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Edited Transcript of RAY.A.TO earnings conference call or presentation 7-Aug-19 1:00pm GMT

Q1 2020 Stingray Group Inc Earnings Call

MONTREAL Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Stingray Group Inc earnings conference call or presentation Wednesday, August 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric Boyko

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

* Jean-Pierre Trahan

Stingray Group Inc. - CFO

* Mathieu Péloquin

Stingray 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 & Research Analyst

* Bentley Cross

TD Securities Equity Research - Associate

* Deepak Kaushal

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

* Drew McReynolds

RBC Capital Markets, LLC, Research Division - 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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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Stingray Group Inc. investor presentation conference call. (foreign language) (Operator Instructions) Before turning the meeting over to management, I would like to remind everyone that this conference call is being recorded today, August 7, 2019.

I will now turn the conference over to Mathieu Péloquin, Senior Vice President, Marketing and Communications. Please go ahead.

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

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Thank you. (foreign language) Good morning, everyone. Thank you for joining us for Stingray's first quarter results conference call, ending June 30, 2019. Today, Eric Boyko, President and CEO, Co-Founder; and Jean-Pierre Trahan, CFO, will be presenting Stingray's financial and operational highlights. Our press release reporting Stingray's first quarter of fiscal 2020 results was issued yesterday after the market closed. Our press release, MD&A and financial statements for the quarter and the year 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 risk 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 27, 2019, which is available on SEDAR. The corporation specifically disclaims any intention or obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable law. Accordingly, you are not advice -- you're advised not to place undue reliance on such looking -- 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 the MD&A for a complete definition and reconciliation of such measures to IFRS financial measures. As well, I would like to highlight that, on April 1, 2019, the corporation adopted IFRS 16 leases using the modified retrospective method. Under this method, the standard is applied retrospectively and the comparative figures from fiscal 2019 are not restated. Please refer to the new standard adopted by the corporation section of the MD&A for further details. Finally, let me remind you that all amounts are expressed in Canadian dollars unless otherwise indicated.

I will now turn the call over to Eric.

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

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Good morning, everyone. We are starting fiscal 2020 on a very strong note, and I'm thrilled with the first quarter result as we achieved several record levels. This certainly reflects the contribution of the Radio segment but also the underlying strength of the Broadcast and Commercial Music business. I'll let Jean-Pierre review the financials in more detail. Looking at the results, what really stands out is our adjusted free cash flow at $20.6 million or $0.28 per share and the adjusted EBITDA at $31.2 million, which -- with both more than double over last year's level. Revenue also increased 130 (sic) [133.4%]. Our EBITDA is down now to 2.89x on pro formas of $120 million, which we'll be able to explain further in the discussion.

Since we completed the acquisition of our radio stations, we have done some extremely good work on many fronts on the Radio segment. First, we surpassed [this year's] expected operational synergies of $8 million and anticipate to be closer to $9 million. Secondly, the Radio group continues to focus on sales performance and innovation, which has led us to market share momentum and also able to beat the market. We estimate our organic sales to be around 2% compared to last year if we take out the incorporation event.

Third, we have made a push into digital advertising. Extending our reach beyond the traditional and mature radio market is providing us with profitable incremental sales on the local side. Moving on to the Broadcasting Commercial Music. For the quarter, revenue growth was fueled by acquisitions and SVOD partially offset by certain delays and implementing the advertising sales model. SVOD numbers were up 3,000 to 360,000 -- 367,000 subscribers, so flat, which we are happy because, last year this quarter, we were down 6%. Our ARPU was slightly down, which means that our level was exactly the same as last quarter. From an adjusted EBITDA perspective, the increase was primarily due to SVOD, the acquisition of DJ Matic and Novramedia and, most importantly, reducing operational expense and the adoption of IFRS 16. Excluding the impact of IFRS 16, we also registered significant improvement in the adjusted EBITDA margin that you can see in our numbers due to efficiencies in operations as a result of stealth.

On a pro forma basis, we expect these efficiencies to generate up to $6 million on the Stingray side in savings over and above the synergies generated on the Radio segment, which explains why our pro forma went from $114 million to $120 million with this extra $6 million. At the end of the quarter, our debt leverage was below 3x adjusted EBITDA. The reduction in leverage reflects the lower debt level, higher the last-12-months adjusted EBITDA and $6 million of operational efficiencies. The pro forma adjusted EBITDA does not reflect the impact of IFRS 16 on prior quarters. As we see significant value in the Stingray stock and generate significant cash flow, we have decided to put in place a normal course issuer bid allowing us to purchase 2.9 million shares over the next 12 months, subject to the TSX approval. We will be using a very disciplined approach to share buyback in our NCIB, and we will not hamper our capacity to fund the M&A strategy moving forward. Jean-Pierre will now review the quarterly financials in more details.

Jean-Pierre?

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

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Thank you, Eric. Good morning, everyone. I think reconsolidated revenues increased 132% to $80.4 million in the first quarter of fiscal 2020 compared to $34.5 million a year ago. The increase was primarily due to the contribution of acquisitions, mainly of NCC, DJ Matic and Novramedia as well as organic growth in SVOD. These contributing factors were partially offset by a 5 to 6 month delay to implement an advertising sales model included in the renewal of contract in fiscal 2019 by a decrease in equipment and installation sales related to digital signage as well as by the termination of some low-margin international contracts.

Recurring Broadcasting and Commercial Music revenues were up 10.2% to $34 million from $30.8 million a year ago. Broken down geographically, revenues in Canada increased 311% to $56.1 million, representing 69.7% of total revenues. This growth was mainly due to the contribution of NCC and Novramedia acquisitions partially offset by the delay in the decrease in equipment and installation sales I've just mentioned. In the United States, revenues rose 11.7% to $9.1 million or to $11.4 million -- 11.4% of total revenues due to organic growth in SVOD.

Finally, in other countries, revenues increased 20.2% to $15.2 million or to 18.9% of total revenues. Now let's turn to our performance by business segment. In the first quarter, Broadcasting and Commercial Music revenues increased 8.4% to $37.3 million mainly due to the contribution of DJ Matic and Novramedia acquisitions coupled with organic growth in SVOD. These contributing factors were partially offset by 3 elements as previously mentioned. Radio revenues stood at $42.1 million for the first quarter of fiscal 2020 due to the contribution of NCC acquisition. For the quarter, consolidated adjusted EBITDA increased to $31.2 million compared to $11.2 million a year ago due to the acquisition of NCC and other acquisitions in fiscal 2019. To organic growth in SVOD and to the impact of the adoption of IFRS 16. Adjusted EBITDA margin improved to 38.7% compared to 32.4% a year earlier. The increase was mainly related to the new Radio segment, which has a higher adjusted EBITDA margin in the first quarter due to the normal business seasonality, and to the reduced operating expense in Broadcasting and Commercial Music. Excluding the impact of IFRS 16, the adjusted EBITDA would have been $29.7 million and the adjusted EBITDA margin 36.8%.

By business segment, Broadcasting and Commercial Music adjusted EBITDA increased by $2.1 million or 17.7% to $14.6 million from $12.5 million last year. This increase is mostly attributable to organic growth in SVOD due to the contribution of DJ Matic and the Novramedia acquisition. To reduce operating expenses and to the impact of adoption of IFRS 16, these contributing factors were partially offset by the same elements. As previously mentioned, the adjusted EBITDA margin increased to 39.1% from 36%. Radio adjusted EBITDA stood at $17.8 million in the first quarter of 2020, reflecting the contribution of the NCC acquisition. For the first quarter, the corporation recorded a net income of $9.2 million or $0.12 per share compared to $1.3 million or $0.02 per share last year. The increase was mainly attributable to higher operating results and to the lower negative change in fair value of contingent considerations partially offset by higher interest, depreciation and amortization, market-to-market losses, conservative financial instruments and income taxes. Adjusted net income increased to $15.8 million or $0.21 per share compared to $5.9 million or $0.10 per share a year ago mainly due to higher operating results and to the lower or negative change in fair value of contingent considerations, partially offset by higher interest, depreciation, income tax and market-to-market losses on derivative financial instruments.

Cash flow generated from operating activity has increased to $26.3 million in the first quarter of fiscal 2020, from $7.2 million a year earlier. The increase was mainly due to contribution of NCC acquisition to our operating results and the impact of adoption of IFRS 16. Note that, as of the first quarter, due to a change in accounting policy, we now disclose interest paid in financing activities and we restated comparative data accordingly.

Adjusted free cash flow amounted to $20.6 million in the first quarter compared to $6.3 million a year ago. The increase was mainly related to the contribution of NCC acquisition and to higher operating result partially offset by higher interest paid. Stingray ended the first quarter with cash and cash equivalent of $6.6 million, subordinated debt of $49.6 million and credit facilities of $450 million, on which, approximately $146 million were unused.

Total net debt stood at $347.1 million. And based on some pro formas and synergies assumptions presented in the MD&A, the net debt to adjusted EBITDA ratio would be at 2.89x. Subsequent to the quarter, we extended to October 25, 2022 the maturity of our revolving facility, and we also reduced our authorized amount by $70 million, bringing it down to $230 million. The term facility remains unchanged with $150 million of availability. The interest pricing grid was also reviewed from both facilities, which will reduce future interest expense by about $0.5 million per quarter or -- at the current debt level or $2 million per year.

On that note, I will now turn the call back to Eric.

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

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And one last [chat] before -- because I know we (inaudible) Stingray this quarter was 26%, but that includes a nonrecurring event that won't be there next quarter. So we are very close to the 4.5% to 5% organic growth on this quarter. So before you get on with the questions, I wanted to trump that one. And also, the last point, very happy that we're able to save $2 million of interest. That's, again, very good for our free cash flow. So with this in mind, I'll let -- if there's any questions.

I'll pass the line to our friends the analysts.

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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 & Research Analyst [2]

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Eric, maybe just start with some of the savings that you're getting. Where is it coming from across the non-NCC platform? And specific to NCC, where's the extra $1 million or so coming from? And I think you've also, in the press release, addressed the opportunity to maybe pursue some incremental synergies at NCC going forward.

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

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So on the NCC side, our savings are roughly $700,000 to $800,000 a month. So anywhere between $8.4 million and $9.6 million. So that's why we say $9 million, so we'll see where that falls in. I just -- better working both companies together. So that was planned. I think our goal at the deal was like 7 to -- $7.5 million to $8 million, so we're $1 million ahead. On our side, having scale, putting both companies together, we're able to negotiate our rights management on our side. And because of all these rights management, we're able to reduce some fees, reduce a lot of different departments.

And also most importantly, which maybe also affected -- will affect some of our organic growth, there is some product lines that are not profitable that we are -- now that we're focused on cash flow, we have iConcert Asia, very small, $35,000 in sales. Looking at our cost structure, it was costing us $40,000 a month, no point for us to maintain a product in Asia with a transmission if we're losing money. So the company, I guess, the model here is that we're really focused on cash. And if a product line, even if it brings up sales, is not profitable and we don't see making profit with that product in Asia, then we'll make the cuts.

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

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Okay. No, that's great. On SVOD, thanks for the extra data points. Obviously, this is a seasonally light period, but there's been a lot of work that you guys have done in terms of new product launches and also on the pricing models for a number of these products. Can you speak to what exactly transpired such that ARPU was kind of slightly lower Q-over-Q and sort of the traction ahead that starts building maybe after Q2?

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

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I think one of the big issues we have is, on the B2C side, we can do whatever we want. When you have partners, you need to have your partners on the B2B2C to agree on price increase. So -- and both of them have to match. So for example, if we want to increase on B2C Karaoke but Comcast and Amazon doesn't want, then we're forced to keep that price. So in our plan, we wanted to increase our pricing faster, which we didn't. We're also launching the Stingray music app in the U.S., which is at $3.99, so that also would affect some of our ARPU. But it was mostly a mix between B2B and B2C. This quarter, had the summer coming along in July, our goal is to try -- if we're able to get 5% monthly organic month-to-month then we double our B2C business. So happy to say that, in July, we had 5% month-to-month over June.

So we're seeing back the growth in the B2C business. And August, for the first 5 days, we're also maintaining about the 4% to 5%. So that is our internal goal on the B2C side, and the momentum is coming back. And most happy, Adam, as you know, last year, we were down 6% on subs this quarter. This is when it really hurt us. So we're happy to show that the business is stable, and then the summer months are good, the fall is good, and then the holiday season is always fantastic.

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

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Great. And maybe just one last question. I mean obviously, the focus on the prior call was very much about deleveraging. You noted the free cash flow strength, so you can still deleverage certainly going forward. But maybe just talk a little bit about the reasonings behind launching the NCIB at this time?

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

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So 2 things happened to us in the last quarter. First of all, we got the extra synergies, which is, for us, $1 in saving is like $2 in sales. So very happy with the extra $6 million of synergies that you already see in our numbers. Our OpEx this year, we predict the OpEx of Stingray to be below the OpEx of last year. So not many businesses can say they grow and their OpEx are decreasing. Our COGS, as you see our COGS or our gross margin has improved a lot, so we're very confident. Our free cash flow was at $20.5 million, plus $0.5 million on the new -- so really a $21 million. So with this in mind, we're very confident about our free cash flow.

And the second point, Adam, (inaudible) on this, but with a new deal, right now, we're paying -- our interest rate is at 3.89%. So we're paying interest rate at 3.89% and our stock is giving 4.6% dividend, nondeductible. You take an interest rate of 3.89%, after tax you're at 2%, and we're paying 4.6% in dividends. So on a pure cash flow basis, every time we buy $10 million of shares, we save like $300,000. So there's a point where it becomes a nonbrainer. And even more, at $1.20 per share, we're trading at 5x sales. It generates 20% return on investment. When we do acquisition, our goal is to get 20% return on investment, and in this one, we have it with our own shares. So I think it's going to be good for the investors that we have that tool and flexibility to make more money, I guess.

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Jean-Pierre Trahan, Stingray Group Inc. - CFO [8]

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Like most companies?

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

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Yes. Is that a good answer, Adam?

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

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Absolutely.

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Operator [11]

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Your next question comes from the line of Drew McReynolds with RBC.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [12]

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First, maybe for you, JP, just on the IFRS 16, what was the allocation by segment on EBITDA in terms of that $1.5 million?

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Jean-Pierre Trahan, Stingray Group Inc. - CFO [13]

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So it's about $400,000 on Broadcast and Commercial side and $1.1 million on Radio.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [14]

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Okay. Perfect. And just back to just the kind of 5- to 6-month delay in the ad sales model being rolled out, can you just kind of flesh that out a little bit and provide a little bit more context on that dynamic?

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [15]

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On which one? Oh yes -- so yes, so on the Radio side, we do have -- we have a very strong web strategy. I don't want to go too much in details because my team and my president would be mad at me because he likes this strategy. So I can say comfortably that our target of $5 million of cross-synergies or web sales on the Radio side will be achieved internally, but I don't want to get in too much details, our strategy on that. And our big push for us to launch, and which will launch in September, is what we call the Stingray 360 Audio. So the goal is to -- on the national sales level to be able to sell to the same customer a $100,000 account. We say $60,000 on Radio, $20,000 on Stingray Mobile, $20,000 on Pay Audio, which we have now renamed it Specialty Audio. So that is our strategy for the extra sales motivation between the 2 companies. But we're well on target.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [16]

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And just on the international contracts, trimming kind of lower margin contracts, is that all flushed through? Or are we going to still see a little bit some other kind of contracts roll through?

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

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No. I think we have another $2 million to $3 million of synergies that we can get at Stingray. I think it's normal. We grew so quickly in 157 countries, our rights management and our COGS has over 1,000 lines. So we sat down as management over the last 3 months, we looked at it on a cash flow basis, how do every deal reports. So that's the difference of being focused on EBITDA and sales and what cash does is it brings us and really looking at -- and the return on the -- the ROI on every CapEx. So I'm not surprised where our cash flow was high. $21 million times 4 is $84 million of free cash flow this year on a run rate. It's $1.20 per share, and that's why the debt is decreasing so quickly and will continue to decrease quickly. And we have -- even our dividend policy, at $0.28 per share, our dividend now is at $0.07. We always told the market that it would be at 30%. So technically speaking, our dividend could have been at $0.09, but we maintain our policy, but a dividend is now only at 25%, which gives us extra room. So I'm very, very confident on the cash flow to be able to do M&A, dividends and share buyback.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [18]

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Okay. Yes. No, for sure. And 2 just final ones for me. First, on just the CapEx for fiscal 2020, I think, last quarter, you alluded to roughly, I think, $15 million total for CapEx, just an update there. And then secondly, just confirming, with the $6 million in kind of additional synergies, I think you alluded to q -- this quarter seeing kind of the full run rate of that. I'm just trying to kind of fine-tune this for modeling purposes.

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

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Yes. So our CapEx this quarter was low again. So how much did you have in your estimates?

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [20]

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I think last quarter was 50, I think you said $15 million for 2020, $18 million for 2019.

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

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So we were at $3.6 million last quarter. Our CapEx was $3.6 million, so.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [22]

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And for the full year, what do you think you'll...

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

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Okay. You know we don't give guidance, but do $3.6 million times 4 and you get your number.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [24]

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Okay. Perfect. And then just on the -- just on the $6 million, just wondering what was realized this quarter just so I'm clear on it.

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

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I think this quarter, most of it has been realized in this quarter, but for sure, we'll get the full implementation over the next 3, 4 -- over the next quarters. And we feel that we'll be able to get a bit more synergies once we get the scale between the Radio and Stingray.

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Operator [26]

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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 [27]

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Eric, I have a follow-up on Drew's question on the advertising. Just some more clarity, you mentioned a 5- to 6-month delay in your strategy. Can you kind of explain what's going on there and the nature of the delay and when we might expect to see the rest of it?

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [28]

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Yes. As you know, we were negotiating with Rogers. We've got a deal done last week. But if you're negotiating with a partner and, at the same time, you're changing a bit of your advertising model on sponsorship on the TV side and ads on the mobile, you usually want to have all your partners on agreements. So it was good. We're very happy with the win-win agreement -- and for both Rogers and us, and very happy to be moving forward on our strategy of advertising.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [29]

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Okay. Because you closed Bell earlier this year...

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [30]

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But you understand, if you're going to go forward, it's not a good time to start changing your model.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [31]

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Got it. So that would cause you to delay rolling out something with Bell given that you're delayed with Rogers? Or how, like how does the Rogers negotiation impact Bell?

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [32]

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Affects everybody. I won't go into the detail with you on the phone here. But for sure, you want to have all your partners in agreement with your advertising strategy. And if you're in FOA process with one of your partners, then it's not the best time to change your model. So that's why we have to wait.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [33]

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Got it. That makes sense. And so now you've got everyone on the same track now, and you've got a green light to go for ads.

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [34]

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Our goal is to start launching mobile in August and to launch our 360 strategy. I think we're going to be making an official announcement in September. End of September, we'll do a big -- what they say and we'll do a big powwow in Toronto. We'll invite you.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [35]

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Okay. Excellent. And so that's for the Canadian market. I think I asked this question last quarter. In the U.S. market, a bit of tepid growth going on in that market, and you mentioned pricing dynamics with Comcast and the others. Can you talk a little bit more about the U.S. market? What's going on in that market and how you might boost some growth over there?

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [36]

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Yes. For us, the big focus in this market, we're still launching more SVOD products with different companies. So the SVOD is still growing on the B2B side. But for us, the biggest push right now that we're getting from everybody is linear, ad-linear channels. So Pluto, LG, Samsung, Roku, Flex, Xumo, they're all asking us to launch our Qello channel that we have in Europe, Jazz, Classica, Ambiance, to do ad-supported. So that, for us, is a huge growth. Just with the Ambiance channel, the fire log channel, with one partner, we went from $2,000 in March of advertising a month to $28,000 gross.

So the potential of this is that all those partners together is bigger than the cable market. So right now, if you go on your Samsung or LG TV, you've got all those TV channels included. Well, our goal is to be part of that and also to launch all the audio channels and to do the same thing across the board. And that, for us, is interesting because LG and Samsung are also moving across Europe and Asia, so we'll be able to have the same channels over the different countries and platforms. So SVOD strategy plus that.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [37]

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Got it. And then so how do you effectively segment SVOD versus AVOD to prevent cannibalization?

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [38]

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This is not VOD, this is a linear channel.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [39]

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I know but how do you prevent cannibalization of SVOD?

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [40]

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No, it's totally separate. On other side, we see the linear channels as a great promoter of our SVOD product. So I think linear with ads will help promote Qello and will help promote Classica and Jazz. And we even wonder -- we even -- some of our partners are asking us to launch a linear Karaoke. So you're going to say, wow, linear Karaoke, but it's great advertising, it's good CPM. And for us, there's no extra cost. The content is already paid for. We already paid the content of Jazz and Classica and Karaoke. So when you launch on a different platform, it's at no extra cost. And IT-wise, there's no streaming costs, and they take care of inserting the ads. So it's a good win-win. So we'll see. That one has humungous potential for us.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [41]

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And I just have one more minor question. So ROIC is the highest since you guys have gone -- since you went public, it's nice to see. You mentioned a 20% return on invested capital target, is that for both Radio and Broadcast? Or how do you split that between the 2?

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

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Absolutely. On the radio side, in the last deal we did, after synergies, we are below 5x EBITDA. And the beauty about Radio, it's all cash flow. So it's a very -- Radio is very -- on our side, it's always been our goal to be below 5, and that's why in our deals we're very aggressive right now. And that's why our stock -- if our stock is giving us $120 million of free cash flow and it's trading at $6, then we're going to be net buyers, and we'll do share buyback until the market understands. Because at 20% return, if you can guarantee me a 20% return on an investment, I'll sell my car, I'll sell my house and I'll give you all my money.

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Operator [43]

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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 [44]

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Eric, definitely a strong quarter on free cash flow, but I wanted to ask you, you mentioned on a previous question the $80 million free cash flow generation per year. Are you comfortable in guiding The Street, at this point, to $80 million of free cash flow? The reason I'm asking is, in the quarter that you just published, usually this is one of the best quarters on Radio. And is that $20 million annual -- can you annualize that number necessarily or there are lower free cash flow generation potential quarters coming up ahead?

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [45]

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So if you look at our -- we don't give guidance because you never know, if we lose a customer, something happens, if iPhone changes their rules and all that and they change the way we have our subscription model, so that's -- we can't give guidance on sales. We can give you guidance that we've got $2 million of cash savings on interest because of you, thank you banks, because of you, Desjardins, and all the banks. So that's -- the $2 million is extra cash flow. And we've got an extra $6 million of savings. So our savings are now at $15 million. So you've got $17 million more of cash flow savings, so that's why we're very confident to say that our cash flow will be better than our first pro forma expected.

The Q1 is not the biggest Radio segment of the year; April, May, June and -- is a good one, but it's not the best one for Radio. And for us, Q1 is our worst quarter of the year, if you look over the last 5 years. Q1, sometimes having been even lower than Q4. So again, we don't want to give guidance, but for sure, if you do a run rate, if you do $21 million times 4, it gives you $84 million.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [46]

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You're saying this because you're comfortable with doing it. I mean you believe the business, right now, is on pace to generate $80 million on a 4 quarter run rate basis?

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [47]

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I think this quarter signals in that direction, I feel very comfortable. Yes. But again, I cannot guarantee you if we lose -- if Apple, if something happens to Apple or something happens to Comcast in September.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [48]

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Of course. Okay. And I understand. I just wanted to just -- because you -- you used to say $70 million or to $75 million, and now you're saying $80 million, I'm trying to figure out if that's where you are right now.

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [49]

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I guess $70 million to $75 million and add $6 million in actual savings, you're at $81 million, and add $2 million of interest, you're at $83 million.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [50]

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Yes, okay, got it. So on the organic growth rate, you mentioned that the delay in the advertising model implementation is -- has pressured your organic growth rate, but why would that be? I mean that model, you have not launched yet. So I'm trying to figure out how a model that has not been launched yet could have affected you negatively in your organic growth rate.

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [51]

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Yes. So again, it's very difficult to discuss client-by-client because we never know who's listening, and it's -- and we're in a competitive market. But more or less, there's a 3% -- or a 3% to 4% this quarter that it won't be there next quarter. So that's all I can say on a public line because of our customers.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [52]

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Because of what you're expecting to launch, right?

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [53]

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No, no, no. Based on, again, I won't go into details, there's a 3% to 4% that is here this quarter that won't be recurring. That will be there next quarter. So if you take away that effect, we're between 4% and 5%. But happy to talk to you one on one.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [54]

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Okay. No problem, we'll do that for sure. And your deployment in the U.S. on cable, can you maybe talk a little bit about how -- what kind of success you've seen over the recent period with the launch on the BDU side in the U.S.? You certainly are going with an aggressive pricing as you keep saying. Are you generate -- are you starting to see the upside in the revenues that you wanted to see on the Commercial side to offset the pricing that you're offering on Residential?

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

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Yes, I think, for us, the U.S. is going well. The big deal is that, for us, the big customers that we're talking to, we feel their contracts are coming up in 2020, so maybe early or middle 2020, so good discussions there. And our deal with Altice is going very well. We're very happy. We have even more news to announce with Altice, but it's a great partner, and we're leveraging now the advertising we can do for SVOD services. So we're just after -- it's been about 7 months now. But we had a good meeting with them 2 weeks ago in New York. And I think our pricing strategy in the U.S. is aggressive, but I think it's going to give us -- the U.S., for us, is our #1 market and our #1 focus as a company. And we should expect a lot of growth in the U.S. over the next multiple years.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [56]

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And my final question on SVOD services, definitely better results on a quarterly basis sequentially versus what you had last year. What should we be looking at in terms of trends in Q2, Q3 as you head into probably a better period for you guys on SVOD? What are your expectations on that front?

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

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Yes. So a couple of points. For us, the SVOD, very stable in terms of sales, increased a bit in subs. The decrease in ARPU, for example, we've launched a service called Rocket in the U.S., it's a test. But on that one, we're a bundle, and the pricing is much lower because it's part of a bundle. If you have a chance, you can go check that product, Rocket. But it's an interesting test for us. We're also -- we're launching with Click, again, which is a mobile bundle. So not the same pricing, at $5 or $8, but for us, it's great margins. And like I mentioned to you, I said that our goal -- if we are able to achieve 5% month-over-month growth, we double the business. So if you do the numbers. So in July, very happy to announce that we had a 5% month-to-month growth over June. So -- and August is looking good. So for us, that's our -- if we're able to do 3%, we grow by 50%. If we do 5%, we double the business. So we had a good month of July.

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Operator [58]

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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 [59]

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Just wanted to follow-up, sorry to beat a dead horse here, but just on the organic, can we think of the difference between the kind of 3% to 4% or 4% to 5% and the $0.6 million as maybe a true-up with one partner that's not going to occur?

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

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Okay. You could say it that way. Again, it's always very difficult because, in Canada, there's -- we have a limited number of big clients, and we have to be careful when we're talking about pricing and different strategies. So that's why we're careful. I'm not trying to elude the question I just don't want to get into -- have my friends at one of our telcos or cable call me this afternoon.

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Bentley Cross, TD Securities Equity Research - Associate [61]

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No, I understand. And then that was just that, based on everything you're seeing on the SVOD side, that we should get back to kind of your goal of closer to 5% for the balance of the year?

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

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Absolutely. Very confident to deliver 5% for the year. So on that one, the management stays and -- stays behind this confidence.

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Bentley Cross, TD Securities Equity Research - Associate [63]

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Okay. And then...

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

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The only effect -- the only effect is if we are -- and we're looking at different product lines in certain countries, could we stop doing Classica in Belgium because it's not as profitable because of the rights. So those are the type of stuff that we're looking into. We're looking to the cash flow results of every product line in every country with all the different IT costs sunk into it.

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Mathieu Péloquin, Stingray Group Inc. - SVP of Marketing & Communications [65]

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Yes, very deep.

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Bentley Cross, TD Securities Equity Research - Associate [66]

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Okay. And on the Radio side, do you have any early indications of how this quarter is trending with the TRAM numbers, perhaps?

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [67]

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Which for sure, I was with Ian at dinner last night, our President. So Ian would say we had a very, very strong first quarter. So he would -- so won't give guidance, but we had an excellent first quarter.

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Bentley Cross, TD Securities Equity Research - Associate [68]

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Well, I know that. You put up the numbers, I just mean, for Q2, how are we looking?

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [69]

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Very, very -- I don't believe -- it's tough, it's tough for us. The quarter is not finished, it's tough for us to see how we're going to finish. And the only thing I can say is that Radio -- people say, oh, Radio is pretty stable. Now you're getting close to the numbers. You get yourselves -- I told you that we have this new successful, that I don't want to go on the phone, local sales strategy with web advertising that's working very well. So that we can discuss in person. So I'm very excited of us using our local sales force to sell more products and excited with the Stingray 360, on the national front, to offer the national advertisers, McDonald's and all the big guys, Tim Hortons, a new way to get audio ads.

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Operator [70]

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(Operator Instructions) 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 [71]

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Yes, a few from me. Can you, Eric, talk a little bit more about these new platforms? You said you're seeing strong demand from Roku, Samsung, LG, what is the monetization model there? Because it's not like these hardware suppliers are generating a subscription revenue model. Is it all advertising? Or is it baked into some sort of B2B contract after that?

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

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I'm even surprised -- we're even surprised ourselves because suddenly, in a matter of 8 months, everybody is approaching us to launch our linear channels, but advertising based, absolutely. So -- and the example of Pluto, for us, this was the Ambiance channel. So Ambiance, the fire log is nice and the trees are nice, but it's not the most sexy channel in the world. So the results that we're having with this channel on Pluto, so for sure, we're going to be launching all our channels on Pluto. The beauty we have in the United States is Qello, iConcert has never been launched, Classica has never been launched as a linear channel, and Karaoke has never been launched as a linear channel.

And then we have the flexibility to become the pay audio for LG, for Samsung, for Roku, for Pluto. So for us, it gives us a great flexibility, advertising base with good CPM. So we'll see, but I think that segment could be -- and this, again, comes -- the thinking here comes because of the fact that now that we have the Radio division, we start putting on our advertising hat instead of always CPS, CPS. And for sure, the model in the future will be more advertising based for those linear channels. And if you have a chance to go on your new Samsung TV or your new LG, you'll see all the TV channels there that are included on the TV, they are free, advertising based. And that's our goal to be on it.

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Tim Casey, BMO Capital Markets Equity Research - Equity Research Analyst [73]

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Okay. Second, can you talk a little bit about your appetite for M&A. What's the pipeline like? Ideally, what type of assets? Given you've shifted more to a cash flow than a pure growth model, what -- how's that -- how should we think about M&A going forward? And I guess, tied into that, what signal are you sending to investors about the NCIB? Is a lot -- there's -- a lot of companies make NCIB announcements, but they ended up -- they end up being fairly muted. How should we think about the balance between M&A and share buybacks?

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

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So I think with the extra savings that we got and the extra -- the $2 million less of interest, which is $0.5 million, the marketing budget at Stingray is $1.5 million a year. Thanks to you again, Tim, because you're a banker -- your bank, sorry. We saved $2 million in interest costs in one negotiation. So for us, it's fantastic. So what I'm trying to say is our cash flow is so strong that we're able to maintain M&A. Our pipeline has never been this strong. Our goal always is, when we buy a company, we buy them 3x to 4x cash up front. We buy them around 6x to 7x EBITDA, and after synergies, our goal is to be below 5. So with this plan, we have many companies in play right now, and we feel that we'll have an aggressive fall. So -- and also just the good news, we've hired also a new person in M&A, [Maggie Lentonier], so we officially have this person involved. So we have a new team. So I'd say the strategy on M&A hasn't changed. The issue we have is that we're tough buyers, so we negotiate, we negotiate, we wait for a price. So a lot of deals get delayed because we always ask for 40% of VTB because we want to make sure that, if you sell us your company, that you're comfortable in yourselves. So sometimes negotiation takes longer. Is that a good answer, Tim?

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Tim Casey, BMO Capital Markets Equity Research - Equity Research Analyst [75]

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Sure, I mean, but what type of -- are you still going -- are you still interested in, for lack of a better phrase, a legacy kind of asset? Or are you more focused on libraries and whatnot? And once again, how do we balance that with the NCIB?

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

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Okay. So just on our pipeline right now, on the B2C side, we probably have 4 to 6 acquisitions in play, on the Radio, we always have 1 or 2. That's you know that people come in and come out. And on Stingray business, there, also, we have 2 to 3. So -- and on the Broadcasting side, also 2 to 3. So we have a strong pipeline in all different verticals. And that we feel we can -- again, most of these are -- at this stage, are tuck-in. I don't think we'll be surprising the market with a $200 million acquisition. So most of these are tuck-in, I'd say, between $5 million to $20 million. That's our range right now.

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Tim Casey, BMO Capital Markets Equity Research - Equity Research Analyst [77]

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And the NCIB, are we going to -- should investors expect you to fulfill that? Or is this...

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

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Look, for us, if our interest rate is at 3.89% and the dividend is higher, then management and the Board will be very aggressive because, if we can save money, for me, a non-deductible dividend and a deductible interest, do the numbers, but we're going to be opportunistic. I know, last time, I know we announced great numbers, and the stock went down to $5.50. And if we feel we generate $120 million of cash, we'll be there to -- and have the tool to use it. So I think you can expect management to be aggressive using this tool.

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Operator [79]

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We have no further questions at this time. I'll turn the call back over to our presenters for any closing remarks.

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

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Okay. Thank you very much for the call today. Yes, I have a small [word]. It is our AGM, I know a lot of you are in Toronto, but it's our AGM at 11, everybody is invited. We have a beautiful [interesting rebuilding]. And the good news is the construction in town is not finished, but the construction at our office is close -- is finished, so you'll be able to see a beautiful afternoon. Thank you very much, (foreign language).

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Operator [81]

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