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Edited Transcript of CSSE.OQ earnings conference call or presentation 12-Nov-20 9:30pm GMT

·40 min read

Q3 2020 Chicken Soup for The Soul Entertainment Inc Earnings Call COS COB Nov 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Chicken Soup for The Soul Entertainment Inc earnings conference call or presentation Thursday, November 12, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Christopher Mitchell Chicken Soup for the Soul Entertainment, Inc. - CFO * William J. Rouhana Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO ================================================================================ Conference Call Participants ================================================================================ * Daniel Louis Kurnos The Benchmark Company, LLC, Research Division - MD & Senior Equity Analyst * Jason Michael Kreyer Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst * Jon Robert Hickman Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst * Thomas Ferris Forte D.A. Davidson & Co., Research Division - MD & Senior Research Analyst * Taylor Krafchik ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, ladies and gentlemen, and welcome to the Chicken Soup for the Soul Entertainment Third Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Taylor Krafchik. Please go ahead. -------------------------------------------------------------------------------- Taylor Krafchik, [2] -------------------------------------------------------------------------------- Thank you, operator, and welcome. With me today on the call are William J. Rouhana, Chairman and Chief Executive Officer; and Chris Mitchell, Chief Financial Officer, to review the results of the 2020 third quarter as well as provide a business update. Following this discussion, there will be a moderated Q&A session open to the participants on the call. During this call, management will make forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding expectations, intentions and strategies regarding the future. Included in these risks are forward-looking statements based on management's current expectations and assumptions and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the projected results. Given these uncertainties, listeners are cautioned not to place undue reliance on any forward-looking statements contained in this conference call. Please refer to the cautionary text regarding forward-looking statements contained in the earnings release, which also applies to the content of this call. Additional risk disclosures can be found in the company's filings with the Securities and Exchange Commission. As a reminder, on May 14, 2019, Chicken Soup for the Soul Entertainment created a subsidiary with Sony Pictures Television, launching Crackle Plus. On today's call, management will make comments on certain GAAP-based and non-GAAP pro forma financial information of the combined company that includes Crackle's financial results for the relevant periods prior to the closing date as if the acquisition occurred on January 1, 2018. The non-GAAP financial measure the company uses is adjusted EBITDA. Management believes that adjusted EBITDA provides useful information and that it excludes amounts that are not indicative of the company's core operating results and ongoing operations and provides a more consistent basis for comparison between periods. The earnings release contains a reconciliation of adjusted EBITDA to net income or loss, which is most like -- which -- the most directly comparable GAAP measure. For further information regarding the company's historical financial performance, we refer you to our filings with the SEC, including our quarterly report on Form 10-Q for the quarter ended September 30, 2020, which was filed today. I would now like to turn the call over to William Rouhana, Chairman and CEO. Bill, please go ahead. -------------------------------------------------------------------------------- William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [3] -------------------------------------------------------------------------------- Thanks, Taylor, and thank you all for joining us. We posted strong results in the third quarter, led by growing momentum in our online networks business, an exceptional distribution and production performance, which was led by our #1 TVOD hit, The Outpost. Q3 exceeded our expectations on the top and bottom line and showed strong sequential growth over our second quarter results. Gross revenue totaled approximately $20 million, and net revenue, $19.4 million, was up 43% sequentially. Adjusted EBITDA increased 56% sequentially to approximately $4.2 million. Our results reflect steady, methodical execution of our strategy since acquiring Crackle in May 2019. Since gaining control of the operations 18 months ago, we fixed the cost structure, ramped up our ad sales efforts and delivered more original and exclusive content, further differentiating Crackle in the emerging AVOD industry and increasing profit margins. We have also steadily built up our distribution and production pipeline and our content library, which now holds over 10,800 movies and 22,000 television episodes. With momentum in the business in Q3, we began turning our attention to increasing awareness of the content on the Crackle Plus networks in order to grow our audience. Overall, we are very pleased with the trajectory of the business. I think it's worth highlighting that year-to-date, we have generated $8.9 million in adjusted EBITDA compared to $103,000 in adjusted EBITDA through September of 2019. This tremendous growth is a direct result of our strategy to increase the mix of original and exclusive content on our network and our distribution and production success, and we think there is more to come. Before diving into results, I probably should quickly update you on the status of our relationship with Sony Pictures Television. As we noted in the press release we issued just before our call, we agreed to extend by 30 days the deadline for Sony to make its option election related to its ownership in Crackle Plus. We extended the option as discussions continue on ways we and Sony might collaborate more closely. The new deadline is December 14, and we look forward to updating you on or before that date. Looking more closely at our results, starting with online networks. Gross revenue of approximately $8 million was up 22% sequentially. Net of the elimination of $1.3 million of intercompany revenue that we paid to our Distribution & Production business, we had $6.7 million in net revenue, up 24% sequentially. Please keep in mind when comparing this year with last year that our performance in Q3 2019 included approximately $6.2 million in low-margin revenue from PS Vue, which is no longer in operation. So when you factor out the PS Vue contribution, our online networks business is up slightly on a year-over-year basis and growing and has a stronger margin profile. Viewership trends have remained steady coming off the pandemic. We saw a peak in March and April. And in Q3, we generated more than 155 million video streams on Crackle and Popcornflix, slightly more than the 151 million in Q2, which included COVID-driven overperformance in April. Original and exclusive content on our networks comprised over 16% of average monthly streaming hours in Q3, up from just 2% a year ago. Our latest Crack original series Spides, which premiered on Crackle on September 17, drove over 1 million streams in the first 2 weeks. This was our #1 scripted series on Crackle and is on track to be the most successful scripted series in Crackle's history. Spides is set in modern-day Berlin and stars Game of Thrones alumnus, Rosabell Laurenti Sellers. This series follows the success of other Crackle originals like Going from Broke, which has generated nearly 17 million views since its release in October 2019; and On Point, which has generated over 15 million views since its release in February 2020. We also saw success with several of our Crackle exclusives, including Corporate Animals, a dark comedy starring Demi Moore and Ed Helms; Metro Sexual, an Australian sitcom that gives you a peek behind the doctor's curtain of a small local sexual health clinic; and Blue Iguana with Sam Rockwell and Ben Schwartz. The advertising environment has also become a bright spot. As we move through the third quarter, we sold an increasingly high percentage of our inventory. With our premium original and exclusive content resonating with our viewers and advertisers, our CPMs are improving, including by as much as double for certain orders due to the continuing increase in demand for AVOD and the unique demographics we bring to advertisers. We've also seen larger existing advertisers significantly increasing their 2021 campaigns. Major new advertisers are also appearing on our networks for the first time, and our upfront registrations have increased by over 2x. From an industry perspective, we've seen a return of broader spending across industries, categories and verticals. We believe a number of advertisers are beginning to transition greater portions of their budgets to our AVOD due to overall viewership growth and due to the greater spending flexibility OTTs like Crackle Plus provide versus the packaged offers often required by some of our competitors. It is now our goal to focus on growing -- on accelerating the growth of our audience across the Crackle Plus networks. So how are we doing that? In a few key ways: First, we are actively launching Crackle and Popcornflix linear and AVOD offerings on new platforms and expect to have 15 more offerings available by the end of the year. For perspective, these new platforms provide access to approximately 45 million additional monthly viewers in the aggregate, and we expect each platform will add as much as 0.5 million new monthly viewers to our networks over the first year post launch. Our audience growth strategy also includes strategic public relations and social media and ramping up paid marketing on services like Amazon Fire, Samsung, VIZIO and LG, including our important strategic move into smart TVs. We view smart TVs as the highest growth area of AVOD viewership. That's why in the third quarter, we partnered with VIZIO, the #1 American-based TV brand, to add a Crackle branded button on 2.5 million 2021 VIZIO TV remotes. Turning to our Distribution & Production business, we posted very strong results. Revenue totaled $13.3 million, up from just $2.7 million a year ago as the strategy we began implementing late last year has really started to take hold. Of course, in Q3, we had a major lift from the smash TV hit The Outpost, which was released at the beginning of July -- at the beginning of the quarter. The Outpost is a military thriller that follows a tiny unit of U.S. soldiers in Afghanistan as they battled the Taliban. The Outpost ended up being the #1 movie in America for much of the month of July and continued to perform strongly through the summer so much so that it returned to #1 on iTunes again in September, nearly 12 weeks after its initial release. This film illustrates that our low-risk content distribution strategy can occasionally produce outsized returns as can our low-risk production strategy, as evidenced by Going from Broke and On Point. Another major highlight for the Distribution & Production segment in Q3 was the new film acquisition facility formed by Screen Media and Great Point Ventures -- Great Point Media. This facility, initially funded at $10.2 million, allows us to acquire higher-profile movies and TV securities in higher volume with greater efficiency and eliminates the need to use our working capital to grow this activity. Over the last couple of months, the entertainment industry has carefully resumed production activity, and it's good to be back to work, albeit with a strong focus on safety for cast and crews. Just to reset, we had originally planned to produce 5 titles during 2020: Willy's Wonderland, Trigger Point, Safehaven, Slasher and Going from Broke 2. We did complete Willy's Wonderland, which features Nicolas Cage battling possessed animatronic monsters in an amusement park. Now those are words I never expected to say in my life. So let me say them again, battling possessed animatronic monsters at an amusement park. Trigger Point, an action film featuring a retired special operative who worked in the darkest shadows of the U.S. government, is nearing completion on principal photography as I speak. And the production of Slasher has just commenced. The remaining 2 productions are scheduled to begin in January and February of the new year. On top of this, we are also moving forward with a full production schedule of 5 to 7 additional titles for 2021 barring further pandemic-related interruptions. These include the series Shadows in the Vineyards, starting Judith Light and Noah Wyle; and The Operative, starting Craig T. Nelson from Landmark -- these are from Landmark; and a second Ashton Kutcher series. Additionally, we are excited about the recent announcement of our new production co-venture with BrandStar. BrandStar brings a large selling organization and its roster of over 500 brand integration partners, which significantly expands our sales capability to sponsors. We see this as a great opportunity as our companies share so many synergies and we offer services that complement each other on several levels. Before wrapping, I want to take a step back and provide some perspective on where we are today, how we got here and where we believe we are going. We entered 2020 on an upward trajectory and posted a strong first quarter before shelter-in-place rules went into effect. Keep in mind, we also lost our largest air rep partner, PS Vue, early in the year, which created a challenge to revenue growth, though the margin impact was de minimis. The arrival of the pandemic drove huge early viewership, but also created tremendous ad market challenges that disrupted our financial momentum. In April, we saw what turned out to be the bottom for the Crackle Plus monthly revenue. However, we have recovered nicely. Based on our October performance, our monthly gross revenue in Crackle Plus increased 83% from the low point, and we are now expecting November and December to be record months. At the same time, we've grown our distribution and production more than 500% year-over-year. The Outpost was a big driver in Q3. But we anticipate similarly strong performance in Q4 that is broadly based and will include, for the first time, meaningful revenue from international sales derived from the films we acquired after the Foresight library acquisition that we completed in late 2019. In short, while the pandemic remains highly unpredictable, our business has surpassed pre-COVID levels and delivered record third quarter adjusted EBITDA. Absent a significant return to the economic disruption from the pandemic, we are going to end 2020 on a very strong note, and we will enter 2021 at an order of magnitude higher performance run rate. We're excited to be at this point where the foundations we started laying 18 months ago are delivering results and validating the opportunity we saw for this company. The goals for our current business simply stated are to drive viewership up and the cost of content down, both of which should serve to drive attractive adjusted EBITDA. As we close out the year, we are also now fully in growth mode, and we feel ready to expand further. We continue to evaluate a variety of growth opportunities that could accelerate our strategy. These include exploring new AVOD channels, including an A+ channel and a Chicken Soup for the Soul channel, as well as other strategic moves. Our debt is not due for 5 years. We have no bank covenants. We have increased financial flexibility. We have improving cash flow. We have the working capital we need to execute our plan. We're excited about what's to come. We want to thank our viewers, our partners, our investors for their support, and I'd especially like to express my gratitude to our employees who continue to step up in these very challenging times for all of us. I'll turn it over to Chris. -------------------------------------------------------------------------------- Christopher Mitchell, Chicken Soup for the Soul Entertainment, Inc. - CFO [4] -------------------------------------------------------------------------------- Thanks, Bill. I will focus on a review of our financial results and balance sheet and then turn to some financial developments and updates. We reported gross revenue of $20 million in the third quarter compared to $13.9 million in the second quarter of 2020, an increase of 44% compared to $17 million in the year-ago period or nearly 18% growth. The year-ago figure includes $6.2 million in gross quarterly revenue from Sony's PlayStation Vue service, which was shuttered at the beginning of this year. Excluding this revenue, third quarter gross revenue would have increased 85% year-over-year. Net revenue was $19.4 million, up nearly 44% sequentially and 15% on a year-over-year basis. These results reflect solid performance across both businesses. Our adjusted EBITDA set a third quarter record at $4.2 million, representing a sequential quarterly increase of 56% and a reversal from an adjusted EBITDA loss of $400,000 in the year-ago period. Drivers of our adjusted EBITDA performance include a rebound in advertising revenue in our online networks business and strong growth in our distribution and production business. Our online networks business, or Crackle Plus, generated $8 million in gross revenue in Q3 2020 compared to $6.7 million in the second quarter for sequential growth of 21%. Year-ago online networks gross revenue was $14.3 million. Without the impact of Sony PS Vue and including the intercompany revenue share payments, third quarter online networks gross revenue would be approximately flat with the prior year. For perspective, our advertising business is now more fully recovering from the impacts of the pandemic, and our online networks revenue is now tracking above pre-COVID levels on a monthly basis. Q3 gross revenue for online networks included $1.3 million in intercompany revenue share payments to our Distribution & Production business, which are eliminated in our consolidated net revenue. Net of the intercompany revenue share payments, online networks generated $6.7 million in revenue in the third quarter of 2020 compared to $5.4 million in the second quarter of 2020 for a sequential growth up 24%. Distribution & Production generated gross revenue of $13.3 million in Q3 compared to $8.5 million in the prior quarter, an increase of 56%, and $2.7 million in the year-ago period, an increase of more than 5x. This included the intercompany revenue share payments I just spoke about, which continue to grow as we flow through more payments related to original and exclusive content provided to Crackle Plus. Gross profit for the third quarter 2020 was $4.5 million or 23% of net revenue compared to $587,000 in the second quarter or 4% of net revenue and $3.2 million or 19% of net revenue for the year-ago period. Gross margin improvement reflected increased mix of original and exclusive content on Crackle Plus, which had higher margin and lower cost, and the benefits of fixed cost absorption as online networks revenue grows. We also saw a nice lift in Q3 from the strong performance of The Outpost as well as Last Full Measure, Blood and Money, Black Water: Abyss and Robert the Bruce. Notably, as you add back the noncash film library amortization expense, gross profit would have been $12.5 million or 64% of total net revenue as compared to $4.5 million or 21% of total net revenue in the year-ago period. Operating loss for the third quarter 2020 was $11.3 million compared to an operating loss of $13.1 million in the second quarter 2020 and $9.6 million in the year-ago period. Given the rebound in performance in the third quarter, we increased performance-based compensation expense and began to increase marketing expenditures, which resulted in elevated SG&A beyond normal levels. Our adjusted EBITDA for the third quarter was 22% of net revenue at $4.2 million compared to $2.7 million last quarter or 56% sequential growth and an adjusted EBITDA loss of $0.4 million in the same period last year. I would note that there were no transitional expense add-backs to EBITDA related to the acquisition of Crackle in the third quarter as those expenses wound down in the second quarter of 2020 as expected. Our operating cash flow year-to-date was approximately negative $13.8 million compared to negative $16 million as of September 30, 2019. This result was primarily driven by significant investments in our film library and a significant reduction in longer-term contractual accounts payable in the third quarter, which improved the company's working capital position. We have invested $20.4 million in film library acquisitions year-to-date, consistent with our strategy to increase the amount of owned content on our networks in addition to driving more revenue in our Distribution & Production business that is approximately double the level of investment through the first 9 months of last year. While we doubled the investment, we nearly quintupled the revenue from our Distribution & Production business year-over-year, and the value of that investment should extend well into the future. In the third quarter, we closed on a $10.2 million film acquisition facility with Great Point Media, thereby significantly reducing or eliminating the need to fund film acquisition activities out of our working capital in the third quarter. We intend to increase the size of our Great Point Media facility over time. Looking at our balance sheet and liquidity position as of September 30, 2020, the company had cash and cash equivalents of $9.2 million compared to $4.7 million at the end of the second quarter of 2020 and $6.2 million in the year-ago period. Accounts receivable health is favorable, with customers paying sooner on average than in the second quarter. You will recall that we used a portion of the proceeds from our July public bond offering to repay the full $13.3 million principal outstanding under our prior bank loan agreement, eliminating all principal amortization payments over the coming years and freeing up capital for further growth. In addition, the company paid off $2.5 million of the LSG credit facility. At the end of the quarter, we had $22.1 million in senior unsecured notes and $2.5 million funded under our LSG credit facility. Looking ahead, we have a lot of momentum heading into the end of the year. While the pandemic will continue to pose near-term uncertainty, we are controlling what we can control in executing our business strategy and enhancing our working capital position and financial flexibility. And we believe we're in a position to drive a strong conclusion for the year with bright growth prospects in 2021. Thank you for joining. I'll now turn the call back over to Bill. -------------------------------------------------------------------------------- William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [5] -------------------------------------------------------------------------------- Okay. Operator, we'll take questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) We have our first question coming from the line of Dan Kurnos with Benchmark. -------------------------------------------------------------------------------- Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - MD & Senior Equity Analyst [2] -------------------------------------------------------------------------------- Bill, nice momentum you're seeing here. I just want to touch on 2 things you talked on in your prepared remarks. First, on the CPM side, you made it very clear that you guys were holding price, so different tactic. And now you're talking about CPMs doubling on certain orders. Obviously, there's been mix shift to connected TV. I'm just curious how much of that is, I think, open programmatics turning the corner in September and sort of underlying market versus just you guys increasing sort of premium content and getting a better look now. And then on the advertising, on the audience growth side, look, we -- I really want to get a little bit better sense for -- if there's any more color you can give on strategy there. Do you need to invest in other channels? Obviously, you've done a great job on distribution. But to the extent that Quibi couldn't make it work, Roku has obviously taken a bunch of share. I'm just curious how you see the landscape in terms of where you guys attack to continue the nice audience growth you've seen. -------------------------------------------------------------------------------- William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [3] -------------------------------------------------------------------------------- Okay. Thanks, Dan. So first, on the advertising CPM side of the world, there's -- the one surprising thing that has happened since we saw our big competitors acquired by major media companies has been that our CPMs have been going up. And I say it that way because you may recall when we originally -- when I talked about this in the past, I would say, "Well, I'm not sure what it means now that we've got all these big competitors owning our then competitors." It turns out that if you're a major media company with a broadcast network or a cable network and an OTT network, you try to stuff down the throat of advertisers a combined package of stuff that they may or may not want. And if they just want OTT and they only want it on a premium basis, there really isn't any place to go anymore but us. And I'm seeing increasingly that, that is a part of the reason, Dan, that we're able to really improve pricing. I think that's going to go on for a bit. I don't expect the big media companies to stop trying to stuff people with a package of things that they -- some of which they want and some of which they don't. And I certainly don't expect advertisers to give up trying to buy what they really want to buy. So that is -- that was an unexpected result of having our competitors purchased, and it's fascinating to me. We have a scarcer and scarcer resource, which is a pure OTT ability to buy advertising. And there's no question that demand in our space is growing very dramatically. It has been ignited by the change in viewership that came from the pandemic. So that's the first one. The growth in viewership question, as I said in the -- in my prepared remarks, not only are we increasing our distribution platforms. And every time we put one of these up, we see 300,000, 400,000, in the case of Flex now over 500,000, monthly viewers added to our viewership. And if you start multiplying that by the 15-plus new platforms that we're going to be launching here over the -- between now and the end of the year, that number starts adding up. So not only are we seeing that working, but we're also -- we've also started a pretty aggressive marketing campaign on the smart TV platforms and on Amazon Fire. On the smart TVs, we've gone there because that's where the growth is. The growth is all coming in smart TVs now. People don't have to buy of an Amazon Fire stick or a Roku stick if they pull out of the box it's a TV that's capable of being a smart television. So we're pushing there. The VIZIO button was a good example of a strategy that I think will really bear fruit. There's 2.5 million remotes next year that are going to be unpacked with our Crackle brand on it, and that will make it easy for people to get to us, should add a dramatic number of new viewers to us. But also, we're finding that with Amazon, we're able to really significantly measure and effectively market to new viewers, and that has really been very helpful. So we are hitting many days all-time high ad impressions right now as we speak. And that's one of the reasons I said -- well, that's obviously been driven by viewers. But that's one of the reasons I said in my prepared remarks that November and December look like they will be all-time record months for us so... -------------------------------------------------------------------------------- Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - MD & Senior Equity Analyst [4] -------------------------------------------------------------------------------- That's super helpful. I just wanted to follow up on that last thought. Obviously, we had the vaccine news. Hopefully, it works -- on Monday. And clearly, COVID's not going away. Just kind of your thoughts on going into '21, how much -- do we -- is the streaming shift sustained? What do you guys think '21 kind of looks like from a viewership perspective? -------------------------------------------------------------------------------- William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [5] -------------------------------------------------------------------------------- Yes. So I think there's no doubt streaming is here to stay. All that happened was we had a step increase in viewership that would have been a straight line up to the right, but instead, we got it in a big step. And then we had a little settling down as people went out over the summer and decided they couldn't stand being in their house anymore. And viewership is growing again as we see people being -- staying at home. But whether there's a COVID or not COVID environment, people are going to watch television on their -- with their streaming platforms. They've gotten used to them. They like the choice. We're all getting better, with we being the streamers, at providing a higher-quality experience. We're getting better at the way we insert ads and the number of -- now I see more repeats of ads on broadcast television they do on our own networks. So I'm feeling better and better about the quality of what we do. So I think streaming is here to stay. 2021, it should be a very meaningful breakout year for us, Dan, with the combination of all the things we've already set in motion. I feel about 2021 on the Crackle Plus side the way I felt about 2020 in the distribution and production side. We set things up for 2021 -- for 2020, in distribution and production, you guys see the impact of that. With or without The Outpost, we were having an amazing year, up 400% year-over-year. Next year, Crackle Plus and the online networks business is set up to grow very meaningfully, not just through the new platforms, not just through the marketing, but also by the additional channels of A plus and Chicken Soup for the Soul AVOD. It's -- there's a lot of stuff in place now to make 2021 an amazing year for us. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- We have our next question coming from the line of Thomas Forte with D.A. Davidson. -------------------------------------------------------------------------------- Thomas Ferris Forte, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [7] -------------------------------------------------------------------------------- So first, I had a statement, then I had a question. And then after you answer my question, I have a follow-up question. So the statement is congratulations, congratulations, congratulations. All right. So my first question is, Bill, I'm going to ask you the same question I asked Roku on Roku's earnings call. Can you talk about the advancements you're seeing in the AVOD sector? What we're noticing is Amazon is taking it more seriously, including its own AVOD efforts, IMDb TV. Amazon even mentioned IMDb TV on its earnings call. And oh, by the way, we've seen Amazon advertising on Crackle. And then we've also seen more legacy linear TV advertisers warmly embracing AVOD beyond GEICO and Progressive, and we see a plethora of interactive ad formats, including yours from Crackle. So that's my first question. -------------------------------------------------------------------------------- William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [8] -------------------------------------------------------------------------------- I'm not sure I heard the question in there, Tom. -------------------------------------------------------------------------------- Thomas Ferris Forte, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [9] -------------------------------------------------------------------------------- I want your perspective on the advancements you're seeing in AVOD. So it's clear to me that AVOD -- I used the word maturing in Roku and they hated maturing. So it's clear to me that AVOD is becoming more prevalent. You're seeing more linear TV advertisers doing it. So I wanted your vantage point, not mine. -------------------------------------------------------------------------------- William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [10] -------------------------------------------------------------------------------- Well, you know what, you're one of the few people I know who watch pretty much every single AVOD network and then report on how many advertisers you see, who they are, how often they repeat themselves, et cetera. So you have as good a perspective as anyone. But I can tell you, from our viewpoint, AVOD is here to stay. AVOD is breaking out right now in a big way. The advertisers have fully embraced it. We -- I think I said in my prepared remarks that we have upfront registrations that are 2x what we had last year. That's not an insignificant fact. But also, we have new advertisers, major new advertisers. I would say in those upfronts we're seeing, about half of those advertisers are brand-new major advertisers. So I think whatever resistance there may have been to this new thing called AVOD, it's over. And the question in my mind really is how fast does the flow continue. And we've got way more demand than we could really service, which is one of the reasons why we didn't take a lot of political ads in the third quarter and instead focused on people who would still be customers of ours when there wasn't an election. So this is -- the demand is very real for advertisers, and it's very widespread. -------------------------------------------------------------------------------- Thomas Ferris Forte, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [11] -------------------------------------------------------------------------------- Excellent. So then my follow-up question is, I wanted you to take this opportunity to remind investors of how you monetize your proprietary film content, such as The Outpost. -------------------------------------------------------------------------------- William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [12] -------------------------------------------------------------------------------- Okay. So as you know, when we either produce or acquire programming, our primary goal is to have that programming available for ourselves, for our own networks with little or no net investment. Well, as it turns out, we not only end up quite often with little or no net investment. We end up making a profit on the way to getting the content to our own networks, and The Outpost was a great example of that. We took The Outpost -- we took all rights to The Outpost domestically. We released it on TVOD, where, as we've mentioned, it was the #1 movie. We released it in DVD, where it's been a huge bet up in Walmart and one of the top performers on Redbox, which, by the way, is still a very vibrant distribution channel for us. And then we added its exposure on Netflix. And Netflix, which used to be only a DVD provider and migrated to the online business we all know it has, has also paid us a substantial sum for that. And it will come back to us and end up on our own networks exclusively after having made us many, many, many dollars in other ways but will only be available for our own AVOD networks. And it will be a high demand because if you take the aggregate of all of those viewers who are on TVOD, who saw it in DVD and who will have seen it on Netflix, a vast majority of human beings will still not have seen it because it hasn't been on free TV, and that's where they will consume it and they will consume it only on our networks. So that is the -- really the magic of the model that we've created that is really working. And as I said a little earlier, that same model has worked a couple of times in television with Going from Broke and On Point. And it's worked pretty much consistently, Tom, with every acquisition we've made and absolutely consistently with all the production. So I see this as a great model. We've been able to replicate it. And it's moving along, and it just keeps moving along at a great pace. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- We have our next question coming from the line of Jason Kreyer with Craig-Hallum. -------------------------------------------------------------------------------- Jason Michael Kreyer, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [14] -------------------------------------------------------------------------------- Obviously, a great job on the production and distribution side of the business. Just wondering, how should we think about that as a leading indicator for your online networks? And when should that have a more prominent impact as that moves over to the Crackle Plus networks? -------------------------------------------------------------------------------- William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [15] -------------------------------------------------------------------------------- So it's -- Jason, thank you. It's a continuous flow, right? Every month, there are 2 or 3 new produced or acquired programs that are exclusively on our networks. And so it's kind of a growing phenomenon, whereas we started with 2 series way back in October of last year and now there's been a couple of months for the last year there's -- so now there's a couple of dozen. Over the next year, there'll be at least another couple of dozen to 3 dozens that we will add. And so gradually, over time, the original exclusive content that we have, which is our most profitable content, will grow as a -- will create a critical mass of its own on our networks. And so we will have a greater and greater percentage of it generating the ad impressions, which already generates 17% of ad impressions when it's only 2 dozen shows out of 7,000 or 8,000 movies. And I don't know how many episodes of television we have on our networks today. So this very small subset already outperforms. But as that subset continues to grow, 2 or 3 every month from here on out, it will grow further and further. It will drive more and more adjusted EBITDA because it will have a -- it has a lower -- these programs have a lower cost of revenue. And this will -- you'll see this just continuously building over the course of the next couple of years. And that's really what we've been trying to do, is create that critical mass of owned programming with a higher level of profitability and which is unique to our network so that people come to see stuff with us that they can't find in other places. -------------------------------------------------------------------------------- Jason Michael Kreyer, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [16] -------------------------------------------------------------------------------- Okay. You've kind of already asked my second question in the first one there, but I'm going to ask it anyway just to close the loop. Do you have a goal of where you would expect that mix of original exclusive programming to get to? Or any time frame and when you expect it to get there? -------------------------------------------------------------------------------- William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [17] -------------------------------------------------------------------------------- That's a very good question, and it raises one of the other issues that we are very focused on for next year. You guys probably heard me say grow viewers and reduce the cost of content being our 2 primary goals in an overarching way next year. And when we said reduce the cost of content, there were really 2 subtexts to that. One was the one we just discussed of growing original and exclusive content on a continuous basis because that will drive greater EBITDA, greater gross profit. But the second thing was more owned content in the things that are on our network. And today, of those 10,809 movies I mentioned and 22,000 episodes of television, only 1,400 of those are owned by us. The rest are share contracts with over 110 producers. But we intend to and will purchase libraries from others in order to put those libraries onto our own networks, thereby eliminating the revenue share for an increasing percentage of our content. So that will grow in -- that exclusive content, which we will make our own networks -- our owned libraries exclusive as well as the 2 or 3 every month that we put up, will help us grow that percentage chase and faster than people realize. And that will be, combined with the original exclusive programs to come 2 or 3 a month, the way in which we drive to a higher percentage of content that has a higher gross profit. So I didn't answer your question about a goal because I'm really not sure what the right goal is and the right tempo is. And it's somewhat driven by the opportunity to acquire meaningful libraries, but we're quite close on a couple now, and so I think we should be able to do that at a pretty good pace. And if that occurs, then the percentage will grow more rapidly than if we just go 2 a month forever. So I hope that helps you. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Our next question, coming from the line of Jon Hickman with Ladenburg. -------------------------------------------------------------------------------- Jon Robert Hickman, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst [19] -------------------------------------------------------------------------------- Congratulations on the quarter. Could you remind us of what Sony's choices are, at least initially their choices, with regards to the Crackle thing? -------------------------------------------------------------------------------- William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [20] -------------------------------------------------------------------------------- Sure. They have 2 choices, Jon. One is to maintain a 49% common equity interest in our subsidiary, which is called Crackle Plus, which holds our online networks, or to own $40 million of the preferred stock that we have at Chicken Soup for the Soul Entertainment. It's got the symbol CSSEP. It's that publicly trading preferred, which, as you recall, is a perpetual preferred that is not -- can never be forced to be redeemed. It's the equivalent of equity. And those are their 2 choices as per our agreement. That's what their 2 choices are as per our agreement. Those are... -------------------------------------------------------------------------------- Jon Robert Hickman, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst [21] -------------------------------------------------------------------------------- Yes. The preferred pays 10% basically, right? -------------------------------------------------------------------------------- William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [22] -------------------------------------------------------------------------------- Yes, 9.75%. 10% if -- you can do the math. -------------------------------------------------------------------------------- Jon Robert Hickman, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst [23] -------------------------------------------------------------------------------- Yes. Okay. So if they take the $40 million, they get basically $4 million a year in direct, okay. And if they take the 49%, then who knows what they get, right? So -- okay. -------------------------------------------------------------------------------- William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [24] -------------------------------------------------------------------------------- They get 49% of the profits of that joint venture. So obviously, we haven't gotten either of those choices made as of a few days from now, which is when they were required to do it so... -------------------------------------------------------------------------------- Jon Robert Hickman, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst [25] -------------------------------------------------------------------------------- Okay. My last question is, could you go over -- I think I might have missed this in the prepared remarks. But could you go over the jump in SG&A expenses this quarter? It kind of was a pretty big sequential jump. And I think there were some reasons for that, but I think I missed them as you were talking. -------------------------------------------------------------------------------- William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [26] -------------------------------------------------------------------------------- Yes. Chris actually did explain that, and I'll let him answer this question. -------------------------------------------------------------------------------- Christopher Mitchell, Chicken Soup for the Soul Entertainment, Inc. - CFO [27] -------------------------------------------------------------------------------- Sure. The biggest driver of the increase in SG&A was compensation. We had a $1.4 million increase year-over-year, and that was really related to performance-based compensation as we saw a strong rebound from the second quarter to the third quarter. So I think as a percentage of net revenue, I think that's about a 7-point increase. We would not expect SG&A to stay at these levels. We also had some unusually high professional fees, a lot of which was related to financing activities. That's probably another 3 points worth. So from a margin perspective, percentage of net sales perspective, this was an unusually high quarter, and we would expect to return to more normalized levels going forward. -------------------------------------------------------------------------------- Jon Robert Hickman, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst [28] -------------------------------------------------------------------------------- Okay. My other questions were more than answered. So again, congratulations. Looks like the future looks pretty bright. So that's it for me. -------------------------------------------------------------------------------- William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [29] -------------------------------------------------------------------------------- Thanks, Jon. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- We have our next question coming from the line of Mike Grondahl with Northland Securities. -------------------------------------------------------------------------------- Unidentified Analyst, [31] -------------------------------------------------------------------------------- This is [Michael] on for Mike. Maybe just -- you touched on the VIZIO remote, kind of the smart TV opportunity. Can you just give us a high level idea of that market size and the current penetration there? -------------------------------------------------------------------------------- William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [32] -------------------------------------------------------------------------------- Well, so VIZIO, they put out -- I've not really -- I know how many televisions they're put on, but I'm pretty sure I'm not -- I shouldn't be sharing that with you per year. But we are going to be on roughly 2.5 million of the remotes in the -- probably in the first half of next year. That's not all the remotes they have, but it's a good chunk of them. What are you trying to get at, [Mike], so I can be more helpful? -------------------------------------------------------------------------------- Unidentified Analyst, [33] -------------------------------------------------------------------------------- I guess just the current -- I don't know the number off the top my head, but the number of TVs out there that are smart TVs and how many people have either downloaded the app or that's on their home at the box. -------------------------------------------------------------------------------- William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [34] -------------------------------------------------------------------------------- Well, the smart team, the point of the VIZIO button for us is that the app's predownloaded and you're able to get to it with just one click. And as far as the number of TVs out there, I actually don't know. But we'll be happy to look it up for you, if you want. -------------------------------------------------------------------------------- Unidentified Analyst, [35] -------------------------------------------------------------------------------- Got it. And then, I guess, just sticking with hardware. With the Microsoft, Sony doing their console -- gaming console upgrades this year, is that an opportunity there to get further viewership or... -------------------------------------------------------------------------------- William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [36] -------------------------------------------------------------------------------- Yes. I mean we have -- we're on both those platforms. And I think there's -- they've been enhanced to be better, more video-friendly for sure. And I think they're likely to be good platforms, but I don't think that they're as significant for our AVOD business as smart TVs are. I think that's where you're going to see the vast majority of growth in viewership over the next little bit of time because it's just easy for consumers. And the primary reason people buy smart TVs is to watch television, whereas the primary reason they buy the game platforms is really to play games. So we are on them, but I don't view them as consequential as I do the smart televisions. All right. Well, that's it for tonight. We're -- thank you for joining us and, I guess, we'll be back next quarter. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- This concludes today's teleconference. You may now disconnect.