Cinedigm Corp.
Q2 2016 Earnings Call Transcript

Published: 10 Nov 2015

[Operator:]

Good day, ladies and gentlemen. And welcome to the Cinedigm Corp. Fiscal 2016 Second 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 is being recorded. I would like to introduce your host for today’s conference Ms. Jill Newhouse, EVP, Corporate Communications and Marketing. Ma’am, you may begin.

[Jill Newhouse:]

Good afternoon. And thank you for joining today's second quarter fiscal 2016 earnings conference call. Participating in today's call are Cinedigm's Chairman and Chief Executive Officer, Chris McGurk; General Counsel, 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, November 9, 2015, 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'd like to turn the call over to Chris McGurk.

[Chris McGurk:]

Thank you, Jill, and thanks everyone for joining us on the today. First off, I would like to update all of you on the status of the strategic conversations we have referenced on these calls before. Over the past few months we've been working with a strategic advisor to evaluate potential significant M&A and capital raising opportunities for the company. As a result of that process, we are currently in discussions with the potential strategic investor in Cinedigm to help meet our ongoing capital requirements. While there are no guarantees that we will complete this investment opportunity, we hope to have more news to share with you about this in the next few weeks. For confidentiality reasons that is all I will be saying about our strategic review process in this particular opportunity on this call and we will not be able take questions about it. But I wanted to make sure our shareholders were advised about the status of our efforts in this area and the potential closing of this significant investment in the company over the short-term. Now to review our current business and let's start with OTT, all the business headlines continue to trumpet the disruption of the old media business by OTT, cord-cutting, binge-viewing and the rise of the S5 business have all of the giant entrenched entertainment companies scrambling to react. Far from being reactionary like those media conglomerates, Cinedigm continues to be ahead of the curve, operating as an innovative disruptor, having already anticipated planned for and transform the company to take advantage of the rise of OTT. Our high quality narrow cast OTT channels are well-positioned to benefit from this changing consumer behavior. As such, we will continue to build our OTT footprint to capitalize on the audiences rapid shift to OTT services. By 2020, the OTT market is projected to be a $20 billion business in North America, far larger than theatrical or DVD at its peak. Cinedigm already has almost 1.4 million app installations on multiple key platforms and devices across our current OTT channels, with several more in the works. We are executing our strategy to aggressively exploit this game changing industry shift and we firmly believe that this will drive strong growth and shareholder returns, if we can take advantage of the current runway of opportunity and grab key real estate over the next year. Let's now dive more deeply into the progress we've made in our OTT business. Most importantly, we successfully launched the Dove channel on September 15th of this year. That OTT channel debuted to strong reviews, with our unique content ratings interface connecting particularly well with users. We are exceeding all of our early targets for this channel with over 145,000 installations on Android, iOS and Roku in the first 55 days. More than 36,000 registered users to-date and we are adding paid subscribers at a rate exceeding our initial plan. Our paid and performance marketing plan on the channel is about to kick in and we are very excited about our growth prospects. Based on our early success, we are also engaged in several conversations about high potential content partnerships and new distribution arrangements for the channel. Dove currently has about 1,600 hours of Dove rated content on the service and we plan to increase that to over 2,500 hours in the next few months. The subscription price is $4.99 per month. The Docurama channel we now have over 650,000 app installations. The service is currently [indiscernible] only, but we have been very encouraged by strong user engagement and viewing time across our device footprint on Roku, iOS, Android, Xbox Tivo, Amazon Fire and Samsung, all despite minimal marketing spend. So we plan to expand Docurama as an S5 service with the major distribution platform partner in the next couple of months. And then we will broadly launch it as a subscription service across all the key platforms in the first calendar quarter of 2016. We will be pricing Docurama at the same $4.99 per month price point as Dove. We have about 800 hours of content on Docurama currently and expect to increase it to over 1,200 hours once we migrate to a subscription service. For CONtv, we have now reached nearly 600,000 installs across Roku, iOS, Android and Samsung, far ahead of our plan. We now have almost 100,000 registered users and are about to put a plan in place based on research of Comic Con fans and have user experience since the channel launched last spring to reposition CONtv to better convert users to subscribe. This month we will be reducing the monthly subscription price from $6.99 to $4.99, consistent with both Dove and Docurama, and reorienting our programming and value proposition to support more of our Comic Con VIP experience than the previous more general Netflix for Nerds approach. This positioning will focus our programming more on both live and recorded events and series from the actual Comic Con themselves both from our partner Wizard World and other Comic Con related live events, like our recent broadcast from New York Comic Con. Currently, CONtv has approximately 2,600 hours of streaming content on the service. As we discussed on our last call, we’ve also been engaged in discussions with several potential distribution partners for our channels. These are platforms that either want to place our channels in so-called skinny distribution bundles or offer them as A La Carte subscription services. We’re pleased to report that we’ve signed an agreement with a major platform with a very significant reach for a subscription service that will include all three of our channels, Dove, Docurama and CONtv. We hope to announce this soon and believe it will help accelerate subscriber growth, as well as provide more market validation that our channels each with a huge volume of highly-curetted and targeted programming should be at the head of the queue for OTT bundling opportunities. And as I said, we also have several conversations going with other major technology and distribution platforms about additional bundling opportunities for our channel. All of these deals, these potential deals would partner us with deep-pocketed distributors who have tremendous reach and marketing resources and deep resolve to quickly build market share in OTT. And we continue our development efforts on several additional OTT channel ideas, with some exciting branded partners. We expect to make some announcements in that regard over the next few months. I think it is important to note that some of those discussions about our new channels, include an international distribution footprint as well which would dramatically expand viewer and subscriber opportunities. Now let's address our entertainment distribution business. During this seasonally slow second quarter, our entertainment business continued to rebound that began in the middle of last fiscal year. For the quarter, we exceeded our internal sales expectations with entertainment sales up 30% from the prior year as we benefited from strong performance of many of our new release titles and increased retail placements in both physical and digital. Year-to-date our sales are up 29% from the prior year. Also, exceeding our sales plan and demonstrating the effectiveness of our sales and marketing operation and leveraging a full pipeline of concept. At the same time, we continue to work with sales and product pipeline for the second half of the year that was significantly impacted by the negative business narrative fallout from our convertible debt raised and resulting activism last spring and summer that we pointed out on our last call. In recent months, we’ve closed several notable deals. We’ve renewed our distribution deals with a variety of important partners, including Sonar and Crown media and we extended our deal with Televisa. We've also acquired several animated films, including Savva. Heart of the Warrior, a high quality CGI family film featuring the voices of Whoopi Goldberg, Joe Pesci, Sharon Stone and Milla Jovovich. However, despite our solid progress, we do expect the shortfalls created by the negative impact through our sales pipeline that I just mentioned to affect our Q3 and Q4 results. As we manage our peak holiday quarter now, our focus is on generating new business, maintaining selling and managing returns. In addition, we’ll continue investing in our OTT business to drive value creation, which will continue to impact EBITDA in the near-term as it did in the first half of this year where we launched two more channels and now have three full operation versus one last year. Now I will conclude by briefly addressing corporate matters. As we announced last month in a continuing process of streamlining corporate structure to better fit our evolving business profile and reduce costs, we eliminated the position of Chief Operating Officer. The CLO position will now be replaced with responsibilities now shared by myself, Jeff, Garry and Cinedigm Entertainment President, Bill Sondheim. We will continue this rigorous approach to cost management. Now I'd like to address recent changes in our corporate governance. As you know in late July, we added four new independent directors to our board adding valuable business and leadership expertise that better reflects Cinedigm’s current business strategy. Given the increased number of independence, two of our long-term independent board members did not stand for reelection. And now two more directors have recently left with very specific personal and professional reasons. We now have a streamlined six person board that we believe is more efficient, cost-effective and more reflective of our business priorities than ever before. Supported by Ron Chez who continues to be a valued strategic advisor to the company and who has contributed meaningfully to many of our current key initiatives were very confident with quality leadership of our board. Additionally, I would also like to note that pursuant to Sageview’s right, Laura Sims will remain as a board observer to Cinedigm and we welcome her ongoing ties to our business very much. Now Jeff will review some key financial points. Jeff?

[Jeffrey Edell:]

Thanks Chris. As you saw from our earnings release we issued earlier today, we’re pleased that our results this quarter, one of our seasonally slowest met analyst expectations in all categories. We exceeded our internal revenue plan and sales increased 30% over the prior year quarter in our entertainment business. Entertainment sales were also up 29% year-to-date versus prior year and also ahead of our internal plan. This continues the positive signs we saw at the time of our last call. While we remain ahead of internal plan on content and entertainment revenues year-to-date, I also want to reiterate that our new content acquisition plans were impacted by the negative business narrative that followed our convertible debt raise in the resulting activism. However, we are working very hard to recover as much of that lost business as possible in the second half of fiscal year as well as maintaining a rigorous focus on managing costs in our base business and in our corporate infrastructure while continuing to invest and execute on our OTT strategy. We also continue to look at our banking relationships and are trying to secure an enhanced revolving line of credit, among other things. Now let's talk about Goodwill. We test Goodwill for impairment when events or changes in circumstances indicate that the carrying value of reporting unit may exceed fair value. This is also known as impairment indicators. Our only reporting unit with Goodwill is our content and entertainment group whose Goodwill carrying value was materially derived from our Gaiam Vivendi Entertainment acquisition in the fall of 2013. We have recounted the issues with that acquisition repeatedly on these calls. And as a result of our analysis of this Goodwill, we recorded an impairment charge of $18 million in this quarter. Keep in mind though that this has no cash impact on the company. Now to briefly comment on the Gaiam settlement; as we announced last month on September 30, 2015, we entered into a confidential statement agreement and release with Gaiam. This recent settlement outlined a path to fully resolve the claims and the counterclaims in our ongoing arbitration. Gaiam agreed to an initial settlement payment of $2.3 million and the subsequent settlement payment in an amount to be determined through an arbitration process that is currently ongoing. The initial settlement payment was received on October 16, 2015, and we're glad to have this issue nearly behind us. On the debt front, we paid down $38.8 million on our long-term debt arrangements in the six months ended September 30, 2015. In addition, we now have an aggregate NOL of an excess of $300 million and under GAAP, the asset value of our NOL is not reflected on our balance sheet. Finally, I want to point out that Cinedigm remains one of the few publicly traded OTT companies. And as I'm sure you can appreciate, we have to be very careful regarding the level of public disclosure of various metrics here for competitive reasons. Now I will turn the call back to Chris for his concluding remarks. Chris?

[Chris McGurk:]

Thanks, Jeff. To sum up, we're very pleased with our progress in the OTT business and our prospects for additional channels and distribution bundling deals that will accelerate our growth. We now have three growing OTT channels in full operation versus one last year, with several more in development and with bundling deals on the horizon, which should significantly expand our footprint. We’re also pleased with our results in the base distribution business where we have exceeded our sales targets and have shown strong 30% growth year-over-year this quarter and 29% growth year-to-date versus last year. We still have significant challenges ahead of us in dealing with the reduced go forward sales pipeline that both Jeff and I spoke about, it’s going to occur in the second half of this year and making sure we continue to have the strategic partnerships and capital required to meet our needs and quickly build our position in OTT to take advantage of that enormous growth and value creation opportunity. However, we believe we have the right plan and team in place to deal with those challenges and seize the OTT opportunity in front of us. We hope to have some announcements about our progress and all these very soon. And with that, we will now take questions. Operator?

[Operator:]

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

[Andrew D'Silva:]

Hey, good afternoon, everyone. Just a couple quick questions. I will start off with the legacy production side of the business. You opined, obviously, that there is going to be some sort of delay related to some of those production deals announced over the last few quarters. I believe the total gross billings amount was approximately $50 million. Is that still on the table for the next 12-month period, or has some of those deals actually been lost due to some of the events that have taken place over the summer?

[Jeffrey Edell:]

Thanks, Andrew. This is Jeff. I will try to answer that question for you. There is around a good percentage of the new buildings that we expected are not going to happen this year. And as I mentioned in my script, we’re going to try to recover as much of that as possible. And you can see that when we actually have control and fill the pipeline during the first half of the year we met all expectations in every category, but I don't expect that the second half of the year is going to reflect us recovering the business we lost due to activism and some other issues that are going on.

[Chris McGurk:]

Yeah. And if I could just add, Andrew, this is Chris. We’re focused as we've said before on trying to mitigate some of that as well, not just by finding new product but we’re focused like laser beam on our cost structure and trying to generate savings by rationalizing our CEG cost structure and also our corporate cost structure. And one other point that I think Gary has mentioned as well, part of the reason why our results have been so strong over the first half of the year we’ve done a extremely good job, our management team and CEG at managing returns. And hopefully, if we can keep that focus over the second half of year that will help us in offsetting some of that lost sales as well.

[Andrew D'Silva:]

Okay. Got it. But as far as the lost sales that were mentioned, are they actually lost, or just delayed into '17 -- fiscal year '17?

[Chris McGurk:]

The sales for the remainder of this year that we thought about, 80% of them or so will be lost, lost sales this year. We’re hoping that we can pick some of this back up next year, but it's not the kind of situation where we’re going to replicate. We’re going to pick up this year’s lost sales and next year's on top. It just delays the start of a lot of these co-finance, co-production deals that attributed to these new sales.

[Andrew D'Silva:]

Okay. Got it. And then just moving over to the OTT side of the business, are you seeing any increased ability to take some of your physical content distribution rights and expand that over to digital? Perfect example is God's Not Dead, obviously did really well at Walmart and Target, and seems like it’d be a perfect showcase, piece of content that put on the Dove Channel. Is that something that you're able to eventually bring over to digital side, which I would imagine be able to expand your viewship audience as well?

[Chris McGurk:]

Yeah, the answer is yes. Up until, obviously, September, Dove, which was an idea, now it’s a reality and using that as an example and it’s been very, very successful. And we've been very encouraged by really the number of producers in that faith and family space. You seemed to be coming out of the woodwork and want to participate now. So I think as I said, we’re going to increase the number of hours in the Dove Channel pretty significantly over the next few months from 16

[Andrew D'Silva:]

Got it. And as far as reducing your average monthly fees for CONtv, are we still in that realm of about a 100,000 paying subscribers as spot subscribers gets you to breakeven on a channel, or is that changing now that the prices are being lowered?

[Chris McGurk:]

No, I mean, I think what we said before was our breakeven was a lot lower than 100,000, but at the 100,000 point, we’re creating a lot of value. So obviously, it will be a little bit higher, but we believe the break is still going to below 100,000 subscribers.

[Jeffrey Edell:]

But remember, Andrew, when you're doing these calculations, you're constantly doing a market spend, create that hockey stick growth in the number of subscribers. So it's difficult to say that the spend you're trying to get new subscribers onboard that they apply to your breakeven on the ones that currently exist.

[Chris McGurk:]

And in our original planning as well. Just on the other side, we did not have any of the skinny bundling or broader distribution arrangements factored into our plans going forward. So to the extent that we can focus on that business in over the next couple of months cut a number of deals for CONtv and our other channels with these kind of new age OTT MSOs. Obviously, that's a factor that we didn’t take into account when we set the original plan.

[Andrew D'Silva:]

Okay. Fair enough. And is there anything we can look at externally that maybe can give us an idea of conversion rates. I know OTT is kind of synonymous with technology and millennials and Twitter seems to be something that’s proliferated with millennials. Is the amount of followers network have given idea of how our channel performing, or are there any other metrics that you can think of that you can guide as to that will help us understand how you are succeeding in market?

[Jeffrey Edell:]

Andrew, its Jeff. As I mentioned in my script there, it’s difficult for us to give that information out because we are one of these few OTT public channels. So anything we do could be sort of used by our competitors. And we’re not -- so we have to be just very careful about that. We’re still evaluating what it is we can produce. And remember, if you follow Netflix and some of the others, there was different times in their evolution of their business that they started to release these kinds of metrics. Again, we’re evaluating, trying to figure it out but at this point there's not much more we can give.

[Andrew D'Silva:]

Okay. And last question, just as far as strategic partnerships or investments go in the company, I know you said you wouldn't really touch too much on it but should we think of it as a channel investment generally or an actual investment in Cinedigm the parent company as a whole?

[Chris McGurk:]

As I said I was going to discuss it further, so I’m not going to -- thank you for your question but I’m not going to respond to it.

[Andrew D'Silva:]

All right. Thank you very much, guys and good luck going forward.

[Chris McGurk:]

Thanks, Andrew.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from line of James Marsh of Piper Jaffray. Your line is now open.

[James Marsh:]

Great. Thanks very much. Just two quick ones here. First, just going back to be the -- I guess the skinny bundle opportunity. Maybe you could talk a little bit about how those economics might be different than the core over-the-top business plan? Just wondering as we think of this as to simply adding another platform with very limited marketing expense or incremental cost that I’m not aware of here. Just maybe if you just talk about how those two opportunities are different? And then secondly, I was just hoping you could talk about why it seems to be taking so long for Docurama to find a partner? I guess VOD OTT will be fairly straightforward but was it just a lower priority at this stage or having difficulty finding the right partner? Maybe you could just elaborate a little on that as well. Thanks.

[Chris McGurk:]

Yeah. Well, I start on the first one. These bundling opportunities are -- they’re going to vary very significantly based on the distributor who we do the deal with. Like I said, they vary from a-la-carte subscription services to bundles where you’re going to be getting a fraction of the subscriber revenues you would get on your own website for instance. But hopefully, you’re a part of a package that’s going to have a much, much wider reach. The one specifically that we’re looking at would be a situation where, I said, it was a-la-carte subscription service where you basically share subscription revenues with your partner or your partner would pick up all other costs of sort of managing and marketing the service. So when you actually work it down on operating margin basis and I want to get too specific here, the economics are not that far off from the situation where we would have CONtv priced to $4.99 on IO, we’ll be taking all that in ourselves. As far as Docurama is concerned, again, we've been very happy with Docurama. We had a number of conversations with potential partners. We are flipping Docurama to a subscription service that had been one of the issues in terms of finding a partner as we started it out a year and a half ago with a partner up in San Francisco on a platform that basically just service that as [Indiscernible] service. Now as I said, we’re going to be launching it with the big distribution partner as a subscription service and then we plan to go wide across all platforms with Docurama early next year and we think that probably is going to be sort of the key catalyst in terms of taking these partner conversations that we've been having been over the line. So it hasn’t been for lack of interest. It's more been the fact that we’ve needed to convert Docurama onto our platform, our technology stack as a subscription service.

[James Marsh:]

Okay. Great. Thanks very much, Chris.

[Chris McGurk:]

Yeah.

[Operator:]

Thank you. [Operator Instructions] And at this time, I’m showing there are no further questions in the queue. I would like to turn the call over to management for any closing remarks.

[Chris McGurk:]

Yeah. This is Chris. Again, we threw a lot in this call. And we thank you for your support. We’re please with the progress in our business. And hopefully, we’ll have some more announcements for you over the next weeks and months. Thank you all very much.

[Operator:]

Ladies and gentlemen, thank you for your participation on today's conference. This concludes your program. You may now disconnect. Everyone have a great day.