, every store wanted to be -- their music to be connected so they could do messaging for COVID security. And that pushed all of our customers to be connected, which now gives us the chance. So the example of people that got connected is Metro, Loblaws, Sobeys, all Walmart, all of Dollarama. So that gives us the chance to now officially drive audio ads that we could not before. So I think it's going to be a very interesting 12 months for Stingray business.

[Operator]

Your next question comes from the line of Matthew Lee from Canaccord.

[Matthew James Lee, Associate Analyst of Telecom and Media]

Can you maybe talk about the out-of-home audio ramp-up in terms of whatever contribution you're expecting from the new business line in 2022?

[Eric Boyko, Co]

Yes. For sure, it's a brand-new product. As you saw, we got certified, and that's a big news. We're certified. It's -- by getting the certification of COMMB, which is a bit like Nielsen and Numeris, now we officially have a currency, an official currency with agencies that we can sell. And the currency is if there's -- in a store, there's 50 people, and we do an ad, we can officially say that we got 50 impressions. So it's not one ad one person like the Internet. So that currency is very strong, and we're seeing that in a grocery store, we're getting about 250,000 impressions among -- we're able to deploy or hit, the word, hit, what are impressions of 250,000 people a month. So you do the calculations, what was the CPM in an audio ads as CPM can be anywhere from $10 to $20. So you can see the potential of just one grocery store. And at Stingray as you know, we're involved in Canada with over 5,000 grocery, pharmacy, Walmart, now Canadian Tire. So it's a huge market for us that I think we're the first -- almost first in the world to deploy. So very excited by it, and I think the agencies are also. And like I said, this is not a pilot anymore because we got our first sale. We started selling our inventory in January. So now it's an official product line.

[Matthew James Lee, Associate Analyst of Telecom and Media]

Great. No, it's perfect. In terms of E&L, I mean, a much better quarter than Q1, but still lower year-over-year. Can you kind of help us understand, is that maybe slower provisioning or lower demand? And I guess, in the back half of the year, should we see that number kind of pick up from where you are right now?

[Eric Boyko, Co]

Yes, it was picking up last year. We had -- that's the problem of E&L or the opportunity, is last year we had a huge sale of USD 3 million with Lush. So you don't have the Lush there. So I think E&L for sure is picking up. There's a lot more investment by all our partners because they're catching up. We don't -- E&L is not an important growth factor for us. We do it because it's a way to now have access to selling music, selling audio ads and selling Chatter. But still, we see that the number should be higher than last year, but we don't expect that -- it's really not one of our growth strategies. So...

[Operator]

[Operator Instructions] There are no further questions at this time. I'll turn it over back to the speakers.

[Eric Boyko, Co]

Okay. Again, I always thank you for the analysts for all your great work and support and for all our investors. We're very excited about our pivot. And I think that over the next few quarters, I think that our investors will be also excited like we are as a Board and as a team. And thank you for everybody helping us. Thank you, guys.

[Operator]

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