Chicken Soup for the Soul Entertainment, Inc.
Q3 2018 Earnings Call Transcript

Published: 20 Nov 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Chicken Soup for the Soul Entertainment Third Quarter 2018 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 may be recorded. I would now like to turn the conference over to Investor Relations, James Carbonara. Please, go ahead, sir.

[James Carbonara:]

Thank you, and welcome. With me on the call today are 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 the participants on the call. We appreciate having the opportunity to provide an update on the business operations and review the third 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 on November 14, 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 Rouhana:]

Thanks James. Good afternoon and thank you for joining us today. We had a very strong third quarter. Our year-over-year revenue increased 7 times and our adjusted EBITDA for the nine months increased over 10 times. We're still expecting our fourth quarter to be our best quarter by far. Our long- and short-form video production business has continued to grow as we expected, and our target of 60 half-hours for the year is well in sight. We advanced our online network strategy in the third quarter with our acquisition of leading global SVOD platform Pivotshare. On top of that, we completed the acquisition of Truli.com and we announced a fourth season of Chicken Soup for the Soul's Hidden Heroes, which by the way, now has 17 episodes rather than the 15 we announced in the press release originally. And at this very moment, we have four series very much in the middle of production. At a very high level, we delivered total revenue of $6.6 million for the third quarter and our adjusted EBITDA of $3.1 million brought us to $15.7 million in revenue for the year-to-date and $5.2 million in adjusted EBITDA year-to-date. So, let's go through each of our business areas beginning with our video-on-demand business, which as you know we call online networks at our statement of operations, and for this call, I'll refer to that as VOD. We've now accumulated over 35,000 hours of programming to use on our VOD networks, and we had an extraordinary third quarter for this business with some special one-time direct sales that may or may not be repeated in the near term. We now have seven ad supported video-on-demand networks; A Plus, Popcornflix, Popcornflix Kids, Popcornflix Comedy, Espanolflix, Frightpix, and our most recent acquisition Truli.com. Our ad requests increased 67% year-over-year from $15 million per month to $25 million per month. Our watch time in September was 246 million minutes, increased to 268 million minutes or 9% higher in October, and it's currently pacing at 32% higher than that for the first 10 days in November. I mentioned our Truli.com family-friendly and faith-based VOD network. We acquired Truli adding an additional channel to our AVOD networks increasing our number of networks to seven. In doing so, we gained an additional 2,500 hours of programming, which brought our content library to more than 35,000 hours. We plan to include some of the Truli content on our Popcornflix Kids channel, and created Truli branded subscription channel using Pivotshare. As you know, we acquired Pivotshare global subscription video-on-demand platform or SVOD platform. And as a reminder, Pivotshare provides the technology needed to launch our subscription-based Chicken Soup for The Soul branded VOD channels. We’ve successfully integrated Pivotshare into our business, and we've already begun to realize the approximate $1 million of cost savings that we expected. As a standalone business, Pivotshare generates approximately $2.5 million in annual gross billings and has approximately 25,000 paid subscriptions with average monthly billings of approximately $9 per subscription. Now, I’m distinguishing revenue from billings, because for GAAP purposes, we are only able to include our share of the billings and revenue. And as a consequence, we can only recognize approximately $800,000 of its current annual gross revenue. Nonetheless, this acquisition is immediately accretive to our business. Acquiring Pivotshare incrementally advances the transformation of our business and it enables the rapid deployment of content libraries we already own at little or no additional cost. Together with our existing online networks, we expect our annual online network revenue, including gross billings to exceed $5 million and generate substantial EBITDA. In our television and film distribution business, we own and license TV series and movies worldwide across all media, including theatrical home video, pay per view, free cable, and pay television, video-on-demand and new digital platforms. We currently own the copyright and hold long-term distribution rights to approximately 1,200 television series and films, and our existing library generates approximately 50% of our TV and film distribution revenue with the balance derived from newly acquired content. We're well on our way towards acquiring the films we need for 2019. However, we still have several big releases in the fourth quarter, including The Mercy, starring Colin Firth and Rachel Weisz, which was released in Australia earlier this year and will hit U.S. theaters at the end of November. And on the docket for holiday release at the beginning of December is an animated feature, Elliot the Littlest Reindeer, starring Josh Hutcherson, John Cleese, and Martin Short. Turning to our television and short-form video production line of business where we have been extremely successful generating significant revenue and adjusted EBITDA, our approach to producing content after we have obtained sponsor commitments exceeding the production cost reduces our operational and financial risk and provides us with reliable content for our online network business. We have aired on eight major networks, including CBS, The CW, Discovery Life, Discovery Family, TLC, FYI, A&E, and Netflix. For 2018, we're on target to produce and deliver 60 half-hour equivalents of programming for this part of our business. As stated earlier, we have four series currently in production, and already have 53 half-hours of long-form programming scheduled for delivery by the end of the year. We have produced and delivered 132 sponsored short-form videos this year. At an average of 5 minutes each, these short-form videos add another 22 half-hour equivalents to our total for the year. Some of these long-form programs were contracted for in 2017. In 2018, we have already contracted for 52 half-hours of long-form programming, 11 of which will be delivered in 2019 in addition to the 132 sponsored short-form videos for 2018. We are currently in discussions on additional series, some of which we expect to contract for before the end of the year; and for clarity, included in the delivered shows this year are nine episodes of Chicken Soup for the Soul's Hidden Heroes from Season 3; three episodes of Vacation Rental Potential from Season 1; 10 episodes of Vacation Rental Potential Season 2; 10 episodes of Going From Broke Season 1; 17 episodes for Chicken Soup for the Soul's Hidden Heroes Season 4; and four episodes of an additional show that is currently in production, and we'll tell you more about soon. We're using all of these resources to accelerate the transformation of our business and to create a network of online networks under the Chicken Soup for the Soul brand. We plan to launch the equivalent of our AVOD networks as SVOD networks using our Pivotshare technology. We continue to believe that acquisitions represent an opportunity to add meaningful value to our company. We are actively monitoring and evaluating a pipeline of acquisition candidates, we're being selective in our consideration keeping our balance sheet strong and using the flexibility of our Series A preferred shares as an acquisition currency. We've got a scalable platform in 2018 and 2019; we expect continued growth. With that, I'll turn the call over to Scott Seaton for more detailed review of our financials. Scott?

[Scott Seaton:]

Great. Thanks, Bill. Total revenue for the third quarter of 2018 was $6.6 million, which favorably compares to $48,000 in the third quarter of last year. The increase was primarily driven by growth in all of our revenue categories. Breaking this down further by our three revenue categories; first is online networks, which are our VOD networks, this revenue category is strictly limited to owned and operated networks for the purpose of our reporting, which is important for investors to understand when you evaluate our business relative to other players in our industry. Revenue was $1.8 million in the third quarter of 2018, compared to $48,000 in the year ago quarter. Over time, we continue to expect online networks' revenue to be the primary driver of our business. Our second line of business television and film distribution, which includes our traditional global distribution of TV series and movies through license agreements across all media, generated revenue of $2.5 million in the third quarter of 2018 versus zero in the prior year, which is before our acquisition of Screen Media. Television and short-form video production, which includes revenue associated with our Chicken Soup for the Soul Original TV series, generated revenue of $2.3 million in the third quarter of 2018, compared to zero in the prior year. We're beginning the process of delivering episodes earlier in the year thereby balancing revenue between quarters as we said, we would do. Gross profit for the third quarter was $4 million or 62% of total revenue, compared to a modest $48,000 in the year-ago quarter. Our 2018 gross profit included the deduction of $1 million of non-cash amortization of our film library in the company's traditional distribution business, which is required by GAAP to be included in the cost of goods sold. Without this cash film library amortization charge, the gross profit would have been $5 million or 78% of total revenue. Operating income for the three months ended September 30, 2018, was $1.1 million, compared to an operating loss of $647,000 for the year-ago period. Without that non-cash film library amortization charge, the operating income would have been $2.2 million or 33% of total revenue, which is well above last year. Net loss for the third quarter of 2018 was $97,000, compared to a net loss of $522,000 for the third quarter of 2017. Adjusted EBITDA for the third quarter of 2018 was $3.1 million, compared to an adjusted EBITDA loss of $340,000 for the comparable period of 2017. A reconciliation of GAAP to non-GAAP measures is included in the press release we issued last week on November 14. Turning to the year-to-date results, total revenue for the nine months ended September 30, 2018, was $15.7 million, compared to $2.3 million in the year-ago period. The seven times increase was primarily driven by growth across all of our businesses. By line of businesses, online network, which again includes VOD networks, A Plus and Popcornflix, generated $3.2 million in revenue in the first nine months of 2018, compared to $399,000 in the year-ago period. The increase is primarily due to growth in Popcornflix and on YouTube, plus the acquisition of Pivotshare. Television and film distribution generated revenue of $7.8 million in the first nine months of 2018, compared to zero in the year-ago period, reflecting the acquisition of Screen Media. And finally, TV and short-form video production generated revenue of $4.7 million in the first nine months of 2018, compared to $1.9 million in the year-ago period. The significant increase reflects an increase in the number of episodes that became available for delivery of broadcast, as well as the delivery of a number of short-form videos. So, licensing revenue earned on previously delivered episodes also added to the revenue increase. Gross profit for the nine months ended September 30, 2018, was $7.8 million or 51% of net revenue, compared to $1.5 million or 95% of net revenue for the year-ago period. The change in percentage of gross profit resulted from $3.7 million of the non-cash amortization of our film library in our traditional distribution business, which is required by GAAP to be included in the cost of goods sold. Without this non-cash film library amortization charge our gross profit would have been $11.5 million or 74% of total revenue, which is well above last year. Operating loss for the nine months ended September 30, 2018, was $284,000, compared to an operating loss of $268,000 for the year-ago period. Without the non-cash film library amortization charge in 2018, we would have had an operating profit of $3.4 million or 22% of total revenue, which is substantially greater than last year. Adjusted EBITDA for the nine months ended September 30, 2018, was $5.2 million, compared to $497,000 for the year-ago period. That's 10 times larger. Turning to our balance sheet. As of the September 30, 2018, the company had $12.3 million of cash and cash equivalents compared to $2.2 million as of December 31, 2017, and outstanding debt of $6.9 million as of September 30, 2018, compared to $1.5 million outstanding as of December 31, 2017. The cash balance does not take into account today's $3.5 million completed preferred stock offering. We returned cash to holders of our Class A and B common stock in the form of a special dividend of $0.45 a share, totaling $5 million on August 10 to holders of record as of August 6. For 2018, we’re reiterating our full-year outlook of $36 million of total revenue and $18 million of adjusted EBITDA. We expect our fourth quarter results to be up sequentially from the third quarter, in line with the historical seasonal trends of our business. The fourth quarter will also significantly exceed the results in the fourth quarter of last year. We again encourage investors not to emphasize quarter to quarter fluctuations as the current composition of our business is not conducive to linear growth, but over the long term, we believe we will deliver strong growth and increasing profitability, while achieving a significant shift in the composition of our revenue and earnings sources. Now, I'd like to turn the call back to Bill.

[William Rouhana:]

Thanks, Scott. Well, the net of all of this is, we've got a strong balance sheet, excess cash, ready access to capital, a proven ability to use our preferred equity as an acquisition currency and we've returned value to our shareholders. Turning to 2019, we've taken a look at analyst estimates and even without additional acquisitions, we hope to exceed their current projections. So, this concludes our prepared remarks, operator, and I'd like to open the call for questions if there are any.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Mike Grondahl with Northland Security. Your line is now open.

[Mike Grondahl:]

Hi, thanks, Bill and Scott. Could you just give us a little bit of an update sort of at Popcornflix and A Plus, just some of the progress you've made the last three months and then just spend a couple minutes on Truli and sort of what you saw there and how you think that grows kind of under your umbrella?

[William Rouhana:]

Sure Mike. So, if you look at the numbers for revenue for online networks, at almost $1.8 million in the quarter, that's a tremendous jump over the prior quarter and certainly an even bigger jump over the prior year, so the revenue is starting to come through nicely. It's driven, as you know by a combination of things, CPMs, which were up since we took over the business, I think about 30 some odd percent, if I remember the number correctly, and also driven by the number of ads we serve, which were up 66% year-over-year. So, more ads, higher CPM, you're going to have higher revenue. This quarter was particularly impacted by the fact that we had some direct sales that as you know are even higher CPMs, and so that's one of the reasons why I caveat it by my conversation about this particular division by noting that we might not be able to repeat immediately the results from this quarter and online networks even though, overall, the line is moving upward pretty well. I mean that was a fairly extraordinary quarter, and I don't know that it continues at this pace, but we will add more channels and we will begin to add SVOD, and we – there are reasons to be very optimistic about the growth in that particular line of our business. It is in fact where our focus is. So, Popcorn is doing extremely well. Pivotshare was only in there for a month and a half, and it's solid as a rock doing exactly what we expected. Truli, it was kind of an interesting opportunity for us. We’ve always thought we needed to be in faith-based programming, as well as obviously we're in the family space, and Truli had amalgamated over a period of years some pretty significant programming relationships that organized them and had generated a fair amount of following on Facebook and the like, but hadn't really begun to monetize it when they ran out of money, which as you guys know, I've been saying for a while, one of the places we will have an opportunity to acquire assets at very low prices is going to be where people tried to build single online networks that cover only one category and that are niche based, but where they just, you know doesn't make economic sense to be in that business by itself. And sure enough, we were able to pick it up at a very – on a very good basis, where essentially, it's a deeply subordinated profits sharing arrangement. And so, we benefited from, I guess about $10 million of capital that went into that business that we got to deploy in our business at no cost. The art now of this is to get Truli up and running, to add an Ad Tech Stack to that and to move it to our SVOD platform as well. And if we do that well, then obviously it's going to be a great success for us in terms of the acquisition, but we have work to do there and we will do it. Sorry, Mike, that was a long answer, I know.

[Mike Grondahl:]

No, that’s okay. And then I guess the next one, can you just – I think you've said, you delivered – you have 57 of the 60 shows ready, and were the numbers you gave out like Hidden Heroes 17, Vacation Rental 3 and 10, were those what added up to the 57? Those were pretty quick.

[William Rouhana:]

So, not only did they – they added up to 53, that's actually the number I gave you, 53 delivered, 52 contracted, excluding the short-form videos, which would take you way over the 60 target that we had for the year, and excluding what we think will be a couple of more series that we likely to sign up even before the end of the year. So, 53 delivered this year, 52 contracted for this year, just long-form, add the short-form, you're way over 60 half-hour equivalents, and you'll see that flow through the numbers in the fourth quarter. When the deliveries – I mean with all of these currently in production with 41 half-hours currently in production and a bunch of short-form videos also about to be finished, that will all translate into revenue and EBITDA in Q4, which is one of the reasons we're still feeling we're on track for the year. That and the fact that we have expectations that the television and film distribution line will have its best quarter, and we are hoping that online networks will sort of stay where they are. When you put that together, that's how we actually get to what we hope – what we believe the year will be. But overall, we've kind of exceeded our expectations across these various -- really all three businesses at this point. So…

[Mike Grondahl:]

Yes. It seems to be going well. Thank you, Bill.

[William Rouhana:]

I agree. It is going well. Thanks for saying that.

[Mike Grondahl:]

Thanks a lot.

[William Rouhana:]

You’re welcome.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from the line of Lisa Thompson with Zacks Investment. Your line is now open.

[Lisa Thompson:]

Hi, guys.

[William Rouhana:]

Hi Lisa, how are you?

[Lisa Thompson:]

Good. So, let me ask you two questions. First, I saw that in the quarter that you did tuck [ph] revenues from Going from Broke, which I guess is the new name?

[William Rouhana:]

Yes.

[Lisa Thompson:]

So, how far off is that till it debuts and we find out what it is and it goes on air?

[William Rouhana:]

So, it will be completely finished by the end of December, and I can't tell you where it's going or when it's going on air yet, because as usual we don't get to make those kind of announcement, Lisa.

[Lisa Thompson:]

Right.

[William Rouhana:]

Only the actual exhibitors get to do that. But I will say that it really looks great. By the way, for those of you who haven't followed this, what was called the Fixer, the show we are doing with where Ashton Kutcher is executive producing at the show about student debt and overcoming student debt in order to build a life with some meaning and outside of the burden of that debt. That is now called Going from Broke, and it's – I've been seeing it, it's pretty amazing. It's very emotional by the way. It's very much like the biggest loser in the sense that really, we delve into the problems that cause the debt and then how to fix the debt and at least a small part of it in every single case is the kids overcoming their own inability to plan their lives better. I mean you go off on a risk there, but it's actually a great, it's actually a great series and it's looking amazing. So, sorry, Lisa.

[Lisa Thompson:]

That's okay. So, I'm just going to guess it's possibly the first quarter because I can imagine…

[William Rouhana:]

Yes, that's a fair guess, I wouldn't argue with you about that.

[Lisa Thompson:]

Okay. Cool. And then you have another mystery one that you haven't said anything about.

[William Rouhana:]

Yes. It's not meant to be a mystery, but this comes back to what a migrate frustrations with the role we play, which is that quite a lot of the time, we can't announce the series when we actually start them. It causes some anxiety on the part of our shareholders, I know. But there are other people who have rights of approval of when we can actually announce releases and until we get those approvals, we are in a position – like we actually are right now, we are one of our series is in production, it is fully sponsored by at least two sponsors, although I think there will be more. And at least four of the episodes will be delivered by the end of the year, with the balance to be delivered next year. There will be a total of 15 half-hours. And we can't tell you the name of it or who the people are yet, but we will soon, I promise. So, it's not meant to be a mystery, it's just the nature of our agreements – require approvals from other people, when me make these things. So, we will get the approvals and when we do, we'll make the announcement. But it'll be anti-climactic now after this call.

[Lisa Thompson:]

Well – no, it won't. Because then we have to see if it's going to be any good?

[William Rouhana:]

Well, I'm excited about this one.

[Lisa Thompson:]

Cool. So, let me just clarify something, so you said in – not distribution, in online, you had some sort of like exceptional direct ad sales or something.

[William Rouhana:]

Yes.

[Lisa Thompson:]

Can you can you quantify that. So that when I draw a straight line with my rule to the project the future, got to take it out?

[William Rouhana:]

It was several hundred thousand dollars. So, – I don't want to get too detailed. But you know, you get – we've always said that direct sales would significantly improve this business if we could make them. Now, so far, I've given you – we did one, I think it was two quarters ago that was material and then we've done one again this quarter, which – or actually more than one this quarter, that's been helpful. And both times, I told you don't expect it to repeat itself. So, you can decide whether you think we can do it again, but I think we'll get into a rhythm where it will actually be possible to think it's going to be repeatable, but for right now, it's still hit and miss, and I'm not a 1000% sure that we will do it every quarter, but obviously we're trying to do it consistently because it makes it material impact on the business. I mean, we – I think, probably everybody noticed, we exceeded expected EBITDA this quarter by on average about 10% over what everybody was thinking we would do, and that was a material contributor that the EBITDA that came from that sale would be a part of that, an important part. So, to the extent, we can continue to do it, we should be able to outperform and we'll keep trying.

[Lisa Thompson:]

Okay. As far as distribution, you called out specifically, The Mercy and Elliott, are those theatrical releases?

[William Rouhana:]

Yes. They're both limited theatrical releases. But the way we make money on those is by the day and day availability of those movies on TVOD on transactional video-on-demand and both those movies have really significant potential for the quarter and for the year and meaningful upside. We've had a couple that have done really, really well. We don't take a lot of risk because we do not spend the money on major theatrical releases, but we do see some pretty significant returns on these TVOD releases, and these two were – The Mercy is what probably the biggest movie we've had in years and years and years with Colin Firth and Rachel Weisz, as stars, they will. There's a fair amount of interest in that movie and Elliott is a Christmas movie, it's about a reindeer. So, I mean putting out at Christmas time, so it makes upset [ph]. So, we're kind of hopeful…

[Lisa Thompson:]

So, is there any way that we from the outside can find out if they are doing exceptionally well or just matters of this [indiscernible]?

[William Rouhana:]

You will have wait till we tell you. Because TVOD is, we get information from the platforms, but we don't …

[Lisa Thompson:]

Right.

[William Rouhana:]

That's only available to us. So, I mean, you could go on every platform and see if it shows up in the Top 10 or something. I mean, that's the one way to do it.

[Lisa Thompson:]

But then we would have nothing to – so we wouldn't have any [concern with it].

[William Rouhana:]

But it would be fun to check iTunes and Amazon and see if it jumps up at one of the – one of the big ones, but other than that, I don't know how else you will be able to figure it out. Anybody on the call who's got too much time on their hands, bored over the – over the holidays could spend some time doing that.

[Lisa Thompson:]

Or at least we could watch them, see if we like them.

[William Rouhana:]

That you should do because they're both really good movies.

[Lisa Thompson:]

Alright.

[William Rouhana:]

And I highly recommend that that you watch them, I think.

[Lisa Thompson:]

Where are they going to be at? Or you can't tell me that?

[William Rouhana:]

Every platform, you know iTtunes, Amazon, Apple's – every TVOD platform that you could imagine.

[Lisa Thompson:]

Cool. So, I just – to bother you, I think, didn't you talk about having an Analyst Day some times? Do you consider about that?

[William Rouhana:]

I don't remember ever saying those words, Lisa, but we certainly would not …

[Lisa Thompson:]

Really?

[William Rouhana:]

We certainly would not reject the idea. I think a good time for that would be early next year as it becomes clear how we are going to evolve some of the direction that we've got in, and as we, I hope, can give you some really great color on just how great 2019 could be. So, that might be a good time to consider something like that. There are a number of very significant things going on that we need to let sort themselves out before it would make sense to have such an Analyst Day, but I think they can sort themselves out before year-end.

[Lisa Thompson:]

Cool. Great. That will be something I look forward to. That's all my questions. Thank you.

[William Rouhana:]

Thank you. Thanks for joining us today. And I believe, operator, we're going to call it a day with that.

[Operator:]

Thank you so much. 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.