Chicken Soup for The Soul Entertainment Inc (CSSE) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Chicken Soup for the Soul Q4 and Fiscal Year 2019 Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Jeff Majtyka from Ellipsis IR. Thank you. Please go ahead.

Thank you, and welcome. With me on the call today are William J. Rouhana, Chairman and Chief Executive Officer; and Chris Mitchell, Chief Financial Officer, to review the results for the fourth quarter and full year 2019 as well as provide a business update and an update on Crackle Plus. Following this discussion, there will be a moderated Q&A session open to the participants on the call.

During this call, management will make forward-looking statements. Forward-looking statements include but are not limited to statements regarding expectations, intentions and strategies regarding the future. Included in these risks are forward-looking statements based on management's current expectations and assumptions and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from projected results.

Given these uncertainties, listeners are cautioned not to place undue reliance on any forward-looking statements contained in this conference call. Please refer to the cautionary text regarding forward-looking statements contained in the earnings release, which also applies to the content of this call. Additional risk disclosures can be found in the company's filings with the SEC.

As a reminder, on May 14, 2019, Chicken Soup for the Soul Entertainment created a subsidiary with Sony Pictures Television, launching Crackle Plus. On today's call, management will make comments on certain GAAP-based and non-GAAP pro forma financial information of the combined company that includes Crackle's financial results for the relevant periods prior to the closing date as if the acquisition occurred on January 1, 2018. The non-GAAP financial measure the company uses is adjusted EBITDA. Management believes that adjusted EBITDA provides useful information in that it excludes amounts that are not indicative of the company's core operating results and ongoing operations and provides a more consistent basis for comparison between periods.

The earnings release contains a reconciliation of adjusted EBITDA to net income or loss, which is the most directly comparable GAAP measure. Please refer to the company's filed amendment #1 to the current report on Form 8-K/A filed with the Securities and Exchange Commission on July 30, 2019, for further details relating to historical financial statements of Crackle, Inc. and pro forma financial information of Crackle Plus. If you have not had the chance to review this Form 8-K/A, now would be a good time to retrieve it. We also refer you to our annual report on Form 10-K for the year ended 2019, which is being filed with the SEC today.

I would now like to turn the call over to Bill Rouhana, Chairman and CEO. Bill, please go ahead.

Thank you, Jeff. Good afternoon, everybody. Thank you for joining us.

The headline for today is that our business is gaining momentum. We delivered on our objectives in the fourth quarter, and we expect to report a strong first quarter. Of course, the world is a very different place today for all of us. So in addition to covering the results, I'll share our thoughts on COVID-19, some perspective on how it may be impacting our business and industry. And then I'll turn it over to Chris, who will go through our financials in more detail.

Let me start by saying I'm very pleased that we delivered record fourth quarter net revenue of $24.4 million, which was up 45% and change over Q3 and above analyst consensus. Gross revenue for all of 2018, you may recall, was just under $28 million. So we've demonstrated the transformation that we've engineered over the past year.

Our growth was driven by continued outperformance from our Crackle Plus networks, including continued contributions from our original content library and, in particular, Going From Broke series. Our distribution and production business was also a strong contributor as we implemented our new model and approach to this part of our business.

For the full year ended December 31, 2019, we delivered record net revenue of $55.4 million, more than double 2018. Adjusted EBITDA was $5.8 million for the fourth quarter and approximately $6 million for the full year, also ahead of analyst consensus. As I look back on 2019, we certainly accomplished a great deal. We completed several important partnerships and transactions, including the most important one in our company's history, the Sony-Crackle deal. We integrated Crackle, a business that was losing over $50 million a year, and put it on track for sustained profitable growth in under a year while growing viewers over 55% from May to December.

We launched Landmark Studio Group with industry veteran David Ozer, an example of our new distribution and production model. We continued to build our valuable Screen Media library with the acquisition of the Foresight Media Film library and the creation of a new international partnership with Mark Damon. We produced and distributed the most successful piece of original content in the company's history with Going From Broke. We signed new ad sales partnerships in Q4 with Crunchyroll, Xumo and Jukin Media. And above all, we delivered record revenue and established a platform for adjusted EBITDA growth.

So we've done a lot of heavy lifting. And with our fourth quarter results, we now have an early illustration of what we're capable of under our new business model. It's important to note we have a solid balance sheet and modest debt. We've taken determined steps over the past years to ensure that we manage our capital base effectively while also building in flexibility to capitalize on growth opportunities.

On that point, I'd like to spend a moment addressing the recent high-profile transaction activity in the AVOD and SVOD marketplaces, both rumored and announced. As soon as Comcast made the announcement about Peacock, industry peers realized they needed an AVOD strategy along with their SVOD initiatives. So then it becomes a question of build or buy. The reason you're seeing so many acquisitions is that it takes several years to build a successful AVOD platform, rights to content and ad-selling machine, which would give -- and an ad-selling machine, including relationships with resellers that provide access to local ad demand, are only a few of considerations. The combination of these attributes equates to speed to market, which would give the buyers essentially a multiyear lead.

For Crackle Plus, we've assembled all of this into what is today a leading independent platform with a strong brand, rapidly growing reach, a differentiated original content strategy and more than 70,000 hours of content in our library. So we believe we're in a strong position to capitalize on all the activity happening in the industry. And as the global SVOD wars play out, we believe there will continue to be enormous value created in the AVOD space.

In recent weeks, we've heard questions from many of our shareholders and analysts trying to understand how to value our company relative to transactions that have recently been announced in the AVOD space. Given our capital structure and the economics of Crackle Plus, it's difficult for investors to calculate how these transactions would translate into per-share value for our company.

Looking at the economics of the Tubi transaction, which we think is the best proxy, the math leads to a number of approximately in the mid-20s per share. We believe our results show that we're well on the way to creating tremendous value in our business. This is becoming visible and possibly even accelerating in light of the current environment. We're closely monitoring the COVID-19 situation and how it is impacting our company and industry. Of course, our biggest concern is the health and safety of our employees and their families and ensuring that they have the resources and tools to do their jobs from home in a safe environment. We've also thankfully not seen any significant impact on our ability to conduct normal operations in most parts of our business.

Beyond that, obviously, it's a very uncertain time. With most of us homebound for the foreseeable future, this is clearly an opportunity for our existing viewers to spend more time with us and for new viewers to discover us. In fact, we are seeing both. Viewership on Crackle and Popcornflix increased between 20% and 25% in just the last couple of weeks. New registered viewers per week have also jumped nearly 47% since the week of March 15. Registered viewers are important as they are usually a good indicator of future increases in streaming hours. Growth in viewers at a pace like this accelerates our efforts to build a large audience and leaves me encouraged that we could emerge from the global crisis with a stronger business.

Of course, our business is about selling advertising against this growing audience. While MAGNA, a part of IPG, has revised industry forecasts to a drop of 4% in total ad spending in 2020, it's important to understand that OTT is a rapidly growing space. MAGNA's revised estimates for digital video advertising spend still shows growth of roughly 8% for this year. We therefore believe that VOD platform operators, especially ones like us who offer a vast and varied library of streaming content, remain well positioned to outperform. Obviously, this is an unfolding situation, but I'm pleased to report that so far, our ad revenue has held up well; in fact, better than expected.

For a perspective, we were already performing well coming into 2020. In Q4, we sold out more than 90% of our available ad inventory. And in December, we achieved a record high in ad impressions up to that time. In the first quarter, we again sold through more than 90% of inventory, above our usual mid-80s target. But clearly, the environment is fluid and things could change. The pandemic has disrupted traditionally strong ad categories like travel and tourism, for example; yet other categories have increased, especially those that offer products or services that can be purchased and used or consumed from home.

Additionally, a significant portion of the most valuable ad supply, live sports programming, has been removed from the market, which makes our audience more attractive to certain advertisers. As we look at these factors, we believe we're in a good position to navigate the uncertainty because we are in a fast-growing space. And we also bring to advertisers an attractive demographic that is over 50% male and strong in the 18 to 34 demographic.

In our distribution and production business, there are some positives and negatives. TVOD and DVD are doing well because people are at home. Theatrical, a very small part of our business, is not. And it's too early to tell with our international business. We should also note, we didn't have any shows in production when COVID-19 lockdown began. While there will be some delays in production activity on future content, we believe at present that we will be able to complete productions currently planned for this year, and we are trying our best to keep on pace by continuing preproduction work remotely. So while it's too early to tell how COVID-19 will impact our overall business, we do believe that much of the impact will be relatively short term in nature and that we're in a strengthening position for the long term.

Looking beyond COVID-19 impacts. I'm very pleased to see how our strategy is bearing fruit in distribution and production. You will recall that after we announced the Crackle transaction, we hit pause on our television and short-form video production activities as we've developed a new model that emphasized co-production partnerships with high-quality producers that increased our access to IP, reduced our capital investments, thereby enabling us to build a bigger, more predictable and less risky business. Previously, production was contributing approximately $12 million of very high-margin revenue annually. So by pulling back, it negatively impacted our revenue and margins in the second half of last year in particular. With the continued expansion of Screen Media's capabilities and the launch of Landmark Studios, our new distribution and production strategy is now in operation and beginning to show results, which can be seen in Q4.

We believe we're just getting started under our new model and that you'll see the improved revenue and margins in 2020. All this sets the stage for what's ahead. I've already shared viewership and advertising insights on Q1, and I also want to share our content and programming highlights.

Overall, we've increased our total programming by nearly 22,000 hours on our networks. We are currently hitting all-time highs in ad impressions on a daily basis. Our exclusive original Going From Broke series continues to outperform our expectations and is one of our top-streaming shows. Our new exclusive, On Point, which premiered in February, was our #1 title for the first quarter with more than 7 million streams. And we have many more originals and exclusives in the pipeline for the coming quarters.

We received the Cynopsis Award for Being Dad and the Parents' Choice Award for Animal Tales. We premiered several other new and notable series, including 85: The Untold Story of the Greatest Football in History; and the Emmy Award-winning Everyday Edisons. And finally, we expanded Screen Media through the acquisition of the Foresight library and the addition of Mark Damon, which expanded our international distribution capabilities.

By the way, we have a unique opportunity with one of the films we acquired through the Foresight film library acquisition, Last Full Measure, which tells the riveting true story of Vietnam War hero, William Pitsenbarger. It will be released on TV, TVOD, VOD and cable VOD on April 24. The film has gotten great reviews on Rotten Tomatoes, carrying a 96% fresh viewer rating and will be available at a time that industry observers believe will be especially good for these markets. Please watch it.

As further evidence of how our distribution and production activities support our online networks over the next couple of months, we will be releasing many new and exclusives on our Crackle Plus networks, including Wonders of the Sea, featuring Arnold Schwarzenegger as narrator; and Grand Isle, starring Nicolas Cage and Kelsey Grammer. Importantly, as each of these new titles go live, they will carry minimum net investment from us.

Wrapping up my comments, we are executing well on our AVOD networks and distribution and production strategies. We are in an excellent position to capitalize in the exciting growth in the AVOD network space. And in ordinary times, we'd be celebrating the successes and planning to take -- to aggressively take advantage of them. But these are anything but ordinary times, and we are, of course, mindful of the unfolding economic uncertainty. As a result, we will be managing investments cautiously in the near term, but we believe we have the right strategy, a valuable brand, significant and growing reach, a differentiated programming model and a long-term sustainable way of doing business. We are beginning to see the financial results materialize, and we look forward to keeping you posted on our progress.

I want to thank all of our investors, partners, customers for their support, especially during these difficult times. We hope everyone is staying healthy and safe. And I especially want to call out the tremendous efforts of our employees as we work through the challenges that the current environment places on all of us. I invited our employees onto this call as part of our efforts to keep them fully informed on the state of our business and the progress we are making.

I'm now going to turn it over to Chris.

Thank you, Bill.

Our financial results for the fourth quarter and full year 2019 reflect the successful execution of our online networks and distribution and production business strategies. Bill has already discussed the overall highlights and current trends that are most relevant to our business, so I will focus on a review of our results and balance sheet as well as a couple of disclosure housekeeping items.

Starting first with the results. We delivered on our expectations to significantly increase revenue in the fourth quarter. Net revenue for Q4 2019 was $24.4 million compared to $11.6 million in the year ago period, an increase of 52.5%. Online networks, which is now Crackle Plus, generated $14.9 million in revenue in Q4 2019 compared to $1.1 million in the year ago period, which was prior to the acquisition of Crackle. Please note that our Q4 online networks revenue includes approximately $5.6 million of ad rep revenue related to our partnership with Sony's PlayStation Vue, which we'll talk about more in a few minutes.

Television and film distribution in Q4 generated gross revenue of $9.9 million compared to $5.4 million in the year ago period, an increase of 45.5%. Television and short-form video production generated gross revenue of $0.1 million in Q4 2019 compared to $5.4 million in the year ago period. As Bill discussed, upon establishing Crackle Plus, we discontinued our internal production activities in anticipation of growing our distribution capability and launching our co-venture production model. This negatively impacted both production revenue and our overall gross margins and adjusted EBITDA margins last year, but the expanded capabilities of Screen Media and our first production co-venture, Landmark Studios Group, are now gaining momentum. And we will begin seeing revenues and margin increases in 2020 as our new production model gains momentum.

Gross profit for the quarter ended December 31, 2019, was $7.6 million or 31% of net revenue compared to $6.6 million or 57.2% of net revenue for the year ago period, an increase of 13.2%. Excluding $6.7 million of noncash amortization of the film library and company's traditional distribution business, which is required by GAAP to be included in cost of revenue, the gross profit would have been $14.3 million, which is well in excess of last year. The comparable gross profit for last year's fourth quarter, excluding noncash amortization of the film library, was $9.4 million.

Operating loss for the quarter ended December 31, 2019, was $10.9 million compared to an operating income of $2.1 million for the year ago period. Adjusted EBITDA for Q4 2019 was approximately $5.8 million compared to $5.2 million last year, an increase of 10.3%.

Summarizing the full year 2019 results. Gross revenue was $55.4 million compared to $26.9 million in the full year 2018, an increase of 106%. Online networks generated $40 million in revenue compared to $4.4 million in the year ago period, reflecting the addition of Crackle to our company. Television and film distribution in 2019 generated gross revenue of $16.0 million compared to $13.2 million in 2018 or an increase of 21.1%. Television and short-form video production generated gross revenue of $0.6 million, down from $10.2 million in 2018. The decrease reflects the discontinuation of production activities ahead of launching our co-venture model, as I noted earlier.

Gross profit for the 12 months ended December 31, 2019, was $14.9 million or 27% of net revenue compared to $14.5 million or 54% of net revenue for the year ago period. Excluding $10.2 million of noncash amortization of the film library in the company's traditional distribution business, the gross profit would have been $25.1 million. The comparable gross profit for 2018 excluding noncash amortization of the film library was $21 million.

Operating loss for the 12 months ended December 31, 2019, was $26.1 million compared to operating income of $0.8 million for the year ago period. Without the film library amortization expense, the operating loss would have been $15.4 million. Adjusted EBITDA for the full year 2019 was $6.0 million compared to $10.0 million last year.

To help the investment community better understand our business, we are providing a pro forma 2019 view of our results as if we had owned Crackle for the full year. For the full year 2019, on a pro forma basis, total revenue was $79.3 million. Gross profit was $24.0 million or 30.2% of revenue, and adjusted EBITDA was $10.5 million or 13.2% of revenue. These strong pro forma results include the elimination of nearly $10 million in very high-margin production revenue as we shifted to our new model.

The other housekeeping item relates to our distribution and production activity. We mentioned on our call last quarter that we were planning to begin reporting distribution and production as a single business area to reflect the manner in which we are now managing the business. We now have an improved production and distribution business that is poised to grow meaningfully while supporting our primary online networks business. This new reporting regime will take effect with our Q1 2020 results, so that we started off at the beginning of a new fiscal year.

I'll wrap up with an update on our balance sheet and liquidity position. As of December 31, 2019, the company had cash and cash equivalents of $6.4 million compared to $6.2 million at the end of the third quarter and $7.2 million at December 31, 2018. As of today, we had approximately $6.8 million in cash on hand. We had outstanding debt of $20 million at year-end with no significant maturities for several years.

When looking ahead to our first quarter results, I wanted to offer a few insights on how the positive changes in our business are rolling through the numbers. Given the trends we have shared on the call today, it's fair to say our online networks business is outperforming our plans in Q1 as Crackle Plus and our internal ad sales effort gain momentum. However, because we're still scaling this business, our ad rep partnerships contribute a higher proportion of online networks revenue than they will in the future. In 2019, the primary contributor to that revenue was Sony's PlayStation Vue. As discussed in our third quarter 10-Q, Sony decided to shut down PS Vue, and that took effect early this year. Revenues from PS Vue were running at roughly $6 million per quarter. But the margins were extremely low, so the EBITDA impact is minimal. We've struck new ad rep relationships with more favorable economics to replace a portion of that revenue and may add more. So we will see some mitigating impact as the year progresses. But as you will see from our growing reach and ad impressions and current strong demand from our O&O networks, which are our focus, the loss of PS Vue revenue is a short-term phenomenon and especially -- and essentially a nonfactor in our adjusted EBITDA.

On the distribution and production side, we're excited about our new model and the momentum that we are building. In the 2019 first quarter, distribution and production combined generated just over $1 million in revenue. You can expect to see this business ramp up significantly in Q1 of this year when we report results to you in a few weeks. The net impact of these factors and the normal seasonality of our business will be a downtick in sequential revenue comparisons relative to Q4 but tremendous growth year-over-year in both sides of the business. In short, our strategy is unfolding as planned, and we are getting stronger with healthier revenues and margins.

Wrapping up, as Bill mentioned, we are focused on navigating the COVID-19 situation and managing the business through the current period of uncertainty. With Crackle results improving, combined with our always disciplined expense management, we are in a good position. However, we also recognize that uncertain economic times lie ahead. And while our business continues to perform well, we are moving proactively to ensure we're managing and -- we're managing our P&L and cash flows prudently, while also evaluating options to further enhance the flexibility we enjoy with our balance sheet, including reviewing how we might benefit from the stimulus package. Thank you for joining.

Market and economic uncertainty notwithstanding, we're excited about the business trends we're seeing as the fruits of our strategy begin to materialize.

I'll now turn it over to the operator to begin the Q&A period.

(Operator Instructions) Our first question comes from Dan Kurnos with Benchmark.

Bill, it must feel nice to say ahead of consensus. I want to get just -- look, we're all obviously focused on the world as it falls apart around us at the moment, although duration unknown. And I guess sort of stress testing and just understanding that you guys are in a unique position since everybody is stuck at home now and watching TV and streaming, maybe just some color on categories -- ad categories that you guys are exposed to. And I know that you said that you wanted to market more aggressively the product, but I wonder if there's an opportunity for you to potentially not need to be as aggressive since users might be coming to you. So what you see from a customer acquisition perspective and whether or not there's any margin uplift just from any benefit you get due to the circumstances?

Dan, I think the best way to answer that question is -- there's a couple of pieces to it obviously. But let me start with the "Do we need to keep marketing as aggressively?" I think the answer is unequivocably no. We definitely do not need to market as aggressively as we have in the past or as we were planning to.

We've got lots and lots of traffic. And frankly, we have more traffic than we can actually monetize right now fully. So I think that really does argue that we can cut certain costs. But we've never been profligate spenders when it comes to marketing. So I think there's a limited amount of upside in that.

Categories of advertising. I had a list here somewhere, which I can't find, that had the various advertising categories that grew in the last month. There were 8 or 10 of them, and it would be easiest just to tell you what they were if I can find them, but I can't. So while some obvious categories have gotten smaller like travel, others have been growing, especially things where people stay at home.

Oh, here's the categories. So last week just -- or from 3/16 to 3/22, beer, wine and liquor ads increased 27%. You guys can make your own judgment about that. Computers and office supplies ads, up 21.4%; soap and cleansers, up 18.1%. It goes on: retail; building and home improvement; household and cleaning supplies; drugs, remedies and fitness; toiletries, et cetera. So there are entire categories that, if you think about it for a minute, makes sense that they would be increasing based on people staying at home versus the things that are not increasing, which are pretty obvious as well like the travel category. And so far, that's the way it's playing out, I think, and that's what we're seeing -- or that's what we're expecting to continue to see.

And in particular, in our case, we also have the advantage, I'd say, of having a rich audience of 18- to 34-year-old males. And there is not a lot -- the sports advertisers are struggling with how to reach that group. So I think that's also an advantage that we have, Dan.

Net-net, when you look at the overall advertising business, even with most everybody predicting downturns in ad revenue, they're almost all saying digital video ads are likely to -- digital video ad revenues is still likely to go up. So that's the best I can do, give you the overall of the industry right now. Too many uncertainties to be sure how this all plays out.

No. That's really helpful color. And then, obviously, you guys have been acquisitive in the past. It's part of sort of adding to the portfolio. Given -- just curious how you're viewing the balance between maintaining the balance sheet and ample liquidity versus finding that there are probably a ton more bargains in this market because a lot of other guys are struggling even worse.

Yes. I guess you've been around us for a while, so you know my nature. That question is a great indication of that. I think as much as this is a distressing time in so many ways for business people, it's also a time of opportunity. We are definitely looking at other things. And we do think that there may be some good opportunities right now for us to grow the business.

But we're not going to pull any trigger without it being clear that it's safe, that we've got increasing liquidity from whatever we're doing. It's definitely a balancing act. And really, I think there's kind of -- given what's going on in the industry, in general, and the strategic stuff that we talked about, that I talked about in my script, we will try our best to capitalize on this one way or another. And there may be -- there are 3 different ways we could go, right? We could acquire. We may be able to partner with somebody because of the great deal of interest that bigger media companies have in our area. And there's always the option of following everybody else and selling out to one of the big guys.

But this is definitely a time of great interest in AVOD. We are still very interested in growing the business through acquisitions. So I think the answer is we think we can -- may be able to do that so.

Our next question comes from Thomas Forte with D.A. Davidson.

So I had 2. The first one is with the outbreak causing significant economic pressure on local businesses, have you seen any change in demand for local advertising?

Yes. That -- there's -- we have a fair amount of local advertising, as you know, that we do through a whole series of resellers, 6, 8 resellers. And that's people like TEGNA or Telaria or Nexstar or Sinclair; [FourFronts], which is part of Comcast; there's a whole series of them; Nexstar, ZypMedia. I mean there's a series of these people.

Yes, there is definitely a drop in demand, Tom. The only reason that doesn't make me -- doesn't cause despair is because we had way too much demand for what we could supply. So right now, it's a very large amount of demand that existed and it's coming down, but it's still equal to or exceeding what we can actually service. I can't tell whether that's going to go on indefinitely, but we're somewhat insulated by the fact that if you look at the map, there are concentrated areas where the country is clearly out of business, but there are a whole bunch of areas where it's still not. And we do cover the entire country in terms of our selling of local advertising. And so when there's local markets that are still operating, we're not seeing the drop in those markets that we're seeing in some where there's literally nobody doing anything, right? Now if the whole country shuts down, obviously, that's going to change. But for the moment, it hasn't.

Good. All right. And then my second question: with movie theaters closed, at least temporarily, are content producers approaching you looking for opportunities to distribute their product on your platform immediately instead of the movie theater?

No. Not yet. But the closing of the theaters has obviously created an opportunity for us to accelerate our TVOD and DVD businesses. And we are taking advantage of that like everybody else. And we are seeing an uptick in the TVOD business, which makes sense because people are at home.

And here's the interesting thing to me: some of the movies that we were planning to do small theatrical releases for, we no longer have to because the TVOD and VOD providers, cable VOD providers are now saying, "Hey, give us the movies now. You don't need to do any kind of theatrical at all," so -- because it's impossible obviously. So I think in some ways, we're going to benefit from that phenomenon. It will bring forward some of the revenue that we thought we'd have a little later in the year. So that's kind of it.

We have sort of a portfolio, Tom, when you think about it, of businesses that we are in between -- and some of which are benefiting and a few of which are not from this thing. Obviously, the growth in viewers on our AVOD businesses is a benefit. The growth of TVOD and the growth of DVD sales because Walmart stayed open, is also a benefit. Walmart and Target sell a lot of DVDs. They're still open because they're effectively considered grocery stores. So there's a fair amount of activity in the DVD space that we didn't have before.

The theatrical business is shut so -- but that was such a tiny part of our business, it really didn't matter much. So I think if you look across the platform of stuff we have, the portfolio of stuff we have, probably more benefited than hurt by this. But I don't think anybody gets through this without some hurt for sure.

And our next question comes from Allen Klee with National Securities.

You talked about around $12 million of profitable revenue that had fallen off as a result of a lower-risk model that you're moving towards. And then that new model is expected to improve throughout the year. Do you think that you'll be able to replace that $12 million in 2020?

More than do that, Allen, without a doubt, expected to be able to replace multiple of that revenue. And I think as you'll see, we've been -- we haven't exactly tried to hide the fact that we feel okay about the first quarter here because we feel it's important to bring you all up to date in these circumstances, especially since we're at the end of the quarter anyway. But you'll see in the first quarter that there's a multiple expansion in that -- in the distribution and production line compared to last year, and we expect that to continue throughout the year with the possible -- with the caveat that if this goes on indefinitely and productions cannot start, at some point, we will lose some of the revenue we expected in that side of the business. But I will tell you with what we already have in-house, we will clearly be bigger than we were last year in that line no matter what, by a meaningful amount. So yes, we can replace it, and we will.

Okay. And can you just -- I know your business is pretty seasonal. Can you maybe help us a little bit? And if we look at 2020, is there anything different in terms of how we should think about the seasonality, just given everything that's going on?

Well, usually, it's Q1 is your weakest quarter, and then it gets a little stronger throughout the year. I don't know what Q2 will look like compared to Q1 at this point because of the situation. But usually the seasonality, as we know, we have a great -- the fourth quarter is big, and then we drop in the first quarter as people reassess. And then as we go through the year, ad revenue rises.

I would have expected it to look very much like that, subject to whatever this virus does and how long it lasts. But right now, I'd say it probably will look like any other year, but I'm not sure. I'm just not sure yet.

Okay. And my last question is, I don't know if you're able to provide this detail, but is there a way to look at, for the fourth quarter, how your viewership was on a pro forma basis year-over-year and kind of where your CPMs were?

So CPMs held in the fourth quarter and in the first quarter and so far are holding in the second quarter as we're selling in advance. So that one's easy. I'm not sure exactly how to -- what you're driving at with the pro forma of Q4. Help me understand what you're trying to -- what you're going for. And maybe even Chris can help me answer the question.

You gave some -- you said -- you gave some anecdotal information of viewership increasing for a few weeks. I was wondering if we'd looked at for all of fourth quarter how your views looked.

Okay. So now I understand it better. The 20% to 25% viewer increase that I discussed in my part of it was the last 2 weeks. It's been this very big spike over the prior periods. And I don't know how long that will go on for. I don't think it will go on indefinitely. But for now, it's an upward trend.

In the fourth quarter, we had record -- each month was a record over the prior month. We had continually increasing viewers in each month: October, November and December. So I don't know what -- I mean that's the answer to the question. They were record months, every one of them.

And our next question comes from Mike Grondahl with Northland Securities.

Kind of as a follow-up to the last question. Earlier in your prepared remarks, you said something about Crackle since March 15, I thought I heard like a 47% increase in viewership. And then were you just saying it was more like 20% to 25%?

Okay. So you were listening. But I was talking too quickly, so let me go back and try to explain what I actually said. So the viewership increased between 20% and 25% in the last couple of weeks, but a separate number, the new registered viewers per week, has jumped nearly 47% in a week-over-week analysis. So what's happening, I guess, Mike, I guess people have more time, and they are coming to our network and signing up as registered viewers at a much faster pace than we've ever seen before.

It's a bit surprising because we've done nothing different, but they're registering. So you were right about both numbers. They were just -- they covered 2 different things.

Got it. No. That's helpful. And then I think you guys had a pro forma Crackle revenue number of like $79.3 million if you would have owned it for the whole year 2019. With PS Vue and it sounds like $6 million a quarter going away, do we have to deduct that from the $79.3 million for sort of 4 quarters to kind of get a new run rate, if you will?

Oh, boy. Now the $6 million has to come off of the online network side of the equation and get replaced over the course of the year by new reseller arrangements on the growth of the O&O business. But you can't -- you have to combine that, Mike, with what I said a few minutes ago about the growth of the distribution and production business.

So in looking at the entire company for 2020, if you just deducted the $6 million, you'd be heading in the wrong direction. The other thing to remember about the PlayStation Vue business, it was a very low-margin business for us. And we've already completely replaced the EBITDA hit that was associated with it.

And our O&O network is growing.

And that -- as Chris pointed out, the biggest part of our business -- the most important part of our network business, the O&O part, is growing so...

Got it. Got it. And then, Chris, could you just repeat what you said when you were talking about the first quarter? I think you combined distribution and production and gave a number how that was trending.

Well, I think what I said was that those businesses generated just over $1 million last year that we were going to significantly ramp up in -- this in 2020. Is that what you're referring to?

Yes. I thought you said something about $1 million, but maybe you were referring to the 1Q '19 combined revenue...

That's correct, Mike. Right.

Okay. And our next question comes from Lisa Thompson with Zacks Investment.

I want to ask you about, first off, operating expenses. I know you had some onetime stuff, I guess, in Q4. What does it look like going forward, like what's the baseline number going into Q1?

Do you have them?

Yes.

Hold on a second, Lisa. We're going to try and get you an answer right this minute.

Excellent. And everyone gets it.

Yes. I can't give you the exact number because obviously we aren't ready to give Q1 number. But if you're looking at it compared to the Q4 numbers, they will come down a bit.

Just a bit? Is there like onetime stuff in Q4 though, isn't there?

There's been onetime stuff all year in those numbers. As you know, we've been transitioning off of a lot of the historical cost that the Crackle business had.

Okay. All right. And so you said that you're going to be down sequentially in Q1. Is that in both categories?

Oh, no. No, no, no. We said we'll be up significantly in production and distribution.

Okay. But the overall number is down.

Driven by 2 things: seasonality and PlayStation Vue.

Okay. Good. And then could you just talk about, given your new model, like what is the difference in gross margins between the distribution business and the online business?

We don't usually break that out that way, Lisa. But I think -- let's put it this way, the overall gross margin is going to continue to go up because distribution is a higher-margin business. Distribution and production is a higher-margin business, and it will have a proportionately higher share of the overall revenue this year.

And both the distribution business and the production business are considerably higher-margin businesses than the Crackle Plus business. So as the production business largely comes back and then exceed last year and then as the distribution business continues to ramp up, we'll see a return of gross margins -- improvement in gross margins that would be higher than what we've experienced this year.

So one thing for everybody to remember because as we talk about these as 2 separate businesses, we really see them as one. And the way we run the company, as you all know, is Crackle Plus pays a revenue share to both Sony and to us, which revenue share goes into our production and distribution side of the equation. We reduced the amount we report as Crackle Plus revenue by that payment to our production and distribution side and put that revenue into our distribution and production side.

The reason for that, of course, is that the 49% ownership of net profits that Sony would have, the partners of the venture, Sony and we, agreed that we should each get a percentage of the revenue as a payment. And that has the impact of making the Crackle Plus side of our business not profitable vis-à-vis the partners. So there is no distribution at the bottom level -- at the bottom line level.

I'm raising this, Lisa, because I remember reading one of your reports, and you quite correctly said, "There was very little visibility into how to estimate how much of the EBITDA would go to Sony from that 49%-51% split." I can give you the answer, 0. Because the net effect of the rev share, our 5% management fee and the amortization that you see in our income statement, which all is in the Crackle Plus side, means that net income for the foreseeable future in that particular unit will be 0. So 100% of the EBITDA of the company will be the company's.

Okay. That sort of makes sense.

Well, it was structured that way for a variety of reasons, not the least of which is that we wanted to be able to profit from the creation and delivery of original programming to the venture. And Sony's profit motive was partially its use of its product and partially the ultimate growth of that unit. But in the near term, the way those numbers work out, both partners make money on their content, and we don't make money on the net income line of Crackle Plus. So we make money from the 5% management fee. We make money from the rev share. And then we make a considerable amount of money because that all flows to the bottom line or ends up as EBITDA in the production and distribution side of the business.

Okay. So my last question is then like for something like Last Full Measure, did you book 100% of those revenues, the box office and stuff? Or is that a net number? How does that work?

With box office, we never -- no one ever -- well, I guess the theaters, for that, report the gross. We report a net number after theater share and distributor share and a whole bunch of other things.

But you are the distributor, no, somebody else's?

No. No, in that case, Roadside is distributing that movie.

Okay. Okay. So you get the net number on that, but then you'll have the gross number on the -- when you put it on online?

Yes. For Crackle Plus, for sure.

All right. Well, that seems to be it. I want to thank you all for coming today and spending time with us in a very strange moment in our history. Hopefully, the next time we speak, things will be coming back to normal or at least we'll see a path to normal. And we look forward to talking to you again. Thanks. Bye.

Thanks, everyone.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may now disconnect.