Eros International Plc (NYSE:EROS)
Q4 2016 Earnings Conference Call
June 28, 2016, 08:30 AM ET
Jyoti Deshpande - Group Chief Executive Officer and Managing Director
Prem Parameswaran - Chief Financial Officer and President of North America
Eric Katz - Wells Fargo
Good day, ladies and gentlemen, and welcome to the Eros International’s fourth quarter and fiscal year 2016 earnings conference call. This call is being broadcast live on the Internet and a replay of the call will be made available on the company’s Web site.
This morning, the company published earnings press release on its Web site. The company would like to remind everyone listening that during this call, we will make looking-forward statements under the Safe Harbor provisions of the federal securities law. 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 these forward-looking statements contained in today’s press release.
During the call, the company will also discuss non-GAAP financial measures in talking about its performance. You can find a reconciliation of these measures to the GAAP financial measures in the company’s press release.
I will now turn the conference over to Jyoti Deshpande, CEO of Eros Plc. Please go ahead.
Good morning, everyone. Thank you for taking the time to attend Eros International Plc’s earnings call for the financial year ended 31 March, 2016. This year, our focus was to reinforce our strong business fundamentals and leverage our market leadership position and strengthen our balance sheet further.
The year-gone-by proved our undisputed market leadership in Indian films with the number one, number three, and number four films of the box office charts, namely Bajrangi Bhaijaan, Bajirao Mastani, and Tanu Weds Manu Returns being Eros films, and seven out of the top 15 films having an Eros association. The films were not only commercial successes, but also won over 150 awards including the equivalent of the Indian Oscars and the prestigious national awards.
This reinforces our strong green-lighting process, our ability to pick winners, our strong relationship with talent, and our portfolio strategy with Hindi and regional films, and underpins our dominant market share.
At the end of fiscal 2016, Eros Now, our OTT service, had crossed over 44 million registered users across WAP, app, and Web, a growth of 132% from the 19 million users at the end of fiscal 2015. While India continues to dominate in terms of numbers, we now have registered users across 135 different countries.
Last quarter, we set a target for 1 million paid users by the end of fiscal 2017 and we are well on our way to cross it. Our strategy for Eros Now is comprehensive and compelling.
Our content ownership and deep library underpins the Eros Now competitive advantage. Eros Now has rights to over 5,000 films across Hindi and regional and over 250,000 music tracks. Eros Now premiered 26 new release films, which include Eros and non-Eros films since last March till date out of 72 digital premieres. There are several originals under development going to rigorous green-lighting and market testing, all of them being new genres, with four such originals under production.
In terms of product features, we now have offline viewing or download function live, which will be a huge incentive for conversion to premium subscribers as users don’t have to be connected to the Internet to enjoy the content. Especially in India, this will be a big unique selling proposition. Apart from this, portability and video progression, high-definition, and multi-language subtitles are additional features we offer.
Moving on to distribution platforms and customer acquisition strategy, it is very important to understand that India is predominantly a B2B market, and not a B2C market like the West, especially when it comes to monetization. So tie-ups with telcos and OEMs is very integral to our distribution strategy. We have integration deals with Airtel, the number one telco in India with over 350 million subscribers, and Idea, the number three telco with over 170 million subscribers. We have entered the Malaysian market with similar partnerships with Maxis and U Mobile. We are in discussions with other 4G operators in India and internationally to replicate similar deals.
Moving to the OEM strategy, post our deal with Chinese company LeEco for pre-load of our Eros Now service on their newly launched smart phones in India, we have now also done a deal with Micromax, the second largest smartphone manufacturer in India. The Eros Now app will be preloaded on Micromax phones exclusively and Micromax anticipates a potential sales of 1 million to 1.5 million phones per month.
In line with our platform-agnostic strategy, we are now integrated on three out of the four main streaming platforms in the world, namely Apple, Android, Samsung, and the fourth, Roku, is in the pipeline.
In addition, we are integrated on Amazon Fire TV and Chromecast 2. This, along with smart TV integration, means that users around the world can get a seamless experience with their televisions or any other Internet-enabled device. With mobile users slated to cross over 1.3 billion in India by 2020, there are already 300 million smartphones, mainly Android-based, in India and it is expected that by 2020 all mobile handsets being sold in India will be 4G-ready smartphones. The future is digital.
Our outlook for FY 2017 slate is very strong with Ki & Ka, Housefull 3, Dishoom, Baar Baar Dekho, Rock On 2, Shivaay, Banjo, Happy Bhaag Jayegi being some of the notable Hindi films, while 24 and Singham 3 are the notable Tamil films, with Sardaar Gabbar Singh leading the Telugu slate.
We have a strong presales visibility for this slate with attractive television deals already signed with Zee, Star, Viacom, and Sony for some of these films and catalogs, in line with our de-risking strategy.
The company’s practical approach towards capitalizing on the high potential regional markets of Tamil, Telugu, Malayalam, Punjabi, Marathi, and Bengali films has further reinforced our reach and scalability in these markets. This continues to be a focus area.
Now, for updates on Trinity and the China opportunity. The first Indo-China film written and developed in-house by Trinity, to be co-produced with leading Chinese studio, China Film Group, will be directed by Kabir Khan, who also directed Bajrangi Bhaijaan and will be shot simultaneously in both the languages. We can expect this film to release in FY 2018.
Another Indo-China film, which we internally call the Wedding Film, is also in final green lighting process and we will release this as well in FY 2018.
Additionally, Prabhu Solomon’s Tamil/Hindi bilingual project, a live action elephant film targeting the kids and Jungle Book family audience, a buddy cop film by Krish, and a children’s action franchise will be going into production this year under the Trinity label. We will be creating comic book series and games and merchandise for some of these films and unlocking the franchise value.
Bajirao Mastani will release in China in September 2016 in over 6,000 screens, one of the widest ever for an Indian film. China is expected to cross the US box office next year at US$10.3 billion. With over 32,000 screens, it is one of the most prolific film markets in the world.
Our balance sheet strength is evident by a decrease in net debt by almost 20% and increase in cash flow from operations by almost 98.9% from $180 million in fiscal 2015 to $234.6 million in fiscal 2016, and free cash flow generation of $21.8 million in fiscal 2016 compared to negative cash flow of $159.6 million in fiscal 2015.
Our content library, our Hindi and regional portfolio, our global distribution network, our dominant market share, our OTP first-mover advantage with the Eros Now, our Trinity and China strategy, and our solid balance sheet makes us one of the front-runners to capitalize on the opportunities presented by the rapidly-growing Indian entertainment sector.
Once again, I thank all our stakeholders, analysts, and our business associates, including the film industry, for their unwavering support. It keeps us positive, motivated, and energized at all times.
With that, let me turn the call over to Prem Parameswaran, our Group CFO, who will walk you through our financial performance in much more detail. We will then open the call up to your questions. Thank you.
Thank you, Jyoti. Good morning, everyone, and thank you for joining us again today. This year was about executing our long-term growth strategy, solidifying our financial profile and executing on our core business lines.
During the last year, we made several financial targets for our fiscal year-end and I’m pleased to say we have met each and every one. I will run through these targets and achievements later, but, first, let me run through the financial highlights for the year.
Revenue for the 12 months ended March 31, 2016 were $274 million, which represents a modest decrease of 3% over the year-ago period. Revenues for the three-month ended period March 31 were $65 million, which represents a decrease of 26% over the year-ago period.
We faced a tough comp with last year’s fourth quarter, given we had no high budget films in this quarter versus one high budget film in the fourth quarter of fiscal 2015. In addition, the deliberate sacrifice of short-term catalog revenues during the third quarter and fourth quarter of fiscal year 2016 had an impact on our sales and profit for those quarters. This has allowed us to focus on revenues with shorter collection profiles, increased cash collections, and reduce our overall receivables balance.
Our primary revenue streams are derived from three channels – theatrical, television syndication, and digital and ancillary. Over the 12-month period, we generated 50% of revenues from theatrical, 26% from TV syndication, and 23% from digital and ancillary. In line with exceptional performance of our theatrical business, revenue from India increased to $160 million in 12 months ended March 31, 2016, which made up 58% of the total revenue for that period.
Cost of sales for the year increased to $173 million compared to $156 million in the prior-year period. The increase is primarily due to a slighter higher amortization cost for films driven by mix and cumulative [ph] costs due to our growing film library.
The decrease in adjusted EBITDA across the reported period reflects the changes in cost of sales, and in particular, the increased amortization charges as well as higher contribution of theatrical revenue and lower catalog sales as mentioned earlier.
Last year, we set three important financial targets for our fiscal year-end 2016. One, generation of free cash flow for the year; two, a meaningful reduction in receivables balance; and three, a cap on investment spend of $225 million. We have met or exceeded each of those targets. We generated consolidated free cash flow of approximately $22 million. We brought down our trade receivables balance to $169 million and spent only $211 million on content.
Now, looking at the balance sheet, gross debt at March 31, 2016, stood at $312 million, which reflects a reduction from last year’s balance of $315 million. We finished the year with a cash balance of $183 million, which means we remain well capitalized and believe our balance sheet is conservative. On a net debt adjusted EBITDA basis, our leverage is 1.8 times.
Over the 12-month period ended March 31, we generated $274 million of revenue, and our net trade receivables decreased by $29 million over the same period.
Our trade receivables balance stood at $169 million as of March 31, 2016. We have made good progress on managing receivables down. As previously highlighted, currently less than 2% of our receivables are more than one-year-old and 34% are not even due yet.
Thank you all for listening. And now, we’ll open it up for questions.
Thank you. [Operator Instructions] We will now take our first question from Eric Katz from Wells Fargo. Please go ahead. Your line is open.
Thanks. Good morning. You mentioned some of the strategic partnerships earlier with the mobile players in India. Can you again summarize exactly who they are, how many subs they cover? And do you have any, I guess, initial data on conversion rates you are seeing from people who try out Eros Now and decide to sign up as a paid sub?
Sure. So some of the partners I mentioned were Idea, Airtel – Airtel One was one of the first deals that we signed. And we are seeing attractive conversions from these platforms. And the OEM names I mentioned was Micromax, which is a brand-new tie-up, and LeEco, which we’ve announced in the past.
So talking about the telco deals, what we want to do, hopefully, in the next quarter onwards is try and give – indicate more clearly where we are vis-à-vis the 1 million target subs that we have indicated we will achieve by the end of fiscal 2017. But, for now, what I can say is that we’re getting extremely encouraging conversions from the telcos. They’re spending, for example, a good amount of budget marketing Eros Now on their platforms. Airtel – if you travel to India, you would see Airtel promotions across the length and breadth of the country promoting Eros Now, Bajirao Mastani premiere, et cetera, on Eros Now on the Airtel platform.
So customer acquisition, this is a much – very much efficient way of going about customer acquisition where the platform promotes the service, and we think we are in talks with other telecom operators as well other than Airtel and Idea and you can guess who they are. So we hope to conclude those deals also in the forthcoming months.
So we think in terms of subscriber constitution, the telecoms and OEMs will play the dominant role in customer acquisition, and then followed by the B2C, which will be a smaller part.
Okay. I believe you mentioned earlier there were 125 countries with users right now. Do you have an actual amount for the international users unless we have a sub number there that you can help with?
And then also, I’m not sure, did you guys start the marketing campaign overseas yet or is that on the way?
No. So we’re still doing the digital marketing campaign. So it’s not a blitz on – we’re doing television campaigns as well, but you will probably not see them because you’re on a ZTV [ph] or other Indian channels, but the marketing has started and we were waiting for the offline feature to go live, which has now gone live, and we have seen good conversions from the offline viewing as well because it’s something that people like to have where they do not have to be connected and be streaming the content while they’re watching it and they can actually download it and watch it. So this is a very important feature.
In terms of numbers that you asked, India versus overseas, it’s still dominant in India. Overseas is a much smaller number in terms of registered users. But in terms of paid conversions, we’re seeing conversions from the overseas markets as well.
Okay. And I guess one last question. You’ve done a pretty good job of working down the accounts receivable. Going forward, do you plan on structuring some of the contracts differently, so maybe you can collect cash quicker, maybe keep the accounts receivable down once you start booking new content sales?
Yes. So Prem alluded to that as well in his speech and that’s exactly what we’re doing. We will keep smaller deals, more deals during the year and give shorter payment terms even shorter than a year, so that we can collect these and we won’t have a situation where accounts receivables balloon again.
Great, thank you.
[Operator Instructions] At this time, there are no further questions. I will now return the call to Jyoti Deshpande for any additional or closing remarks.
Thank you very much, everyone, for taking the time to attend this call. We value your support and look forward to talking to some of you again. Bye.
That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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