Chicken Soup for the Soul Entertainment, Inc. (CSSE) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by. Welcome to the Chicken Soup for the Soul Entertainment First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference to your speaker, Taylor Krafchik with Investor Relations.
Taylor Krafchik: Thank you, operator, and welcome. With me on the call are William J. Rouhana, Chairman and Chief Executive Officer; and Chris Mitchell, Chief Financial Officer, to review the first quarter 2021 results as well as provide a business update. Following this discussion, there will be a moderated Q&A session open to the participants on the call.
William Rouhana: Thanks, Taylor. And thank you all for joining us today. We have had a lot of good news to share with you recently and I think lots more today. So let me start by recapping some of what we've gotten done over the last five months. We've reported results for 2020 full year that were well ahead of expectations and showed tremendous growth. We closed the largest content deal in our company's history with Sonar, adding IP rights to 372 television series, 1,825 episodes of TV and over 700 films to our already robust library. We presented brand new original and exclusive content at the Newfronts which includes numerous exciting and stars-studded titles like Going From Broke Season 2, which by the way is off to a good start. We announced the new television studio called Halcyon to be led by David Ellender, which will help grow our pipeline of high quality and own content. We announced our new AVOD streaming service, Chicken Soup for the Soul. And we took important steps to enhance and grow the distribution of our streaming services, unveiled innovative new ad experiences. And we'll be delivering a new and compelling product and user experience both on television and mobile devices.
Chris Mitchell: Thank you, Bill. As you've already heard, our operating highlights I will focus on a review of our financial results in balance sheet. And as Bill discussed, Sony converted its ownership stake in Crackle Plus to an ownership stake in Chicken Soup for the Soul, strengthening our relationship with Sony and giving us 100% ownership of Crackle Plus, with full ownership, we're no longer required to record Crackle Plus separately from the rest of our results to Sony, which has allowed us to further integrate Crackle Plus and more efficiently manage the business from a consolidated perspective. At the same time, the integration allows us to achieve synergies and realize savings and sharing costs in areas such as content operations, and marketing, all of which leads to profitable growth. With the business now managed as one holistic, consolidated operation. We're reporting our financials on a consolidated basis. As we said in our last conference call. This is the way I will discuss your financial results today. However, I would note that we have added a table in our MD&A section and our revenue footnote section of the 10-Q, that breaks down our consolidated net revenue by revenue source, which we believe could be helpful for investors. With that, our financial results for our first quarter 2021 reflect the further progress we've made in executing our growth strategies, which in turn enabled us to build on the momentum we saw coming out of 2020. Starting first with the results for the first quarter, we reported net revenue of $23.2 million compared to $20.2 million in the fourth quarter of 2020 which was an increase of nearly 15% sequentially, even though the fourth quarter is typically the strongest quarter of the year due to seasonality. This compares to $13.2 million in the first quarter of the prior year for an increase of 10 million, or roughly 75% year-over-year. This year-over-year increase in net revenue was primarily driven by a $7.9 million increase in international revenues, resulting from licensing of international rights to international distribution partners for several titles, including Going from Broke, Heroes of Lucha Libre, and On Point. The increase also includes a $4.2 million increase in TVOD, and internet streaming revenue that was primarily driven by the strong performance of Willy's Wonderland, Skyfire and Senior Moment, as well as an increase in AVOD related direct sales. These increases were partially offset by lingering COVID-19 related softness in the areas of video distribution, and theatrical revenues, as well as the absence of PSU and PSP related revenue this year. By the end of the first quarter of 2021, our streaming services had substantially rebounded to pre pandemic levels, our distribution pipeline remains strong, and the outlook to resume production improved position us well for the remainder of the year. As we've noted on prior calls, Q1 2021 will be the last quarter, in which our year-over-year comparisons are distorted due to having PSU in our prior year results. We sold virtually all of our advertising inventory again in Q1, as campaigns from larger advertisers remain strong and viewers remained engaged. Further, our CPMs also continue to improve driven by our strong content offerings, and coupled with innovation and enhancements we've made to the overall ad experience. We expect to see continued momentum in this area throughout the remainder of the year. Gross profit for the first quarter 2021 was $7.0 million, or 30% of net revenue, compared to $5.9 million in the fourth quarter of 2020 or 28.5% of net revenue, this compares to $3.3 million in the same period prior year, or 25.2% of net revenue. Excluding non-cash film library amortization expense, gross profit in the first quarter would have been $13.9 million, or 60% of total revenue, as compared to $8.2 million, or 62% of total net revenue in the prior year period. Operating loss for the first quarter 2020 was $5.8 million, compared to an operating loss of $10 million in the year ago period. Our adjusted EBITDA for the first quarter was $4.6 million, compared to $2 million in the same period last year, a year-over-year increase of roughly 124%. Looking at our balance sheet and liquidity position as of March 31 2021, the company had cash and cash equivalents of $24.6 million, compared to $14.7 million at the end of the fourth quarter 2020 and $7.1 million at the end of the year ago period. The first thing cash balance reflects our strengthened balancing and enhanced liquidity position following the closing of our common stock offering in January 2021. In closing, we're pleased with the continued momentum we saw in our business in the first quarter, and excited about the opportunities we see to build on that momentum as the year unfolds. We've accomplished a tremendous amount in a relatively short period of time, positioning us really well to evolve the business and further accelerate growth in coming months. To that end, we're particularly focused on growing viewership, with initiatives aimed at enhancing the user experience and platform, growing distribution of our streaming services, and pursuing larger and more innovative marketing partnerships. With all of these initiatives in place, and a significantly more robust content pipeline, we are confident in the growth that lies ahead. And as we work to capture that growth, we will continue to take advantage of our ability to integrate all aspects of our business and to manage expenses and risk in a disciplined way, with an eye on improving cash flow, and enhancing flexibility of the balance sheet. Thank you for joining. I'll now turn it back over to Bill.
William Rouhana: Thanks, Chris. Operator, we'll take questions now.
Operator: First question comes from Tom Forte with D.A Davidson. Your question please.
Tom Forte: So first off, Bill, congrats on the quarter. One question and one follow-up. and state of reopening in various parts of the U.S. I was curious to find out how your local ad sales are doing right now.
William Rouhana: First of all, Hi, Tom. And thank you. Local ad sales are doing well. I mean, there is generally an upbeat tempo in that part of the business as well, that lag the International - I mean the national direct sales for a while, but I think it's coming back. So the reopening is starting to have an impact.
Tom Forte: Great, and for my follow-up question if I talk about fully fleshed out your strategy on having multiple today, the Chicken Soup for the Soul, Crackle, and Popcornflix, fully fleshed out, do you envision having more? And then from that point, to the extent that you have these specific AVODs quantify the potential accretion of CPM rates? Meaning does this give you by more than 10%?
William Rouhana: So it is a two part question, Tom. So let's take we tried taking one part at a time. Do I anticipate having more? Maybe, but that is really - that really depends on a few different issues. But for now, the focus is on really driving these three. We think these three are a complete package with a male oriented Popcornflix, a female oriented Chicken Soup for the Soul network, a general ad presentation network, we think that a couple of these networks, if not all three of them can travel the globe, we see them as really great opportunities, all of them, we think we've got an unusual amount of content that relates to each of them. So we feel great about the portfolio of networks that we've now put on the on the field. And we get access to other people's networks in different ways, sometimes through add representation agreements, and otherwise, as a way of having an even more diversified group of growing networks that we take a share of. But for now, the focus is on these three, it will remain there, absent something that causes me to make a decision that's different, which would be an opportunity. So that's part one. Part two, the CPM growth, there's already too much demand, we're not the only one seeing this right now as the ad agencies and advertisers are moving much more rapidly now, towards OTT from broadcast and cable. And we're - what we talked about today, with those seven or eight different presentation type sponsorships that I talked about. Those are way more than $10 more time than what we normally get. Because those presentation credits come with a fixed kind of charge that if you're going to present an entire series or entire tray or any show on our network, you're asking for special treatment, and that requires special payment. I don't know how is to put that. And as we've been growing that part of the business, in addition to the normal ads you see, we're growing revenue by monetizing our viewership in a way that's much less intrusive, presented by, as you'll see in Promised Land, or as you can see on going from Broke Season 2 sponsorship is a very different thing for a viewer. It's great for the advertisers, they get credit for delivering an ad free experience to the viewer, but it's great for both parties and great for us, it's more profitable. So I've been saying for a while as you know that, we're going to continue, continue to innovate in the way we bring advertising to the network. This is just another example of it. And there's much more of this coming. But each of these ways we innovate are going to take into account the fact that we want to give more value to our advertisers and make it a better experience for our viewers. So it's not about a 10% increase, it's about a seismic change in the way you think about advertising, and monetize viewership, it's very exciting.
Tom Forte: Great, thanks for taking my questions.
William Rouhana: Appreciate it.
Operator: Thank you. Our next question comes from Dan Kurnos with the Benchmark Company. Please go ahead.
Dan Kurnos: Good evening, Bill, probably the most complete quarter you've put together today. Looks like it's all starting to come together, coming up basis for you guys. I guess the question that I have for you first, on international since we didn't really get to talk about that too much. On the Sonar call, I kind of left it open ended and didn't really come up with just you talked about monetization mechanism, how quickly you think you can pursue that opportunity? And what you think kind of the initial Tam is out of the gate?
William Rouhana: Yes, these are good questions Dan, and by the way, thank you for that comment. You've been around with us from the very beginning. So you've seen the history of the company. And it is the most complete quarter we've ever put together. It's as an astounding quarter. And, but there's going to be much better through the rest of the year, this is just the beginning of what's going to be a great year for us. The international opportunity is really developing much more quickly than I had anticipated. And I think part of it is a direct result of the launch of the Chicken Soup for the Soul, AVOD. We have been hearing from quite a few companies, quite a few media companies around the world, about rolling that network out in their markets. I think the ideal way for us to do an international business is in partnership. I think probably country by country with major media companies, especially broadcasters, who are looking to change the way to basically give their businesses a longer life as they try to deal with the reality in their own markets of people migrating. We can deliver it to an international partner, basically AVOD and a box. Here, you provide us the marketing and the sales, use your advertising sales force, use your own existing broadcast network to market the existence of these AVOD channels, and drive people to a business you own a piece of. That's the ideal mechanism for going in international from my point of view. If we can make that work, Dan, then we can accelerate this very, very rapidly, because what we have to do on site is reduced to the minimum amount of operational activity. And I think this is a model that's been used by a number of very big media companies. In fact, one of them A&E I believe, really kind of rolled out their entire international strategy on this basis. And that of course as we all know, was a huge success. I think that's replicable in AVOD, probably we would be the fastest because what's the key element in all of this content, you've got to have the content. We've got the tech, we've got the content, and we're going to have the data. Marketing and sales are local activities. And that's where we all need help. Now, that's one way this may go. I don't expect us to launch our own units in various countries without partners. But there's also a possibility we might do a much bigger deal with a partner across the world. But the international opportunity is real. I'm not going to get into any more detail in that for the moment, Dan, because I believe is I believe this is something that we'll be able to talk about his future quarters with much more detail. But it's a real opportunity. It's coming much faster than I anticipated. And we're ready for it, which is the great news, because we are done with the basics here in the U.S. of the new platform, access to data. And of course, we put together a four year lead in content in the AVOD I space.
Dan Kurnos: Got it. That's helpful, Bill. Look forward to hearing more on that front. And then look, you made a point to really call out advances in sponsorship. Obviously, people are starting to take notice that your critical mass and content we're now through race of the new fronts, we've got the upfronts we've got 18 other fronts, it seems like this year. But the conversation you're having with advertisers now. Can you just talk about, kind of the tenor of those conversations and whether you're getting either longer commitments, I know advertisers are reluctant to commit anything that can't cancel tomorrow right now, but longer commitments, bigger commitments, kind of brand expansion, just to help us get a little bit more granularity and what seems like a positively developing story?
William Rouhana: Yes, I think the way to think about this is to go back to that point I made about the nature of advertising on AVOD beginning to change. These presentation credits are just the beginning of an evolution, I think, in some ways back to the future, really and back to Hallmark Hall of Fame type stuff, where advertisers are going to want to take credit for delivering great content, but in an even better way for AVOD viewers. And I see that then expanding into bigger relationships with advertisers to sponsor entire; I want to say sub channels, was Trey's on our networks, and because they know that getting access to this inventory is going to be very competitive. First of all, in a world where as we know, 50% of the hours that are being streamed are being streamed on SVODs where there's no add opportunity at all. So you've got 50%, less of what used to be a bigger pie that you've got to get access to if you're an advertiser. And you want to do it in a way that's value add to the viewer so that they like you more. If I think you're going to see a number of these presentation type relationships grow in scale and scope. And that's what I say, is another part of the very great part about OTT. We can do things very differently than they can on broadcast networks. And I see there's an increasing amount of interest in that among advertisers having a longer term relationship against the whole category of content, which is relevant to their world. And we're pushing that in earnest.
Dan Kurnos: Got you. And if I could squeeze just one more in, I know, it's been a little bit lengthy. But just on the COGS comment you made, Bill, I think it's really important. Roku brought up expanded gross margins in the Roku channels is based on the fact that they're seeing a lot more people willing to sell content rather outright rather than grow rev share. I think that's kind of a critical component. And if we pull out the nonsense amortization in your COGS, it was a really healthy margin, again, in Q1. So how do we think about how that kind of trends over time and how much more does that - how much more leverage do you think you have in that line, because we're just trying to get a sense of sort of underlying profitability here?
William Rouhana: I think we're not done by any stretch of the imagination. The drivers have always been the same, as we've talked about this. One is the original and exclusive content, which continues to perform really well and grows and overall amount. And the other is owned library. And I keep coming back to zero is a great cost of revenue. When you own IP, your cost of revenue is - you own instead of rent, and it's a much better model for us. We're going to continue to grow the owned IP portion of what we what we present. And that will continue to drive margins in the direction we want them to be driven. And I think the other thing to be aware of, and Chris made this point in his speech. The integration now that we're able to drive across our entire business, we're sharing content ops costs, we're sharing marketing costs now across the business, we don't have to keep the pristine separation we had when we had a potential 49% partner in Crackle Plus, that we required us to track things in a very - in a not integrated way. But the other thing about that to understand is, we are able to integrate the revenue growth as well. And so you're going to see in some of the future quarters that the sponsorships that there are inside of these productions are driven exactly by the fact that we have the Crackle Plus networks. And that combination is going to allow us to increase gross margin and grow revenue at the same time. So this whole thing is coming together the way it's supposed to now, all parts of this plan are starting to get knitted together in a way that's driving margin, allowing us to reduce costs, because we were able to keep certain costs lower because we've been able to integrate the various parts of the business into one. And that's contributed to a much higher EBITDA than people expected in this quarter. And frankly, and we expected, the business is working extremely well. Thanks for asking that question.
Dan Kurnos: Thanks for the color, Bill. I appreciate it. And excellent start to the year.
William Rouhana: Thanks, Dan.
Operator: Our next question comes from Austin Moldow with Canaccord. Your question please.
Austin Moldow: Hi, thanks for taking my questions. First ones on the Chicken Soup for the Soul network. When does that launch and how many distribution platforms will be on? And can you talk more generally about go-to-market strategy there, and I guess how you'll be leveraging the publishing entity to viewers and such?
William Rouhana: First of all, Austin, welcome. We saw your research report this morning. And we appreciate your involvement in our work in our efforts to make this a bigger company. So thank you for that. The Chicken Soup of the Soul network has just got so many different things going on at the same time. In terms of our launch strategy, it's pretty simple. We're going to start with a few linear channels. And particularly on VIZIO, whereas we've got our Crackle button coming, but that Crackle button is going to lead you to a world which will include Crackle and Popcornflix and the Chicken Soup for the Soul networks ultimately. And we will start with some linear channels to start to get people used to the content. We'll move to - in addition to those linear channels to AVOD towards the end of the year, and then it will go across all of the 37 platforms that we currently have Crackle on and we're pushing to put Popcornflix on, it'll be available on all of those platforms. Which of course means that we're going to be telling you at some point, we're going to more than 61, because you guys can multiply 37 times three, I know that. So we'll be expanding our consumer touch points over time. So in terms of reach and launch, that's the plan. In terms of what it means in terms of opportunity, the Chicken Soup of the Soul brand has been around since 1993, we've sold a billion books around the world, hundreds of millions in the United States, there are 40 million households in the U.S., which have a Chicken Soup for the Soul book on a bookshelf. Probably most of you have one in your house; you may or may not know. But you do. The books continue to sell at a great pace. And it's a love brand, a trusted brand. What that means is advertiser's trust us want to be involved with us. They like our programming. And that's really - that makes them great allies in the way we roll out the business. And much of what I talked about in the last answer about individual subsets of our networks being susceptible to presentation types, crap tag credits, it doesn't take a lot of imagination to think, well, if we're going to have a food and a travel, and a home section on each of these - each of the Chicken Soup of the Soul AVOD networks, that there's a natural sponsorship opportunity for that entire line of content for different major companies. So we've got an opportunity here which I believe how this will come out to really engage in meaningful long-term relationships with sponsors that are very different than the up and down nature of the spot in that business that advertisers, most people think of when they think about the advertising driven content businesses. So there's really a big opportunity to advance this model and do it in a different way, Austin, so. We're excited about it.
Austin Moldow: Got it. Okay, thank you for that. Can you speak to the trajectories of user growth and maybe time spent across Crackle Plus?
William Rouhana: Yes, I'd say that, user growth is good. But almost irrelevant. I've been arguing for a couple of years. That's not really the primary metric. I did want everybody to understand that the strategy of rolling out these new touch points is actually coming out the way we thought it would. In fact, we said it was going to be 200,000 to 500,000 new monthly active viewers. The range is actually quite a bit broader than that. And some of the more developed ones have hit over a million monthly active viewers. The less developed ones that are only open a couple of weeks are much lower numbers, but on average, it was 280,000 over the first six of the quarter. But the time spent is critical, critical things because it's really you need more time to have more ad impressions and you do need to sell your impressions despite me, hoping that we'll be selling more presentations than just ad impressions in the future. And there we were weak because our tech wasn't as good as it needed to be our recommendation engine wasn't as good as it needed to be. And it's all of that's about to change with our new tech platform, which I think you may have seen it the new fronts. If not, you should take a look at that video. And that's really where we expect to make the big improvements over the remainder of the year by very much improving the amount of time spent overall and really that's a key thing for us to accomplish this year. That's the best way for us to grow viewership in the way I mean, that phrase.
Austin Moldow: Got you. One last quick one, on the library. What portion is owned content?
William Rouhana: Which portion is owned? Is that what you asked me?
Austin Moldow: Yes, I guess of the available titles.
William Rouhana: Okay, well, 2000 movies, 2000 TV episodes out of 11,000 total of available movies and 22,000 total available TV episodes. That's the way to look at it.
Austin Moldow: Got it. Okay, thanks very much.
William Rouhana: You're welcome.
William Rouhana: Our next question comes from Brian Kinstlinger with Alliance Global. Your question, please?
Brian Kinstlinger: Thanks, Bill. I only ask one question might be two parts so we can get some other things. Hello, can you hear me?
Operator: You're on mute?
Brian Kinstlinger: I am not on mute.
William Rouhana: We can't hear you, Brian.
Operator: We couldn't hear you. Thank you, Brian.
Brian Kinstlinger: Okay. I'm new to the iPhone. I'm kidding. I am only going to ask one question. You're constantly adding new, original exclusive titles. You've acquired a huge amount of content recently. Where are you? And I'm sure the technology platform you're putting in is going to help this. But where are you in the evolution to optimizing own content versus licensed content and especially through recommendations? And where is that long-term mix? And where are you right now?
William Rouhana: Yes. So we're at the very beginning of the process, which is why the answer to Dan's question about margin at 60%? Is it going to get better? The answer is yes. We're at the very beginning, Brian, we just acquired the second half of our own content, right, or actually, we haven't even finished we'll close the Sonar deal. As I said very soon, and that we will have doubled the amount of owned or long-term distributed content. And that, of course, will dramatically affect our ability to lower cost to revenue. But we're not done with either the production or the acquisition on a daily basis of film and TV series nor are we done with acquiring libraries, because we are the most logical acquirer of any library that has AVOD use. We can continue to put that - we can continue to make that much more valuable to us. And further, as you know, we're targeting one new original or exclusive piece of content every week beginning in 2022. This means that we will have ramped up both the distribution side from 10 to 20 movies, the production side with partners to another 20 movies - 20 series. And we'll acquire 10 or so additional things on an Ad hoc basis over the course of the year. So we're going to continue to ramp up our new and original content that's coming through, we're going to continue to ramp up library ownership. It's the very beginning of that exercise, and it will drive cost to revenue down even further.
Brian Kinstlinger: Great, great results. Thank you.
William Rouhana: Thanks. I think operator, this is going to be our last question.
Operator: Thank you, sir. A last question will be from Jason Kreyer with Craig Hallum. Please go ahead.
Jason Kreyer: Thank you. So Bill, we've spent the last few quarters talking about this content pipeline that you build up, and obviously starting to see that in the financials. It's just more on the production and distribution side. At what point does that pipeline of titles start to hit crack applause and then I know you don't like to comment on the viewership trends of things. But how does that impact your business when all these titles move over to crack? I mean, what are the metrics that you're looking forward to kind of gain that mindshare?
William Rouhana: So, you have made this point, Jason, I mean, very well, over the last few months, as I read your work. There has been - there is this - the content is kind of like a leading indicator, as you've sort of pointed out. And as it comes on an increasing level, we're going to have increasing viewership just because of the quality of content continuing to improve. And there is a pipeline now that's pretty inevitable. I don't know exactly how many new movies we're bringing on; I think it was something like nine or 10 that we announced in the Newfronts and another dozen or so series that we announced. But that's not really the end of the process. That's the beginning of it. We're already seeing, lots of new content come on, like going From Broke Season 2, which by the way, was the number four show on the network, when I looked that yesterday. And by the way, it hasn't premiered. What's up right now are these 10 minisodes that are presented by track phone or smart track or somebody. And those minisodes are sort of like a preliminary to the real premiere of the season, which is May 2020. That kind of content is going to continue to come at a pace that drives viewership just like Going From Broke Season one day. And it's going to be supplemented by the stuff that's in the pipeline; things like the Outpost and Willy's that will be here next year. And that combination is going to, I think be a very powerful driver of additional viewership. I also think, though, that the new tech and the recommendation engine, and the incorporation of data will also have a very big impact on time on site. But the nice thing is, we're coming from a great place, we're starting from a base that is really good, a solid base now, I think far in excess of what people really expected and we're going to go up from here. So there's every reason to be very excited about where we are and our ability to grow this, we are in a unique spot. I think we can - it's nice to see our kind of competitors now, admitting that you do need original and exclusive content in the AVOD business. We're only been saying that for four years all by ourselves. But it is clearly right. It has a big impact on the business. It is one of the key elements of that three lag its two lag about talking about. Go ahead, you got one more.
Jason Kreyer: Well, I mean, just correct me if I'm wrong, but we've been talking about this mix shift towards profitability. And then as some of these titles move over to Crackle Plus, I would think that that's another positive mix shift for profitability. As I don't believe there's a lot of cost of revenue attached to those titles once they hit Crackle. Am I incorrect there?
William Rouhana: No, you're absolutely right. It's another good driver of this cost to revenue, down gross margin EBITDA. So, grow viewership, drive cost revenue down. That's what we said this year was about. We've done both already in the first quarter, I think far in excess of what people would have expected. I see it continuing over the rest of the year, growing viewership at an accelerating pace, driving costs revenue down. It means a bigger and much more profitable business. And hopefully, we'll be able to continue to tell you each time we get on one of these calls that the future we see is even brighter than the future we saw before. As we've done the last three times, we've done this. I think that's where we are.
Jason Kreyer: All right. Thanks, Bill.
William Rouhana: You're welcome, Jason. Well, thank you everybody, for joining us today. As you know, we're very excited about our business. I think you could probably tell that by these comments. And we look forward to giving you more information as time goes on. Thanks for joining us.
Operator: Thank you. And this concludes today's conference call. Thank you for your participation and you may now disconnect.
