Chicken Soup for the Soul: A Comprehensive Look At The Business

Summary

• This is my comprehensive follow-up to my original CSSE article, originally written on April 1st, but shared with free site readers on April 5th.
• As that free site piece was poorly timed, I decided to share this piece, given the significant amount of time invested synthesizing and then crafting this piece.
• CSSE's business, not its stock price per se, has arguably never been better. This piece discusses this in greater detail.
• This idea was discussed in more depth with members of my private investing community, Second Wind Capital . Learn More »

BrianAJackson/iStock via Getty Images

If you have been closely reading and following my work then perhaps you have noticed I have been focusing (or at least striving to) on the process, and the quality of that thought process, over short-term outcomes in the form of stock prices. Notwithstanding what certainly feels like a blow off top in many commodity stocks, among one of the few safe havens in 2022, at least through April 2022, the average stock has been taken to the woodshed.

During the first four months of 2022, the NASDAQ is down 21.2% and the Russell 2000 17%. The indices are market capitalization weighed and therefore tend to be more somewhat more insulated than the average stock. Therefore, during nasty bear markets, this means the indices can understate, sometimes dramatically so, just how bad the price action in so many stocks.

As for today's piece, this is a comprehensive look and follow up piece to my original piece on Chicken Soup for the Soul Entertainment, Inc. (NASDAQ:CSSE): An Inflection Point Or Just A Nice Short Squeeze? (published April 5, 2022). As I very transparently shared then, I bought and recommended shares of CSSE (to my group), on April 1, 2022, at the opening bell's price of $9.80, by the April 4th closing bell, wasn't 100% sure if this was an inflection point or a short squeeze, as the title clearly indicates. With the benefit of hindsight, and at least in the short term, the market action suggests more of a short squeeze.

As it turns out, after April 4, 2022, CSSE go onto move lower for eight consecutive days. From the April 4th close of $12.70 to its April 14th closing price, of $7.20, CSSE shares declined by 43.3% and closed lower than where they started on March 31, 2022 (at $7.99) despite reporting a fantastic Q4 FY 2021 and offering really solid FY 2022 guidance and qualitative commentary.

A Comprehensive Look At CSSE, The Business, Not Just Its Stock Price

(Most of this article was originally published on April 18, 2022, to my Marketplace group, Second Wind Capital, with shares then trading at about $7 even)

On April 1, 2022, before the bell, I put a 'jumping up and down' strong buy on shares of Chicken Soup for the Soul Entertainment. The stock opened that morning at $9.80 and despite a lot of volatility closed at $11.49, with 2.971 million shares changing hands. For perspective, there are only 7.7 million Class A shares outstanding and 7.65 million Class B shares. The B shares are owned by the CEO and Chairman, William J. Rouhana, Jr. This means that 38.5% of the entire float traded in one day. The next trading day, April 4, 2022, CSSE shares traded as high as $13.52, and closed the day at $12.70. Since then, CSSE shares are down eight consecutive days, closing at $7.20, as of April 14, 2022. As of 11:30am, April 18th, they are down again, so that would be nine consecutive days.

CNBC

Since April 13th, and notably over the long weekend, I have done a lot more work on CSSE. This includes reading the past six conference calls and re-reading the March 31, 2022 call, a second time and with a fine tooth comb, deliberately reviewing CSSE's FY 2021 10-K, spending time on the Crackle App using my Roku TV, iPhone, and Samsung TV, and endeavoring to understanding competitive landscape.

Despite the unexplainable stock price action, the fundamentals look fantastic, and I would argue that CSSE is an exceptional buy in the low $7s. Frankly, I am shocked, a state that I seem to find myself in far too often these days, in this diabolic market, to witness CSSE share trade at such a low valuation. Arguably, CSSE's fundamentals have never been brighter, the business is clearly inflecting, and the risk/ reward is favorable and outsized in the low $7s.

If you closely read past conference calls, Bill Rouhana has been crystal clear about this vision and how he was positioning the pieces on the chessboard.

The growth in streaming is here to stay as the world continues to move away from linear / cable television at a rapid pace (see the Appendix). With a broadband connection and a Smart TV, unless you are really into sports, there is no reason whatsoever to need linear TV or cable. However, the SVOD (subscription video on demand) business dominated by the likes of Netflix, Disney + (DIS), Hulu (CMCSA), HBO Max (WBD), Showtime (PARA), and a few others is super crowded and not growing in the U.S. This is a land where giants roam as both Netflix (NFLX) and Disney reinvest incredible amounts of money back into content to maintain their dominate market share / catbird seat positions. No question these giants are uncatchable, but the market is segmented and nuanced.

Moreover, outside of SVOD, there is a vibrant AVOD (ad supported video on demand) business. So people, with smartphone or Smart TV can access free content in exchange for their willingness to viewing ads. Ad supported television is how the linear / cable TV business was built and that business thrived as consumers proved willing to view ads in exchange for the ability to view their favorite content.

That said, and outside of CSSE, this market is also controlled by giants:

• Amazon (AMZN) owns IMDb TV, but is rebranding it Amazon FreeVee
• Roku has the largest business (and also own an operating system for smart TVs, an Ad Tech network, is involved in the manufacturing of the TVs). So they are vertically integrated.
• Pluto TV is owned by Paramount (formerly known as Viacom). They paid $340 million to buy them (January 2019)
• Tubi is owned by Fox Corporation

For perspective, as of Q2 FY 2021, Crackle, CSSE's most popular app (they also own Popcornflix, and are rolling out Chicken Soup for the Soul (only on Vizio now) had 13% market share.

Statista

Source: Statista

Since then, and as of the March 31, 2022 Q4 FY 2021 earnings call, Crackle Plus has 40 million monthly active users.

On average, we continue to add between 400,000 and 450,000 viewers with new touchpoints, The Crackle Plus network is now available on more than 70 touchpoints and our average totally monthly -- total monthly active users for the Crackle Plus now exceeds 40 million. We also launched our new Chicken Soup for the Soul streaming service on several fast channels and on Vizio as an app earlier this month.

Also, given all of the time I spent reading and synthesizing the past six earnings calls, I want to highlight two comments that jumped out at me.

Comments on Consolidation

Q2 FY 2021 Call (August 11, 2021)

This exchange between Laura Martin (analyst at Needham) and Bill.

Laura is asking about exit strategy. Bill gives a two-part answer.

Q2 FY 2021 Conference Call

Part one is continue to grow and get bigger and part two is to answer the phone when the competitors call to discuss and buy them CSSE.

Q2 FY 2021 Conference Call

And then on the most recent conference call, Bill subtlety mentions consolidation. It is up to the readers to interpret the subtext/ context.

Q4 FY 2021 Call (March 31, 2022)

Exhibit A

And recently reported research says more of those savvy viewers are in the millennial and Gen Z demos, who over the coming years will control the vast majority of purchasing power. All of this should ultimately lead to consolidation. A thesis well supported by the historical evolution of the media industry. SVOD has succeeded in driving cord cutting, but the slow migration away from linear pay TV doesn't mean the end of free to air content.

Exhibit B

Samsung's much more recently launched app has started off strong with engaged viewer watch time up around 70% since the launch. We are also on track to add new tech to Roku, Fire TV, LG and other major platforms in this quarter, Q2. We expect the continued rollout of our updated apps will mirror these increased watch times. While we are highly focused on executing on these strategic growth pillars, we remain optimistic and opportunistic about the consolidating media marketplace.

The Vision Has Been Consistent

Bill's vision has been consistent. OTT or streaming is replacing linear TV. Most of the headlines and attention are focused on SVOD, but the old school ad supported linear TV business was an $80 billion business (total ad dollars). So in order to compete in the AVOD world you need to focus on original and exclusive content. And this is why Bill has smartly acquired content.

CSSE April 2022 Slide Deck

(Source: April 8, 2022 8-K)

Also, he has been a savvy allocator of capital.

In January 2021, he raised $21.4 million by selling 1.023 million shares at $22 per share and on July 7, 2021, he raised $70.5 million by selling 1.875 million shares at $40 per share.

CSSE FY 2021 10-K

He used this capital to buy content and invest in the business by upgrading the technology and growing the number of touchpoints where new users can be acquired by downloading the Crackle App.

Look at the trajectory of ad revenue for original content and exclusives.

On the Q3 FY 2020 conference call, which took place on November 12, 2020, Bill noted that original and exclusive content compromised 16% of streaming hours, up from only 2% (Q3 2019).

Viewership trends have remained steady coming off the pandemic. We saw a peak in March and April and in Q3, we generated more than 155 million video streams on Crackle and Popcornflix, slightly more than the 151 million in Q2, which included COVID-driven over performance in April. Original and exclusive content on our networks comprised over 16% of average monthly streaming hours in Q3, up from just 2% a year ago.

As of Q4 FY 2021, the number reached 28% of ad impressions in December 2021, and averaged 24% during Q4 FY 2021.

As a percentage of overall ad impressions, original and exclusive viewership generated as high as 28% of total ad impressions in December. 24% for the quarter, both of which exceeded our goal, our year-end goal of 20%. And that number will undoubtedly increase with our more robust 2022 pipeline. Remember, this is our most profitable content.

And given its acquisition of new media libraries (the 1091 Media) acquisition and the ramp up of Sonar and Screen Media, CSSE is planning on over 100 new pieces of content (both new originals and exclusive content).

In March 4, 2022, the Company acquired the assets of 1091 Media, LLC (“1091 Media”) for approximately $15.6 million. The purchase price is comprised of $8.0 million in cash, $2.0 million in the form of newly issued shares of the Company’s Series A perpetual preferred stock valued at $25 per share, and 375,000 shares of Class A common stock valued at $14.80 per share. 1091 Picture’s provides a diverse library of approximately 4,000 movies and television series and established FAST and AVOD channels in specific verticals, with approximately 1 billion yearly ad impressions.

Check out this commentary about the 2022 pipeline of new content:

We believe our company has been an AVOD leader and a growing force in streaming at large by ramping our original and exclusive releases. We now believe we will have more than 100 pieces of new original and exclusive content this year, or two titles per week across our three-core streaming services. Viewership of our owned and original exclusive content, a metric unique to us that we've been reporting to you for some time, is a good way to monitor our progress. As a percentage of overall ad impressions, original and exclusive viewership generated as high as 28% of total ad impressions in December. 24% for the quarter, both of which exceeded our goal, our year-end goal of 20%. And that number will undoubtedly increase with our more robust 2022 pipeline. Remember, this is our most profitable content.

Source: Q4 FY 2021 Call (March 31, 2022)

For perspective, that is a doubling of new and original content, up from management shooting for 52 pieces of first original and exclusive programming (on the Q3 FY 2021 call that took place on November 8, 2021).

So let's turn to our coming attractions. As I've noted on previous calls, our plan is to roll out a new piece of original and exclusive content every week in 2022 and we remain on track to meet that goal. We provide this content to all three of our streaming services. In fact, we are already making this move on Popcornflix having just announced the rollout of the first original and exclusive program for that streaming service an action-packed original documentary Hollywood Bulldogs that tells the story of British stunt performers who dominated Hollywood in the '70s and '80s.

Source: Q3 FY 2021 Call (November 8, 2021)

70+ Consumer TouchPoints And Improved Ad Tech

CSSE is managing its customer acquisition costs making the Crackle App accessible on multiple touch points.

We increased our viewership and viewer retention on our networks. Our distribution touchpoint strategy has been very successful.

On average, we continue to add between 400,000 and 450,000 viewers with new touchpoints, The Crackle Plus network is now available on more than 70 touchpoints and our average totally monthly -- total monthly active users for the Crackle Plus now exceeds 40 million. We also launched our new Chicken Soup for the Soul streaming service on several fast channels and on Vizio as an app earlier this month.

We are now rolling out the Chicken Soup for the Soul service more broadly opening another avenue for driving revenues from our quality content and growing our viewership base. Beyond content and distribution, we get began the rollout of our new improved tech platform. It has been well received by both our viewers and our advertising partners. The new tech is now launched on Vizio and Samsung and the results are coming in as we'd hoped. I will add some more color on this in a minute.

Here is the recent slide deck on this.

CSSE April 2022 Slide Deck

The new technology upgrades for the user interface. I can tell you first hand because we have a Roku TV (a TCL) and a higher end Samsung. The Crackle App interface is much, much better on Samsung (same with VIZIO based on management's commentary).

With the VIZIO and Samsung new tech launches, we've seen great progress with our user engagement. VIZIO tech is beginning to have the impact we hoped. In February, watch time on VIZIO averaged over 88 minutes per engaged viewer, a 40% increase. VIZIO unique were up 25% month-over-month. VIZIO MAUs were up 28% month-over-month. VIZIO start time increased 42%. And here's one that went down, and we're happy about it. There was a 196% decrease in ad exits on the VIZIO platform, and that makes our advertisers happy.

Samsung's much more recently launched app has started off strong with engaged viewer watch time up around 70% since the launch. We are also on track to add new tech to Roku, Fire TV, LG and other major platforms in this quarter, Q2. We expect the continued rollout of our updated apps will mirror these increased watch times. While we are highly focused on executing on these strategic growth pillars, we remain optimistic and opportunistic about the consolidating media marketplace.

Exclusive of Sherlock

As of April 1, 2022, CSSE has a three-year exclusive, in the U.S., on Sherlock, the BBC hit series. Although, Sherlock is an old show, it aired from August 2010 to January 15, 2017, yet this show was very popular in the UK, and I would argue that it is a really good show, as I have already watched a few episodes on Crackle, despite too many commercials.

Look at the views in the UK.

Wikipedia

Valuation (As of April 29, 2022)

As of April 29, 2022, CSSE shares closed at $8.71.

CSSE has been aggressively buying back stock since Q4 FY 2021 and bought more back during Q1 FY 2021.

During the fourth quarter of 2021, we repurchased roughly 879,000 shares for a total of $12.6 million. And in the first quarter through yesterday's close, we repurchased approximately 765,000 shares for a total of $8.5 million.

15.4 million shares x $8.71 equals a $134 million market cap.

CSSE FY 10-K 2021

The company $44.3 million of cash, at year end, and $31.5 million of 9.5% debt and $17.8 million outstanding on its revolver. Net of the $8.5 million spent on the Q1 FY 2022 buybacks and $8 million (cash portion of the 1091 Media deal), we are looking at pro-forma net debt of $14.1 million. The company also has 3.7 million shares preferred stock outstanding (9.75% and $25 par value). So inclusive of the preferred stock, about $92.5 million.

The company issued $40 million of preferred stock to Sony (and warrants) as part of its Crackle deal.

On April 19, 2022, CSSE announced a relatively small add on debt offering to its 9.5% 2025 Notes (NASDAQ:CSSEN). This deal was quickly completed and net proceeds of $9.5 million were raised by the end of the week.

So a pro-forma enterprise value of about $242 million, at $8.71 per share.

So we are talking about a $242 million EV (including the preferred stock) / Adj. FY 2022 guidance of $33 million. So a valuation of only 7.3X for a business that has tons of MO (momentum) and is clearly inflecting.

There are a number of warrants, but the cash proceeds can then be used to buy back some of these shares.

CSSE FY 10-K 2021

What Bill (And Team) Will Do With The Debt Proceeds

If I had to guess, I think Bill is using most of the $9.5 million of new debt proceeds to opportunistically buyback more shares in the $7s and $8s.

Let me share the data points so readers can understand my logic/ connect the dots. That said, we won't ultimately know until CSSE reports its Q1 FY 2022 results and publishes its FY 2022 10-Q.

1) They upped their buyback authorization in February 2022, by $10 million to $30 million. There is about $9 million left on it.

Additionally, our Board of Directors approved a $10 million increase to our stock repurchase authorization in February. This is in addition to the approximately $20 million the company has repurchased since November 2021. During the fourth quarter of 2021, we repurchased roughly 879,000 shares for a total of $12.6 million. And in the first quarter through yesterday's close, we repurchased approximately 765,000 shares for a total of $8.5 million. These repurchases reflect our confidence in the work we have done to build a strong business foundation, and we intend to continue to buy back shares opportunistically.

2) Bill owns 7.7 million B shares and thinks the stock is super undervalued.

CSSE Q4 FY 2021 Conference Call

3) More comments on valuation of the equity.

Our library is incredibly valuable. We have one of the largest film and television libraries now in the world, and it's high-quality programming. And we own much of the intellectual property underlying it. And we have long-term rights on most of it. It's an unusual amalgamation of asset value. And in fact, if you look at the way some of the distribution companies are being sold today with libraries that are a fraction of our size, they're selling for more than our market cap, which is another ridiculous thing, by the way, if you want to talk about ridiculous things. Our market cap is one of the most ridiculous things I've seen. But before I get on that one, let's let the next person and the last person ask a question because we are running out of time. So, thanks, Michael.

Again, just to be clear, I could be dead wrong and they aren't opportunistically buying back the stock.

How I Am Positioned

Just to be crystal clear, at present, I do not own any CSSE shares. Last week, I exited my long position, from the mid $8s, and most shares at $9 even.

As you can see, from a P/L perspective only, CSSE was a complete waste of time. Net-net I only made $2K. If you go back and read the piece from April 5th, I had roughly $3,700 in realized gains and additional $3,200 in unrealized gains.

Fidelity Closed Positions 2022

So, at least so far, only people that deftly traded this stock, by 1) capturing the 30% + move from the April 1st opening price of $9.80 and cashing out in the $12 or $13s on April 4th or 2) folks that bought a bunch of the stock on the unexplainable dip to $7 (or in the high $6s) have done well here.

The biggest reason I sold was because I have a really largely sized long position in Netflix starting at $250. Keep in mind, on April 1, 2022, Netflix shares closed at $373 (so Netflix's market cap has lost $83 billion during the month of April 2022). This share price is so irresistible, I have actually added additional shares, around $217 and more under $200 in another account.

From a risk management / sizing perspective, I just can't have 40% to 45% of my capital invested in one sector: Media and Streaming. In my view, Netflix under $200 is one of the most amazing buys in the entire market and I greatly prefer it, at least from a relative value perspective, to CSSE, even though I think CSSE shares are attractively price at $8.71. Moreover, I do think I made a strong case, in this piece, that CSSE shares should be worth $12 to $15 (possibly more).

Putting It All Together

(The timing of publishing my first CSSE article, at least on SA's free site, on April 5, 2022, proved poor. Therefore, I elected to share this follow up and comprehensive article.)

There is a big secular shift from linear/ cable TV to streaming. The SVOD side of the business is controlled by giants, as is the AVOD side. However, CSSE is the little engine that could, as they have carved out and systematically built out a strong foot hold in the AVOD business. They did this by Bill Rouhana's strong business skills and cogent ability to envision how this business would evolve. The business is all about original and exclusive content and the amount of capital required to have built out the technology and attract an audience. These are the entry fee or table stakes to play this high stakes poker game. Bill has successfully done this despite bringing much less capital to that poker game, but somehow elbowed his way into the main event.

Moreover, as of May 1, 2022, I would argue that CSSE has never been in a stronger position, the actual business and as a company, setting aside stock prices. CSSE has cleverly acquired good assets and built a vibrant audience. And the business is clearly inflecting whether you look at revenue growth, overall active monthly users, the number of new and quality ad partners (including P&G), or its pipeline of new first original and content via its media / production segments.

Also, keep in mind Paramount paid $340 million to buy Pluto TV back in January 2019. CSSE owns a lot of content and unique assets, so it's hard to work out how its current enterprise value is only $242 million.

Clearly and with the benefit of hindsight, a lot of fast and hot money rushed in and rushed out of this stock, yet the fundamentals have never been better for CSSE. And no question that high volume churn, very common these days, led to eight consecutive down days (if CSSE closes down again today) after a 69% rally (from March 31, 2022 to its April 4, 2022 intra-day high of $13.52), to this whipsaw action. After the dust settles, there are multiple ways to win here and we can't rule out a buyout as this is the largest piece of real estate, with strong market share, not owned by the giants.

Appendix

From the Q3 FY 2020 Conference Call (November 12, 2020)

The first and most important aspect of our transformation is our focus on the business of building and acquiring ad supported video on demand networks or as we've been referring to AVOD. Make no mistake that AVOD is the current and future growth of this company. I'm sure you're all well aware of the enormous amount of activity in the streaming world where much of the focus is on the global subscription VOD, or SVOD battle, SVOD war, now at hand among Netflix, Amazon, Apple TV, Disney+, Hulu, HBO, Max and more.

Consumers have choice now, and they're going to pay for the best options to get their content where and when they want it. As consumers cut loose from the cable bundle and move to streaming subscriptions, the traditional ad supported TV model and $80 billion business would appear to be at risk and it is. Consumers not only have great choice for where to spend subscription dollars, they also have a choice as to how they want to spend to get great content.

So as the global SVOD wars play out, the AVOD side of the market is rising rapidly, just not as prominently in the headlines. According to a recent report by WARC, W, A, R, C ad spending on AVOD platforms is expected to reach 47 billion by 2023 which accounts for only 5% of the global ad spend. That growth comes as nearly one-third of U.S. based broadband households are now using ad based OTT services, up from 24% in 2018 according to our Parks Associates recent report.

AVOD is a proven model that we believe is becoming more relevant to consumers as they seek access to broader arrays of programming, while limiting the money they're spending on subscriptions. We also see tremendous appetite for advertisers as eyeballs move away from traditional ad supported television networks to streaming platforms. In this quickly evolving and growing market, we have already established our scale and leadership.

We are among the largest AVOD networks for television and long form content. Based on our recent survey by Imagine Crackle is number two in viewership behind only the Roku channel. And if you add our seventh ranked Popcornflix property we offer advertisers access to the largest audience in AVOD. In total, our AVOD networks have an estimated share of about 16%. And as we've previously said, we're focused on growing that share through acquisitions of other AVOD networks.

Additionally, as a result of our successful marketing test on Going From Broke, we now see opportunities and a roadmap to grow organically as well. Moreover, we are positioned in the most attractive part of AVOD sector. In AVOD you have lots of names thrown around, most prominently YouTube and others like Pluto, which was acquired by Viacom for 340 million in cash.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NFLX either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I have more good /compelling ideas than available capital. I don't like to make small bets, so I don't have room for every stock.