With shares of media technology company BBTV Holdings Inc. (BBTV-T) struggling to recover from a disappointing market debut a month ago, founder and chief executive Shahrzad Rafati is on a mission to win over the market.
“We have a very aggressive plan in terms of our marketing in the coming weeks and we’re very confident in terms of our position,” Ms. Rafati said in an interview, adding the company would be providing “a few really strong updates” before the end of the year. “We’re going to keep putting out great numbers in the market, and we’re going to educate the crowds, and the stock is going to catch up with the company.”
Investors in the Vancouver-based company that owns digital platform BroadbandTV — which helps video creators make more money from advertising that runs with their content on social media platforms such as YouTube — have seen their shares drop by about 20 per cent since it went public at $16 a share on Oct. 28. BBTV’s IPO happened on the same day as a broad sell-off of North American markets.
Yet as markets bounced back the stock continued to slide, dipping below $10 last Wednesday before rebounding to close at $12.41 on Friday.
Analysts believe the drop in BBTV stock is largely due to the shift away from technology stocks, which have had a spectacular run amid the remote working world brought on by the pandemic.
“BBTV shares have underperformed since the Oct. 28 IPO and we believe this has been driven by macro market rotation away from tech and not BBTV fundamentals,” Scotia Capital Markets analyst Jeff Fan said in a Nov. 25 note. He has a “sector outperform” (similar to buy) and $19 target on the stock.
“We believe BBTV’s current share price presents a unique buying opportunity,” Eight Capital analyst Kevin Krishnaratne said in a Nov. 25 note. He has a “buy” and $22.50 target on the stock.
The analysts’ notes also reacted to an unusual announcement the same day, in which the company issued select financial data for the fourth quarter, which is not yet two-thirds complete, less than two weeks after announcing its third-quarter results.
In its Nov. 25 “corporate update,” BBTV said its revenue and gross profits in October, the first month of the quarter – typically its busiest time of the year – increased year over year by 45 per cent and 25 per cent, respectively.
BBTV’s poor stock market performance is at odds with other tech IPOs this year, likely for a few reasons: All but a few million dollars of the IPO’s $172.4-million gross proceeds went to buy out BroadbandTV’s majority owner RTL Group, a subsidiary of European media giant Bertelsmann that bought its stake from Ms. Rafati and other investors.
That left BBTV – previously a holding company for the minority shareholders’ stake — as the sole owner of the operating company (Ms. Rafati controls BBTV through a class of multiple voting stock). Demand for the offering was about two times the available stock, much lower than other recent Canadian tech IPOs that have been oversubscribed by 10 times or more. Meanwhile, there are a few details in the company’s prospectus and financial filings that could be giving investors pause.
BroadbandTV helps video creators make more money from advertising that runs with their content on YouTube, Facebook and other online channels than if they posted it themselves. With the collective heft of its platform, BroadbandTV – the second-largest online video purveyor behind Google – sells aggregated content to advertisers in packages, which helps increase views and revenue for creators. BroadbandTV videos had 439 billion views in the past year.
But it’s a low margin business, so BroadbandTV has been pushing to sell “value-added” services to creators, such as direct advertising campaigns and mobile app creation. That business carries much higher margins – in the range of 30 per cent, compared to under 10 per cent for the basic advertising sales – but it accounts for less than a third of BroadbandTV’s gross profit. Ms. Rafati said the company had a “multibillion-dollar opportunity” to move more existing creator clients to higher-value services, which it began offering about two years ago.
Investors are buying into that promise more than past and present results. While BroadbandTV generated $372.4-million in revenue last year 89.5 per cent of that was paid out to content creators, meaning effective revenue was closer to $40-million. It lost $8.2-million last year.
That margin has actually climbed this year, to 92.1 per cent in the third quarter, according to numbers buried deep in BroadbandTV’s third-quarter financial statements. That means that while the operating company’s reported revenue increased to $120.7-million from $92.4-million in the same period a year earlier, the amount left over after paying content creators actually declined slightly, to $9.56-million from $9.92-million a year earlier. (The company does report gross profit, which combines all direct costs related to revenue generation, quite prominently in its earnings release; that amount also fell by 4 per cent, to $8.8-million, in the quarter)
“Look, that’s because of COVID,” Ms. Rafati said, explaining that “we don’t have as many ads” running with children’s content on video platforms.” She also blamed the pandemic for crimping the production of higher-margin content, but pointed to the early figures for the fourth quarter as “an indication of how we’re getting out of COVID.”
Another question concerns growth. BroadbandTV’s pace of online page view growth slowed last year to 4.2 per cent from 20.5 per cent in 2018 after it dropped content creators it deemed “objectionable.” (Revenue growth shrank to 11.2 per cent from 38 per cent in the same period.). Revenue was also soft early in the pandemic. But Ms. Rafati said page views and revenue rose 15 per cent and 25 per cent, respectively, in the third quarter, adding BroadbandTV would post “similar growth rates ... moving forward” – an encouraging sign.
There’s another potential overhang on the stock. BBTV didn’t completely rid itself of RTL with the IPO – its former controlling shareholder still holds $30.9-million in convertible debt in the company, and is owed a further $15.7-million in accrued interest. The debt matures on Dec. 1, 2021, and bears interest at a rate of eight per cent annually – rising by 0.5 per cent per month starting next July 1 to reach 10.5 per cent starting next Nov. 1.
The company can pre-pay the balances owed plus accrued interest in full or part without penalty at any time and in stages, and is convertible at RTL’s option into subordinate voting shares less a 20 per cent discount.
From the vantage point of today, that represents a potential concern for shareholders. Consider that BBTV owes RTL $46.6-million. If the stock were to double from its $16 IPO price in a year, that would be convertible into 1.82-million subordinate shares – equivalent to 13 per cent of the 14.1-million shares sold in the IPO. But if the stock were to sag to, say, $10, does that mean it would translate into 5.8-million shares issued to RTL – a staggering 41 per cent dilution of the subordinate voting class? Not quite. BBTV has built in downside protection in its agreement with RTL, capping the amount of subordinate voting shares its former controlling investor could own at any time at 24 per cent of the total fair market value of all shares in the company or 24 per cent of the total.
It’s still a potentially large chunk of stock if the stock doesn’t perform, but Ms. Rafati dismissed any concerns, saying BBTV has “a very good relationship [with RTL], they are a very friendly group and we’ve been actually having discussions about modifying the terms if need be.” An RTL spokesman said in a statement “we have repeatedly demonstrated that we can work out feasible solutions for both sides” during the relationship between RTL and BroadbandTV but declined further comment.
She added the company has “many refinancing options in front of us” including an untapped line of credit and factoring facility, as well as $10-million in cash on its balance sheet. She added the company is in discussions with banks about refinancing the banks and that it could also roll over the debt by extending the terms. “We do have many options,” she said.
Moez Mahrez, an investment analyst at 5i Research Inc., says the convertible debt may be one factor behind BBTV’s lacklustre performance since going public, but also believes there appears to be a lack of interest in the stock and disappointment in its growth, relative to other tech names.
“Tech IPOs are not always received as favourably in Canada as they are in the U.S.,” he said. “We expect investors want to see much higher growth and profitability from a tech name.”
He said BBTV’s 31-per-cent revenue in the third quarter “may be perceived as low for a small and growing tech company.”
Also, the buyout of the previous majority owner (RTL) in conjunction with the IPO “also makes it a bit of a tougher story for investors to understand, leading to less interest,” he added.
The timing of the IPO, amid positive vaccine news, has also made technology stocks less interesting to investors compared to earlier in the year, Mr. Mahrez said. “Investors are beginning to eye cyclical companies that have underperformed this year.”
PenderFund Capital Management CEO and portfolio manager David Barr, who bought the stock on the IPO, says he’s not discouraged by the stock’s drop, seeing it as a long-term buy.
“Obviously the stock hasn’t responded that well,” he says, which he blames in part on short-term investors bailing from the stock post-IPO. “The stock came public on a terrible day, which created downward price pressure. People who thought they’d make money quickly didn’t so they moved on.”
He likes management, including the “passionate, driven and successful founder,” as well as its “democratizing” technology that helps people get noticed on social media and is expected to gain traction.
“We think there’s a good chance that Shahrzad can turn this around from a $12 stock and [take] the multiples higher in the next five to 10 years,” he said.
Editor’s note: RTL has rights under its holdings of BBTV convertible debt to convert its holdings into subordinate voting shares representing a maximum of 24 per cent of the fair market value of all shares in the capital of the company at the relevant time, or a maximum of 24 per cent of the total voting rights attached to all shares in the company’s capital. Incorrect information appeared in an earlier version of this story.