Cineverse Corp (CNVS) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cinedigm Corp. Fiscal 2018 Second Quarter Earnings Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I'd now like to introduce your host for today's conference, Ms. Jill Calcaterra, Executive Vice President, Corporate Communications. Ma'am, please go ahead.

Thank you, Liz. Good afternoon, and thank you for joining today's second quarter fiscal 2018 earnings conference call. Participating in today's call are Cinedigm's Chairman and Chief Executive Officer, Chris McGurk; Chief Financial Officer, Jeffrey Edell; and our General Counsel and Head of Digital Cinema, Gary Loffredo.

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 16, 2017, 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.

Thank you, Jill, and thanks everyone for joining us on the call today. On November 1, we closed and funded our game-changing transaction with Bison Capital that we've discussed with you on our last 2 calls. Bison now beneficially owns a majority of our outstanding Class A common stock. Very importantly, in connection with that closing, we retired the remaining approximately $50 million in convertible notes that we had been carrying on our balance sheet, completing the full elimination of the $64 million in notes that we were carrying a year ago. As another key part of this transaction, Mr. Peixin Xu and Mr. Peng Jin, both directors of Bison Capital, joined Cinedigm's Board of Directors.

This Bison investment brings multiple significant benefits to us financially, strategically and operationally. Let me reiterate those key benefits. First, Bison's equity investment provides significant growth capital to support our business initiatives after funding the full elimination of the remaining convertible notes I just described. This Class A common stock investment gives Bison majority voting control and clearly aligns their interest with those of all of our other common shareholders.

Additionally, this transaction will provide another $10 million in the form of a Bison loan by December 31 to provide more growth and working capital to the company. Besides the convertible note elimination, this transaction also gives us the opportunity to further refinance and/or retire the remaining higher interest debt in our balance sheet. We are currently working with Bison on a plan to reduce or refinance additional debt, potentially lowering our aggregate cost to capital by as much as 2% to 3% and further improving our liquidity.

Strategically, this transaction gives us the opportunity to leverage Bison's position as a major force in the booming Chinese entertainment marketplace where Bison already has key investments in film and TV production, film distribution and Internet-related mobile services. We will accomplish this by expanding our digital content and OTT businesses into China, the fastest-growing major entertainment market on the planet. This will create the potential for Cinedigm to become the first true China-U.S. independent entertainment studio.

This transaction also gives us much needed growth capital to solidify our position as one of the largest and most well-positioned independent content companies in the business with particular strength in the highest growth segment of the market, OTT, a projected $65 billion global business by 2021. Bison's investment in related businesses will be key catalysts in securing Cinedigm's business position as a major player in that booming market in both China and North America.

Not only does this transaction open the door for us in China to distribute content; it also provides the opportunity to launch our existing and new OTT channels there with particular focus on the fast-growing online and mobile marketplace. The online video market in China is projected to be a staggering $33 billion business by 2022. Reciprocally, this transaction will give Cinedigm the opportunity to release Chinese content and launch China-oriented OTT channels here in North America, representing another significant potential revenue source. Working closely with Bison and their related media companies, we are now preparing the details of our strategic plan for content distribution in channels in China and for Chinese content in channels in the U.S.

So adding all these key benefits up, we believe our expertise and track record in content distribution, digital and OTT, combined with Bison's significant investment in Cinedigm and business leverage in China, can potentially make us the go-to independent content company in both North America and China, the largest and fastest-growing major entertainment markets in the world, respectively. Combine all that with our much-strengthened balance sheet, and we believe it is very clear why this Bison transaction is game changing for Cinedigm.

Now let's discuss our ongoing business. From an OTT perspective, the Bison transaction now gives us the funds necessary to acquire and refresh more content to populate our channels and help drive subscriber growth. We're already very encouraged by the high volume of quality deal flow for further distribution of our channels as well as new channel ideas. We have closed 2 significant new platform deals that we will be announcing pending launch and have several more distribution and channel deals ready to close on the near-term horizon.

During the second quarter, we made our first international launch of our OTT business by bringing the Dove Channel into Canada on iOS and Android. And just last week, we announced our Dove Roku launch in Canada. With over 2/3 of the 37 million Canadians identifying themselves as people of faith, we expect that market to meaningfully contribute to OTT revenues in the coming quarters as we ramp up our marketing efforts.

Subsequent to quarter end, we announced that we have rolled out a 24/7 CONtv channel on the hugely popular social video service, Twitch. This new Twitch channel reflects Cinedigm's ongoing commitment to redefine the television viewing experience by providing viewers with both a lean-back and a curated on-demand option. Twitch, a subsidiary of Amazon, which began as a gamer-oriented platform for millennials, announced in 2015 that it had more than 100 million visitors per month. As of the third quarter of 2017, Twitch is the leading live streaming video service in the world.

On the OTT content front. Earlier this month, we announced that our Dove Channel original series, Frankly Faraci, has returned for a second season. This one-of-a-kind series provides viewers with an intimate, behind-the-scenes look at high-profile figures in entertainment, music, sports, business and politics whose lives and careers are inspired by faith.

In other channel news. Our first distributed channel, WHAM, a lifestyle channel focused on the incredibly large and fast-growing eSports and gaming businesses is expected to launch in the first quarter of next calendar year. Earlier in this quarter, we also entered into a transaction with media giant, Scripps, to bring Newsy, the next-generation national news network that provides "news with the why," to the Dove Channel. Newsy is providing the channel curated short-form video news stories throughout the day that are relevant for the Dove Channel audience.

And importantly, and the first of many pending deals, we recently closed a significant distribution deal to embed our OTT networks with a top 3 consumer electronics device manufacturer. This deal affords us critical placement usually only available to companies like Netflix, Amazon and Hulu and reflects the rising consumer value that manufacturers, telcos and MSOs are placing on our portfolio of channels. We expect to announce this agreement when our channels go live in this platform before the end of the year -- calendar year.

Additionally, we're about to close a major deal with a top 3 domestic telecom and media company to distribute our channels to their users. We will announce upon launch next year. And we are in conversations with other prominent Fortune 500 media and broadcasting companies about providing content, OTT services and cross-promotions for future initiatives in the space.

On the new channel front, we're also now in contract negotiations with 2 potential channel partners we believe would highly complement our existing lineup of services. We expect these branded channels to launch in calendar 2018.

These new and pending deals will not only provide additional ad support and subscription revenues but will also diversify us into fast-growing OTT revenue models, including channel license fees, sponsorships and revenue-sharing deals with brands and platforms.

In our distribution business, the SVOD revenue opportunity continues to grow rapidly in the U.S. And part of our digital strategy is focusing on establishing new SVOD outlets to diversify our income streams and further maximize our content ranks. In the past quarter, we have opened a dozen new U.S.-based SVOD accounts and are concluding deals with several new entrants that will begin to provide international reach as well.

In our entertainment distribution business, while we moved from our seasonally slowest period into our highest sales quarter, we continue to find success representing some of the key content players in the industry, maintaining physical distribution relationships with industry stalwarts such as Walmart, Amazon, Best Buy, Target, Ingram, Costco, Red Box and digital and television distribution arrangements with Netflix, Amazon, Google, Hulu, Apple, iTunes, Fandango, In Demand and many, many more.

From a digital point of view, our Hallmark TV series, When Calls the Heart, continues to overperform in the marketplace. And as we enter the holiday season, our Christmas movies are seeing very solid performance.

With that, I'll now turn things over to Jeff to review our progress in strengthening our balance sheet and our business results. Jeff?

Thanks, Chris. Our objective for the past year has been to raise new capital, which is the lifeblood of any company dependent on fresh entertainment content, to fund our growth. As Chris just outlined, we have now achieved that with the completion of the Bison investment. While we've transacted the deal and then waited for it to close for over the last 9 months, we have continued to focus our efforts on cost-cutting, deploying new systems and creating more operating efficiencies. Having cut more than $11 million in annual expenses, we are now a much leaner organization poised for more rapid top line growth. We will continue to focus on aggressively managing our cost structure as we move forward.

As Chris mentioned, we have made tremendous progress in reducing our corporate debt and strengthening our balance sheet during the past year and quarter. The Bison transaction allowed us to eliminate 100% of our remaining approximately $50 million in convertible debt. Keep in mind that we eliminated substantially all of this debt at more than a 50% discount to book value, thereby increasing the book equity of the company by over $25 million. The payoff of the convertible debt also served to reduce annual interest costs by approximately $2.5 million going forward.

Additionally, and as part of our new strategic partnership with Bison, we are working on a subsequent global refinancing of our entire balance sheet to further reduce interest costs and improve cash flow. We are now examining all higher interest loans where we could potentially gain up to 5 or 6 percentage point reduction in certain interest costs.

Importantly, this reduced annual interest cost, potentially, could also serve to free up Digital Cinema revenues and cash flows to be available for the entire consolidated business, whereas historically, Digital Cinema revenues have been limited to reducing the specific debt in that particular business segment only. This incremental free cash flow could amount to approximately $20 million during the ensuing 12 months, thereby freeing up more capital to invest in our content, OTT areas as well as in our new systems and technologies, which are extremely important to our future revenue and EBITDA growth. We will continue to update you on these calls as we make progress against these comprehensive refinancing plans.

Even before we implement this plan, I am pleased with the great progress we have already made in reducing our debt and improving our balance sheet. During the second quarter of fiscal year 2018, the company paid down on approximately $18 million in overall corporate debt. In regard to our ongoing balance sheet initiatives, we should not lose sight of the fact that we have been able to pay down overall company debt by approximately $200 million since 2013 with an approximate $76 million reduction through the end of December of this year alone when we add in the full retirement of the convertible notes earlier this month and inclusive of the projected paydown through the end of this calendar year.

The result of all the debt reductions leaves Cinedigm today with approximately $75 million in total corporate debt across all consolidated entities on its balance sheet, with only $12 million remaining on a recourse basis. The result of all the debt reductions leaves Cinedigm today in a very good position.

Although we have been in our seasonally slow sales period for our content distribution and OTT businesses, we are pleased with the positive momentum we are seeing and the subsequent financial results for the second quarter. I want to highlight some quarter and year-to-date metrics for you.

For the quarter, consolidated revenues were $16.3 million. Digital Cinema revenues were $7.9 million. Content and entertainment revenues were $6.3 million, and consolidated adjusted EBITDA was $5.9 million. For the year-to-date, if we remove a onetime accounting reversal of a noncash book item, the content and entertainment EBITDA, inclusive of corporate overhead in our OTT channel business, improved slightly over last year-to-date.

Ducking the trend in the world of virtual print fees, or VPFs as we call them, they're performing better than expected on the Digital Cinema front. The reason for this? We get paid VPFs based on each time a new film plays on a projector. As fewer major studio movies are released, they tends to stay in theaters for a longer time frame. And as subsequently, more indie films rotate in and out of theaters, our Digital Cinema revenues will increase.

In addition, we continue to actively pursue options to realize the significant residual value of the more than 4,600 digital projector systems we currently own and create additional revenue opportunities or convert the equipment into leverageable capital.

We are exploring options to see if our new relationship with Bison could help us unlock that potential in China where the theatrical market is still growing rapidly.

In our content business, our revised greenlighting process is now approximately 1 year old and is bearing solid results. In fact, one film we recently distributed, Hickok, which is a continuation of successes we have had in the Western genre, has more than doubled in terms of its IRR from our initial projections. Our targeted IRR was 58%. It is now approaching 144% in the first year alone since its release date. This clearly demonstrates the upside that our new greenlighting process and strong execution can provide. We are optimistic that this momentum will continue as we now move into our seasonally strongest sales period.

In our OTT business, with a third-party channel, WHAM, set to fully launch by Q1 of calendar 2018, we believe we now have a more profitable and minimal risk model to execute as the OTT marketplace continues to evolve. The WHAM model is an example of a revenue-sharing deal with no investment on Cinedigm's part. By leveraging our go-to-market know-how with our technology and content library, we believe this type of deal will allow us to financially participate in a number of profitably -- or profitable OTT channels with almost no financial risk.

In closing, I just want to reiterate that in addition to all the financial upsides and the infusion of much-needed capital, the new Bison relationship will open up a multitude of new revenue streams for us internationally, in addition to enhancing all aspects of the current revenue base, which should leverage or streamline the overhead structure. There is so much to be excited about.

Now I'm going to turn the call back to Chris. Chris?

Thanks, Jeffrey. We believe that the Bison transaction is game changing and transformative for the company for all the reasons that we have stressed on this and our prior 2 conference calls with you.

Bison provides the capital and the relationships to help achieve a bold, new vision for Cinedigm. We plan to become the first true independent China-U.S. studio strongly positioned to take full advantage of the booming OTT steaming business through our huge library of films and TV rights, our digital content distribution muscle and our proven expertise in providing top-notch OTT channels and services. We will aggressively leverage those assets in the world's fastest-growing major entertainment market, China; and in the world's largest entertainment market, North America.

With all that as a backdrop, I'd now like to open up the call for your questions. Operator?

(Operator Instructions) Our first question comes from the line of Terry Hackett with Hackett Management.

Jeff, the numbers came pretty fast there. I'd like to focus on cost savings so that I understand the buckets. The first bucket I think I heard was the aggregated G&A savings, which have been effectuated, are around $11 million, which was up from the noted $10 million during the last 2 quarters. The second bucket I think I heard was the retirement of the subordinated debt has allowed a $2.5 million go-forward interest savings. And the third bucket I think I heard was that all other aggregated debt on the balance sheet, if restructured globally, can save another $20 million go forward in financing charges?

Terry, you're close, so let me give this you. So the first bucket was, you're correct, was $11 million. That's annual savings and that was for SG&A, which includes, obviously, payroll. The second bucket, you're correct, the $2.5 million is just based upon removing the convertible debt. And then the third bucket is if we continue our global refinancing of the rest of the balance sheet and we reduce the prospect note, we reduce the second-lien note, which are the larger ones and maybe even the most at some point in time, we could save $3.5 million in interest arbitrage on that. So those will be the 3 buckets: $11 million, $2.5 million and $3.5 million. The other piece you heard was that should we be able to refinance with a global piece of debt across the entity to take out prospect in the Digital Cinema business, during the next year, it could free up about $19 million to $20 million of cash flow that would be available to the whole company. It's not lowering any cost per se; it's just freeing up monies that used to have to go to pay down the prospect note directly.

So the third bucket is a debt restructure?

Yes.

Okay. And I hope that's on the front burner.

It's absolutely on the front burner, Terry.

On all burners.

(Operator Instructions) I'm not showing any further questions at this time. I'd like to turn the call back to Mr. McGurk for any closing remarks.

Well, thank you, operator. Again, we believe this Bison transaction is transformative and game changing for us. And we thank you for your support and investment. While it's taking its course, it's been 9 months, I think, since we first talked about the transaction, but now it's done and behind us. And speaking for management and the board of the company, we're thrilled that the transaction has been completed, and we're looking forward to moving forth on our new strategic plan and the vision for the company. And we really look forward to updating you on our progress on our next call. So thank you all very much.

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