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Edited Transcript of RAY.A.TO earnings conference call or presentation 7-Feb-19 3:00pm GMT

Q3 2019 Stingray Group Inc Earnings Call

MONTREAL Apr 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Stingray Group Inc earnings conference call or presentation Thursday, February 7, 2019 at 3:00:00pm 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 and 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

* Nicholas Kim

BMO Capital Markets Equity Research - Senior Associate

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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 the Stingray Group Inc. Third Quarter 2019 Results 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, February 7, 2019. I would now like to 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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(foreign language) Good morning, everyone. Thank you for joining us on Stingray's conference call for the third quarter ending December 31, 2018. Today, Eric Boyko, President, CEO and Co-Founder; and Jean-Pierre Trahan, CFO, will be presenting Stingray's financial and operational highlights. Our press release reporting Stingray's third 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 operation and performance are subject to risks and uncertainties and actual results may differ materially. These risks and uncertainties include, but are not limited to the risk factors identified in Stingray's annual information form dated June 7, 2018, 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 advised not to place undue reliance on such forward-looking statements.

Thank you. I will now pass 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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Okay. Good morning everyone. I'm very happy to be here today to discuss our results for the third quarter and some recent business highlights. In early May of last year, we first announced the acquisition of NCC. Here we are several months later with the first look with its impact on our results. Please note that the Q3 results include 67 days of NCC results.

Our revenues reached $70.8 million, up a 100%, and our adjusted EBITDA reached $27.2 million, up 144%, achieving yet a new milestone. As indicated before, NCC represents a great and strategic asset for Stingray. Even without the full contribution of the acquisition during the quarter, adjusted free cash flow doubled to $16 million, allowing us to raise the dividend to $0.065 per share. This number represents an increase of 18.2% over last year.

At the end of December, as planned, we had mostly completed the divestiture of NCC's non-core assets for a total consideration of $12.4 million. We're also glad to report that 90% of the planned synergies have been realized to date.

Now on to major highlights from the last quarter. Our SVOD and B2C monthly revenues increased by 25% over the last quarter to $3.2 million. Since we first started reporting SVOD, our average revenue per user increased 42% to $9.07, mainly due to more B2C sales. During the quarter, 3 new apps were launched, The Voice; Piano Academy; and Stingray Classica.

This momentum will be further supported in upcoming quarters with the launch of Stingray Karaoke and Stingray Qello on The Roku Channel. Apple is now our biggest revenue-generating platform for Stingray suite of products.

In late December, we announced a multi-year distribution agreement with Altice USA, one of the largest broadband communication and video service providers in the U.S., bringing 50 Stingray music audio channels and hundreds of music videos from Stingray on-demand catalog to Altice USA's Optimum and Suddenlink subscribers. The deal also provides Altice USA with rights for other popular Stingray products such as linear music video channels and subscription video-on-demand products and TV apps.

In Canada, we were happy to report the Stingray audio channels and music video channels are now measured by Numeris. During the holiday season, Stingray's music TV service reached 15 million Canadian, including 41.6% of the 25 to 54 age group. Over the next few months, we will also increase distribution of our music video channels providing national advertisers with a new offering targeting niche and attractive demographics.

Finally, in terms of capital allocation strategy, on a short-term basis, the focus is primarily focused on reducing the debt level. We are in very good shape concerning our solid free cash flow projection going forward. We will, therefore, continue to pursue opportunistic tuck-in acquisition.

So with this, I will pass you to Jean-Pierre, who will review the quarterly financials. Thank you.

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Jean-Pierre Trahan, Stingray 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. The Stingray revenues increased 101.6% to $70.8 million in the third quarter, compared with $35.1 million a year ago. The increase was primarily due to the acquisition of NCC combined with the acquisition of DJ Matic and organic growth of SVOD and B2C apps.

Recurring revenues were up 15.9% to $33.4 million from $28.8 million a year ago. Geographically, Canadian revenues increased 188.2% to $46.7 million or 66% of total revenues. Due to the acquisition of NCC, United States revenue increased 25.5% to $8.8 million or 12.5% of total revenues, whereas revenue of -- in other countries increased by 28.3% to $15.2 million, or 21.5% of total revenues.

Broadcasting and Commercial Music revenues increased 10.8% to $38.9 million, mainly due to the contribution from the acquisition of DJ Matic and Novramedia and to a lesser extent to revenues from B2C apps and SVOD, partially offset by lower non-recurring equipment and installation sales related to digital signage. During the quarter, existing operation excluding non-recurring equipment and installation sales related to digital signage experienced organic growth of 2%, which also contributed to the increase in the segment's revenues.

For the quarter, Broadcasting and Commercial Music adjusted EBITDA increased by $1 million or 8.1% to $13.3 million from $12.3 million last year. This increase is mostly attributable to the contribution from the acquisition of DJ Matic and to a lesser extent of subscriber revenues from B2C apps and SVOD. The slight decrease in adjusted EBITDA margin was mainly related to the acquisition of DJ Matic which was as a lower margin.

Radio revenues stood at $31.2 million for third quarter of 2019. This increase is attributable to contribution from the acquisition of NCC since the closing of transaction 2018. As a result, Stingray adjusted EBITDA was up 144.1% to $27.2 million from $11.2 million a year earlier. The increase was primarily due to the acquisition of NCC and the acquisition was realized in fiscal 2019 and 2018 and to the organic growth of B2C apps and SVOD. Adjusted EBITDA margin also increased to 38.5% from 31.8% a year ago and was mainly related to new Radio segment which has higher gross margin.

For the third quarter, the corporation recorded net loss of $18.1 million or $0.26 per diluted share compared to a net income of $700,000 or $0.01 per diluted share last year. The decrease was mainly attributable to the non-recurring CRTC tangible benefits expense of $25.3 million related to the NCC acquisition, higher interest and acquisition expenses partially offset by higher operating results.

Adjusted net income increased 106.1% to $12.4 million or $0.18 per diluted share compared to $6 million or $0.11 per diluted share a year ago as higher operating results were partially offset by higher interest expenses. Cash flow generated from operating activities increased to $9.2 million in the third quarter from $6.6 million a year earlier. The increase was mainly due to higher operating results partially offset by higher acquisition expenses and higher interest rates.

Adjusted free cash flow increased to $16 million from $8 million for the same period a year ago. The increase was mainly related to higher operating results partially offset by higher interest paid.

Looking at our financial position, Stingray concludes the third quarter with a cash and cash equivalent of $5.1 million, a subordinated debt of $49.5 million and a credit facilities of $450 million which approximately $135.5 million was unused. Total net debt stood at $359 million and based on some pro forma and synergies assumption presented in the MD&A, the net to adjusted EBITDA ratio would be at 3.19. NCC will be consolidated in full in the fourth quarter.

I'll 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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Okay, thank you. So I think it's time for the questions. So we will -- we're pleased to answer the questions from our friends.

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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 from 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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Maybe, Eric, just to start with SVOD, obviously, we saw base catch up recovery in terms of seasonality. Maybe you can give a little color as to some of the moving pieces. I mean you touched on the new apps being launched and maybe speak to a degree to any momentum that continues into the 4Q.

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

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Like we said in our report, we launched 3 new apps in December always music related. We launched The Voice, which is a very similar app to Yokee Karaoke. We launched Piano Academy which is a learning app for piano and we launched Classica. So the momentum is very strong, as you saw 26% and even in January, in January, we see another increase of 10%. So, no, the B2C market is exciting, but the growth is -- year-over-year is about 55% right now. So January was good, but we'll see how February and March goes.

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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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Okay. And maybe just few items for JP regarding, well, couple of the disclosures and maybe one for you also again, Eric. The CapEx seems to be running a little bit higher than we expected. Any color in terms of what we should think about to close out the year and/or maybe into F'19? I think pre-F'20 that is, I think previously the comment was maybe $8 million to $10 million should have been the expectation, but you are running higher than that.

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Jean-Pierre Trahan, Stingray Group Inc. - CFO [5]

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Adam, we did some CapEx in this quarter, but we expect to go back to normal in the future.

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [6]

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But I would say $10 million is a good target for -- to put in the CapEx for Stingray. For sure we are investing a lot in the B2C apps, so these apps that we're launching and the Piano Academy one, those require lot of investment, but the return on investment for all the B2C is…

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Jean-Pierre Trahan, Stingray Group Inc. - CFO [7]

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Amazing.

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [8]

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-- is amazing, so it's -- we will continue to develop more application and also to get more subscribers.

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Adam Shine, National Bank Financial, Inc., Research Division - MD, Head of Montreal Research and Research Analyst [9]

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So it's really the B2C apps that is the incremental. And when we look at the corporate costs which is a new line item, a little bit of revenue just residual from the hotel over at NCC which was sold at the end of the quarter, but a good run rate per quarter going forward, should we think about it as closer to $2 million or closer to $1 million?

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [10]

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No, $1 million. $1 million to $1.1 million, very stable. The only people we put in corporate, again this is our first quarter, so we worked harder over 2 weeks period, but the people that we put was mostly the CFO, ourselves, the people that worked for the public company, so about $1 million.

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Jean-Pierre Trahan, Stingray Group Inc. - CFO [11]

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And all the cost related to the…

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [12]

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And all the -- yes, and all the cost related to being public, so about $1 million.

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

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We cleaned out.

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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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And just the last question is regarding the legal side of things in terms of this lawsuit with Music Choice. There seems to be the stay of the proceedings has sort of run its course so to speak. There's new court date set for I think later in August. How should we think about what really remains here because there seems to be a whole slew of these components of the various patents that have been rendered largely moot. Do we start thinking about some incremental residual legal costs as we go forward into the next 2, 3 quarters? How should we think about this?

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

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Yes, that's -- so as of now for sure we're planning to go to court I think over the summer like you said. I would expect between $1 million to $2 million of legal cost and again the bad news on this story is even if we win, we don't win anything, so it's really the U.S. is very expensive, those legal costs, so we should expect $1 million to $2 million in Q3 of next year of fees.

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Operator [16]

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

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [17]

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Just to follow up on Adam's question around Music Choice. Eric, still no change, I obviously read the disclosure in the MD&A, but still no change in terms of your confidence and positioning on this whole litigation?

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [18]

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No, I think at the start and don't quote me these, I think there were 60 claims in the patents that were put against us and I think where we had 50 of them that were discounted by the courts, so there's 10 claims left, our position we feel is very strong and the damages are very -- in the worst case scenario, damages are very, very low. So this case is purely about our competitor murking the waters to keep customers in limbo and so the good news is the signing of Altice just proves that I think the market is realizing that this is not as strong as they expect and we feel comfortable that we can sign some other big U.S. competitors over the next 12 months -- U.S. customers, not competitors.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [19]

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That’s great. And shifting gears a little bit, with respect to radio, certainly no surprises from my perspective on the quarter, you've done a couple of additional small tuck-in acquisitions. Just would like to get your thoughts on the strategy there, is it -- are there incremental synergies to it, is it just about kind of getting a little bit bigger scale, maybe comment on that?

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [20]

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I think for us the radio business, we've been with it now for 67 days on an accounting basis, it's an incredible business because when you say EBITDA on radio, you really say cash flow. There's no CapEx in the radio business, so when we buy a smaller station and we are able to achieve 5x EBITDA after synergies, we're really buying businesses at 5x cash flow. And for me as a shareholder, if I can invest the money at 20% return, I'll invest it every day of the week. So these tuck-ins are great. We have the scale, so we're really able to get the synergies on day 1. And I must say that our management team at the Stingray Radio, with [Scott], Steve and our friend, Ian, I think we have the best management team in Canada and any day of the week I would fight in any city or any region against our competitors and I think we will win.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [21]

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Okay. Great. Two follow-ups for me and then I'll pass it on. On the back of the B2C apps that you launched and pending, maybe over the next kind of 2 to 3 years, Eric, just comment on what the B2C roadmap could look like maybe in terms of the number of apps or broadening out what you offer. And then second question just on the dividend increase, are you still targeting, I believe it was a 30% to 40% payout ratio given kind of your current free cash flow priorities? Or is that range kind of shifting a little bit?

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [22]

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So on B2C, that's when we first launched the B2C SVOD about -- a few years ago, we said to the market that our goal would be 1 million subscribers at $5 a month, so $5 million a month. In December, we hit $3.2 million, so we hit 64% of our goal. So I think our goal of hitting $5 million of revenues from SVOD is more achievable than ever and seems very strong. The products we have right now are we launched the Stingray Classica direct where we're launching Qello and Karaoke. These platform are launched on not only on iOS and Android but also launched on Roku, Amazon Fire, Apple TV, so we're getting broad distribution. And this is a good example, with Altice, our goal is to with the Altice customers to convert some of them to take the B2C app. So I think -- so we're very positive on the growth of that segment. That segment has very high margins. So right now if you do $3.2 million times 12, it's a $40 million business. And so far, last quarter it was growing by 55% over last year. So if you do 55% over $40 million, you -- it's a -- the B2C division will become bigger than their TV division, which is about $60 million. So I think we did the right pivot as a company. We're using our linear channels to promote our B2C product, and that's the pivot that we need to do in our industry. Regarding the dividend, we're at $0.26. Our free cash flow per share is at $1, so we're at 26%. So right now our first goal is to bring down the debt below the 3. I think this will be achieved over the summer. And then we'll reposition ourselves, but for now, we're keeping the good old $0.02 increase every 6 months. So we should minimum increase the dividends in the next 2 quarters by $0.02. And then we'll adjust the [sale] depending on how the debt EBITDA goes. Is that a good answer or…

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Operator [23]

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

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

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I've got a couple follow-ups and then a couple of new questions. Just going back to the Music Choice side, Eric, you mentioned the opportunity with other carriers. Can you maybe expand on that and talk about how your U.S. strategy changes or looks going forward post Music Choice world?

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

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Yes, no, I can't go in too much detail because on these calls you never know who's on them. And it might be your competitors. But for sure we have a very aggressive strategy for the U.S. market and that's why we got the Altice account and I think we're going to continue being aggressive in the market. We have the leverage of having the B2C product that we can monetize, that our competitors don't have. So for us, we see pay audio just like radio as a great way to advertise our B2C products. So we have that advantage that our competitors don't have and we're going to be taking advantage of it.

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

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And then going back to the Canadian market, I'm thinking in terms of your linear video channels that you're launching -- in the process of launching and preparing to launch, now that you have Numeris ratings and what's kind of been the feedback on the advertising potential for these channels? How does it kind of rank with other ad-supported channels out there? And when would we start seeing this revenue coming?

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [27]

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Yes. No, that's -- we gave a guidance and the deal with our friends from NCC that we would generate $5 million for advertising on the Stingray side. So the good news we've launched -- we have about 2 million subscribers out of 10 million in Canada. We're confident that we'll hit by summer 6 million to 8 million subscribers. Our AMA with 2 million is at around 4000, so if we go to 8 million, we feel our AMA will be anywhere between 14,000 to 16,000. And at that range we could leave -- our advertising -- national advertising will be above 10 million. So we need to get the distribution. We launched with TELUS I think 2 weeks ago. We got Rebel, but we need to launch with our friends at -- to put ourselves HD with Shaw, with our friends at Rogers, Videotron, and Cogeco, and we're launching with Eastlink. So that's our goal. So very positive momentum on that side. And we are -- we have our team in place. And Stingray partners with -- Stingray Radio partners with Bell for national accounts and we will partner with Bell for the national accounts on the TV side also.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [28]

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And then I do have one last question, Eric. When we look at the industry more broadly in the music business, we've seen serious moves for Pandora and Liberty Media moving for broader pieces of music business. When you think of a multi-platform music business and the one that you're building now, where do you see the advantages and where do you see the opportunities in being multiplatform? Like what do you get out of being in commercial, in broadcast, in video, in mobile? How do you think about that from a business perspective?

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

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So for -- us compared to Spotify and compared to XM Sirius and even Pandora, one of the big difference is that we're very strong on the video side. So we're number 1 in the classical space, we're number 1 in jazz, we're number 1, again, video, and we're number 1 with Karaoke which is a video product. So I think that's an advantage that we have that our audio peers don't have, but also we've launched our Stingray mobile app open in the U.S. We're excited about that, we're going to start having advertising in the US, so we're happy with that also. So it's going to be interesting, interesting the space, and for us, big advantage is we have on our product and distribution we have high margins. So Stingray is able to generate strong cash flow while growing and investing and R&D.

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Operator [30]

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

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Bentley Cross, TD Securities Equity Research - Associate [31]

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First just a quick housekeeping question. The disclosed pro forma EBITDA of $112.7 million, that just hasn't moved because you guys don't want to give guidance, correct?

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

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No, we gave that number, it was a pro forma number when we -- the deal was achieved with NCC, we gave that to give the market a bit of a sense of the debt EBITDA ratio. So that number, we're not going to change it, and I guess by the end of this year in December, you guys will have 12 months and then will be able to calculate the exact trailing 12 months EBITDA. But we're very -- that number for us still makes sense.

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Bentley Cross, TD Securities Equity Research - Associate [33]

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And then on the real questions, first just the timing of the Altice deal, when will we start to see revenue contributions there?

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

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January, so the revenue contributions start in January. The Altice deal for us is a profitable deal. And the 2 things we want to leverage with Altice is the commercial subscribers with them, and most important the B2C. For -- Altice has about 4 million subscribers in New York, and I'm keeping it simple. But if we're able to convince 1% of them to take our Classica app or Qello app at $10 a month, just that would generate 40,000 subscribers. At $10 a month, it's $400,000 a month. So -- and New York and Manhattan being one of the I'd say -- I won't say richest, but very, very affluent subscribers, yes.

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Bentley Cross, TD Securities Equity Research - Associate [35]

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And then switching gears to radio, can you guys give any sort of pro forma trend on the revenue side?

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

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Yes, radio for sure, we've -- the integration with the (inaudible) takes a long time. So I would say the last quarter sales were good but still is soft. EBITDA is up because we're able to increase -- decrease our OpEx, and I think the management team is very lean and mean. But for sure the -- how do you say, the core business, the dealership, those sales are down, so it's a bit soft. But we're able to cover with some -- with the synergies and the implementation that we've done. An important point, all of the synergies from Stingray and radio will finish on January 31. So there's -- now we're focusing on the positive synergies and getting the cross-selling, cross-promotion. And you're able to -- you're going to see it on the radio and on pay audio and we're excited now to look at the fun side of the acquisition instead of the accounting/structure.

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Bentley Cross, TD Securities Equity Research - Associate [37]

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Just to paraphrase that, Eric, is it fair to say essentially trends remained as they were before you guys bought it, were revenues down? Were they still up?

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

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Yes, revenue is down a bit, it's almost -- slightly down, EBITDA up, and for sure a bit soft. And we'll see for this year. I think we're -- there's no doubt that doing a big integration like this, 55% to 60% of our sales are local sales. So we have to -- now we have to -- so one of my goals is to visit every station the next 2 months with Ian and Rob Steele and to make sure that we're all aligned, one team and very motivated. So we need to a put a bit of fun in the business.

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Bentley Cross, TD Securities Equity Research - Associate [39]

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I think you'll be able to do that.

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Operator [40]

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Your next question comes from the line of Maher Yaghi from Desjardins.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [41]

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Guys, good numbers on the SVOD. Can you talk a little bit about the seasonality and we're lapping a year now into the numbers, what you're expecting in terms of seasonality in this quarter? And also just to follow up on that, when I look at your broadcasting business, in general, you said organic growth is running around 2%. With SVOD growth that we're seeing which is double-digit, what is dragging the organic growth down?

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

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Yes. So to the questions on the SVOD, very interesting. The SVOD, last year we had one product with one customer, and we can't go in details because these are -- we have only one product to one customer that went down. If you take out that one product one customer where there was a technical issue, our SVOD never went down. So we're very, very confident about the increase of our SVOD. Like I said just in January we're already up -- we're already up 10% compared to December, so a very strong January. For sure there's a bit of seasonality, but our products are doing well. And the more you do B2C, the more it helps the B2B. So the more we promote Karaoke B2C, it helps ourselves on Karaoke Amazon and Karaoke Comcast and Karaoke Cox. So the B2C and the B2B seem to be related because if you want to do Karaoke and you like Stingray and you're a Comcast user, then you might buy it on Comcast instead of buying directly. So the trends are very good. We're very excited. So that's for the SVOD side. And the second question was -- oh, the (inaudible).

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [43]

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Yes. Trying to figure out what -- we had 5% organic growth last quarter, now you're down to 2%, but you're seeing double-digit growth on SVOD. So I'm trying to figure out what is bringing down that growth.

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

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So I think the SVOD -- first of all, the SVOD numbers really took a peak in December, so you're going to see the numbers in -- in the January, February, March in Q4 because we had a peak starting again in December, so we're going to see the money this quarter. And for sure I would say the TV side is for us the goal on TV is to be at 0. TV market is tough and our subscribers in Canada are going down by 2%, so it's not the end of the world, but it's no growth. And around the world except for Latin America, which we're seeing growth, even in Europe the market is very tough and that's why we're making the pivot from TV to B2C because it's going to be -- and we're working more and more with over-the-top players. If you think about it, in the last 12 months, our biggest customer now is Apple with 2 million a month, Comcast 1.2 million, and our friends at Amazon we just hit 0.5 million with them. So our customers are switching from a CPS model to a subscription model and we're making money with it.

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Jean-Pierre Trahan, Stingray Group Inc. - CFO [45]

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More and more.

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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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Yes, yes, that's…

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

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That's the…

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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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And the re-pricing that's going on, on the TV side?

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

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No, that's a bit in Europe -- a bit of re-pricing in Europe with some of these channels, but again we're using those channels to promote the B2C app, so a bit of re-pricing, but again we -- the TV side for your forecast we used to say 0% to 5% and now I say 0% to minus 2%. We don't see TV linear on a CPS model declining, but we see our revenues on TV advertising that will more than offset the CPS model and that's where we -- that's where we did the radio deal and that's where we're still focused on advertising and the advertising would more than offset the decrease of subscribers and this decrease of CPS. Is that a good answer or…

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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. No, no, that's -- that's good. So I wanted to talk about the adjustments you made to EBITDA, $10 million of cost. How much should we expect in let's say in non-recurrent costs that you might add back in this quarter or the quarter after? How much of that…

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

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Which one of the…

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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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The $10 million cost that you had in the quarter, how much of that is a decline?

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

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So one thing we did this quarter is we put all of the severances, legal costs, everything was put in this quarter.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [54]

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Yes, everything was cleaned up.

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

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So starting in January we're clean. Those -- starting in January we've -- we put everything in the quarter because this quarter is a bit of a murky because it's only 67 days of radio, there's no -- so we cleaned out like you said the balance sheet. And my last question would be also -- and even on the EBITDA side there was some reversal of rate from the radio side, so don't expect the radio to make 48% EBITDA margin. It's lower than that because there were some reversals done in December of right to accruals that are -- again were for last year, so there's about $1 million to $1.5 million of reverse EBITDA, positive EBITDA that we have to take out.

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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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On the radio side?

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

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Yes.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [58]

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And my last question on note 9 on your MD&A you talk about a leverage ratio, financial covenant target that if you don't meet it you could be forced to pay 50% of your excess cash flow to reduce your debt repayment. What is that covenant and what the ratio is at this point in time?

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [59]

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Yes, but this one we're -- our EBITDA ratio is at 3.19.

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Jean-Pierre Trahan, Stingray Group Inc. - CFO [60]

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That's about 4…

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [61]

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4.5.

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Jean-Pierre Trahan, Stingray Group Inc. - CFO [62]

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So we're far from that.

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [63]

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Our ratio is 4.5 and we're at 3.2 and you can imagine in every week we -- the good thing about the radio business in our business is that cash comes in every week. So we are -- we're safe regarding those ratios and always (inaudible).

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [64]

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Yes. Okay, no, I -- yes, yes, no, no, I think 4.5 is way, way, higher than where you are right now. I just wanted to make sure you're not close to it, that's all.

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [65]

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And just give you a feedback, in January the radio business generated $8 million of free cash flow. So for sure, it's a big month as we're collecting November-December. But you've got a business that's generating $1.2 million to $1.5 million of free cash flow a week right now. So it's great to be -- it's -- when you make cash flow everybody is happy.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [66]

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And Eric, just one last question on -- sorry, on SVOD market. You seem to have a good grasp on where to go other than the recent findings in the U.S., what are the potential prospects in the U.S. market in terms of getting into new cable providers or launching SVOD with other over-the-top TV providers in 2019?

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

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Yes, I think in 2019 one thing you're going to see and I think the market will be happy is we're also doing SVOD, we're aggressively going after AVOD market. A lot of opportunities in advertising, video-on-demand, so we'll be launching a lot of our channels with large players over the next few months. And it's going to be very interesting how we can monetize with the advertising AVOD over the U.S. and around the world. So for sure, the U.S. market is the number one market for Stingray. It's a number 1 gold. The sale -- the U.S. market should be 50% of our sales in the future. Every media company has all their sales coming from USA and Stingray is a bit of a unique unicorn and that's where our focus is and that's where we as management and in terms of focus is -- our timing is spent in New York, Philadelphia, San Francisco and LA. I'm having lunch with (inaudible).

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Operator [68]

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Your next question comes from the line of Nicholas Kim from BMO Capital Markets.

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Nicholas Kim, BMO Capital Markets Equity Research - Senior Associate [69]

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Most of my questions were answered, just one quick one. So in your prepared remarks, you noted deleveraging is a near-term priority. Like how should we reconcile that with future M&A prospects? Can you just give us an update on your M&A pipeline?

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

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Yes, so our M&A pipeline, for sure we always keep the pipeline open, but for sure now we're not going to be taking a big risk over the next 6 months. So don't expect us to make a big deal. And to be very direct, we told our M&A team we'll do deals, but the cash payment upfront has to be below $3.2 million.

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Jean-Pierre Trahan, Stingray Group Inc. - CFO [71]

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It take time to close, so.

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

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So right now we're very aggressive in terms of pricing. So for sure that -- and -- but we're always -- you're going see we're always doing tuck-ins because tuck-ins are a great synergies day 1. So tuck-ins on the radio side, tuck-ins on our side, but I don't expect for the next 6 months until we're below $3 million, we don't expect any major deals that would -- that we would pay a lot of money upfront to increase our debt EBITDA ratio.

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Nicholas Kim, BMO Capital Markets Equity Research - Senior Associate [73]

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And then just one more. Can you just give us an update…

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

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And the second point for that also important, now we're also very focused on organics growth. So we just did a big deal. We got a lot of cross-selling to do between radio and Stingray and the B2C product and our teams are very focused over the next 6 months to show strong organic growth and the cross-synergies of the last deal we did.

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Nicholas Kim, BMO Capital Markets Equity Research - Senior Associate [75]

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And can you just give us an update on the -- for the SVOD business, what the subscriber churn rate was last quarter and how that's been over the last 12 months now that you've got a full year under your belt?

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

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Yes, roughly that business has about a 10% churn depending if you're B2C to B2B, but right now again most 98% of our [sub-grow] for -- has all been organic. We started doing a bit of advertising on the Karaoke and Piano. We have some successful campaigns, so that's also exciting. Roughly a lifetime value of our Karaoke customers last piano was about $50 and right now we're able to do customer acquisition at $30. So that's also helping out the branding of our products. So churn of 10%, but again, like I said in just in January we had a 10% growth over December.

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Operator [77]

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(Operator Instructions) Your next question comes from the line of Deepak Kaushal from GMP Securities.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [78]

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Just a quick follow-up. Eric, JP, I had a question about margins for the broadcast and commercial business. I think the EBITDA margin was 34% without the corporate overhead. In the past before the radio acquisition, you guys had a target range of like 35% I believe on the margin side for the core business fully baked with overhead. What would be the outlook for margins going forward for that side of the business?

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [79]

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Yes, I think the 35% -- and the 35% is a good target and the more we do SVOD, the more EBITDA margin goes up. So because SVOD is -- the EBITDA margin on SVOD is anywhere between -- now depending if you -- because the big difference again with the SVOD is the fact that now we're making gross, because before if we would sell $10 on iTunes, iTunes keeps $3, we will report $7, now we're reporting $10. So EBITDA margin on the SVOD market is around 60%. So the more we do SVOD, the more it increases the EBITDA margin. I don't know if you follow me.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [80]

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Yes, I get it. I appreciate the follow-up.

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [81]

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And the radio side also above 35%.

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Operator [82]

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There are no further questions at this time. I turn the call back over to management for closing remarks.

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Eric Boyko, Stingray Group Inc. - Co-Founder, President, CEO & Non-Independent Director [83]

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Okay. So thank you very much for your time and your call today and thank you very much for all the analysts that follow us. Good questions and we're very happy to be partners with all you guys. So thank you very much and excited to see you guys in June for our fourth quarter results and year-end. Merci.

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Jean-Pierre Trahan, Stingray Group Inc. - CFO [84]

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Merci.

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Operator [85]

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