Cinedigm Corp.
Q3 2019 Earnings Call Transcript

Published: 14 Feb 2019

[Operator:]

Good day, ladies and gentlemen and welcome to the Cinedigm Corporation Fiscal 2019 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s program is being recorded. And now I would like to introduce your host for today’s program, Jill Calcaterra, Executive Vice President. Please go ahead.

[Jill Calcaterra:]

Good afternoon and thank you for joining us today for our third quarter fiscal 2019 earnings conference call. Participating in today’s call are Cinedigm’s Chairman and Chief Executive Officer, Chris McGurk; Chief Financial Officer, Jeffrey Edell; President of Digital Networks, Erick Opeka; and our General Counsel and Head of Cinema Equipment Business, Gary Loffredo. Before I hand the call over to management, please note that on this call certain information presented contains forward-looking statements. These statements are based on management’s current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties that could cause the company’s business and financial results to differ materially from these forward-looking statements are described in the company’s periodic reports filed with the SEC from time-to-time. All of the information discussed on this call is as of today, February 13, 2019 and Cinedigm does not intend and undertakes no duty to update future events or circumstances. In addition, certain financial information presented in this call represents non-GAAP financial measures. And now, I would like to turn the call over to Chris McGurk.

[Chris McGurk:]

Thanks, Jill and thanks everyone for joining us on the call today. We made significant business progress in the third quarter which was generally in line with our expectations. In our OTT business, we achieved several significant growth milestones. As of today, our overall ad-supported footprint surpassed 2.4 million monthly active users, up 370% versus last year. In tandem with this, we saw a 212% quarter-over-quarter growth in connected TV ad requests, a big future driver of revenues for us. We have also now grown our active subscription base to more than 109,000 users and have successfully moved that business to a low OpEx high-margin distribution business. During the quarter, we accelerated our plan to expand our OTT business into digital linear subscription in ad-supported third-party platforms. We also expanded our OTT services in distribution businesses, the areas which I will describe in detail shortly. And as we noted last quarter, this plan allows us to leverage large scale OEM cable and telco partners to drive engagement in revenue, while at the same time minimizing marketing and operating costs. Additionally, we are leveraging our superior distribution technology and capabilities with our matchpoint platform enabling entertainment brands and content owners’ access to effectively monetize their content while reducing time to market and at lower operating expense. Finally, strategic M&A transactions began in earnest with the acquisition of ComicBlitz often referred to as the Netflix of digital comics; Viewster, a general interest ad-supported streaming service with an international footprint; and Viewster Anime, a leading global anime service. Overall, we made significant progress in all key areas of our business this quarter. First, for OTT network distribution, we had a total of 22 channel launches on 14 third-party platforms during the quarter, delivering over 12,000 film and television assets. These launches breakdown into three key categories

[Jeffrey Edell:]

Thank you. In summary, we continue to make strong progress. For the third quarter of fiscal 2019, consolidated revenues were $14.6 million. As expected, total consolidated revenues for this quarter declined as a result of the contracted decline in our cinema equipment business as the combination of 10-year deployment contracts and cost recruitment contracts are at various stages of reaching the end of their terms. For the quarter, adjusted EBITDA decreased by $1.9 million or 34% to $3.6 million for the 3 months ended 2018 compared to $5.5 million for the 3 months ended December 2017. The decrease was largely due to the expected cinema equipment, virtual print fee decline in the legacy business, which is particularly offset by 250% increase in the content and entertainment business. Direct operating expenses decreased in the third quarter of fiscal ‘19 to $5.2 million, down 18% compared to the prior year primarily due to low physical volume and the change in revenue mix which caused lower royalty costs and lower pre-unit fulfillment cost in the majority of the physical distribution business. Also net interest expense decreased 18% to $2.6 million in the third quarter compared to $3.1 million in the third quarter of the last fiscal year. The decrease is primarily as a result of the reduced debt balances compared to the prior period, particularly the full payoff of our formal convertible debt balance. Our total debt is now $64.8 million or 13% lower than it was 12 months ago. The net loss attributable to common shareholders for the third quarter of fiscal 2019 was $3.3 million, a nearly 44% improvement compared to $6 million loss in the third quarter of fiscal ‘18 and a 6% improvement sequentially compared to the $3.6 million loss in the second quarter of fiscal 2019. The improvement is primarily the result of decreased interest cost due to much lower debt balance, the reduction in depreciation expense is system’s continued offline, the full impact of our efforts to streamline our cost structure and improve margins from the performance of our content entertainment business, and the shift of our business more towards OTT streaming. Our legacy cinema business equipment business continues to runoff as expected. Subsequent to the third fiscal quarter, we completed the sale of 311 digital cinema projection systems bringing the total number of systems sold to-date to 328. We expect to recognize significant revenues in the fourth quarter due to these sales. As I mentioned before, we are in the process of selecting the advisory firm with expertise in the area to help monetize the remaining available systems and expect to announce more sales in the coming months. With that, I will now turn the call back to Chris.

[Chris McGurk:]

Thanks, Jeff. In summary, we continue to make strong progress in expanding our OTT footprint by increasing our library of content in our channel portfolio and launching it across additional platforms. Our matchpoint services are rolling out and look to be a strong addition to our OTT product and revenue portfolio. We are also building our presence in the high growth, high margin AVOD market through new channels, platform partnerships and licensing deals as evidenced by our rapidly growing user base now 2.4 million monthly actives, up 370% versus last year. In addition, we continue to look for more smart and accretive acquisitions like ComicBlitz, Viewster and Viewster Anime that can further accelerate our growth curve. And with that, we will now take any questions you may have. Operator?

[Operator:]

Certainly. [Operator Instructions] Our first question comes from the line of Austin Moldow from Canaccord Genuity. Your question please.

[Austin Moldow:]

Hi, thanks for taking my questions and congrats on a nice quarter. So, I want to start out with a question about your user base, which we said is 2.4 million. I know there are lot of different channels and a lot of data feeding into that number, but I am wondering if you could maybe walk us through qualitatively what you know? I am kind of interested hearing maybe what which distribution platforms are bringing in the most customers or maybe the best – the most viewers and the best viewers with a lot of engagement are viewing for a long time whether it’s the OEMs or AVOD or direct, just kind of any behavior characteristics that you can share would be super helpful?

[Chris McGurk:]

Right, thanks Austin. This is Chris. I will have Erick Opeka, our President of Networks is here to answer that question and again I will just caution that we got to be just a little bit careful in terms of confidentiality and disclosure, what he will do is perhaps answer your question.

[Erick Opeka:]

Sure, thanks. Hi, Austin. So, without sort of talking about specific activity on certain platforms, because clearly we can’t disclose that information, what I can tell you is on a sort of segment basis in terms of growth and engagement, we see the digital first linear and in particular OEM integrations for digital linear are tending to scale the factors and represent the largest and fastest growing portion of that number. And we really look at that and say that, that’s driven predominantly by these things being baked into the firmware of television. So there is no apps to install and users can start consuming immediately. Following that AVOD platforms like Tubi and others tend to drive a quite a bit of consumption just due to their very large scale installed base. So that’s give you a little directionality there.

[Austin Moldow:]

That’s super helpful. Thanks for that. And if you don’t mind commenting on the monetization or maybe just sort of comment where we are, I know it’s de minimis basically as of last quarter, are you seeing that ramping on schedule or is there still sort of a time period for it to – for engagement to take off before you start meaningfully monetizing from here?

[Erick Opeka:]

Well, I think it would be helpful to give sort of a sense on the monetization cycle on any of these platforms. It varies from platform to platform, but generally speaking we see from launch typically it takes 30 days to 60 days for our content channels and so forth to flow all the way out to the entire addressable base. So, a lot of these platforms are very careful to cap with the small footprint or one channel of users and then it flow. So it typically can up to 60 days to be fully addressable. And then it typically takes about a quarter to optimize the ad serving and fill rates on an ad supported service. Sometimes we can do it faster than that depending on the platform and partner, and sometimes partners get it out to scale much quicker. But generally speaking, that’s we can kind of look at 30 days to 60 days to hit the full addressable footprint and then about a quarter to fully ramp up and see it fully realize what it can monetize.

[Austin Moldow:]

Great. That’s really helpful. My last question is on just your – how you’re thinking about the sale of Projection Systems in general, mainly, I’m kind of interested in what the current thinking is amongst management between balancing timing of these sales, trying to sell them all perhaps as quickly as possible and to clean up the story and then also balancing on the other side getting as much – getting – selling for as high prices you possibly can while cleaning all the story?

[Chris McGurk:]

Yes. Thanks. It’s Chris, I’ll let Gary to fare up, who is on the line and runs that business answer that question, but I – before he responds also, we’re very pleased by the way with the deals that we’ve made so far. Obviously, we can’t disclose the specific pricing of the deals, but I think you’re going to see some significant revenues from the more than 340 –

[Jill Calcaterra:]

3,000 [ph].

[Chris McGurk:]

No, 340 we sold to-date. And we’re going to book most of that in our fourth quarter, but I’ll let Gary answer your question. Gary?

[Gary Loffredo:]

Sure. You did hit the exact dynamic we’re trying to weigh. We’ve sold 328 systems so far, and as Chris said for a number of reasons mostly competitive and for future negotiations, we’re not disclosing the specific sales price by projector. But these sales, mostly sales close in the fourth quarter and we’ll be reporting them in our 10-Q where we’ll be reporting total revenue for these systems as a Group. We’re not going to release special terms, but we weigh selling them quickly versus selling at a price that we’re comfortable with. And we’re weighing more toward getting a fair price. We know what these systems are worth. We know what the fair price is and we don’t intend to sell them for less than that fair price. So, we will take our time. There are still – some of them are still earning VPFs and we’ll sell them in an ordinary course.

[Austin Moldow:]

Got it. Really appreciate the color, and congrats, yes.

[Chris McGurk:]

Thanks, Austin.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Lisa Thompson from Zacks Investment. Your question please?

[Lisa Thompson:]

Hi, good afternoon.

[Chris McGurk:]

Good afternoon, Lisa, it’s Chris.

[Lisa Thompson:]

Hi, Chris.

[Chris McGurk:]

Hi.

[Lisa Thompson:]

So, let me just clarify on the projector sales you sold 311 of them in the fourth quarter?

[Chris McGurk:]

Gary, do you want to answer the question?

[Gary Loffredo:]

Yes. We sold 311 in the fourth quarter.

[Lisa Thompson:]

Okay. And, so I guess, we’re talking around $3 million ish that’s the ballpark, yes, right?

[Chris McGurk:]

Well, we don’t – I don’t think we –

[Gary Loffredo:]

Yes, the number, the total number will be in our next report in our 10-K. We have to get through the fourth quarter and see if there is any more sales and then close the quarter.

[Lisa Thompson:]

No, do you anticipating having sales every quarter or is this just something end of year everybody should want to go by a projector?

[Gary Loffredo:]

We are talking with almost every exhibitor that has a projector, but it’s more – it’s driven by their timeframe and their specific capital constraints, their budgetary issues and their goals.

[Lisa Thompson:]

Sorry?

[Gary Loffredo:]

So, we are in active discussions with almost every exhibitor that has our projector.

[Lisa Thompson:]

Okay. But – so you’d have a test of how this is going to flow?

[Gary Loffredo:]

No, like I said we want to sell it at a fair price, so when the opportunity arises and we can come to terms at a price that we’re comfortable with, we’ll sell them.

[Lisa Thompson:]

As far as Phase I, is that gone now, should we expect revenues in the fourth quarter, 0?

[Gary Loffredo:]

No, there’s still limited revenue that we’re collecting from Phase I, but all the major studios have reached – have paid for 10 full years, so they stopped. So, the majority of the revenue has ended.

[Lisa Thompson:]

But there will be a little something?

[Gary Loffredo:]

There will be a little something, yes.

[Lisa Thompson:]

Okay. Okay. I wanted to go back to the statement where you said that, what was it, Content and OTT grew 254% or something. Can you design exactly what you were talking about there?

[Jeffrey Edell:]

Yes, the 256%, so that’s the leases, yes, that’s the quarter-over-quarter, year-over-year, and that’s specifically, remember, when we talked about the model and so forth, we have the Content and Entertainment Group alone, we have the OTT area, and then we have this unallocated corporate overhead basket. This is just the Content and Entertainment Group by itself is 256% ahead of last year quarter-on-quarter.

[Lisa Thompson:]

And that’s all the revenue in the Content business minus physical distribution or is that a subset?

[Jeffrey Edell:]

This is the EBITDA.

[Lisa Thompson:]

The EBITDA?

[Jeffrey Edell:]

The EBITDA generated from the physical and distribution original CEG business, I mean, nothing to do with OTT or unallocated.

[Lisa Thompson:]

Okay. And how does that compare to revenues? Can you describe that a little bit?

[Jeffrey Edell:]

Revenue is down – well, the interesting news is, is revenue if we’ll see it on the Q that we’re publishing, revenue is down slightly, but we’re way ahead in terms of the EBITDA performance.

[Chris McGurk:]

Because of all the things that we’ve talked about in these calls for changing the mix of our content, a more effective greenlighting program, focusing more on co-productions et cetera, et cetera. And that has always been our goal to focus on the EBITDA line in that business.

[Lisa Thompson:]

Okay. And can you just say a little bit how physical distribution looked compared to last year?

[Jeffrey Edell:]

The physical business – you mean in terms of revenue or in terms of –

[Lisa Thompson:]

Yes, revenue.

[Jeffrey Edell:]

Yes, we can go over some of that on our call, Lisa, separately.

[Lisa Thompson:]

Okay.

[Jeffrey Edell:]

But revenue again, these buildings are down for the physical size a bit, so the revenue is down. Remember, the physical business itself is declining at anywhere from 8% to 15% depending upon what studio we’re talking to et cetera. And we are – even though our catalog continues to decline from just straight physical side of things, the fact that we have focused our business now on more the Content deals that we’re doing.

[Lisa Thompson:]

Right.

[Jeffrey Edell:]

That should be able to buffer some of that decline.

[Lisa Thompson:]

Okay, right. And you didn’t talk anything about bringing movies to China. Is there anything in the works right now?

[Chris McGurk:]

We’re still working on, and as you can see, yes, yes, we’re working on it, we’re trying to be selective. Remember, there is only 64 release leftover [ph] in China for non-Chinese content. We’ve got a number of conversations going on right now. We focus our efforts really as you can see in closing distribution deals for the U.S. and closing deals with big Chinese entertainment companies, who’re going to provide content to service our BAMBU launch for later in the year. But keep your eyes open for announcements going forward about Hollywood films that we’ve managed to get the right sport for release in China with our Chinese partners.

[Lisa Thompson:]

Okay. And Jeff going back to last quarter you talked about a number of movies that you had coming out. Is anything do particularly well or – I saw some good reviews for some of them?

[Jeffrey Edell:]

No, we – there were many of the films that we came out with did actually pretty well, but no one movie was the driver of any of that revenue. It’s – we’re now pretty linear in terms of the amount of new films that we’re putting out there. So, we’re going to – we’re getting one or two every quarter and the plan for the next year over the guidance would be anywhere from 5 to 10.

[Chris McGurk:]

Yes. And again, the focus is on co-productions, where I suppose it is going on acquiring a Finnish film. We actually get involved in the early stage in FT for [ph] to some extent over the production of the film. And I think as we’ve talked about last time that business had a year to return on investment for us is they are getting better and better. And again as I said, we have already identified 4 of those films for next year that we are excited about and hopefully we will add 3 or 4 more to the portfolio.

[Lisa Thompson:]

Okay. And just to clarify on Bambu, when you launched that, is that going to be a channel just like your other channels meaning it’s going to go into distribution in the same way?

[Erick Opeka:]

Yes, this is Erick here. So our goal is to take any channel that we distributed and trade versions that allow us the broadest device reach. So, we anticipate that channel going out in an ad-supported and subscription fashion in the market. We like the hybrid model or the freemium model as it’s commonly called in the industry and that allow us the broadest reach it allow for sampling and lower cost of user acquisition.

[Lisa Thompson:]

Okay. So, we will expect it to see it on XFINITY and on Tubi TV and all those other places like everything else?

[Erick Opeka:]

Exactly. Yes, third-party distribution strategy is a heavy part of Bambu and all future channel launches that we would do.

[Lisa Thompson:]

Okay, great. I look forward to seeing it. That’s all my questions. Thank you.

[Chris McGurk:]

Thank you.

[Operator:]

Thank you. This does conclude the question-and-answer session of today’s program. I would now like to hand the program back to Chris McGurk for any further remarks.

[Chris McGurk:]

Okay. I just want to thank everyone for your continued support with us and for joining us on the call today and we look forward to reporting again in our fourth quarter results in June. So thank you all.

[Operator:]

Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.