Scotia Capital analyst Jeff Fan launched coverage of newly-IPO’d company BBTV (BBTV Stock Quote, Chart, News TSX:BBTV) on Tuesday with a “Sector Outperform” rating, with Fan calling BBTV a unique play on global secular online video ad growth.
Vancouver-based media technology company BBTV allows content creators to monetize their video content and offers end-to-end content management, distribution and monetization solutions via its VISO platform. The company has two main solutions segments, Base Solutions and Plus Solutions, with more than 90 per cent of BBTV’s revenue currently coming from Base Solutions.
BBTV’s total views currently make up over half of YouTube’s unique views, representing four times more video views than Facebook and twice the amount of watch time as its next-largest traditional media company. That scale allows BBTV the data to support its content creators, said Fan, who sees Plus Solutions as a prime growth area.
“Even though BBTV generates over 50 per cent of YouTube views, we estimate that BBTV’s Base Solutions revenue represents less than five per cent of YouTube’s ad revenue, which is an opportunity for BBTV,” Fan wrote. “By converting some of BBTV’s most-viewed content from programmatic ad sales to direct ad sales in Plus Solutions, BBTV can increase monetization by over 4x, as measured by cost per thousand impressions (CPM). We believe this is the most important growth and margin expansion driver for BBTV. In addition to direct ad sales, Plus Solutions includes SaaS, rights management, and mobile gaming applications.”
Formed in 2005, BBTV Holdings has BroadbandTV as its operating business, 51 per cent of which was sold to European media company RTL Group in 2013. BBTV used proceeds from its IPO last month to buy back the 51 per cent to become sole owner of BroadbandTV, which is now the second-largest source on online video content on the planet (after Google) with 245 billion online views over the first half of 2020.
Last week, BBTV reported its third quarter financials, posting revenue of $120.7 million, up 31 per cent year-over-year, and an 18 per cent uptick in views to 121.2 billion over the quarter across its platforms.
“We are very pleased with our performance during Q3, as we executed on our strategy to increase our global scale and experienced strong growth in audience views of our content, accelerated by beneficial secular tailwinds including television viewers ‘cutting the cord’ to watch digital video on demand,” said Shahrzad Rafati, Chairperson, Founder and CEO of BBTV, in a press release.
Rafati said the company will push forward with its growth strategies which include investing in technology, scaling and expanding its higher-margin products and adding accretive acquisitions. The company reported an adjusted EBITDA loss of $722,000 for the third quarter and ended the Q3 with about $10 million in cash and equivalents on a consolidated basis and after fees and expenses and $46 million in long-term debt in the form of convertible notes.
Taking back full control of BroadbandTV was a big deal for the company, according to Fan, who wrote, “In recent years, in our opinion, without control of the company, BBTV management could not fully pursue some of the significant growth opportunities in Plus Solutions that we describe in this report.”
“Now, as an independent company free from a media conglomerate, coupled with additional capital from the IPO and a public currency, we believe BBTV can actively leverage the strong market position of its Base Solutions business to drive Plus Solutions’ higher-margin growth over the next few years, which will create significant potential shareholder value,” Fan said.
The analyst pointed to macro trends in Internet penetration (currently at about 60 per cent with 4.8 billion Internet users worldwide) which has created “a video streaming boom.” Further, global ad spend has been shifting to digital, with BBTV saying global digital ad spending will grow at a 12-per-cent CAGR from 2018 to 2022 to reach over $441 billion.
Those features will benefit BBTV, said Fan, as it uses its significant scale and end-to-end platform to help creators along with its history of being very active in content acquisition.
“Our financial forecast is predicated on double-digit total revenue growth driven by Plus Solutions, combined with natural margin expansion as Plus Solutions, which is higher margin (27 per cent margin versus 6 per cent base margin), becomes a larger proportion of the total revenue mix. Over the next three years, we expect Base Solutions revenue to grow at a CAGR of 10 per cent (2020-2023),” Fan wrote.
“Plus Solutions is currently less than ten per cent of revenue, but it generates 3x higher gross margin than Base Solutions. We forecast the Plus Solutions revenue mix to increase from less than seven per cent in 2020 to over 16 per cent in 2023, which will help gross margin expand from 7.9 per cent to 9.4 per cent between 2020 and 2023. We expect BBTV to become EBITDA-positive in 2023 and free cash flow (FCF) positive in 2025,” he said.
By the numbers, Fan is calling for 2020 revenue and adjusted EBITDA of $437 million and negative $4.9 million, respectively, and for 2021 revenue and adjusted EBITDA of $493 million and negative $8.5 million, respectively.
Fan has paired his “Sector Outperform” rating with a one-year target of $19.00, which at the time of publication represented a projected return of 47 per cent.
Disclosure: Cantech Letter’s Nick Waddell owns shares of BBTV.