This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: 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.
spk01: 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.
spk04: 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.
spk02: Thank you, Bill, and good afternoon, everyone. Second quarter revenue was $79.9 million, up 112% year-over-year, and adjusted EBITDA was $700,000. As Bill outlined, Performance in the quarter reflects our strategic pivot to higher cash-generating activities in lieu of lower return ROI investments in content, which is already being reflected positively in our margins. In the quarter, the combined business had a blended gross profit margin of 23%, up from 16% in the prior year, and nearly doubled out of the first quarter margin of 12%. Bill discussed a number of initiatives we've undertaken to reduce our cost structure and drive cash flow across our business lines. One primary area in which we reduced costs has been G&A, where we've realigned our organizational structure for greater efficiency. Our total employee headcount has decreased by 4% since January 1st, primarily due to attrition, and the reduction in headcount will result in annualized G&A run rate savings of approximately $12 million. We reviewed our office footprint and made the decision to exit our Seattle office and move our corporate employees in that region to a fully remote model. And we continue to reevaluate the need of our physical offices and other locations and anticipate further streamlining. Finally, we've put in place plans that target approximately 15 million of incremental cash flow savings through streamlining of our digital and distribution businesses. Operating loss for the second quarter was $25.9 million compared to an operating loss of $16.8 million in the prior year. The variance is driven by continued higher amortization expense related to the merger with Redbox. Our physical kiosk network, we ended the quarter with approximately 30,000 kiosks nationwide. Finally, turning to our balance sheet, as of June 30th, the company had $6.9 million of cash on hand. As you'll recall, in the beginning of the quarter, we closed the public offering of our Class A common stock for $10.8 million, the proceeds of which were primarily used for working capital purposes. We continue to focus on improving working capital through accelerated collection and monetization efforts for our long-dated receivables. We continue to have flexibility under our HPS agreement to finance receivables and sell assets under specified terms. Speaking of HPS, as a reminder, we have favorable debt terms on our HPS credit facility that has no financial covenants for two years and provides us the ability to pick interest through February of 2024, giving us runway given our expectations around timing of free cash flow. Turning to our outlook, as Bill and I just outlined, we are shifting our priorities to cash generating activities in lieu of future revenue drivers. As a result, we expect full year revenue to come in between $400 and $450 million, adjusted from our previous estimate of $500 million. Our estimate for the full year adjusted EBITDA will be less impacted by our pivot, and as a result, we are anticipating full year adjusted EBITDA to be between $75 and $100 million. And this is in line given our cash flow profile of our initiatives. We anticipate higher free cash flow conversion for the remainder of the year. Now I'll turn the call back over to Zaya.
spk01: Thank you, Jason. Operator, can we please open the call for questions?
spk00: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by. We compile the Q&A roster. And our first question will come from Jason Cryer from Craig Hallam. Your line is open.
spk06: Thank you. Bill, can you just maybe walk through the cadence of the quarter, what you saw evolve across the industry. And maybe, maybe if you can do so with kind of talking about this in terms of business segments, I'm just curious, um, top line performance, you know, how that, how that varied via or how the very relative to expectations across, you know, kiosks and streaming and licensing and things like that.
spk04: Sure. Um, okay. So, um, Let's start with the licensing because there, Jason, we basically decided we're not going to invest in longer-term deals that consume cash up front and generate cash over time. And as a result, we turned away, I would say, about $30 million of licensing deals that were originally in our projections for the year. Turns out we've already more than doubled the second quarter's licensing deals in the third quarter with ones that will generate cash in the near term. So I think that was a good decision. But in the digital business, which is TVOD and the AVODs and the fast business and an ad rep, we had a decent quarter. Things were up, as you heard, 8%, I think, year over year. And we had good fill rates, little CPM pressure, but not much. The direct sales did well. And I'd say, once again... while there's definitely been pressure on the advertising industry in general, we've been a little bit insulated from it by the fact that we've got, um, that direct selling organization that manages to get a lot of really good things done, including, you know, uh, getting custom content deals done like the ones we did in the quarter inside the black box and a couple of others, uh, at home with Genevieve. And there's a couple of other shows that we did that were funded by advertisers. And because we go to advertisers in a different way than most people and with connected TV inventory, we've got a better thing to offer. And as a result, we've been doing okay. The kiosks have not done as well as we wanted them to do. They've grown. They've gone up. But they haven't grown at the pace we were hoping they would. And so we've been focusing really heavily on making sure we find other ways to to monetize those things, hence the TikTok deal, the addition of the screens, the launch of the digital out-of-home business, which is off to a good start. And we focused it on the service business where we can add new service customers. You know, we already have cut the – well, I should say this carefully. The service business has already cut our net cost of operating our kiosks in half. Tad Piper- As we grow that service business, we should be able to bring the cost of operating the kiosks down even more so that the place at which we're reaching we're reaching cash flow generative rentals comes down in an absolute number, I hope that was clear. Tad Piper- And so that we've made a lot of progress on, but I would say, if you looked if you looked across the board, I was, I was satisfied with. Most of what happened, but the focus of we've started looking at the business strictly as cash flow Jason, because it's, that's where we're at. I mean, that's where the world is at. You know, everybody wants cash flow, including us. And so we focused in on 10 91 of the distribution business. We focused in on the ad rep business and the, in the Avon business focused in the kiosk service business. Those are the places we can drive cashflow rapidly. and without significant capital investment. And we don't want to be investing in content. It's not where we want to be right now. We have too much of it. So we want to be harvesting it.
spk06: Okay. And then is there any way you can – maybe providing like a July snapshot would be helpful. I guess back of the envelope math here, you're calling for – what would that be? A little less than $200 million in revenue in the back half of the year, but over $50 million in EBITDA against it. That's about a 30% EBITDA margin. I think we saw things peak out at about 18% in Q1. That's a heavy lift.
spk04: Jason, it's a little over $200 million in the second half. Yes, we do think that the EBITDA margin is going to be better, but it's because of the way we've approached it. And we already know that the third quarter's got locked in a bunch of EBITDA without any cash spent because we've already done a bunch of deals. I tried to refer to that in my talk. So it won't be a heavy lift to get to the kind of EBITDA we're talking about, but we're mostly focused on making sure that EBITDA doesn't consume any of our cash, but rather is cash generative. And that's why Jason mentioned the fact that we were focused on the free cash flow percentage of that EBITDA.
spk06: Okay, maybe last one. You gave an updated guide. I'm curious if you can maybe give a little bit more transparency on your outlook for free cash flow generation, if that's something you can achieve on a quarterly basis, or you still achieve that this year, or what the timeline looks like.
spk04: Yes, this year. And... I haven't broken it down quarterly, but yes, this year, for sure.
spk00: Got it. Thanks. Thank you. Our next question will come from Mike Grondahl from Northland Securities. Your line is open.
spk05: Hi, this is Mike with you, John, from Mike Grondahl. Thanks for taking the questions. Maybe first, I think you said this is about $15 million. incremental sort of free cash flow savings. Is that already in place or are we going to see more of that in the second half?
spk04: Well, actually, it's more than $15 million. $12 million has already been as a result of what's already happened. There's another $15 million from the consolidation of systems and tech and vendors in the digital side. That took a while to plan out. It's now planned and it's now being implemented. So it'll be more like 30 million more, 27 million more than the original plans we had when we first combined the companies. We found that we could really consolidate a lot of stuff that we hadn't consolidated before and that we didn't need as heavy a staff as we've got. Look, this has resulted in And we've taken advantage of the fact that there's been attrition. And we've given people promotions and opportunities to, you know, to expand their horizons. And I think it's been good for them. So we've been able to do this in a way that I feel good about. Do you have anything?
spk02: No, I think it's, you know, the incremental streamline will happen over the next couple quarters. It's going to take time to put in place, but it's going to produce meaningful results on an annualized basis.
spk04: Much done and more to come.
spk05: Got it. And then on that 30 million of licensing revenue that basically was turned down in the second quarter, is that something you can, you know, pick up some of that again and, you know, end of the year, next year, if other things kind of turn around?
spk04: You know, this happened once before. You may remember, Mike, a year or two ago where we deferred something from one quarter to the next and then the next, you know, I don't know if you remember it, but it happened once before. And it worked out incredibly well for the company. We ended up having a great follow-on quarter. In this case, what we did is we shifted the focus away from the licensing deals that require you to go in with capital at the beginning to get it back over time. And we've already more than doubled what we did in the second quarter with deals that we've already struck in the third quarter. And all of them fit the parameters that we're looking to meet today. which are not consuming cash but generating cash either immediately or over time. So I think we've already done what we wanted to do there, but I wasn't willing to do deals that I knew were going to consume cash up front. It just didn't make sense to me.
spk05: Got it. Thanks.
spk00: Thank you. And as a reminder, to ask a question, please press star 1-1. And our next question will come from Eric Wold from B. Reilly Securities. Your line is open.
spk07: Thank you. Good afternoon. A few questions. A couple follow-ups first. Just on the incremental $27 to $30 million of cost savings that you've identified since the acquisition, how much of that is reflected in the new $75 to $100 million guidance, and then will all of that be reflected next year?
spk04: I would say about half of it's reflected in the new guidance, Eric, and then all of it will be reflected in next year for sure. But I don't think we're done with this, frankly, because as Jason said, there are further opportunities to reduce costs by looking at our office footprint, and that takes time to deal with. And there are other things that we're looking at. This was just the, what we identified here were already existing changes to G&A that have taken place and $15 million of consolidation savings from really making sure the digital business doesn't have two of everything because we had Redbox Digital and Chicken Soup Enterprises Digital. Now what we've got is under this model we'll have one unified digital business, which will save us a ton of money in terms of outside vendors and in terms of other costs. But we're not done. I mean, as we've gone through this process, we've seen other places that we can continue to add additional incremental savings. So I'd say next year we'll reflect even more.
spk07: Okay. And then back on the free cash flow question, it sounds like a last call, you talked about $50 million of free cash flow for the year. It sounds like for the prior question, you're still comfortable with that given the what will come in the back half of the year. Just want to make sure that that's correct. And do you have the first half of the cash flow number?
spk04: We'd have to – let's do that in the after call because Jason needs to do some work to get the answer. Okay. I mean, last question. Well, I am comfortable that second half is going to look like it was – in terms of cash flow, it's going to look the way it should.
spk07: Got it. And this last question, kind of go back to the red box comment you made, obviously, that they're not growing at the pace you wanted. You look to other things. I think you have a lot of data to lean on. What do you think has been adversely impacting kind of the core demand, core rental demand, core revenue trends at the kiosk? Is it title mix, changes in demographic profile, consumer spending, head of rent? What do you think? You may not know exactly what it is, but what do you think is driving that? Is it something you can control?
spk04: I think it's been primarily driven by the sporadic new content on and off nature of it. When we get it for a few weeks in a row, it goes great. When we don't, it doesn't. We're getting closer to what I think would be a steady pace, but we're not there yet. I think that's what's driving it. That's what seems to be driving it. My view of this is that we have to make it so that the cash flow break even for the red boxes is as low as possible. And if you look at the service business, which is what I look at to do that, plus these additional ways we can generate revenue from the red boxes, we're going to approach a point where it will be a very small amount of revenue that will start to generate free cash flow as we continue to reduce the cost of that operation. And, you know, if we... when we look at the service business, Eric, there's been a tremendous contribution made by that service business, but it's also really positioned to grow considerably over the next little bit of time. There are at least three pilots now underway with new customers. There are two being planned, and there are three or four more customers, sizable customers, who are in the beginning phases of becoming customers. And we only have, I think today, five customers in that business. So this would more than double the number of customers. And these are substantial companies. Plus we have Pokemon growing like crazy, which is one of our existing customers. And we've completed the Amazon Key trial and that's gone well. So that's been successful. So there's been a lot of progress in that business that business can quickly absorb the costs involved in maintaining the red boxes and merchandising them. And to me, that's really the key to this because you'd like to have free cash flow from those red boxes start at a very low number with very little to cover.
spk00: Perfect. Thanks, Bill.
spk03: Thank you.
spk00: Thank you. And as a reminder, to ask a question, please press star 1-1. And our next question will come from Brian Kintzlinger from Alliance Global Partners. Your line is open.
spk03: Great, thanks. I just want to put some context into some of the discussion for looking on licensing and others. I assume you're going to put the queue out any minute. Maybe you can help us, excuse me, with separating revenue from video-on-demand streaming, retail, and licensing and other that you give every quarter.
spk04: Oh, yeah, it's in the queue, and the queue, I believe, was filed. I think it is filed now. Yeah, so it was roughly $30 million for DOD and streaming, roughly $30 million for retail, and $17 million for licensing. So when I say we've already done over $30 million of licensing in the third quarter, you can see why I say it's about twice what we've already done there.
spk03: I guess I'm confused on the retail piece. $30 million of retail is lower than the first quarter. You have this constant flow that you've discussed for the last quarter and a half of new releases, and while it might not be completely linear, you've had some of the best weeks, it sounds like, for Mario and others. I'm a little confused why the June quarter would have less retail revenue than the March quarter. Maybe you can speak to that.
spk04: I think it may be the way we've defined it now, Brian, but I think we need to go through that with you in the – in more detail in the post call.
spk03: Okay. Well, at $30 million with, again, notwithstanding the future next year, which is obviously uncertain in terms of theatrical releases right this second, but in the second half of the year, again, you've laid out the releases happening on a weekly basis throughout the year. Is there a reason to believe it will improve from that $30 million in September or December? Or are you realizing the trends with this level of theatrical releases might not achieve those aggressive targets that you had before?
spk04: I think there's reason to believe it will continue to increase. But we're not betting on it to the exclusion of making sure we're driving the cost down. I mean, it's really we're going for both now. We've got to drive costs down. in case it doesn't happen. That's what we really need to do.
spk07: Okay, thanks.
spk04: I do believe it will continue to go up, though.
spk00: Thank you.
spk04: Those are our questions, so thank you for joining us, and we will talk to you again next quarter.
spk00: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.
Disclaimer