If you love to watch sports, you may have heard by now of fuboTV (FUBO 1.46%). This sports-centric, streaming-TV subscription business is capitalizing on the trend of consumers moving away from cable TV. It offers a similar product but without all the hassles that come with cable TV, such as a long-term contract or waiting for the cable person to show up for installation.
As such, fuboTV's traction with consumers is snowballing. The company has grander ambitions and is spending aggressively on growth. For that reason, the advertising revenue it generates could propel further expansion. Let's take a closer look.
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Advertising revenue hitting records
In the most recent quarter, fuboTV increased advertising revenue by an impressive 281% over the year earlier. The growth was fueled by two factors: ad prices and subscribership. As economies reopen and companies seek to reach customers, the price of ads is going up. Secondly, the company increased total subscribers year over year, so more people saw its commercials.
In its shareholder letter, the company explained just how remarkable the most recent quarter was for its advertising business:
The second quarter was also record-breaking for our advertising business, representing the company's strongest ad sales quarter in our history. Ad revenue reached $16.5 million and grew 281% year-over-year, accounting for 13% of total revenue in the second quarter of 2021, compared to 10% in the second quarter of 2020. Advertising [average revenue per user] was up 62% year-over-year to $8.70, and increased 22% sequentially.
Notably, the company's ad revenue comes with higher profit margins than its streaming subscriber revenue. That's because with each new subscriber, the company faces incremental costs for the right to show the viewer content like Disney's ESPN. Indeed, those subscriber-related expenses were $121 million in the second quarter on revenue of $131 million -- which may in part be why there is a fairly high short interest on the stock at the moment.
The ad business, in contrast, does not come with attached expenses. There are minimal incremental costs other than the initial resources like time and money spent to build out the technology to enable ad revenue. Therefore, expanding the ad business to 13% of overall revenue from 10% increased its contribution to the overall profit margin.
Fueling growth at fuboTV
Management is guiding investors to look for it to grow revenue by 116% in fiscal 2021. The growth in ad revenue is undoubtedly helping achieve that target directly and indirectly -- directly by the incremental ad sales and indirectly by the increased profit that can then be funneled into investment projects.
One particular project on fuboTV's radar is developing its mobile sportsbook, a sports betting service which could be a hit with its sports-first subscriber base. The company is planning a launch in its fiscal fourth quarter. The costs will not stop there as it needs to go state by state to get regulatory approval to operate.
Even though the ad business is helping, it's not enough right now to fund all of the company's growth ambitions. Recently, fuboTV filed paperwork with the Securities and Exchange Commission, saying it might sell additional stock worth $500 million in the near term.
Thankfully, the company has its advertising business, which can throw off cash flow for reinvestment and at least reduce its reliance on capital markets.
