U.S. Markets closed

Edited Transcript of EROS earnings conference call or presentation 8-Oct-19 12:30pm GMT

Q1 2020 Eros International PLC Earnings Call

Mumbai Oct 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Eros International PLC earnings conference call or presentation Tuesday, October 8, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Kishore Arjan Lulla

Eros International Plc - Executive Chairman, Group CEO & MD

* Prem Parameswaran

Eros International Plc - Group CFO, President of North America & Executive Director

* Rishika Lulla Singh

Eros International Plc - Director

================================================================================

Conference Call Participants

================================================================================

* Timothy Wilson Nollen

Macquarie Research - Senior Media Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to the Eros International Plc's First Quarter Fiscal Year 2020 Earnings Conference Call.

This call is being broadcast live on the Internet and a replay of the call will be available on the company's website.

This morning, the company published its earnings press release on its website, erosplc.com. The company would like to remind everyone listening that during this call, it will be making forward-looking statements under the safe harbor provisions of the federal securities laws. The company's actual results may differ materially from those projected under forward-looking statements. During the call, the company will also discuss non-GAAP financial measures in talking about its performance. You can find a reconciliation of these measures to the GAAP financial measures in this company's press release.

I would now like to turn the call over to Mr. Kishore Lulla, Executive Chairman and CEO of Eros International Plc. Please go ahead, sir.

--------------------------------------------------------------------------------

Kishore Arjan Lulla, Eros International Plc - Executive Chairman, Group CEO & MD [2]

--------------------------------------------------------------------------------

Thank you. Good morning, ladies and gentlemen.

Indian filmed entertainment was not born a global phenomenon. It is an industry we have worked hard to create over the last 40 years. Be it the distribution or the creative aspects of the business, having spearheaded the driving force which has taken Bollywood global, it is within our core to ensure our films have the ability to touch individuals around the world. Eros has opened markets worldwide, be it U.K., U.S., Canada, Middle East, Korea and now China. Our [theatrical resume] in China had been a runaway success both ranking within the top 4 highest Indian-language box office grossing films. Furthermore, Eros Now continues to grow not only in the subscriber numbers but also the global distribution presence across the platforms such as in Apple, Amazon, Vodafone and this quarter most notably Wasu Media in China, where we are yet again in the pioneering markets creating a global Indian entertainment phenomena.

The key to successfully exploiting content is creating content of substance, storytelling that has the ability to resonate with [the billions]. Our expansion into the regional language content ensures that we are able to reach and navigate a culturally and a linguistically diverse landscape. Today, approximately only 7% of the content consumed in India is in English. 60% is in Hindi and the balance is in regional Indian languages. We have seen this segment grow due to international releases and rural penetration. Eros has successfully released hundreds of regional-language films in the past 10 years. Furthermore, Eros Now also serves its content across over 10 regional languages. Eros Now recent original series premiere of Modi was the first scripted episodic biopic of our Prime Minister. This original series was not only released in Hindi but also in 4 regional languages. We also have our forthcoming theatrical release slate to look forward to, imminently Laal Kaptaan as well as our first trilingual feature film based on the classic cinematic successful 1971 film Haathi Mere Saathi.

As our business continues to grows and evolve, we understand it's important to set clear financial targets for all the stakeholders who measure and track our performances. Therefore, for the full fiscal year of -- ending 2020, we are forecasting consolidated revenue in the range of $200 million to $220 million, adjusted EBITDA of $80 million to $95 million and a net debt in the range of $100 million and $110 million. Over the longer term, our goal is to be a net debt-neutral company.

As we continue to pioneer markets as well as (inaudible) the ways stories are told, we also see a shift in the way in which content will be consumed, as infrastructure, platform and content collide the very way in which we consume content will change. From theatrical, television, DVD to OTT, we'll see a much hungrier consumer craving a more engaging linear experience. Eros Now is pioneering technology partnerships to ensure we are in the driving seat of change, creating a truly unique ecosystem.

Now I'll hand over the call to Rishika Lulla, Chairman and CEO of Eros Digital.

--------------------------------------------------------------------------------

Rishika Lulla Singh, Eros International Plc - Director [3]

--------------------------------------------------------------------------------

Thank you, K. L. Good morning, everyone.

The last quarter, we had double-digit digital subscriber growth, increasing our paid universe to over 21 million monthly paid subscribers and a community of over 166 million. We would also like to reiterate our guidance of 50 million paid subscribers over the 3 years and crossing the 200 million registered user benchmark this year.

Our distribution reach is widening and ensuring worldwide distribution presence. We closed 6 key distribution deals this quarter ranging from large screen deals with Tata Sky in India, TCL, Etisalat in home viewing as well as OnePlus. We also closed small-screen deals with Vodafone Qatar, Wasu Media in China. We are aiming for 100 live distribution partners and deals by the end of FY '20.

An overarching theme for the digital video space in India in FY '19 to '20 is the launch of Jio Giga Fiber commercial services across India as well Airtel XStream and larger investments in the broadband infrastructure for the country. This will contribute to the growth of online video. Importantly, for the first time in history, home viewing is expected to grow into double-digit-percentage growth of the overall viewing pie. As the digital ecosystem evolves, we gear ourselves to ride the growth wave. Be it our approach to content, partnerships or marketing, we ensure we tap into the right consumer segment to grow our consumer funnel. Our recent original success, Modi, was released in 4 languages, namely Gujarati, Tamil, Telugu and Kannada, to cater to the regional audience. The content received excellent viewership in Gujarat, Tamil Nadu and Andhra Pradesh, among others. Ahmedabad was #1 city for viewership of the Modi show. This is an important precedent, as Ahmedabad does not feature in the top 10 cities for online video. And our data suggests there is a case to be built that consumers are logging on to the Internet, in many cases for the first time, to consume online video and key shows such as our original Modi.

There are 2 billion video users globally today. What would it take to grow to 5 billion global users? India sets the perfect example with a captive audience of 1.3 billion. In a country so rich with diversification in language and culture, it is imperative that we are able to touch the micro niche pockets of the country.

Localization of platform in a customizable, personal manner is a key ingredient to creating and growing a loyal and global audience. To us at Eros, PLC means deep personalization, customization and localization. This is the first time any platform in the world is addressing this curated user journey. Our focus on the technology stack was first time in India and world innovations to be launched this year in collaboration with Microsoft, aimed to change the ecosystem. A lot of the incumbent services have been constructed for an English-speaking audience world over. Eros Now will deliver a [linguistic copy] service based on our fundamentals of PLC. We believe revolutionizing technology will create a stronger customer experience and drive deep penetration into the micro niches around the world. We are already on track to being the most popular OTT service across Tier 2 and 3 cities in India, with over 50% market share. And over 65% of our users are watching content daily, opposed to the industry average of approximately 50%.

We remain laser focused on our 50 million subscriber target with a high direct-to-consumer skew. As our subscriber base matures, we are focused on revenue targets and creating a much higher-quality recurring revenue model as well as striving to deliver a better customer experience every day for our subscribers and community, at the same time delivering compelling content globally.

I would now like to pass the call over to Prem.

--------------------------------------------------------------------------------

Prem Parameswaran, Eros International Plc - Group CFO, President of North America & Executive Director [4]

--------------------------------------------------------------------------------

Thank you, Rishika. Good morning, everyone, and thank you again for joining us on our earnings call. I'm looking forward to sharing with you some of our financial highlights this quarter. Then we will take your questions.

This quarter, we generated $43.5 million in revenues compared to $60.2 million in the first quarter of 2019 on a like-for-like basis. Adjusted EBITDA for the quarter was $18.6 million compared to $27.5 million last year, which represents a margin of 42% compared to 45.7% last year.

This quarter, we released 12 lower-budget films, as compared to 1 medium- and 13 lower-budget films last year. We released 5 original series on Eros Now this quarter, including as Rishika mentioned the biopic Modi. Our Eros Now business continues to ramp nicely. We finished the quarter with over 166 million registered users and 21.1 million paying subscribers.

We ended the quarter with gross debt of $220.9 million, a meaningful reduction of $60 million from our March year-end. On a 12-month trailing basis, our net-net leverage ratio was 1.48x, which we believe remained conservative. The majority of our debt has a long-term maturity profile. Also to highlight, we are now in active dialogue with the Indian credit rating agency CARE to update our Indian subsidiary credit rating.

Given the shift to digital in our underlying business and a focus on OTT, we have now realigned our internal reporting segmental revenues into digital and studio business lines. For this quarter, the split was approximately 35% digital, 65% studio. By the end of the fiscal year 2020, we expect that mix to be circa 50-50. From the next quarter onwards, we will break out the business lines in detail, including revenue and adjusted EBITDA for both segments.

On the P&L, we are targeting between $200 million to $220 million in revenue and $80 million to $95 million in adjusted EBITDA for the full fiscal year 2020. We are also planning to be free cash flow positive by the end of this fiscal year. Over the following 2 fiscal years, we expect our top line growth to be in the 20%-plus range.

Thanks for listening, and now we're happy to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Tim Nollen of Macquarie.

--------------------------------------------------------------------------------

Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [2]

--------------------------------------------------------------------------------

I have got several. First off, I heard your comment just now, Prem, on the new reporting. Is it possible to give us the numbers for the quarter just reported for the usual theatrical, TV and digital breakdown? The revenue was a bit lower than we had forecasted, so I'm wondering what it is that's driving that. I would guess it's the smaller film slate and, I think you mentioned in the release, less TV syndication as you're going more OTT, but if you could clarify that in some numbers would be great. That's the first question. I guess, secondly and relatedly, nice growth in your paid sub number, the 21 million. Your revenue, though, is still -- like I said, came in lower than we had modeled. I wonder if you could talk about ARPU and your ability to raise pricing or get more direct subs versus the wireless subs or if the strategy of partnering with all these different providers means that your ARPU has to stay low. So if you've got a way to raise that, that would be great to hear. You mentioned also the -- you mentioned a strategic review and you mentioned your talks with CARE on the credit rating. I wonder if there's anything more you can tell us about either of those given that they seem to be quite important. And then lastly, you did this $25 million equity placement a few weeks ago. I wonder if you could just explain how that impacts your thinking on debt. I know you were out looking for a debt raise a while ago. Just what is the update on your debt position? I got the ratio, but what is your thinking on your debt status currently?

--------------------------------------------------------------------------------

Kishore Arjan Lulla, Eros International Plc - Executive Chairman, Group CEO & MD [3]

--------------------------------------------------------------------------------

Perfect, Tim. Prem, do you want me to take this?

--------------------------------------------------------------------------------

Prem Parameswaran, Eros International Plc - Group CFO, President of North America & Executive Director [4]

--------------------------------------------------------------------------------

Sure, sure. Sure, Kishore.

--------------------------------------------------------------------------------

Kishore Arjan Lulla, Eros International Plc - Executive Chairman, Group CEO & MD [5]

--------------------------------------------------------------------------------

Okay. Perfect. Tim, so there are 4 questions, the Eros Now questions and the ARPU and everything. I'll let Rishika take it. On the first question, on the segment reporting, we are going to report between Eros studio and Eros digital. So digital will have the digital revenues and you've seen that. What we are going to get on is the recurring revenue model annually, which will increase the quality of the earnings, which we'll be getting more subscribers. And we'll be holding back a lot of TV syndications in the markets internationally also, wherever it is affecting Eros Now. So focusing on Eros Now, getting into B2C more subs, like we have seen the traction now coming from the telcos. So the strategy was, in the last 3 to 4 years, because we didn't wanted to spend a lot of money and CapEx into subscriber acquisition. So we were looking at working with the telcos and also syndicating our subs so that we don't dent our balance sheet and we don't have to keep on doing more CapEx just on subscriber acquisition. Now we have reached the meaningful 166 million registered users worldwide, and the conversion rate is about 12%. And then the Eros Now brand is very popular amongst the consumer, so I thought the shift was very necessary now whereby we hold back the syndication in the markets, whereby the consumer will be forced to go on the Eros Now platform and Eros Now will be the only destination to have that content. That will -- as I said, will increase the quality of our earnings. This quarter, it's 35-65 digital and the studio. We're -- going forward this year, we're looking at 50-50. And then in the years to come, I think you will be looking at, in the next 3 years, let's assume, between 65% to 70% coming from digital, and the balance will be coming from studio. The company's policy is simple: Produce best content, best movies. Don't get reliant highly on theatrical revenues, which are bumpy. Have -- get reliant more on the subscription revenues and get more subscribers worldwide. We are not only looking at India but looking at all over the world, whereby we're dubbing our movies into different languages, and those markets are taking traction. And that's what the strategy is. So first question was that.

Second question, on the ARPU. I answered you that the way we are looking at things is, at the moment, India is about $3 to $4 for the telcos and for the B2C is about $10 to $12. So when we'll focus more on B2C, internationally is about $30. You will see the quality of the earnings going up, the revenue going up and subscribers going up. So that is the second answer for your question. The third one, we are working with the CARE agency already because all our -- there is no delay in any interest payments or any covenants with any of our banking facility. I hope that within the next 30 to 60 days we should get back our ratings, which was earlier. That's the earliest we're looking at. And what was the fourth question, Tim?

--------------------------------------------------------------------------------

Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [6]

--------------------------------------------------------------------------------

On your balance sheet, your debt situation. You did this equity placement in -- a few weeks ago. Just how does that factor into your thought process on your debt levels, the -- not on the amount but the timing and what you need [for the] balance sheet.

--------------------------------------------------------------------------------

Kishore Arjan Lulla, Eros International Plc - Executive Chairman, Group CEO & MD [7]

--------------------------------------------------------------------------------

Yes. So if we look at, our forecast for this year-end is about $100 million to $110 million net debt. And within the next 2 years, I think we should be net debt 0 company because of the -- naturally the subscribers and the growing -- and the growth in the digital which will come across. We have invested a lot into the content in the last 7 to 8 years, and that's what you can see because now we have a library of more than 12 -- 13,000 movies on digital. And the library we invested on, that's what is seeing the revenues coming back. And what will happen also on the debt is, because our syndication will go low, and your subscribers revenue and other revenues, the DSO days cycle will go back -- from 270 to 300 days to back to 100 to 120 days. So that will see the basically better working capital cycle. So -- and this $25 million, [this is a] convert which is at 3.59 from the market, and that's -- you must have seen the convert terms.

--------------------------------------------------------------------------------

Prem Parameswaran, Eros International Plc - Group CFO, President of North America & Executive Director [8]

--------------------------------------------------------------------------------

Yes. And if I could just add to what Kishore said, Tim, when you look at how we're projecting the future. As I mentioned in the call, we are projecting to be free cash flow positive for this fiscal year, which from a debt perspective we are fully funded. We don't expect to access the markets anytime soon and we look forward to growing the digital business.

--------------------------------------------------------------------------------

Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [9]

--------------------------------------------------------------------------------

So no near-term debt maturities, nothing to worry about in the next, say, 12 months regarding debt.

--------------------------------------------------------------------------------

Prem Parameswaran, Eros International Plc - Group CFO, President of North America & Executive Director [10]

--------------------------------------------------------------------------------

No, no.

--------------------------------------------------------------------------------

Kishore Arjan Lulla, Eros International Plc - Executive Chairman, Group CEO & MD [11]

--------------------------------------------------------------------------------

Not at all, no.

--------------------------------------------------------------------------------

Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [12]

--------------------------------------------------------------------------------

Great, interesting. Can I maybe have a couple quick follow-ups, please? I don't know if you can say anything, but you did mention in your press release that your strategic review is ongoing. If there's anything you could say on that.

--------------------------------------------------------------------------------

Kishore Arjan Lulla, Eros International Plc - Executive Chairman, Group CEO & MD [13]

--------------------------------------------------------------------------------

I could say only one thing, Tim, that we are very happy with the progress, but I'll be driven with -- by my lawyers on this. And my lawyers told me to, "Keep your mouth shut and not to say anything until it's done."

--------------------------------------------------------------------------------

Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [14]

--------------------------------------------------------------------------------

That's what I thought. And then lastly, as -- you're talking about the shift toward less film content production, less TV syndication, more OTT; and that's not new. I mean this has been going on for at least a year or 2, maybe more. And I've asked this question before. Could you maybe address content costs or any other costs associated with this, marketing costs, et cetera? I was assuming through now, and I guess it's still the case, that any incremental investment in OTT original content would basically come out of your former film studio budget. Is that still the case? Or are there any incremental content costs to know about? And likewise, as you are pivoting to more B2C, D2C, same thing, is there any more marketing or other costs to be aware of?

--------------------------------------------------------------------------------

Kishore Arjan Lulla, Eros International Plc - Executive Chairman, Group CEO & MD [15]

--------------------------------------------------------------------------------

Not at all, Tim. In fact, as I told you, that the investment into the content in the last 5 to 7 years has made us come into the cusp whereby we can take advantage of it now. We are -- our CapEx budget will be anywhere north of $150 million to $175 million, and the next year at about $200 million. And then it includes the studio films. As well as, because we have lot of CapEx investments done in the last 3 to 5 years, which we'll also release this year and the next year the movies, that will have a positive impact on that. And the series also is included in that. And the marketing costs, because we have the alliances with the telcos, with a lot of the marketing costs, the telcos are doing the marketing. And then you will see the platforms like Apple or Amazon whereby, Eros Now subscribers, we look at not marketing anything. They will be doing the marketing for us, whether it's Wasu Media. You saw the Wasu Media deal in China. Now they have 180 million subscribers, and they will do the marketing for us. So in that way, we are quite lucky that we don't have to invest a lot of money into the subscriber acquisition.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

(Operator Instructions) And at this time, I'll turn the floor back over to Mr. Kishore Lulla for any additional or closing remarks.

--------------------------------------------------------------------------------

Kishore Arjan Lulla, Eros International Plc - Executive Chairman, Group CEO & MD [17]

--------------------------------------------------------------------------------

Yes. I would like to thank all our shareholders, stakeholders and everyone with Eros, friends. Thank you for believing in us, and I think we'll make it happen. The next 2 or 3 years are going to be quite exciting.

Thank you a lot.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.