Good day, everyone. Welcome to Cineverse's Third Quarter Fiscal 2024 Financial Results Conference Call. My name is Elliott, 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 also being recorded. I would now like to turn the call over to our host, Gary Loffredo, Chief Legal Officer, Secretary and Senior Advisor for Cineverse. Please go ahead.

Good afternoon, everyone. Thank you for joining us for the Cineverse fiscal 2024 third quarter financial results conference call. The press release announcing Cineverse's results for the fiscal third quarter ended December 31, 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 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, February 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 represents non-GAAP financial measures. And we encourage you to read our disclosures and the reconciliation tables applicable to 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 third quarter fiscal year 2024 highlights, the latest operational developments, outlook, and long-term growth strategy. Mark will follow with a review of our results for the fiscal third quarter ended December 31,2023, and Erick will provide some detail on our streaming business results and operating initiatives before we open the floor for questions. I will now turn the call over to Chris McGurk to begin.

Thanks, Gary, and thanks to everyone for joining us today. This morning, we announced the partnership with global technology and search giant, Google, with whom we developed and will soon launch a groundbreaking new AI-based unified streaming search technology called cineSearch. Both Erick and I will speak more about this later in our remarks. However, I want to emphasize that we believe this AI technology partnership with Google and the launch of cineSearch is an important milestone for the company that not only further validates our industry-leading proprietary technology, but should also provide an important new revenue stream for Cineverse because it directly helps solve the biggest consumer issues with streaming search and discovery today, the current time-consuming, archaic search technology that provides limited and unfiltered content choices for viewers. cineSearch and our chatbot video guide, Ava, will soon help solve that important issue for consumers. Now, let me speak to this quarter's results. Just as we reported last quarter, we again made strong progress this quarter toward our goal of dramatically reducing costs, improving margins, and achieving sustained profitability. We did this by continuing to aggressively cut costs as we finalize the consolidation of the 80 streaming content and technology acquisitions we made over the past three years, while we also continue to offshore a significant number of domestic employment positions to our Cineverse Services India operation. The unique competitive cost and work efficiency advantage that Cineverse enjoys versus everyone else in our space. We also continue to further optimize our stream channel portfolio, sacrificing some revenues for improved margins and profitability by culling lower-margin channels while focusing our resources on higher-margin and higher-return performers. Driven by these initiatives to dramatically cut costs, offshore domestic positions to our Indian operation, and further optimize our channel portfolio, I believe our…

Thank you, Chris. For the fiscal third quarter ended December 31, 2023, Cineverse reported total revenues of $13.3 million, which compares to $13.0 million last quarter, and $27.9 million in the prior-year period. As a reminder, the prior-year quarter included material non-recurring revenue of approximately $4 million for Terrifier 2 theatrical revenue, and $7 million of revenue related to our legacy digital cinema business. When excluding the impact of Terrifier 2 and digital cinema, the decrease in revenue 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. We are cautiously optimistic for double-digit revenue growth in fiscal year 2025 as the economy improves interest rates decline, and the expected improvement in the advertising market in a political year. Subscription-based revenues increased 13% to $3.4 million driven by the continued success of our enthusiast streaming services. Advertising-based revenues declined 31% to $4.1 million primarily due to our channel optimization efforts and the continued impact of the current economic environment on advertising spend. Erick will provide some additional detail on the operational drivers behind our financial results. As Chris mentioned, our direct operating margin for the period was 59%, an increase from 48% in the prior-year quarter, which is in excess of our previously provided guidance of 45% to 50% for the full fiscal year 2024. Our improved direct operating margin is a direct result of our cost optimization initiatives referred to earlier. SG&A expenses decreased $2.7 million or 30% from the prior-year quarter, and $500,000 from last quarter. Again, this improvement is a direct result of the cost optimization initiatives discussed previously. We expect to gain…

Hey, good afternoon everyone and thanks for joining us today. So, considering our announcement today, I'd like to start off discussing the market opportunity for our technology platform, Matchpoint, and then we'll review our financial operational performance and future outlook. As you've heard and seen from our announcements and materials, we've also been rapidly focused on scaling our Matchpoint technology and services business. We believe this is the most important part of our growth strategy for numerous reasons. First, the entertainment landscape is rapidly evolving into a universe of scale, bundled subscriptions, a wide array of enthusiast services, plus thousands of fast channels, and large-scale ad-supported platforms found on every major hardware manufacturer. This is a great opportunity for content owners, as there is a landscape with tens of thousands of buyers globally, all of them requiring large volumes of content license from the tens of thousands of media companies around the globe. Today, there is no unified platform that allows companies to deliver all of these to all these partners automatically and at scale. At the same time, we're hearing from the buyers, the platforms themselves, the content owners, the hardware manufacturers, that they simply don't have the infrastructure and ability to manage these massive content needs. For example, the major FAST platforms have been heavily focused on scaling AVOD and bundled channel solutions for this year, but they lack the infrastructure to compete with Amazon, Apple, and Google. Some are trying to build these solutions internally and are struggling. On the content side, like many of the studios, they throw huge sums of cash at the delivery problem, outsourcing it to legacy companies who continue doing it manually and very expensively. And small to mid-sized companies are simply not equipped to keep up with the cost. In addition,…

Thank you. [Operator Instructions] Our first question comes from Brian Kinstlinger with Alliance Global Partners. Your line is open. And please go ahead.

Great. Congratulations on making the difficult but necessary decision to cull the channels and give up some revenue where the economics were poor. Great to see EBITDA profit without the legacy business for the one of the first times I can remember, so, great job. Can you talk about the expected early commitments from the platforms related to your new channels, whether it be Dog Whisperer, Meateater, the Sid & Marty Krofft Channel, as well as Entrepreneur? How long does it take to know whether these will be needle-movers? And how long does it take to know whether they will hit the success you hope they'll hit?

Hey, Brian, this is Chris. I just want to thank you -- and I want to thank you for those comments first, Brian, there. I think they were spot on, and we appreciate it very much. And I guess Erick will answer your question.

Sure, yes, and great questions. So, yes, and we -- over the last few years, as we've been launching these channels, when we first started this because we were very early on, we've been doing FAST now almost five -- almost six years now. Today, the competition for slots have gone up dramatically. You have every major studio now launching channels. So, the lead time to launch new channels is really longer than it was when we first started doing this business, used to be a quarter or two. It's nowhere near the duration it used to take in cable to get full distribution, and that could take three to four years if you were doing a good job. I think here, six to nine months is probably a realistic steady state for distribution. May take a little longer as we now have a lot of legacy media providers entering the space, DirecTV, Charter, and others are all contemplating services. So, some of the legacy cable providers or Comcast are already in. So, as we look at the market here, I think the duration is going to continue to get longer as this business looks more and more like the new cable. For us, I think the good news is we launched a lot of our services on pretty large scale platforms like Tubi, Amazon, and others. So, we get a really good perspective right out of the gate about how well they're going to perform. I'll give you one good data point just to -- that we find very optimistic, our Dog Whisperer Channel is already outperforming Bob Ross, which has always been our big champion performer, by about 40% on the first platforms we've launched it, which includes some big players like Amazon and others. So, we think that's very, very promising. And so, as we always thought Cesar Millan could be a second Bob Ross, but it's doing even better than Bob Ross is to this date. So, we think as that scales out its distribution, we're hoping to see that same pattern follow. Same goes for Meateater. Meateater, on the platforms we've launched, it's been dramatically over-indexing far above other things that we have on the platforms it's on. So, we think that -- that we've always known that it's going to fill a niche that's really not being served by most FAST channels in the market today. But we think the performance we're seeing on there is extremely impressive, so out of the gate so far. It's too early to tell on some of the other ones that just launched, but I think, overall, we're very, very pleased with the ones that should be doing well are doing better than expected. And with things like Meateater doing even better than we had even hoped, it's still looking like it's going to be very fruitful next few quarters.

Great, that's super helpful. Is there a way to think about, because it's unclear to us how many platform you're on early on and adoption and scale, is there something you can share with us in terms of maybe exiting Calendar 2024 with these channels in total a run rate might look like in terms of revenue, is that too difficult to provider, is it totally unclear? Just maybe any helpful discussion on that would be great.

Yes, I think it's too early to say. We're just rolling out the distribution on these. But the expectation out of these larger brands and channels was to stand up another Bob Ross, was to stand up another sort of large-scale brand. And early indications are that between Meateater and others, we're really good, I think we really do have that here. I think also one of the things that's changed in the last few months, last year and the prior year, there was really a more conservative approach to channel launches. I do think that what we're seeing is most of the major players are really ramping up the total footprint that we're seeing here. So, in aggregate, if we look at where we are stead state with the current business, my sense we've added at least another Bob Ross-and-a-half, maybe two Bob Rosses long-term at full steady state distribution. I don't have the specific numbers to share with you on that but I hope that gives you a sense of scale.

Yes, great. And then, maybe you can provide some updates regarding the managed services business. You made some high-level comments. But last call you talked about I think getting to a $10 million revenue run rate as you exited Calendar 2024, if I'm saying that right, and correct me if I'm wrong, which I believe would assume probably two large VSPs, and maybe some smaller ones on-boarded. Can you talk about if your assumptions have changed, is it still reasonable, and any discussions on early adopters would be great?

Yes, so I'll get it started, and then Tony Huidor, who is on the call, can provide some color on that too. As we look at our product suite and our product mix where we're getting the most attention and traction is on the dispatch side, which makes a lot of sense. In my prepared comments, we said that every major FAST platform, which include Samsung, VIZIO, all of them, they had it relatively easy over the last few years where to launch that platform they took a feed from us and hundreds of other people. And it's a lot easier than managing an ad-supported service. There's no content delivery, other people handle programming, you don't really -- you're not involved at the depth of analytics versus AVOD, there's no back office problems you have to deal with for paying royalties, and things like that. Well, now that they're all aspiring to be Tubi and Pluto-like, with vast AVOD catalogues, they all need massive amounts of technology. Now, on the flipside, they need to ingest lots of content. So, you've got this universe where AVOD is rapidly growing and expanding alongside FAST now. This year I think we'll be -- you'll see that. I've heard a lot of other pundits in the market talking about that, and I would tend to agree given our conversation at CES and other places with the platforms and content owners. So, this universe where you have this massive demand and need for the ability to push tends of thousands of hours, and receive and manage tens of thousand of hours, I think it's led to a universe where most of these people have no systems to do this, they're doing it manually, they're doing it with Google Sheets and paying third parties to do…

Great. I'm going to sneak one last question, and I'm going to hop off. On cineSearch, is this functionality that you're going to try and sell directly into streaming platforms as a standalone solution, so like a subscription or is it going to be bundled or somehow priced into one of your products?

Tony, do you want to describe your thoughts on the business model?

Yes, I'll take that. Again, thank you for the question. It's probably the short answer is all of the above. I think from my perspective, having done some initial outreach, TV OEM is probably the first likely partnership. The TV manufacturers have a variety of different services and apps and content libraries that they can't really properly provide search for. So, we think that would be the first opportunity. It's likely going to be a licensing model. In that case, it likely would be white label. We won't require that they keep the cineSearch branding or the Ava branding, but we're not opposed to it. I think the second tier would be smaller platforms, definitely not the Netflixes of the world, but others who are trying to compete, who have difficulty with discovery. So, cineSearch, once again, would be made available there. And then ultimately, we always see everything that we do as a showpiece or a Matchpoint. So, we will make it available within cineSearch and potentially other services that we launch. So, in that case, on a consumer model, it'll be likely a hybrid, a free tier with an unlimited usage, premium tier, paid sponsorship, search ads, combination of different ways to monetize. Ultimately, the cost that we're trying to cover is the accessing the LLM can be expensive. OpenAI, obviously had that problem. That's why they came out with the subscription, a $20 fee that they later raised. So, we'll see the same issues, but a lot of our focus has been on trying to optimize the usage and better understand behavior. Hence why we're coming out with the beta first so that we can get a better understanding of the cost structure.

Great, thanks so much, guys.

Thanks, Brian.

Our next question comes from Dan Kurnos with The Benchmark Company. Your line is open. Please go ahead.

Great. Thanks. Good evening. Tony, can I just follow up on that for a second? Obviously, major platforms like Roku have what to watch and everyone's trying to figure out how to work on discovery in this space. And I think what you guys are proposing is really intriguing for sort of the next evolution. Obviously, there are some puts and takes around when you guys meta tag everything appropriately, and AI still has some accuracy issues. So, I'm sure you're trying to work all of that out and some of that's going to be incumbent on the owners of the actual content to fix some of that I guess in order to make this thing work. But on the flip side, given how many, at least for now until there's more consolidation, given how many platforms are out there, if you're offering this tool, is there not a way for you guys to ultimately participate in the bounty race that like Roku, if somebody said, if Roku points somebody to Netflix and says, "Hey, this is on you might want to sign up for Netflix." It's probably a bad example because they monetize Netflix that way, but they would theoretically capture a bounty for that. I know you guys are trying to put this as part of a broader package, but there's a huge element or secondary element of subscription service sign-up that is addressable here, and I know the OEMs want to tap into that. I'm just curious how you're thinking about kind of everything that I just sort of laid out in that sort of secondary revenue stream?

First of all, Brian, sorry for calling you Dan, I got your voice confused. So, Dan, yes, it's something that we thought about. Essentially, what you're describing is an affiliate model, a bounty, a paper bounty. I see that probably as a secondary approach. I think for us to get to the point where that makes sense, we need scale. And for us to get to scale, we need some fairly large partnerships in place. At that point, when we have the eyeballs and the viewership in place, we potentially can. And these affiliate models exist. It's not something that we need to go out and invent. So, we have the ability to strike deals where if we drive traffic and can show conversion, we should be able to benefit and get some type of subscription bounty for doing so. What's interesting about this product is there's a lot of different ways of kind of trying to extract value and monetize the service in terms of what you're outlining. We're not relying only on traditional metadata that comes from the licensors. First of all, we've licensed, we have official license to official metadata from key metadata suppliers. But as Erick pointed out, we are investing heavily, and we've already started the process of indexing our library as well through computer vision. And ultimately that data has tremendous value that has probably a third possible revenue stream, which is we could start passing that through the ad tags on our ad-supported business. So, as we're doing FAST channels and providing these to platforms, the more detail you can provide about what's inside the movie, there's value there on the advertiser side. So, we think that's an area where the work that we're doing on AI and contextual tagging has significant value in the long-term. The future is all going to be about metadata. And AI only works well when it has a very rich library and trove of metadata to search from. And so, for us over the last year, you've probably seen some of these announcements we've done with buying labs and others. Many of you probably don't really understand the significance, but we've been laying the groundwork for this product for the last year, and part of that groundwork has been building the metadata capabilities and building our library of metadata so we can better search it. And so, really what we've announced today is a culmination of all that work and finally present it in a package that consumers and investors can understand.

Got it. That's really helpful.

I'll add one point. I was going to add one point to that too is if you kind of look at the broader, the bigger opportunity for platforms as these become very skilled businesses with very large captive audiences of 10 to 50 million plus users in some cases of the scale, global platforms, hundreds of millions. All of them are really thinking about how to squeeze more ARPU per user out. Today, they're all focused on building ad-based experiences. But there could be a real opportunity here, much the way Google deployed AdSense with the acquisition of DoubleClick and later scaling that across their whole search products, building self-service ad tools and other things into this that allows for a very intuitive and natural advertising opportunities native to interaction with a persona. So, if you can imagine interacting with a persona and the platform. If somebody wants to promote something specific and we find somebody searching for something very appropriate, you're talking about targeted advertising, contextual advertising. Doing it in a natural and very seamless way in a user interaction, where a user's talking with a persona, having that system be white label to offer to every streaming service could be a very significant rental opportunity. So, we're exploring things like that on top of a license and kind of meter usage model.

And Erick, can I add one more thing on that?

Well, thanks for stealing my -- go ahead, Tony.

So, Dan, one other thing, I think the question that will be asked is why is Google doing it with Cineverse, right? Why isn't Google doing it themselves? As Erick pointed out, I think the short answer -- the short answer is Matchpoint. We have a huge head start over all the other platforms who are trying to compete in this space. What we have in Matchpoint, the underlying foundation, user authentication, recommendation engine, a lot of that fundamental sort of technology is required to power a service like cineSearch and there's really not a lot of players out there who kind of have that same full stack that we do and that is really our competitive advantage that we have a head start and we're obviously anxious to get this to market. We want to get it right, but we wouldn't be able to do this if we didn't have the underlying stack that we've built with Matchpoint over the last few years.

All right. I'm going to try to ask another one because you guys just answered the two questions I was going to ask on self-serve and why Google. Erick, can you just maybe talk, because you brought this up in terms of expanding. I mean, look, this is obviously the future of the platform, right, is Matchpoint based. And you've talked about new capabilities, and Tony just talked about all the groundwork that's been laid out. And the fact that you just landed Google as a partner suggests that doors are open to you that may not have been open previously. And so to the extent that you're thinking about expanding through partnership obviously guys that are making noise like ThinkBack that are linked in on the back end, are there any other particular areas of opportunity that you see through partnership that you can drive more platform creation similar to what you announced today? And is it possible that there are other major partners, not necessarily, there are only so many Googles, but other major partners, and Amagi was a big one too, that could be coming, let's say, in the next couple of months?

Sure. Yes, so first up, you make a good point on Google, Google Cloud. I look at, as we built a technology platform here, that getting access to more customers rapidly and scaling rapidly is critical. So, in addition to, obviously, our own direct sales efforts, the Amagi partnership, really working with the existing cloud stores today is going to be very important. Clearly, we're working with Google Cloud. I think the natural progression of this would be to put Matchpoint and other offerings in the Google Cloud store. So, obviously getting access to those markets is incredibly important. We will need to do some work to our software stack to make it work in that environment. But I think that's an immediate path, I think, is a real opportunity. So, I would say that's a big one. Tony, I don't know if there's any -- I think adding more partners.

Microservices, obviously, right?

Yes. Yes, microservices. So, today when our platform -- today, if you wanted to work with us, you can license dispatch and start using it. You can license our Blueprint product. You can license our analytics product. But the reality is most major media companies, the biggest scale platforms in the world, they may want to use a piece of what we're doing, right? They may say, wow, the cineSearch is amazing. Hey, these elements of your stack are awesome, but they're not going to -- Netflix isn't going to abandon their stack. These are stacked, right? What, so that's where the microservices bottle comes in, where we basically take all the features and capabilities and Matchpoint, make them into a variety of microservices that can be licensed and leveraged as APIs in third-party customer software, and they can be integrated very rapidly with developers. The beauty of this is you can, and instead of us taking six to 12 months to deploy a customer, if you have a good SDK and well-documented APIs, an engineer could test you out and see if it works for their stack and that's where we really need to be going. So, we're in the process of really, for Matchpoint 1.5 to 2.0, is re-architecting our business model approach. We're still going to offer a full turnkey solution with a backend for SMBs and mid-sized companies, but I think for us to work with the Netflix, Google, Warner Media and other studios and others that have their own engineering forces and massive audiences, for us to get that business, we're going to sell them microservices instead. And we think ultimately, look, that's the AWS model, that's a lot of cloud-based models follow that, and we think that's a way for us to really win in this space. Low barriers to entry, very rapid scale, and when you start having very big companies hitting our services with the meter running, it can be quite lucrative very quick.

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

Great. This is Chris. So, thank you all for joining us today, and please feel free to reach out to Julie Milstead with any additional questions that you might have. And we very much 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 all for your participation. You may now disconnect your lines.