Chicken Soup for the Soul Entertainment, Inc. (NASDAQ:CSSE) Q1 2023 Earnings Call Transcript

Chicken Soup for the Soul Entertainment, Inc. (NASDAQ:CSSE) Q1 2023 Earnings Call Transcript May 15, 2023

Chicken Soup for the Soul Entertainment, Inc. misses on earnings expectations. Reported EPS is $-2.7 EPS, expectations were $-1.17.

Operator: Good day and thank you for standing by. Welcome to the Chicken Soup for the Soul Entertainment’s First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today Zaia Lawandow, Head of Investor Relations. Please go ahead sir.

Zaia Lawandow: Thank you, operator. Good afternoon and thank you for joining us. We’ll begin with opening remarks from our Chairman and CEO, William J. Rouhana, followed by remarks from our CFO, Jason Meier. After their remarks, we’ll open the call for questions. Matters discussed on this call use forward-looking statements including those regarding the performance of future fiscal years. Such statements are subject to a number of risks and uncertainties. Actual results could differ materially and adversely from those described in the forward-looking statements as a result of various factors. This includes the risk factors set forth in our most recent annual report on Form 10-K and in our most recent quarterly report on Form 10-Q.

The company undertakes no obligation to update any forward-looking statements. Please refer to the earnings release in the Investor Relations section of the company’s website for a discussion of certain non-GAAP forward-looking measures discussed on this call. With that, I’ll turn the call over to William Rouhana, Chairman and CEO. Bill please go ahead.

William Rouhana: Thanks Zaia. Good afternoon everyone and thank you for joining us. I’m pleased to report that we had a good start to the year with revenue and adjusted EBITDA coming in within our guidance range. Consolidated revenue for the quarter was $110 million, adjusted EBITDA was $20 million, and as many of you know we only reported the fourth quarter six weeks ago so there hasn’t been a lot of time since that report, but it’s probably worth highlighting some of the progress we’ve made since then. The media landscape continues to shift in a way that pushes more people to free ad-supported streaming. I’m sure you’ve all seen the news coming out of media earnings with studios now simultaneously removing content and increasing prices on their subscription services, forcing consumers to pay more for less.

It’s paying for the privilege of watching ads in most of these cases. The value proposition of our totally free ad-supported digital services and our low-cost physical rentals is greater than ever. And our kiosk rentals remain the most affordable way to watch premium new release theatrical movies anywhere. As we progress through the year, we’re encouraged by what we see as three ways we’re growing. One is the rebound we’re seeing in kiosk rentals. The second is our position as a premier ad sales platform. And the third is our plan to drive free cash flow through the expansion of our services businesses and I’ll talk some more about that in a few minutes. I said on our last call that we expected the studios to rush to release many films theatrically and that’s what we’re seeing.

There’s been a — we finally reached a steady state where films are constantly arriving at the kiosks. Looking at the summer, we’ve got some really interesting things coming. Starting tomorrow Ant-Man and the Wasp: Quantumania arrives in kiosks. Next week we’ll have both Creed III and Shazam! Fury of the Gods followed later in May by Dungeons & Dragons: Honour Among Thieves, 80 for Brady, and 65. In the first two weeks of May, we had two theatrical releases. And during the rest of the month, we’ll have six additional major theatrical titles at our kiosks with a combined box office of nearly $650 million. And that’s just May. Arriving in kiosks in June we have Renfield, releasing early in the month. I’m excited about mid-June where we’re going to have The Super Mario Bros.

Movie and John Wick: Chapter 4, followed later in the month by Avatar and Evil Dead Rise. In all, we’re anticipating 11 theatrical releases to arrive in the kiosks in June with a combined box office of nearly $1.6 billion. In July, we’ll have eight theatricals arrive in kiosks including Scream VI Are You There God? It’s Me, Margaret. And for those of you not keeping count, that’s 27 theatrical releases arriving between May and July with a combined box office of nearly $2.5 million — $2.5 billion, sorry. And August is shaping up to be just as impressive. It’s exactly what we were looking for when we first took over Redbox, but we’ve only seen three major event movies from August to February. So keep in mind, the title counts I mentioned, don’t include originals or direct-to-video titles, it’s just the big ones.

Including those, these new title counts come in from May through July at 48. Our second pillar of growth is our position as a premier ad sales platform. We just came out of a very successful NewFronts presentation a couple of weeks ago, which you’ll be able to watch on our website in the coming days. And I suggest you do it. It’s very impressive. There’s some really good stuff there. You’ll see Redbox streaming, you’ll see Crackle streaming, Chicken Soup for the Soul streaming, and a lot of interesting innovative ad techniques we’ve launched. We’re thrilled with the response to our Crackle Connex platform and we continue to build it out as a leading supplier for independent AVOD services and digital out-of-home networks. In fact, we now represent over 10,000 digital out-of-home screens through our deals with Coinstar’s adPlanet Retail Media Group and Velocity MSC.

We have the potential and the scale to be a large participant in the digital out-of-home business, which in turn can be a tailwind to revenue generation on our kiosks, adding in another revenue stream to our business. We’ve also presented a new — a number of new and renewed projects through our branded entertainment group. Series like At Home with Genevieve Gorder, Just For Kicks a brand-new show about the hottest new sneaker drops; and new seasons of our original hit series from executive producer Ashton Kutcher Going From Broke; as well as Inside the Black Box; Pet Caves; and Wedding Talk. As you know we partner with leading national advertisers like the General Insurance PetSmart and Men’s Wearhouse, among many others to mitigate the costs and risks associated with production.

Beyond brand’s entertainment Crackle Connex is also developing a number of data and technology partnerships that will allow for targeting execution and measurement of ad campaigns across platforms. Later this year, we’ll be rolling out interactive ads through Amazon Publisher Direct to Amazon DSP advertisers. The ads will connect viewers directly to check out by using their voice or remote control to add items to cart and complete purchases. We’ve also announced partnerships with measurement companies Upwave and Geopath to measure positive ad lift in both series and digital video screens respectively. Our ability to provide exceptional service to our ad rep partners is complemented by the depth and quality of our film and television category — catalog, which remains in high demand.

And I’m pleased to announce what I’m hoping will be the first of many announcements with TaTaTu, a leading European-based social media entertainment company. We’ll bring our film — our extensive catalog of films and television series to their innovative platform as they roll out internationally, allowing us to expand our global footprint. This is the first platform of scale that rewards audiences for viewing and engaging with content, and I couldn’t be more excited to explore ways to incorporate their tech into our networks. Finally, generating free cash flow remains a priority and will continue to be driven by the rental rebound we’re seeing along with continued cost management initiatives. Additionally, the success we’re seeing with our service businesses both our kiosk and ad rep has encouraged us to look at our entire business to identify other opportunities to apply the service model and generate incremental revenue that can be immediately converted to cash flow.

As you know, our kiosk service and ad rep business continues to scale providing greater value for our B2B clients. Our ad rep clients have grown to 22 leading independent AVODs and digital out-of-home networks. We’ve grown the number of kiosk service customers to four including EcoATM, Kimi, Pokemon and Amazon with whom we have a long-standing partnership. In addition to these partners, we have a full pipeline of potential new customers with many pilot programs in or near launch. The low upfront investment combined with synergy opportunities makes these service businesses very attractive and we continue to look at the rest of our overall business to find other opportunities to create additional service revenue. In closing, I’m excited by the results we’re seeing early in the year and look forward to updating you on our progress in the months to come.

Now I’ll turn the call over to Jason, who will walk you through the financials.

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Jason Meier : Thank you, Bill, and good afternoon everyone. As Bill mentioned, we began the year on a very strong note with both revenue and adjusted EBITDA coming in within our guidance range. First quarter revenue was $110 million, up 275% year-over-year, and adjusted EBITDA was $20 million, up nearly 450% year-over-year. Sequentially, although revenue was down 4% from a seasonally strong fourth quarter and adjusted EBITDA was up 37%. Performance in the quarter continues to reflect the strength of our multi-platform strategy, especially the monetization of Screen Media’s library. In the first quarter, excluding the impact of acquisitions year-over-year, revenue increased $33 million more than double the first quarter of 2022, reflecting demand for our premium content library.

As we previously mentioned on past calls, we continue to view Screen Media’s library, as an extremely valuable asset that generates future cash flow for our business. Further to our multiplatform strategy, year-to-date our TVOD business continues to accelerate. Coming out of April, which had the largest TVOD revenue week in our history, we saw continued growth in May with year-over-year revenue up 14%. In fact, over the past week alone TVOD revenue was up 13% week-over-week. We’re excited about the TVOD growth we are seeing as it is a leading indicator of films that will be hitting our kiosk network in the coming weeks. In the first quarter, our gross profit was 12%, a 14% sequential increase over the fourth quarter. Our gross margin in the first quarter was adversely impacted by a decrease in kiosk rentals year-over-year largely attributable to lack of films a consequence hitting the kiosks on a consistent basis.

With a number of event films and the cadence of films expected over the remainder of 2023, we expect our gross margin to improve in the future. In our physical kiosk network, we ended the quarter around 30,600 kiosks nationwide. Daily rentals per kiosk or our version of the same-store sales remained strong in April. On average daily rentals per kiosk for March and April were nearly 20% higher than in January and February underscoring the positive impact of the return of theatrical titles and kiosks. Our operating loss for the first quarter was $38.5 million, compared to an operating loss of $10.8 million in the prior year. The variance is largely driven by the mix of revenues along with increased compensation expense and higher amortization expense both related to the merger with Redbox and the acquisition of 1091 Media in 2022.

Our adjusted EBITDA for the quarter was $20.1 million, compared to $3.7 million in the prior year quarter, representing an increase of $16.4 million or nearly 450%, which includes the equitization of $3.45 million of CSS management and license fees. More to come on that in a moment. Excluding the impact of the CSSE equitization, adjusted EBITDA for the first quarter would have been $16.6 million. Turning to items impacting our financial position. As you will recall in late March, we announced a public offering of our Class A common stock that closed in early April raising $10.8 million. Also in late March, we entered into a modification agreement with our parent company Chicken Soup for the Soul LLC related to our management and license fee agreement.

Under the modification, the company was able to equitize up to $16.2 million of future fees through the issuance of our Class A common stock subject to certain defined terms. Under the agreement $3.45 million was equitized in the first quarter of 2023 as I previously mentioned. More recently, credit rating agency Egan-Jones reiterated its BBB rating on both the company and our senior secured notes, underscoring the strength of our capital structure. As a reminder, we retained favorable debt terms under our HPS credit facility with no financial covenants for 2.25 years and the ability to pick interest through February 11, 2024, giving us plenty of runway, given our expectations around the expected timing of increasing operational cash flows.

We continue to focus on further streamlining our organization to result in more cost effective coordinated and efficient approach to our operations. As Bill previously mentioned in his remarks, we’re evaluating ways to replicate the service aspect of our ad sales and kiosk service organizations across other parts of our business to drive future revenue and scale, resulting in increased future cash flow. Additionally, we continue to look at assets that we own that are not strategic to our go-forward strategy which we may choose to sell or partner with others to raise additional cash flows in the future. In closing, we’re already seeing the results of our cost-cutting initiatives and an increase in the number of event films available in the kiosk starting in late May and we expect the combination of these factors to significantly increase our operational cash flows.

Now, I’ll turn the call back over to Zaia for Q&A.

Zaia Lawandow: Thank you, Jason. Operator, can we please open the call for questions?

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question comes from the line of Jason Kreyer with Craig-Hallum. Your line is now open.

Operator: Thank you. One moment for our next question please. And our next question comes from the line of Eric Wold with B. Riley Securities. Your line is now open.

Operator: Thank you. One moment for our next question. And our next question will come from the line of Brian Kinstlinger with AGP. Your line is open.

A – William Rouhana: Thanks, Brian

Operator: Thank you. One moment for our next question, please. Thank you. And our next question comes from Dan Kurnos with the Benchmark Company. Your line is open.

A – William Rouhana: Thank you.

A – William Rouhana: Yes. So, this comes back I think Dan, to the never-ending question of programmatic advertising versus direct sales, one way or the other. What keeps us — what I think, keeps us interesting to the — what you call demand sources, is the fact that we don’t really need them. And now, that we’re consolidating so many AVODs in our little network, I don’t know how else to describe it in Crackle Connex, we become a more and more important potential customer for them. And we’re seeing that, manifest itself in a couple of different ways. But I probably, I am not going to be able — I probably shouldn’t go into it because, it’s stuff that is kind of — I think it’s confidential stuff. We should keep it confidential.

But I will say this, our relationship with those parties, are getting stronger and it makes sense because we’ve got 22 partners now, who are buying through us. And a lot of them are buying programmatically as well as direct. So what’s your next question, Dan?

Operator: Thank you. One moment for our next question. And our next question will come from the line of Mike Grondahl with Northland Securities. Your line is now open.

Operator: No more questions. Thank you for all of your questions. This concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone have a wonderful day.