Cinedigm Corp.
Q1 2016 Earnings Call Transcript

Published: 12 Aug 2015

[Operator:]

Good day ladies and gentlemen, and welcome to the Cinedigm Corporation First Quarter Fiscal 2016 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 be given at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to hand the conference over to Jill Newhouse Calcaterra, Executive Vice President of Marketing and Corporate Communications. Please go ahead.

[Jill Newhouse Calcaterra:]

Good afternoon and thank you for joining today's first quarter fiscal 2016 earnings conference call. Participating in today's call are Cinedigm's Chairman and Chief Executive Officer, Chris McGurk; Chief Operating Officer, Adam Mizel; General Counsel and Head of Digital Cinema, Gary Loffredo; and our Chief Financial Officer, Jeffrey Edell. 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 12, 2015, and Cinedigm does not intend and undertakes no duty to update future events or circumstances. In addition, certain of the financial information presented in this call represents non-GAAP financial measures. And now, I'd like to turn the call over to Chris McGurk.

[Chris McGurk:]

Thank you, Jill, and thanks everyone for joining us today. Since we just had our last call six weeks ago, today's remarks will be fairly brief, and then we will take the questions. I will start by giving a quick quarter update, followed by a review of our larger strategic initiatives, then I will review a recently announced corporate governance enhancements. After that, Adam will review our entertainment business in more depth, followed by Jeff, who will review our financial results. Despite it being our slowest seasonal quarter, Cinedigm saw content and entertainment revenues increase 27% versus the prior year quarter, as we benefited from the strong release schedule, and excellent physical and digital retail placement. We also added promising first run film titles to our line-up, such as A Brave Heart

[Adam Mizel:]

Thank you, Chris. During the seasonally slow first quarter, our entertainment business continued to rebound that began in the middle of last year. Entertainment revenues were up 27% versus prior year quarter, exceeding our expectations, as we benefited from strong performance and many of our new release titles and increased retail placements in both physical and digital. We continue to seek co-production distribution partnerships and one-off content acquisitions to bolster our future release pipeline. However, this effort was limited the past several months by the corporate and activist factors Chris just mentioned. We are hopeful that with it now behind us, we can work rapidly to make up for lost time towards the end of our fiscal year, and we will also aggressively manage all aspects of our business to drive continued improvement in result. Let's now dive more deeply into the strong progress we have made in our OTT business; given the dramatic surge in the OTT market, Cinedigm's focus has been appropriately dominated by CONtv and its initial success as well as preparing the Dove channel for launch next month. So it has been less than six weeks since our last call, CONtv continues to grow, up nearly 30% to almost 430,000 app installs compared to 333,000 at the end of June. We achieved this with very little marketing spend, and we are just this week, ramping up marketing, having completed our latest version of the app with numerous new features, and preparing for the important Wizard World Comic Con in Chicago, starting August 20th, which over 60,000 attendees are expected. CONtv live presents Chicago Comic Con will be live streaming for three days, including panels that stars Jeremy Renner, Stephen Amell, Burt Reynolds and many more. This content will only be available to CONtv subscribers behind our paywall. Some additional stats we want to share; average minutes viewed per week over the last month are up to 101.5 from slightly over 90 in June, and positive sentiment on social media has now exceeded 83%, with over 7.8 million social impressions. We have clearly hit a deep vein in the millennial fanboy and fangirl audience. As we mentioned on the last call, our initial launch phase has been designed and maximized the number of AVOD customers into the top of our funnel, as we refine our marketing offers and app features. Now with learning under our belt and the critical next technology development phase complete, we have shifted over half hour content behind the paywall, increased the ad loads on the service, and ramped up our proprietary live at the CON streaming program, as we attempt to turn our avid AVOD viewers into paid SVOD subscribers. Our current slate of originals is regularly the most highly viewed content on the app, so we are implementing a plan to acquire and/or produce additional content at a low cost. As a result, we have upped our slate with seven original programs/series including Last Man Standing; Flight of the Living Dead; My Morphin Life; Mythica 1 and 2; Riftworld; and Comic Book America; in addition to the panels and other recorded from the CON. Now let's shift to the Dove channel; our direct-to-consumer over the top digital network for families and kids, seeking quality family friendly content, rated and proved by the Dove Foundation. Slated to launch next month, the channel will feature newly acquired and original programming, as well as offering some Cinedigm vast library of content, including VeggieTales, Fraggle Rock, Highway to Heaven, The Adventures of Black Beauty, Swiss Family Robinson, and Where the Red Fern Grows. The plan to have over 900 hours of Dove approved content available at launch, all access through our unique interface, it allows users to set controls using the Dove rating system, that gauges six key criteria, to ensure appropriate programming for families. We are the only OTT service that can offer this Dove group detailed interface, and believe it will differentiate us from any competitive offerings. Docurama continues to hold its own, with more than 630,000 AVOD app installs across multiple platforms, and the 167.4 minutes of average weekly view time. Although, we have not invested as aggressively to-date in Docurama, as we have with CONtv and Dove, we obtained the channel benefit from the CONtv launch due to greater marketing leverage across multiple platforms. We intend to increase our marketing and content investment around the channel, as we continue to seek a strategic partner. This embedded customer base is a very powerful and attractive asset in our strategic discussions. As Chris mentioned earlier, as a leader in the OTT space and one of the very few with multiple branded channels launched, we are in numerous deep conversations with many potential distribution partners, interested in offering some or all of our channels. We are excited by the prospect of this significant third party marketing support for our brand, as well as the accelerated and added revenue potential this could bring to Cinedigm. We intend to aggressively pursue these opportunities. We also invested time and resources in this quarter and in Q1 on our ongoing working capital and AAA arbitrations with Gaiam, and both are proceeding on a path and timeline we are comfortable with. We remain confident in the merits of our position. Since this is a very active legal matter, we do not provide any additional disclosure, beyond what is in the 10-K and 10-Q. Overall, it continues to be a busy and productive time at Cinedigm. We are driving our entertainment business forward, acquiring content distribution rights that will drive future growth and also can be very valuable on our OTT channels, and making large strides in scaling our OTT business. We are doing this while tightly managing our expenses, so we can focus our investment dollars on high return growth and customer acquisition. Now let me turn the call over to Jeff, to provide greater detail on our Q1 results.

[Jeff Edell:]

Thank you, Adam. We are pleased with our results this quarter, our seasonally slowest. This continues the positive signs we saw at the time of our last call. Consolidated revenues were $22.8 million, flat from the prior year quarter. Non-deployment, which is our entertainment and services group, revenues were $11.8 million, an increase of 7% from the prior year quarter. Content and entertainment revenues were up 27% versus the prior year quarter, consolidated adjusted EBITDA was $7.8 million, an increase of 7% from the prior year quarter, and non-deployment adjusted EBITDA was a loss of $2.3 million, improving 52% from a loss of $4.8 million in the prior quarter a year ago. Revenues in our phase-1 and phase-2 deployment businesses decreased compared to the prior period, primarily because there were six blockbuster titles released in the first quarter of the prior fiscal year, compared to only three released in the June 30, 2015 period. Revenue generated by our services segment decreased as a result of the reduced VPFs, earned by our phase-1 and phase-2 deployment businesses. Revenue at the content and entertainment segment were well ahead of plan, and up 27% versus the prior year quarter, reflecting increased revenues related to digitally distributed content and significantly fewer product returns compared to the June 2014 period. Non-deployment EBITDA, although significantly better than the prior year, was impacted by one time charges from our fulfillment and back office services deal from Universal. Non-deployment EBITDA was also impacted by significant investment in OTT, as we ramp up our offerings and launched the Dove channel. Importantly, we also achieved lower direct operating costs in the quarter, due to tighter expense controls. We made principal payments of $28.8 million on our long term debt obligations and paid down our revolving credit facilities by $9.2 million in the three months ended June 30, 2015. All in all, we are pleased that net retail sales of physical products and digital sales performed well for us during our seasonally slowest quarter. As we prepare for our peak holiday quarter, our focus will be on generating new business, maintaining selling and managing our returns. In addition, we will continue investing in our OTT business to drive value creation, which will impact non-deployment EBITDA in the near term. While we remain ahead of our internal plan on content and entertainment revenues year-to-date, as both Chris and Adam mentioned earlier, our new content acquisition plans were impacted by the corporate and activism issues which we have recently resolved. However, we will try to make up for that lost business in the second half of our fiscal year, while continuing our strict expense management and executing on our OTT strategy. Finally, we now have an aggregate NOL of an excess of $270 million, and under generally accepted accounting principles or GAAP, the asset value of our NOL is not reflected on our balance sheet. Now I am going to turn the call back over to Chris. Chris?

[Chris McGurk:]

Thank you, Jeff, and thanks Adam. Supported by our home entertainment business, we are focused on accelerating our momentum in the now fully emerged OTT arena, as more and more viewers cut cords and the old school media companies scramble to react. In contrast, over the last two years, we have carefully built and implemented a plan to create a portfolio of 10 or more narrowcast OTT channels, each with potentially multiple hundreds of thousands of viewers and subscribers, that will generate significant new streams of advertising and subscription revenues for us, including the new skinny bundling distribution opportunities I mentioned, that are rapidly presenting themselves and can further accelerate our growth plans. Cinedigm is now following the path of disruptive companies like Netflix and Amazon in their early years. Those companies focused on building audiences, customer affinity and top line growth. Investing to build market share and solidify their competitive advantages. That is what aggressive and successful companies, operating at an early stage in new businesses with dramatic upside potential do. We ask you to consider and understand that, when you analyze what we are doing at Cinedigm today. Building a position as a leader in the highest growth, highest multiple part of the entertainment business, a potential $20 billion market in North America, called OTT. And, since we are the only small cap entertainment company with a public currency and a real and growing footprint and strategy in the OTT space, we continue to receive expressions of strategic interest from industry and financial entities that value those assets. Rest assured, that we will evaluate those opportunities with value creation and the best interest of our shareholders, are our overwriting priorities. And with that, we are now happy to answer any questions you might have. Operator?

[Operator:]

[Operator Instructions]. Our first question comes from the line of Matthew Brooks from Macquarie.

[Matthew Brooks:]

Good afternoon guys. I just got a few questions on the OTT side. I was wondering if you are able to say, what percent of the users are active, say after, the first month after they register? Whether there is any evidence that you can point to about the customers and whether they are paying for your OTT content so far? And can you say more about how the partnerships might work? I am just not sure I understand how someone who is going to buy CONtv is also going to buy Dove, they seem like different markets to me. Thanks.

[Adam Mizel:]

Sure, I will start. Generally speaking, we see and expect to see monthly active users anywhere from 30% to 40% of our installed base, that's kind of normal in this space, and we are seeing that generally in our channels. So that's the first answer to your question. Second would be, as mentioned in the comments, we are shifting aggressively now to pushing the SVOD offering on CONtv, so we expect to see that subscriber numbers begin to ramp up on the SVOD guide over the next 90 days, as we market that aggressively. We needed to get a number of technology developments done on the -- in that billing, on live streaming and a bunch of capabilities that have all finally cleared QA within the last couple of weeks at the various platforms. Then the last question, I think when you look at the skinny bundles, that Chris and I both referred to, there are a number of interesting players out there, who are looking at ways in which, they can create a content offering to cord cutting consumers, that is a much lower cost, but also much more focused on that audience's interest and need, and look at our channels and say, I can create for them a compelling content offering, in which they then will subscribe either to whatever service they are providing it through, whether its -- I will give you an example -- lots of examples, whether its any of the virtual MSOs you see, are here out there or other technology players, and I think its sort of interesting, it’s a hybrid between the cable model and a completely a-la-carte model, and we are getting a lot of interesting conversations, because we have these channels at scale, a lot of content duration and out there in the market being well received.

[Matthew Brooks:]

Okay. That's good. Thank you very much.

[Adam Mizel:]

Sure.

[Operator:]

Thank you. [Operator Instructions]. And I see no additional questions in the queue at this time. I would like to turn the conference back to management, for any closing comments.

[Chris McGurk:]

This is Chris. Again, I just want to thank you all for your interest and your support, and we look forward to talking again in a few months. And if you haven't bought a subscription yet to CONtv, now is the time to do it, and in 30 days, please do the same for the Dove Channel. Thank you all, and we look forward to talking to you soon. Bye.

[Operator:]

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a good day.