BBTV Holdings Inc. (OTCQX:BBTVF) Q2 2022 Earnings Conference Call August 10, 2022 5:15 PM ET
Company Participants
Nancy Glaister – Chief Legal Officer
Shahrzad Rafati – Chief Executive Officer
Ben Groot – Chief Financial Officer
Conference Call Participants
Adhir Kadve – Eight Capital
Operator
Good evening everyone. Welcome to today’s BBTV Holdings’ Second Quarter 2022 Conference Call. My name is Dante, I am your operator for today’s call. [Operator Instructions]
I will now pass the conference over to our host, Ms. Nancy Glaister, Chief Legal Officer of BBTV. Ms. Glaister?
Nancy Glaister
Welcome to BBTV’s fiscal second quarter 2022 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’s 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 they 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 to number of risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements. These include the risk that our assumptions may not accurate, as well 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, risk and uncertainties in our press release and MD&A issued today, as well as in our AIF dated March 29, 2022, filed with Canadian securities administrators 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 on our earnings press release and our MD&A, which are available on our 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 also 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
Hi everyone and welcome to BBTV’s second quarter 2022 analyst call.
We press-released our financial information earlier and posted our financial statements and MD&A to SEDAR.
As a reminder to everyone on the call today, we’re a creator monetization Company with a mission to help creators succeed by increasing their viewership and making more money. From individual content creators to global media companies, BBTV provides comprehensive end-to-end solutions powered by our innovative VISO platform, which helps creators make more money while allowing them to focus on their core competency, which is content creation.
BBTV has about 600 million unique monthly viewers globally, who generate more than 30 billion views of video content every month. Although our Base Solutions revenue remained flat sequentially and declined year-over-year, we see significant fundamental tailwinds driving revenue contribution in our business. These tailwinds include the expedited activation of YouTube Shorts monetization and the diversification of our Base Solutions to additional platforms like Facebook. This is in addition to our focus on growing our Plus Solutions, which has experienced significant growth.
With our cost optimization programs, we see a clear path to adjusted EBITDA profitability for the business.
We would also like to note that all margin loans have been paid off.
Plus Solutions growth in Q2 2022 remained strong. Driven by content management and direct advertising sales, Plus Solutions revenue grew in the quarter by 29% over last year and by 46% for the first half of the year and we are reiterating our guidance for over 40% growth in that segment for 2022. Our core Plus Solutions, specifically Content Management, Direct Advertising sales and Mobile Gaming Apps, grew by a combined 41%. Plus Solutions represented 13% of total revenue in Q2, up from 9% of revenue last year.
From a margin perspective, Plus Solutions represents 30% to 40% of our total adjusted gross profit contribution, up from 20% to 30% last year. The growth in Plus Solutions is directly related to investments that we’re making in the segment. This continued growth is a strong indicator that our investments in Plus Solutions are paying off. And we will continue to invest in growing these revenue streams because they consistently deliver four times higher gross margins than our current Base Solutions revenue. They will also continue to strengthen our overall earnings profile as we scale. Our decisions to focus investment on our higher margin Plus Solutions makes us a lot less sensitive to the short-term volatility of views and RPMs.
For content management solutions, BBTV is currently working with some of the largest blue chip clients in the industry, including Sony Pictures, the NBA, Paramount Global, Univision, Fox, and more. This quarter, we renewed and expanded our partnerships with Sony Pictures. We saw an expansion on our Rights Management solution, adding Facebook and Instagram.
We also expanded our channel management partnerships, which includes the launch of a number of new channels for their TV shows and movies across a number of verticals. We also expanded our relationship with Fox to add a number of key growth initiatives that will make the partnership even more strategic to help Fox with their overall digital video initiatives.
We also renewed deals with PBS, BET and Relativity Media. Regarding direct advertising sales, Q2 was a strong quarter for the team and capped off the strong first half. Average order size increased by 53% year-over-year. And our teams are working to increase our brand awareness with agencies and brands.
We’re concentrating on leveraging the demise of cookies to promote BBTV’s strength in contextual advertising. Key wins for the quarter included the addition of a new global music streaming partner and a top five global beverage company to the portfolio while increasing the revenue for existing clients. Typically, views on RPMs in Q2 increased sequentially from Q1, due to seasonality. In Q2 2022, RPMs were $0.94 at 15% sequential increase over $0.82 reported in Q1 2022.
Last year, the sequential growth of Q2 over Q1 was 15%. So the pattern this year holds, while RPMs declined year-over-year by 5% to $0.94 compared to $0.99 last year when excluding YouTube Shorts viewership, RPMs would have increased by 4%. Atypically, views for Q2 declined sequentially by 10% to 95 billion views down from 105 billion views in Q1. Year-over-year views declined by 14% compared to 111 billion we reported last year.
BBTV monetization is closely tied to the performance of YouTube. Two weeks ago, Alphabet reported that YouTube ad revenue growth was down year-over-year. This is due to primarily to a switch in consumer performance to micro content across all major platforms. YouTube introduced YouTube Shorts last year to respond to consumer preferences. And this format now represents over 20% of BBTV’s viewership.
However, as we have stated in our previous conference calls, they have yet to be monetized. Alphabet announced during their conference call that they are accelerating their plans to monetize YouTube Shorts, which should cascades through BBTV. Monetization is starting ahead of expected timing. Once it becomes monetized across our entire library, it could represent incremental revenue of approximately $90 million annually across base solutions at current market rates. With the opposing sequential trajectories of RPMs and views alongside favorable seasonality trends, the end results was that Base Solutions revenue still grew sequentially by 1% to $86.9 million compared to $86 million in Q1.
In the meantime, our emphasis on Plus Solutions continues to mitigate viewership risk for BBTV by concentrating on generating incremental higher margin revenue streams from retained content creators. Our churn rate continues to be low amongst creators on the BBTV platform. In Q1, our views retention was exceptional at 98%. We believe in the inherent value of our services is clearly reflected in our retention performance.
We have been able to retain more audiences in comparison to the industry. Again, we are convinced that this is due to the quality of solutions and our effectiveness in monetizing content on behalf of our creators. Overall, we are pleased with the market response towards our Plus Solutions, in particular, the growth in content management, which has highly predictable recurring revenue streams and continues to garner a lot of interest from large enterprises. We’re also excited about the developments in direct advertising.
I’m going to hand the call over to Ben Groot, our CFO to review our financial performance in details. And then after that, I will highlight our outlook for the business. Ben, please take it away.
Ben Groot
Thank you, Shahrzad, and good afternoon, everyone. Before I begin the review of our Q2 performance, I’d like to remind everyone that our cost of revenue as presented in our results includes the amortization of assets recorded as part of our purchase price allocation or PPA when BBTV Holdings acquired our main operating entity, BroadbandTV Corp. for our IPO in the fourth quarter of 2020. Amortization associated with the PPA in the amount of $7.5 million was recorded in cost of revenue for Q2 of 2022, it should be noted that this is a non-recurring transaction and the amortization is non-cash.
Accordingly, we will provide commentary on the company’s gross profit and gross margin as for the statutory filings without the PPA amortization, as well as metrics of BBTV share and adjusted gross margin.
Now turning to our results. The second quarter did not reflect the seasonal uplift. We typically see in Q2 for our Base Solutions revenue, primarily due to a decline in views that resulted from recent consumption changes, which offsets the usual seasonal gains. Although, our base solutions revenue remained flat sequentially and declined year-over-year, we see significant fundamental tailwinds driving revenue contribution in our business in the future. These tailwinds include the expedited activation of YouTube Shorts monetization and the diversification of our Base Solutions to additional platforms like Facebook.
This is in addition to our focus on growing our Plus Solution revenues, which continues to experience significant growth and benefits from our investments in this segment. With the growth in Plus Solutions, our overall gross margin improved year-over-year to 8.3%, which continues to reflect the positive shift in our revenue mix.
Our viewership retention rates also remained exceptionally high at 98% for Q2 and 94% for the last 12 months. The total revenue for Q2 was $99.9 million, which is 15% lower than the same quarter last year due primarily to the exceptionally strong comparison period of Q2 last year, when we had experienced a resurgence in advertising spending, coming out of COVID.
Our total views of 95 billion were down 14% from Q2 last year, reflecting not only the post-COVID pullback and viewership as a result of the pent-up demand for off-screen activities such as travel and outdoor pursuits, but also the impact of the growth and consumption of micro-content, which we’ve seen in the last few quarters.
Micro-content views are not currently monetized and we are in the early stages of signing these creators. As our main focus of the content acquisition team is to onboard monetizable creators. As Shahrzad mentioned, we are now ramping up our efforts to sign micro-content creators, as we expect this format will begin being monetized earlier than originally forecasted.
RPMs were down 5% in the quarter compared to a year earlier due to the impact of YouTube Shorts viewership, which remained steady at about 20% of our total views, roughly the same as the prior two quarters. As we previously noted, this artificially depresses the RPM figures because YouTube Shorts were not being monetized.
If we exclude YouTube Shorts viewership, our Q2 RPMs would’ve grown by 4% year-over-year and our H1 RPMs would’ve grown by 10% year-over-year. We consider this to be a significant future growth opportunity and we’re now ramping up our micro-content acquisition efforts. Alphabet’s announce announcements that they are accelerating their plans to monetize YouTube Shorts is a positive for BBTV, as it should benefit both our views and RPMs.
We therefore expect our RPMs to trend upward with the combined benefits of our Plus Solutions continuing to scale and the activation of YouTube Shorts monetization. Our Plus Solutions revenue was up 29% year-over-year to $13 million, which partially offset the 20% decrease in Base Solutions revenue resulting from the lower views and RPMs.
The growth in Plus Solutions was led by continued strong performance in Content Management and our Direct Sales and Mobile Gaming Apps also had strong results. The Plus Solutions growth rate was below our 40% guidance, which we anticipated for this quarter and we remind everyone that our guided revenue growth rate of 40% for Plus Solutions is annual guidance.
While there were continued to be some lumpiness in its ramp up, we still expect Plus Solutions to see further benefits from our investments, allowing us to grow our BBTV share and gross profit at a faster rate than our total revenue over time. We remain focused on higher margin Plus Solutions and we’re becoming less sensitive to the short-term volatility of views.
Our gross profit for Q2 was $8.3 million, excluding PPA amortization, representing a gross margin of 8.3%. This improved from 7.8% in the same period last year, due to the higher revenue mix of Plus Solutions. Plus Solutions now represents 30% to 40% of our total gross profit, up from 20% to 30% last year.
BBTV share, which is revenue less content creator and third-party platform fees was $8.7 million and our adjusted gross margin was 95.5% comparable to 94.9% in the second quarter last year.
Operating expenses were $16.2 million for the quarter or $1.2 million higher than the same period last year, due to higher sales and marketing expenses as part of our investment in Plus Solutions. It’s important to note that the OpEx levels for Q2 do not yet reflect the savings identified through our previously announced cost optimization program, which should start being reflected in Q3 results.
The lower Base Solutions revenue and the increased spending for our growth businesses resulted in an adjusted EBITDA loss of a $5.7 million for Q2. With our cost optimization program continued ramp up of our Plus Solutions and activation of YouTube Shorts monetization, we see a clear path to EBITDA profitability for the business in the future.
In terms of the balance sheet, we ended the quarter with $22.8 million in cash and utilize $9.5 million of our $15 million overdraft facility. Our long-term debt balance was $54.1 million as of June 30 with maturity in 2026. Based on our forecast and EBITDA breakeven timelines, we are comfortable that BBTV has adequate liquidity for at least the next 12 months.
I will now turn it back to Shahrzad.
Shahrzad Rafati
Thank you, Ben. I would like to itemize some of our activities that we’re working on to scale our revenues and increase our margins. We will continue to concentrate most of our activities on Plus Solutions, where margins are higher and opportunities are increasing. However, we’re also shoring up our Base Solutions streams in two ways. We will work with YouTube to monetize YouTube Shorts, and then now announce accelerated timeframe.
And we are further diversifying our creator base to other platforms like Facebook in a scalable way under our newly launched multi-platform partnership program. This is a key driver to grow our overall revenue and improved growth margins for our Base Solutions. As margins on new platforms are 4 to 6 times higher than current Base Solutions with YouTube. Content management will continue to be a key driver for Plus Solutions growth. We plan on continuing to leverage our key competitive advantages to help new and existing clients, build, grow and monetize their audiences online.
We have a very strong pipeline of enterprise clients and we will continue to keep investors updated on them as they come to fruition. The direct ad sales growth strategy consists of five key elements. One, hiring the best talent; two, delivering larger transactions from strategic clients; three, delivering premium reach for CTV buyers; four, promoting our bipart, which is black indigenous people of color creators and leveraging our ability to track media dollars directly to minority owned businesses; and finally, leveraging our massive data sets and leveraging unique insights.
We continue the expansion of our direct advertising team in the east central and west U.S. markets. As a reminder, expansion is designed to enhance our reach, our presence and expertise in our core category segments of CPG, auto, apparel, NGO, entertainment, tech, and beverage.
Earlier this year, we brought on Erich Lochner to help us expand our Base Solutions in a scalable way across other platforms like Facebook, Instagram, TikTok, and others. He has successfully scaled similar offerings twice before at Jellysmack and Outloud Media, neither of which have access to BBTV’s uniquely extensive community of creators, library of content, technology, and infrastructure. Our contracts with 5,000 creators, industry leading tech teams and years of expertise in the creator economy uniquely positions us to be a major player in this space, we are currently ramping up on Facebook and will be scaling up on other platforms like Snapchat and TikTok in the near future.
There’s growing demand for micro content like YouTube Shorts, TikTok, and Instagram Reels. As I mentioned, micro content views are not currently monetized and we’re in early stages of signing these creators. As the main focus for our content acquisition team is to onboard monetizable creators. Now that we expect this format will begin monetization earlier than originally forecasted, our team is now ramping up their efforts to sign micro content creators.
Once YouTube Shorts becomes monetized across our entire library, it could represent incremental revenue of approximately $90 million annually across our Base Solutions at the current market rates. In mid-June, we conducted cost optimization exercise that reduced our headcount by approximately 14%. Given the current market conditions, we felt it was also prudent to put our focus on core activities that will help drive us towards sustained positive cash flow faster. The impact of the cost optimization exercise did not impact our Q2 results and will be realized in the coming months.
With respect to M&A, we remain engaged on several funds, however, we are cautious of our share price and will ensure that any transactions that we do in the future are accretive to current share price levels.
I want to conclude by saying that we have a very strong business model that is really valuable to creators and makes us sticky. Our business model and technology are highly scalable and extensible, so we’re able to continuously add new revenue streams at minimal expense. And we have proven that our business model can deliver meaningful cash flow. Based on forecast and adjusted breakeven timelines management is comfortable that it has adequate liquidity for at least the next 12 months.
The first half of 2022 has been challenging throughout the industry and we believe that we are exiting a revenue and earnings trough. With the accelerated monetization of YouTube Shorts and our future expansion onto other platforms like Facebook, we have visibility towards higher revenue growth. The first half of 2022 has been challenging throughout the industry. And we believe that we are exiting a revenue and earnings trough. With the accelerated monetization of YouTube Shorts and our further expansion onto other platforms like Facebook, we have visibility towards higher revenue growth.
BBTV has the foresight to diversify this revenue streams to Plus Solutions and as a result, we are uniquely positioned to come out of this trough with higher quality revenue and higher margins that we’ve ever had for the business. With our cost optimization, profitable growth is more attainable than ever before. We’re excited about the future, our business is strong, and I believe that we’re allocating capital in a way that maximizes the value of our company.
We can now open it up for questions.
Question-and-Answer Session
Operator
Thank you, ma’am. [Operator Instructions] Our first question comes from Adhir Kadve from Eight Capital. Your line is now open.
Adhir Kadve
Hi. Thanks guys. Thanks for taking my questions here. I wanted to ask about the accelerated YouTube Shorts timeline. Can you give us a sense of when that timeline kind of starts? And I think previously you may have said maybe Q4 is the best timeline for that, but given that it’s accelerated, can you give us a new kind of guidepost?
Ben Groot
Yes. Absolutely. Go ahead, Shahrzad.
Shahrzad Rafati
Go for it, Ben, go for it.
Ben Groot
Yes. Yes. Largely Adhir based on Alphabet’s earnings call a couple weeks ago, they had mentioned that they’re accelerating the monetization of YouTube Shorts and so they’ve already been testing it even last quarter. But they’re expecting to ramp that up at scale in the second half of this year, so going into Q3 and Q4.
Adhir Kadve
Okay, great. And then maybe just on the back of that, your micro content acquisition efforts, can you kind of give us a sense of, of what that would entail? It seems as though, given your deep library of content and content creators with YouTube, it seems as though this would be kind of – it’d be almost easy for you guys to get those content creators who are also probably creating on YouTube Shorts. So give us a sense of how your micro content acquisition efforts will kind of play out?
Shahrzad Rafati
For sure. So when it comes to our content acquisition efforts, as you know, we’ve been actually really focused on monetizing content and content creators that have monetizable content. And as a result of it, the focus hasn’t been onboarding necessarily short form content. But even with that, as you know, Adhir, 20% of our viewership are actually coming from YouTube Shorts. And now that shorts are about to be monetized, we have given the content acquisition team, the mandate to onboard more content creators that have that diverse range of the micro content and also regular YouTube content.
The way we see the platform evolving, you would actually look at every content creator having a range of multiple formats from micro content, less than a minute long to shorter – to longer form content. And again, we have the team in place to be able to onboard obviously content creators that have shorter form content. So the ramp over that is already underway. And we will actually see the YouTube Shorts viewership increasing as this format gets monetize.
Adhir Kadve
Okay. And then just maybe on the diversification onto Facebook, can you give us any additional color here? What would that entail? Maybe how long it would take any costs associated with that and what’s your expectations where we are?
Shahrzad Rafati
For sure, I mean, when it comes to the multi-platform program really the idea is to take place and make specifically Facebook and meta scalable revenue streams. Given the fact that with our existing contracts, we already have the rights from the content creators across all platforms digitally including Facebook and what we’ve done is it’s just – it comes down to repurposing existing content based on audiences that are already consuming it and launching those new channels on particularly Facebook where it would allow us to generate revenue streams. For some content creators as a matter of fact, this revenue stream maybe even more attractive then YouTube in terms of scale. And to answer your question in terms of like the revenue opportunity we think is going to be significant of course, this year and next year are going to be build years. And you would actually see this ramping up as we look at end of 2023 and to 2024.
I don’t know if Ben you want to answer that?
Ben Groot
Yes. I think just the other piece to that is because our strategy is a bit different on Facebook, in that we’re repurposing existing content and we’re the ones doing the video editing and the content deployment. We’re able to charge a much higher revenue share to our creators. And so we expect the margins on new platforms, like Facebook to be at least five times higher than our existing Base Solutions, so even higher than some of our Plus Solutions.
Adhir Kadve
Okay. Got it. And then maybe just in terms of the cost optimization, I know you guys said, it’ll probably start taking place in Q3 onwards, but can you give us some additional color on where you really see these efforts kind of having where – where they’re going to really take place?
Ben Groot
Yes. As I’m sure you saw in our press release an update on our cost initiative. We had reductions of about 14% of our total head count. So it’s largely in relation to headcount and then where we focused was where areas that were less profitable. So we had targeted certain business units like base solutions and shared services when it came to the savings.
Adhir Kadve
Okay. Got it. And unless…
Shahrzad Rafati
Yes. And I you to ask that, really when we were looking at cost optimization, of course, as we outlined we want to make sure that the management believes in the conservative case, we have liquidity needed over the next 12 months. And as – and as a business we actually do this exercise on an ongoing basis because we want to make sure that we have a strong business. And when it comes to specifically cost optimization exercise, whether if it’s across revenue or shared services, the really goal is to get to sustainable profitability. So and our office exercise, our cost optimization exercise is just really all around that.
And so how do we get to the business to that sustain profitability as quickly as possible. And this is why when we’re looking at Plus, and the growth of Plus, if you’re looking at the core components of Plus Solutions where we saw more than 40% growth, and we are guiding against that. We can continue with that – with those growth rates moving forward. We’re still doubling down on Plus and again, growth rates have been very promising, which really shows that management had the foresight to diversify revenue streams and really grow the revenue streams across Plus Solutions that are higher margin.
Adhir Kadve
Okay. Thank you very much, guys. Thanks for all the colors I’ll pass the line.
Shahrzad Rafati
Thank you.
Operator
Thank you for your questions, sir. There are currently no questions registered at this time. [Operator Instructions] There are no questions registered at this time. So we will conclude the call here. That will conclude the BBTV Holding Second Quarter – sorry ma’am continue.
Shahrzad Rafati
No, that’s great. No. I said thank you everyone for joining.
Operator
That will conclude the BBTV Holding second quarter 2022 conference call. Thank you for your participation. You may now disconnect your line.
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