Good day, everyone. Welcome to Cineverse's Third Quarter Fiscal 2024 Financial Results Conference Call. My name is Cameron and I'll be your operator today. Currently, all participants are in a listen-only mode. You will have a question-and-answer session following management's prepared remarks. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the call over to your host, Gary Loffredo, Chief Legal Officer, Secretary & Senior Advisor for Cineverse. Please go ahead.

Good afternoon, everyone. Thank you for joining us for the Cineverse fiscal year 2025 first quarter financial results conference call. The press release announcing Cineverse's results for the fiscal first quarter ended June 30th, 2024 is available at the investor section of the company's website at www.cineverse.com. A replay of this broadcast will also be made available at Cineverse's website after the conclusion of this call. Before we begin, I would like to point out that certain statements made on today's call contain forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties, and assumptions. The company's periodic reports that are filed with the SEC describe potential risks and uncertainties that could cause the company's business and financial results to differ materially from these forward-looking statements. All the information discussed on this call is as of today, August 14th, 2024, and Cineverse does not assume any obligation to update any of these forward-looking statements except those required by law. In addition, certain financial information presented in this call represent non-GAAP financial measures, and we encourage you to read our disclosures and the reconciliation tables through applicable GAAP measures in our earnings release carefully as you consider these metrics. I'm Gary Loffredo, Chief Legal Officer, Secretary & Senior Advisor at Cineverse. With me today are Chris McGurk, Chairman and CEO; Erick Opeka, President and Chief Strategy Officer; Tony Huidor, Chief Operating Officer & Chief Technology Officer; Mark Lindsey, Chief Financial Officer; Mark Torres, Chief People Officer; and Yolanda Macias, Chief Content Officer, all of whom will be available for questions following the prepared remarks. On today's call, Chris will discuss our fiscal year 2025 first quarter highlights, the latest operational developments, outlook, and long-term growth strategy. Mark will follow with a review of our results for the fiscal first quarter ended June 30th, 2024. And Eric will provide some details on our streaming business results and operating initiatives before we open the floor to questions. I will now turn the call over to Chris McGurk to begin.

Thanks, Gary, and thanks everyone for joining us here today. This was a transition quarter for Cineverse. Consistent with the prior four quarters, we again generated significant savings in SG&A during this quarter of $1.3 million or 17% versus the prior year, reflecting our previously reported cost savings initiatives. Most importantly, our offshoring of domestic employment positions to Cineverse Services India. We've now reduced our domestic headcount by 57 positions or 39% since we began consolidating operations after we completed our acquisition activities two years ago. That offshoring of domestic positions to a battle tested efficient operating division of Cineverse in India was the driving factor behind the $8.9 million in SG&A cost savings we recorded in the last fiscal year and this quarter's results demonstrate the continued success of this key initiative. Those cost savings were the main factor that enabled us to beat our direct operating margin target again this quarter, recording a 51% margin versus our stated target of 45% to 50%. Our revenues in this quarter were impacted by an almost $2 million decline in digital licensing due to the timing of digital content releases between quarters and the comparison to non-recurring revenues in our legacy digital equipment business that we booked in last year's quarter. Another key timing and transition related issue that impacted revenues in the quarter is that we did not yet begin to report any upsides from our new sales teams and SaaS sales initiatives for our proprietary Matchpoint Technology, AI based products and omni-advertising programs, most importantly direct ad sales. However, we've now built a very robust pipeline in all those areas that Eric will talk about in just a minute. And based on that, we fully expect to begin to record revenue upsides over the next few quarters as we…

Thank you, Chris. For the quarter ended June 30, 2024, Cineverse reported total revenues of $9.1 million compared to $13.0 million in the prior year period. As a reminder, the first quarter of fiscal year '24 included material non-recurring revenue of approximately $1.2 million related to our legacy digital cinema business, which is not present this quarter. When excluding the impact of the legacy digital cinema business, the decrease in revenue was primarily driven by approximately $2 million decline in the company's digital distribution revenue mostly resulting from a delay in content releases during the quarter compared to the prior year quarter and an approximate $500,000 decline in advertising revenues due to our channel optimization efforts. We expect this trend to reverse for the remainder of fiscal year 2025 as the economy improves and our new direct advertising sales team continues to ramp up. Despite these top line revenue results for the quarter, we remain cautiously optimistic for double-digit revenue growth in fiscal year 2025. As the economy improves, interest rates decline with the expected improvement in the advertising market in a political year is realized and revenue growth from our technology offerings. Eric will provide additional details on the operational drivers behind our financial results. As Chris mentioned, our direct operating margin for the quarter was 51%, which is in excess of our previously provided guidance of 45% to 50% for fiscal year 2024. Our improved direct operating margin is a direct result of our cost optimization initiatives referred to earlier. We expect our direct operating margin in future quarters to be in line with our previously stated target margins of 45% to 50%. SG&A expenses decreased $1.3 million or 17% for the quarter compared to the prior year quarter. Again this improvement is a result of the cost…

Thank you, Mark. This quarter, we've made significant strides in moving forward our strategic initiatives, particularly in our streaming technology, content distribution and monetization efforts. First, let me highlight our streaming performance. We achieved remarkable viewer growth with 2.26 billion minutes watched in Q2, 2024, up 73% year-over-year. The surge was driven both by our established brands and successful new channel launches. For example, our Bob Ross channel saw over 800 million minutes watched, up 33% year-over-year. New channels like Dog Whisperer and Yu-Gi-Oh! have shown impressive growth with Dog Whisperer experiencing nonstop growth for five consecutive months and Yu-Gi-Oh! up 132% in June over its May launch. The surge in inventory comes at the right time as we ramp up in direct sales and go into our busiest time of the year. In terms of our subscriber base, our subscriber count stands at approximately 1.39 million down approximately 3.5% sequentially, but up 10% year-over-year. This decline is attributed to the summer seasonal churn we typically see and we expect to see this number to see appreciable increases in subscriber count on the back of the Terrifier 3 release later this year and the usual surge in subscribers that occurred during Q3, our fiscal Q3 rather. Keep in mind, we saw triple-digit subscriber growth following the release of Terrifier 2 in late 2022. It's worth noting that our year-over-year comparisons in digital transaction sales were impacted by substantial revenues that came in from several one-off licensing deals, Terrifier 2 and other content in the prior fiscal year, which we didn't have this year. However, we're extremely excited about the upcoming release of Terrifier 3 and its impact on revenues across all company lines of business. Unlike its predecessor, which began as an event release, Terrifier 3 will have a wide…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Brian Kinstlinger with Alliance Global Partners. You may proceed.

Great. Thanks for taking my questions. I wanted to start with getting a better understanding of the revenue trends. First, if you could explain the drop in digital distribution. What were the content delays? What specifically, if you could, I think you guys mentioned that a few times. And then is this a one-time event, an anomaly, or is this something we should expect going forward and this is kind of the base of where your revenue is going to start to grow from?

Hey, Brian, this is Chris. I think that Eric addressed that a little bit in his remarks, but I think Yolanda and Eric if you want to field that question.

Sure. I'll get it started. So if you kind of look at the bulk of that number, right, it's probably about so if you're taking out the non-recurring revenue from projection systems, which was about $1 million or so. And you take out the about 500K on the ad supported side, I believe it's about $1.5 million. We had in the prior year, we had some large specific licensing deals that in aggregate were around $1 million of that, that we didn't have that same licensing occurring in this quarter. Those were opportunistic one-time licenses that happened in the prior year that we just didn't have this year. We do have content to license. We had deals that were pending. They just were not closed during this particular quarter. We'll see those deals in the current quarter that we're in. So that's that. And then the second is we had in that quarter in the prior year, we had multiple titles that were new released plus sort of the back half of the Terrifier bump that we didn't have this year. We did go through a gap in the calendar in the releasing year. Yolanda, can give a little more color on, to the extent of how many titles moved, but we had titles that moved out due to production delays and other things that were on the schedule. Yolanda, I don't know if you have any additional color for Brian on that.

Here's the question, Eric. And I think, Brian, it is an anomaly. We don't expect that going forward. But you just have to realize that in the licensing business, we're subject to the content pipeline and there are a lot of timing issues that occur and we expect to see substantial growth in that business going forward.

Okay. Let me take a step back, because I want to understand what's going on excluding digital distribution. Your revenue for streaming and digital is a three year low. You've got more channels that are taking with consumers. You got 73% increase in viewership. You got wider distribution you keep announcing. You've got several new products and services you've announced for the last year and a half. So what am I missing that excluding digital distribution that revenue seems to be, I would expect it to be growing, it needs to be headwinds to growth or offset to higher growth, maybe a higher level picture?

Yeah, I would say, you know, most of our salespeople just started within, you know, the last quarter to quarter and a half. You know, the typical ramp period for those salespeople is, usually around two quarters where we really see them start to hit their stride, which we are starting to see that now. Matchpoint is the same thing, right? We have a very robust pipeline. We closed our first deal. I think we're about to close our second deal any day now. And there's many more deals like that in the pipeline. It just took longer than we had anticipated to get those sales processes and systems stood up. So I think in terms of the viewership, you're right. We've had a pretty significant surge in viewership in the last quarter or so and really starting in last year, we had been less aggressive on squeezing monetization out on programmatic to sort of protect our CPMs for the oncoming direct sales team. And so it's really a delicate balancing act, right. We could either we could short-term really increase revenues and, you know, lower our CPM floors and goose revenue, but that comes at the expense of higher margin, higher CPM revenue from packaging the sales team sells. Conversely, if we keep them too high, short-term, we have revenue challenges out of our programmatic business. So I think we're trying to strike a balance. I think we were maybe a little too aggressive in protecting CPMs early on as that team was ramping. So I think we're finding the good balance now. That team is selling broad-based omnichannel packages, so we're less CPM sensitive. And so we're playing with that and increasing the revenue there, being more opportunistic on CPM. So I think a lot if I want to sum all this up, it's really, it really comes back to we have a lot of sales teams ramping up and getting on board. We have good pipelines of revenue coming and I truly believe we're bouncing off the bottom of revenue now and going into a pretty robust period of growth.

Okay. One more question for me, I'll get back in the queue. Dog Whisperer obviously has been, it sounds like a home run for you guys. And I think you're almost as equally as excited about GoPro if I have the two channels right that are catalyst right now, I mean, you have others. How much revenue can someone in a range reasonably expect from a top earning channel of yours these days when fully ramped and distributed widely?

So typically, generally speaking, you know, a high end successful channel of the type that we're doing would be in the low to mid-7 figure range. I think Dog Whisperer is a unique property because we in addition to having channelization rights, we have licensing rights, we have some other consumer goods rights, we have digital distribution rights. So I would say that one would be on the higher end of that scale. For things that we that are channelized only, you're looking at probably lower 7 figures on the revenue front. That varies obviously depending on the success of the channel, the rate of distribution and so on. But that would that's generally speaking where these things perform.

Okay. Thanks so much for all the information.

You're welcome.

The next question is from the line of Dan Kurnos with Benchmark. You may proceed.

Yes. Thanks. Good afternoon. Eric, I just want to follow-up on your commentary, just around the market place. The upfronts are over now by and large. And, yes, we all know that programmatic CPM floors got slashed. And I totally appreciate what you're trying to do with direct sales, which we've seen a lot in the industry. But obviously Netflix and Amazon and others have been pumping a ton of supply into the marketplace. And so we're starting to see some of the monetization out of you guys. It's obviously early, probably you would like to be a little bit further ahead than where you are. But I just want to understand what gives you confidence, knowing that you have more niche properties, but what gives you confidence that you're going to see sort of this nice rebound with this consolidated direct sales and programmatic effort going forward?

Sure. Well, so if you think about if we were just competing on spots and dots, you know, just selling ad inventory, look, we're not Netflix, right? We are a specialty enthusiast player. We have some compelling verticals, but we're not competing with the big scale general entertainment streamers on a Connected TV inventory to inventory comparison, right. What we are doing is working with brands and developing, I'd say, more bespoke and more custom campaigns that involve things like in addition to inventory, involve omnichannel, podcast, display, other forms of audio, email, social and even things like events and other things. So we think that approach protects us because those kinds of initiatives are important to brands, especially to entertainment brands like gaming, movies and so on, which is I think our bread and butter. So those brands really are less and we're not really looked as a place, hey, let's go in and buy CTV inventory for this, that and the other. That's a piece of the mix, but our direct sales teams are really selling comprehensive packages of opportunities that include things like sponsorship and everything else. So when you look at it from that perspective, you can't buy that kind of experience for your brand or your film release or your video game on an open exchange, you just can't do it. So that's why we think and the demand for that is increasing. We're going into arguably our busiest season of the year. We're probably one of the top brands in the horror vertical, for example. We'll be sold out of all available inventory for that market to Fortune 500 brands, movie studios, you name it that are focused on that. We're getting sponsorship revenue for some very large brands, for events and things like that. So I am very optimistic about that approach. If we were just competing on programmatic, it would be I think you're right, that would be a much harder battle. But we're starting from a much lower base and I think we can do lots and lots of sales and lots of growth for many years focused on this part of the industry, that our team is just incredibly experienced and has been selling for collectively over a 100 years of experience among everybody that's going to be doing it.

Got it. That's really helpful. And then speaking off on a smaller base, I mean, is the podcast just break a million a quarter this quarter, and how big do you think that gets? And you mentioned political in your commentary. Is that something you guys can actually tap into because this year is obviously going to be bonkers?

Yeah. So I think we're approaching that number. Our podcast and we have a podcast and other bucket that we break out, in terms of that. I think that number is pretty close to that number, if not exceeding it at this point. Keep in mind, right, and I think we've discussed this previously that the amount of monetization that's happening out of the podcast business today up until very recently was 100% programmatic. We've just started to get our first campaigns online. So we've been doing campaigns with the usual direct to consumer brands, some movie studios and other things. So that business is just starting to lift off. If I had to be conservative, I'd say, we're probably monetizing one directly less than 10% of that total inventory today. So there's a tremendous amount of upside growth out of that. We're also we're in the process of changing programmatic partners. We believe that could have a substantial material increase on the programmatic piece alone, right. I think we you know our growth rates in that business have sort of we've outgrown our current programmatic partnerships and I think we're looking at expanding those and taking them to the next level. So I think you'll see a lot of growth there as well.

And political piece, Eric?

I'm sorry. On the political side, we are getting political through programmatic. Most of the if you kind of look out there at the marketplace, this market is really probably one of the more most focused demographically and regionally that's ever been done before. So I think local markets are tending to take a big chunk of the lion's share of this election. It's less about swaying independent voters. But we are seeing our piece. We are getting a piece. We'll see a lift from that in programmatic particularly. I don't know that we'll see the same lift that you would see out of say, broadcast conglomerates or others that are far more about regional targeting. But we will get a decent lift. I think internally we've been forecasting that, you know, we looked at prior years and I think we saw something like a, you know, 10% to 15% lift out of that. Don't know exactly how that's going to go this year, because it's anyone's guess, how much is spent and where it's spent, how it's spent. But we should see a lift like that, like we did in prior years.

Got it. And just have you embedded does your guidance include any monetization from cineSearch at all? And then lastly, on the OpEx side, obviously, a lot of progress there. You said 5% to 7% more. Just curious if you guys if that's just from the offshoring and if there's sort of any other plans after that or there's more of a balance? I think Chris has said a balance of reinvestment going forward once the revenues scale.

Yes. I think so if you kind of look at our OpEx today, you know, I mentioned during the remarks about 5% to 7%. That's identified already of things that are already underway. That's predominantly switching a variety of technology vendors. I think we've recognized somewhere in the neighborhood of $1.6 million to $1.8 million of OpEx savings, which should equal that percentage range. Those are identified. A good chunk of its underway already. And so we would expect to realize that over the next two quarters or so. There's infrastructure changes and other things that we need to make. But this is from heavy iron compute systems, SaaS products and other things that are core infrastructure that we're just migrating. Just due to the scale we have, we're getting cheaper prices on things. So those are already underway. You know, we're the other piece of that, and I think you heard that in Lindsey's remarks is we're holding fast on SG&A. We think we can maintain and operate our business sufficiently for the foreseeable future at the sort of the SG&A percentages we're at. So really we'll see SG&A decline as we hold this as revenue increases as well. So all-in, I think the gross margins are looking very strong for this business with the 5% to 7% change. I think we'll be comfortably into the low-50s on the streaming side of the business, which is now the bulk of the revenue.

Okay. Thanks for bearing with me, Eric. Appreciate it.

You're welcome.

Thanks, Dan.

There are no further questions remaining, so I'll pass the conference back over to the management team for closing remarks.

This is Chris. Thank you all for joining us again today. And please feel free to reach out to Julie Milstead with any additional questions you might have. And we look forward to speaking with you all again on our next quarterly call. Thank you.

That concludes today's conference call. Thank you for your participation. You may now disconnect your line.