FuboTV Inc. Q1 FY2023 Earnings Call

Good morning. My name is Chris and I will be your conference operator today. At this time, I'd like to welcome everyone to the Fubo Q1 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Alison Sternberg, SVP of Investor Relations, you may begin.

Thank you for joining us to discuss Fubo’s first quarter year 2023. With me today is David Gandler, Co-Founder and CEO of Fubo; and John Janedis, CFO of Fubo. Full details of our results and additional management commentary are available in our earnings release and letter to shareholders, which can be found on the Investor Relations section of our website. Before we begin, let me quickly review the format of today’s presentation. David is going to start with some brief remarks on the quarter and full year and Fubo’s strategy and John will cover the financials and guidance. Then I am going to turn the call over to the analysts for Q&A. Before we begin, I would like to remind everyone that the following discussion may contain forward-looking statements within the meaning of the federal securities laws, including, but not limited to, statements regarding our financial condition, anticipated financial performance, anticipated tax requirements, and our ATM program. Our business strategy and plans, consumer behavior, and expectations regarding profitability. These forward-looking statements are subject to certain risks, uncertainties, and assumptions. Important factors that could cause actual results to differ materially from forward-looking statements include those discussed in our annual report on Form 10-K for the year ended December 31st, 2022 to be filed with the SEC. These statements reflect our current expectations based on our beliefs, assumptions, and information currently available to us. Although we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. Except as otherwise noted, the results and guidance we are presenting today are on a continuing operations basis, excluding the historical results of our former gaming segment, which are accounted for as discontinued operations. During the call, we also refer to non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are also available in our Q1 2023 earnings shareholder letter. With that, I will turn the call over to David.

Thank you, Alison and good morning everyone. I'm pleased to update you on Fubo's strong first quarter results. Fubo's North American streaming business exceeded guidance, posting double-digit year-over-year growth in total revenue and paid subscribers. We closed the quarter with $316.5 million in revenue, up 34% year-over-year and 1.285 million subscribers, up 22% year-over-year. Our rest of world business, which includes our French streaming service Molotov, also posted double-digit growth in total revenue and paid subscribers during the quarter. We delivered a healthy $7.8 million in revenue, up over 40% year-over-year and 379,000 paid subscribers, up 24% year-over-year. Our North American ad sales business delivered $22.5 million in Q1 revenue, remaining flat year-over-year despite continued pressure on the advertising market. We expect a re-acceleration of growth in the second quarter. We announced at our 2022 Investor Day that we are targeting positive cash flow in 2025 and I’m very pleased to report that we continue to meaningfully advance toward that goal. In the first quarter, we reduced our adjusted EBITDA loss by $36 million year-over-year and improved free cash flow by $40 million year-over-year. This is our largest absolute dollar improvement in a profitability metric since we've been a publicly-traded company and represents a key milestone. From a cash usage perspective, we anticipate continued significant year-over-year improvement in 2023, similar to our seasonal trajectory in 2022. Fubo continues to focus on efficiently allocating capital through a measured and disciplined approach, in particular on controlling cash usage. We believe that our current cash balance of $364.8 million is sufficient to fund our operating plan until we achieve positive cash flow in 2025. During the quarter, we raised $117.2 million in net proceeds from our at the market program, of which $106.1 million settled in the first quarter. And based on our current outlook, we have no further plans to sell under the ATM program. Customers continue to demonstrate their preference for Fubo's content aggregation model delivered through a premium user experience, all through a single app. Our growing market share coupled with the over 100 hours users spend on our platform every month on average, supports why Fubo ranks Number One in Customer Satisfaction among Live TV Streaming Providers. Turning to content, we are continuing to double down on our brand proposition by adding more sports. Fubo is now the streaming leader in professional baseball coverage, strengthened by our expanded partnership with Major League Baseball. This is the same popular content that was recently dropped by a competing virtual MVPD and underscores Fubo's solid differentiation for sports fans. We're also continuing to make smart investments in our product to deliver a personalized product experience for every customer. Fubo's proprietary tech stack has enabled us to continuously push the boundaries of live TV streaming. We were the first virtual MVPD to launch 4K and multi-view, and we did both years ahead of our peers. Continuing to set the standard for innovation in our industry, we are harnessing our proprietary AI and computer vision technology acquired through the purchase of Edisn.ai. We plan to transform how users engage with streaming video and traditional DVR. We look forward to sharing more details in the coming months. With our sports-first differentiation and premium user experience optimized for live sports and TV comes pricing power. In early Q1, as a result of recent content additions, we raised prices on our channel plans. These increases had negligible churn impact supporting our thesis that consumers will pay more for a premium service and underscoring our brand and value proposition. In closing, we had a stronger than expected first quarter, growing double digits despite ongoing challenges in the marketplace. We continue to invest in custom experiences and engagement levers with the ultimate goal of optimizing monetization and our focus is always on our path to profitability. We believe our track record, the momentum we continue to see across our key operational metrics and the strength of our balance sheet clearly demonstrate our continued advancement towards our 2025 positive cash flow goal. I will now turn the call over to John Janedis, CFO, to discuss our financial results in greater detail. John?

Thank you, David and good morning, everyone. Our first quarter results reflect market progress against many of our goals and key operating metrics. More importantly, we expect this trend to continue. Total revenue for the quarter increased 34% to a record $324.4 million, driven by 34% revenue growth across North America and 41% revenue growth from the Rest of World. Our topline growth continues to be driven by healthy increases in subscribers, including a 22% increase in North America subscribers to $1.285 million, along with a 24% increase in Rest of World subscribers to 379,000. We are pleased with our progress on the monetization front with North America ARPU expansion of 8% to $76.79. And despite the headwinds across overall advertising budgets, we were able to deliver $22.5 million in advertising revenue across North America, remaining relatively flat year-over-year. We're also pleased with the progress we have made on the operating and cost side of the business, including a positive gross profit and a 1,075 basis point improvement in gross margin versus Q1 2022. This resulted in a net loss of $83.4 million, a $45 million reduction year-over-year and a net loss margin of negative 26%, favorably compared to a negative 53% net loss margin in the prior year period. This led to a first quarter 2023 loss per share of $0.37 compared to a loss of $0.81 in the first quarter of 2022. First quarter adjusted EBITDA loss improved to a loss of $58.9 million compared to a loss of $95.3 million in the first quarter of 2022, and adjusted EBITDA margin was minus 18.2%, an improvement from minus 39.3% in the prior year period. This resulted in an adjusted EPS loss of $0.27, an improvement compared to an adjusted EPS loss of $0.62 in Q1 2022. Turning to our path to profitability, we are pleased with our ongoing efforts to identify efficiencies and maximize leverage across each operating expense category. For example, we demonstrated greater leverage over our subscriber-related expenses, which decreased from 101% to 93% of revenue in Q1 2023 versus the prior year period. We expect this year-over-year trend to continue as we work towards meaningfully growing subscribers, optimizing our pricing, and further improving our mix of premium plans. Turning to cash flow, we were pleased to improve free cash flow by $40 million year-over-year. Accordingly, our expectation continues to be that both adjusted EBITDA and free cash flow will improve on a year-over-year basis as we believe 2022 represented peak losses for our business. As it relates to our balance sheet, we ended the quarter with $364.8 million of cash, cash equivalents, and restricted cash. During the quarter, we raised $117.2 million in net proceeds from our at-the-market program, $106.1 million of which settled in Q1 and the remainder settled in Q2. From a capital structure standpoint, we remain highly disciplined in our investments and deployment of cash, while also affording Fubo the financial flexibility to fund measured and disciplined growth initiatives. Importantly, given our cash position and planned expenses and investments, we are confident that our cash balance is sufficient to achieve positive cash flow in 2025 based on our current operating plan. Moving to guidance, we are guiding North America's second quarter 2023 subscribers of 1.12 million to 1.14 million, representing a 19% year-over-year growth at the midpoint. And we expect revenue of $292.5 million to $297.5 million, representing 36% year-over-year growth at the midpoint. For the full year 2023, we are raising our previous guidance for North America and now expect full year 2023 subscribers of 1.55 million to 1.57 million, representing 8% year-over-year growth at the midpoint and full year 2023 revenue of $1.235 billion to $1.265 billion, representing 27% year-over-year growth at the midpoint. For the rest of the world, our Q2 2023 guidance projects 377,500 to 382,560 subscribers, representing 10% year-over-year growth at the midpoint and revenue of $6.9 million to $7.9 million, representing 27% year-over-year growth at the midpoint. Our full year 2023 Rest of World guidance projects 395,000 to 415,000 subscribers, representing a 4% year-over-year decline at the midpoint and revenue of $28.6 million to $32.6 million, representing 26% year-over-year growth at the midpoint. Note that the fourth quarter 2022 subscriber number was impacted by the World Cup. Our Q2 2023 guidance reflects our ongoing emphasis on expanding ARPU and improving unit economics with revenue growing and more than 3x forecasted subscriber growth. In summary, our performance in the quarter reflects our continued focus on the unit economics of our streaming business, margin expansion, gross profit, and cash usage. And we are very pleased with our recent results and remain confident in our ability to achieve our goal of positive cash flow in 2025.

Thank you. Our first question is from Laura Martin with Needham. Your line is open.

Good morning. Bright numbers, you guys. David, let's start with the price increase you guys did in January. Can you talk about up-to-date what's going on with the churn? Because your subscriber numbers are excellent. I wouldn't expect churn to be higher.

Yes. Well, first of all, thank you very much, Laura. I look forward to seeing you in a couple of weeks. I think that one of the things that we were really focused on during the last earnings call was the fact that we did have two price increases, one of $5 and then within about 30 to 35 days, there was an additional increase of $12. Going into the earnings call without really understanding the fate of the RSNs, we were a little bit more conservative. But I think the two cohorts that we were most concerned about that we mentioned on the last call was the World Cup cohort and the NFL cohort, which typically we would have expected them to turn off at a greater pace. The fact that we did have the RSNs allowed us to give an option to those people to stay on the platform. And from that respect, the crossover into the RSNs was actually much stronger than we anticipated, which resulted in stronger subscriber additions.

Laura, maybe I'd add a couple of things as well. For Q1, year-over-year we saw churn up very modestly. So, to David's point, it was up less than 100 basis points, but we thought it actually could have tracked a little higher. For Q2, we're looking at a potential tail in terms of churn impact, call it a couple of months or a quarter or two out. What I can say as of now is that quarter-to-date churn is actually down year-over-year.

Helpful. And I won't ask my advertising question, but I will follow up on your RSN comment. Can you tell us the status of your rights and your payment obligations if the RSN bundle falls apart from a rights point of view? Thank you.

Good question. So, first of all, we've had a set of RSNs for the last few years, and we've had the greatest number of independent RSNs as well. Many of these services either have a direct-to-consumer service or are planning to launch one. It hasn't really impacted us to the same degree. Our relationship continues to strengthen not only with Diamond Sports but also with individual teams. I can't talk about the specifics of the deal itself, but there are provisions in there that allow us to reduce payments should certain events occur. We haven't seen any significant impact in our business, and we are very happy with our relationship. The changes in some rules, particularly around pitching, have contributed to our strong results.

Thank you very much.

Could you please talk about just the overall demand trends? Specifically to connected TV advertising demand trends, I know it was flat year-over-year despite what we are hearing in the environment. What have you heard? What is top of mind for people? Any specific categories or verticals that you can call out? Thank you.

Yes, Shweta. Our Q1 results came in about flat on ad revenue. From a monthly perspective, January was down slightly, February was flattish, and March was up a bit, maybe mid-singles. We're seeing further acceleration now into April and 2Q, where we finished up in double digits. From a category perspective, in Q1, we saw strength in financials, consumer packaged goods, travel, and competition. We saw some softness in pharma, auto, and retail. For 2Q, we're seeing strength in retail, pharma, travel, CPG, and quick-service restaurants. Weakness is emerging in financials, insurance, and telecom. There’s a lot of initial dialogue with agencies going into new fronts, so we’re encouraged by the trends.

Can you kind of speak to your direct ad sales efforts' progress? What is direct in Q1 as a percentage of total mix?

This is an area we’re focused on. We've started building the team. Direct ad sales are still a relatively small component of our overall advertising sales, which encourages me regarding future revenue growth opportunities. We have seen ad revenue increase by about 30% year-over-year despite flat viewership trends. The acquisition of more RSNs dilutes broadcast viewership and creates more inventory. Additionally, we have a 50-50 split with our fast channel partners, yielding more inventory than cable networks. We presented at the new fronts, generating a lot of interest in our capabilities and are committed to developing these assets to ensure we achieve our profitability targets.

In terms of direct as a percentage, that growth was triple-digits year-over-year. We expect that number to trend to the double-digits over the next couple of quarters or more as we move into 2024. CPMs are usually 20% to 50% above programmatic CPM, making direct sales very significant for us.

On content costs, where are we in evaluating and cutting back? How much more do you expect to cut?

We've improved our SRE line significantly, reducing it from 101% of revenue to 93%. We're confident in our ability to continue this trend moving forward. We expect to see further volume discounts from the ongoing evolution of the cable industry, and given this trend, we feel optimistic about achieving profitability.

Thank you. The next question is from Nick Zangler with Stephens. Your line is open.

Congrats on the quarter. Could you just remind us or give any color around the roadmap for unique ad units on Fubo or what the appetite is?

We're exploring interactive and shoppable ads, but these are in early stages and not yet scalable. Currently, our focus is on display advertising, which we've seen some internal success with. Integrating our computer vision technology from Edisn.ai will help us engage advertisers effectively. We're being cautious with live TV and shoppable ads due to potential disruptions in the viewing experience. We aim to develop ad products and packaging that deliver value for advertisers.

Thank you, operator. We will take a handful of questions that came in through our Safe Technologies portal from investors. David, can you discuss your long-term growth plans and any new product launches or updates you have on the horizon?

Our goal is to be breakeven by 2025 while reducing cash burn. We're working on a unified platform for future scaling, and you'll see fresh apps tied to this platform later this year with improvements to our backend infrastructure. We're also syncing our FanView data with real-time content, working on instant highlights for DVR users, and migrating our video processing to on-premises data centers to improve quality and reduce costs. We are focused on enhancing our core product, and our advanced DVR capabilities will be the greatest upgrade users have seen, with enriched personalization powered by AI. We are committed to continued innovation in our industry.

Thank you, David. Over to you, operator. This will conclude today's conference call. Thank you for participating. You may now disconnect.