Good day, everyone. Welcome to Cineverse's Second Quarter Fiscal 2024 Financial Results Conference Call. My name is Tia, and I will be your moderator for 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 Advisor for Cineverse. Please proceed.

Good afternoon, everyone. Thank you for joining us for the Cineverse fiscal 2024 second quarter financial results conference call. The press release announcing Cineverse's results for the fiscal second quarter ended September 30, 2023 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 contains 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 can 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, November 14, 2023 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 represents 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, Secretary and 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 and Chief Technology Officer; Mark Lindsey, Chief Financial 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 second quarter fiscal 2024 highlights, the latest operational developments, outlook and long-term growth strategy. Mark will follow with a review of our results, and Erick will provide some detail on our business results and operating initiatives before opening the floor for questions. I will now turn the call over to Chris McGurk to begin.

Thank you, Gary, and hello, everyone. Thank you for joining us today. We made great strides this quarter toward achieving our previously stated goal of dramatically reducing costs, improving margins and driving towards sustained profitability. We did this by further optimizing our more than two dozen streaming channel portfolio, culling lower-margin channels while focusing resources on higher margin, higher return performers. And then by cutting costs, as we finalize the consolidation of the eight key content and streaming acquisitions we made over the past three years. At the same time, we are also transferring a significant number of domestic employment positions to our Cineverse Services India operation, a unique competitive cost and work efficiency advantage that Cineverse enjoys versus everyone else in our space. I believe the results this quarter show significant progress towards our goal of long-term sustained profitability and also demonstrate our willingness to trade off lower-margin revenue streams for higher margins and profits in pursuit of that goal. In the quarter, we increased our total operating margin to 64% from 42%. We increased our recurring operating margin to 56% from 30% when excluding our legacy Digital Cinema Equipment business. We decreased our operating expenses by $6.3 million or 34%. We decreased our SG&A costs by $2.8 million or 29% via a reduction of 30 employment positions and tight cost controls. We have also put any management variable bonus compensation on hold until we achieve sustainable profitability. And we have significant additional positions that we plan to offshore to Cineverse Services India over the next few months beyond the 29-plus positions that we have already moved there or identified to offshore. All of that will enable us to hit our goal of $8 million in annual SG&A cuts. Cineverse Services India is a very significant advantage for us. providing a huge cost savings and work efficiency upside that we own versus our competitors, and we intend to leverage that to the fullest extent possible. As a result of all these optimization and cost savings initiatives, which significantly exceeded the revenue impact of culling lower-margin channels, we improved our operating profit by $5.3 million to $600,000 this quarter. And we increased our adjusted EBITDA by $3.7 million or 283% to $2.4 million. And we also narrowed our net loss to $400,000. That's net loss attributable to common shareholders. That's an improvement of $5.4 million. Clearly, we are on the right track towards sustained profitability and that remains our overriding focus. Mark Lindsey will next add some color to these results and speak to our cash management activities and planning. Erick Opeka will then review all of the initiatives we have in place to drive high-margin incremental revenues, including our recently announced deal with technology unicorn, Amagi and our upcoming announcements regarding AI partnerships for streaming search and discovery. Mark?

Thank you, Chris. For the fiscal second quarter ended September 30, 2023, Cineverse reported total revenues of $13.0 million, which compares to $14.0 million in the prior year quarter. As Chris noted, this decrease was primarily due to the impact on our advertising revenue from the intentional elimination of certain lower-margin channels via portfolio optimization and reallocating those resources to higher-performing and higher-margin streaming properties, which is important to our goal of achieving sustainable profitability in the near-term. Subscription-based revenues increased 52% to $3.5 million, driven by the continued success of our enthusiast streaming services. For example, our screen box channel revenues increased over 350% compared to the prior year quarter. Advertising based revenues declined 28% to $4.1 million, primarily due to our channel optimization efforts and the continued impact of the current economic environment on advertising spend. Nonrecurring revenues related to our legacy Digital Cinema business were $2.4 million, a decline of 7% from prior year quarter. We don't expect any additional future revenues associated with this business other than nominal equipment sales. Direct operating margin for the period was 64%, an increase from 42% in the prior year quarter. When excluding the impact of our legacy Digital Cinema business, our recurring direct operating margin improved to 56% compared to 30% in the prior year quarter, 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 that Chris referred to earlier. Selling, general and administrative expenses decreased $2.8 million or 29% from the prior year quarter. Again, this improvement is a direct result of the cost optimization initiatives discussed previously. We expect to gain even greater efficiencies as our offshoring efforts to Cineverse Services India gain momentum over…

Good afternoon, everyone, and thank you for joining us today. I'd like to start off by sharing our financial progress, particularly in the streaming sector. Our Digital and Streaming revenue declined by 7% to $10.6 million. This stems from our strategic digital licensing and expansion of our subscription base, which was offset by a decline in ad revenues and as previously noted, the culling of multiple lower margin streaming channels. Subscription revenues have seen a considerable increase to $3.5 million, up 50% -- 52% over the prior year. We reached 1.24 million subscribers, thanks to our target acquisitions for Screambox Horror channel and the Dove Channel's expansion. This progress underscores the strength and appeal of our enthusiast streaming services, and we're going to continue to focus on smart growth by optimizing retail pricing for our services, expanding distribution and pursuing bundling partnerships. Beyond that, we continue to rationalize content spending. You've seen the major streamers reduce content spend across the board and we're no exception. Going forward, we have shifted away from capital-intensive all rights acquisitions and productions to lower-cost acquisitions and minimum guarantee and revenue-sharing deals. This approach will greatly reduce our need for content investment spend. And given our other efforts noted, we'll see minimal impact to top-line revenue while boosting profitability. Ad-based revenues experienced a dip to $4.1 million, a decrease of 28% in the quarter, year-over-year. This decline aligns with the insights Chris and Mark shared earlier. We streamlined our channel portfolio, prioritized higher-margin channels and concluded the wind-down of several underperforming ones. Despite the challenges in the ad market, including a prolonged tech migration with a major FAST partner, we've navigated these waters with strategic finesse. And our partners' Marketing Make Goods [ph] have helped us bounce back with that partner, reaching pre-transition revenue levels…

We will now begin the Q&A session. [Operator Instructions]. The first question comes from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed.

Great. Thanks and congratulations on all the restructuring and what it means for the much stronger fundamentals that it looks like already in the quarter. Sorry, it was a lot of information on write-downs, if you could share if you provided if the gross margin of the business, excluding the legacy business. And what was the operating margin or EBITDA margin, if you will for again, the business that excludes legacy?

This is Chris. Thanks for your comment. But I'll let Mark Lindsey go through those numbers with you. Mark?

Thanks, Chris. Yes. Thanks, Brian. So the gross margin before excluding legacy was 64% this quarter and 42% prior year quarter. Excluding the legacy business, it's 56% this quarter and 30% in the prior quarter.

30% is EBITDA or operating margin?

That's operating margin.

Got it. Okay. And then if you could -- I think it's a good time, given your announcement with Amagi and the partnership that's planned to roll out, if you could highlight the revenue model, is it selling subscription to the Cineverse streaming content for platforms? Is it they're able to use your Matchpoint services to curate and transfer content? And then the second part of that question, you mentioned low eight figures in terms of revenue contribution in your prepared remarks, does that suggest you expect to close next fiscal year with about $10 million of revenue? Or is that too quick and steep to have it by then?

Erick, do you want to take that one?

Sure, sure. So to go through both parts. So first, on the -- what are we actually selling. So we're tentatively calling this FAST kit. So essentially, if you kind of look at the marketplace today, there is a large number of Amagi calls and video service providers. This is going to be hardware manufacturers, telcos, anybody who really was at the musical chairs of when Tubi and Pluto were for sale and missed out. Or just have not -- don't have the resources or assets to launch a scale streaming platform for the -- like the Roku Channel has or others. So we're teaming up with Amagi to essentially offer this as a turnkey, where you can get the applications, the back-end infrastructure. Amagi has 800-plus FAST channels. We have 70,000 hours of programming. And then both of us have monetization capabilities. It really allows companies very rapidly and turnkey to get into the market, save years of effort to do so. And by the way, we look at -- we evaluated the market. There are many, many companies that the amount of monetization they have in this space relative to what they should have due to their market share, there's quite a large addressable market here. And you combine that with their -- Amagi's 800-plus customers, there's a very, very large market. So the idea here is to have Amagi's 25 to 30 person global sales force that's already engaged in nine figures of revenue or more, we estimate across the board to really start bolting on much bigger meaningful services in this partnership. So that's number one. In terms of the model, as you can imagine, with sort of these bigger enterprise deals, it's going to be dependent on what services the partner needs. Some partners may want to do their own content acquisitions, may want to develop the front-end on apps, but need back-end infrastructure or vice versa. So it's really going to be tailored by partner. I would expect this to be similar to Amagi's model of SaaS-based consumption. It will be -- our model and a deal with Amagi will be in market on a similar basis. It will be consumption-based model, based off of what these partners decide to utilize. And then the last part...

So you are getting share on consumption?

Exactly, exactly. So they'll be direct-build for a variety of services, right? For content-based deals, they'll probably be a revenue share-based model as well. So third, as terms of our look at the market. Clearly, as you remember as -- I think we've talked about previously, the sales cycle on these you're talking about people launching and building applications, bringing them to the market. So you're looking at -- we typically see a deal cycle like this of typically a quarter or two depending on the partner and how complex of a deal it is. And then the implementation is going to come after that. So we think the next fiscal year will really be about ramping up to that number. And that's sort of the number we expect the steady state to be at once this business is ramped. So we're hitting the ground running in our fiscal Q4 here. My expectation is that a lot of people in the market are going to want to be able to take advantage of a very heavy ad market this year. So we'll probably have lots of engagements towards the middle of the year to try to capture Q3 -- calendar Q3, Q4 ad revenue. So I would expect us to see some results in the fiscal year next year, will we realize the full eight-figure amount. It will probably be a longer ramp to hit that, but I think we'll start to see some material efforts coming by mid next year.

Great. And then separately, you touched on having your direct ad sales team, I think, in place is what you said, Erick. Can you talk about the progress? Has there been a contribution? How long does it take before you see the impact of that team building relationships and driving higher-margin ad sales?

Sure, sure. So it's really a three-stage process, right? Stage 1 is today, or prior to just even a few months ago, we were predominantly open marketplace, programmatic. In other words, anybody and everybody could buy and sell our inventory. And that -- one of the things we've been doing since mid- to late summer is transitioning from that, we'll call that the low end of the CTV market upstream to programmatic direct and private marketplace deals with agencies, brands and DSPs. So we've been in the process of going through that since midyear. And we've made an incredible amount of progress on that, I think that's the first step. It's hard for a direct sales team to go out in the market and sell -- if they can buy it open programmatic, right? So you have to sort of move everything upstream in the stack. That's what we've been working and focused on. Simultaneously, we've hired up our direct sellers team. And as you -- I'm sure you know, the cycles for direct sales, most of the brands and agencies are working six to nine months out. There is some, we'll call it, scatter opportunities in the back half of this year and early Q1. But I think we'll really start to see the fruits towards the end of our fiscal Q4 efforts on this. We ran a few campaigns. We did Ancestry, Jack in the Box and a few others over the last quarter or so. But we've got RFPs flying out the door pretty constantly at this point now. So I expect next year to be pretty robust.

Great. One last question, I'll get back in the queue. I think you were very clear on your plans for content acquisition costs come down like everyone else in the industry, are there any known significant cash content costs you see in the near term that you can call out? And should we expect the cash flow cost outside of the P&L to be nominal? Or there will still be some bits and pieces here and there of cash content costs?

I'll let -- go ahead.

We went through our state of high-profile spending over the last quarter. As Erick mentioned, with Terrifier, spending we did, [indiscernible] and Dog Whisperer. And I think you're going to see a real narrowing of our spend continue for at least the next six months.

Great, thank you.

Thank you. The next question comes from the line of Dan Kurnos with Benchmark Company. Please proceed.

Thanks. Good afternoon. Chris and Erick, the whole channel portfolio balancing, let's just call it, that's not new for you guys. I know, Chris, you've emphasized that in the past as of you, Erick. So this is not a big shift. I think the order of magnitude is maybe a little larger than we might have thought in the quarter, but the way that Erick outlined it, once we get into fiscal Q4, there's stuff coming back online. And obviously, the profitability of the portfolio has significantly improved. So I just want to make sure I have kind of the math right. I mean it feels like, I don't know, $2 million-ish incremental call. And obviously, correct me if I'm wrong on that, on the revenue side, but I'm just trying to get a sense between all the initiatives you have planned. Because if you strip out the legacy revenue you announced on the quarter today and then take out the base distribution business, you still have about $10 million in -- roughly. Anyway, revenue between subscription advertising and some licensing and digital in there that you intend to grow off of. So I guess, I just want to get a sense for how much you think that business grows by before we kind of layer on all of software SaaS stuff that I do want to talk about afterwards.

Well, there are a couple of things. Dan, this is Chris. First of all, the channel portfolio optimization, even though I've talked about it in the last couple of calls, what you're seeing this quarter is you're really seeing the bulk of the impact really hitting the P&L because we cut some channels in the middle of last quarter and the whole thing. So it's -- I've been talking about it, but the impact on our financials, you could say, is more impactful this quarter in new -- that is a new factor. We're not going to be able to answer your question on this call. As Mark Lindsey said, we're going through a process now of looking at the impact of all of our channel optimization activities and turning it into a long range forecast and layering in all these new revenue upsides that Erick talked about. And we're in process of that right now. I think it's probably a conversation that would be better had offline. I don't know if Erick or Mark, want to add anything to that. But I mean that's my answer at this point. Erick?

No, there's nothing to add. It's too early.

Go ahead, Erick.

Yes. Yes, I think the only thing really to add is, obviously, the timing of the bulk of the channel portfolio that we have launching is happening in Q4. I think we're still locking -- this is one of the challenges of the FAST market today is think of these channels are probably getting -- or trying to launch another dozen to two dozen channels in Q1 and optimizing the timing and planning of each. So we don't know our exact launch dates yet if it's going to be early in the quarter or later in the quarter yet. We hope to find out soon, obviously. We've got the channels ready to go. We've been testing them and they're ready to be launched. It's just a matter of us locking the timing. So it's hard to say definitively how much those are going to impact the quarter and what that's going to be as it stands today, but we're going to know pretty soon on that front.

Yes. And the other thing Dan, is we've got a couple of tech deals that we're hoping to announce in the next couple of weeks that we haven't talked about -- we can't talk about on this call. They are also going to have an impact. And that's why we're being very careful and we're trying to be very strategic in looking at our long-range forecast and hopefully in the next few weeks that will come together. The one thing we are 100% sure of is that we're going to continue to rip costs out of the system. Cineverse India is a huge upside for us. I mean we are basically transferring jobs over there at 10% to 15% of the domestic cost, and we're getting better workflows and efficiencies out of it. And again, I said this on the last call, that's a trusted operating division of the company. We're not outsourcing it to a third party. We're offshoring it to our own division that's performed pretty tremendously. So we're expecting significant additional savings that are all going to improve our margins further, and that's kind of the foundation of the plan that we're in the process of putting together.

Fair. Look, I'm just trying to understand the baseline. Like you're obviously making a healthy profit in tech pivot here and it doesn't mean that you're moving away from the streaming and/or advertising business piece of it, I just wanted to sort of get a sense. So now we have -- this is the new baseline. So there's not much more to come off based on what you've said. And then at a more profitable base now, there will be upside to that from whatever happens with the advertising changes that Erick referenced in terms of the ad sales model as well as new channels, timing TBD and all of that stuff. And now, as you referenced, Chris, there's, obviously, the Amagi deal, to me is sort of a preface for a broader tech push, I would assume is coming. And so does Amagi, in particular, do they add tools to the kit? Did they give you expanded capabilities? And just in general, how do you think about sort of reinvesting or expanding your tool belt when it comes to leveraging the Matchpoint Technology?

Erick or Tony, you want to take that?

Sure, sure. So I'll say generally, and Tony can talk more specifically about Amagi, what Amagi brings to the table. But I think the biggest game changer for us is you have arguably the largest infrastructure player in the streaming market and FAST market today with a very large global sales force selling our product. They can take it to market much faster than it would take us quite a long period of time to hire up a comparable sales force to what Amagi has. And then the second piece is what Amagi brings to the table in terms of assets beyond the sales force be -- the portfolio of 800-plus channels that they can bring to bear in the market. And the huge customer relationship base that they have. We have a pretty decent customer relationship base, but theirs is oriented to much larger enterprises than we are today. So those assets really accelerate all of the efforts. It doesn't mean that we're not internally focused on the small and mid-market segments to complement that. But I feel like they'll push a revenue drive much faster than we'll incrementalize from the small end.

Just to add to that, I think one way of looking at it is most of the big media companies have been investing in FAST. That's where the immediate opportunity is. But now as all the big studios have released their own stand-alone services, having applications available to the consumer has become an important part of everyone's strategy. And that's the area where we have a head start. We've developed Matchpoint over the last eight years, specifically for servicing apps and video on demand. And that's where we see the rest of the industry moving, using FAST as kind of the entry point, but really expanding into next-generation services where it's a map or larger catalogs of direct video-on-demand content.

And last one for me. Just now that the actor strike is over, everyone thinks that content spend will start to increase next Spring. Albeit it will take some time to ramp and perhaps with a slightly less quantum than in the prior years where the streamers got a bit giddy. I'm just curious how you think that factors into any of the initiatives you have, whether it's on sort of the more traditional streaming side or on the Matchpoint side. Does that act as somewhat of a catalyst to the market? Or does it change how you might address -- if you think the market evolves in its advertising focus, which, Erick, yes admittedly right now is more direct PG, but may return to more open PMP in a more healthy environment with better visibility, barring whatever happened to the economy.

Erick, you want to take that or Yolanda?

Sure, I could take it. So I think for us, as it relates to our business, excluding Terrifier and a few other projects that we have going on, we're going to be in the market for finished product. So I think, number one, it's not going to -- I think the good news is I think we already had a waiver for Terrifier 3 even before the strike ended. So we were going to -- production was going to begin on that regardless of the strike. And we're not -- we're in really long-term, not in the big theatrical movie game. So for us, to go forward, we'll be -- we're really going to be focused on acquisitions and pickups and less on the production side. We think we can get a lot of value with a much smaller outlay, licensing titles rather than investing in heavy titles. Obviously, with the exception of some of these really key -- Terrifier is a no-brainer. There's other things that we're working on that we've committed to that are great investments. But we think that's going to be a much smaller piece of our business going forward anyways.

Erick is absolutely right. I just wanted to add that the strike allows for our new releases, for talent to be able to promote them and to affect their social media. So everything Erick just explained is absolutely correct in terms of our content strategy, but it really unlocked that valuable talent promotion tool.

I also think Dan, kind of philosophically, we've positioned ourselves as an artist-friendly independent studio that puts the artists first. And I think Terrifier was an example of that to the industry where we released an unrated uncut movie because we wanted to bring the Director's vision to audiences in the U.S. And people notice that. And that's been our philosophy. And if anything, that these strikes emphasize is that the major studios don't particularly put artist friendly at the top of their list of things that they want to be known for, okay? So I think in a weird way, the strike actually helped our position in the industry because we were waving a flag for paying artists and treating artists the right way, bringing their labors of love to the audiences around the world all along. So I think from a philosophical standpoint and a positioning standpoint, it helps us as well.

Okay, I appreciate all of the color guys, thanks very much.

Thanks, Dan.

Thank you. There are no additional questions left at this time. I will hand it back to the management team for closing remarks.

Great. Thank you, operator. And this is Chris again. Thank you all for joining us today, and feel free to reach out to Julie Milstead with any additional questions you might have. We look forward to speaking to you all again on our next quarterly call. Thank you very much.

That concludes today's conference call. Thank you. You may now disconnect your lines.