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CSSE: Business Is Improving as the Ad World Wakes Up to AVOD

11/16/2020

By Lisa Thompson

NASDAQ:CSSE

READ THE FULL CSSE RESEARCH REPORT

Coming off a dismal summer for advertising driven by pandemic lockdowns, business is rapidly improving for Chicken Soup for the Soul Entertainment (NASDAQ:CSSE) and the entire AVOD industry as the slow moving advertising industry finally starts to shift spending to where the viewers are. Since Netflix and the rest of the SVOD crowd are unavailable, advertisers are embracing the AVOD players where not only can they place ads, but fine tune them to be viewed by the audiences they want with precision. In the third quarter analytics company Innovid measured that ad impressions delivered by connected TV (CTV) grew 55%. This growth has been accelerating and by September ad impressions grew 58%. A connected TV includes all streaming whether through a smart TV, or a device such as a Roku device or Fire TV Stick. CTV’s market share of video ad impressions is also growing as reached 41% of all video ad impressions from 33% in 2019’s quarter.

Crackle+ averaged approximately 52 million video streams per month in Q3 compared to 50 million in Q2. In the quarter original and exclusive content was 16% of streaming hours compared to 17% in Q2 and almost 15% of streaming hours in Q1 2020. In last year’s third quarter it was only 2%.

Importantly Crackle has seen increased interest from advertisers and an increasing CPM. The company believes the brands are looking for targeted campaigns Crackle can provide, and many of the other AVODs, now owned by multimedia companies, are trying to sell them bundles of various media rather than just the AVOD show or channel they want.

Our 2020 revenue estimate is $68 million. Our valuation for the company is $37.00 per share, based EV/Sales peer multiples. To a strategic acquirer, the price could be multiples of that.

Q3 2020 Results

Chicken Soup for the Soul Entertainment came in with Q3 revenues and EBITDA above our forecasts. Net revenues were $19.4 million versus $16.8 million a year ago, up 15.3%. The Television and Film Distribution segment reported $13.3 million in revenues compared to $2.7 million last year, no doubt significantly benefitting from the company’s hit movie The Outpost. The company released it to video on demand on July 3rd. It was a streaming hit and shot to the top of the charts. It has generated $2 million in overseas box office revenues. It was not released to theaters in the US. After its VOD run, the movie was sold on DVD, and moved to Netflix on October 2nd where it can be seen now. It will ultimately become available on the company’s Crackle service.

Online networks declined to $6.7 million from $14.4 million a year ago. Gross revenues were however $8 million versus $14.4 million as there were intercompany transfers of $1.3 million. The decline in revenues was primarily due to the loss of low margin ad revenues from the now shut down PlayStation Vue service. Revenues from that service contributed $6.3 million in sales to the Q3 2019 quarter. Without that $6.3 million in last year’s quarter, online network revenues would have been $8.1 million in 2019 versus $8.0 million in 2020.

The company continues to work to add more original and exclusive content as it provides higher ROI. This quarter that content was 16% of viewership versus last year’s 2%. In the quarter CSSE launched Spides a new scripted series that has become it biggest viewed series and has had over a million views already. It also had success with the movies Corporate Animals, Metro Sexual, and Blue Iguana.

Gross margin after film library amortization was 22.6% up from 18.6% a year ago. This was significantly above the 4.2% in Q2. Before amortization, gross margin was a much-improved 64.6% compared to 28.8% a year ago and 51.7% in Q2. 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 expand.

Operating expenses increased to $16.0 million versus $12.7 million last year.

Other expense was $0.7 million compared to $1.6 million a year ago. Last year’s number had one-time expenses of $1.4 million of acquisition related costs and loss on extinguishment of debt.

Net loss to common shareholders was a loss of $13.1 million, slightly less than the loss of $13.3 million in Q3 2019. GAAP loss per share was $1.04 versus a loss of $1.11 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 $1.02 per share versus a loss of $1.00 per share a year ago.

Fortunately the company is run on EBITDA due to high amortization costs distorting the profitability of the enterprise. For Q3 EBITDA beat expectations and was a positive $4.2 million compared to $2.7 million in Q2 2020 and a negative $372,000 in Q3 2019. We expect EBITDA to continue to improve. In addition to EBITDA, the company was also operating cash flow positive. Operating cash flow was $2.9 million and free cash flow was a positive $520,000.

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