Cineverse Corp (CNVS) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cinedigm Corp. Fiscal 2018 Fourth Quarter and Full Year Earnings Call. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Jill Calcaterra, Executive Vice President. You may begin.

Thank you. Good afternoon, and thank you for joining us today for our fourth quarter and full year 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, June 25, 2018, 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.

Thanks, Jill, and thanks everyone for joining us on the call today. In fiscal year 2018, we overcame the key challenges we faced with our balance sheet and need for more growth capital to make significant progress, transforming Cinedigm into a global player in the rapidly growing OTT entertainment business.

A soon-to-be $65 billion market segment, that is a largest and fastest growing part of the entertainment industry. As remarkable advances and device penetration continue in mobile, video and wireless technologies, and consumer demand continues to shift to multi-platform consumption, if the expensive traditional theatrical and cable viewing habits, we've transformed Cinedigm from our legacy theatrical deployment roots to become an increasingly important provider of content, networks, services and technology through the entire global OTT ecosystem with particular strength in North America and China the 2 largest entertainment and OTT markets in the world.

Our digital and OTT expertise and track record supported by our deep content library and massive volume of consumer preference in viewing data has uniquely positioned Cinedigm to generate multiple high-margin revenue streams across the entire global streaming OTT ecosystem, taking full advantage of the rapid digital transformation of home entertainment and the dramatic shift of the entire industry to streaming. In addition to our growing digital content licensing business, we've seen tremendous growth over the past year in our branded OTT channel services portfolio. A year ago, we distributed just 3 owned multi-platform OTT channel services. As of today, we distribute 6 channel services, including several in the digital-first linear channel format and all with rapidly growing engagement and reach that I will describe in detail momentarily. In addition, we have announced 3 additional OTT channels to launch in this fiscal year with several more in development.

In addition to our owned services, Dove Channel, Docurama and CONtv, we launched 2 third-party finance channel services, the WHAM Network, focused on eSports and gaming lifestyle, and CombatGo, a global combat sports and MMA service. We also announced 3 additional third-party or partnership finance services in the last quarter. Gatherer, an entertainment and lifestyle channel for Gen X woman -- women, a yet-to-be-named Chinese language OTT channel service, targeting Western audiences with top-tier Chinese content; and K-pop music channel HallyPop, to be launched in partnership with JungoTV and top Korean broadcaster SBS. As you may have seen from recent media coverage, K-pop is one of the hottest and fastest growing entertainment genres in the world.

Fueled by our dramatically expanded OTT channel portfolio in a series of platform and connected device deals, the reach of our launched channels has grown exponentially since last year. Our estimated reach to mobile phones, smart TVs and other connected devices grew by 91%, adding over 200 million more devices in the last year.

Our device footprint includes already scaled platforms with massive reach like Amazon, VIZIO, iOS and Android among many, many others. It gives us a huge foundation for future growth as we add more services and channels and continue to scale the business.

On top of that, we have a robust and growing pipeline of new OTT streaming opportunities underway with telcos, original equipment manufacturers, technology giants, fast-growing startups as well as Fortune 500 branded strategic partners who value the expertise and assets we bring to the OTT table, most of which we will announce upon service launch.

For instance, our Dove Channel service will begin the stream on a large national satellite-delivered OTT service by the end of this month, at which time we will announce the specifics of the deal.

We believe these new opportunities should help the company generate significant additional high-margin OTT revenues by launching and operating additional owned and third-party direct-to-consumer SVOD, AVOD and linear branded OTT networks, distributing and creating additional content for the global OTT ecosystem, and by providing OTT technology, operational products and services to media and entertainment companies around the world.

We have a unique advantage in the OTT space because we have positioned the company to generate 4 distinct high-margin revenue streams from the OTT ecosystem. First, subscription fees. Second, the advertising and sponsorship revenues. Third, digital content distribution licensing fees; and fourth, management, operational and technology service fees. Virtually all of the other players in this huge and growing business segment participate in only 1 or 2 of those high-margin revenue streams at most.

At Cinedigm, our full set of OTT assets as well as our uniquely strong position in both North America and China, give us an increasingly attractive position as a content, channel, services and technology provider to everyone, either already participating in, or entering the global OTT business. We plan to aggressively leverage that advantage and scale the business by rapidly growing all 4 of those key sources of high-margin, high-multiple digital OTT revenue.

In fiscal year 2018, despite the growth capital constraints as we waited for the Bison investment to close, we grew our OTT revenues from those 4 streams by 23%, with our OTT channel's revenue comprised of subscription fees and advertising, up 36%, a solid indication of the momentum we are building along with all the new deals we've either closed or have in the pipeline from the fresh access to growth capital that Bison provided.

The new deals I'm mentioning, include 2 major new virtual multi-channel video programming distributer deals for our subscription OTT services we closed in the last quarter. Along with 3 significant new deals with large-scale, ad-supported and digital-linear platforms and original equipment manufacturers that generate in excess of 21 million monthly unique viewers. We are currently in the process of delivering the approximately 10,000 content assets that it will take to support the launch of our content and channels on those services, then expect most of them to go live over the next 4 to 5 months when we will be able to announce them.

Going forward, we expect to close an additional 2 to 3 content networks, services and technology deals per quarter in this sector for the foreseeable future. These increases in OTT revenue and our improving operational metrics result directly from a series of strategic alliances, high-caliber partnerships and financing transactions, all designed to best position the company to capitalize on the significant growth opportunities in the global OTT marketplace.

In that regard, the most important new partnership for us in fiscal 2018 was our financial and strategic transaction with Bison Capital. As discussed in the last call, we closed and funded the $40 million transaction with Bison, a Beijing-based investment firm that also owns several complementary media investments to become the first China/U. S. independent studio. Strongly positioned in OTT in the 2 largest entertainment markets in the world. Besides helping to vastly strengthen our balance sheet, where we reduced overall debt by $71.8 million, and overall annual interest cost by $4.8 million last year, this relationship paved the way for Cinedigm to become a major player in the creation and delivery of independent content in OTT services both into and out of China.

Bison is exploring additional upgrades to our balance sheet with us as well as new financial and strategic initiatives to deploy high return growth capital into the business in both North America and China. On the heels of this transaction, in early calendar 2018, we formed a strategic alliance with Starrise Media, a leading Chinese entertainment company to release Hollywood films in China theatrically and digitally. This new alliance also targets the release of hundreds of films into the home entertainment marketplaces in China and North America with particular focus on digital platforms.

Subsequent to the end of the fiscal year, the company also signed 6 new business cooperation agreements with leading entertainment partners in China, including Youku, the Alibaba-owned #2 Chinese streaming service, considered the YouTube of China. And the China International Cooperation Committee, considered the National Geographic of China. These 6 new partners will provide quality Chinese content and distribution services to accelerate the bilateral flow of movies, TV programs and short-form programming between China and the U.S.

At the Beijing film festival in April, I also announced the plan to create our Chinese content OTT channel in North America into the younger Western audience. Signed a One Belt One Road cultural cooperation agreement with China and presented 2 keynote addresses that emphasized our plans to increase the flow of content between the 2 territories. All of that activity generated significant and widespread broadcast, print and online media coverage across China that underscored both our strategy and our close working relationships with both Chinese media partners and key regulatory agencies.

In addition, subsequent to year end, we signed a distribution deal with Youku to represent 30 original feature films, and we will announce the details of that partnership shortly.

Overall, our support from Chinese media companies and regulators stems from our business model, a supporting bilateral content flow in OTT initiatives, which are clearly significant positives for Chinese audiences, content producers and distributors. We believe our high-level regulatory relationships in addition to our status as a Chinese majority-owned company is a key competitive advantage for us in China that we will continue to leverage. That support combined with the fact that we are the only majority investment in a U.S. media company approved by both China and the U.S. government in the last 2 years has been intently noticed in both China and in Hollywood, providing a competitive advantage while, at the same time, raising our profile to relevant and major players in the content and OTT businesses.

As we stated on the last call, we expect all this China activity to generate significant new revenue streams for the company, via content licensing, theatrical and digital revenues from Hollywood releases in China and in OTT, with the Starrise deal alone expected to generate $15 million in annual incremental revenues when it reaches steady state after this fiscal year.

Let me now provide some more details about our expanding OTT operations and our content distribution business. In OTT, as I mentioned, we now have a hugely expanded and growing portfolio of OTT channels, both owned, third-party financed for partnership structure versus a year ago. At the end of last year, we had 3 owned OTT channels. Now we have 6 branded channel services currently streaming, and 3 more announced to launch by the end of this fiscal year. As I said, our estimated device reach with mobile phones, smart TVs and other connected devices increased by over 200 million devices or 91% versus a year ago, and we have a very robust deal pipeline that will be delivering even more reach in OTT channel services over the near term.

In addition to the platform, content, channel and services deals I mentioned previously, we have several more OTT concepts in development, almost all under a partnership or third-party management and financial structure, including a true crime channel, 2 sports channels and a 24/7 news channel all with a branded national news organization; a Broadway and performing arts-related channel and an urban channel. As we scale up our channel portfolio primarily with high-margin, low-risk, third-party financed and partnership deals, we gain increasing leverage with OTT platforms and device manufacturers.

In our content distribution business, with the infusion of new growth capital for content acquisitions and our leading competitive position as the key remaining independent content studio, we are seeing strong and encouraging results. And in fact, have exceeded our internal revenue plans for the current quarter, the last 12 months, and are performing very strongly in the first quarter of this fiscal year. We believe our enhanced greenlighting process, an analysis of our massive consumer preference in viewing data has led to a much higher success ratio and return on content acquisitions, particularly film coproductions.

In addition, we continue to be a smart last consolidator in the independent DVD and Blu-ray business, leveraging our relationships in content acquisition licensing of Western action, and family films and TV series with key retailers like Walmart. It's a great success.

Our DVD and Blu-ray business has been flat to slightly growing despite the overall industry trend, and our ability to generate positive results in that category for producers and content creators gives us a big advantage as we seek to acquire digital rights for premium content that can drive OTT revenue. In that regard, we've also seen strong results with many of our coproduction and licensed film releases in our transactional digital VOD business. Driven in large part by an enhanced approach to social media and targeted demographic advertising, all aided by analysis of our huge volume of consumer preference and viewing data. As I noted on the last call, given the new strategic positioning of the company, we have launched a reinvigorated IR effort, attending several investor conferences, preparing updated materials and meeting with dozens of potential new investors. We plan to continue these efforts to describe our new narrative and attract investors, integrating key learning obtained so far and spreading our outreach to potential investors in China.

Through these efforts, we hope to stimulate the same level -- the same high level of interest and excitement for Cinedigm that now exist in the entertainment business, and in China into the financial and strategic investment community also.

Before I turn things over to Jeff, let me make a few comments about the new high potential revenue profile of the company. I think this is important to underscore, now that our business transformation has made such great progress, our legacy theatrical deployment business is now getting smaller. Our new strategic vision for OTT is now clear, our financial status and balance sheet are now strengthened enormously, and our expertise in OTT and strong position in China has now raised our profile and helped lead to a large and growing pipeline of quality and new deal flow.

So we are now looking at 3 key revenue sources for the company that, we believe, will help drive significant growth and EBITDA going forward. The first is total OTT revenue, which we will grow to become the largest portion of our revenue portfolio, driven by our unique asset mix in OTT. As I described previously, we plan to generate total OTT revenue across the entire global OTT ecosystem from 4 distinct streams: subscription fees, advertising and sponsorships, digital content distribution licensing fees and service fees for management, operations and technology.

Second, our underlying independent content distribution business besides providing premium content to support our OTT initiatives, generates fees from full-service content distribution via the tens of thousands of films and TV episodes in our library of rights as well as from new content acquisitions. These revenues are comprised of distribution fees across all entertainment channels, supply chain fees and manufacturing fees resulting from the distribution of content in all formats.

Third, we will generate revenues from the distribution of content into and out of China. Besides the Chinese language OTT service already announced, we will generate both distribution licensing fees and theatrical revenues in China for Hollywood content and home entertainment distribution fees in North America for Chinese content.

With that, I'll now turn the call over to Jeff for a review of our financial results and some other key business points. Jeff?

Thanks, Chris. Let's first cover our financial highlights. For the fourth quarter, consolidated revenues were $17.7 million compared to $19.6 million for the fourth quarter of fiscal '17. Consolidated adjusted EBITDA was $6.3 million compared to $6.7 million for the fourth quarter of fiscal '17.

For the full year, consolidated revenues were $67.7 million, consolidated adjusted EBITDA was $23 million and total OTT revenues were $11.5 million, which was up 23% compared to the $9.4 million from the last fiscal year. This was driven mainly by the strong growth we had in subscription fees and advertising revenues for our OTT channels, which increased by 36%.

As expected, total consolidated revenue for the fourth quarter declined 10%, which was primarily driven by the contracted decline in our legacy projector business, as the combination of 10-year deployment contracts and cost recruitment contracts begin to come to the end of the terms. This decline was partially offset by the increase in our OTT streaming and digital revenues, which we plan on becoming the biggest revenue contributor for the company, and increased last year by 23% in aggregate, led by a 36% increase in OTT channel revenue.

Additionally, our fourth quarter results for the content and entertainment group reflected a 36% increase in EBITDA. When compared to the fourth quarter of fiscal year '17, this reflects the strong revenue performance that Chris mentioned as well as reflecting the full impact of the $11 million in operating cost reductions that we made during the last fiscal year.

Over the past year, we focused our efforts to dramatically strengthen our balance sheet, enhance our internal operating efficiencies and cash flows, expand our OTT businesses and close a transformational deal with Bison. I'm pleased to report that we were successful across the board with each of those initiatives. We significantly strengthened our balance sheet as we used a significant portion of the $30 million Bison initial equity to successfully discount by over 50%, and then pay off our outstanding convertible debt, which saved us considerable interest expense as well. We also closed a new and improved $19 million revolving credit facility that more than doubled the borrowing capacity when compared to the Societe Generale bank group's prior facility. This new revolver is more closely aligned with our current business trend and allows us to finance the growth across our OTT streaming and digital businesses.

In total, Cinedigm reduced over $71.8 million of debt across all Cinedigm segments, inclusive of the discounted convertible note reduction. As part of that, we paid down $23.6 million of debt in our cinema deployment business during the year, reducing our total debt net business down to $40.2 million at year-end. And on a consolidated basis, we have reduced annual interest cost by $4.8 million. And since year-end, we have paid down another $7 million in the cinema debt as well.

In terms of our operating efficiencies, financial results and improved cash flows, our enhanced content greenlighting process continues to pay dividends. We have managed to make great strides in this area by minimizing downside risks in our content investments.

During fiscal year '18, given growth capital constraints for much of the year, as we waited, of course, for Bison's transaction to close, we invested significantly less in the content acquisition side than we had planned, but we still exceeded our internal revenue plan via more precise and better greenlighting decisions, and analysis of our massive data on consumer content choice and viewing preferences.

This new fiscal year, we plan to continue that trend and drive much stronger growth given the fresh capital from Bison, and our enhanced and expanded revolver. We are planning on deploying significantly more capital for content acquisition and licensing in the last year. This should also further enable us to take full advantage of the consolidation that continues to take place in the independent distribution marketplace as we are the largest and strongest remaining independent distributor with the growing OTT business and a footprint in China that give us added competitive advantages.

During the past several months, the company has undertaken a comprehensive analysis of options to improve our systems and technologies to better support our supply chain processes and infrastructure, which we will need in order to handle the massive increase in digital content asset management that will occur as we generate significant new revenues across the entire global OTT ecosystem. We plan to have this enhanced system in place within this next fiscal year. The new systems will allow for quicker and more accurate access for rights availability, which will enable us to deploy assets globally at 10x the speed with which we do so now. This should also be a key element in our anticipated rapid revenue and EBITDA growth.

As Chris noted, our OTT business has been growing very nicely, and we're quite pleased with our revenue growth last year despite the capital constraints I mentioned earlier. With our strengthened balance sheet, growth capital from Bison, vastly expanded channel portfolio, massive and rapidly growing device reach and a robust pipeline of new OTT distribution deals and channels, we expect continued, accelerated and significant growth in OTT revenues going forward.

Chris already outlined the 4 distinct revenue streams that make up our OTT revenues so I don't need to go over that again. But they will generate, from the entire global $65 billion OTT ecosystem, subscription fees, advertising and sponsorships, digital content distribution fees and service fees from management, operation and technologies. I just want to add that we expect the margins from all 4 revenue streams to average between 20% and 40%, another reason why we're so focused on leveraging the portfolio of OTT channel services and the broad foundation of huge device reach with already scaled platforms and services we now have in place to achieve rapid growth.

Now that we have effectively transformed the business, we plan to focus on key OTT metrics that we can report to our shareholders on a regular basis. Our goal is to begin to deliver these OTT metrics by the end of this first quarter. These metrics will definitely include total OTT revenues, as I described, and may also include a number of app installs, the number of transactions and views, the total number of channels that we operate in all formats, the number of networks we work with, subscribers, device reach, digital assets deployed and registered users. This is the key data that we use to manage our business and our reporting will reflect it. Mindful that we need to protect competitive data, of course, particularly for individual OTT channel services.

Additionally, we expect to modify our segment reporting to reflect this in the next Q. In terms of our relationship with Bison, we continue to evaluate new opportunities with them daily regarding additional lower interest financing, deployment of growth capital and other strategic growth opportunities. We continually evaluate the highest and best use of this potential fresh capital, whether it be to invest in new premium content and channels or accretive M&A opportunities, or to further reduce debt interest costs and enhance our balance sheet, or some combination of the above. The new Bison relationship has opened up a multitude of opportunities both domestically and in China and other parts of the world.

As Chris mentioned, our alliances with Starrise and other new media partners in China gives us the ability to distribute not only independent film and television content, but access to additional content financing and the potential to acquire rights for the highest profile Hollywood independent films.

All in all, we believe we are poised for a strong fiscal 2019. And now I'll turn the call back to Chris. Chris?

Thank you, Jeff. In summary, we are very encouraged about the company's current positioning and future growth prospects for the following reasons: first, the Bison deal in large part solved our balance sheet and growth capital challenges, while opening the door to unique two-way stream of content and OTT channels into and out of China; second, we made significant progress with our business transformation. We have become a key independent player in the OTT business with 9 channel services launched or announced. Partnerships with some of the most important mega players in the media and technology businesses, huge and escalating device reach for our OTT channel services; a robust and growing new deal flow and a unique business model that generates 4 distinct streams of high-growth, high multiple revenues in the entire global OTT ecosystem; third, working closely and directly with our Chinese media partners and high-level regulators, we now have an advantaged business model versus other U.S. companies that should provide significant revenues from the reciprocal distribution of content and OTT channel services in China and North America; fourth, besides providing support and premium content for OTT, our content distribution business is clicking on all cylinders due to an advantaged competitive situation, more growth capital for content investment, an enhanced green lighting process, an analysis of massive consumer preference data; fifth, based on the Bison deal, our growing presence in OTT, and our high volume of deal announcements and corporate press activity, our business profile and the recognition of our new narrative has increased dramatically in Hollywood, China and in all the OTT-related business sectors.

Besides increasing deal flow, we believe we can combine this business excitement about our new narrative and our enhanced profile with solid financial results to propel a reinvigorated and successful IR effort to reach new investors.

Finally, we believe we have a strong management and employee team at the company that has weathered some big challenges and come through all of them stronger to transform the company. This team is now fully battle tested and ready to handle the rapidly scaling revenue and business growth we're about to generate.

Thank you, and we will now take any questions you may have.

(Operator Instructions) Our first question comes from the line of Austin Moldow of Canaccord.

So it looked like the content and entertainment revenue grew year-over-year for the first time in several quarters. Can you talk about the puts and takes within that segment? And in particular, what the headwinds are there? And when they'll stop to ostensibly show even more robust underlying growth? And I'm not sure if the Blu-ray and DVD strength that you mentioned is related to that. So if it is, can that particular component continue?

Sure. Austin, this is Jeffrey Edell. So yes, we did have -- it was great that we had quarter-over-quarter growth in the content and entertainment group and growth area. And it was driven by combination of the digital business as well as the physical business. We're just starting to see some real benefits here. One of the benefits is the cost cutting that we put in place over a year ago has gone full scale. So now we can expect some of the quarters year-over-year to start improving, and at the same time, where as some of the industry seems to be flattening out or dropping rather in the physical side of the business because we're that last standing aggregator that is left and because some of the deals we're green lighting, and the opportunity for independent producers and content libraries to come through us, we believe we can maintain a sort of a flatness there, and with the cuts we have made, we'll generate, we believe, some significant EBITDA changes year-over-year.

Just one quick follow-up on this enhanced green lighting that you've been talking about and all those consumer data inputs. What are those data sources? And sort of what assures you that the improvements you're seeing and using all these inputs can continue?

That's a great question. So look nobody in Hollywood has a crystal ball and they know how to figure out what their box office would be on a film or what they would do in terms of DVD sales et cetera. But because we have a large history that combines what we've done here, to the history from the (inaudible) days, we have a large database library. We also have a great marketing department that is out there figuring out what customer desires are and so forth. So it's a combination of the metrics from our own internal experience, to looking at different genres like Chris mentioned, Westerns, for instance, seems been doing very well and so we tend to go into those areas at a very low risk, low cost. We're investing significantly less on a picture-by-picture basis to obtain rights now than we were a couple of years ago. So therefore, it minimizes the risk and with the lower numerator, if you will, across the same denominator, we're going to get a higher return.

Yes, I can just add, this is Chris, Austin, to what Jeff said. You've got to remember, we've been delivering more independent content to the marketplace for years than probably anybody that exists in North America right now. With a library that fluctuates in its size, but we've got tens of thousands of films and TV titles in our library across all genres that we've been delivering to 60,000 retail and digital storefronts for a very long time, and been accumulating just a massive consumer preference in viewing data over that period. And now we have the benefit of being able to apply that analysis against what is essentially a buyers' market right now on the independent side of the business. As I think we mentioned on these calls before, a number of our competitors have either been consolidated out of the business or have gone out of the business, and we are really the 800-pound gorilla that's standing here right now that can offer quality distribution across all channels of distribution. So we're now able to combine this knowledge base that we have about what's working and not working with the fact that we can be much more selective than previously, because we're in a strong competitive position. And then the final thing that's now we're beginning to see, that's giving us a leg-up is data off our OTT channels and the ability to distribute content across this channel portfolio. And then China, the ability to buy content rights for China in the U.S. and in some cases, guarantee theatrical distribution in both markets gives us a big leg-up, because for an independent producer who, in the past, maybe has not generated a dime of income out of China, one the biggest entertainment markets in the world and the biggest theatrical market in the world, for Cinedigm to be able to offer access eyeballs across all media in both markets gives us a competitive advantage. So beyond the green lighting and the viewing data, there are a number of things that have developed. Assets that we have that are giving us a lot of leverage, they grow the business in that market currently.

At this time, I'd like to turn the call back over to Chris McGurk for any closing remarks. Sir?

Yes, just very briefly, I want to thank you all for joining us on the call today. I hope we gave you a sense of why we're so bullish on the company's future at this point, particularly in the OTT side of the business and in China. We're going to be talking you again in 2 short months. So we hope to be able to lay out some positive news in August. So we'll talk to you then. See you then. Thank you very much.

Thank you sir, and thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day.