Cinedigm Corp.
Q1 2017 Earnings Call Transcript

Published: 16 Aug 2016

[Operator:]

Good day, ladies and gentlemen and welcome to the Cinedigm Corp. Fiscal 2017 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference Ms. Jill Calcaterra, Executive VP Corporate Communications. Ma'am you may begin.

[Jill Calcaterra:]

Good afternoon and thank you for joining today's first quarter fiscal 2017 earnings conference call. Participating in today's call are Cinedigm’s Chairman and Chief Executive Officer, Chris McGurk; Chief Financial Officer, Jeffrey Edell; and our General Counsel, 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, August 15, 2016 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?

[Chris McGurk:]

Thank you, Jill, and thanks everyone for joining us on the call today. Since we just spoke with you only four weeks ago, we're going to make this call brief. I will provide some general updates. Jeff will review our first quarter financials and then we'll take your questions. First, as we discussed on our previous call, the financial of up to $11 million in second lien secured debt with a modest equity component is currently in process. Since the last call, we've been working on securing additional funding commitments are in the process of engaging an investment bank to assist us. We expect to announce another closing in the near future. Once we complete this raise, we plan to readdress the exchange offering for our convertible and mezzanine holders that we described on the last call and in our filings. We also continue discussions regarding a new enhanced revolver for our base business. Overall, we believe our ongoing efforts to strengthen the balance sheet and provide additional capital combined with our initiatives to streamline operations have primed Cinedigm to attract significant new business and enhance shareholder value. Now to review our business operations; first let's talk about our venture business OTT. We announced metrics in our OTT channels last month and are very pleased with the strong progress we have made, including solid growth in app installs, registered users and active subscribers. We currently have approximately 60,000 active subscribers. We continue to be pleased with our involvement in Amazon Streaming Partners Program and we are in active discussions with other major distribution platforms and technology companies about making our channels available on more services under similar arrangements. These initiatives include an eminent deal with a very large consumer hardware manufacturer to embed both CONtv and Dove channel in their North American product offerings. Two agreements to include CONtv on high potential SPoD platforms targeted at millennials and a bundling arrangement for Dove on a family-friendly, multimedia, direct to consumer commerce service. Additionally, we continue our discussions with other potential strategic partners across all of our channels to accelerate growth and also share the capital outlay required. We've engaged an investment banker to assist us with this initiative also. In our entertainment distribution business, changing market conditions continue to allow us to acquire a variety of new titles under very favorable terms and have presented us with a very strong queue of potential new deals that could dramatically expand our revenue base. As we look to fill our release pipeline, we've recently did a full inventory update of our content and are pleased to report that we currently have over 58,000 films and TV episodes in our library. Family and animated titles make up over 30% of that library, that's been an important area of focus for us since there continues to be a strong and growing global demand for family-friendly content. And obviously having such a robust family library, clearly one of the largest independent collections in the world is also a key competitive advantage for us as the Dove channel continues to expand. Since our last call, we've also made good progress on a new arrangement with a major content supplier to our base business, which has the potential to significantly expand our content offering. We hope to have news on that soon. Overall, when combined with our aggressive cost rationalization plan and continued focus on improving the product mix and customer base for both our physical and digital businesses where new digital services continue to launch, we are profitably managing our base business while it also provides a key competitive advantage in helping us to quickly build our leadership position in the venture business of OTT. And now Jeff will review some key financial and operational points. Jeff?

[Jeffrey Edell:]

Thanks Chris. To review our results for the first quarter of fiscal 2017, consolidated revenues were $22.5 million, content and entertainment revenues were $6.8 million, consolidated adjusted EBITDA was $10.7 million and non-deployment adjusted EBITDA was a loss of $1.2 million, but that's inclusive of the significant investments we've made to ramp up our OTT Group and it's an improvement of $1.1 million versus prior year quarter of last year and this is one of our seasonally slowest quarters as you know. All this was consistent with analyst expectations for the quarter or above. Importantly, now we are getting significant revenue traction in our OTT business. Going forward, our intention is to break out OTT results as they contribute to the overall content and entertainment segment and we plan on adjusting our future filings to reflect that change. For the past two years, Cinedigm's overall entity has been funding a venture capital business within its public structure. We believe that as we continue to look for additional capital fund growth in this venture business, making it a separate reporting business makes the most sense. By treating the business this way, we believe it will provide more clarity and enhanced potential valuations. As we mentioned on the previous call, although we feel our operations have been streamlined to a great extent through over $9 million in cost reduction initiatives, we continue to endeavor to look for ways to improve efficiencies and profitability. As Chris mentioned, we have recently been able to acquire high profile content under very favorable terms and have a number of opportunities in front of us that could generate significant new revenues. As we look ahead with these changes made and continued progress across our businesses, we believe potential investors and partners are now able to focus on the strong asset value that Cinedigm brings to the market place. This is evident by our ability to raise capital given the large base of collateral that exists within our company, including the residual value of our installed projection systems in the development business, the large over 300 million NOLs we carry, our public currency, the depth and breadth of our now 58,000 title catalogue and library, our broad distribution range of over 50,000 outlets and of course, our burgeoning OTT channel business with its rapidly expanding metrics including approximately 60,000 active subscribers. Finally, the company made principle reductions and payments of $16.8 million to our long-term debt arrangements for the quarter ended June 30, 2016. As Chris mentioned, we are also in discussions to replace our current ABL with a new expanded facility that better reflects the current state of our business and our extensive collateral base. Now, I'll turn the call back to Chris for concluding remarks. Chris?

[Chris McGurk:]

Thanks Jeff. In closing, I want to thank our investors and other constituents for their continued support as we complete our financings, deal with the changing base business market place and build out our venture business OTT. We continue to move ahead on the significant operating deals I mentioned, while we also evaluate several strategic corporate opportunities. And with that, we will now take your questions. Operator?

[Operator:]

[Operator Instructions] And our first question comes from the line of Andrew D’Silva of Merriman Capital. Your line is now open.

[Andrew D’Silva:]

Good afternoon. Thanks for taking my call. I just got a couple quick questions for you kind of related to some of your prepared remarks. First off, still little curious on how your strategy is evolving related to owned content as well as maybe original content? It seems lot of weight is being replaced on OTT space related to either having complete distribution rights, owning content and having original content and I guess that can be most easily evidenced by all the original series, investments that are taking place today. Owning content, original content seem a way to open alternative branding opportunities outside of VOD and perhaps make a more sticky subscriber base and I am just interested on your strategy related to that as you had a pretty mixed library related to your distribution rights and stuff of that nature?

[Chris McGurk:]

Well, thanks, Andrew. This is Chris. I'll answer that. We've obviously -- we've done a lot of research on the viewership of our three channels. Obviously that's the advantage to owning channels, a big advantage obviously that Netflix has had over the years, because they know exactly what their viewer base is watching and it helps them really develop a much more effective and efficient content strategy going forward and we've been trying to do the same thing with our now, year of data on Dove, year and half on CONtv and a couple years on Docurama. And first and foremost, for these narrowcast channels, the most important thing that we found through all of this research is that we have very high volume content for our avid viewers, which is really important. And I think, that’s what you saw with Netflix during its early years when they did not focus on original programming, they focused on providing as much entertainment content to their audience as they possibly could. We have the advantage of not being a general entertainment service. So we don’t have to have that broad array of content. But we launched each one of the channels as you know and we talked about it on these calls, with a very high volume of content relative to our competitors. And obviously, we think that’s one of the things that has helped us grow the channels so significantly. The research we’ve seen at this point says that in addition to having that high volume of content that's suited to a tee for that audience, what the audience wants to see is not necessarily original programming that you can get anywhere else at this point, maybe down the road, that will be a much more important component, but right now it’s really to have a refreshing of the content, a recorder every six months or whatever and also more of what you might consider premium content and that doesn’t mean house of cards for the Dove Channel. It means recognizable content with recognizable talent and it doesn’t have to be original programming. It can be catalogue programming as long as it’s recognizable. So that’s some of the very generally I’m telling you some of the key learning from our research. So I don’t think based on their research, what you're going to see is a focus from us and going out and creating a lot of expensive, untested original programming over the near term. You’re going to see some. We're doing that on CONtv very low budget programming. We’re going to concentrate more on making sure we got the right and broad product offering for our consumers on each specific channel and we're going to try to refresh that and sprinkle it more with premium recognizable content and most of that is going to be library content.

[Andrew D’Silva:]

Great, great, that was a lot of good color. Thank you for that. And just my last question, just been getting this question a lot lately. Maybe you can provide a little color on your VPF paydowns and your internal expectations. Is it still -- do you still feel that VPF fees will be able to cover the majority of the nonrecourse debt during the repayment period? Or do you feel like you’re going to have to tap into some of that digital equipment asset that it’s pegged to?

[Chris McGurk:]

Yes. If Gary Loffredo who is our General Counsel and runs our digital cinema business, Gary, if you’re there, maybe you should answer that question or Andrew?

[Gary Loffredo:]

Sure, sure, Andrew. Our internal models show that there is sufficient VPF revenue and servicing fee revenue to pay down all the nonrecourse debt, including the prospect debt.

[Andrew D’Silva:]

Oh! Great. So that means have you done any calculation on the potential asset value? I’d imagine that’s probably equivalent if not more than the market cap of the company today, if that’s the case, right, in some conservative percentage?

[Gary Loffredo:]

Yes. We have not provided any estimate on what we think the asset value is, but we believe it is substantial.

[Andrew D’Silva:]

Okay. Great. Thank you for taking my call and good luck going forward.

[Chris McGurk:]

Thanks for your questions. Andrew.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Andrew Kumar. Your line is now open.

[UnidentifiedAnalyst:]

Hi, how are you guys doing today? A couple of quick questions. Would you guys think about selling the projector business, given that it’s such a different business than the OTT and returning some of that cash to shareholders? I know, I got in this stock because of the projector business and assuming it’s a slow drawdown on the distribution business and wasn’t really expecting this huge investment into OTT, which has really cratered mine investment and I think that would be a really huge thing for investors and then if they want us to play in the OTT, they can and if they don’t want to, they’ve at least been able to cash out a significant portion.

[Chris McGurk:]

Yes, this is Chris. First of all, I take umbrage to your comments that there was OTT that cratered the investment, there a lot of factors in that. I think if we continue to invest and build the OTT business and continue to build metrics and we continue to cut the kind of deals that I talked generally about, you’re going to see OTT be a huge value creator for the company. That said, we have talked previously on these calls about the potential idea of maybe splitting the business. You’re absolutely right. There is no direct synergy between the digital business and our base content distribution business in OTT, other than the tremendous goodwill that this company created in the entertainment space by being the company that really led the charge on the VPF program and figuring it out and taking 13,000 screens and almost 400 exhibitors digital. So, we have had incomings in the strategic conversations that we had from potential investors who are interested in the assets that we have, in the digital business, the two biggest ones being the residual value of the equipment that we own A, and B, the NOL that Jeff mentioned in his remarks. And if we can find the right deal, that would reflect the value of those assets with the right investor, we would consider either spinning off that business or splitting the business. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Alan Cortelli. Your line is now open.

[Chris McGurk:]

Hello.

[Alan Cortelli:]

Can you hear me?

[Chris McGurk:]

Yes, go ahead.

[Alan Cortelli:]

One of my questions was already answered. My only other question, I think, it’s Gary, should be directed to Gary is, when will Senior Management of CIDM of Cinedigm be given the okay to buy Cinedigm stock on their own? I know that would tremendously help the stock price if investors saw insiders buying the stock. And I’m just -- I know you guys have confidential information, but you disclosed so much in your press conference, especially the last one, I don’t know what it is that would prevent you from buying the stock, but I’ve always heard General Counsel, we haven’t heard words from the General Counsel, so I’m asking that question of the General Counsel.

[Gary Loffredo:]

Sure. Like any public company, we have insider trading policy that provides for open windows and closed windows when we have inside information before we disclose our quarterly earnings and annual reports. So that drives it, but even when those windows are opened, we still have to do an analysis on whether we have any insider-trading, any deals that we are working on that, that have not been made public. So it’s on a case-by-case basis.

[Alan Cortelli:]

So right now is the door closed?

[Gary Loffredo:]

Our insider-trading policy says that the window is closed until two days -- two full days after disclosure of our quarterly earnings. And then once it opens, you have to look to see if the insiders have any material information that has not been made public.

[Alan Cortelli:]

Okay. So Gary, that two days after this press conference, you have to make a decision with Chris and whether there’s any information that I don’t know, you have [to guess] whatever the word is, since it’s only two days away, do you have any opinion?

[Gary Loffredo:]

We look at the circumstances at the time in connection -- in conjunction with our outside counsel and make decision.

[Alan Cortelli:]

Okay. All right, well you see my point though and if investors saw, management buying shares, that would help the stock price.

[Gary Loffredo:]

Yes. We understand your point.

[Alan Cortelli:]

That’s my point. And I think, everyone on this call, I believe, would agree the stock price, even though it’s made a little recovery, is pretty significantly undervalued so…

[Chris McGurk:]

As we’ve said, management completely agrees with you, Alan. As far as the stock price is concerned.

[Operator:]

Thank you. And I’m showing no further questions at this time. I would now like to turn the call over to Mr. Chris McGurk for closing remarks.

[Chris McGurk:]

Thank you. I’d like to thank again all of our investors and other constituents for your support on this call, and we look forward to reporting some significant progress to you on our next call. So thank you all.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.