Chicken Soup for the Soul Entertainment, Inc. (NASDAQ:CSSE) Q4 2022 Earnings Call Transcript

Chicken Soup for the Soul Entertainment, Inc. (NASDAQ:CSSE) Q4 2022 Earnings Call Transcript March 31, 2023

Zaia Lawandow: Thank you, Kevin. Good morning, and thank you all for joining us. We’ll begin with opening remarks from our Chairman and CEO, William Rouhana, followed by remarks from our CFO, Jason Meier. After their remarks, we’ll open the call for questions. The matters discussed on this call include 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 factors set forth in Chicken Soup for the Soul Entertainment’s most recent annual report on Form 10-K and in our most recently filed quarterly report on Form 10-Q.

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

William Rouhana: Thank you, Zaia. and welcome, everyone. And thank you for being flexible as we had to adjust the timing of the call in order to take advantage of the opportunity to raise a bit of capital, as you saw in our filing this morning, and I’ll discuss that in greater detail in a moment. But first, let me talk about — a little bit about the past year. 2022 was a year of transformation, not only for our industry but for our company as well. Total annual revenue for the company was $253 million, up 129% over last year, and adjusted EBITDA was $33.5 million, up 53% in the same period. We hit our revenue run rate of $500 million in revenue and $100 million to $150 million of adjusted EBITDA as we planned. When we started the year, we had about 170 employees.

Seemingly overnight, we found ourselves with over 1,300 when we acquired Redbox. Integrating a company several times larger than us was no easy feat, particularly one dependent on the returns of theatrical releases. And despite the challenges we faced, we were able to position ourselves successfully for continued growth in 2023. As we look forward, there are many opportunities for us to scale our business further and continue growing, all driven by 3 pillars. One, the Redbox integration and the kiosk rebound that is currently underway; two, our position as a premier advertising sales platform for the broader AVOD industry; and three, efficient working capital that supports the growth we expect in 2023 and beyond. As I’ll discuss in a moment, the return of theatrical titles is firmly underway.

This return, however, began in earnest months later than we had anticipated when we acquired Redbox. When looking at 2022, there was only a small trickle of big budget wide release hits that broke the year-long theatrical drought, films like Top Gun Maverick, Black Adam and Black Panther: Wakanda Forever. But the frequency of the releases was sporadic and very slow. We were still seeing extended weeks with no major releases. To give you some context, that’s only 3 major event films from August through February. And as you all know, the kiosk depend equally on the frequency of major releases as they do on the volume of those releases. The frequency of major releases is finally here. After waiting for years, big movies are back in the theaters every week, beginning in February of this year with the theatrical release of Ant-Man and the Wasp: Quantumania.

We expect at least one new major wide release every weekend for the rest of the year. It’s like the floodgates have opened and the studios are rushing to release as many films as possible on available weekends. In fact, the 2023 theatrical slate is one of the most impressive in terms of content and volume in years. Some of the highest-grossing film franchises of all times are slated to release their latest installments this year, including films like Indiana Jones and The Dial of Destiny, Fast X, Transformers: Rise of the Beasts, and Mission Impossible: Dead Reckoning. And there are many, many others. We already see the positive impact on rentals as these films move from theaters to kiosks and TVOD. The average weekly rentals at the kiosks in March are nearly twice those in the month of February.

Rentals per kiosk per day, our version of same-store sales, also jumped in March and are now over 40% of 2019’s level, and we expect that to continue to grow. In line with our expectations, we expect to see the early impact of the theatrical rebound beginning Q2 as those films arrive in the home video window following a 4- to 6-week theatrical run. And for those doubting the pent-up demand for audiences to watch these films in the theater, all you have to do is look at the theatrical performance of recent releases like Creed III, Scream VI and John Wick Chapter 4. All of these films set franchise record-breaking opening weekends. Creed III had the biggest opening weekend of any sports film in history. Even when looking at the Super Bowl ads this year with 11 film trailers shown, nearly double the amount during last year’s Super Bowl.

You could see the evidence that the theatrical business is back. As studios spent millions on P&A, marketing these sales, we stand to benefit from consumer awareness as the films leave the theatrical window and enter the home video window. By the way, it’s important to highlight the value of the home video window. We are down in player in that window, which includes rentals and sales of physical DVDs and digital TVOD. An industry study recently showed that Studios generated about $7 billion a year from the home video window. Even during the pandemic, studios generated $5 billion a year, underscoring the window’s resiliency. As we all know, studios are obligated to maximize the value of their films for stakeholders, including talent and producers, and can no longer justify skipping such a valuable window.

As they realize this, we stand to benefit because we are an important participant in that window, both in physical DVDs and TVOD. And as a reminder, we operate one of the largest TVOD platforms in the industry. The second pillar of growth for the year comes from our premier ad sales platform, through which we are cementing our leading position in the broader advertising ecosystem. You might have seen a press release yesterday from the IAB announcing this year’s lineup at the NewFronts, and it would have included a name you might not have heard before, Crackle Connex. I’m happy to announce that we just launched Crackle Connex, a unique and fully scaled in-house media company that represents not only our own ad inventory but also that of third-party clients, what we used to call Ad Rep partners.

Led by our Chief Revenue Officer, Philippe Guelton, and President of Ad Sales, Darren Olive, Crackle Connex will connect brands with consumers. We also announced today a significant milestone as we accelerate our growth across the advertising ecosystem. Crackle Connex now represents 20 Ad Rep partners. And by the way, that’s up from 2 last year. Together, they reached 80 million monthly active viewers, 60 million of which come from our Owned & Operated platforms, which is up from $40 million, and 20 million come from our Ad Rep partners. We’re excited to capitalize on the growth we’ve seen over the year, representing our AVOD partners in the ad ecosystem. We look forward to sharing more on Crackle Connex in the coming weeks, leading to our presentation at NewFronts in May.

During the quarter, we saw strong growth across our Owned & Operated AVOD platforms. In December, we saw our Redbox AVOD usage hit an all-time high, driven by the highly curated content slate, including The Expendables film series, which accounted for the best title performance on Redbox ever. Holiday content was also a huge hit, with our Screen Media owned film, Elliot the Littlest Reindeer, it’s one of my favorites, maintaining its position as a top performing title on Redbox AVOD and Crackle AVOD. Crackle MAU growth was driven by our ongoing strategy of meeting consumers where they are across connected TVs, and Crackle and Redbox branded remotes. Finally, the Chicken Soup for the Soul AVOD continues to be our fastest-growing AVOD, with growth reflecting the launch of FAST channels and New Apps, which I’m pleased to announce just launched on Roku.

Overall, direct CPMs were up modestly year-over-year and fill rates remain in the 80% to 90% range. December was about 29% over the prior December, consistent with the results we saw in Q3. We remain comfortable with the broader advertising environment, which continues to benefit from the shift of ad dollars from linear and broadcast to connected TV. And as more viewers and brands converge on AVOD, we are well positioned to continue capturing that growth this year. Our FAST networks continue to perform very well, including our Owned & Operated channels, which are syndicated to third parties like Roku and Samsung. We recently expanded our offering of third-party content by partnering with industry-leading media outlets, including QVC and Allen Media, Weather Channel, bringing a local now, bringing our total number of FAST channels to over 160, makes us one of the largest — having one of the largest numbers of FAST channels on any service.

Our TVOD business is already benefiting from the return of theatrical titles. In fact, this past Tuesday was our biggest day in TVOD ever, driven by the release of Avatar: The Way of Water. TVOD orders in the fourth quarter were up 6% year-over-year and up 13% sequentially from the third quarter. We continue to refine our strategy on our TVOD offering as we do with our kiosks to merchandise previous titles in a franchise around the release of the latest installments. We did this when we merchandised the kiosk and TVOD with Knives Out, around Netflix’s release of Glass Onion. We also did it with Scream, and it’s a meaningful way to capture audience demand around new releases. In fact, just recently, John Wick Chapters 1 and 3 were our top 2 catalog titles in kiosks over the past 2 weeks coinciding with the theatrical release of John Wick Chapter 4.

Turning finally to the third pillar. We have adapted our approach to taking — we have adapted our approach to take into account the challenging macro financial environment we’re living in, with rising rates, inflation, bank problems, among other challenges. We’ve attacked these issues head on. First, by achieving the synergies we identified when we entered the Redbox transaction. But we did not stop there. We continued by looking at all the commitments Redbox made to make sure that they were things we thought made sense for the business. If we found they weren’t, we changed them. In addition, we made further cost cuts than we initially anticipated and deferred further expenses such as executive bonuses to tie them more closely to our expectations for free cash flow.

And we recently licensed content that we weren’t fully utilizing to the tune of $8 million. We have begun the integration of our Ad Rep business, O&O networks and SaaS platforms to generate contribution margin that we use to invest in the growth of our Owned & Operated networks. This should allow us to continue to grow that integrated business with less capital needs. And finally, yesterday, we did a small public offering to begin the process of strengthening our balance sheet. We raised $10.8 million from investors, including our parent company, and worked out an arrangement with our parent company to reduce future cash payments starting January 1 relating to the management of license agreements through a stock purchase commitment. In addition, we’re looking at certain assets that are not strategic to our go-forward strategy, which we intend to sell.

We believe that this will help us reduce debt more quickly than anticipated. And of course, we plan to finalize our working capital loan with our accounts receivable in the near future. In closing, if 2022 is a year of transformation, 2023 has the potential to be a year of execution and growth. The rebound in theatrical releases is already driving rentals higher. The integration of our ad-supported businesses is already well underway. Our TVOD business is continuing to grow. Our short-term actions are focused on addressing the macro environment we’re all living in, but our long-term mission remains to build the leading premium entertainment company for value-conscious consumers. With that, I’ll turn it over to Jason.

Photo by ThisisEngineering RAEng on Unsplash

Jason Meier: Thank you, Bill, and good morning, everybody. We ended the year on a strong note with fourth quarter revenue of $113.6 million, up 216% year-over-year and adjusted EBITDA of $14.7 million, up 59% year-over-year. Sequentially, revenue was up 57% from the third quarter. The strong performance in the quarter reflects the continued strength of our multi-platform strategy, including library monetization and digital performance across both our Owned & Operated platforms as well as our Ad Representation business. The performance in the fourth quarter was driven by the strength in distribution and licensing on Screen Media, reflecting the demand for our premium content library, which more than offset the impact of a limited number of theatrical releases at the kiosks and on TVOD.

As Bill discussed earlier, the frequency of those releases was sporadic and inconsistent, unlike what we are expecting for the remainder of 2023. Despite the limited number of title releases in the fourth quarter, TVOD revenues were up year-over-year, driven by an increase in orders reflecting the strength of Top Gun Maverick, which was a top order new release title from October through December, demonstrating an impressive consistency unusual for a title prior to its release on the SVOD window. The other driver titles on TVOD were Black Adam and Black Panther. As the theatrical slate rebounds in 2023, we expect to see continued growth in both TVOD revenues and orders. As Bill mentioned, we’re already seeing the positive impact of the return on big theatrical titles to our kiosks in March.

Black Panther: Wakanda Forever drove week-over-week rentals up 30% and on transacting customers up 23%, followed by Puss in Boots: The Last Wish, a week later that drove rentals up 12% and new transacting customers up 19%. We ended the quarter with about 32,000 kiosks nationwide. As previously mentioned, we are constantly optimizing our kiosks footprint, which includes expanding relationships with our most profitable retail partners. We recently announced an expanded partnership with a leading national value-conscious retailer, who will be adding 1,000 new kiosks to their stores this year and an additional 500 next year, bringing their total kiosks count to over 5,000. As always, we will continue to identify ways to drive greater profitability and customer reach.

As an example, in Q1 of 2023, we began rolling out the ability for Redbox kiosk customers to utilize their loyalty rewards on our TVOD platform driving further digital engagement with the Redbox customer base. I’d like to take a moment to provide some context around kiosk rentals and the assumptions that underpin our expectations for the remainder of 2023. Based on the early rebound in rentals we’re seeing in March, along with the size and scale of the theatrical slate from now through the end of the year, our expectations of rentals return to approximately 30% of 2019 levels pre-pandemic. Along with this, we’re seeing the conversion rates at our kiosk beginning to rise towards the 45% level that they were in 2019. As the steady flow of films returns to kiosks, we expect conversion rates to rebound.

In fact, over the past 2 weeks, we’ve seen conversion rates jump to the highest level since we acquired Redbox. Now let me turn to the fourth quarter. In the fourth quarter, gross profit before film library amortization expense-related costs and after Redbox product cost, was $76.6 million or 68% of net revenue as compared to $23.1 million in the prior year quarter or 64% of net revenue. On a comparable basis, CSSE’s stand-alone gross profit was 30% of net revenue in the quarter, up from 22% in the third quarter of ’22 and 32% in the prior year quarter. When combined with Redbox’s stand-alone gross profit margin after product cost of approximately 58%, the combined business had a blended gross profit margin of 43%. Our reported operating margin in the fourth quarter on a comparable basis to Q3, adjusted for a nonrecurring impairment charge, was 200 basis points higher or 19%.

Our operating loss for the fourth quarter was $47.1 million compared to an operating loss of $19.1 million in the prior year. This variance is driven by increased compensation expense related to over the 1,000 additional heads, and other nonrecurring charges, as well as higher amortization expense and management fees, all driven by the acquisitions of Redbox and 1091. Our adjusted EBITDA for the fourth quarter was $14.7 million compared to $9.3 million in the same quarter in 2021, representing an increase of $5.4 million or 59%. Sequentially from the third quarter, adjusted EBITDA was up 53%. In the quarter, we continued to realize synergies related to Screen Media’s original content at the Redbox kiosks and the Redbox TVOD platform. As well as savings related to leveraging Crackle’s ad sales force from — on Redbox’s AVOD platform and distribution, I should say, Screen Media’s distribution of Redbox’s content, just to name a few.

Turning to our balance sheet. As of December 31, ’22, the company had $18.7 million of cash on hand. And as Bill previously discussed in his remarks, we’re focused on increasing recurring free cash flow through enhancing working capital by reducing content spend, realization of synergies, and are expecting an amplified working capital improvement as the kiosk rentals rebound in 2023. And with that, I’ll turn it over to the operator.

Zaia Lawandow: Thanks. Kevin, can we open the line for questions, please?

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Q&A Session

Operator: . Our first question comes from Thomas Forte with D.A. Davidson.

Thomas Forte: I think I’ll ask one question and get back into the queue. So Bill, basically, your results were pretty much as expected. Your outlook for the year was good, as expected, including for the first quarter. But you talked about the capital raise and you talked about that you may talk more about capital raises in general. So can you talk about, I guess, your current capital structure and how investors should think about your capital needs over the next 12 months, especially given the favorable performance both in the fourth quarter, the expectation for the first quarter and full year?

William Rouhana: So yes, it was — I wanted to give you the context of the entire approach we’re taking to addressing capital, working capital, those kinds of things. I mean it’s a moment in time for everybody in our industry where people are attacking the questions of costs and the questions of content spend and questions of working capital and questions of capital on the balance sheet as a combined effort. And I think that’s the way we need to look at what we’re doing. We’re not just doing one thing. We’re doing many things, all of which are designed to drive cash flow faster and to improve the overall capital of the business. We — I’ll repeat some of the things I said earlier because they’re important, we took a look at commitments that have been made.

That were made by Redbox, made sure they made sense. We combined tech commitments where we could in order to reduce costs. If we found something we didn’t like, we changed it. We deferred bonuses, the way I said earlier. We’ve also tied them more closely to what will be growing cash flow in the second, third and fourth quarters. We’ve been licensing content in order to make sure that we tap what I used to call our savings account, and it still is, that very large library we have is a generator of cash for us, in the last few weeks alone $8 million. We’ve looked at our Ad Rep business and put it — put our Ad Rep business and our FAST platform and on our O&O networks together and are running them with the contribution margin that’s coming from the Ad Rep business and the contribution margin that’s coming from the FAST platform to fund the O&O networks, that means less capital is needed for the AVOD business, all right?

We didn’t mention that for the 2023 year, we’re anticipating only about $19 million of net content costs. So if you looked at the $100 million of EBITDA on the low end of the range that we have for the year and subtracted $15 million of interest we have to pay on our notes and our preferreds and $19 million of cash content, and throw $15 million in there for working capital ups and downs, you’d have $50 million of free cash flow this year on the low end of our range. So it’s a combined effort of things. The public offering we did yesterday is the beginning of just beefing up the balance sheet. As you know, we’ve been working for a while and getting our working capital loan against our $110 million of accounts receivable, and that’s going okay.

So it’s all of these things together, plus the deferral of the management fees, so that there’s more cash flow for the company, that are the right way to be thinking about the business. In these times, things are different. We understand that rates have risen, and we need to compensate for that. We understand that the macro environment is different than it was. But we’re not alone in that. Every one of our competitors and every — and even the big media companies are going through the exact same things as we all kind of rightsize our businesses, our capital structure. So it’s not just capital structure, it’s also the way we run the business. Those 2 things together are the important thing to bear in mind. And just one more thought, and I know it’s a long answer, but it’s a very important question, Tom.

The business itself, separate from this working capital and capital structure, is really doing well. The AVOD business, that in combination of ad sales, FAST and the O&O businesses, that business is doing incredibly well. There was no slowdown in CPMs and there was no slowdown in fill rates. And that business is continuing to grow dramatically, and we’re in a very good spot there. And the kiosks have turned. March was a much better month than February. We’re trying to — I think what we’ll try to do is introduce this metric of rentals per day per kiosk so that everyone can do a comparative back to 2019. And if you look at our plan for the year, that $500 million of revenue comes from us achieving 30% of what Redbox did in 2019. With 55 major event movies coming, one every weekend, we’re saying all we’re going to do is get back to 30% in 2019.

If we do that, we get $500 million of revenue and $100 million of adjusted EBITDA. So I think it’s the overall plan, Tom, that people need to understand, not just one piece of it.

Operator: Our next question comes from Eric Wold with B. Riley.

Eric Wold: So Bill, I just want to hit on that last comment you made, kind of follow-up, a couple of questions around the rental trends on Redbox. So the getting back to 30% of ’19 levels kind of on a full year basis this year, I guess — one, I guess, what would you expect kind of exit the year on? Kind of what — can you kind of gave us the run rate for business kind of exiting last year? Kind of what would you expect that run rate to be kind of exiting next year so you can get a sense of the — or exiting this year to get a sense of trajectory heading into next year? And then two, on apples-to-apples basis, what is kind of the pricing and the average transaction value you’re seeing now versus ’19? I know you see the price increase late last year when Top Gun Maverick came out, so what do you think about that? And kind of how sensitive are consumers right now to price increases since that, how much could you take it further if you needed to?

William Rouhana: I didn’t hear the last thing that you said, Eric, could you just repeat that?

Eric Wold: How sensitive are customers right now, do you think? So if you needed to take price or want to take price further, what is your ability to do so?

William Rouhana: Yes. I think it’s hard to tell. We didn’t see any noticeable change from the price rise that we did. But it was really — it was $0.25. So even though it was 11%, it didn’t seem to have much of an impact. I think we’ll have a way better sense of that as we go into this next few weeks and months, and we have this really steady flow of great stuff. If somehow it doesn’t materialize. I have to say, I think it’s going to be above what we have planned. But if it doesn’t, then maybe one of the factors could have been the price rise for all I know. I don’t think we’ll do another price increase for a bit, maybe next year sometime. But it depends — I think it depends overall, Eric, on inflation in general. If inflation drops and sort of calms down, as I know all of us are hoping for on a macro level, then it’s less likely.

But if it continues at a fast pace, then we should keep up. We really should keep our share where it is. The question you asked about leaving the year, so we’ve modeled, as I said, the business, so that it will achieve 30% of 2019 by the end of the year. What we would think would happen in 2024 would be we’d rise to 50%. And so — and that’s where we think the business will end up being, around 50% of that level. At the 50% level, the EBITDA from the kiosks alone will approach $150 million a year, plus the EBITDA that we’re generating across the rest of the company, which, as you know, has been considerable. So we never think — we’ve never thought the business would go all the way back to where it was in 2019. But what’s interesting to me is when I look at the same-store sales numbers, as I said in my part of the talk, there — these same-store sales numbers are already starting to approach 40% of — and more of 2019.

And so maybe we didn’t — maybe we understated it a bit. It’s hard to tell. When you — If you went into a Redbox kiosk over the last 6 months, you would have seen a few movies you recognized, Top Gun, Black Panther, Black Adam, 1 or 2 others, but you would have seen 30 other movies on the home page that you never heard of. And so that’s a very different environment for our consumers than when they walk into a Redbox and they see only movies they’ve heard of. And all these franchise movies that are coming and so many more will all end up on that front page over the next few months. And that should drive, as Jason said in his talk, a rebound in conversion rate from the 20s to the 45% level that it was in the past. And it should drive an increase in the basket plans.

We’ve seen a couple of upticks in basket size over the last few weeks as particular releases have come out. But it’s not yet consistently moving towards this 2.5x. It’s somewhere between where it was and the 2.5x that it used to be. But if you did the math, and you go from 20% conversion rate to 45% conversion rate, and you go from 1.5 this basket to 2.5, what you would realize is the business should more than triple from where it is today, 3.3x is actually the number, without any new customers coming back. Yet we’ve only modeled it to double from where it is today. So in looking at the 2023 plan, there are a lot of reasons to believe we could even do better than that. I hope that helps, Eric. But I know I threw a lot of things out there, but I think they’re all important statistics.

Operator: Our next question comes from Dan Kurnos with The Benchmark Company.