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CSSE: Low Cost TV Programming Spurs Huge Demand From Networks

10/03/2017
By Lisa Thompson

NASDAQ:CSSE

We are starting coverage of Chicken Soup for the Soul Entertainment (NASDAQ:CSSE). This company was founded in 2015 as a business separate from the Chicken Soup for the Soul parent company that focuses on books. It went public on NASDAQ on July 17, 2017 as a Reg A+ deal, raising $30 million.

➢ CSSE has a license to use the Chicken Soup for the Soul brand and its content for use in video. It focuses on family friendly content with a positive message that is sold to cable and network television channels.

➢ Chicken Soup for the Soul Entertainment is built on a new business model with built in profits that provides TV channels with free or very low cost, high quality content. 

➢ Corporate advertisers or foundations, which fund production in exchange for either making their product part of the story, sponsor its shows or promoting an idea they endorse.

➢ Since these shows are paid for by advertisers in advance of production, and producers are hired on a flat fee basis, the company already has a profit locked it before production starts. It can then offer the content to television channels free. These channels then make their money by selling ads while taking no financial production risk on the content. This novel arrangement has produced demand for Chicken Soup provided content.

➢ The Chicken Soup brand and track record assures participants of high quality family friendly content with a positive message.

➢ The company is producing four shows to be delivered in 2017, with the possibility of three more being signed this calendar year. As the company only books revenues upon delivery of completed episodes, it will book the majority of its revenue in Q4 of 2017 due to the delivery schedule of these four shows. 

➢ Its unique business model affords high margins and high EBITDA that is expected to be reinvested in the business to create more content. It has the capacity to reach $20 million in sales in 2017 with just three employees plus a 10% management fee to the parent company as all production work is outsourced.

➢ The company also has plans to leverage its content by providing an on-demand OTT service using its tail end content, and other third party content. This OTT service will be offered in two versions: free with ads and paid without ads. It also generates revenue from it A Plus subsidiary that produces web-based short form video using celebrities and targets a younger demographic. This A Plus unit is 75% owned by the parent company and 23% owned by Ashton Kutcher, the actor, producer, and VC. Ashton is also contracted to produce two TV series for CSSE.

➢ CSSE has a strong balance sheet and over $10 million in cash after the IPO. It repaid all outstanding debt and has substantial liquidity with positive operating cash flow.

➢ Due to its high growth rate, high margins and the high EBITDA multiples afforded companies in this industry, we believe CSSE common stock could be worth as much as $25.85 per share by next year if it can reach our conservative EBITDA targets. This is based on an industry multiple of 20.2 times enterprise value to EBITDA. The risk in this is that the company is unable to book a sufficient number of shows at favorable pricing. In addition the lumpy quarters and tendency for revenues to be back end weighted adds more risk to the stock.

READ THE FULL INITIATION REPORT HERE

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