Cinedigm Corp. (CIDM) on Q3 2021 Results - Earnings Call Transcript
Operator: Greetings and welcome to Cinedigm Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Jill Calcaterra, Executive Vice President. Thank you. You may begin.
Jill Calcaterra: Thank you. Good afternoon and thank you for joining us today on our third quarter fiscal 2021 earnings conference call. Participating in today's call, are Cinedigm's Chairman and Chief Executive Officer, Chris McGurk; Chief Strategy Officer and President of Cinedigm's Networks. Erick Opeka; President, Chief Operating Officer, General Counsel, Gary Loffredo; and Senior Vice President, Finance and Accounting, Sheryl .
Chris McGurk: Thank you, Jill, and thanks everyone for joining us on the call today. Let me give an update to cover some key points about our corporate strategy and business outlook. And then I'll turn things over to Erick for a more in-depth review of our streaming business results and strategy. Then Gary will cover our strong fiscal third quarter financial results and the remarkable progress we have made over the last few months in reducing debt and strengthening our balance sheet. Let me emphasize at the outset that we are in the strongest position we have ever been in financially. We have significantly reduced our debt and have plenty of ammunition on our balance sheet to execute our growth agenda. In addition, our equity ownership comp position has changed dramatically over the last six months. We no longer have a majority shareholder and the Chinese funds, including Bison Capital, have reduced their ownership to less than 20%. This ownership composition change and resulting increased share of liquidity have given us the flexibility to more quickly and fully execute our strategic streaming role of acquisition strategy. And it has also already opened up Cinedigm to an entirely new wave of investors who seem very attuned to the company's unique streaming business narrative and tremendous growth prospects. With that overview as a backdrop, let me first talk about our streaming business. Overall, despite the impacts of COVID-19 on the advertising, theatrical and DVD markets, we have had a tremendous run so far this fiscal year, and particularly in this last third fiscal quarter, where our streaming channel revenues from our 15 channel targeted enthusiast streaming portfolio increased by 85%. And we reached almost 23 million monthly active ad-based viewers.
Erick Opeka: Thank you, Chris, and thanks to everyone for joining the call today. Before I dive into the numbers, let me first provide an update on the competitive environment in streaming today, and how Cinedigm is poised to succeed in what is shaping up to be the biggest transformative period in the history of film and television. Today as more than a third of Americans have opted out of pay cable, and more than 5.5 million a year, are on average flowing out of the cable ecosystem, most of the major media companies and platforms are remaking themselves to compete with Netflix, as they chase scale in global general entertainment audiences. In the meantime, we're seeing an incredible surge in consumer engagement with what Chris and I have described as enthusiast streaming services, namely, services that cater to a consumer's passion for a topic, genre of content. With the average number of streaming services used per household in America now approaching about 7.5, up from just two a few years ago, the industry is finally able to deliver what consumers have always wanted, the ability to build their own custom bundle of channels that reflects their interests and passions. On top of this, the emergence of free ad supported linear and on demand channels, provides consumers additional choices and breath while giving advertisers the addressability and audience demographics they need. As one of the largest providers of channels and streaming content Cinedigm has quickly become one of the most important players in this emerging streaming ecosystem. Our offerings enable some of the largest entertainment and platform companies in the world, like Amazon, Apple, Comcast, Dish, Netflix, Samsung, Viacom and Fox to fulfill on delivering the single most important thing that's driving the streaming revolution, freedom of choice. So whether we're licensing movies to Netflix or providing subscription channels to Comcast Xfinity platform, replacing Bob Ross on Viacom's Pluto TV like we recently did, Cinedigm drives engagement and revenue no matter the platform, business model or location.
Gary Loffredo: Thanks, Erick. For third quarter of fiscal year 2021, consolidated revenues were $10 million. The revenues derived from our core content and entertainment business segment increased by 8% for the three months ended December 31, 2020, compared to the three months ended December 31, 2019. As expected, the overall revenues in our legacy digital cinema equipment business declined by 71% for the three months ended December 31, 2020, compared to the three months ended December 31, 2019, due to the significant negative impact of COVID-19. Theatres in many major markets remained closed throughout the fiscal third quarter, causing the majority of major studios to move releases is scheduled for the quarter to future dates. We only earn a virtual currency when a movie is first played on a system. In addition, and as previously discussed, the employment contracts in the cinema equipment segment provides for the payment of virtual currencies for up to 10 years from the date of the installation of the digital projection systems. And therefore, these continue to move towards the end of their respective 10-year terms. We have planned for this expected roll off of virtual print fee revenue. Reflecting the shift in our business to streaming, third quarter revenue for our streaming channels was 85% higher than last year. AVOD channel revenue was up 150% over the prior quarter ended September 30, 2020 and up 79% over the third quarter of the prior year despite the temporary impact of COVID-19 on the overall advertising market. Our net interest expense decreased 41% to $900,000 to the third quarter of fiscal 2021, compared to $1.6 million for the prior year period. The decrease in net interest expense is primarily the result of our active reduction in outstanding debt balances. Our total outstanding debt balance as of December 31, 2020 was $25.4 million. That is a reduction of $25.7 million or 51% lower to the debt balance as of December 31 2019. $12.1 million of that outstanding debt balance at December 31, 2020 is related to the digital cinema business, which leaves $13.3 million of debt on the content and entertainment and corporate business compared to $39 million as of a year earlier. That is a $25.7 million or 66% reduction. And as of today, the content and entertainment and corporate debt is only the East West Bank credit facility which is $2.4 million and a PPP loan of $2.2 million for which we have submitted our application for forgiveness. Third quarter fiscal 2021 adjusted EBITDA for the base distribution and OTT streaming and digital business was $1.3 million compared to negative $500,000 from the third quarter of fiscal year 2020, an increase of 376%. From a liquidity standpoint, we have taken several important steps to improve our liquidity position. First, the credit facility with East West Bank. The East West Bank credit facility had an outstanding balance of $18.6 million on March 31, 2019. That was reduced to $14.5 million as of March 31, 2020. And that balance had decreased to $5.1 million as of December 31, 2020. As I stated the current balance on the East West Bank is only - today is only $2.4 million. The East West Bank loan is at an interest rate of 3.75%. So that currently results in payments of about $7,500 per month. Now the company's second lien loans. These loans had an outstanding balance of $8.2 million on March 31 2020. The outstanding balance on the second lien loans as of December 31 2020 was $6 million. In January and February of 2021 after the quarter ended, we exchanged with various holders of second lien notes, an aggregate of 1.4 million shares of common stock for an aggregate of $2.4 million principal amount second lien loans. On February 9, 2021, the company prepaid all of the remaining outstanding obligations under the second lien loan agreement. The payoff amount was approximately $3.2 million. The second lien loan agreement was then terminated effective February 9, 2021, and is no longer outstanding. The only recourse debt that remains as of today is the East West Bank credit facility which is $2.4 million, and the PPP loan of $2.2 million. The nonrecourse debt related to the digital cinema business as of today is $12.1 million. As of December 31, 2020, we had $26.2 million of cash on the balance sheet, 8.7 million of that amount relates to the digital cinema business. On February 2, 2021, after the quarter ended, we sold $5.6 million shares of common stock through a registered direct offering to a single institutional investor for gross proceeds of $7 million. Our efforts over the past year to reduce our debt and reduce our interest expense have resulted in a strong balance sheet and cash position that will enable Cinedigm to continue the growth of our core business and to continue to execute on our roll up acquisition strategy. We have eliminated all of our convertible notes and all of our second lien debt. We have a strong cash position to enable Cinedigm's to take vantage of future accretive acquisitions. And we have achieved that reduction in debt, while simultaneously growing our core business EBITDA and investing behind our rapidly growing streaming business. With that, I will turn the call back to Chris.
Chris McGurk: Thank you, Gary. In closing, Cinedigm has entered calendar year 2021 in tremendous shape. We had an extremely strong quarter financially, and on every key streaming growth metric. We now have significantly reduced our debt and have a much strengthened cash position, providing the firepower to augment our remarkable organic streaming growth with smart accretive streaming channel roll up acquisitions. We no longer have a majority owner, which has made it much easier to quickly execute our streaming roll up strategy, while still maintaining our strong position for future monetization in Asia. It's also greatly enhanced our common shared liquidity and open the gates to a whole new group of forward-thinking investors who seem to really understand the potential of the streaming space and Cinedigm's unique competitive position and growth prospects. The future looks very bright. And with that, we will now take your questions. Operator?
Operator: Thank you. Our first question is from Dan Kurnos with The Benchmark Company. Please proceed.
Dan Kurnos: Great, thanks. Good afternoon and congrats on the quarter guys. Really strong traction here on streaming in particular, maybe if we can just start there for Chris or Eric, just in terms of all the acquisitions that you've made, clearly very savvy, gaining a lot of attention from several outlets. Just curious if maybe you could at least share with us what the trajectory is now, kind of the AVOD business post acquisition. And since you guys have done such a great job with the balance sheet, does it change the way that you guys are going about the acquisition, target evaluation? Does it change the potential acquisition pool and maybe even some of the conversations, given the change in the ownership structure that you were having before that might be a little bit more forward now? Thanks.
Chris McGurk: So this is a Chris, I'll answer the second part of the question, and then turn it over to Erick for the first part of the question. All the financial firepower that we have right now, has not yet changed the way we're looking at acquisitions in the space. We got a very, very robust list of potential acquisitions like the three that we already made that seem to meet our criteria. So we're going to plow through that first, because we think in each one of these instances, we found these kind of gems that existed out in the marketplace, that are going to have an immediate impact on our results. And we've got several more that we're considering right now before we decide whether we want to step up a little bit more. And also, we're, we're integrating the three right now. We want to make sure we get it right, with all three. But as Erick mentioned in his remarks, the integration seems to be going extremely well, right now and a large part because of the mesh point technology that we both spoke about in our remarks. So Eric, do you want to hit the first part of the question?
Erick Opeka: Yeah, so as we look at the composition of acquisitions if you'll notice, we acquired two subscription, predominantly subscription-based services, and then another service that was predominantly advertising based. I think our outlook on the market is we look at in the enthusiast space, both of these are going to be vital as we look at and say, where we're really providing that richness and depth once people get bored with some of the bigger services and want to dive into things that are their particular interest areas, we think there's plenty of room on that front for both ad supported as well as subscription services. So furthering what Chris has said, so our focus is looking at things that could not only when we acquire them, they are a - they are either ad based or subscription, but that their business could then be easily ported to the hybrid model that's working so well for us, like we do with Dove and CONtv and Docurama and others. So think of it as a perpetual free trial when we - if we, and when we launch a Pandora, linear an ad supported play, that's really a way for a larger number of users to get exposed to the service, thus not only generating revenue, but reducing our customer acquisition costs. And then in terms of scale and size, I think the composition of ownership change, our balance sheet changes really does afford us the structural flexibility, if we find something and we want to step up and pursue it and go bigger, we have the balance sheet capabilities to do that now. And so I think that's a much bigger plus as we are M&A is partly strategic and partly opportunistic. And I think that helps with the opportunistic part of M&A.
Chris McGurk: I think another point, Dan, is that a lot of these acquisition initiatives, we're looking at are incoming sort of - really, I talked about in my remarks, and Erick did is pretty clear in the industry, and a lot of these smaller maybe subscale streaming acid companies, they really recognize the upside. So we're starting through a lot of incomings as well, which makes the job larger but a lot easier.
Dan Kurnos: Yeah, I think in a way, Chris is kind of what I was getting at a little bit just given the balance sheet cleanup and also the ownership too, I was just curious if you were seeing more inbound or having easier conversations. And then just Erick, can I follow up on something that you just mentioned. We've seen some success with other services out there and kind of pushing a linear first offering, particularly international. I know it's not, you guys have some decent - you have such a huge playground's domestically. But can you just give us any thoughts there if that might be an option for you guys to get a bigger international viewership footprint before you push more channels that way.
Erick Opeka: Yes, so that's been a big focus. That's one of the bases for the acquisitions we made as we evaluated them on their international potential. And as we look at every acquisition now, our model is, can this thing scale to millions or tens of millions of subscribers, depending on the business model of how whether its wholesale subscribers, third-party or direct, can we scale up rapidly internationally as well? And so the answer with all three of those acquisitions was a resounding yes. We saw the fine need in the market. We have already on the ad supported side, we've already been anticipating that we would be entering Europe and Asia. So we've been entering into - I think we've closed at least half a dozen, if not more, advertising partnership deals for those territories. And our focus over the next 12 months is to match that 50 plus advertiser footprint we have in North America, every DSP major DSP, we're going to do that the rest of world. And then most of our partners on the platform side, if you look at who we're working with, Samsung, TCL, all of them are international all of them are rapidly expanding internationally, and all of them are pressing us to expand internationally. So I think, international is going to be a huge part of the 2021 story as we continue to really dive into that.
Dan Kurnos: Got it. That's super helpful guys. Thanks and congrats again, really strong results.
Chris McGurk: Thank you, Dan.
Operator: Our next question is from Brian Kinstlinger with Alliance Global Partners. Please proceed.
Brian Kinstlinger: Hi, guys, thanks for taking my questions. Can you highlight during the December quarter how many digital channels were live? I think I heard you, but I wasn't sure compared to the September quarter. And then if you can in any way quantify the increased adoption by partners of the channels that have been live for six months or more.
Erick Opeka: Yes, so we have 15 channels live in the market today. We actually added - so that includes the addition of Bloody Disgusting and the two B2 film detective channels that were added in that quarter as well, that makes up the additions. In terms of the channel footprints that we have, I don't have broken out the number of devices per channel in front of me. We can talk - I think I can get back to you on the overall distribution footprint by channel subsequent to the call. But I'll tell you that in terms of the scale of distribution, there's different levels for different channels. Some channels are what we would characterize as eight plus channels that are going to be on every single platform. I would say for the channels that we put into that bucket, the vast majority of those are broadly distributed in North America on most of the footprint. There's a second tier of channels where some channels are still getting more distribution and smart TV, I'd say it's about the middle third of channels. So we probably over the next six to nine months will continue to expand the distribution on those channels. I would say there's another tier of channels. I think, I mentioned, like we ceased distribution of certain channels in the portfolio, so that 15 is net of us dropping Hollipop and Combat Go, which underperformed, for example. So our vision is, if channels don't cut the mustard in terms of carriage, consumption, scalability, we're going to pretty ruthlessly edit them out of the portfolio. So, it's unfixed much like any other portfolio of any kind of assets where you have to constantly trim the laggards and add new things that are going to be the beat your top performers. So that's really our focus for this year is adding more Bob Ross scale of channels. And we're going to do that by eliminating channels that don't hit our sort of minimal threshold footprint.
Brian Kinstlinger: Great. And then you talked about ad budgets getting back in the fourth quarter and I heard some of that to through some advertising. I'm wondering what you saw in terms of pricing or CPMs, in the fourth quarter or even today compared to the year ago period. Is it higher, is it lower or is it about even?
Chris McGurk: I would characterize, generally speaking, it's about even to slightly higher. I would, if I had to estimate a number of probably maybe 5% higher in the last quarter. Now, a lot of that, of course, was driven by a very, very aggressive October, in election spending, which is a biannual sort of scenario that happens and heaviest in Presidential election years. But we definitely saw a nice bump out of that, which made up for a lot of lost ground on the year. But then, that general shift that I've been talking about, the five to six million viewers that have shipped cable. The cable cancellation numbers that you hear out there, those are the trailing indicator. Because usually what happens is people kind of forget the middle to higher income individuals. They have cable, they maintain and maintain it, and then as they realize they're not using it at all, they get around to cutting it. But meanwhile, the advertisers are already seeing those declines and just in the lack of viewership and audience. So, that's one of the most important and critical driving factors of consumption, is that even for people who still haven't cut the cord, their consumption has already moved to streaming. So that's being borne out in higher demand for connected TV advertising overall. And I think just anecdotally, as we look at how things are already going in Q1, that's kind of a preview, we're seeing not the typical season. We do see a seasonal drop, but we're not seeing it to the extent we used to see it. Which to me leads me to believe that these sort of sustained higher CPM, higher flow of higher capture of ad dollars is just going to be an ongoing trend, as cable TV homes go from 82-83 million down to whatever the floor could be, that could be 40, 50 million or less.
Brian Kinstlinger: I don't mean to - 58% growth is fantastic, obviously in any business. So forgive me for asking it this way, but the viewership up 300%, CPM rate up a little bit. The election helping ad budgets back to pre COVID. And you have so many more channels than you had a year ago, why don't we see - and maybe 100% on the ad budgets - sorry on the Avod, I guess I'm wondering why revenue growth doesn't look a little bit more like viewership growth, what is the disconnect there?
Erick Opeka: We've got 34% growth in digital sales in that number, 58% growth number.
Brian Kinstlinger: That's a 100% on the Avod and a 300% on viewership.
Chris McGurk: Yes, and you got it, full licensing of the different platforms, which was 34%, which postpaid a little bit. But that number in and of itself. The 34% growth is a great number for that business.
Erick Opeka: Yes. So all I didn't say, so our viewers. So it's really what happens is you kind of look at the scale of the model is or how the process works is first you have to have enough eyeballs that advertisers are interested in you. So we've clearly accomplished that. The second phase of that is, having enough demand partners and field partners to sell every last bid of our inventory. That's been the work in progress. You can't really do that until you have the audience. Nobody wants to work with you if you don't have an audience. They'll say come back when you build an audience. So you have to go through a period of time for every channel, where you have to prove that you have an audience, get data, and then go back to all the advertisers and get them to want to advertise with you. Even on programmatic, it's - it goes beyond your direct selling. And so you're always going to have a lag of, a quarter to two quarters, and it depends on how far each channel along in their life cycle, where you've got, a lot of audience and then the monetization follows. So if you look at it, and you say, all right, our viewership is up 300%-ish, our revenue growth is up 150%. So what that tells me is one, we've got a lot more room to improve CPMs, fill rates to do more at bring more ad partners and more scale and more revenue. So there's more headroom from that part of the business. So we're only halfway there, if you look at it from that perspective to achieving the full potential of the footprint we currently have. And that number only gets better as you add more and more channels, more and more distribution, and so on and so forth. So, we went from basically, if you look at over the last 18 months, having basically no ad business, to now having to scale ad business that we're - we've really done a good job starting to monetize. The next 18 months are going to be about further enhancing the monetization out of that current business. So if you look at it from that perspective, you could say, well, can we double our revenues again? If we did nothing else, but just more effectively, extract revenue out of the existing basis. I would say, that's a fair question. And I think that's one of our goals, and one of the big opportunities of the company.
Brian Kinstlinger: Great. Yeah, that was really helpful way to think about that at the end. Last question, I have that, three acquisitions you've made. Just take, what should investors think about in terms of revenue contribution? Is it like adding two new channels, is it much bigger than that? What would you be reasonably happy with as you look at fiscal '22? And what would you be really unhappy with their contribution for next year?
Erick Opeka: Well, I'll say - we don't - so from numbers, we usually don't - we're not giving guidance on these channels, per se. But what I'll say in general of what we've been saying overall, is that when we acquire a channel. We're looking at something that over the mid to long-term, globally can deliver in the $15 million to $20 million range in revenue per channel. Now that means fully launched, fully distributed under every distribution model globally, including wholesale licensing, all these other pieces. But that is - that's what we talked about overall, in the long-term, it's an aspirational number, but we're not really giving particular guidance on the individual channels one-by-one or how they're going to perform in the short to mid-term.
Operator: Thank you. This does conclude our question-and-answer session. I would like to turn the conference back over to management for closing remarks.
Chris McGurk: This is Chris McGurk. Just in conclusion, again, I just want to thank all of our shareholders again, for all your attention and support. And again, really, thank all the new investors that we have, the enthusiastic new investors that have found the company and are commenting about it, and following us on Reddit and Wall Street Bets and Robinhood and StockTwits. I - we all want you to know that we were listening to you. And we're glad that we have your support. And even though you're not multibillion dollar investment funds, some of the advice and comments that you give are just as intelligent, as smart as we get from those types of groups. So keep talking to us and we'll keep listening. Thank you all for your support. And we'll talk again very soon. Good bye.
Operator: Thank you. This does conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.