Strong Global Entertainment, Inc. Class A Common Voting Shares

Good afternoon and welcome to the Strong Global Entertainment Earnings Conference Call for the third quarter 2023. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Jen Belladeau of IMS Investor Relations. Jen, you may begin.

Thank you. Good afternoon and welcome to Strong Global Entertainment's earnings conference call for the quarter ended September 30, 2023. On the call today are Mark Roberson, Chief Executive Officer, and Todd Major, Chief Financial Officer. I would like to remind everyone that there is a slide presentation accompanying today's presentation that can be accessed on the Investor Relations section of the company's website. Before we begin, I would like to remind everyone that some statements made on this call will be forward-looking in nature. These statements are based on management's current view and expectations as of today, and the company is under no obligation and expressly disclaims any obligation to update forward-looking statements except as required by law. These statements are also subject to risks and uncertainties and may cause actual results to differ materially from those described on today's call. Risks and uncertainties are also described in the company's SEC filings. Today's presentation and discussion also contain references to non-GAAP financial measures. The definition of non-GAAP terms and reconciliations to GAAP measures are available in the earnings release posted on the Investor Relations section of the website. Our non-GAAP measures may not be comparable to those used by other companies, and we encourage you to review and understand all of our financial reporting before making any investment decisions. At this time, I'll turn the call over to Mark Robertson. Go ahead, Mark.

Thanks, Jen. Good afternoon and welcome to what is our second investor call since we completed the initial public offering back in May. At Strong Entertainment, we are the go-to partner for the cinema industry, and we're continuing to execute on our growth initiatives. We're seeing sustained demand from exhibitors for laser upgrades and other investments in upgrading to premium cinema. We're in the early stages of that cycle, and we see these trends continuing for the next several years. Our strong technical services team has done a really nice job listening to our customers, you know, tailoring our services to meet their needs, and increasing our market share. Installation revenues is just one example, are up over 68%, as you can see on slide five. And we added additional services and resources to help support our customers' upgrade and with their retrofit initiatives. Our screen business continues to perform. Laser upgrades are driving steady demand from our cinema exhibitors. The team is also expanding our non-cinema offerings, rolling out new products like our seismos flooring and our Ryan optical tiles. The seismos flooring is a new product that came, again, from listening to our customers and designing solutions to meet their specific needs. We introduced the new flooring product earlier this year, and we're already starting to see a contribution in revenue. We're also continuing to develop our content IP portfolio and our production services capabilities in our studios unit. Over the past year, we've spoken quite a bit about M&A as being a key component of our growth plan. We have a strong core business, and our objective is to leverage that foundation, add scale, and transform Strong into a much larger entertainment company. As an initial step in that direction, We closed our first two acquisitions recently. Unbounded closed in September, and this acquisition strengthens our production services capabilities and our content business. And just this week, we just announced the acquisition of Innovative Cinema Solutions, which provides additional scale and resources in our cinema services team. These are two very different deals, and we'll talk more about them in a moment. But the overall commonality is that we're doing what we said we'd do. We're driving organic growth and we're scaling the company through selective M&A. Acquisitions aside for a moment, the core services and screens business continue to perform nicely. The key organic growth drivers in our view include the continued overall resurgence in the cinema industry and the rebound in the box office. This is particularly evident at the premium end of the market. the increasing pace of laser upgrades and other enhancements to deliver a premium immersive experience, our strong and sometimes exclusive relationships and our increasing geographic reach, and the expansion and diversification, including the addition of studios and new products for non-cinema immersive applications. The industry backdrop continues to strengthen with exhibitors reporting growing revenues and improved financial results The box office continues to perform well, and we're seeing the industry evolve and adapt. We're seeing things like live events. Taylor Swift is one example. More flexible windowing. We now have Apple and Amazon developing content for both streaming and cinema. If you review the latest quarterly investor calls for folks like IMAX or Cinemark, for example, it's interesting to hear their view on the industry, and especially how the performance of premium large format auditoriums is driving their numbers. Premium auditoriums are over-indexing relative to the overall box office, and when consumers go to see Oppenheimer or Taylor Swift or Dune, for example, they want to see it on a large screen in an immersive environment with the best sound quality possible, and they're willing to pay a premium for it. Consumer demand for premium experience is driving, and we believe it will continue to multi-year cycle as exhibitors retrofit and upgrade existing venues and invest in laser projection, premium screens, and sound. In our studios business on slide eight, we have several projects under development. If you recall, we realized our first meaningful revenue transaction in that business last quarter with the sale of a portion of the IP for Safe Haven. Now, we also recently announced that we're developing Endangered, which are out shopping now and are receiving strong interest in the market. Our model, and this will be true for Endangered, is to develop projects and produce them only when we've received funding through presales, minimum guarantees, and other sources. That model minimizes the capital allocation and overall risk while creating a valuable IP portfolio. Moving to the recent acquisitions on Slides 9 and 10, Unbounded was our first deal post-separation. Unbounded was a strategic acquisition that positions our studios group with the resources and capabilities in the production services area. This is a small team with deep experience and represents a really nice step in our M&A strategy. We expect to begin seeing revenue contributions from Unbounded in 2024. And more importantly, we intend to use this as the tip of the spear in building a larger production services business. We also, as we just said, closed the acquisition of Innovative Cinema Services this week and are really excited about quickly onboarding the team there. This transaction adds immediate revenue and additional scale in our services group. ICS has historically generated over $6 million in annual revenue, and we have the ability to expand that number next year as we integrate their operations in our service group and we leverage their services across our customer base. So overall, we're very excited about the outlook. for the business, and we expect to see continued positive momentum. Todd?

Thanks, Mark, and good afternoon, everyone. As you can see on slide 12, consolidated revenue was up 10% from the prior year, with increases in both our product and service offerings. On the product side, increases in traditional cinema screen sales and higher revenue from our recently launched seismos flooring and Orion optical tiles product lines were partially offset by a small decline in the sale of digital equipment. Our services revenue benefited from the continuing momentum in our installation services, which saw its seventh consecutive quarter with year-over-year increases, as well as increases in revenue generated from our field maintenance and monitoring. From a geographic perspective, sales outside the U.S. increased approximately 70% from the prior year. This was primarily the result of the large immersive flooring project in Asia that is expected to be completed by the end of the year. While gross margin generated from the sale of products was relatively flat year over year, gross margin from services was 22% during the third quarter as compared to 10% in the prior year. Margins on services benefited from our strategic move away from outsourcing the installation work to utilizing our internal labor to complete the projects. The increase in gross profit was offset by higher selling and administrative expenses, including marketing and travel and entertainment expenses, as revenue and business activity increased. We also incurred higher general and administrative expenses in connection with operating as an independent public company following our IPO in May of 2023. Flipping over to the balance sheet, overall we have healthy liquidity, enough to operate the business on a day-to-day basis. We are utilizing some working capital, but that is to be expected in a growing business. For example, our accounts receivable balance is increasing as revenue continues to rise. We believe our customer base is stable with a solid mix of large international companies and some smaller regional players. We continue to work with each of our customers as they come to us for additional solutions. On the liability side, the debt that was related to the production of safe haven that was added to the balance sheet in the second quarter was fully repaid during the third quarter via receipt of the minimum guarantee and the tax rebates for shooting the series in Canada. That concludes the financial review for the quarter. We'll now open up the call for questions.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star one to ask a question. One moment please while we poll for questions.

Your first question for today is coming from Pamela Carter at Carter Management.

Hi. Thank you for all of that. Hey. Everything sounds great. I do have a question about how you guys are thinking about your acquisition strategy moving forward. Do you feel it's going to be more focused on studios end or the cinema business? If you can delve into that a little bit more, that would be great.

Yeah, thanks for the question. It's a good question. Obviously, as you know, we completed our first two here just in the past, well, one this week and the first one just about a month ago. So we've certainly been busy on the acquisition front post IPO. And we do expect that to be an ongoing part of our growth strategy going forward, you know, whether that will be focused in one area of the business or the other is, you know, we're looking at potential targets really across the business, both on the cinema side of the business, as well as on the content side of the business. You know, whether our next one will be in one of those others hard to predict, because as you know, deals, deals take time, and sometimes the ones you're not expecting to move quicker, do so. I would tell you I would expect to see it on both sides of the business. I think there's probably a larger number of opportunities out there on the content side. It's a larger universe of potential targets versus the cinema side, but both sides have very interesting targets, and we expect to continue that.

Okay, great. Well, that sounds wonderful. Thank you. I appreciate you.

Once again, if there are any questions, please press star 1.

We have reached the end of the question and answer session, and I will now turn the call over to Mark for closing remarks.

Thank you, and thanks for joining the call and listening today. I know some of you may have questions after the call. Feel free to reach out to myself or Todd. We'd be happy to take those questions offline. Otherwise, I hope everyone has a great Veterans Day tomorrow, and we look forward to speaking to you again soon.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.