Chicken Soup for the Soul Entertainment, Inc.
Q2 2018 Earnings Call Transcript

Published: 15 Aug 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Chicken Soup for the Soul Entertainment Second Quarter 2018 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 Mr. James Carbonara of Hayden IR. Sir, you may begin.

[James Carbonara:]

Thank you and welcome. With me on the call today is William J. Rouhana, Chairman and Chief Executive Officer; and Scott Seaton, Vice Chairman. Following this discussion, there will be a moderated Q&A session open to participants on the call. We appreciate having the opportunity to provide an update on the business operations and review the second quarter financial results. During this call, management will make forward-looking statements. These statements are based on the current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the cautionary text regarding forward looking statements contained in the earnings release issued today, which also applies to the content of this call. I would now like to turn the call over to William Rouhana, Chairman and CEO. Bill, please go ahead.

[William J. Rouhana:]

Thank you, James. Good afternoon everybody and thank you for joining us today. There is lot to cover on this call. Our second quarter results are marked by a significant increase in our online network business, securing of additional production commitments that put us ahead of pace against last year, a highly successful $16.2 million public offering of our new series A perpetual preferred stock, and subsequent to the quarter end a material return to our capital – capital to our shareholders in the form of a special one-time dividend. Importantly today, we signed a definitive purchase agreement to acquire Pivotshare, a global subscription-based, video-on-demand service, and for the purposes of this call we will refer the subscription video-on-demand as SVOD. At a very high level, we delivered total revenue of $3.1 million for the second quarter, in line with analysts’ expectations. Adjusted EBITDA was $400,000, which was also in line with expectations. We made additional progress towards securing our television production commitments. For the year, we have had 12 half hours delivered in Q1 and 20 more half hours now committed for production. Based on these results and increasing visibility into the second half of the year, we’re confident we will achieve our outlook for 2018. So let me go through each of our three business areas. First, our video-on-demand business, which we call online, networks in our statement of operations and for this call I will refer to as VOD, are comprised of six advertisers supported video-on-demand networks, A Plus, Popcornflix, Popcornflix kids, Popcornflix comedy, Españolflix, and Frightpix. We made significant progress towards expanding our presence in online networks during the quarter. Our revenue increased 690% from Q2 of 2017 to Q2 of 2018.Our ad requests increased 67% year-over-year from $15 million per month to $25 million per month. This is the July numbers. In the three quarters since we acquired Popcornflix, our average monthly views have exceeded 24 million per quarter compared to approximately 19 million views per quarter for the prior three quarters, so lots of progress on all metrics. Today, we’re pleased to announce that we signed a definitive agreement to acquire Pivotshare, which is a global subscription video-on-demand service offering channels across a variety of categories of content including music, sports, religion, arts, and culture, lifestyle and family. As we have previously stated, one of our fundamental objectives for this year was to launch our SVOD business. Pivotshare has a series of SVOD channels online with 28,000 hours of programming, that’s approximately $2.5 million of revenue annually, 25,000 paid subscriptions with an average monthly revenue of $9 per subscriber. After our recent perpetual preferred stock offering, we decided to offer Series A preferred shares as an acquisition currency to the Pivotshare shareholders. They agreed to accept $3.35 million of the $4.35 million purchase price, which excludes our closing costs. In the form of perpetual preferred stock, the balance of the purchase price is 74,235 shares of our common stock, all of which we had repurchased through our stock buyback program and $257,000 in cash. Pivotshare is expected to generate approximately $1 million per year in cost savings for us which is an approximate 23% return on this investment annually. Using our preferred stock as an acquisition currency with a 9.75% coupon and focusing on accretive acquisitions like this one, we’ll substantially and rapidly grow our business while adding to our cash flow. Acquiring Pivotshare secures our presence in the VOD – in the SVOD space earlier than we had projected. We can now deploy our already owned content libraries as SVOD services quickly and at little or no additional cost. The pending acquisition which should close September 1st will incrementally advance the transformation of our business and launch our SVOD space. Together with our existing online networks, our annual VOD revenue will now exceed $5 million and will generate substantial EBITDA. As we said in our last earnings call, there is no doubt that video streaming and online video-on-demand are contributing – are continuing to disrupt and to be a key driver of growth in the entertainment business. Now the value of these online VOD services appears to be increasing. Last month, AMC acquired RLJ for more than a quarter of billion dollars. It is reported that Sony is valuing its AVOD service Crackle at approximately $200 million in connection with a strategic transaction, and GAIA’s market value is approximately $300 million. These valuations indicate that our Popcornflix and Pivotshare assets together have great value. We believe this is not yet fully reflected in our current market valuation. Now, let’s talk TV and film distribution, our second revenue category. We licensed TV series and movies worldwide across all media including theatrical, home video, pay per view, free cable and pay television, VOD and new digital media platforms. As you recall, we own copyright – own the copyright and hold long-term distribution rights to approximately 1,200 television series and films in our library in this part of our company. The most important predictor of results in this part of our business is our pipeline of acquired product. Our existing library generates approximately 50% of revenue in this area, and the balance of revenue generally comes from newly acquired content. Not surprisingly when we took over Screen Media, we found there was work to be done in filling the 2018 pipeline. We successfully acquired enough content to fill the pipeline through the end of the first quarter of 2019. We have released 33 films in 2018 and acquired or already targeting our first 10 films for 2019. Included in our pipeline for this year is the film Bel Canto starring Julianne Moore, which is being released in September. You may have seen the recent favorable press coverage in Entertainment Weekly and Vanity Fair about this film. Julianne is confirmed to be on Late Night with Seth Meyers, the Rachael Ray Show and the Today’s Show to promote the film. Now, let’s turn to TV series and short form video production. This has been the bread and butter of our business for our first three years. It has and continues to generate significant revenue, adjusted EBITDA as well as library rights for the businesses as we hoped. We had great success obtaining sponsors and obtain sponsor coverage for four series in 2017. Our strategy of only producing series after we have obtained commitments for more than the production cost has clearly worked. We have produced 111 half hours of television series using this method. The series have aired on eight major networks

[Scott Seaton:]

Great, thanks Bill. Total revenue for the second quarter of 2018 $3.1 million, which is inline with the analyst expectations for a softer quarter sequentially from Q1. And that is compared to $793,000 in the second quarter of last year. The increase was primarily driven the acquisition of Screen Media and nearly a seven-fold increase in online network revenue. So breaking this down, by our three revenue categories, first is online networks, which is our APlus and VOD networks. Revenue was $725,000 in the second quarter of 2018, compared to $92,000 in the year ago quarter. As we noted last quarter, we limit the online networks category strictly to owned and operated networks. In television and film distribution our second business line, this includes our traditional – global distribution of TV series and movies through license agreements across all media platform. And it generated $2 million in the second quarter of 2018 versus zero in the prior year, which was before our acquisition of Screen Media. Television and short-form video production includes revenue associated with our Chicken Soup for the Soul original TV series and generated revenue of $306,000 in the second quarter of 2018, compared to $701,000 in the year ago quarter because no new episodes became available for delivery. Overtime, we continue to expect in the Pivotshare acquisition evidences that our online networks revenue will become the primary driver of our business. Gross profit for the second quarter was $1.1 million or 39% of net revenue, compared to $472,000 or 60% of net revenue for the year ago quarter. The lower gross profit percentage results from a $1.2 million of non-cash amortization of the film library in our traditional distribution business, which is required by GAAP to be included in cost of goods sold. Without this non-cash charge, the gross profit would have been $2.3 million or 79% of net revenue, which is higher than last year. Operating loss for the three months ended June 30, 2018 was $1.3 million, compared to $162,000 for the year-ago period. The increased operating loss results from the same $1.2 million of non-cash amortization charge of the film library. Without this non-cash charge, the operating loss would have been $92,000, or slightly better than last year. The net loss for the second quarter of 2018 was $1.4 million compared to a net loss of $699,000 for the second quarter of 2017. The increased net loss results from that same $1.2 million non-cash amortization of film library. Without this non-cash charge the net loss would have been $200,000 which is significantly better than last year. Adjusted EBITDA for the second quarter of 2018 was $400,000 compared to $166,000 for the comparable period of 2017. Moving on to the year-to-date results, total revenues for the six months ended June 30, was $9.1 million compared to $2.2 million in the year-ago period. The increase was driven primarily by the acquisition of Screen Media in November 2017, and the growth of online networks. Revenue was generated as follows

[William J. Rouhana:]

Thanks Scott. On the net of all is we continue to have a strong balance sheet, excess cash, ready access to capital, proven ability to use our preferred equity as an acquisition currency, pending acquisition, a pending acquisition that supports our shift in the composition of our business towards more online network revenue and we’ve returned value to our shareholders. We’re executing against our business strategy with performance as expected in the first half and heading into a stronger second half, reinforcing our confidence in 2018’s targets. We still expect the fourth quarter to represent the highest revenue by far, although we’re making significant progress towards reducing our seasonality. This now concludes our prepared remarks. Operator, I’d now like to open the call for questions, if there are any.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Dan Kurnos with Benchmark Company. Your line is now open.

[Dan Kurnos:]

Great. Thanks. Good evening. Bill, just a couple questions on Pivotshare if I could, got some of the metrics in the release, but if you could just talk about the blend of original versus license content and how that sort of messes, you said in the release that it fits nice through some of the Chicken Soup stuff, so maybe give us a little bit of color on how the content fits with your library and what you are trying to build on the VOD front?

[William J. Rouhana:]

Okay. So, the interesting thing about Pivotshare is all of its content comes from third-parties, Dan. So it was originally conceived as a technology platform, but actually Ashton Kutcher recently described in the Shopify for online video content. A place where people could go and load their own content app, create their own SVOD channels, and generate revenue for themselves. Over time, some 7,000 or so publishers as they call them, loaded content on to the system or signed up to load content, so I made 100 or so loaded content up and about 10 or 15 of them became the key sources of revenue, and those are in the areas, the categories that we talked about in our press release that many of which you know are relevant to our business just by the mere description of them as lifestyle, family, arts and culture, religion, et cetera. As we looked at it – when we started looking at Pivotshare, we thought about it as a technology platform, as we began to look at it further and further, we realized it had become an online network of networks of the sort that we wanted to develop that we have talked about developing, and that it would not only generate for us, not only create for us a way to launch our own SVOD network very rapidly, but it would also give us relationships and access with other – what they call publishers, what I would call, producers, that would give us a chance to work with them on their content and we could work together. One of the great things that they created in this system they have is this kind of ecosystem where publishers will call them producers for this conservation. Work with each other, share content, and also share promotion and publicity. It’s really a very smartly designed business and perfect for somebody like us who wants to create a series of online networks. So I know, that’s not exactly the answer to everything you asked Dan, but that’s the essence of Pivotshare. Do you want to follow-up with some other questions?

[Dan Kurnos:]

Yes. I mean that’s helpful. So if you use it as a tool to kind of to launch your VOD ambitions, I don’t know if you have – care to share an updated time horizon on getting a Chicken Soup branded VOD channel out there. But assuming, you don’t want to go down that path just yet, can you talk just about how you envision sort of segregating the buckets here, so that way you have 3P content, I’m assuming you can do some cross pollination with some of the ONO content you have on your film distribution platform. How do you kind of – then you layer on your own CSSE branded stuff. How do you kind of keep brand royalty, how do you advertise all of that? Am I thinking about it kind of the right way from sort of a vision perspective.

[William J. Rouhana:]

First of all, you are right on with everything you just said, you’re dead on with the idea. And some of this will happen very rapidly. So for example, our content will be quickly uploaded into the Pivotshare system, it will be available for some of the publishers to use, just the way we do today when we license our content to third-parties except now it will be on our group of networks, our group of affiliated networks. So that will be almost immediate in that context like 90 days. Beyond that, we’ll start segregating, I don’t know, in previous conversations, we’ve talked about how we would look at our content that exists today in our library and divide it into categories and gradually launch different channels with the Chicken Soup name around those categories, but what we couldn’t answer for you is, how we are going to actually do that, how that was actually going to be delivered to consumers, how we’re going to actually bill and collect, how we’re going to actually track all of these things. Well, the answer is now in front of you. The Pivotshare is going to be the way we do all of that because it is the base on which we will now run our SVOD, and by the way, our AVOD businesses too in the future. So this will now start to happen pretty quickly, we’re already in the SVOD business because of the purchase, we’ll start to roll out our own networks between now and the end of the year as we also load up our own content, Dan. One of the great things about this, if you think about that Shopify analogy that Ashton used, by it’s very nature this is designed to make it simple to load content into channels and then to manage them on a channel by channel basis. It gives us a lot of information about the way people are using and consuming video because we see it across a whole series of other peoples’ content as well as our own, and we can learn from that what works and what doesn’t. There’s so many aspects of this that are enabling for us a company that aspires to build a major SVOD and AVOD business. The other thing, we’re going to move all of our existing online networks on to this platform even for the advertiser supported aspects of it, and that will take a little bit longer than launching our own SVOD networks. But it’s all going to be on one platform for us now. This is going to avoid kind of legacy problems that people have when they bring multiple technologies together, we’re going to have one great technology. We get for really talented tech guys with this acquisition, who have built this entire system, they are signed on for three years each at the very least, they have various things that tied to them – so that period of time. We will – because the system is fully developed and therefore generating this 200 – somewhat thousand a month just year in and year out, day in and day out. We now have their time available to organize and drive all of the technology across our company, which is how we’re going to save over $1 million a year in cost. And this means that our bottom line will improve and our cash flow will improve as a result of this acquisition as well.

[Dan Kurnos:]

Got it. That’s really helpful. Thanks, Bill. So then let me just close the loop by asking sort of the next question and I’ll get back in the queue here. Just on – sort of the outlook here, I assume you’re not going to try to handicap, what you think, this thing grows this year or over the next, call it 18 months as you integrate all of the contents, I mean, any sort of directional granularity is helpful there. But on the acquisition front, do you feel like your sort of cemented now on the tech stack perspective and it’s more about content or is there a still a missing piece on tech that you kind of need to integrate before you’re comfortable that you have the underlying base set.

[William J. Rouhana:]

We’ve got the underlying base, that part we have. This gives it to us, I’ll tell you where a tech might play a role in our future but I’m not sure it needs to or will and that’s one level down, Dan, where you do network management in order to ensure quality of service. Right now, we outsourced that short of stuff as do most people, there are a few technologies that we seen that might help us take control over that cut our cost a little bit further and give us even more assurance that our quality of service will stay high. This issue is really brought to ahead because of the changes in the SEC’s view of Internet freedom let’s call it. And we have to make sure that we’re always going to be able to manage delivery of our services without ever being hijacked by one of the underlying carries. So that’s the only place there is a technology issue in our lives yet. And I don’t – it’s not a pressing one, but it’s one that we’re looking at and evaluating. The next acquisitions we do are much more likely to be content and/or digital publishing. We’re not trying to be huge here, we have told you all that we have found that there is more than one or two players who have said, that they will be willing to take our Series A preferred stock as consideration. So if we can continue to offer up that those shares, which have no dilution for our shareholders. And when you – and when we measure the dividend cost, so that we can be confident that we’re getting a multiple back in increased cash flow and EBITDA by those acquisitions. We’re going to use that currency all day long and it will help us accelerate the acquisition process, because we will be generating increased cash. We have a fixed cost of our acquisition currency that we know in advance. And if you take a look at the Pivotshare deal then, it’s really so interesting, right? They are taking $3.35 million in the preferred, which means we’re going to pay them roughly $300,000 a year of dividend. But we’re going to make $1 million a year on that, that’s three times as much money. Now it’s all the $1 million, we’ll go to EBITDA, but the net cash flow will be over – roughly three quarters of $1 million, we get done finishing of the process. On top of that, we’re going to pick up, I didn’t really say this in my remarks, about $290,000 of cash in the company and we’re giving them $257,000. So, this is the cash flow positive event from the beginning and we’re using shares that we bought back to tie up the key tech guy Adam, so that the – in the end, we have added no real dilution to the company, it’s a fantastic structure for the transaction and a good prototype to be thinking about in the way we look at things and the things we want to acquire. When we can get those kind of accretive results, right up front, especially, in an asset we consider strategic, we’re excited and happy, and that’s why we feel that Pivotshare. So it’s got to grow. In terms of growth, let’s talk for a minute about the AVOD growth we’ve experienced. Because I think that’s really, really important. We gave you a lot of numbers in the – when we’re talking about the online networks, but I’m not sure if they all don’t just blend together when you hear them presented so quickly. We took a look at the – at the number of ads we were serving – served in 2017 versus now. So, our average monthly ad request in 2017 on Popcornflix were 12,700,000 a month. This year, there are 16,350,000 a month. What’s even more dramatic than that though is in July of this year we served 24,770,000 ads versus 12 million last year. Popcornflix is doubled in ad requests at one year. This is a pretty big – pretty that was July of last year that’s 12.7 million – sorry, I might not have said that. That’s a dramatic increase. So – and I’m not saying we’ll do exactly the same thing in Pivotshare, but we’ve taken this thing and we really fixed it, it’s growing rapidly. We have it in a fantastic place and I think it’s worth talking about the comparisons for some of these other AVOD and SVOD businesses at some point. But in any event, we’ve demonstrated that when we get into this space and we analyze these companies the combination of marketing, technology, taking a look at the way these things organize that we can have an impact and I think we’ll have a similar impact on Pivotshare driving more consumers, more customers, more content and additional publishers not only our own to generate revenues. So, I’m pretty bullish on that.

[Unidentified Analyst:]

All right. Thanks for all the color. I’ll get back in the queue.

[William J. Rouhana:]

Okay, thanks.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from Mike Grondahl with Northland Securities. Your line is now open.

[Mike Grondahl:]

Yes. How are you guys? Hey, Bill, one follow-up on Pivotshare’s. I don’t know if I heard when you thought you would brand something there Chicken Soup for this all. Any ideas or a timeline or how do we think about maybe, something being branded Chicken Soup?

[William J. Rouhana:]

This year, Mike – would be what I would expect to launch, one of the Chicken Soup channels, I think it will be, I’m going to guess, it’s going to be the family friendly one, the Chicken Soup is for family and kids channel would be my guess, which is really just another name for Popcornflix Kids. So, that would be the easiest one to quickly move onto the platform and add the offering as an SVOD service in addition to an AVOD service, which is as you know, we’ve planned to do with all of our channels.

[Mike Grondahl:]

Eventually, right, okay. Yes. I think it will be really interesting to see a branded offering. So, that’s great, so that’s – now you have the back office in the platform to do it. Okay. And then can you talk a little bit about The Fixer looks like it quickly picked up four sponsors.

[William J. Rouhana:]

Yes.

[Mike Grondahl:]

Which is great, talk about that process and the significance of it.

[William J. Rouhana:]

Yes. Well, I think that’s a good question, last – this is the first time, we had a multiple sponsor show, and I think it’s probably no secret to most people who are listening that, two of those four sponsors are Ashton Kutcher investment companies, companies that you’ve invested in through some ventures that would Acorns and Handy, and he is the executive producer of the show, the creator of the show, and it may not be as obvious to Dan Rosensweig, who actually was the CEO of Chegg, is really what Ashton call as mentor. And then Dan sits on the board of Adobe, I mean the time you get done, it’s one – very good web of relationships that are being used to create a great series of very incredible departments right now, in terms of the topic in this country. So, it’s – this was, the way this developed, which is kind of people with relationships all trying to attack the same problem, trying to figure out how it relates, how to use it in their business in the appropriate way is our great model for us to try to replicate over and over again. And of the three series that we’re very close to getting launched that are not yet announced, two of them are single sponsor series like our previous ones. One it’s a renewal and you guys can guess which of this. But the third one is also an amalgam of sponsors, who are coming together around an issue, I don’t want to pretty get down to it. So but coming together around an issue, which they care about, but which also relates to their business, and it’s a very similar model, Mike, through the model for The Fixer. Because all of the stuff we do obviously have some social purpose, some aspect to it that makes the Chicken Soup. And what we find is the sponsors like COB sometimes like to come together around our subject matter that’s important to them and they think relevant to their business and then where we can integrate them into a series that also shows that they care about the people who are their customers. So, it’s – this one is a good mile for what you’re going to see. I think our world is going to come down to a single sponsor shows like vacation rental potential, like Hidden Heroes has been and the multi-sponsor shows that are organized around a theme like The Fixer like this other one I’m describing it. These are – I think that’s kind of what we’re seeing is the two different ways, sponsors are organizing around our stuff.

[Mike Grondahl:]

Got it. Yes, it really does. Congratulations on some of the strategic process. thank you.

[William J. Rouhana:]

Thank you.

[Operator:]

Thank you. I’m not showing any further questions at this time. I would now like to turn the call back over to Bill Rouhana for further remarks.

[William J. Rouhana:]

All right. Well, it’s – we’re excited about this Pivotshare acquisition as you all can tell. It was a late night last night, so if we found a little tired, we apologize. But we’re there, we got it done, it’s a very important step for the company, a great financial transaction and a great strategic transaction. Thank you all for joining us and we’ll talk to you all soon. Good bye.

[Operator:]

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