Cineverse Corp (CNVS) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience. You joined the Cinedigm Corp. Fiscal 2019 First Quarter Earnings Call. (Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Executive Vice President, Jill Calcaterra. Ma'am, you may begin.

Thank you, Atif. Good afternoon, and thank you for joining us today for our first quarter fiscal 2018 earnings conference call -- I'm sorry, 2019, I apologize.

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, August 14, 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.

I'd now like to turn the call over to Chris McGurk.

Thanks, Jill, and thanks everyone for joining us on the call today. We're going to keep this brief today since we just held our last call 8 weeks ago and announced many of the initiatives and accomplishments from the first quarter at that time.

Overall, we generated strong results during the first quarter, which exceeded our internal expectations, particularly the 31% adjusted EBITDA growth in our overall content and distribution business, our progress with OTT channel launches and new deal flow in our streaming business and continued China business developments.

During the first quarter, we made significant progress advancing our OTT growth agenda to build a foundation for a high-margin streaming revenue flow from our nearly 30,000 titles of digital programming, our 9 digital-first linear networks and our 3 direct-to-consumer OTT services. Our first key effort has been to expand our base of rights in content partners. We added 3 new digital network partners in Gatherer, CombatGo and HallyPop, diversifying our channels in right space into the lifestyle, sports and music arenas and adding rights for several thousand hours of additional streaming content.

Our next key effort has been to expand our base of distribution in OTT footprint, which is critical in order to fully service and capitalize on the widespread sea-change consumer migration to OTT services. We grew our OTT platform to 95 partners, up 33% over the prior year and 19% from last quarter.

Key deals included a multiyear agreement with DISH Networks and Sling TV as well as signed agreements with a market-leading streaming OEM manufacturer, 2 of the top 5 scaled ad-supported OTT platforms and another top 3 MVPD, all of which we will announce upon launch.

Due to the significant growth in the industry, we currently have more than 30 additional OTT distribution deals at various stages of negotiation.

Our current addressable footprint covers more than 435 million connected devices, and we expect that, that reach, which increased by 19 million this quarter, to continue to grow considerably in the near future.

Our third key effort has been to leverage our OTT digital supply chain and partner footprint as a unique competitive advantage. As the global footprint of OTT services and platforms continues to grow, our ability to deliver and manage digital content and channels at scale is a significant inhibitor to competitors and a key revenue driver.

Year-over-year, we have increased our content throughput to partners by more than 74%, all supported by our state-of-the-art supply chain and technology stack. And we are now targeting additional opportunities to add incremental high-margin OTT revenues. By launching and operating additional owned and third-party direct-to-consumer SVOD, AVOD and linear branded OTT networks and distributing and creating additional content, we're expanding the foundation of our OTT business and solidifying our unique ability to generate 4 separate high-margin OTT revenue streams from subscriptions, advertising, digital content licensing and SaaS services, whereas almost all of our competitors are dependent on only a single one of those revenue streams.

We have a robust and growing pipeline of new OTT streaming opportunities with telcos, original equipment manufacturers, technology giants, fast-growing start-ups and Fortune 500 branded strategic partners who value the expertise and assets we bring to the OTT space.

Going forward, we expect to close an additional 2 to 3 content network services and technology deals per quarter in this sector for the foreseeable future, just as we did this quarter.

In regard to China, during the quarter, we signed 6 new business cooperation agreements with leading entertainment partners, including Youku, the Alibaba-owned #2 Chinese streaming service, considered to be the YouTube of China; and the China International Cooperation Committee, considered to be 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.

In April at the Beijing Film Festival, I announced the plan to create a Chinese content OTT channel in North America, aimed at the younger Western audience, which we plan to launch in our fiscal fourth quarter. We are currently deep in the middle of negotiating content supply arrangements for this new OTT channel with leading Chinese entertainment companies. We expect this programming to include over 70 original films from 2 of the top entertainment studios in China.

At the festival, we also signed a One Belt One Road cultural cooperation agreement with China and presented 3 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.

Overall, our support from Chinese media companies and regulators stems from our business model of supporting bilateral content flow in OTT initiatives, which are clearly significant positives for Chinese and American audiences, content producers and distributors. That support combined with the fact that we're the only majority investment in the 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 previously, we expect all of 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.

We're also currently in an outreach process in Hollywood to identify high-profile films with high potential for release in China. We hope to make some announcements regarding that initiative soon.

And 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. Before I discuss the financial results, I'd like to point out that effective April 1, 2018, we've revised our public financial reporting to more closely and directly reflect how we review and evaluate the company's operating performance.

Beginning with the first quarter of fiscal 2019, we now report our financial results in 2 primary segments: our cinema equipment business that was previously called Digital Cinema, but now changed to avoid confusion with our other digital revenues; and our Content and Entertainment business, or CEG, as we sometimes refer to it. All prior periods results have been reclassified for comparison purposes to reflect these new reporting segments as well.

Our cinema equipment business includes the nonrecourse financing vehicles and administration for the Digital Cinema equipment that we installed in movie theaters throughout The United States, Canada and in Australia and New Zealand approximately 7 to 10 years ago. It also provides fee-based support services to over 12,000 movie screens as well as directly to exhibitors and other third-party customers in the form of monitoring, billing, collection and verification services.

Our Content and Entertainment segment includes ancillary market aggregation and distribution of entertainment content in branded and curated OTT digital network business, providing entertainment channels and applications. Additionally, under the new ASC 606 in effect for the new year, which standardizes contract revenue recognition across companies worldwide, we will now provide revenue breakdowns of our OTT streaming and related digital revenues.

In making these changes, we believe investors will have a clear view of the primary focus of our strategy, which is to build our streaming OTT network business.

Overall, we performed very strongly during our 2019 first fiscal quarter. Despite this being one of our slowest periods, we exceeded our internal expectations driven by solid growth in our Content and Entertainment segment, which includes OTT. That business grew 9% top line and 31% in adjusted EBITDA overall.

For the first quarter of fiscal 2019, consolidated revenues were $13.1 million. As expected, total consolidated revenues for this quarter declined as a result of the contracted decline in our cinema equipment business as the combination of 10-year deployment contracts and cost recoupment contracts are at various stages of reaching the end of their terms. This decline was partially offset by an increase in the Content and Entertainment business revenues, which, as I just said, were up 9% to $6 million.

Again, despite the slow season, we had a very strong sales activity for the first quarter. Our total billings in the DVD Blu-ray business increased 65% year-over-year and our OTT digital billings were up 30%. Those results were reflected this quarter and will also be recognized in the future quarters. Our total OTT streaming and related digital revenues for the first quarter were $2.2 million.

Direct operating expenses decreased in the first quarter of fiscal '19 to $3.4 million, down 16% compared to the prior year period, primarily due to a reduction in content advance amortization in our Content and Entertainment business segment. As improvements in our greenlighting process and strong competitive acquisition position that we discussed on our last call continued to show solid results with respect to our current selection process and the IRRs that we're achieving.

Interest expense decreased 33% to $2.7 million in the first quarter of the fiscal '19 compared to $4 million in the first quarter of fiscal '18. The decrease is primarily a result of the reduced debt balances compared to the prior period, particularly the full payoff of our former convertible debt balance.

Despite the expected and contracted reduction in the cinema equipment revenues of $2.1 million, the net loss attributable to common shareholders for the fiscal quarter of 2019, this particular quarter, was $3.4 million, a 35% improvement compared to a $5.2 million loss in the first quarter of fiscal 2018. This underscores the shift in our business model to the higher-margin streaming businesses and also reflects the cost streamlining efforts we have undertaken.

Finally, we reduced our debt by $72.4 million over the last 12 months, and we continue to work with Bison and our new banking partner, East West Bank, to evaluate additional opportunities to further strengthen our balance sheet and improve our liquidity.

With that, I'll now turn the call back to Chris. Chris?

Thanks, Jeff. In summary, our results were strong this quarter, and we made substantial progress in expanding our OTT footprint and the important bilateral entertainment content and OTT streaming initiatives we're putting in place with our partners in China.

And with that, we'll now take any questions you may have. Operator?

(Operator Instructions) Our first question comes from the line of Lisa Thompson of Zacks Investment.

So I'm kind of interested in talking about the OTT landscape. There seems to be people entering with all sorts of schemes every single day. And I was curious as to just kind of your overall strategy as to what kind of OTT channels to introduce? What your competitive advantage is? How do you cut through and have people find you? Just a big picture discussion if you would.

Let me try to respond to that a little bit. That's a very big question. But as we've said, I think, as opposed to all of these newbies, if you want to call them, who are entering the space, we now have a track record of 4 years of having successfully launched streaming channels, and we actually have a track record since 2006 of being one of the key aggregators of digital content for the OTT streaming pipeline that first got off the ground around that time with the launch of iTunes and Netflix and some of the others. So I think, first and foremost, we've got a proven expertise and track record in servicing the OTT ecosystem from a content standpoint, from a channel launch standpoint, from a technology standpoint, et cetera. And I think that's why I talked in my remarks about the deal flow that we have. That's why our deal flow, at this time, has become almost more than we can handle because even some of the bigger players who are entering the space now see us as a go-to company that can provide a broad array of services to help others either launch channels or launch them in partnership with us or service existing channels with our content, et cetera. And that's why we feel, again, one of our advantages is the fact that given our expertise, given the assets that we have, given our track record, we're poised to generate 4 different streams of revenue -- separate streams of revenue between subscriptions, advertising, digital licensing and SaaS revenues, whereas almost everybody else on the -- entering the space is only going to generate a single one of those revenue streams. So I think, that's, in a nutshell, is why we feel very good about our positioning in this business. And again, there's been a sea-change in consumer viewing habits in the entertainment industry that they've shifted to streaming. And I think we're remarkably well poised to take advantage of all that in a number of ways. It's going to be an $85 billion global business very soon. And on top of it all, we've got the China connection that I mentioned, where the streaming business has -- again, has taken off in China. And given our relationships with the government and our partners over in China, we're very hopeful that we're going to be able to bring sort of the same assets to bear in that marketplace that we have in North America, which is going to make us an extremely attractive partner in addition to the other attributes I mentioned because it's been so difficult traditionally for North American companies to crack the market in China, and we're already there with boots on the ground.

All right. So when we look at you what you plan to do past what you've already announced, how do you -- how would you decide to either go into some sort of vertical, new channel or have you any interest in buying people that are out there that you could put on your platform, what are your interests going forward?

Yes. I think when you cut through it all, I mean, our goal, as we stated, particularly in the last conference call, is to increase our streaming revenues in EBITDA -- high-margin, high-multiple revenues in EBITDA as quickly as possible. So when we're evaluating opportunities, whether it's to launch our own news channel or to partner with a Fortune 500 company, sort of coinvest in maybe a general entertainment channel, again, the bottom line for us is to do our financial analysis and try to target our energies against those initiatives, channels, servicing deals, content aggregation plays that are going to increase our digital OTT revenues as quickly as possible. That's the way we think that we can grow as quickly as possible into a $1 billion company. To your point, we're also looking at potential acquisitions in this space. We're being very careful and disciplined about it. We're only going to do acquisitions if, again, they meet that parameter of having a high probability of dramatically increasing our streaming revenues and EBITDA. We're only going to do deals like that if they are accretive. The good news is that we're one of the few strategics operating on the independent side of the streaming business. You're seeing a lot of consolidation among the big boy strategics at the top end of the business. And we've had smaller companies that have particular assets in this space that want to scale up that are talking to us now because they see us as a very good strategic partner. They think our currency, our share price is very undervalued. We do too. And all that says that we need to really look at these opportunities and see if they can dramatically improve our metrics. We don't have to do a deal. But if there is a deal out there that can advance our agenda faster than we could do organically, we're going to try our best to do that deal. And fortunately, our financial position versus a year ago has fundamentally changed, where we have a much, much stronger balance sheet. We've got Bison as our majority investor who've been a great partner and have said that they would be willing for the right opportunities to employ more capital or help find more capital against accretive growth opportunities. And we have another great partner now in East West Bank that we're working with to see whether we can utilize them to help us move the agenda forward.

All right. So one question about China. You said that you should have some sort of distribution, some sort of content that's going to be announced shortly. How far off is that? And is that going to be some sort of theatrical release or when are we going to see that happen?

Yes, what you're going to see is we're -- we've got 5 or 6 negotiations going to supply content for our streaming channel, okay. So that would be content that would be released on our channel. We'd also probably license it, not -- maybe not all of it, we'd window it into other digital platforms here domestically. That includes 70 -- up to 70 original Chinese films, some of which are released theatrically over there, some of which are released on the digital platforms in China similar to Netflix' original content strategy. There may be opportunities in a very selective way to take some of that content out theatrically here, but again, we're going to be very careful and disciplined about it. So I think, you can expect to see some announcements in that regard very soon, probably starting with the deal that we mentioned on the last call, which is a deal with Youku, which is the YouTube of China, where we are close to papering a long-form agreement to release, I think, it's 50 of their original productions here into the digital markets, and ultimately, on our channel.

(Operator Instructions) Our next question comes from the line of Terry Hackett of Hackett management.

Gentlemen, you've been busy.

Yes, we have. Thank you, Terry.

And -- but it's got to be fun to be creating again, which is wonderful. I'd like to just turn to the cinema equipment briefly. It gets dismissed a bit, but as I recall, both the contracts and the debt burn off on the equipment around 2020 and thereafter, and there's got to be some significant inherent value with that debt gone. And I wondered if you have any more insights into how you might realize on that captured value?

Terry, it actually probably will go a little bit longer than 2020, it could go up to 2022, as these things, systems fall off. And remember, we don't really make any -- we don't have a view necessarily on the value or the number of systems we can sell and the timing of that, but there is substantial value in the equipment at the end because you do know we own 3,800-or-so systems. So a lot's going to depend on the release schedule that's in the theaters in Phase 1 and Phase 2 as Phase 1 and Phase 2 moves forward, that coupled with theaters looking to be opportunistic to purchase the equipment from us, and then all that will be compared to the amount of debt we owe. You see we've made significant reductions like $8.3 million just in this quarter alone in the Digital Cinema debt. And so we're pretty close to dropping it below $30 million now, into the upper 20s is sort of our next guideline. And it's high-interest debt, so we want to get that thing paid down as quickly as possible through the cash flow in the business, and then Gary Loffredo working his magic with the team on selling equipment as it gets returned to us.

But again, Jeffrey, there is significant inherent value in those. Is there any way to quantify that? I know it's a moving target, but do you sit around some time and say, gee, I wonder what that is worth?

We do, Terry, but we've kind of -- as we don't issue any guidance, we've been very careful not to lay out those assumptions or make any projections about what the equipment might be worth. It's pretty easy to do the math though given the number of projection systems that we own and putting some assumptions in terms of what an individual projection systems might be sold or leased for.

Yes. We're constantly working on internal modeling for the banks because the banks always want to know that information, and we just again don't publicly release it and we let others determine value. There were a number of systems sold at $15,000 a piece that we've been able to do. We don't know what sales would be at scale. And again, so much depends on when the equipment comes back to us. I mean, if you just do math of X percentage interest on $30 million of debt accrues a certain amount of interest. If we can sell systems earlier on, it's reducing that number. If they're sold later on, there would be more interest tacked on to the note. So it is difficult to predict when the systems were going to be coming back to us, and that's just something we're starting to realize now.

Good. Well, I would appreciate it if during this fiscal year, you might take a look at that for the shareholders and place all the caveats and assumptions you desire on your formula but it would be nice to have a range of numbers, I think, because I think there is some inherent value here that we're not realizing upon even in the stock value.

Yes. We'll do the best we can, and also pay attention to it. Now we're getting some research coverage, and I'm sure the various research reports like the ones from Zacks and some others that we're trying to pick up, they may have their own indication of value and residual value themselves. So I'd look out for all of that.

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

Well, I want to thank you all for attending the call. We'll be speaking to you again in November. Again, we felt we had a very good quarter. We made a lot of progress both on the OTT and streaming business, our base business as well and in China. And we hope we have a similarly strong report for you in November. So thank you all.

Thank you, sir. Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may disconnect at this time.