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CSSE: Pre-Crackle Earnings Miss Expectations, But No One Cares

05/20/2019
By Lisa Thompson

NASDAQ:CSSE

READ THE FULL CSSE RESEARCH REPORT

For Q1 2019, Chicken Soup for the Soul Entertainment's (NASDAQ:CSSE) revenues were $2.5 million versus $6.0 million a year ago, down 58%. Revenues and earnings missed expectations as the company carried over significant revenue opportunities for its original series Going From Broke, Chicken Soup for the Soul’s Hidden Heroes season 4, and Chicken Soup for the Soul’s Animal Tales. However, no one cares, because the all that matters now is how the Crackle+ joint venture affects the company’s earnings going forward.

Pro Forma Results

Management gave us a first look at the Crackle+ joint venture by giving out some pro forma numbers for the first quarter. Crackle generates revenues in two ways, by ads being placed on its owned and operated channel, for which is receives 100% of the revenue and for placing ads on other people’s channels, for which it keeps approximately 20% of gross billings. In Q1, CSSE claims that Crackle generated $15.9 million in gross billings resulting in $10.9 million in revenue for Q1 2019, up 52% year over year. The owned and operated business, which we believe is 90% of revenues, grew 33% year over year, while the ad network revenues doubled. For the 2018 year, Crackle generated $72 million in gross billings and “at least” 2/3 of that in revenues, or $48 million.

Q1 2019 Results

In Q1, only five episodes of Animal Tales were booked as revenue for $300,000 and another five episodes of Animal Tales have already been booked in Q2. Given its new Crackle Plus joint venture, the company is now evaluating the economics of airing its content through Crackle Plus in addition to cable, broadcast TV, and other online distribution opportunities. Having Crackle+ as an option has made the optimization decision much more complicated. CSSE still expects revenues from television and short form production for the year to exceed 2018 revenues of $10.2 million. This means in the last two quarters of the year revenues should exceed $9.6 million.

Revenues from television and film distribution were down year over year to $1.5 million versus $3.2 million a year ago. This business varies seasonally and is affected by the success of films. In last year’s quarter the company had one hit that it owned that contributed $1.7 million all by itself. While CSSE typically has one major owned movie released per quarter, in this year’s quarter it held over The Man Who Killed Don Quixote to April 10th in the hopes timing would be more auspicious. Box Office Mojo says it grossed $345,000 so far at the US box office, and the company expects considerable additional revenues from streaming. Online networks grew 11% year over year in the seasonally weak first quarter.

The GAAP EPS loss for the year was $0.28 versus $0.09 a year ago. On a non-GAAP basis with one-time items and stock based compensation removed the EPS loss was $0.23 in Q1 2019 versus $0.07 in Q1 2018. Shares outstanding increased to 12.0 million versus 9.4 million last year or 27%. Last year’s share count was restated and reduced due to the acquisition of A+. We expect the rest of 2018 share count numbers to be also restated down. EBITDA for the quarter was a loss of $940,000 versus a positive $1.6 million a year ago.

Revising Forecasts

2019

For now we are hypothesizing that the company will deemphasize its content production business, however it already has a number of shows booked, has had all its series renewed, and has at least two new shows launching in 2019, so we find it difficult to project lower revenues in that business that in 2018. In distribution, we now see that CSSE grew that business $2.4 million last year, and we can hope it will grow by the same this year.

Then the remainder is the unknown Crackle Plus. We had expected $7.5 million from CSSE; so adding another $46 million for two and a half quarters of the Crackle addition seems very conservative. Management said that Crackle did $72 million in gross billings and revenues were “at least 2/3” or $48 million. So we are taking the $48 million, and growing it 33% and adding it for the period CSSE owns Crackle. Our new revenue estimate for CSSE for 2019 is $70 million in revenues, diluted EPS of $0.15, and $18 million in EBITDA.

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+ 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+ business will be so we have guessitmated by taking out half of 30% of earnings for the year.

For 2020 we are starting with $105 million revenues. This assumes that the online business only grow 20% for the year, which we imagine to be conservative. Our first cut at EPS is $0.30 per share and EBITDA of $30 million.

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