Good morning, ladies and gentlemen, and welcome to the Stingray Group Inc Q2 Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we'll conduct a Q&A answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, November ninth, 2022. I would now like to turn the call over to Mathieu Péloquin. Please go ahead, sir.
Thank you, sir. Bon matin. Good morning, everyone, and thank you for joining us for Stingray's second quarter conference call for the period ending September 30, 2022. Today, Eric Boyko, President, Chief Executive Officer, and Co-founder, and Jean-Pierre Trahan, Chief Financial Officer, will be presenting Stingray's financial and operational highlights for Q2 of fiscal 2023. Our press release reporting Stingray's second quarter results for fiscal 2023 was issued yesterday after the markets 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 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 June 7, 2022, 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're 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 our CEO and President, Eric Boyko.
Thank you, Mathieu. Sorry for the voice this morning. Good morning, everyone, and welcome to our second quarter conference call for fiscal 2023. Stingray continued to deliver against its long-term growth strategy in the seasonally soft second quarter, with revenues increasing 9.8% to CAD 77.6 million. In recent months, we have focused on better monetization of our investment in driving operational efficiency. As a result, we have narrowed our focus on proven high-growth pillars, such as retail media, FAST channel, in-car entertainment, and B2B-driven subscription-on-demand SVOD to accelerate our digital transformation. On the profits side, we generated Adjusted EBITDA of CAD 27.0 million, resulting in a margin of 34.8%. I am pleased with the progress we have made on the margin with a 140 basis points improvement from the previous quarter.
Based on ongoing revenue momentum and cost control measures, we are confident about sustaining a 35% adjusted EBITDA margin by fiscal year-end. Turning to our business segments, broadcast and commercial music revenues grew 17% to CAD 44.9 million in the quarter, again, largely based on Stingray Advertising fueled by InStore Audio Network acquisition. The Stingray Advertising business segment secured another big win last week with Time Out joining Stingray's advertising retail network. In all, we are now over 20,000 locations across North America, including 16,000 in the United States, which are now certified by Geopath, a nonprofit organization that provides industry-standard audit metrics for out-of-home advertising. Stingray also maintained momentum in the FAST channel market in the quarter with stream hours nearly doubling year-over-year to 13.7 million hours.
We recently signed a distribution agreement with LG and TCL for a suite of FAST channel designed for smart TVs and webOS operating system. Turning to in-car entertainment, we continue to grow our footprint in the automobiles with Stingray Karaoke. Revenues were up more than 40% in the second quarter. As indicated in previous quarters, we're engaged in talks with several other car manufacturers to integrate our technology in the new models, but the sales cycle is prolonged and must run its course. In terms of SVOD, our subscriber count climbed 24.4% to more than 760,000 at the end of the quarter. We're nearing our goal of reaching a million subscribers, but more importantly, we are focused on gaining higher-margin subscribers through B2B2C partners who have large installed customer base. Moving on to our radio business.
Revenues improved 1.3% to CAD 32.7 million in the second quarter as the segment benefits from a gradual return to normal commercial post-COVID operations. Although radio is not a high-growth business, it generates healthy cash flows that support our digital transformation. In closing, our capital allocation strategy remains unchanged. Given persistent inflationary pressure and the uncertain market environment, we will focus on debt reduction while dedicating the necessary resources to grow our high-margin digital business. We have taken a cautionary approach and have realized CAD 12 million in OpEx savings on a recurring basis, that will be coming over the next few quarters. We are confident to bring the debt level closer to three by the end of the year. With this, I will turn it to you, Jean-Pierre, to do the financial overview. Thank you.
Thank you, Eric. Good morning, everyone. Revenues reached CAD 77.6 million in the second quarter of 2023, up 9.8% from CAD 70.7 million in Q2 2022. As Eric explained, the growth was primarily due to the acquisition of InStore Audio Network. Revenues in Canada improved 1.2% to CAD 47.2 million in the second quarter of 2023. This year-over-year increase can be attributed to a growth in radio revenues based on the gradual easing of COVID-19 restriction and a return to normal commercial operations. Revenues in the United States grew 69.2% to CAD 18.4 million in Q2 on the strength of the InStore Audio Network acquisition. Revenues in other countries decreased 8.7% year-over-year to CAD 12 million in the most recent quarter.
The decline reflects lower audio channel and commercial revenues and a negative foreign exchange impact. Looking at our revenues by business segment, broadcasting and commercial music revenues rose 17% to CAD 44.9 million in the second quarter of 2023. Again, the increase was primarily driven by the InStore Audio Network. Radio revenues improved 1.3% year-over-year to CAD 32.7 million in Q2 2023 due to the gradual easing of COVID-19 restrictions, a return to normal commercial operations. In terms of profitability, consolidated adjusted EBITDA increased 5.6% to CAD 27 million from CAD 25.6 million in Q2. The increase in adjusted EBITDA was primarily due to the acquisition of InStore Audio Network, partially offset by the Canadian wage subsidy program in 2022.
By business segment, broadcasting and commercial music adjusted EBITDA increased 16.6% to CAD 16.9 million, mainly due to the contribution of InStore Audio Network. Radio adjusted EBITDA, meanwhile, decreased 9.6% year-over-year to CAD 11.3 million. The decline can be attributed to a lower gross margin related to the larger proportion of digital revenues and the CEWS program in Q2 2022. In terms of corporate adjusted EBITDA, which represent head office operating expenses, less share-based compensation, as well as performance and deferred share unit expenses, it amounted to - CAD 1.2 million in Q2 2023. Stingray reported a net income of CAD 2.3 million, or CAD 0.05 per diluted share in the second quarter of 2023, compared to CAD 12.1 million or CAD 0.17 per diluted share in Q2 2022.
The decline is caused mainly by our unrealized change in fair value of contingent consideration of CAD 6 million, higher interest expenses, and an unrealized loss on derivative instrument. Adjusted net income totaled CAD 10.8 million, or CAD 0.15 per diluted share in Q2 2023, down from CAD 16.3 million, or CAD 0.23 per diluted share in the same period of 2022. The decline is caused mainly by unrealized change in fair value of contingent consideration of CAD 6 million and our higher interest expenses. Turning to liquidity and capital resources, cash flow generated from operating activities amounted to CAD 18.4 million in Q2 2023, compared to CAD 20.4 million in Q2 2022. The decrease was mainly due to higher income tax paid, higher negative change in non-cash operating items, and higher restructuring and other costs, partially offset by higher operating results.
Adjusted free cash flow totaled CAD 15 million in Q2 2023, compared to CAD 15.4 million in the same period of 2022. The decrease was mainly due to higher interest paid, partially offset by improved operating results. From a balance sheet standpoint, Stingray added cash and cash equivalents of CAD 15.4 million at the end of the second quarter, subordinated debt of CAD 25.5 million, and credit facilities of CAD 368.4 million, of which approximately CAD 64.8 million was available. Total net debt at quarter-end stood at CAD 378.5 million or 3.44x pro forma adjusted EBITDA as expected. Because of potential benefits payable to the CRTC, ability to incur debt was decelerated in the same quarter.
We were given a grace period by the Canadian government during the pandemic, but in fiscal 2023, we have a total of CAD 13 million in regulated payment due to the prescribed recipient in August of this Q2 and the coming November. Going forward, our focus will be on reducing our debt as outlined by Eric. Finally, we repurchased and canceled 46,000 shares for a total of CAD 300,000 under our Normal Course Issuer Bid program in the second quarter. This ends my presentation for today. I will now turn the call back to Eric.
Okay, thank you, JP. This conclude our prepared remarks. At this point, Jean-Pierre and I will be pleased to answer any question you may have. Thank you again for being on the line today, and we appreciate all your support.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star key followed by the number one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your question will be polled in the order that they were received. Should you wish to decline from the polling process, please press the star followed by the number two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment please, for your first question. Your first question is from Adam Shine from National Bank. Please go ahead, sir.
Morning. Eric, maybe we could start with macro, and obviously we've seen companies reporting and talking about some softening trends, you know, in terms of advertising, but also in regards to consumer behavior. Can you speak at all about the last few weeks and the line of sight going into the next quarter, how things are trending, any incremental pressures? And then one or two more.
Yeah, I guess our business is pretty recession-proof or robust. The broadcasting side does not much impact. The car business, there's not much impact. Retail media is on the opposite side, increasing. Retailers wanna do ads in stores, so we're seeing incredible numbers that we're gonna have in October, November, December. Even radio. Radio, because we're much more local than our competitors, radio is gonna be pacing in Q3 the same that we're pacing in Q2. Everything is pretty stable as of now, and we're already halfway through the quarter. Like I mentioned, we did our OpEx savings of CAD 12 million. We're gonna start seeing those savings coming in the October, November, December quarter. It's pretty material. We're looking at CAD 3 million a quarter.
That's why we also had a lot of severance this quarter, which affected our net income. I think we're making the right moves and I guess the trends for us right now are looking good, compared to last year and compared to our budget.
Just touching on the margin. I mean, obviously, I think two, three quarters ago, remember, you signaled that the margin would be perhaps in the 33%-35% range for the year. Then obviously, you know, I think in your disclosures today and in the release yesterday, you're talking more about a sustaining level of about 35%. Part of it is obviously the additional OpEx savings. Maybe you can elaborate on those as well. Just to be clear, if I can understand, is it a matter of delivering 35% on the year and being confident of continuing that, you know, into next year?
Is it more about sort of exiting the year, sort of closing out Q4 at a 35% level, you know, to gear up for next year?
Well, a very good point. I think our we can raise our range from 33%-35% to 35%-37%. For sure, the cost saving, you're looking at CAD 3 million a quarter out of CAD 80 million of sales. Just that will increase our margin by 4%. The cost saving, what we did, Adam, was really look at our projects that were profitable three years ago and are not profitable now because of all the extra costs of inflation and salary. We're really being more efficient, more productive without cutting growth. A lot of our projects were nice to have, and now we're realizing that those nice to have projects are not making money.
I think the focus is good, and I think we started this process of cost saving in June. I think we might even beat the CAD 12 million run rate of savings. We're focusing on higher margin products. When you focus on higher margin product, you make more EBITDA. I think, you know, I think we're adjusting well and like we see in the market, most companies adjusting.
Just lastly, you know, on leverage, obviously, you've talked about it in regards to trying to get it down from your reported level, you know, towards that 3x. You know, you're slowing the buyback, you're focused on the de-leveraging. Obviously you're looking at margin to boost EBITDA and free cash flow. Are there any component parts of the business that, you know, might have some monetization opportunity in the context of a sale at this point, or not necessarily so?
No, we don't. We maintain, you know, we're gonna do again close to CAD 70 million of free cash flow this year. We're doing CAD 1 per share, so we're gonna reallocate most of that free cash flow towards debt repayment. As you saw, we have tangible benefits. This year we're paying for almost three years of tangible benefits. It is paying back debt, but it's not debt with interest. I think it's the right focus. The good news is we have another three years of CAD 5 million a year of tangible benefits to the CRTC, and that will be finished forever. We're one of the last few companies in Canada that has tangible benefits. We tried to convince the CRTC that this tax is not fair, but they kept their position.
No, I feel very confident to be close to three by the end of March. I think our focus is in a year from now to be lower than 2.5. With the strong free cash we have with the cost savings, and most of our sales are B2B, you know, they're pretty much guaranteed. Amazon, Comcast, and all these, TCL, FAST, Samsung are not gonna lose the number of screens, and Tesla. That will be our primary focus as a management team.
Okay, great. I'll leave it there. Thank you very much.
Thanks, Adam.
Your next question is from Matthew Lee from Canaccord. Please go ahead, sir.
Hey, morning guys. Maybe start with a housekeeping question. Just how much in intangible payments did you say that you were planning to make in November? Then how much more was there in 2023 and 2024?
Yeah. In November, we still want to hit closer to CAD 3 million. We got about CAD 6 million in November, and then we have for the next three years, in August, we have CAD 5 million, CAD 5 million, CAD 5 million. The good news is on the Stingray Digital side, we had tangible benefits when we did the IPO, so that's finished this year. Now we're paying a tangible benefit for the radio with the NCC acquisition. We got CAD 15 million left.
Got it. One more. You mentioned that CAD 70 million in free cash flow just now, that kind of implies a relatively sizable ramp-up in the second half of the year. Can you maybe help us decipher where that's coming from?
Yeah, for sure. Our biggest quarter is Q3. You can expect, you know, a strong Q3 even with the looming recession. So far we're looking in good shape. The retail media is very strong, lots of demand. That also is really surprisingly happy. I guess advertisers are looking to transfer from TV and radio to more in-store. That's a good ramp-up. Our cost saving initiative are kicking in. In Q2, you don't see it. I'm sorry for my cough. In Q2, you don't see it, but you'll see it coming in Q3, Q4, and the rest of next year. The CAD 12 million in cost savings we did or in productivity is recurring.
It's on salaries. No, we didn't cut the Christmas party or the holiday party. We're gonna see it next year, and I think it just makes Stingray leaner, a lean company and also more productive.
Great. Just in terms of finding advertisers for the digital out-of-home services, it looks like advertising revenue is sort of flat quarter-over-quarter. Is that seasonality demand related, or are you just being patient with the partners as you find inventory?
You're absolutely right. It is 100%, based on, you know, the first quarter, I mean, so was— No, we have a big decrease in retail media in Q2, and you're gonna. You know, it is seasonal. We're gonna see a huge increase in Q3 compared to Q2. So there is, there's much more seasonality for now. Also, in this business unit, we invested a lot of money. We hired a lot of new reps. We have close to CAD 100 million inventory in Canada and $200 million in the US right now. So the issue is about how do we execute and sell that inventory. So our focus is really executing on this inventory that we have, that's exclusive. And we have a certain advantage with this program.
The issue, it's still new. We have to evangelize it, you know, it's when you go to stores, you're gonna hear it more and more. In every store you go, you're gonna hear the ads. Advertisers are getting used to it, so that's our feeling.
Okay. Thanks, guys. I'll pass the line.
Thanks, Matthew.
The next question is from Scott Fletcher from CIBC. Go ahead, sir.
Hi, good morning. Sort of a follow-up on your last answer there. Can we get an update on the ramp-up of the sales team in the U.S.? I know that you had sort of been looking to target sales reps to target agencies. Sort of a further question on the progress on rolling out sort of the measurement capabilities in the U.S. Is that still sort of about the same team?
Yeah. Good point.
You talked about last time? Yeah.
In terms of our cost saving of CAD 12 million, we're a bit more. We're investing close to CAD 1.5 million in a new team. We have four new partners in the U.S. that just joined our team. We have one more in Canada. In terms of boxes, out of the 4,000 I SMB boxes we needed to transfer, I think we're almost at 2,500. And the other boxes, we'll be able to use our technology on these boxes. We're ready to go in the U.S. of being a measured platform. I think it's gonna be, you know, but it's gonna take, you know, 3-6 months for this team to come in.
Even in the meantime, there's a lot of demand that we're getting from the actual team. I must say, retail media went from almost zero last year, and we're gonna hit close to CAD 40 million this year. It's a material as a progress. You know, I think retail media has the potential in terms of inventory we have to surpass radio in the next few years.
Okay, thanks. Maybe sort of in the Canadian business, obviously, things seem like they're going well on the retail media side. Are you seeing any lift to the CPMs as people shift out, as advertisers shift, maybe, like you said, away from whether it be TV or some of the other channels?
Yeah. Our CPM in retail media is, you know, in Canada we're almost hitting close to CAD 20 CPM. In the U.S., we're improving the CPM with the measurement. For sure, you know, that's where there's a lot of scalability. You go from a CPM from $3-$12 with the same number of ads, you quadruple your sales. That is our primary focus. Just to say, we are by far the biggest retail media network in terms of audio in the world. We're well-positioned, and it's a new market. We also have, like I said, we already have the network because we have over 80,000 boxes installed in the US and Canada. It's almost like if we're a mini cable company.
Okay. Thanks, Eric. I'll leave it there.
Your next question comes from Tim Casey from BMO. Please go ahead, sir.
Yeah, a couple for me. Eric, can you just give us a little more color on what you're seeing in the quarter? As you've mentioned several times, the December quarter is a fairly seasonally significant one for you. How would you describe overall the ad growth? I know you're quite excited about retail, but maybe just talk about some of the other platforms, particularly radio. Then when you look out to next year, how are you thinking about radio in particular? You know, we've sort of normalized the financials, I guess if you will. You're through the headcount cutting, the queues are gone.
How are you thinking about that business and what sort of margin sort of contributions are you expecting in the context of what is now consolidated 35%-37%? Thanks.
Thank you, Tim. You know, for this quarter, again, we see radio very stable like in Q2, so a small increase in sales compared to last year. Again, we keep our costs low, so we see pretty much the same trend that we saw in Q2. Retail media is gonna be a huge quarter for us because it's a lot. You know, we're getting a lot of buys right now in October, November, December, so that has a huge impact. We have the cost savings coming in. Radio for now, you know, national is soft, but we have a very strong local sales team. I think that's the difference between us and Corus and Rogers and Bell.
I think our sales team is really overachieving compared to our competitors. That's working well. With the cost savings we have, we feel confident to maintain EBITDA margin of higher than 35% because you know, the cost saving represents anywhere from 4%-6% of EBITDA, and those are there to stay. I think we're well positioned. For sure there's a big recession we'll have to see for the radio. Radio last year, you know, did CAD 135 million, CAD 130 million off my head and about CAD 42 million-CAD 44 million EBITDA. We're still having margin of 35% EBITDA, even if the sales are lower than our peak of CAD 155 million.
Thank you.
Thank you, Tim.
Your next question comes from Drew McReynolds from RBC Capital. Please go ahead, sir.
Yeah, thanks very much. Excuse me. Good morning. I missed the first part of the call, so I apologize for any repeat here. Just on the modeling side, clarification on the tangible benefits. You have a payment going out in November, CAD 6 million, and then another payment in aggregate, CAD 15 million in August. Did I get that right?
No. CAD 6 million in November, and then it's gonna be CAD 5 million of August next year. August 2023, 2024, 2025.
Got it. Okay. Awesome. Thank you.
which by the way, the tangible benefits are in our books. It was booked as a debt when we did the deal. It's just that we thought we could—I thought we would be able to delay it more, but the CRTC doesn't want us to delay it more. You know, we're regulated, so we gotta follow the regulator.
Yep. Understood. Again, just for kind of modeling with respect to free cash flow here, cash taxes and CapEx, just remind us cash tax rate we should be assuming and then where CapEx comes in, just given all the kind of efficiency focus you're putting in.
Yeah, that's a good point. For sure, with interest rates or, you know, interests are higher, but I guess we're able to deduct 33%, so that's the advantage of interest. That will lower our taxes. For sure, with our cost synergies of CAD 12 million, you know, you're talking about close to 100 people. You know, it's less computers, less phones, less chairs. Our CapEx is gonna be much tighter. I'll have to get back to you with the exact number. JP and I will get back to you for what would we see. You can expect our CapEx and our income tax to be lower, offset by higher interest rates.
Yeah. Got it. Last one for me on the streaming subscribers, and I apologize if this is a repeat. Just can you give an update, you know, on where you are with respect to kind of the mix of those subs and, you know, the churn you're seeing and obviously we're entering now a seasonally strong period. Thank you.
Yeah. For us, you know, on the SVOD side, for sure there's a big focus and a big progress on the B2B2C side, so Amazon and Comcast and Cox. The good news is there's more platform being launched. You know, we're working right now with our friends at YouTube and Google as an SVOD platform that we're gonna be launching with. Amazon is expecting to launch in 12-14 more countries. And then we
New product.
The new product. We're also launching with all of our clients. With Calm Radio, we launched the SVOD Calm Life. That is a brand new product in the music sector for wellness and meditation. We're able to leverage our big partners to really use their network and their expansion. Those customers on the B2B side, there's technically no churn because there is a churn, but we don't. You know, they give us the churn, but you know, Amazon and Comcast and Cox and all these partners continue to grow month-over-month. A bit slower these days compared to last year, but they always grow. I think it's gonna be a sustainable platform for Stingray for the years to come.
I think we'll be hitting our million subscribers, you know, hopefully in the next 12-18 months. The growth is well positioned. I'm excited with the new partners on launching SVOD platform. The beauty, it's one check, huh? We get one check from Amazon, we get one check from Comcast, we get one check from Claro, from Izzi. It's a great business model for us to scale and have, you know, 80%-90% EBITDA margin.
Thank you.
Thank you, Drew.
Ladies and gentlemen, as a reminder, should you have a question, please press the star key followed by the number one. We'll pause a moment for questions. There are no further questions at this time. Please proceed.
Okay. Thank you again for the analysts and all the companies that are covering us. We appreciate your time, and I know you guys are busy, and also everybody on the call. Thank you for being confident in Stingray.