Q2 2023 Chicken Soup for the Soul Entertainment Inc Earnings Call
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Good day, and thank you for standing by welcome to the chicken soup for the Soul Entertainment's second quarter 2023 earnings Conference call.
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As they are Luanda 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 .
Followed by remarks from our CFO , Jason Myer.
After their remarks, we'll open the call for questions.
The matters discussed on this call include forward looking statements.
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.
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 and 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 <unk>, Chairman and CEO Bill. Please go ahead.
Thank you Sarah and good afternoon everybody.
On August 11th.
The one year anniversary of our Red box acquisition.
It's been a an action packed year.
Two companies to create one of the largest providers of premium entertainment.
For value conscious consumers.
It's worth noting that as we've gone through this first year there'd been massive changes in the media space and in the broader economy.
They are affecting everyone.
Fed funds rate was below two it's now about 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 a major asphalt services, creating an uncertainty about the Vod space Linde.
To your advertising declines at some of these concerns crept into our market, although not really appropriately.
And ongoing writer and actor strikes create other uncertainties.
Sure.
The entire industry, which is feeling some pain.
But despite these changes we're fully committed to growing our business and streamlining streamlining it and the most cost effective way and.
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 inconsistency of new titles for the kiosks.
Taking for instance, our successful partnership with Universal.
A major studio has demonstrated its commitment to traditional windowing perfect protection, particularly for its tent pole titles.
Evidence that the strategy of committing to home video is working.
He started as reflected in the performance of Super Mario brothers across both Pepsico.
He asks it was a massive hit breaking a record for top movie rental in 2023, and most rented movie in its first weeks its top gun and the most first week rentals for a family films since the crudes are new age.
The film also broke T bought in premium Vod Records.
So we review we view our relationship as universe with Universal is a template for a successful partnership with a studio that recognizes the tremendous value of the home video window and.
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.
<unk> revenue was up 16% year over year, driven by a strong spring release slate.
Revenue on our own now fast networks were up 8% year over year. Despite what people say is a soft ad environment.
Fill rates improved sequentially from Q1, driven by Eva strength on Redbox and crackle.
Alright, and in fact, a recent report from Samba TV show the crackles 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 as sites in a box.
Yeah.
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 in programmatic selling of soft.
And as we head into an election year, we remain optimistic that the broader advertising environment, which is already rebounding.
We will continue to grow viewership and fill rates.
So turning to other highlights in the spring, we announced it would be adding an additional 500 kiosks over the next two years with one of our most profitable retail partners dollar general.
Recently completed the planning phase of that expansion and began rolling out these additional kiosks response.
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 port land yet.
Two very popular series.
On the international front, our production copying it company in India locomotive global So a record a record quarter and signed content deals with all three media Fremantle and others.
Locomotive Global's hit series rain and they do received a green light for Netflix for a second season.
And was named the 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 Tic Tac.
Which will provide branded content to over 3000, redbox kiosk video screens.
Nationwide.
It will 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 tailwind that will drive our performance throughout the year, including studios Recommitting to the home video window.
<unk> rental rebound in CTV AD market fully insulated from the broader advertising showdown.
And although these talents have materialized the pace at which some of them have rebound has been slower than expected.
Add to that concerns around production slowdowns and we find ourselves in an immediate climate that remains uncertain.
And 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.
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 derisking, our business model and focusing on driving free cash flow through us through several channels.
One 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 won Y on those deals with millions of dollars of those deals with millions more to come.
Two we've utilized our kiosks and a much more diverse and strategic way.
Theres No question, we have a unique and a replicable asset in our nearly 30000 kiosks base.
The reach of that base is unmatched and valuable, especially to retailers independent producers studios and advertisers.
As a result, we've 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 servicing business and our kiosk servicing business.
Growing our digital out of home business through our deals with <unk> Tic Tac Coinstar and velocity just in case, you don't understand that is using our kiosks and video screens attached to them and to create yet another revenue stream from the kiosks.
And then implementing slotting are paid titles, allowing independent films to have the same reach as major studios.
Third we 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 gonna assisting that they optimize those channels for profitability.
For Us our service business, which includes add rapid crackle connects and kiosks servicing business.
Both these businesses have tremendous value for us and we're doubling down on driving customer growth the.
The economics of the service businesses are.
Our very favorable with each incremental client, providing additional cash flow with limited additional investments.
We went from 2% to 26 AD Rep partners over the past year 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 and cost effective ways.
Expanding our relationships with our reseller customers.
Well I think I've 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 as long as the strike continues the more valuable library becomes.
In addition, our 10 91 distribution business in particular, which releases between 25 and 35 titles monthly provides.
<unk> provides attractive cash flows and we're focused on making sure that that continues to grow.
Six we are refining our licensing strategy, we proactively deferred the timing of licensing deals from Q2 to Q3 to conserve cash.
<unk> licensing deals that would have sacrificed cash flow for revenue.
As a result license revenue in the quarter was lighter than anticipated however, cash spend was enhanced.
In fact, we more than doubled our licensing by the way in fact, we more than doubled while 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 for 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 cost 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 back filling existing roles and hiring new ones, we brought our <unk>.
Count 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.
Trying to form a strategic review committee consisting of independent board members to evaluate these opportunities and we will pursue transactions that checks all the boxes and 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 rightsize 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 cracks.
Made great strides in our strategic priorities and remain optimistic in our ability to drive meaningful cash flow and pay down debt.
Let me turn it over to Jason.
Thank you Bill and good afternoon, everyone.
Second quarter revenue was $79 9 million up 112% year over year and adjusted EBITDA was 700000.
As bill outlined the performance in the quarter reflects our strategic pivot to higher cash generating activities and lower in lieu of lower return ROI investments in content, which is already already being reflected positively in our margins.
In the quarter, the combined business at a blended gross profit margin of 22% up from 16% in the prior year and nearly double that 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 reduce cost has been G&A.
Where we realigned our organizational structure for greater efficiency.
Our total employee head count has decreased by 4% since January one primarily due to attrition.
And the reduction in head count.
Will result in annualized G&A run rate savings of approximately $12 million.
Additionally, we reviewed our office footprint.
<unk> 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 in 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.
And that's driven by continued higher amortization expense related to the merger with Red box.
Our physical kiosk network, we ended the quarter of approximately.
30000 kiosks nationwide.
Finally, turning to our balance sheet as of June 30, the company had $6 $9 million of cash on hand, as you'll recall in the beginning of the quarter. We closed a 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 Hp's agreement, the finance receivables and sell assets under specified terms.
Thinking of Hps as a reminder, we have favorable debt terms, our <unk> 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 the timing of free cash flow.
Turning to our outlook as Bill and I, just outlined we are shifting our priorities to cash generating activities and lower future revenue drivers as a result, we.
<unk> full year revenue to come in between 404 hundred $50 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 anticipate 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.
Now I'll turn the call back over to Sarah.
Thank you Jason operator can we please open the call for questions.
Thank you.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby, we compile the Q&A roster.
And our first question will come from Jason <unk> from Craig Hallum. Your line is open.
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 segment I'm just curious.
Top line performance how that.
How that varied.
They're very relative to expectations across kiosks in streaming in licensing and things like that.
Sure.
Okay. So 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 upfront 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 double 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.
In the in the digital business.
Which is <unk> and the <unk> and the SaaS the SaaS business at an AD rep.
We had a decent quarter things were off as you heard.
8% I think year over year in there where we are.
Good fill rates.
Little CPM pressure, but not much the direct billing the direct sales did well and I'd say.
Once again, while there's definitely been a pressure on the advertising industry in general.
We've been a little bit insulated from it by the fact that we've got.
That direct selling organization that manages to get a lot of really good things done including.
Getting custom content deals done like the ones, we did in the quarter inside the black box in a couple of others at home regenerative and Theres. A couple of other shows that we did that were funded by advertisers and.
And because we go to advertisers in a different way than most people and with connected television.
Inventory.
We've got a better we've got a better thing to offer and as a result, we have been doing okay.
The kiosk kiosk, we have not done as well as we wanted them to do that.
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 monetize those things hence the Tictoc deal. The addition of the screens the launch of the digital out of home business, which.
It's off to a good start.
And we focused it on the service business, where we can add new add new service customers.
We already we already have cut well I shouldn't say I should say this carefully.
The service businesses already cut our net cost of operating our kiosks Pratt in half 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 where reach we're reaching cash flow generative rentals comes down in an app.
<unk> number.
I hope that was clear.
And so that we've made a lot of progress on but I would say if you looked at if you looked across the board I was I was satisfied with most of what happened, but the focus that we have started looking at the business strictly as cash flow adjacent because it's that's where we're at I mean, that's where the world is that everybody wants cash flow, including us and so.
We focused in on $10 91 of the distribution business, we focused it on the AD Rep business.
The <unk> business focused in the kiosk service business. Those are the places we can drive cash flow rapidly.
And without significant capital investment and we don't want to be investing in.
And content, it's not where we want to be right now we have too much of it.
We want to be harvesting it.
Okay and then.
Is there any way you can maybe.
Maybe providing like a July snapshot would be helpful. I guess.
Back of the envelope math here Youre, 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 EBITDA against it that's about a 30% EBITDA margin.
I think we saw things peak out at about 18% in Q1, so that I mean, that's a heavy lift.
It's a little bit are there any.
Jason It's a little over $200 million in the second half.
Okay.
And 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 spend because we've already done a bunch of deals.
I tried to refer to that in my in my talk so it won't it won't be a heavy lift to get to the kind of EBITDA, we're talking about but we're mostly.
We're mostly focused on making sure that EBITDA doesn't consume any of our cash, but rather use cash generative and thats why Jason mentioned, the fact that we were focused on the free cash flow percentage of that EBITDA.
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 thats something you can achieve on a quarterly basis or are you still achieve that this year, what the timeline looks like.
Yes this year.
And.
I didn't I haven't broken it down quarterly, but yes this year for sure.
Got it thanks.
Thank you.
Our next question will come from Mike Grondahl from Northland Securities. Your line is open.
Hi, This is Mike with John from Mike Grondahl, Thanks for taking the question.
Maybe first I think you said.
This is about $15 million.
Incremental free cash flow savings is that already in place or are we going to see more of that.
Second half.
Well actually it's more than $15 million $12 million has already been.
As a result of what's already happened there is another $15 million.
From the consolidation of <unk>.
Our systems, and Tak and vendors and the digital side that took a while to plan out its now planned and is 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 consolidated a lot of stuff that we that we hadn't consolidated before and that we didn't need as heavy of staff as we've got look this has resulted in and.
We've taken advantage of the fact that theres been attrition and we've and we've given people promotions and opportunities to expand their horizons and I think it's been good for them. So we've.
We've been able to do this in a way that I feel good about.
Do you have anything.
No I think it's the incremental streamlining will happen over the next couple of quarters, it's going to take time to put in place, but it's going to produce meaningful results on an annualized basis.
<unk> done it and more to come.
Got it.
And then on that $30 million.
Licensing revenue.
It was turned down in the second quarter is that something you can.
Pick up some of that again end of the year next year.
A lot of things kind of turnaround.
This happened once before you may remember Mike.
A year or two ago, where we deferred something from one quarter to an extra than the next.
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 these these.
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 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 re to meet 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 were that I knew we are going to consume cash upfront. It just didn't make sense to me.
Got it thanks.
Thank you and as a reminder to ask a question. Please press star one one.
And our next question will come from Eric Wold from B Riley Securities. Your line is open.
Thank you good afternoon, a few questions a couple follow ups first just on the.
The incremental $27 million to $30 million of cost savings that you've identified since.
The acquisition how much of that is reflected in the new 7500 laid our guidance and then we'll all of that and you reflected next year.
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 where we identified here were already existing.
<unk> to G&A that have taken place and 15 million of consolidated consolidation savings from really making sure of the digital business doesn't have two of everything because we had red box digital in chicken soup Enterprise's digital.
Now what we've got is we're under this model will have one unified digital business, which is 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 would say next year will reflect even more.
Okay, and then back on the <unk>.
Free cash flow question, it sounds like a lot.
Last call you talked about $50 million of free cash flow for the year. It sounds like from a prior question you are you still comfortable with that given.
What will come in the back half of the year just wondering if that's correct.
First half free cash flow number.
We'd have to do that in the after call because Jason needs to do so.
Sir.
Okay, and then just last question again well.
Well I am comfortable the second half is going to look like it was in terms of cash flow is going to work the way it should.
Got it.
And just last question kind of going back to the Red box comment you made obviously.
Not growing at the pace you wanted.
Look to other things.
Data to lean on what do you think has been adversely impacting kind of the core demand.
Rental demand core.
Revenue trends as kiosk.
Title mix changes in demographic profile consumer spending headwinds.
We don't know exactly what it is what do you think is driving that is it something you can control.
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 is 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 breakeven 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 costs of that operation.
And 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.
Coming to <unk>.
Cutting customers and we only have I think today at five <unk>.
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 Thats gone well. So that's that's been successful so there's been a lot of progress in that business.
That business can quickly.
Absorbed 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 started a very low number.
With very little to cover.
Perfect. Thanks Bill.
Yes.
Thank you.
And as a reminder to ask a question. Please press star one one.
And our next question will come from Brian Ken Slinger from Alliance Global Partners. Your line is open.
Great. Thanks, just wanted to put some context into it.
And we are discussing forward looking at licensing and others.
Assuming you put the Q out any minute.
Can you help us.
Hughes me with.
Separating revenue from video on demand streaming retail and licensing and other.
Give every quarter.
Yeah, it's in the Q in the Q I believe was filed I think it is filed now.
Yes, so it was.
Roughly $30 million for DVD, and streaming roughly $30 million per 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.
I guess I'm confused on the retail piece $30 million of retail.
Lower than the first quarter you had 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.
A little confused why did you <unk> quarter, we're going to have less retail revenues in the March quarter, maybe you can talk speak to that.
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 <unk>.
In more detail on the post call.
Okay, well at $30 million with again, the continuing now.
Notwithstanding the future next year, which is obviously uncertain in terms of theatrical releases right. This second.
Half of the year again, you've laid out.
Well Lisa is happening.
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.
Level of theatrical releases might not.
Achieved those aggressive targets that you had before.
I think there is reason to believe it will continue to increase.
But we're not 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.
Great. Thanks.
Do believe it will continue to go up though.
Thank you.
There are questions. So.
Thank you for joining us and we will talk to you again next quarter.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
Yeah.
Okay.
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Okay.
<unk>.
Sure.
Sure.
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