CSSE: Viewership Accelerated in Q1 and Crackle+ Should Emerge Even Stronger This Fall

By Lisa Thompson

NASDAQ:CSSE

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Chicken Soup for the Soul Entertainment CSSE is in a unique position in the streaming wars and is capitalizing on market trends accelerated by the pandemic shut down. It could emerge even stronger as viewers reevaluate their experience having explored more content avenues during the shutdown. For one, people have discovered Crackle and Popcornflix who never watched them before. Secondly, movie producers have no theatres in which to release their films, making TVOD (aka pay-per-view) an important channel and one that has given CSSE its greatest profits in recent weeks. The moviemakers have also discovered that TVOD even generates greater profits for them than theatrical releases when they are in the middle market—not a huge superhero blockbuster and not an indie cult choice. Third, with sports shut down, advertisers are giving Crackle a look as it attracts that desirable demographic of 18-34 year old males.

Certainly while consumers save money by eating at home and not going to events, SVOD has benefited, but coming out of these shut downs, spending will shift again to live experiences and subscriptions may be cancelled. One would expect cord cutting could accelerate, as viewers not only seek to save money, but have now learned they can survive without Comcast.

CSSE is the last man standing as an independent AVOD and management continues to talk to the 14 to 15 players that should be thinking about how AVOD fits into their plans. Crackle+ is years ahead of any de novo business strategy and at current valuation, billions in cost below the numbers thrown around by startups such as Peacock. We believe CSSE CEO, who is also the largest shareholder will do what ever is right to maximize the value of the company, including an outright sale.

Short term Crackle + continues to suffer from the reduction in ads primarily from local advertising (which are typically 40% of ad revenue) as businesses were shut due to the pandemic. After a disappointing April (down some 15%), May was considerably better, but maybe not back to pre-pandemic levels. As a result we are expecting revenues to come in close to what they were in Q1. Production has been shut down for any new content. Management believes it has enough content until Q1 2021, but there are four or five productions on hold waiting for locations to reopen and talent to consent to start up. While delaying completion, this also reduces some costs and well as increases the value of CSSE's film library.

Since businesses across the world have shut down, viewership has grown substantially at Crackle as people have more free time, but less money, making AVOD services even more attractive. Crackle+ averaged approximately 50 million per month videos streams on Crackle and Popcornflix. Viewership began to spike in March leading to growth in ad impressions throughout the quarter with stable ad pricing. Again advertising demand was greater than supply in Q1, however local advertising showed some weakness near the end of the quarter, and weakened significantly in April. The company emphasized its strategy to depend more on new and original exclusive content. In Q1 this content was almost 15% of streaming hours in the quarter, and the highest percentage to date and showed less reliance on Sony content. It has had extreme success with Going From Broke, produced by Aston Kutcher and On Point, its basketball documentary series. This month it highlighting the Crackle exclusive movie Cooped Up and Screen Media's Crown Vic.

Source: Chicken Soup for the Soul Entertainment

Q1 2020 Results

Chicken Soup for the Soul Entertainment came in with Q1 revenues below forecasts and EBITDA above forecasts. Net revenues were $13.2 million versus $2.2 million a year ago, up 1126%. The company is now combining Television & Short Form Production with Television and Film Distribution, and this segment reported $5.1 million in revenues compared to $1.8 million last year. Online networks grew to $9.0 million from $0.7 million a year ago and was on target with forecasts.

Gross margin after film library acquisition was 23.6% up from 22.2% a year ago. This was below the 30.4% in Q4 that had much higher revenues. The Production and Distribution segment has a higher margin than the online business and as that segment becomes a greater part of overall sales, margins should expand.

Operating expenses increased to $13.4 million versus just $3.2 million last year before the Crackle+ joint venture. The biggest increase was from amortization, which added $5 million in expense alone.

Other expense was $422,000 from $526,000 a year ago. Without one-time acquisition costs other expense would have been $323,000 versus $128,000, owing entirely to interest expense.

Net loss to common shareholders was a loss of $11.4 million down sequentially from $12.4 million in Q4 2019 and a loss of $3.4 million in Q1 2019. GAAP loss per share was $0.95 versus a loss of $0.28 a year ago and the share count remained steady. On a non-GAAP basis, taking out stock-based compensation and one-time charges, we believe the loss would be $0.75 per share versus a loss of $0.23 per share a year ago.

Fortunately the company is run on EBITDA due to its high amortization costs distorting the profitability of the enterprise. For Q1 EBITDA beat expectations and was a positive $2.0 million compared to $5.2 million in Q4 2019 and a negative $940,000 in Q1 2019.

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