Substantial decrease in Pay TV device sales at Aferian in 2023

Aferian plc (LSE AIM: AFRN), the B2B video streaming solutions company, announces its results for the year ended 30 November 2023.

FY2023 posed significant challenges for Aferian. Unfavourable macro-economic conditions, coupled with a change in competitive environment, led to a substantial decrease in sales of Pay TV streaming devices compared to the previous year resulting in an impairment of a significant share of the Group’s goodwill and intangible assets.

Operational Review

The Group has two operating divisions: 24i and Amino.

24i

24i’s robust, end-to-end SaaS video streaming platform enables all kinds of video content owners and distributors to monetise their content investments by quickly launching and efficiently managing attractive streaming services on all consumer devices. These include mobile phones and tablets to Smart TVs and the managed devices provided by pay TV operators.

24i revenue analysis:

US$m unless otherwise stated  2023  2022  Change %
----------------------------  ----  ----  --------
Software and services         21.0  19.1       10%
Devices                        0.4     -       n/a
Total revenue                 21.4  19.1       12%
Exit ARR at 30 November        9.9  14.2     (32%)

In FY2023 revenue grew as 24i launched new products strategically positioned to capitalise on the expansion of ad-funded streaming, specifically targeting what is commonly referred to as Free Ad supported Streaming TV (‘FAST’) channels Today, thousands of these streaming-only TV channels are available on aggregation platforms worldwide.

In March 2023, we announced a partnership with global FAST experts, Amagi, in which 24i can support the owners of these channels to quickly launch their own streaming apps, build direct relationships with their consumers and develop new monetisation strategies. The first joint Amagi and 24i customer, US food and travel video streaming network Tastemade, launched their 24i-based apps followed thereafter by Virgin Media.

Other customer project wins in the year included Israeli Public Broadcaster, KAN, which used 24i’s application framework and SaaS content management platform to launch a series of new Smart TV streaming applications with sophisticated new features such as personalisation in December 2022 to coincide with the FIFA World Cup. The 24i-powered app was downloaded more than 380,000 times during the tournament alone.

We proactively reduced the cost base of 24i as a result of further synergies identified from our prior M&A endeavours and the successful completion of product development. Regrettably, two significant customer contracts ending at the back end of FY2023 resulted in lower exit ARR revenue for 24i at 30 November 2023. Nonetheless, the demand for 24i’s video streaming platform remains robust, and our past investments in sales and marketing are yielding positive outcomes.

Amino

Amino’s managed video streaming devices and SaaS management platform enable Pay TV and Digital Signage operators to deliver their live, scheduled and on-demand content with the quality of service and level of support that consumers demand for their big-screen viewing experience.

Amino revenue analysis:

US$m unless otherwise stated  2023  2022  Change %
----------------------------  ----  ----  --------
Software and services          5.6   5.0       12%
Devices                       20.9  67.0     (69%)
Total revenue                 26.5  72.0     (63%)
Exit ARR at 30 November        4.7   4.4        7%

The significant decrease in Pay TV device revenues was due to customers delaying device orders, deferring capital expenditure post COVID-19 and throughout the continued cost-of-living crisis. Whilst we expect the impact of this to reverse in FY2024 we are also seeing increased competition from commoditised low margin Pay TV streaming devices. As a result, we anticipate that Amino’s revenue will be lower than levels recorded in FY2023. We have already adjusted the Amino cost base in line with these revenue forecasts.

Having made the decision in early 2022 to invest in components and finished goods as a precautionary measure to mitigate supply chain risks linked to the COVID-19 pandemic, inventory in Amino at 30 November 2023 was $5.1m, $4.1m lower than prior year. As lead times reduce, we have taken the decision to also reduce inventory and anticipate inventory levels to reduce back towards 30 November 2021 levels (which were $2.6m) in 2024.

With Pay TV operators looking to maximise their own cost efficiencies, Amino’s SaaS device management platform continues to gain traction in the market. This platform has now been deployed by over 120 Pay TV operators who use it to remotely maintain and upgrade devices located in consumer homes, ensuring they maintain a high level of service quality whilst also reducing customer support costs. Unlike previous generations of satellite and cable TV set-top-boxes, streaming devices can be posted to customers, self-installed and remotely managed, providing a major cost saving compared to the old model of an engineer home visit installation for every customer.

Encouragingly, we have witnessed ongoing advancements in the deployment of our digital signage devices. These devices play a crucial role in streaming information and entertainment content to digital displays across diverse settings, ranging from betting shops and stadiums to healthcare facilities, retail outlets, transportation hubs, and government facilities.

Notably, our digital signage devices have been successfully deployed in several international airports in India. Furthermore, one major betting shop operator is undertaking a migration of its services from legacy satellite delivery to next-gen low-latency IP video delivery by leveraging Amino digital signage devices throughout its shops in the UK and Ireland. This transition not only enhances the quality of service and reduces latency for an improved customer experience; but also results in significant operational cost savings driven by secure remote device management and control across an extensively distributed network.

Whilst the video streaming device market is forecast to continue to grow it has evolved with low-cost manufacturers meeting the needs of many pay TV operators who, whilst needing to upgrade their services to incorporate video streaming, remain focused on cost reduction. Therefore, to enhance profitability, Amino’s focus will be on delivering value to its customers through:

• delivering higher quality, higher margin Pay TV streaming devices which can also be bundled with the Group’s Software-as-a-Service (“SaaS”) device management platform. This SaaS device management platform is also integrated with third party devices and sold on a standalone basis; and
• driving growth in its digital signage and enterprise video business selling into large integrators and via distributors.

Current Trading And Outlook

Although the 24i video streaming business has seen a decline in its ARR, following the cost reduction actions taken it is making progress in line with its focus on profitability and cash flow. It has also seen new customer deployments and multiple contract extensions being delivered in the first half of the year. Unfortunately, since 30 November 2023 there has been a further deterioration in the trading of the Amino business due to lower than expected orders for video streaming devices as customers have delayed purchasing decisions longer than anticipated. Although we have taken management actions to further reduce the Group’s cost base in the first half of FY2024, we expect Group adjusted EBITDA for FY2024 to be lower than the FY2023 adjusted EBITDA of $1.6m (though still positive), and for this to be weighted into the second half of the financial year. Net debt at 31 March 2024 was $12.3m and is expected to be higher at 31 May 2024 reflecting the seasonal billing cycle of the Group and the costs of management actions taken in the first half to reduce the cost base and renegotiate the Group’s loan facilities. Positively, the extension of the Group’s loan facilities provides a stable financial platform on which the Group can move forward.