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Edited Transcript of RAY.A.TO earnings conference call or presentation 8-Nov-18 3:00pm GMT

Q2 2019 Stingray Digital Group Inc Earnings Call

MONTREAL Nov 9, 2018 (Thomson StreetEvents) -- Edited Transcript of Stingray Digital Group Inc earnings conference call or presentation Thursday, November 8, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric Boyko

Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director

* Jean-Pierre Trahan

Stingray Digital Group Inc. - CFO

* Mathieu Péloquin

Stingray Digital Group Inc. - SVP of Marketing & Communications

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Conference Call Participants

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* Adam Shine

National Bank Financial, Inc., Research Division - MD, Head of Montreal Research and Research Analyst

* Bentley Cross

TD Securities Equity Research - Associate

* Caleb Ho

RBC Capital Markets, LLC, Research Division - Associate

* Deepak Kaushal

GMP Securities L.P., Research Division - Director and Technology & Communications Analyst

* Maher Yaghi

Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst

* Tim Casey

BMO Capital Markets Equity Research - Equity Research Analyst

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Presentation

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Operator [1]

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Hello. My name is Dan, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Stingray Digital Group Q2 2019 Conference Call. (Operator Instructions) Thank you. I would now like to turn the call over to Mathieu Péloquin, Senior VP of Marketing and Communications. Please go ahead.

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Mathieu Péloquin, Stingray Digital Group Inc. - SVP of Marketing & Communications [2]

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(foreign language) Good morning, everyone, and thank you for joining us on Stingray's conference call for the second quarter ending September 30, 2018.

Today, Eric Boyko, President, Chief Executive Officer and co-Founder; and Jean-Pierre Trahan, CFO, will be presenting Stingray's financial and operational highlights. Our press release reporting Stingray's second quarter results 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 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 7, 2018, which is also 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 maybe required by applicable law. Accordingly, you are advised not to place undue reliance on such forward-looking statements. (foreign language) And I will now turn the call over to Eric.

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [3]

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(foreign language) Good morning, everyone. I'm very happy to be here today to discuss our results for the second quarter and some more recent business highlights. Also happy to announce that for the first time, that Stingray has enterprise value close to $1 billion. So very, very proud to have hit that milestone.

So starting in the third quarter.

The transformational acquisition of NCC specifically alters Stingray's financials. NCC will be consolidated for the 2 months in what is considered as a seasonally strong quarter for the radio industry.

Despite this large and transformational acquisition, the corporation will maintain a healthy financial position and the capacity to pursue other acquisitions. Taking into account the NCC acquisition, the divesture of the NCC noncore assets and a product placement of $25 million, the net debt at closing is estimated to be at $356 million. On a pro forma and annualized basis, we estimate that our net debt-to-adjusted EBITDA to be at 3.16. Just as a reference, the noncore assets of NCC are a hotel and camps and should yield proceeds estimated at approximately $12.4 million. So far, we are very pleased with expected synergies, of which 92% was realized or $7.6 million out of $8 million has already been realized as of October 26, 2018, date of the close -- date of the closing of the transaction.

In terms of financial performance. We expect the radio operations to deliver year-over-year EBITDA growth, which is consistent with the past. In a separate press release issued Monday, we announced a $25 million private placement. We're very -- we're extremely pleased to have the Steele family, Irving West, reinvest some of their proceeds received from the NCC transaction with a $25 million private placement in Stingray shares at a price of $10.29. This is a syndicate premium of 25% above the prior-day closing price. As you know, it's the same price we issued our shares concurrent to the announcement of the NCC acquisition, and the same price that the people in the Eric Boyko holding company invested the money. This clearly reflects their confidence in the benefits of the merged companies and the tremendous growth opportunities provided by our digital platform.

With regards to Music Choice, our offer is still on the table, and we are open to discussions -- and we are open to discussion. We remain optimistic. But by the respect of our partners and the process, I'm sure you will understand I will not make further comments about the situation at this time.

We also state these in other fronts. We recently announced acquisition of DJ-Matic 10,000 locations in Europe; and Novramedia, also a business-to-business operation, with one of our biggest accounts being BMO; launched -- and also launched an 8 linear televised channels on Bell and made some key management hires. Jean-Pierre will soon review the results of the second quarter. We are proud to report another solid quarter with an adjusted EBITDA growth of 20%, fueled by organic growth of 5.4%, excluding equipment and labor projects and margin expansions when compared to last year. Since the beginning of the fiscal year, the drivers of this has been the growth in the SVOD and the Qello Concerts acquisition.

Just a few words on SVOD and B2C. Again, this quarter, SVOD was an important contributor to revenue growth year-over-year. More importantly, in the U.S., SVOD revenue increased, while subscribers slightly declined 1.8% over previous quarters. Starting in the third quarter, we expect some improvement in the subscriber base due to gradual introduction of new services, seasonality, which is very positive for us for certain of our products. And also, we're going to be launching our first B2C application by November, December. So Stingray will have the flexibility to have a true B2C product.

So going forward, we are very confident in our ability to deliver cross-selling and operational synergies related to the acquisition as well to have the capacity to pursue our acquisition program.

So with all this, a lot of news today, Jean-Pierre will now review our quarterly financials in more details. Jean-Pierre?

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Jean-Pierre Trahan, Stingray Digital Group Inc. - CFO [4]

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Thank you, Eric. Good morning, everyone.

Before I begin, let me remind you that all amounts are expressed in Canadian dollars, unless otherwise indicated.

Stingray generated revenues of $34.7 million in the second quarter, an increase of 11.1% compared with the of $31.2 million a year ago. The increase was primarily due to organic growth of SVOD services combined with the acquisition of Qello Concerts. Recurring revenues were up 14.5% to $30.7 million or 88.4% of revenues from $26.8 million when compared with that to recurring revenues as a percentage of total revenues increased from 85.7%.

Canadian revenues decreased 4.1% to $14.2 million or 41% of total revenues due to less equipment and installation sales related to digital signage.

United States revenues increased 54.5% to $8.1 million or 23.3% of total revenues, whereas revenues in other countries increased by 11.1% to $12.4 million or 35.7% of total revenues.

Music Broadcasting revenues increased 13.9% to $25.5 million, mainly due to organic growth related to SVOD services as well as the acquisition of Qello Concerts.

Commercial Music revenues rose 3.9% to $9.2 million, mainly due to the acquisition of Novramedia, Satellite Music Australia and SCA Music, combined with organic growth related to international expansion, partially offset by a decrease in equipment and installation sales related to digital signage.

As a result, adjusted EBITDA was up 20.9% to $11.4 million from $9.5 million a year earlier. The increase was primarily due to the acquisition realized in fiscal 2018 and 2019 and to organic growth related to SVOD services, partially offset by higher operating expenses related to international expansion.

Adjusted EBITDA margin also increased to 32.9% from 30.3% a year ago and was mainly related to a decrease in equipment and installation sales, which present lower margin, combined with the increase of adjusted EBITDA margin of Yokee Music after successful integration, which had the effect of reducing royalty expense and other operational costs.

For the second quarter, the corporation record a net income of $0.8 million or $0.01 per diluted shares compared to a net loss of $3.4 million or $0.07 per diluted share last year. The increase was mainly attributable to lower legal fees and higher operating results, partially offset by higher income tax expense and depreciation.

Adjusted net income increased 24.1% to $6.7 million or $0.12 per diluted share compared to $5.4 million or $0.10 per diluted share a year ago, as higher operating results were partially offset by higher depreciation and income net tax expense.

Cash flow generated from operating activities increased to $5.5 million into the second quarter from $2.7 million a year earlier. The increase was mainly due to lower legal expense and a higher operating results, partially offset by the negative change in noncash operating margin and higher income tax paid.

Adjusted free cash flow from -- flow decreased to $5.4 million from $6.9 million for the same period a year ago. The decrease was mainly related to higher capital expenditure and income tax paid, partially offset by higher operating results.

Looking at our financial position. Stingray conclude the second quarter with a cash and cash equivalent of $2.2 million. Our net debt position was $55.2 million, resulting in a net debt to last 12 month adjusted EBITDA ratio of 1.21. NCC will be consolidated for 2 months in the third quarter and in full in the fourth quarter.

I will now turn the call back to Eric.

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [5]

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Okay. Thank you, Jean-Pierre. So as you can see, a lot of information and data in this summary today. This sums up our conference call for today. Thank you for your time and attention. At this point, Jean-Pierre and I will be pleased to answer any questions you may have. So back to you, guys.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Adam Shine with National Bank Financial.

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Adam Shine, National Bank Financial, Inc., Research Division - MD, Head of Montreal Research and Research Analyst [2]

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Eric, maybe let's start with NCC. Just a few points of clarification. The noncore assets have already been divested? Or we could see that for...

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [3]

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It hasn't been digested, but our agreement has been consumed, meaning the deal has been done and we're going to be getting the cash in the next few months. And it's included in our 3.16 EBITDA ratio.

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Adam Shine, National Bank Financial, Inc., Research Division - MD, Head of Montreal Research and Research Analyst [4]

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Yes, understood. The realization of your royalty $8 million of cost savings, pretty quick, do you see an opportunity now that you actually have the keys to the asset to maybe build on that in some way in the near term?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [5]

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Yes. So right now, for sure, we've done $7.6 million on the $8 million at closing. Right now, we know a lot of positions we have are going to be a mix between Halifax and Montréal. So for sure, at this point, you would assume that we're going to beat our goal of $8 million. But we're still keeping the guidance at $8 million to be conservative.

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Adam Shine, National Bank Financial, Inc., Research Division - MD, Head of Montreal Research and Research Analyst [6]

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Sure. With respect to how NCC might have performed in the quarter, can we assume that they're similar trends as would've been previously reported so far this year?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [7]

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Exactly like we said it online. We expect for the EBITDA to be above last year in the same historical growth. So for sure, it's going to be a bit of a mixed quarter because October is not going to be reported. And we're only going to have 2 months and 5 days. So for sure, we'll have to give a bit of pro forma guidance when we come to the February 7 board meeting because we're not going to have a real quarter.

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Adam Shine, National Bank Financial, Inc., Research Division - MD, Head of Montreal Research and Research Analyst [8]

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Yes. Okay. If I turn quickly to Music Choice, I know you don't want to say anything further, but you said you're open to discussions, which is different than you're actually engaged in discussions. So are we in a situation where you're actually waiting on a response from Music Choice? Or are there actually some points of engagement between the 2 companies?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [9]

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Yes. So for sure, because we made an official offer, I think, in August for Music Choice, if the answer was no, we would have informed the market.

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Adam Shine, National Bank Financial, Inc., Research Division - MD, Head of Montreal Research and Research Analyst [10]

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Okay. We'll leave it at that. With respect to your operations proper in the context of CapEx, it looks like CapEx is tracking a little higher than a run rate otherwise anticipated. Can you just give us a little color on that?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [11]

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And we agree with you 100%. For sure, this quarter, $1 million that we paid in income tax, a bit in the U.S. and a bit in other small countries. And when that happened in this -- the payment happened in this quarter, it doesn't mean that the income tax was this quarter. And then we have $2 million investment at software. We're investing a lot of money in our B2C app that we're launching in November. So we will be like Netflix able to sell directly all of our products directly to consumers at $10, and we won't need to pay Apple the 30% or 50% we pay certain of our partners' web share. So that will increase our margin and will increase -- so we're very excited about that platform. And our launch is end of November. And the last part also, we also finished -- we have our new building. So we did all the payments for the cafeteria and all the addition. That's about $1 million. So we should have been at close to the $9 million of free cash flow.

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Adam Shine, National Bank Financial, Inc., Research Division - MD, Head of Montreal Research and Research Analyst [12]

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Okay. So obviously, the last of the building payment's done. With respect to the software development, is that largely concluded? Or will it bleed in a little bit into the Q3?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [13]

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I'd say we had $1 million extra there and $1 million extra in income tax. Our free cash flow and EBITDA should be close -- should be between $8 million to $8.5 million. And I agree that if you look at our numbers, all our numbers are great. That was the only metric that we felt was underperforming.

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Adam Shine, National Bank Financial, Inc., Research Division - MD, Head of Montreal Research and Research Analyst [14]

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Yes, it's obviously CapEx-related.

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Operator [15]

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Your next question comes from the line of Deepak Kaushal with GMP Securities.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [16]

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Eric, just on the upcoming launch of the B2C app, can you perhaps shed some light on how you're going to market this app, and if there's any risk of this cannibalizing linear opportunities for your video services with Comcast, Cox and others in the U.S.?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [17]

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Yes. So it's interesting because we have a -- so we're launching this B2C app SVOD ala Netflix for Classic, for Karaoke and for Qello. So it's going to be a brand new -- it's going to be the first time in the history of the company that Stingray will be able to sell all of its products worldwide in every country. So we don't see any cannibalization with the linear lines. We've also launched The Voice. So with The Voice app, we have -- we already have 600,000 downloads. So 800,000 -- sorry, 800,000 downloads. So I'm very excited about this new application that we're launching with our team from Yokee in Israel. So we're going to see the monetization of that app over November, December, January. And also the third app that we're also launching B2C is we have a piano academy, which is a learning music app to learn piano, which is going to be sold around $20, $25 a month. So we have a lot of new product offering. And also, we're going to be launching a new mobile product that will be monetized. So that's something else that's all coming in, in November, December. And right now, roughly, our B2C sales are up 60% over last year, and it's about a $30 million to $40 million division. So the B2C division, that's really propped up over the last 2 years.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [18]

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Okay. Just to follow up on that then. Any thoughts on strategies for creating more stickiness around those B2C apps, particularly the seasonal ones like Karaoke that tend to...

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [19]

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For sure, in terms of stickiness, now you're going to see -- if you look at our linear channels on Bell, Videotron, Cogeco, Shaw, Rogers, we are cross-promoting all of our SVOD properties. And you'll see a lot more cross-promotion, not only in Canada, but we're doing in United States, in Mexico, in Holland, the rest of Europe. So we're really going to be cross-promoting our products from linear using our linear lineups to promote our SVOD and B2C services.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [20]

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Okay. Just a second question then. On management turnover, there seems to be some changes, some new additions and some departures. Has the nature of requirements changed? Is this kind of a normal rate of turnover or an upgrade in talent? What's going on?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [21]

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As you know, when you're a public company, something you realize, when your name -- when you're at an exact level, so I think both of the execs that are leaving are still with the company. They're still acting as a consultant. But legally speaking, we have to advise the market, if we weren't a public company, we're not needing of an advice. It's more of a change of role. So -- but because of the legalities, we have to put it. And for sure, Ian coming onboard is -- Ian is the President of Stingray Radio. So I think he's a key executive. So it's just normal procedure. And we're just realigning the company for -- and we added like David Purdy coming on board, helping us with advertising. We're just readjusting the company for the future level of role for ourselves.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [22]

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Okay, great. And then just my last question, if I may. Eric, you're the sound of the company and a big shareholder of the company. I wanted to get your thoughts on how you think of share dilution as you grow. When I look at the last 5 years, the annual average growth of adjusted EBITDA is at 16% a year. So it's very good. On a fully diluted share basis, it's lower at 5%. Even when I include NCC over the 2 years, 20% on the EBITDA line, but on a per share basis, you're only have 14% annually over the last 7 years. So how do you think about share dilution as an owner of this business?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [23]

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So 2 things on there. First of all, Stingray, and we have no doubt in this media space, we need scale. So now, today, we can say we're a $1 billion company, and we needed that scale. And for me, the most important is the free cash flow per shares. When we went public, we were generating about $0.40 of free cash flow per share. Before the NCC deal, we were about at $0.50. And now post the NCC deal, with the acquisition, we're at $1 free cash flow per share. So that's a key metric for me as an entrepreneur and for the management team. Because at the end of the day, with free cash flow, we can increase the dividend -- increase the dividends, and it's a quarterly bonus for the management team. Did I -- was that an okay answer?

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [24]

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No. That's good clarity. I appreciate that. Free cash flow matters more than EBITDA. We recognize that.

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [25]

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Yes. As you know at the end of the day, it's all about cash. So maybe I'm too much of an accountant. But EBITDA, this -- we see the adjusted, adjusted, adjusted EBITDA, at the end of the day, we don't -- it gets complicated. No, but the cash flow is in line.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [26]

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Glad you're counting it.

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Operator [27]

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

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Tim Casey, BMO Capital Markets Equity Research - Equity Research Analyst [28]

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A couple here. But first, Eric, could you just reiterate what you said about how big the B2C business is? I didn't get that.

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [29]

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Okay. Yes. So for us, that's a good question. So we lump up SVOD. We have 2 SVOD products. We have B2B2C. So example, Comcast, Amazon, Cox. When we work through these partners, we call that B2B2C. And then we have our true B2C division, which would be Qello when we sell on Apple, Yokee directly with Apple and Android and Stingray and Singing Machine. So for sure, that business right now is roughly -- we're roughly about $32 million, $38 million because we're growing fast. So -- and that business has a year-over-year growth of around 50% to 60%. And November -- even November, we're now -- we're looking at 65%. So it's a smaller division, but now it's increasing quickly. And that is our #1 focus of growth for the company. So does that give you more clarity?

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Tim Casey, BMO Capital Markets Equity Research - Equity Research Analyst [30]

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Yes, that's great. Just along...

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [31]

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And the only reason -- before, Tim, we used to divide SVOD B2C and SVOD B2B2C. But because we have direct competition from Medici in the classical space, from Smule in Karaoke, indirectly even from Spotify, other players, we try to -- not to divulge too much information on these calls because then after that, they can see our pricing, our ARPU and our strategy.

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Tim Casey, BMO Capital Markets Equity Research - Equity Research Analyst [32]

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Got you. Okay. Just also on that, what about the B2B2C, I guess, segment in terms of expanding the footprint? So you've got -- you're live, obviously, on Comcast and Cox. You're going to roll out on the Xfinity platforms in Canada. But what about Amazon? Can you give us an update on what's going on there?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [33]

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Yes, So for sure, so the next goal for us is we launch Sling with our friends at network TV, but I'm getting our friends at...

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Tim Casey, BMO Capital Markets Equity Research - Equity Research Analyst [34]

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DISH?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [35]

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DISH, sorry. DISH. And also with regards to Sling, not a big -- not a yield, but still about 2 million accounts -- 2 million potential subs, I mean, of access. We're launching in Canada with also our Xfinity friends, so with the Shaw, Rogers and Videotron. We're also going to be launching with Bell. We're also launching December 5 on Roku. Roku announced that they're doing an SVOD strategy platform. So that's 50 million subs. So those are our B2B2C partners. And I think in Q1, we want to be able to launch more products with Cox. Our Karaoke has been a good first step. We want to be able to launch Qello and Classic with Cox, who was a good partner. So we're still -- and then a very good question. Amazon, I think Amazon we're supposed to launch LATAM, Australia and Japan in Q4 this year, but I think that will go in Q1 next year. So I think in Q1 next year, the -- and again, this Amazon, it's -- your information's as good as mine, but we should have LATAM, Canada, Australia, Japan and a few countries in Asia. So for us, every time there's a new country, it's all positive news.

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Tim Casey, BMO Capital Markets Equity Research - Equity Research Analyst [36]

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Okay. And on the new platform you're about to launch on B2C is -- how should we think about that in terms of associated marketing spend, if any? So is it just going to be a cross-sell deal? Or are you going to go out and actually do B2C marketing?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [37]

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Yes. Most -- for now, most of it is it is 9 -- is going to be 99 -- 95% cross-selling marketing until we get used to the platform. But the beauty about having our own platform is we can dictate pricing. We can do A/B testing on pricing. So for sure, over pricing right now is almost at $7.99. We're going to be testing pricing at $9.99. Yokee right now sells for $17.99. So we've increased our pricing on Karaoke. So, a,we have that flexibility. And then also we can -- then we control the customer in terms of churn, giving them an offer when we lose a customer. So we have a lot more flexibility compared to the working with the Comcast, where we don't have access to the consumer.

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Tim Casey, BMO Capital Markets Equity Research - Equity Research Analyst [38]

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Okay. The other one, just switching over to radio, can you talk about your appetite for more radio deals? And like are you looking to refine the portfolio in terms of divesting and acquiring? Or are you thinking about net acquisitions? How are you thinking about the portfolio growth...

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [39]

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Yes. So the radio, for us -- for sure, in this quarter, besides the Music Choice apposition -- and that, for sure, we're not looking to do any deals for November, December. Our goal is to finish December at 3 or below 3x EBITDA to debt. So we're -- and we're more in the deleverage mode. But starting next year, there's many small tuck-ins the radio markets. And for us, there's tuck-ins that works well because where we have like in the Toronto region, we have a strong management team and a strong manager. So if we do tucks-ins in the same catch-ins area, it's -- we get great synergies because it's the same manager. So it gives us more scale. So the tuck-ins that we want to do in the radio business are going to be to help us to have more scale and improve EBITDA margin and efficiency, but small.

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Operator [40]

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Your next question comes from the line of Bentley Cross with TD Securities.

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Bentley Cross, TD Securities Equity Research - Associate [41]

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First, I just wanted to ask on -- Eric, a clarification on your comment on radio EBITDA growth. I assume that was meant to be excluding synergies you still expect growth including...

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [42]

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Exactly, excluding synergies. So for us, when we told the market that the deal was $52 million plus $8 million. So $60 million. That was our number when we announced the deal in May. So we expect to be -- we expect -- are very confident because we're already 11 months in that we will surpass the $52 million, excluding synergy.

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Bentley Cross, TD Securities Equity Research - Associate [43]

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Okay. And then secondly, just because it bounces around from quarter-to-quarter, any indication you can give us on equipment sales in the pipeline? Should we expect another down quarter in Q4? Or...

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [44]

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Yes. So that's why it is important that we measure organic growth. That's why I think last year, we -- one quarter, we were 15% organic growth. But out of the 15%, 9% was equipment. So it's not -- so it's important that we exclude E&O. This quarter, we'll be very strong. We're very pleased to announce that we do all the digital signage for BMO. So if you go to the BMO office at the First Canadian building, all those signs in the TSX, all those are ours. And now we're installing a $1.5 million to $2 million screen for BMO. It's going to be the largest LED circular screen in the world, and that's going to be launched in November at the Manulife building. So if you have a chance -- for the people in Toronto to go see that screen, it's going to be a great showcase for Stingray of what we can do. So that's an example. So that $2 million is great. It's going to be great in November. It's going to give us about 30% margin or 25%, but it's not going to be an issue. Okay. Sorry about that.

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Bentley Cross, TD Securities Equity Research - Associate [45]

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No need to apologize.

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Operator [46]

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Your next question comes from the line of Deepak Kaushal with GMP Securities.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [47]

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I had a couple of follow-ups. I hope I'm not taking anybody else's place. Just to follow up, Eric, on the commercial music. I wonder if you could talk more about what the dynamic is in the U.S. market for that opportunity. I know you had a noncompete with Mood Media. Does that expire? Do you have an opportunity to get back into the U.S. market?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [48]

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Yes, So you're exactly right. So we do have a partnership with Mood Media, where we both have a noncompete for the music part only. So we're allowed to do digital signage. So for example, with the BMO account, we're working hard to try to get the Harris account in the U.S. for us. That will be a fantastic transition. But that noncompete/or partnership is still in place, and it's still there for the next 2 years. So for now, the U.S. market is off. And I can't give you more information on it because we always have our friends from Mood on the call, so we've got to be careful.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [49]

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Can you generally talk about how the ARPU differs commercially between video and signage versus just audio?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [50]

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Yes. So for more and more the market of music and digital signage is merging. Our box, the SB3 box is able to deliver both audio and video. So it's merging. But for sure, music is around $45 to $50 ARPU worldwide, I'm giving you Canadian dollars. And digital signage goes all the way up to $90 to $100. So digital signage is a great business. And the margin on digital signage, so there's no right management. It's mostly content is very high. It's above 90%. So it's a great segment for us when we grow that business.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [51]

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Okay. Excellent. And the last kind of question, more of my own personal curiosity. I think you guys did a live-streaming concert through Qello last quarter. I was wondering If you could generally talk about the economics for that and what the gross op...

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [52]

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Yes. For sure. Live streaming for us is going to be a big, big vector when we launch our B2C -- whatever B2C platform will be. Our goal will be to do as many live concerts, live festival, classical events. And that strategy is very simple. It's always offered for free for our consumers. They don't need to pay for it. It is a free service. The reason for that, it's for the artists. The artists just have to do a live show and give us a stream. If we're not making money from it upfront or/and all their fans can have access to it. Then the goal is once -- first, it comes on our platform and views it, then our conversion rate is about 7% after. So we're working on attracting them to convert them after. So you'll see we'll be very aggressive from Concerts, Classica, operas around the world that we can do live streaming. It's a great way to -- it's a great marketing tool, very inexpensive to attract new customers.

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Operator [53]

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Your next question comes from the line of Caleb Ho with RBC.

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Caleb Ho, RBC Capital Markets, LLC, Research Division - Associate [54]

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It's Caleb on for Drew. A question on SVOD. Looking past holiday season for Q3, can you expect sub-growth to kind of keep going? It's been bouncing around a bit and even looking to 2020. And on the ARPU, I guess, it's also been ticking up. And with all the B2C launches, can we expect this traction going forward?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [55]

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Yes, absolutely. So interesting market. The SVOD market is changing in 2 ways. First of all, so we're very happy to go B2C. By going direct, our ARPU of products anywhere are going to go from $10 to $20 a month. And also, on the SVOD side, you're going to see a lot of our products, we're now selling it per week. So we're selling it about $8 a week. So a lot of demand for weekly subscriptions, which at $8 a week makes it like $32 a month. So that's -- and also another strategy. So we see ARPU going up. We see consumers going up. And it is our #1 goal for management. Our focus is all about growing SVOD, both B2B2C and B2C, and we're very excited. And we're still very confident, like we told before, that we will -- now we are in a way to reach 1 million subscribers overall of our products. It's just a matter of more B2C and more management effort and more cross-selling.

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Caleb Ho, RBC Capital Markets, LLC, Research Division - Associate [56]

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Right, right. Second question here. On NMCC, it was previously announced there was a $5 million synergy for revenues to be achieved over 2 years. Am I confusing that? Is that part of the $8 million cost synergies? Or is that still...

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [57]

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No. Absolutely. So we have $8 million cost synergies. And the $8 million cost synergies, any private equity firm could have done it. So there's nothing -- I think Stingray is doing good, but there's nothing that nobody else could do. On the synergy side, we're very -- we've hired David Purdy. We hired Ryan Fuss with Vice and our friends at Blue Ant started business from 0 to $25 million in advertising. And for sure, for now, we're keeping the $5 million. But I think over the next few quarters, we're going to be able to give a lot more guidance on the positive synergies. But the 3 vectors for us is advertising on the mobile side for U.S. and Canada, advertising on the music video channel side and sponsorship on PyAudio, sponsorship on the Ambiance and sponsorship with Les Réseaux. So we have 3 strong vectors, and we -- I think we'll be able to easily surpass our $5 million goal for March 2020.

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Operator [58]

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(Operator Instructions) Your next question comes from the line of Maher Yaghi with Desjardins.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [59]

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Sorry if I ask a question that you already answered. Just say, "Read the transcript." I want to take it against you. I just hopped from the TELUS call. So first question I have is on your debt level. Given that it's at 3.16 right now with after closing the NCC transaction, what's your view on how long it takes to bring it down over the next couple of quarters as you integrate NCC and you start reaping the cash flows from that? Can you maybe just talk a little bit about how you see this in a year from now? If you answered the question again, just say, "Read the transcript." it's okay. The second question I have, on free cash flow, I noticed that you made some additional investments in the quarter to support those acquisitions that you made and to grow organically. But when you look at free cash flow year-on-year, it's down. Versus EBITDA, that is up. So just trying to see how much more investments are you planning to do on CapEx and intangibles over the next couple of quarters.

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [60]

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Okay. So good question. So we're -- so the first one was not asked. So for sure, we're very happy to be at 3.16. For us, as a management team, we see above 3 is a bit of -- not a danger zone, but you've got to be careful. Below 3 is the safety zone. And we expect that by December, so the next 60 days, that we should be at the end of Q3, we should be at 3 or even try to be below 3. So we're very focused here in terms of CapEx, income tax expenses in these months to be below 3. So that's the first answer. So we like to be -- and we feel we'll be close to 3 by December. So in the next 60 days. And for sure, this quarter, we had a lot of investments. We're investing heavily in our B2C platform, which will --- is going to be. That platform is going to be Classica, sorry, Qello and Karaoke on about 10 different platforms. So when we launch this, we're going to be launching 30 different applications. So the -- our products will be available on Apple TV, iOS, Android, Roku. So that's why it's such a major launch. And for sure, we're investing more in the software, but it's key for the future of Stingray to be able to control the pricing, the user interface and to have access to the consumer directly in terms of churn and also a better understanding of the SVOD market. Is that a good answer?

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [61]

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Yes, that's a good answer. Maybe just to follow up on your cash -- the leverage trajectory. If I take, Eric, your NCC deal and include them in your financials and whatever acquisitions you've already done to date, and I assume no more acquisitions, on a pro forma basis, what's the -- on a yearly basis, how much does leverage will go down over a year? That would be the best answer I can get from you, but if not, it's okay, I understand if you don't want to give that information.

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [62]

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Okay. So just at closing, to give you a bit of the numbers, so we closed at $356 million of debt, our pro forma adjusted EBITDA, including LTM Stingray, LTM NCC, we added DJ-Matic and Novramedia, and we added the synergies, we're about roughly at 1.12.7 (sic) [$112.7 million] of pro forma EBITDA.

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Jean-Pierre Trahan, Stingray Digital Group Inc. - CFO [63]

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$112 million.

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [64]

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Yes, Which gives us the 3.16. So for sure, we also announced that we will generate about $1 of free cash flow per share. So we feel -- right now, we're generating about $70 million of free cash flow. So if you do $70 million divided by 4 if all things go well, and then you can do the calculation at the deleverage of the debt.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [65]

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That's helpful. Okay. And -- yes. No I, get it. I didn't -- I missed out on that cash flow number you gave probably is earlier on the call. Okay.

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [66]

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It's the first line of the press release.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [67]

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Okay, okay. I -- yes, I see. That was -- no, but that's -- okay. So when you look at that number, does that include CapEx or that's after CapEx? That's after...

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [68]

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After CapEx, after income tax, after interest. So what we did is we took the last 12 months, and we set on a pro forma basis how much cash free cash flow will we have generated. We would have generated roughly 70 -- no, $71 million of free cash flow in the last 12 months. But again...

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [69]

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But it doesn't include synergies?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [70]

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Those include pro forma synergies of $8 million.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [71]

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Okay. Includes the synergies?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [72]

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On a pro forma, I agree with you, it's a bit more complicated. So...

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [73]

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It includes the synergies?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [74]

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Yes, it does.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [75]

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Okay. It includes the synergies. And the $5 million you talked about?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [76]

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No. The revenue synergies, we've told the market, we expect those to come in, in next year. So for year-end March 2020.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [77]

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Okay. It doesn't include any acquisitions that you made?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [78]

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The pro forma that we just told you, the free cash flow does include both acquisitions that we did

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Jean-Pierre Trahan, Stingray Digital Group Inc. - CFO [79]

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DJ-Matic and Novramedia for 12 months.

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [80]

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12 months.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [81]

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Okay. Okay. Now we're getting somewhere. And so finally on...

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [82]

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I know those pro formas. It's complicated because...

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [83]

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Yes. That's why I wanted a more prospective number than a free -- looking back, I just wanted to look forward on that leverage ratio because I know you want to do more acquisitions. You want to be active in M&A. So I just wanted to see when can we sort of view -- start seeing you guys go back to that aggressive M&A strategy that you had last year, the year before acquiring EBITDA and growing through that.

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [84]

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Yes. I think for management, once we're below 3, which we feel we'll be by the end of December, I know we'll be -- we have -- and by the way, we have -- it's a bit -- we probably have response in the pipeline that we never had. A lot of different acquisitions, but for now, for November, December, excluding Music Choice, management, we're going to focus on our synergies, focus on our debt ratio. And also JP's going to have more vacation. He's going to go to Florida, deleverage the work that we did. .

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [85]

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Okay. And just one last question on the SVOD market. Beyond the markets that you're already currently selling into, should we look for new markets to open up anytime soon to help you grow that number to, as you said, you want to get it to $1 million?

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [86]

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Yes. I think just for example, we have Jaya that does yoga that do SVOD. They hit 0.5 million subscribers. Smule which is a private company in California, they claim or the press release that they have 2 million Karaoke subscribers with their application. And just Qello, Qello Concerts, when we speak to our big labels, now we should -- that one itself has a potential to have 1 million subscribers. So for us, the Karaoke product, the Qello product and Classica, which we are dominant, I think there's a lot of growth. And that's where we've got to put our focus. And this is in every market. These sales are in every market. So -- and also work with our partners, like I don't know if you want to call them. We're launching with Roku in December, but we're launching more products with Cox. We're launching in Canada with our X1 partners. So that's how it's growing.

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Operator [87]

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And there are no more questions over the phones at this time. I'll turn the call back over to your presenters.

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Eric Boyko, Stingray Digital Group Inc. - Co-Founder, President, CEO & Non-Independent Director [88]

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Okay. So I thank you very much for joining us today on this conference call. I know a lot of information. And I know that today was a very busy day in terms of reporting in the market, so I appreciate the analysts for taking your time to be on our call with all of the TELUS and Canadian Tires and Bombardiers and TD Trust. So I appreciate your time, everybody, for being here today. Thank you.

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Operator [89]

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This concludes today's conference call. You may now disconnect.