Sabio keeps Buy rating with Beacon Securities

Look for continuing strong organic growth from Canadian ad tech company Sabio (Sabio Stock Quote, Charts, News, Analysts, Financials TSXV:SBIO). That’s according to Beacon Securities analyst Gabriel Leung, who reviewed Sabio’s latest quarterly numbers in an update to clients on Thursday. Leung reasserted his “Buy” rating on the stock, advising that Sabio currently presents a compelling investment opportunity.

Toronto-based Sabio is a provider of cloud-based software and services for advertisers and advertising agencies aimed at the mobile, connected TV (CTV) and Over-the-Top (OTT) streaming spaces. Sabio supports content creators in their distribution, monetization and analytics and has among its offering the Sabio DSP content monetization platform, the SaaS platform App Science and ad insertion cloud technology platform Vidillion.

Sabio, which began trading on the TSX Venture in November, 2021, released on Thursday its second quarter 2022 financials, showing revenue up 70 per cent year-over-year to $7.2 million, gross profit of $4.3 million compared to $2.6 million a year earlier and an adjusted EBITDA loss of $1.4 million compared to positive $27,053 a year ago. (All figures in US dollars except where noted otherwise.)

“Our early focus on the ad-supported streaming/connected TV (CTV) market continues to pay dividends as we are pleased to deliver yet another record revenue quarter,” said Sabio Founder and CEO Aziz Rahimtoola in a press release. 

“Our investments in sales and technology backed by a complete end-to-end product suite enables us to out-grow the market and gain share despite the uncertain macro-economic environment. We continue to add major brands as new customers and deepen our relationships with existing customers— as witnessed by increasing average deal size and, for the first time in Company’s history, winning upfront deals from major brands,” Rahimtoola said.

Breaking down the topline, Sabio generated $3.2 million in revenue in the quarter from its CTV/OTT streaming segment compared to $1.5 million a year earlier, while Mobile generated revenue was $3.9 million compared to $2.7 million a year ago. Sabio said the higher EBITDA loss was primarily due to investments in growth initiatives, additional overhead related to being a public company and costs associated with employees returning to the office.

Looking ahead, management said it expects strong year-over-year organic revenue growth over the second half of the year along with gains in market share, leading to positive earnings over the H2.

“We are in a unique position to continue to capitalize on the burgeoning CTV/OTT streaming advertising market. Management believes the heavy investment period in the operating infrastructure is largely complete and expects Adjusted EBITDA to be profitable in the second half of the year and see continued improvements in operating margin in 2023,” Sabio said in the press release.

Looking at the quarterly results, Leung said Sabio managed a beat on revenue, with the realized $7.2 million coming out ahead of his estimate at $6.4 million. Gross profit of $4.3 million was also better than his $3.9 million, while the negative $1.4 million in EBITDA was deeper than Leung’s forecast at negative $848,000.

Leung said gross margins for the quarter stayed strong at 59.3 per cent although they were down from 61.9 per cent a year earlier and down from 61.1 per cent for the previous quarter, with Leung attributing the drop to the inclusion of Vidillion (the acquisition closed on April 1, 2022), which had a lower gross margin profile. 

On earnings, Leung said the larger EBITDA loss reflected increased investments across the business which have “clearly been beneficial” to Sabio, as the company’s organic growth is registering as faster than the industry average.

“Overall, we believe our growth thesis on Sabio remains intact with the company continuing to aggressively grow its customer base and contributions from existing customers. Average deal size also continues to increase with a 48 per cent year-over-year increase led by CTV,” Leung wrote.

“We believe the company’s App Science household graph platform remains unique in the marketplace, which should enable it to outperform industry growth rates over the mid-term,” he said.

Along with his reiterated “Buy” rating, Leung has maintained a target price of C$3.00 per share, which at the time of publication represented a projected one-year return of 191 per cent.

“We are maintaining our Buy rating and C$3.00 target, which is based on 4x CY23e EV/Net Sales. At its current valuation of 1.5x EV/net sales versus the group at 4.3x, we continue to view the stock as a compelling investment opportunity particularly given its organic growth potential,” Leung said.

Leung thinks Sabio will generate full 2022 revenue of $34.6 million compared to $24.2 million for 2021 and moving to $45.5 million in 2023. On EBITDA, Leung is forecasting a move from $1.9 million in 2021 to negative $0.7 million in 2022 to positive $2.4 million in 2023.

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