Chicken Soup for the Soul Entertainment, Inc.
Q4 2020 Earnings Call Transcript

Published: 31 Mar 2021

[Operator:]

Good day and thank you for standing by. Welcome to the Chicken Soup for the Soul Entertainment Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference to your speaker today, Taylor Krafchik, Investor Relations. Please go ahead.

[Taylor Krafchik:]

Thank you, operator, and welcome. With me on the call are William J. Rouhana, Chairman and Chief Executive Officer; and Chris Mitchell, Chief Financial Officer, to review the fourth quarter and full year 2020 results as well as provide a business update. Following this discussion, there will be a moderated Q&A session open to the participants on this call.

[William Rouhana:]

Thank you, Taylor and thank you all for joining us. We posted solid Q4 results and capped an important year for our company. In light of the unprecedented year that we've all been through, I think it's amazing what our company actually accomplished. If you think about these factors, we lost a $15 million revenue company - revenue customer when Sony shuttered PlayStation Vue at the beginning of the year. The advertising business nearly shut down in the second quarter. Nine of our movies were unable to go - and television series were unable to go into production because of COVID. And despite all of that, we finished 2020 with a total revenue increase of over 20% and nearly doubled our EBITDA from the prior year.

[Chris Mitchell:]

Thank you, Bill. Our financial results for the fourth quarter and full year 2020 reflect the successful execution of our online networks and distribution and production business strategies. Bill's already discussed the overall highlights, so I will focus on a review of our results and balance sheet for the fourth quarter. Starting first with the results for the fourth quarter we reported gross revenue of 20.2 million compared to 20 million in the third quarter of 2020, which was roughly flat sequentially and compared to 24.8 million in the year ago period were a decline of nearly 19% year-over-year. Net revenue was 20.2 million, up nearly 5% sequentially, and compared to 24.4 million in the prior year period or down roughly 17% on a year-over-year basis. The year-over-year decline in both gross and net revenue reflects the approximately 5.6 million in gross quarterly revenue Crackle received in the year ago period from Sony's PlayStation Vue service, which Sony decided to shutter at the beginning of last year.

[William Rouhana:]

All right, operator, we'll take questions.

[Operator:]

All right. And our first question comes from Thomas Forte from D.A Davidson. Your line is open.

[Thomas Forte:]

Great. First off congrats on the quarter in the year. So one high level question and one follow up, so Bill at a high level without debating individual deals, meaning Quibi and This Old House, do you see Roku's entry into content in that manner as validation of your business model and why?

[William Rouhana:]

Well, of course, first of all, thanks Tom. And second of all, of course, it is absolutely validation and their disclaimer that this is the - they just happen to do these two content deals somehow by accident or something. It's hard to really accept. They know that building a network requires original and exclusive content to build loyalty from consumers to get them to come to you first to get them to come back. And so they're going to have to learn how to be in the content business. But as I have said many times, we've been at this for years now. We've developed the systems that allow us to create a very steady flow of content in a low-risk way. And by the way, I don't know if you all picked up in the original remarks that we are aiming to pick up the pace at which we bring original and exclusive content to our networks to as many as one a week by the end of this year. That will make us pretty unusual in the VOD space, not just in the AVOD space. So we are starting to ramp this up even further. This is an absolute must in our business. And you look at the numbers, the 20% of the ad impressions that are originals and exclusive generated over the course of 2020 from about 150 shows out of over 10,000, tells you that viewers are looking for that kind of content, content they can't find anywhere else. So there's no doubt that they know about this Tom and there's no doubt that they have to learn more about it. I want to bait the deals because you asked me not to, but you already know I don't think they were very good.

[Thomas Forte:]

Okay, excellent. And then for my follow up question, it seems to me, given you talked about being sold out on inventory that an easy way for you to generate growth on top of growth in calendar '21 is by increasing pricing or CPMs. How should we think about your pricing power?

[William Rouhana:]

I think there has –I think as I've said, there's a pretty big range now of possible CPMs that we can charge depending on our ability to target. I think there is pricing power. So I don't think we've hit that point yet where it's dramatically one sided in our favor. But I do think there's pricing power, mostly from the ability to continue to be - to get better and better at targeting. And there's a difference between a really targeted ad and a less targeted ad is - you get twice as much for the really targeted ad on a CPM basis. And we're getting better and better at delivering those. Over time and especially with our new platforms that are coming in the middle of the year, we're going to get even better at that. And there are a number of other things we plan to do this year, especially in the nature of increased data capabilities that I think will enhance that even further. So I look at CPMs as moving upward without a doubt, as there's more demand for OTT than there has ever been. I look at the scarcity as a good thing and a bad thing because we should have more viewership so that we have less scarcity, but we're working on that as you know. And I think pricing power is moving in our direction kind of inevitably Tom because there's just way more demand coming into the space as advertisers follow viewers. And unlike anybody else the one other thing that we have that makes us unique is that we are not trying to force feed advertisers some package of stuff that includes broadcast and cable, ads that they already have enough of in order to get OTT as we sell only one only one thing a AVOD ads and I think advertisers like that about us. They know they get treated a certain way. We're not trying to get them something they don't want. We have a great relationship with advertisers. I looked at the list of advertisers for 2020 it's just so impressive.

[Thomas Forte:]

Thank you, Bill and congrats again on a wonderful year.

[William Rouhana:]

Thank you, Tom.

[Operator:]

Our next question will come from the line of Dan Kurnos from The Benchmark Company. You may begin.

[Dan Kurnos:]

Thanks. Hey Bill let's talk about the advertiser equation for a second. Maybe just in term - you actually brought up sort of data capabilities targeting, can we talk a little bit about demos here look there's going to be somewhat $7 trillion and stimulus money that's coming in the back half of the year. You've got a publishing environment that's facing the cookie cliff and obviously CTV, OTT, EST et cetera are all areas that are audience-based targeting. So can you just talk about some of the conversations that you're having with advertisers now around what you're bringing to the table maybe how you're thinking about the content that you are providing that you're launching this may be trying to drive more targeted demo that you can bring increased impressions in some of the categories that advertisers are looking for?

[William Rouhana:]

Okay, that's a lot of questions all in one Dan. There's a lot of stuff masquerading as one question. So let me try to take it apart as best I can. So there are some natural demographic things that advertisers seek obviously, male, female, age, income. We're able to give them a pretty good view of most of those statistics for many of our viewers, but certainly not all of them and we've got to get better and better at that. The number one thing that we need to do is to continue enroll people when they come to our Crackle Plus networks and part of what we will be doing in our new platform is making it easier for people to enroll and we'll be driving more of that, but I don't want to preview too much of the - of that new platform until we get a little closer to it, so that's one thing just basic demos. The other thing is advertisers like to be associated with certain types of content and as I've told you in the past and many others, they like original and exclusive content, they like the idea of being associated with it, so they'll pay more for that. Obviously, they have to have at least premium content and that's where we are. We're positioned as a premium content business and there's a scarcity of that in the world. It's not like you can create premium content the way you can create a webpage. So it's a scarce resource. It can be targeted. Unlike broadcast which is very tough to target the way we can target our ads. And then there's the impact of technology Dan on the way we deliver ads, so that's the other thing we can do. The free view ad which I think most of you know where you get the opportunity to decide whether you want to interact with an ad and watch less ads. As a result it gives an advertiser more information. It gives the viewer a better experience and it makes us more money that you can't do in broadcast, you can't do that in cable, but you can do it in digital advertising. There's quite a bit more of that sort of ability to use the technology to deliver more relevant ads, better ads and therefore more valuable ads. So I gave you a lot of stuff in response to that very broad question. If there's something else you want to know you get one follow up how's that.

[Dan Kurnos:]

Alright winner winner chicken dinner, so maybe just on the content side Bill and I guess I'll risk a two part follow up and I'll try to limit it to two. How do you - we had the question about content acquisition by other AVOD players. A lot of stuff's going behind the paywall right. You guys are in a unique position given some of your relationships, some of your production relationships. So how do you think about content costs if perhaps some of the larger guys are taking some of the bigger deals off the table and leaving some of the smaller players to go after perhaps less available options? And then the follow up to that would be you're kind of you're combining your business lines, I'm just wondering if we should be thinking about that as messaging that? There's maybe more flexibility in how you monetize your content going forward.

[William Rouhana:]

So we still have that same risk averse approach to obtaining content, which we've spent years developing both on the acquisition side and the production side. In terms of competitive question or the access to good content question, for a variety of reasons, we seem to be seeing better and better stuff. If you took a look at the list of things I read about the Screen Media acquisitions for this year. They're increasingly very good, much better, more talent, more star driven, more marketable, just better and better stuff coming to us, being acquired by us and then being distributed by us. And I don't think it's actually an accident that we've now had two really, very successful movies, one in The Outpost and now the second one Willy's within a few months of each other, that's something that never happened before in the history of Screen Media. We've got some good momentum on the acquisition side, and it's getting better not worse. We have more access than we've had before, in part because the studios are just doing less and less in terms of any kind of independent movie type stuff or smaller movies. On the production side, there's an increasing need globally for international broadcasters to get great programming. The streamers have taken 100% of rights globally. So Disney, HBO Max, Netflix, they insist on owning 100% of the rights globally on projects. And that's starting to cut off international broadcasters from a flow of quality, scripted and unscripted programming that they were count - that they used to be able to get by combining with US networks and helping create things. That puts us in a great position. That puts us in a position with a growing domestic US network that's not affiliated with a broadcaster who would try to take all the rights away, but being able to partner with international broadcasters in order to create higher and higher quality programming. And I think what you're going to see, as we roll out, I think we have nine or 12 Productions scheduled for this year, as we roll through those without changing our risk profile, what you're going to see is the impact of being able to attract more broadcast partners is going to significantly increase the ability to create great programming. Now the other thing that's really affecting our ability to create great programming is talents - talent, the fact that talent is being cut off from participation in streamer productions as well. So if you're a talented person, like Brad Turner, the guy who created 24 and Homeland, and who works with us on a number of different projects, some of which you'll see coming up. You don't want to be working just for a service fee. You want to have some true opportunity to make money if your show is successful. And we still provide that opportunity to talent. And so we're seeing an increasing incoming interest. Now, very talented people, if they're really smart, most of them have great managers and the like, will do some combination of working for a streamer for a big fee and investing in their future by working with someone like us who can help them have a piece of the action. So on both those fronts, both on the international demand side and on the talent need side, we have good dynamics right now in attracting better and better programming without taking any kind of increasing risks Dan and that's the dynamic we like.

[Dan Kurnos:]

Perfect. Thanks for the color. You've left the door open for someone to ask the international monetization question, but I will stop. So thank you.

[William Rouhana:]

Thanks Dan.

[Operator:]

Our next question comes from the line of Jason Kreyer from Craig Hallum. You may begin.

[Jason Kreyer:]

Great, thank you. Bill, you mentioned back in the fall, you'd already pre-sold a lot of inventory heading into Q4 and just given how rapidly ad spend came back online, kind of curious if you feel like you left any opportunity on the table there and I know part of that was strengthening relationships, but why don't you just give your puts and takes on that as we sit here today. And perhaps this is a little bit of a question of kind of the direct sold inventory versus programmatic, but any color you can provide on that that would be great.

[William Rouhana:]

Yeah, I don't think we left much on the table Jason. There was - there were higher CPMs as the year went on. There was way more demand. You see - I mean if we all go back to Q2 you guys may remember that we were all worrying that the world would never come back to normal and of course as we went through Q3, we did better and of course Q4 we were up another 35% or 36% over Q3 on the apples-to-apples comparison. And then by the end of the year we were ahead by 16% year-over-year in December over last year, so that rebound that was taking place we're talking about revenue. So I think we got the revenue we should have gotten out of the year, but the one great thing was we blew all the way back through what was last year's level and ended up exiting the year at more than where we were last year, not just getting back. So I feel like we did okay on that. It is true we just have a lot of demand. We have - we do have more demand than we have supply now. I will tell you a funny anecdote, last week Crackle wrote about $2 million in IOs the single biggest week our sales force has ever had. So the demand is truly there. We just got to keep growing our viewership and that's why our focus is very much on these distribution platforms beginning to do more marketing, which is a little bit of a reflection on the Q4 numbers and also making sure that we continue to increase the flow of original and exclusive content because that's a critical part of what drives viewership.

[Jason Kreyer:]

So maybe we can unpack a little bit of that more. Several times you've called out the strength of what you're seeing in Q1 both from a viewership standpoint, clearly last week being a record for Crackle. I think you called out earlier in the quarter that you're seeing very nice increases in ad prices early in the year. Just what are the key factors that are driving these substantial increases early this year?

[William Rouhana:]

I don't really know. I think it's just the continued migration Jason into the space. I saw some numbers recently that the first quarter was down in advertising spend this year, but we didn't see that. I think it was down something like 7% when I looked at these - some numbers recently. It hasn't shown up in our business, but I think this is that continuing migration following the consumers. The consumers are - there are more and more of them with us and that's - if you're an advertiser you got to go where the viewers are, so I think that's the number one driver without doubt.

[Jason Kreyer:]

Got it, great thanks for the time Bill, appreciate it.

[William Rouhana:]

Thanks Jason.

[Operator:]

Our next question will come from the line of Austin Moldow from Canaccord. You may begin.

[Austin Moldow:]

Hi, thank you. Can you just speak a little bit about your outlook for your ad rep partners and if there's any expectation there to, I don't know, sign more or have more inventory from the existing ones come your way?

[William Rouhana:]

Yeah, that's a good question Austin. I think that is one way we can help satisfy the excess demand. We do have Funimation and Crunchyroll who we represent in the ad rep space. Crunchyroll had a good couple of weeks and so it's funny. They're supposed to merge and I guess most of you know that they're under investigation by the antitrust department as to whether that's a good merger. I didn't know that anime was a protected category from a competitive point of view, but apparently it could be. So we do have a couple of good ones. We've talked to - we talked to a number of others, but we need a certain size ad rep partner to make it worth the effort. The PlayStation Vue deal was a terrible deal from an economic point of view and we just won't do one like that again with that kind of low margin. So we have some pretty exacting requirements, we're going to have our sales force and our resellers go to work for somebody else, it has to be a certain scale and scope, and we need to know there's going to be some longevity to the relationship. So it's hard to find ones that actually fit that bill unless you just go by them. So my view is that might be the better approach to filling the need to the extent we need to fill it in non-organic ways.

[Austin Moldow:]

Thanks for that. Is there any expectation that as the world opens up again, you might see declining usage numbers that might impact your comp this year?

[William Rouhana:]

So I don't think on a comparable basis that's an issue, but obviously, we are in a seasonal business, right. I mean, besides advertising demand, which is seasonal, Q4 is the highest, Q1 is the lowest. You also have what's called the spring and the summer and people go outside and they watch less TV. So there are kind of natural waves to our business that have nothing to do with COVID or not COVID. So I think we're going to have the normal natural waves that we have. But overall, I still believe and I think the evidence is with me that the amount of people who have moved to OTT viewership just overwhelms those natural waves. And so year-over-year the growth continues. And I think that's really the way it's going to keep going. That doesn't mean that I don't think more people will go outside and therefore watch less television when they can. Of course they will, but they do that every year. There's really a big pie out there that needs to be split and we're just going to have a bigger piece of it than we had before.

[Austin Moldow:]

Okay, thank you very much.

[William Rouhana:]

Thanks Austin.

[Operator:]

Our next question comes from Mike Grondahl from Northland. You may begin.

[Mike Grondahl:]

Yeah, how do you Bill? Hey, the first question is just on the 41 touchpoints you've hit, what are a couple that really stick out to you recently in terms of adding viewers? And what are a couple as you get to your goal of 64 consumer touchpoints that you really are excited to get to?

[William Rouhana:]

Okay, so I'll answer that question, but I'll answer it slightly differently. For example, Plex has been an incredible standout. They were one of the first ones we added. They've been amazing. And you guys might note that we recently added that as an ad rep partner to go back to Austin's question from a minute ago. They fit the characteristics of somebody who has a good relationship with, a long-term profitable relationship. We're already doing other things with them. So that's been a standout. Plex has been great. I don't want to give anybody the wrong idea, because I know this is a controversial name, but our Fubo rollout has gone really well as well. That's been another one that's really - I've been sort of - actually I've been very surprised that how good it was. It's gone very, very well. By the way, there have been a couple of stinkers in there too. But I'm not going to tell you what those were. But we'll get those to work. We'll market them. We'll do what you do to make sure that you get the right amount of business there. Some take longer than others to develop, so those two have stood out. What was the second half of your question Mike?

[Mike Grondahl:]

Just of the incremental when you go from 41 to 64, what's one or two that are - or three that are really important to you in the next wave?

[William Rouhana:]

Yeah, so some of them - Smart TVs, number one plays across the board that we are really excited about. You already saw we did with VIZIO. You'll see further evidence of us working with them closely. We think they're terrific. That wasn't a plug for them as a public company. They really are good partner to us. So VIZIO has been great. We have a - we're looking very - we're working very hard on the Samsung relationship, LG. There'll be further developments there. And those are the ones that excite me Mike because that's as you probably remember that's my view of where the future of Smart TV viewership is going to overwhelm in my mind, things like the Roku stick and the Fire stick because when you open up a Smart TV you throw away a Fire stick or a Roku Stick. If you're a consumer, you don't need it anymore. So we are really trying to be very, very aggressive in the way we take territory so to speak, on the Smart TV offerings and get involved with the Smart TV providers. That's the number - that's the one that excites me the most, those people

[Mike Grondahl:]

Got it and then lastly, just on Willy's Wonderland, any sort of range for revenue that you can give us? We know it slipped from 4Q to 1Q, but it sounds like it's done really, really well. How do we think about that?

[William Rouhana:]

Well, first of all, don't use the past tense because it's still doing really, really well. It has done and is continuing to do really, really well. It's very popular. I'm not exactly sure why Nicolas Cage battling possessed animatronic beings. Notice I can say that better now after the twelfth time of saying it is so interesting to people, but they like it. It's actually done reasonably well even in theatres, which is something we generally shy away from, but it had a great per screen average. We made some nice money on it, supplemental money. It's doing very, very well in the Premier VOD, but it's going EST now and it's going to drop to a lower cost coming soon. I expect that to continue to generate a lot of incremental revenue. When it's done, it's probably going to give us three to four times what we spent on it. And remember, we own that in partnership with the Landmark Company, which we are a majority shareholder up, so that one's a good one. It's a really good one.

[Mike Grondahl:]

Got it, great, congratulations.

[William Rouhana:]

Thanks Mike.

[Operator:]

And our next question will come from the line of Brian Kinstlinger from Alliance Global. You may begin.

[Unidentified Analyst:]

Hi, everyone, this is Jacob on for Brian. Can you quantify the number of users that have watched Crackle content for the first time through the VIZIO remotes and what percentage of total impressions are coming through this relationship so far?

[William Rouhana:]

You're just a little early with the questions since the remotes don't actually get to consumers until the second quarter. So we'll try to answer that question then, but for now, obviously, the answer would be zero since they're not there yet.

[Unidentified Analyst:]

No worries. How are VIZIO views trended from Q1 compared to 4Q?

[William Rouhana:]

The viewership has been going up overall. Impressions have been okay up a little bit, so generally upward, but Q1 and Q4 are pretty different in terms of their tendencies because of the seasonality associated with them, but they've been fine.

[Unidentified Analyst:]

Alright, that's all for me. Thanks, guys.

[William Rouhana:]

You're welcome.

[Taylor Krafchik:]

This is going to be the last question operator.

[Operator:]

All right, our last question will be from the line of Jon Hickman from Ladenburg. You may begin.

[Jon Hickman:]

Hi, I just have a really mundane accounting question. What prompted the reversal in the returning line?

[William Rouhana:]

Yeah, so it's a funny thing, but we have to guess John every quarter on how many DVDs will come back. And we guessed wrong, less came back than we thought. We over reserved.

[Jon Hickman:]

Okay, so that's just - I mean that's - you're guessing every quarter in the year and then at the end of Q4 you true up?

[William Rouhana:]

Yeah, we have to true up at some point and if it came clear. Really, I think The Outpost did it because The Outpost just kind of really was ridiculous across every single place we distributed it, whether it was TVOD, or SVOD or DVD, it just kept going. And if you put a normal reserve on a film like The Outpost, you're going to over reserve without a doubt. So that's what I mean. It's not a - it's a good thing. Not a bad thing.

[Jon Hickman:]

Okay, then I'll ask someone else's question. What about international revenues?

[William Rouhana:]

We had - we have had growing international distribution business and it is continuing to grow. I know I didn't ask that question. In the third quarter, somebody asked me, how did I think we were going to do in the fourth quarter on the distribution and production business? And I said, I thought it was going to be okay. Because even though The Outpost was such a great hit in 3Q, I felt that there was a pretty diversified set of international sales out there that we're going to basically make up for it and I would have been right, except for the Willy's delivery issue. So unfortunately, we delivered Willy's on New Year's Eve, and apparently that's not 2020 anymore. It's now according to the count, and so it's 2021. So you guys were happy. Teach me about the new calendar that exists out there where that's the reality. Anyway, thanks John. Operator, thanks for coming and everyone. That's going to wrap this up today. Thank you all for joining us. We appreciate it. And I hope to talk to you all soon. Take care.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect.