Earnings Call Transcript - FUBO Q3 2020

Operator, Operator

Good afternoon. Thank you for joining us to discuss fuboTV's Third Quarter 2020. With me today is David Gandler, CEO and Co-Founder of FUBO; and Simone Nardi, CFO of FUBO. 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 FUBO's strategy, and Simone will cover the financials and guidance. Then I'm going to turn the call over to the analysts to dig into Q&A. I will conclude by taking investor questions that were submitted in advance of our call. Before we begin, I would like to remind everyone that this call may contain forward-looking statements, including statements about revenue and subscribers and other nonhistorical statements as further described in our press release. These forward-looking statements are subject to certain risks and uncertainties and assumptions, including those related to FUBO's growth, evolution of our industry, product development and success, including with respect to online wagering and general economic and business conditions, such as the impact of COVID-19. These statements reflect the company's current expectations based on its beliefs, assumptions and information currently available to it. Although we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. Description of these and other risks that could cause actual results to differ materially from these forward-looking statements are discussed in our reports filed with the SEC, including our most recent annual report and our press release that was issued this afternoon. During the call, we may also refer to certain non-GAAP financial measures. Reconciliation with the most comparable GAAP measures are also available in the request release on our website at ir.fubo.tv. With that, I'll turn the call over to David.

David Gandler, CEO

So thank you, Brinlea. We're really excited to be hosting our first earnings call as a publicly traded company on the NYSE. Since we're a leading live streaming platform, we thought it would be most appropriate to host this call via a live earnings webinar and Q&A session. It has been a momentous quarter for the company, to say the least. We closed our public offering last month, raising total gross proceeds of $197 million before commissions and fees. And from an execution standpoint, Q3 was by far the strongest quarter in the company's history. Our results have exceeded previously raised guidance with solid growth across every KPI we track. Revenues were up 47% to $61 million. That's well ahead of the guidance range we provided of $52 million to $55 million. Our business is really comprised of two components: subscription revenue, which was up 64%; and advertising revenue, which was up an amazing 153%. Ad revenue for the quarter exceeded 12%. And to put that into context, 2019 ad revenue represented roughly about 8%. So you can see why we're so excited about the quarter and about our guidance for Q4 and for the full year 2021. Paid subscribers at quarter end totaled 455,000, and that's 58% above the 288,000 last year. Net additions came in at 167,000. That's up almost 100% year-over-year. Acceleration of net adds also came in at a lower SAC, which was a brilliant job by the team given the fact that we were already really efficient. We are encouraged with the increase in market share from a net adds perspective relative to our peers. Margin expansion for the first three quarters of the year also came in ahead of estimates. In January, I said that our goal was really to expand our margins by about 150 basis points on a quarterly basis sequentially going forward. Adjusted contribution margin came in at a whopping 16%, and that's really due to the timing of content drops and the addition of Disney and ESPN. But from a normalized basis, that's roughly about 10% to 10.5%. And this result was really driven by three things. We had a price increase of $5. We had better merchandising. And I think the team did a phenomenal job selling 800,000 attachments versus 235,000 attachments in the year prior. That's an increase of 240% year-over-year. And advertising sales, which I've already highlighted earlier, clearly plays an important role in margin expansion. At the end of the day, we made some really bold moves in the quarter, and that really speaks to our ability to leverage our proprietary data. And it also speaks to our quality of execution. As you all know, it's tough to expand margins while growing your sub base at this current pace. The tailwinds have never been stronger. FUBO sits firmly at the intersection of three megatrends: The first is the secular decline of traditional television viewership; the second is the shift of TV ad dollars to connected devices; and the third is online sports wagering, a market we absolutely intend to enter. Our growth opportunities are numerous, and there are great many reasons for us to be optimistic given the optionality in the business. Since some of you are new to the story, it might be helpful for me to provide a quick background on who we are. In 2015, we founded FUBO, introducing a live streaming platform to serve the needs of U.S. soccer fans that were unable to watch international soccer leagues. We quickly learned that soccer fans wanted three things: They wanted a greater breadth of sports and entertainment content; they wanted an intuitive user experience; and they, of course, wanted exceptional value. In a very short period of time, FUBO is becoming a leading sports-first cable TV replacement service for the entire family. We offer a wide variety of premium sports and entertainment content at a very affordable price with over 110 channels and 50,000 live sporting events. And that also includes both the regular season and the postseason for leagues like the NFL, the NBA and the NHL. Supporting our offering is our proprietary data and technology platform that we really have optimized for live TV and sports. Our platform has enabled us to regularly offer new features and functionality for our subscribers. To the best of my knowledge, we are still the only virtual MVPD to stream live sports in 4K. As a matter of fact, we stream Thursday Night Football as well as most recently, the World Series that's on Fox in 4K. We're also the only virtual MVPD where customers can watch up to four live streams simultaneously through our recently updated multi-view feature on Apple TV. We believe our platform offers a more differentiated, a more personalized premium viewing experience for sports apps, and that's really reflected in the recent reports highlighting customer satisfaction relative to our peers. And it also is reflected in our app ratings. And most importantly, it's reflected in our improving retention. We are indeed expanding into the online sports wagering market. Our goal with wagering is to develop a very robust revenue stream. We believe wagering could be as valuable as our growing ad sales business, and FUBO has an opportunity to combine a sports wagering service with a leading live sports streaming package. We've nailed down our strategy, and we expect to share tactical details as appropriate. As you will hear from Simone shortly, the outlook for Q4 is extremely solid. We are raising full year guidance not only for 2020 but also for 2021. The growth of our advertising business, coupled with our strong attachment rates on value-added services, such as our Cloud DVR and the ability to stream on multiple devices, continues to improve margins. The team is laser-focused on driving both the top line growth and making progress on our path to profitability. We believe FUBO's differentiation in the marketplace, which is sports-focused programming and a tech-first user experience, firmly positions the company for long-term growth and massive success. And with that, I will turn it over to my colleague, Simone.

Simone Nardi, CFO

Thank you, David, and good afternoon, everyone. We're very pleased with our third quarter results and are excited to be publicly traded on the New York Stock Exchange. Before we address your questions, I will walk you through a few financial highlights and discuss our forward-looking guidance. Total revenue was $61.2 million in the third quarter, an increase of 47% compared to the pro forma revenue in 2019 and an increase of 71% if we exclude FaceBank AG's revenue last year, the business that we then sold in July 2020. This growth was driven by continued strength across all revenue segments. Subscription revenues increased 64% year-over-year, and advertising sales increased 153%, accounting now for 12.3% of total revenue in the quarter. In summary, we continue to focus on both the top line growth and progressing on our path to profitability. Now looking forward, in conjunction with our strong quarter and continued momentum in the business, as David mentioned, we're raising guidance for the fourth quarter 2020 as well as for the full year 2021 as we do not expect the legacy FaceBank business to generate revenues in the fourth quarter. And my comparison year-over-year will now be to the pre-merger FUBO numbers in 2019. We expect the fourth quarter revenue to be between $80 million and $85 million, an increase between 51% and 60% compared to 2019. We also expect to end the quarter with paid subscribers of between 500,000 and 510,000, an increase of 58% to 62% year-over-year. We've increased further our guidance compared to priorly provided guidance. Full year 2020 revenues is expected to be $244 million to $248 million on a pro forma basis, an increase of over 65% year-over-year. We expect our growth in 2020 to continue into 2021, where we are raising now by $15 million our previous revenue guidance to a new range of $415 million to $435 million, projecting a growth of over 70% year-over-year. In summary, we continue to be very excited about our future growth opportunities and remain focused on driving long-term growth and reaching profitability. With that, let's turn the call over for questions.

Operator, Operator

Thank you, David and Simone. At this point, we're going to turn the call over to our analyst panelists for some Q&A. Let's start with Kevin Rippey at Evercore.

Kevin Rippey, Analyst

I guess on the first one, given the subscriber momentum you saw in 3Q, can you help us think about how much of that came by way of better gross additions versus reduced churn? And perhaps give some color around how much the addition of ESPN contributed to that. And then a second question, just on the longer term as, David, you mentioned on the sports gambling opportunity. Is there a certain subscriber scale that you have in mind before getting more aggressive on that front? Or just helping us think about the timeline would be really interesting to hear.

David Gandler, CEO

Yes, sure. So for the first part of your question, I think the answer is all of the above. We benefited from an increase in subscriber accounts. We benefited from the better retention dynamics, and that was obviously evident in our numbers. As with respect to your wagering question, look, we're super excited about wagering. I would say that we've already started executing on our strategy. And at the appropriate time, we'll provide more details. But the way we think about wagering is we look at it from a three-bucket perspective: we have an acquisitions advantage, we have an engagement advantage, and we have a monetization advantage. So for acquisitions, you should think of it that we're starting with 500,000 paying subscribers. And what you've heard from our ability to sell attachments this quarter, we think that we're going to be able to also sell in a lot of wagering opportunities. Number two was on the engagement front. We have over 50,000 sporting events on the platform, and we're getting people to watch over 120 hours per month. So there are going to be ample opportunities for us to really drive that forward. And then I think the third piece is the monetization advantage. Obviously, getting players to play is important. But think about the value from a retention perspective, getting people to churn out less and also from a monetization perspective in terms of advertising sales. So we feel like we have everything that we need to sort of build a sizable business around this. And as I said, we're already executing on that strategy.

Operator, Operator

Our next question comes from Dan Salmon at BMO.

Daniel Salmon, Analyst

Maybe I'll ask a question about advertising. You mentioned over 100% growth this quarter. Many of us have been receiving numerous inquiries about the growth of connected TV and the shift towards it during the COVID period, in particular. Could you elaborate on the short-term trends and what specifically is driving this outperformance? Additionally, looking at the bigger picture, you recently brought in a new executive, Diana Horowitz, to lead the advertising business. What is your vision for your platform and the key milestones you aim to achieve as you develop it over the next few years?

David Gandler, CEO

Yes. Well, thank you, Dan. That was a good question. Look, at the end of the day, COVID really just accelerated what's been happening prior to this. There's been a shift of TV ad dollars to connected devices well before COVID. We're starting to see the impact of that on a normalized basis in the sense that it really hasn't impacted our business in Q3. With respect to Diana Horowitz, we're continuing to build out a team around advertising. We're also starting to develop more ad tech to be able to provide more addressable opportunities that we think will ultimately drive up our CPMs higher. And also, just the number of viewing hours that we're seeing also continues to uptick, albeit below what we saw in Q2. But certainly, we're able to maintain the current trend that we saw in Q1 going into Q4.

Operator, Operator

And our next question comes from Jason Helfstein of Oppenheimer.

Jason Helfstein, Analyst

Maybe I'll dig in a bit more on the marketing side and subscriber growth. So you did highlight lower SAC. That being said, if we calculate sales and marketing per average sub, which does have obviously other items, it was up a lot in the quarter. So just maybe talk about leaning into marketing, particularly around fourth quarter and into next year as you have a healthier balance sheet. And then as well in that sales and marketing line is investment in your sales team to do more direct sales. Maybe just how should we be thinking about that line broadly kind of fourth quarter next year now that you've got a stronger balance sheet?

David Gandler, CEO

Thank you, Jason, for your great question. To date, we've spent approximately 17.5% of our total revenue on marketing over the first three quarters, which is significantly lower than typical spending for a growth company. In terms of ad sales, we are in the process of expanding our team. Subscription businesses require upfront investments to maximize long-term value. Simone, do you have anything to add?

Simone Nardi, CFO

No. In terms of the performance there, it's exactly as you mentioned, David. I mean the expansion that we're seeing is quite important. I mean we're always managing, and we've been able in the past to manage in a very measured way the way we push the marketing spend to ensure that we kind of are very efficient in acquiring subscribers, and we'll continue to do that going forward.

David Gandler, CEO

Yes. To elaborate on that regarding Q4, we are well within our estimates when considering the marketing spend linked to our subscriber acquisition cost.

Operator, Operator

Our next question comes from Laura Martin at Needham.

Laura Martin, Analyst

Great. Maybe a couple of follow-up. Kevin has led with two. First of all, we argue that your content costs are lower than your competitors because a much larger percent of your subscribers view sports every week, and so that $8 you're paying a month for ESPN is actually spread more equally over your subs. So could you give us, in this really heavy sports quarter of the third quarter, what percent of your total subs were watching sports every week and therefore, amortizing your content costs over more? And then, I guess, the second one is on churn. One of the things you've been working on is getting that SAC, which was $60, at least last quarter, to extend into two or three extra quarters for the sports day for the entertainment. So I'm interested in that metric. Like have you extended by another two weeks or one week? Can you give us some idea of how you're thinking about lowering churn? But I'm actually more interested in the vertical number, which is when you spend money on SAC, how many customers come for this soccer season, next soccer season, next soccer season because maybe that's the right way to think about your churn? And I'm wondering if you have any maybe guidance about that vertical churn number as well as the number you keep track of, which is the horizontal through time, churn and whether it's falling.

David Gandler, CEO

Yes. So Laura, thank you. That, again, is a great question. We obviously focus on vertical cohorts as well. We see a significant amount of reactivations typically at the start of every season, whether it's a soccer season, an NFL season, or college football season. So reactivations typically come in between 25% and 35%. So we are looking at our churn both horizontally and vertically, and I would say that is the correct way to look at it. And we favor our marketing budgets that way as well. You'll see us spend more at the front of the season and less towards the end of the season. So in terms of marketing expenditure for Q4, October was also a big month because, as you know, some of the college football has started to return. And so the teams are working hard to ensure that we're able to manage our subscriber acquisition costs. And as I said before, we're doing a really good job really honing that in. And let's not forget, Q3 was a big political quarter. So with political coming in, you're going to see a lot of pressure on the amount of inventory that's available, and you're going to see pressure on pricing. So again, we did a really good job this quarter adding a significant number of net additions. It's roughly 100% above last year and coming in on a subscriber acquisition cost side with roughly below 3.5% below where we did last year. So again, we're very excited about that, and the team has done a phenomenal job.

Operator, Operator

Let's move forward with Darren Aftahi from ROTH Capital.

Darren Aftahi, Analyst

Great results, and I hope you're doing well. I have two questions. We've touched on this a bit, but the Trade Desk call was very optimistic, especially regarding the connected TV market. They mentioned that a large e-commerce brand moved about 10% of their traditional advertising budget to connected media and experienced a strong return. Considering this, I believe one of the often-overlooked aspects of your story is the advertising segment. Could you provide some insight into your long-term vision for that ad business and what possible accelerators or challenges you foresee in achieving that? Additionally, regarding your updated subscriber count guidance for the fourth quarter, we are about halfway through. How much clarity do you have on the 500,000 to 510,000 subscriber figure?

David Gandler, CEO

Yes. So I'll take the first part of the question. Look, I think from an advertising perspective, we provided guidance at the midpoint of $6.50 of advertising ARPU per customer. We ended with just over $7.50. So we feel very good about our ability to monetize our customer base. Over the long term, I think we provided guidance in our S-1 and during our roadshow that we think the long-term opportunity is roughly about $20 per month on a net basis. When I say on a net basis, that's after fees to some of our third-party vendors. So there's a long way to go here. We've got ample room in terms of where we are from a CPM basis. All of our deals currently today are done programmatically. And again, we're right now investing in our data. We're investing in our ad tech, and our goal is to really productize a lot of our data. We think that there's an opportunity to really grow that business significantly over the next, call it, 18 to 24 months.

Simone Nardi, CFO

Yes. Regarding the second part of your question about subscriber numbers in our fourth quarter guidance, we consistently monitor subscriber figures, and our team is very focused on this metric daily. The numbers we are projecting in our guidance are ones we are confident in and indicate expected sequential growth each quarter compared to the prior year. This represents solid growth, and we feel optimistic about it.

David Gandler, CEO

Yes. And the last thing I'll just add is that, obviously, there's visibility. We're a subscription business so there is some level of predictability in our subscriber revenue and in our subscriber count. And as I said, we're just seeing the benefits of college football, which we didn't see normally that we would in third quarter.

Operator, Operator

Jason Helfstein from Oppenheimer.

Jason Helfstein, Analyst

So maybe just digging a bit deeper on advertising, David. How are you thinking about long term, how much of advertising should be direct sales? How much should we add to it? How are you just thinking about kind of maybe the evolution of the ad business over the next two years?

David Gandler, CEO

Great question, Jason. I think what's important to note is that this company is very young. It's a five-year-old company. This is a cloud-born company. Everything we do in the cloud, everything we attempt to do is automated. And therefore, when we look at advertising and ad tech, the goal here is to really automate our capabilities. And so if you're thinking about how much we're going to invest in our direct sales team, obviously, it'll be a fraction of what a company that was more boots on the ground would invest. So again, we're looking to do a lot of this programmatically through private marketplaces. And eventually, we'll be able to build out a self-service platform when you think about the opportunity over the long term.

Operator, Operator

And I saw Laura Martin from Needham had a question.

Laura Martin, Analyst

You brought up political. I'm dying to know. Roku was saying 2% or 3%. Trade Desk said 5% or 6% of their CTV. Did you guys see a benefit from political in the third quarter?

David Gandler, CEO

Yes, absolutely. I mean FUBO was known for live sports and live news, both of which are a sport. So no, I think we benefited tremendously from political. I would say ours is probably closer to about 15% just given the number of news channels we have on the platform. And as you know, FUBO is about live television, and this is the type of content that is certainly consumed live.

Operator, Operator

And I think I believe Kevin Rippey at Evercore had a follow-on question.

Kevin Rippey, Analyst

Yes. Just one more for David or Simone, feel free to take it. Regarding the subscriber acquisition cost trajectory, could you identify maybe one or two of the biggest drivers in the decline you observed? And how sustainable are those?

David Gandler, CEO

Simone, would you like to take that?

Simone Nardi, CFO

Yes, I believe we need to focus our efforts on subscriber acquisition due to the seasonality of our growth. As we've mentioned before, we are adapting our strategies based on the strong market demand we've observed in recent months, particularly as we head into the fourth quarter. We are significantly increasing our targeted acquisition efforts, which are now more efficient and focused on digital channels with diverse cost structures. As we continue to grow, we expect to benefit from more organic expansion opportunities. In the fourth quarter, we will maintain our investment to ensure we achieve the desired returns on subscriber acquisition. The first half of the year tends to be more seasonal, so we are exploring ways to mitigate that seasonality while being more cautious about our spending to maintain our subscriber base.

Operator, Operator

Dan Salmon at BMO.

Daniel Salmon, Analyst

David, you mentioned the attachment rate and the merchandising of the product and pricing these days. I'm mostly interested in the attachment rate. What's the short-term sort of runway for that? What are some of the key strategies that you're implementing in the merchandising of the product to drive that right now? And like I said, what's the runway on that type of opportunity that seems to be fairly material right now?

David Gandler, CEO

Yes. So our attach rate, Dan, was about 1.2. That's now just exceeded about 1.8. The team is very data-driven. I think we've said that this company collects about 21 billion data points per month. And the team is A/B testing on a daily basis. And we've got about 400 landing pages with different offers, and they continue to tweak those. And again, you're going to start to see new types of products coming out. And we're also leveraging the marketing channels to see where those folks are coming in and if there's any way for us to really do more of that cohorting that allows us to really improve that attach rates. But we're very happy with our current trajectory, and we think that continues over the long haul. And as you may have read in the shareholder letter, we've also added Starz and Epix. So that's yet another way that we think we're going to be able to continue to drive the attach rate.

Operator, Operator

And I believe Darren Aftahi from ROTH Capital had a follow-on.

Darren Aftahi, Analyst

Yes. I know you're not giving too much detail on wagering today. But David, I'm just kind of curious what your thoughts are in terms of how symbiotic sports and wagering go together, what kind of impact that would have on retention rates long term.

David Gandler, CEO

Yes. Thanks, Darren. Look, it's a great question. I think it's clear we are a sports-first pay-TV replacement service. People come to FUBO for the sports and so we have a very credible brand. I think that it enhances the value of our entertainment package. It also allows us to continue to create a lot of interactivity and connectivity between consumers as well. So we're very focused on that. As I said, we started executing against our strategy. There's a lot of advantages that we have. And look, we're looking forward to starting to make announcements in the coming months.

Operator, Operator

I believe that is it from the analyst Q&A perspective. Before we end the call, we wanted to address some investor questions that were submitted in advance to our IR inbox. Our first second question, can you talk about the competitive landscape? Why choose FUBO?

David Gandler, CEO

Yes. So thank you, Brinlea, and thank you to our investors that have been writing in. Look, at the end of the day, FUBO is a cable TV replacement service. Our motto is come for the sports, stay for the entertainment. We've differentiated via our sports branding. And the way we look at competition, really, is that this is not a zero-sum game. There are 80 million people that still have a cable service, and we're looking to attract those consumers. So at the end of the day, I think we're all going to benefit from the secular trend.

Operator, Operator

And one final investor question. What do you intend to do with the proceeds from the IPO?

Simone Nardi, CFO

I'm happy to address that. Regarding the IPO, we are very pleased with the results, having raised $197 million in gross proceeds and successfully offering a significant portion of the overallotment. As we outlined during the road show and IPO process, our objective is to effectively capitalize the business to enhance our growth and execution speed. The primary use of those funds will be for working capital to ensure we continue to progress and expand our business rapidly.

David Gandler, CEO

Yes. Just to add to that, look, we're very excited. We had an amazing Q3. We think we're going to have a very good 2020, which is very difficult to say coming out of COVID. I think there were many reasons why this could have failed. But again, kudos to the FUBO team. They've done a tremendous job this year. And we're going to continue to build out our team. We're going to continue to build out our technology, and we're going to continue to make bold moves throughout 2021. Thank you.

Operator, Operator

Thank you. On behalf of the FUBO team, thank you for joining us today. We appreciate your ongoing support and interest and look forward to keeping you updated on our progress.

Simone Nardi, CFO

Thank you very much.

David Gandler, CEO

Thank you very much.