Sabio has a 233 per cent upside, Beacon says

It’s been a strong start to the year for ad tech company Sabio (Sabio Holdings Stock Quote, Charts, News, Analysts, Financials TSXV:SBIO), according to Beacon Securities analyst Gabriel Leung. Reporting on Sabio’s first quarter earnings results on Monday, Leung reiterated his “Buy” rating for the stock, saying investors should take note of the company’s organic growth potential going forward.

Los Angeles-based Sabio is a provider of CTV/OTT advertising platforms with software and services to cover elements such as reach, targeting and analytics. The company, whose shares started trading on the TSX Venture last fall, has delivered record quarterly results since then, including in its first quarter 2022, reported on Monday, which saw revenue rise by 116 per cent year-over-year to $5.6 million. Sabio management credited expansions in its sales team and leadership in key regions like New York as helping to account for almost half of the growth over the quarter. (All figures in US dollars except where noted otherwise.)

“We are pleased with our results for the first quarter of 2022. Sabio continues to execute and take advantage of the significant industry shift towards ad-supported CTV/Streaming,” said Aziz Rahimtoola, CEO and founder, in a press release. “Despite the seasonal nature of our industry along with supply shortages and other macro environment issues, we continued our streak of double-digit organic growth, putting us in the strongest financial position in the Company’s history.”

Breaking down the revenue, Sabio said its CTV business over the Q1 jumped to $2.3 million compared to $0.6 million a year earlie, while Mobile and OTT streaming revenues were also up 64 per cent to $3.3 million, with the increase attributed to a multi-year expansion of an existing partnership and an increase in CTV and Mobile bundled campaigns.

Sabio recorded an adjusted EBITDA loss of $0.9 million for the quarter compared to a loss of $0.5 million a year earlier, and the higher loss was chalked up to investments in growth initiatives and costs connected to employees returning to the office. The company ended the Q1 with $4.0 million in cash, of which $1.25 million was put towards the completed acquisition of US-based streaming TV supply side platform (SSP) Vidillion subsequent to the quarter’s end. 

CFO Sajid Premji called the Q1 Sabio’s strongest first quarter ever, saying in the press release, “Our sales pipeline for the rest of the 2022 is the strongest in the Company’s history and we expect to continue to deliver strong revenue growth, improve our cash flows in the remaining quarters, and deliver positive Adjusted EBITDA1 for the full year. We believe the Company is well-funded to navigate through any potential foreseeable short-term challenges that the current macro environment may present.”

Looking at the first quarter results, Leung said they arrived better than expected, with the revenue/EBITDA of $5.6 million and negative $861,000 beating his estimates at $4.95 million and negative $888,000. Leung noted that revenues were down sequentially by 47 per cent from the seasonally strong Q4, while the company’s average deal size increased by a full 59 per cent year-over-year to $64,000

“Mobile revenues (which includes OTT) of $3.3 million represented ~58 per cent of total revenues, while CTV of $2.3 million was ~42 per cent. Over the course of CY22, we expect this shift in favour of CTV as Sabio continues to win share in this fast growth market segment,” Leung wrote.

The analyst called the Q1 gross margins strong at 61.1 per cent, which was up slightly both year-over-year and sequentially, reflecting in Leung’s account the high proportion of  revenues from CTV and the strong return on investment from Sabio’s product platform.

On the negative earnings, Leung said, “ The EBITDA loss of $861k increased year-over-year despite higher revenues to reflect increased investments across the business. We believe these investments are already paying dividends as evidenced by the company’s investment in the New York City region, which now represents ~19 per cent of revenues versus nine per cent last year,” he said.

On the ongoing integration of Vidillion, Leung said it has so far yielded positive results and he expects the addition to be accretive to Sabio’s EBITDA and contribute about $2 million in revenues.

Leung noted that while management did not provide specific guidance for 2022, it did say there should be robust revenue growth this year on the back of its CTV momentum, the investments made in sales and R&D and the US mid-term elections which should act as a tailwind on advertising spend.

With the update and maintained “Buy” rating, Leung has lowered his target price on the stock from C$3.25 to C$3.00 due to an industry multiple contraction, saying, “At its current valuation of 1.3x EV/net sales versus the group at 4.0x, we continue to view the stock as a compelling investment opportunity particularly given its organic growth potential. “

At press time, Leung’s C$3.00 target represented a projected one-year return of 233 per cent.

Disclosure: Sabio Holdings is an annual sponsor of Cantech Letter.