CSSE: Q2 2019 Results

By Lisa Thompson

NASDAQ:CSSE

READ THE FULL CSSE RESEARCH REPORT

Revenues beat expectations as Crackle turned out contributing more than previously thought despite being part of Chicken Soup for the Soul Entertainment (NASDAQ:CSSE) for only half the quarter. Total revenues for the quarter were $12.2 million versus $3.1 million last year, but pro forma revenues, with a full quarter of Crackle, would have been $21 million. Pro forma Q1 revenues were $17.6 million, so there was a 20% sequential increase.

Online revenues, which are now the new Crackle Plus, were $10.0 million but would have been $18.8 million on a pro forma basis if Crackle were part of CSSE for the full quarter. In Q1, pro forma online revenues were $15.8 million, which means they grew 19% sequentially. Since we are in the summer months when there is less viewing and advertising, we expect pro forma revenues could be down sequentially in the September quarter, but hockey stick going into the heavy advertising Christmas season. In addition to just the current Crackle Plus content, management is now getting calls from other major players interested in negotiating AVOD rights for their libraries. Additionally, advertisers are now seeing CSSE over the minimum threshold of views to buy ads on its channels. In just two months CSSE has finalized 13 AVOD agreements and have over a dozen in deal memo stage, which all together include thousands of hours of programming. As management noted on the call 70% of Netflix viewing is from non-original content showing there is a huge market for library content, and no real need to take the risk to produce your own. That being said, management is sorting out a structure for a production company that will produce original content for Crackle Plus, but with no upfront risk for CSSE and only upside. So far the only original content discussed so far is the episode series Going From Broke, and the movie The Man that Shot Don Quixote, with the possible addition of the next season of Hidden Heroes.

In Q2, five episodes of Animal Tales were booked. The company continues to evaluate the economics of airing its content through Crackle Plus in addition to cable, broadcast TV, and other online distribution opportunities. It decided that its new Ashton Kutcher produced show Going from Broke will air as a Crackle exclusive in October and those revenues will fall into the fourth quarter. Depending on viewing, revenues could be between $1 and $4 million for that show alone.

Revenues from television and film distribution were $2 million flat with last year. The Man Who Killed Don Quixote was released on April 10th and Box Office Mojo says it grossed $392,000 at the US box office; the company expects $1-$4 million in revenues from streaming in Q4.

Gross margin before amortization of the film library declined from 80% to 66% for the quarter. After amortization gross margin was down from 38% to 30%.

Operating expenses grew $4.2 million with the addition of a half of a quarter of Crackle. Operating margin was -24% versus -40%.

The reported operating loss was $3.0 million compared to $1.3 million last year.

The operating loss reflects certain non-cash or one-time expenses including $0.7 million in non-cash amortization, $1.2 million of transitional expenses related to the Crackle Plus joint venture, and $1.6 million in film library amortization. If such expenses were excluded from SG&A or cost of revenue, CSSE would have reported quarterly operating income of $0.5 million.

Other income this year was an expense of $2.4 million of which $2.3 million was from one-time acquisition costs. The rest was interest expense, similar to last year.

The company reversed $253,000 in taxes, versus a payment of $79,000 last year. CSSE has a tax loss carry forward of approximately $8.6 million.

Net loss for the year was $5.1 million versus a loss of $1.4 on a GAAP basis after minority income. After paying the preferred stock dividend, the loss for the first quarter of 2019 was $5.9 million.

The GAAP EPS loss for the year was $0.49 versus $0.14 a year ago. On a non-GAAP basis with one-time items and stock based compensation removed the EPS loss was $0.18 in Q2 2019 versus $0.07 in Q2 2018. Shares outstanding increased to 12.0 million versus 9.8 million last year or 22%.

EBITDA for the quarter was $1.3 million versus $411,000 a year ago. On a pro forma basis, EBITDA would have been $3 million. EBITDA for the first six months of CSSE pro forma was approximately $5.6 million versus $2.1 million as reported in the first six months of 2018.

2020

In the 2020 May 15th to November 15th time period, Sony has to make a decision whether to keep 49% of the equity in Crackle Plus or take $40 million in preferred stock from CSSE. Our assumption in forecasting is that Sony will make that decision on May 15th and will keep the equity, at which point earnings at CSSE will be reduced by minority interest. It is difficult to forecast what that portion of earnings for the Crackle Plus business will be so we have guessitmated by taking out half of 30% of earnings for the year.

We are maintaining $105 million revenues for 2020 for now with upward revision possible. This assumes that the online business only grows 20% for the year, which we imagine to be conservative. Our EPS estimate is $0.27 per share and adjusted EBITDA of $30 million, although given the pro forma adjusted EBITDA in 2018 of $26 million this could turn out to be low. Our valuation for the company is $19.00 per share using an EBITDA multiple of 10X.

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