Eros International's (EROS) CEO Jyoti Deshpande on Q1 2015 Results - Earnings Call Transcript

| About: Eros International (EROS)

Eros International Plc (NYSE:EROS)

Q1 2015 Earnings Conference Call

August 21, 2014 08:30 PM ET

Executives

Jyoti Deshpande - CEO

Andrew Heffernan - CFO

Analysts

John Janedis - Jefferies

Bryan Goldberg - Bank of America/Merrill Lynch

Operator

Good day and welcome to the Eros International’s Conference Call to discuss the company’s first quarter 2015 earnings. This call is being broadcast live on the internet and a replay of the call will be made available on the company’s website. This morning the company furnished its earnings press release on its website www.erosplc.com.

The company would like to remind everyone listening that during this call, it will be making forward-looking statements in to the safe harbor provisions of the Federal Securities Laws. The company’s actual results might differ materially from those projected in the forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in this forward-looking statement is contained in today’s press release. During the call, the company will also discuss financial measures in talking about its performance. You can find the reconciliation of these measures to GAAP financial measures in the company’s press release.

I will now like to turn the call over to Jyoti Deshpande, CEO of Eros PLC.

Jyoti Deshpande

Thank you. Good morning ladies and gentlemen, I am Jyoti Deshpande, the CEO and Managing Director of Eros International PLC. Thank you for taking the time to attend Eros International’s earnings call for the first quarter ended June 30, 2014.

Eros International is a leading global company that co-produces, acquires and distributes Indian films across multiple distribution channels, such as theatrical, television and digital platform across 50 countries and in over 25 different languages worldwide.

In our three decades of market leadership, we have built a valuable library of over 2300 films, which has given us a distinct competitive advantage and positioned us to extract further value from emerging digital distribution channels, such as our premium television channels with HBO and our online and mobile content service called ErosNow.

We enjoy a market share of over 40% when measured in box office terms, and although the Indian film business is not as hit driven as Hollywood can be, we have been very consistent in picking up winners with at least three out of the top 10 films every year for the last several years being Eros films.

We seek to [beat this kind of] [ph] investment through pre-sales where we aim to recover a majority of our investments through contractual commitments, even before the theatrical release of the film.

We can recover between 45% to 70% of Hindi film cost through pre-sales and over 100% of Tamil and other regional language film costs through pre-sales. Our market is highly underserved with just 10 screens to a million people, while the US has over 120 screens per million people.

A 100% of our screens are already digital like in China. The high demand for films, coupled with scarcity of screens gives a very high opening weekends queue to the box office, and together with the low cost of marketing and distribution approximately just 15% of the films budget makes this a relatively less risky business model compared to Hollywood.

Our revenue streams are diversified with approximately 45% coming from theatricals, 35% coming from television licensing, and the balance 20% from digital and ancillary. We seek to invest around $180 million to $200 million in content CapEx each year, so we can have visibility of our film release slate at least two years in advance.

Our quarterly results year-on-year are strictly not comparable, as results may vary based on number of films as well as a mix of films released, as well as quarterly contribution from catalog income.

Generally the third quarter between October and December tends to be an important one with the higher budget films tending to release around the festive seasons.

Moving on to our results for Q1 ended June 30, 2014, I am pleased to report strong growth in revenues by 10.7% from $41 million to $45.4 million, with an increase of 15.2% on the basis of currency comparable revenues.

Adjusted EBITDA is down marginally to $8 million from $8.4 million, mainly due to the mix of releases and the timing of catalog revenue coming through during the year.

The main driver film for the quarter was a much awaited Tamil film Rajnikant starer Kochadaiyaan which was India’s first motion capture film in 3-D and it was released in at least six different language versions worldwide.

The film was underpinned by strong theatrical, television, as well as music presales. There were notable revenues from the medium budget international-only Hindi releases namely Main Tera Hero and Ek Villain, as well as valuable contribution from library monetization.

The ErosNow channels on YouTube have now crossed over 2 billion video views in aggregate and have over 2.3 million free subscribers. We are in the process of completing the acquisition of Techzone, a leading company in the mobile value-added services within India, having billing integration in place with some of the major telcos within India.

Techzone currently processes over 25 million transactions per month through its billing platform, and we will seek to transfer more of the ErosNow service to that traffic and convert a proportion of them into free as well as premium subscribers for ErosNow.

As we look ahead we have at least six major releases planned for this fiscal 2015, and we started with the release of Rajnikant’s Kochadaiyaan this May, we have Aagadu in September, we have Action Jackson, Happy Ending, Uttama Villain in the October to December quarter, and we have Tewar in the fourth quarter.

The future slate for FY ‘16 is also robust with a string of high budget releases already locked in such as Bajirao Mastani, Shivay, Rajnikant’s next untitled film, Saif Ali Khan’s next, Gabbar 2 with Pawan Kalyan to name a few.

Becoming the first Indian media and entertainment company to list on the NYSE has positioned our company even more advantageously within the industry as well as the Indian market in general.

The recent follow-on offering in July where we raised just over $90 million has further strengthened our balance sheet and given us more firepower. With that let me turn over the call over to Andrew Heffernan, our Group CFO, who will walk you through our financial performance in more details. We will then open the call up to your questions.

Andrew Heffernan

Thank you, Jyoti. Good morning and thank you for joining us today. Our performance for the three months ended June 30, 2014, our first quarter and fiscal year ended March 2015, is in line with expectations and this is also in line with the recent development updates provided in our follow-on offering prospectus.

Revenues increased by 10.7% to 45.4 million in Q1 fiscal 2015, with currency comparable revenues increased by 15.2%. Adjusted EBITDA stood at $8.1 million in Q1 fiscal 2015. At this stage I would draw your attention to the notes regarding the use of non-GAAP measures and the uses and limitations contained within our earnings release.

Our revenue streams are derived from three channels television syndication, theatrical, and digital ancillaries. We released nine films in Q1 fiscal ‘15 of which five were Hindi language films and four were Tamil, as compared to 16 films in Q1 fiscal ’14, of which seven were Hindi films and 11 were Tamil and other regional languages.

Of these films in Q1 fiscal 2015, one was a high budget film and three were medium budget films, as compared to no high budget films and six medium budget films in the year ago period.

Increase in revenues for the quarter reflects mix and performance of the film slate released during the periods, along with the strong contribution from our valuable catalog of films.

Constant currency comparable revenues for the three months ended June 30, 2013 are 39.4 million based on the average rates of exchange for the three months ended June 30, 2014.

I should note that in the three months ended June 30, 2014 the average rates of exchange used to convert Indian rupee to US dollar was INR 59.9 to $1 compared to 55.7 to $1 in the year ago period.

Turning to our segmental performance for the Q1 fiscal ‘15, the aggregate revenues from theatrical, television, syndication and digital ancillary were 19.1 million, 15.5 million and 10.8 million respectively.

For Q1 fiscal ‘15 cost of sales has increased to 33.2 million compared to 28.4 million in Q1 fiscal ’14, which included 26.4 million of content amortization compared to 21.9 million in Q1 fiscal ’14.

The increase in cost of sales is mainly due to this 4.5 million increase in amortization, reflecting cumulative additions to the film catalog. Gross profit in the quarter totaled 12.1 million compared to 12.6 million in the year ago period.

The company’s gross profit margin was 26.8% in the quarter compared to 30.7% in the year ago period. The decrease in the gross profit margin in the quarter was primarily attributable to increased cost in proportion to revenue generated by the new release slate, as well as the timing of contribution from catalog sales.

But we’d note at this stage that quarterly or annual changes in margins should not on their own be taken as indication of future margins.

Adjusted EBITDA was 8.1 million in the quarter, compared to 8.5 million in the year ago period. This decline is primarily attributable to the change in the gross profit margins.

Net income showed a loss of 2.6 million in the quarter compared to a profit of 8.8 million. The decline reflects that in the quarter there was a loss on interest rate mark to market derivatives in the quarter of 2.4 million compared to a 6 million profit in the year ago period.

Beginning with our balance sheet, debt as at June 30, 2014 stood at 261.9 million as compared to 258.1 million as at March 31, 2014, with cash and cash equivalents totaling 135.8 million. Net debt was increased by 13.4 million in the quarter ended June 30 of 2014 and totaled a 126.1 million.

The changes to net debt in the quarter were principally driven by cash from operations, working capital outflows related to content and receivables, and investments in the feature film slate.

In summary, confirming our recent follow-on, we believe our business continues to be well positioned for strong growth and profitability, and we will seek to capitalize on opportunities presented by the rapidly growing Indian media and entertainment sector.

Thanks for taking the time to listen and now we’ll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of John Janedis with Jefferies.

John Janedis - Jefferies

Jyoti, can you talk a little bit more about the implications of the ZEE content in the context of ErosNow meaning, I guess number one, should we expect more deals for content to come; number two, how does this impact the tax breakeven from a subscriber perspective; and three, at this point are you seeing competition from other platforms bidding for that same content?

Jyoti Deshpande

Great question, John. I think Zee is not the first piece of content that we’ve got. We announced that we got Viacom’s content; we’ve got UTV’s content. So it goes back to the objective of ErosNow wanting to be the one stop shop solution. Not only will we offer movies from us and other studios, but we’ll also offer TV shows, we’ll offer music videos.

So this is just a little step in the right direction of offering that content base, that broad based content base and of premium content. So the Zee shows are premium shows and so it’s valuable. We’ve discussed this, there isn’t too many of competing services out there.

There may be music streaming services or there may be some sites offering a few movies, but there isn’t anything like ErosNow out there. So we are very keen to sort of capitalize on the lead and move this forward and with the Techzone acquisition and the integration that’s happening right now, we hope to gain great momentum one with the content as well as on the distribution side with ErosNow.

John Janedis - Jefferies

Maybe a side question, just on HBO, can you talk maybe about the evolution of the India pay TV market, are you seeing more of a willingness for consumers to pay for premium cable networks and how is the HBO offering being perceived.

Jyoti Deshpande

It’s very positive. I think it’s still early days in terms of premium television. But the writing is on the wall in a very positive way. Star has received good response to their HD channel as well.

People are wanting to access content in high definition quality and I think more than high definition what attracts them is the fact that these channels don’t have any ads. You know people have been used to watching content whether it’s a 23 minute TV show takes 45 minutes to get through because of the ads, a two and a half hour movie takes four hours to get through because of the ads.

So an ad free environment in high definition quality is very attractive, and slowly but surely we are hearing from other broadcasters that they’re going to be launching their premium services soon, and once that happens I think we will see true momentum, because each content offering will be slightly different from the other, and the consumer will start sort of converting to consuming content in a premium service manner rather than the ad monetized model. So I would say it’s going in the right direction.

Operator

(Operator Instructions). Our next question comes from the line of Bryan Goldberg with Bank of America/Merrill Lynch.

Bryan Goldberg - Bank of America/Merrill Lynch

Just to follow up on ErosNow, I was wondering what kind of updates you could provide us on your thoughts surrounding time-to-market for formal launch onto the smartphone platform through Techzone, and any - what are your latest thoughts on retail pricing model, potential revenue shares that you might undertake with telecom operators, anything there would be helpful. Thanks.

Jyoti Deshpande

We’re already live on mobile platform, so you could download the ErosNow app today. And it’s available on android, IOS, all operating platforms. So whatever smartphone user you are you could access ErosNow today through your cell phones.

What the difference with the Techzone what we are hoping to do is, we are hoping to have direct billing integration so that when customers are accessing our site through WAP or their mobile app they don’t have to put their credit card details and we can take a share out of the mobile wallet.

So that’s I think a couple of months away, but we are very close and we will support it with marketing push through SMS marketing, push SMS marketing et cetera, so that all the mobile traffic that Techzone enjoys right now gets to know about this great new service and we hope to up sell to that traffic.

So I hope I’ve answered the first part of your question. And coming to the second part in terms of pricing and economics, well there are different buckets of pricing. So you can access the whole service for a set fee per month or you can access different buckets of content for smaller fees per content.

So it can be as small, it can be a micro payment for just a song video or just for a film or just for a piece of music or it can be eat all you want for the whole month. So it varies, but a similar pricing across all telcos because that’s how it works. Does that answer your question?

Bryan Goldberg - Bank of America/Merrill Lynch

Yeah.

Jyoti Deshpande

And probably we can get into details of, send you some links to show what are different kinds of pricing that is available across telecoms.

Bryan Goldberg - Bank of America/Merrill Lynch

Yeah, that would be very helpful, and you answer was helpful as well. And I guess just a follow-on to that, and I assume this is a much smaller aspect, but maybe I am thinking about it wrong.

Could you just talk about how your recent announcement with Hathway Cable sort of folds into the broader ErosNow strategy and what that offering is, and is this something that can be deployed across other broadband platforms as well?

Jyoti Deshpande

Absolutely it can be deployed across other broadband platforms, and one way of thinking about it is a consumer can access ErosNow directly just through the net. So what is the advantage of tying up with someone like a Hathaway? Now these guys go door to door to collect monies from people who are their subscribers.

Even now the billing mechanism is going door to door and collecting money from the people. So this is like a distribution tie-up or a marketing tie-up where they will go and along with their broadband service, when they are pushing their cable service they’re trying to up sell people to the broadband service, and along with that they will try and up sell the ErosNow content service.

So it’s a billing, it’s a marketing and all their customers will be - ErosNow will be marketed to them actively, and we hope that the conversion rate will come through those customers and we share a small piece of the revenue for what they do for us.

So we hope to replicate this across all the other major cable networks, as well as the DTH operators who also offer similar services and so whether it is Tata Sky. So all those platforms that are currently offering our HBO services are a potential platform integrator for our ErosNow services as well.

Bryan Goldberg - Bank of America/Merrill Lynch

And just one final follow-up, is it possible for you to bundle your ErosNow talks and negotiations with the broadband platforms with the HBO product as well or are these sort of, are these viewed as complementary services or are they two very distinct products, business relationships in the eyes of the cable operators?

Jyoti Deshpande

I think to begin with the whole product is different. ErosNow is all about the Bollywood experience; it’s all about Indian movies, Indian music and music videos and the Indian TV shows, whereas the HBO the product SKU is more towards Hollywood rather than Bollywood.

So I think to begin with we’ll keep it simple, and we want to gain as much momentum for ErosNow as possible, and the HBO channel will take its own course and they will gain subscription as people subscribe to premium channels, and we don’t plan to bundle them immediately. But if any deal it evolves into something attractive than we will make those happen.

Operator

And it appears we have no further questions at this time. I would now like to turn the floor back to Ms. Jyoti Deshpande for any additional closing remarks.

Jyoti Deshpande

Well thank you all again for taking the time to listen to our earnings call and thank you for your continued interest in the company.

Operator

Thank you this concludes today’s conference call you may now disconnect.

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