Chicken Soup for the Soul Entertainment, Inc.

Good day, and thank you for standing by. Welcome to the Chicken Soup for the Soul Entertainment second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Zaya Lawando, Head of Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us. We'll begin with opening remarks for our Chairman and CEO, William J. Ruhanna, followed by remarks from our CFO, Jason Meyer. After that 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 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. Now I'll turn the call over to William Ruhanna, chairman and CEO. Bill, please go ahead.

Thank you, Zeya, and good afternoon, everybody. August 11th was the one-year anniversary of our Redbox acquisition. It's been an action-packed year. was we've integrated two companies to create one of the largest providers of premium entertainment for value-conscious consumers. You know, it's worth noting that as we've gone through this first year, there have been massive changes in the media space and in the broader economy, and they're affecting everyone. The Fed funds rate was below two. It's now above five. The ability to borrow has become more expensive, and at the same time, Stock prices of many media companies are down 50, 60, and even 90%. Streaming losses have piled up and major SVOD services creating uncertainty about the VOD space. Linear advertising declined and some of these concerns crept into our market, although not really appropriately. And ongoing writer and actor strikes create other uncertainties. So in short, this is an entire industry which is feeling some pain. But despite these changes, we're fully committed to growing our business and streamlining it in the most cost-effective way, and we're capable of doing that. And I'm going to discuss that in a moment. We said before we rely on our relationships with the studios and the cadence and consistency of new titles for the kiosks. Taking, for instance, our successful partnership with Universal, a major studio that has demonstrated its commitment to traditional windowing, particularly for its tentpole titles, it's evident that the strategy of committing to home video is working. We saw this reflected in the performance of Super Mario Brothers across both TVOD and physical. At kiosks, it was a massive hit, breaking the record for top movie rental in 2023, the most rented movie in its first week since Top Gun, and the most first week rentals for a family film since The Croods, A New Age. The film also broke TVOD and premium VOD records. So we view our relationship with Universal as a template for a successful partnership with a studio that recognizes the tremendous value of the home video window, and we expect to replicate that template with other studios. In addition to our record-breaking performance of Mario Brothers, we had a number of highlights in recent months, including on our digital-owned and operated platforms. TVOD revenue was up 16% year-over-year, driven by a strong spring release slate. Revenue on our O&O, FAST, and AVOD networks were up 8% year-over-year, despite what people say is a soft ad environment. Fill rates improved sequentially from Q1, driven by AVOD strength on Redbox and Crackle. In fact, a recent report from Samba TV showed that Crackle saw a 5% increase in total viewership in the first half of 2023 compared to a year ago, in line with viewership growth at Hulu and Roku, and surpassing growth at some of the other well-known SVODs and AVODs. In the quarter, our mix of ad sales shifted slightly more to direct sales, reflecting the importance of our ability to sell direct at a time when reseller and programmatic selling is soft. And as we head into an election year, we remain optimistic that the broader advertising environment, which is already rebounding, will continue to grow viewership and fill rates. So turning to other highlights, in the spring we announced we would be adding an additional 1,500 kiosks over the next two years with one of our most profitable retail partners, Dollar General. We recently completed the planning phase of that expansion and began rolling out these additional kiosks this month. We also expanded our fast channel offering to nearly 180 channels, including through our recent partnership with AMC Networks for channels that include The Walking Dead and Portlandia, two very popular series. On the international front, our production company in India, Locomotive Global, saw a record quarter and signed content deals with all three media, Fremantle and others. Locomotive Global's hit series, Raina Naidoo, received a green light from Netflix for a second season and was named a top 10 globally streamed series on Netflix, which is pretty amazing, actually. It's been watched all around the world. And more recently, we announced an arrangement with TikTok, which will provide branded content to over 3,000 Redbox kiosk video screens nationwide. It'll utilize both the scale and breadth of our digital out-of-home network. So turning to the environment in which we're operating today, despite the channels I outlined earlier, when we began the year, we anticipated a number of tailwinds that would drive our performance throughout the year, including studios recommitting to the home video window, a significant rental rebound, and a CTV ad market fully insulated from the broader advertising showdown. And although these tailwinds have materialized, the pace at which some of them have rebounded has been slower than expected. Add to that concerns around production slowdowns, and we find ourselves in a media climate that remains uncertain. In that kind of an environment, we believe we have to be very careful and make decisions that underscore our commitment to paying down debt and generating free cash flow. In other words, we need to adapt to the current market conditions. We recently conducted a review of all our operations to identify ways to drive greater cash flow, and we've already begun implementing those changes. We are actively de-risking our business model and focusing on driving free cash flow through several channels. One, we're streamlining future content commitments. We've identified a number of content deals that could generate EBITDA but not cash in the near term. In fact, some of these content deals we wouldn't see a return for a number of years. So we've unwound those deals with millions of dollars of those deals with millions more to come. Two, we've utilized our kiosks in a much more diverse and strategic way. There's no question we have a unique and irrevocable asset in our nearly 30,000 kiosk base. The reach of that base is unmatched and valuable, especially to retailers, independent producers, studios, and advertisers. As a result, we focused on creating optionality with our kiosks to create additional cash flow beyond simply renting major studio titles. We're creating this optionality in a number of ways, implementing cost reductions across our physical footprint, streamlining locations for profitability with certain partners like we did with Dollar General, increasing our pipeline of clients in our kiosk servicing business. Growing our digital out-of-home business through our deals with TikTok, CoinStore, and Velocity. Just in case you don't understand, that is using our kiosk and video screens attached to them to create yet another revenue stream from the kiosks. And then implementing slotting of paid titles, allowing independent films to have the same reach as major studios. Third, we've increased our fast platform. We continue to scale that service and add channels. However, some of the third-party fast channels don't meet our revenue thresholds, and we're insisting that they optimize those channels for profitability. Fourth, our service business, which includes ad rep at Crackle Connects and a kiosk servicing business. Both these businesses have tremendous value for us, and we're doubling down on driving customer growth. The economics of the service businesses are very favorable with each incremental client providing additional cash flow with limited additional investment. We went from two to 26 ad rep partners over the past year and have several potential kiosk service customers in the pipeline. It's actually more than several. It's actually a pretty robust pipeline now. Five, putting content distribution into OverDrive. We've licensed content to resellers in cost-effective ways, expanding our relationships with our reseller customers, I think I mentioned earlier the writers and actors strike, and as that strike continues through the second half of the year, the demand for library content continues to increase. We have a large catalog. We can monetize that in the event of a prolonged slowdown. And in other words, the longer the strike continues, the more valuable the library becomes. In addition, our 1091 distribution business in particular, which releases between 25 and 35 titles monthly, provides attractive cash flows, and we're focused on making sure that that continues to grow. Six, we're refining our licensing strategy. We proactively deferred the timing of licensing deals from Q2 to Q3 to conserve cash, including licensing deals that would have sacrificed cash flow for revenue. As a result, licensing revenue in the quarter was lighter than anticipated. However, cash spend was enhanced. In fact, we more than doubled our licensing in Q3 than all of what we recorded in Q2. That's already occurred. Seven, integrating our digital assets for more efficiency. As part of our strategic review, we identified additional cost savings across our digital products, eliminating vendor relationships, and further consolidating our tech platforms. We're anticipating approximately $15 million of additional cost savings in the first year alone. Eight, our asset monetization program. We've identified certain assets that are non-quarter operations and that can be monetized. And then lastly, our increased focus on G&A and cost management will minimize costs, drive cash flow, and it remains our priority. We've ended certain vendor relationships. We've optimized our org structure by promoting talent internally. We paused on backfilling existing roles and hiring new ones. We brought our headcount down by 50 people since January 1st, mostly through attrition. And so overall, we've seen an increase in cash flow from operations. Finally, in recent months, we've seen an increase in strategic activity within our space. And we've had incoming requests from financial and strategic partners. We're going to form a strategic review committee consisting of independent board members to evaluate these opportunities, and we'll pursue transactions that check all the boxes in creating value for our shareholders. And this is clearly not reflected in our stock price. In closing, we've identified ways in which we can right-size the business, reduce costs, improve cash flow, and particularly by driving efficiencies within our kiosk network, licensing, and distribution strategy. growing service clients, expanding ad rep through Crackle Connects. We've made great strides in our strategic priorities and remain optimistic in our ability to drive meaningful cash flow and pay down debt. I'm going to turn it over to Jason.