Good day, everyone. Welcome to Cineverse's Second Quarter Fiscal 2025 Financial Results Conference Call. My name is Mikaya [ph] and I will be your operator today. Currently, all participants are in a listen-only mode. We 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 and Senior Adviser for Cineverse. Please go ahead.

Good afternoon, everyone. Thank you for joining us for the Cineverse fiscal year 2025 second quarter financial results conference call. The press release announcing Cineverse's results for the fiscal second quarter ended September 30, 2024, is available at the Investors 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 of the information discussed on this call is as of today, November 14, 2024. And Cineverse does not assume any obligation to update any of these forward-looking statements, except as 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 to applicable GAAP measures in our earnings release carefully as you consider these metrics. I'm Gary Loffredo, Chief Legal Officer and Senior Adviser at Cineverse. With me today are Chris McGurk, Chairman and CEO; and Erick Opeka, President and Chief Strategy Officer; Tony Huidor, Chief Operating Officer and 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 2025 second quarter highlights, the latest operational developments, outlook and long-term strategy. Mark will follow with a review of our results for the fiscal second quarter ended September 30, 2024. And Erick will provide some detail 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 today. We reported a very strong second quarter of growth and financial improvement, even without recording a single dollar of financial results from our hugely successful box office hit Terrifier 3, where we control all domestic rights in the U.S. and Canada in which we released after the close of this quarter. We grew our revenues 20% versus last year in this quarter, excluding the impact of our legacy Digital Cinema business. In addition, we grew our revenues by 40% versus our last reported quarter ended June 30th, showing strong sequential business momentum. We also exceeded our previously stated operating goals with a margin of 51%. We continue to significantly reduce our SG&A costs and also generated positive adjusted EBITDA of more than $500,000. We beat our analyst consensus guidance on every key financial metric. Additionally, all our key operating metrics across our content licensing, technology, advertising, streaming and podcast businesses continued to grow significantly during the quarter which bodes very well for our continued future success. Mark and Erick will speak to all of that in just a few minutes. So now let me take some time to discuss what I know is the number 1 topic for most of our investors, the unprecedented success of our Terrifier horror film franchise and what it means for Cineverse's future. Following the late 2022 success of our Terrifier 2 release which surprised and shocked the film industry by achieving approximately $11 million at the domestic box office via a limited release on just a $250,000 production budget and a less than $500,000 marketing spend which all resulted largely because of Cineverse's very targeted, fan-based digital and social media marketing plan that leveraged our horror assets of Screambox and Bloody Disgusting, we set out…

Thank you, Chris. As Chris mentioned, we had an exceptionally strong quarter, allowing us to exceed analyst consensus guidance for revenue, net income, net income per share and adjusted EBITDA. For our second fiscal quarter ended September 30, 2024, Cineverse reported total revenues of $12.7 million compared to $10.6 million in the prior year period or a 20% increase when excluding the $2.4 million of nonrecurring noncash revenues from our legacy Digital Cinema business from the prior year quarter. In addition, compared to our last quarter ended June 30, 2024, our revenues increased by $3.6 million or 40%. The 20% increase in recurring revenues in the current quarter was driven by $0.7 million increase in streaming and digital revenue, primarily due to a $1.6 million of revenue from the licensing of our Dog Whisperer with Cesar Millan content, a $0.6 million or 93% increase in our podcast and other revenue and a $0.8 million increase in our base distribution revenue. With the amazing performance of Terrifier 3, the continued double-digit growth of our podcast business, improved content licensing opportunities and expected growth in our direct advertising revenues, we are expecting a material increase in revenue for our fiscal quarter ended December 31, 2024. Erick 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 exceeded our previously issued guidance of 45% to 50% for direct operating margins. 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 -- in line with or exceed our previously stated targeted margins of 45% to 50%. SG&A expenses decreased $0.5 million or 7% for the second quarter…

Thank you, Mark. As we discussed last quarter, we focused on a few key strategies to drive our growth. This included expanding our streaming footprint, enhanced ad sales capabilities, opening up new distribution channels and investing in technology that supports everything we do. This quarter, we took solid steps in each area, building a foundation that aligns with our long-term vision. Now while today's numbers don't yet capture the impact of Terrifier 3 which has performed far beyond expectations in theaters, we expect to see significant financial contributions from it through all lines of our business in the next quarter, as Chris and Mark will detail. We're excited about what Terrifier 3 represents and how it reinforces our direction for Cineverse's sustainable growth. On the streaming side, total subscribers for the quarter were approximately 1.36 million, marking a 13% increase over the prior year quarter. During the quarter, anticipation for Terrifier 3 also fueled renewed interest in Terrifier 2 on our platforms, with Screambox subscribers growing approximately 7% in September alone. The film's viewership surged by 161% from August, reaching 1.28 million minutes viewed across all internal platforms in September. On third-party platforms like Amazon, the film has dramatically exceeded all expectations. And new revenue-sharing agreements we put in place on the franchise lead to significant low 7-figure revenue streams on the title in the subsequent quarters from this quarter. We expect these films to be evergreen cash cows for the company for the foreseeable future. Our FAST channels also saw remarkable growth this quarter with more than 2.32 billion minutes streamed during the quarter, up 40% over the prior year quarter. September marked the second best month ever for our Dove Channel with over 95 million minutes consumed just behind July and up over August, typically a slow month…

[Operator Instructions] The first question comes from the line of Dan Kurnos with Benchmark Company.

Chris, obviously, just a big congratulations on what is an unprecedented success in the movie industry. I'm sure you've been getting plenty of plaudits from your peers and others but I'll just start off by saying that on T3. And I -- you mentioned it in your prepared remarks, I'd love to have a sense from you guys. You're going to make a boatload of cash from this thing. You have some debt. You can kind of fund additional investments in content based on that playbook. How do we think about how you're going to position the company going forward? I know you're going to talk more about it next quarter but you started with Silent. But just help us think through what the success means and what other films could do. Like how does this grow quickly into another revenue stream for you?

Yes. And thank you, Dan, for those comments. It was very nice of you. Well, look, we're still a streaming technology and content company. That's the core of what we do. And I think you saw the results this quarter, where our revenues were up 40% over the last sequential quarter, show that our plan is working across our base business even without Terrifier in terms of digital licensing, your technology business, the podcast business, our streaming business on and on and on. So I just want to underscore that point. Our goal right now is to really take advantage of what just happened, where we sort of developed a new blueprint for releasing movies that kind of astounded the industry and turn it into another successful profit line for the company. And it's consistent with who we are because the reason why the release works so well is what I was saying in my remarks and Erick did also, that we leveraged every element in this ecosystem that we built over the last 10 years in order to build a better mousetrap and figure out how to release a movie in an incredibly successful way with almost no out-of-pocket marketing spend. It's just kind of astounding that we did that. So the goal now is to leverage our entire ecosystem, create a new line of business here, both with product that we acquire ourselves and then to allow other independent studios and actually majors to use our ecosystem to market and leverage their own product because they don't have all the assets that we have in place across this really fan-centric portfolio of channels, our podcast network, our ad technology, all these and our social footprint, with what they're discussing. So we're sorting through properties right now. Obviously, people are knocking on our door, particularly in the horror space. You saw that we just announced Silent Night, Deadly Night which is a classic controversial horror movie that came out in '84 and banned from theaters. We're continuing our assault on Christmas following Terrifier 3 with Art the Clown and Santa Claus. But we've got a number of other properties that we're looking at, some very well-known IP, that people want us to consider taking out using our ecosystem. And we've had some entries in the non-horror space as well in the faith and family space and in the animation space. So it's our goal really to turn this into an ongoing business. It's not going to be a hugely capital-intensive business for us, as we just saw with Terrifier 3. And it really is an extension and supports and augments and it's based on all of the assets we put in place as a technology and streaming company. So I think you're going to see more announcements about content releases coming over the next 3 or 4 months. And some of those might be releases that happen sooner rather than later.

Got it. That's hugely helpful. And just one last one on T3 before I turn to Erick. How are we thinking about -- at this point, you have the rerelease in Christmas. But you have an opportunity to decide how to maximize its licensing, windowing, putting it on Screambox. Have you thought through that yet? And do you have a plan? Or is that sort of TBD?

That's a great question because, obviously, we have to balance the upside we would get from our subscriber base on Screambox versus getting a big check from pay in streaming services that now are recognizing the value of the franchise. So we're actively engaged in analyzing our options in that space and we hope to make a decision on what we're going to do over the next few weeks.

Perfect. Erick, just quickly for you. I appreciate the update on the ad -- direct ads, nice progress there. I just wanted to ask you quickly about cineSearch and how we should think about that from kind of a long-term monetization opportunity, given that we're hearing a lot of movement now in the industry around meta tagging and kind of what to watch and buy tech. And I thought your comments on short cycle sales was particularly interesting, given that the industry has finally realized that they need to license more content to stem the streaming bleeding, so AVOD and FAST are taking off again. Just kind of curious what you need to see there in order to develop that business line.

Sure, sure. So first, I'll tackle the -- that second part of your question on the short cycle piece. So if you kind of look out at the marketplace, there's -- one of the biggest trends has been all of these FAST platforms which is basically every single TV OEM manufacturer, the Samsungs, VIZIOs and so on of the universe. All of them are really expanding their ad-supported offerings to complement the FAST platforms. Most of them launched as FAST-only without much on-demand programming. Really to have a rounded out offering, everybody needs to have a mix of FAST channels, on-demand programming and add-on subscriptions, so all of them are adding all of these components. What that's caused in the market is a pretty significant demand for large volumes of ad-supported content. So number one, in addition to us controlling and owning a very large library, clearly, we're rapidly expanding our efforts to distribute AVOD content ourselves. But for Matchpoint, the real opportunity is for most players like us in the industry, the cost of rapidly delivering and scaling up content to all of these places quickly, a Berlin Airlift of content, if you will, is very, very expensive and has very long cycle time. Today, we can take Dispatch, one of the modules that we have in Matchpoint and help companies very rapidly either ingest that into their own ecosystem, so we can help platforms do a better job at it, or we can actually help companies that normally are trying to do this with 3 guys in a room where you're using expensive outsourced services, scale up and actually make a lot of money rapidly to take advantage of that. Beyond that, this same system that works incredibly well to help the existing streaming ecosystem is really also…

The next question is from the line of Brian Kinstlinger with Alliance Global Partners.

Let me add my congrats on your success in the box office. Following up on the future playbook in response to the success of leveraging your ecosystem, how will you go about evaluating what I suspect is numerous independent movies and titles coming to you to determine what has the best chance of success under your platform?

Thanks, Brian, for your comment and a couple of things. We have a very exhaustive greenlighting process in place anyways that we would continue to use to evaluate any new property. But first and foremost, we would look for properties that we think we can best leverage with our system. Obviously, we have a ton of horror assets in place with Screambox and Bloody Disgusting and our history of distributing horror movies and an executive team that really knows what works and what doesn't work in that space and that's what we leveraged with Terrifier. And so we're looking at properties in the horror space specifically that we can follow the same playbook, properties that have online buzz like Terrifier did, known IP like Silent Night, Deadly Night that still has a fan base that will give us a leg up in launching it. And I think the other thing that's usually important here is kind of a threshold question for any movie in my mind is, is it a concept or an idea that the fan base is actually going to go to a theater to see? What is it about the concept that is going to make that fan rush out on that first Friday to go see it, so that he can -- he or she can tell all their friends to be the first one to see it? And that's sort of a threshold question we ask about any piece of content. So again, as I said, we're looking in other verticals where we think we have strength. Children's and family content, we've really built up that business not just with Dove but with all of the kind of evergreen IP that were -- are on our channels now from Garfield to Barney to Sid &…

Great. And then for titles like Silent Night, Deadly Night or any other title, how will you determine if it will be a theatrical or a limited release? Is that title by title? Or are you realizing, given your ecosystem, you can wide release it?

We're intending to use this model to do wide-release movies. But until you actually see the movie, whether it's in production or you're buying a finished movie, it's tough to make that call how wide you're going to go. Fortunately, as I said, with Terrifier 3, we knew what we had. We saw the movie. Once it debuted at Fantastic Fest in Austin in August, we knew we had a complete winner based on the critical reaction and also the fan reaction. So there's absolutely no question about going wide with the movie. It was just a matter of getting exhibitors to realize how much upside there was. And they quickly figured that out when their theaters started selling out 5 weeks in advance of the release of the movie. So hopefully, we're going to pick properties that maybe don't have that level of interest and excitement but even at a fraction of that, that have sort of that built-in audience and excitement. So that we can make a really smart informed decision about whether we go wide on how many theaters or whether we take a limited release.

Great. On cineSearch, maybe you could share a little bit about the revenue model. Is this an annual licensing model? Is it a recurring kind of SaaS model? Is it price per device if it's on a TV? Just if you could help us understand how that's going to be monetized, the revenue model.

Erick or Tony, do you want to take that?

Yes. I think at a very high level and, obviously, as I mentioned earlier, these are really going to be more bespoke than a pure SaaS model just due to the size and scale of these types of deals. So -- but I would anticipate the deal being some combination of license fee plus variable costs, similar to you would see in other similar sort of API-driven platform models, right? But I do think also, there are other opportunities and ways to do this. For example, advertising-based models and other things that could modify that approach depending on the partner.

Great. My last question is revenue from podcasting grew 30% sequentially. I'm wondering, with the various non-entertainment advertisers you discussed that are coming to you with RFPs with the much stronger viewership, I'm wondering, do you expect to see even stronger yields where revenue will grow faster than viewership over the next couple of quarters? I'm just wondering how you're thinking about that in fill rates.

Yes, yes. So we -- I think our first goal was to build -- when you're in the chicken-and-egg scenario of building a new product, our first goal was just to build audience with a great lineup of products. And so we really did that first before focusing on monetization. So that leads to a natural monetization gap, where you have a lot of head space to grow revenue. So I think you're right, your comment that revenue growth will outpace audience growth. Although if you look at what I'd call -- what we can call the Terrifier effect, right, of success begets -- in the film business, obviously, success begets more interest and in our -- and even in the podcast space, the success of Terrifier is opening doors to much larger properties and agencies that represent larger podcast properties that want to join our network. So while I'll say, I think in the short term, the audience -- the revenue growth will outpace the audience growth, that can also change very quickly if there's some very, very large shows that we've been in dialogue with that want to join the network as well. So in the short term, that's the case. But I think in the longer term, they'll either pace neck and neck or they -- we may have big surges of audience and inventory growth if we do sign some bigger shows. So our real focus though is to maximize fill on this platform. We're rapidly hiring up salespeople to help sell that faster. We've been doing co-selling partnerships with a variety of people to help fill the inventory in the short term. So I think our number 1 goal, this is our biggest real opportunity of scaling revenue growth in the short term outside of the film business is the podcast business. So we're going to put a lot of energy and effort into growing that over the next few quarters.

The next question is from the line of Jay Petschek with Corsair Capital.

Great quarter. We've seen it. We're celebrating it. And I think the promotion of Terrifier not only has highlighted what you can do in the film business but has raised, obviously, Cineverse's capabilities all along. I will get to a question but away from Terrifier which was great. Revenues up, margins up, operating costs down, that seems like a pretty good combination. We're getting close to breakeven. We're still at, amazingly to me, only a $45 million market cap, about a $50 million enterprise value. And I think one reason why is because people were worried that you'd run out of cash and have to do a dilutive financing as was done maybe a year ago. I'm glad to hear you emphasize that you're not going to need cash. I mean this Terrifier is a real boon. And I guess there'll be another real chance of it from Terrifier 4 as well in a couple of years. In any case, that's a lot of statement. My question -- because I think the other 2 gentlemen asked good questions about the opportunity space. The data AI business, you know I'm a little bit enthralled with that idea. The amount of spending that's going on right now to improve AI is amazing. But what sets you apart? Why -- you're not the biggest company out there. You have a big library, yes. But compared to the Disneys and Warner Bros. and Universals, why wouldn't the data AI guys get their data from video from those folks? And I think I know the answer but I'd like to hear it again and probably helpful to others.

That's a good question, Jay. And I'll let Erick answer that more specifically in a second but it has to do with our technological capabilities and our capability over the years that we've demonstrated in acquiring, assimilating and distributing vast amounts of content across the spectrum and we've probably done more of that than anybody in the business. But I just -- I want to thank you for your support and your question and we really appreciate it. I just want to say that at the onset. And then I'll turn it over to Erick and let Erick specifically answer the question on AI data capability. Erick?

Sure, sure. Well, I think if you look at the AI licensing landscape, there's a couple of challenges that you've seen deals announced with AI being used at studios. But really, it's been more of to develop internal tools for marketing. What we haven't really seen is a major licensing deal out and there's a couple of reasons for that. One is I think the issue with guilds and unions and talent in the -- at the top echelon of the space as well as IP rights and other things for some of these multibillion-dollar franchises that make it incredibly difficult for the studios to do licensing. There are signatories to all kinds of agreements and other things. In the independent space and more broadly in the global space, there isn't those same limitations. When you think about these AI training models, they actually want a high degree of diversity. They want high-quality content. They want independent content. They want documentaries. They want foreign films. They want foreign TV shows. So it actually -- they do not want to blanket and only license studio content because that will skew the models in one direction. So I think the dynamics of what they need which is this diverse set of information and data, makes this market highly beneficial for independents. The second piece, why us versus anyone else, is very simple with the idea of scale. We've been in the business of delivering massive amounts of scale content into the streaming ecosystem. We've delivered literally millions of assets out into the streaming ecosystem over the last 15 years. And we now have an automation platform that allows us to not only deliver this at scale but do the preprocessing or work that's required to meet the very specific and very intensive…

It does and I think it's obviously a very big opportunity given the size of your firm today. To license out a few million dollars a year is huge to you at this size. Just following up on that, as you talked about your ability to get it in the right whatever metadata form or whatever you call it for AI ingestion or analysis. But to license out your library today, do you have to spend any significant sums to get your library in shape? Or you've already done that?

I'll let Tony Huidor on the call to answer that. Go ahead, Tony.

I'll take that question. So the underlying sort of premise of Matchpoint is we do a deal with the licensor and they deliver our highest-quality source into Matchpoint. We then -- it then undergoes QC and mastering and prep. We then take that file and it sits inside of Matchpoint. And from that point on, they never need to deliver the file again and Matchpoint can deliver 1,000 different ways. So regardless of what any of these AI partners' requirements are, Matchpoint was designed to deliver to that spec. So to Erick's point, we can -- these companies are -- when they're licensing video for data, they're not licensing 50 movies or 100, they're -- each order is on the average of 10,000 hours or more, in the tens of thousands of hours. So this is why, to Erick's point, this won't scale for the big studios because they're using third-party vendors, who are generally charging $500 to $1,500 per file delivery. And if the revenue to license a title for training is far less than that, it's just not sustainable. Whereas for Matchpoint, our cost to actually use Matchpoint and deliver is measured significantly less than that. And so we could deliver 10,000 movies at a click of a button, without a single human touching a single file and in any flavor that any partner wants. And that is our secret sauce and that is the competitive advantage that we have with Matchpoint, where we can use that to deliver our own library and potentially even deliver on behalf of other companies who are looking to license to the AI companies.

Great. Thank you. Well, I look forward to continued improvement in the core line, the new line of business promoting movies sort of individually on top of the Terrifier franchise and all the metaverse and metasearch, etcetera, etcetera. So thank you and congrats on Terrifier again.

Thank you, Jay. That is the plan and thank you. [Call ends abruptly]