Cineverse Corp. Q1 FY2024 Earnings Call

Good day, everyone. Welcome to Cineverse's First Quarter Fiscal 2024 Financial Results Conference Call. My name is Cole, and I'll be your operator today. 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 go ahead.

Good afternoon, everyone. Thank you for joining us for the Cineverse Fiscal 2024 First Quarter Financial Results Conference Call. The press release announcing Cineverse's results for the fiscal first quarter ended June 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 on the Cineverse website after the conclusion of this call. Before we begin, I would like to point out that certain statements made on today's call contain 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 of the information discussed on this call is as of today, August 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. 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; John Canning, Chief Financial Officer; Yolanda Macias, Chief Content Officer; and Mark Lindsey, Executive Vice President, Finance and Accounting, all of whom will be available for questions following the prepared remarks. On today's call, Chris will discuss first quarter fiscal year 2024 highlights, the latest operational developments, outlook and long-term strategy. John will follow with a review of our results for the fiscal first quarter ended June 30, 2023. And Erick will provide 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 hello, everyone. Thank you for joining us today. We made some very good progress during the quarter toward our previously stated goal of reduced costs, improved margins and sustained profitability. We reduced operating costs by $2.5 million versus last year's quarter, enabling us to narrow our operating loss by $1.9 million or 41%. We posted a direct operating margin of 46.2%, in line with our guidance target of 45% to 50%. These improvements are the direct result of our cost streamlining and margin improvement efforts, which have included a 30-position headcount reduction, the renegotiation of most of our operating deals, a planned cut in go-forward overall executive compensation until we reach sustained profitability, major future cost savings from our offshoring of positions to Cineverse Services India, and now the culling of lower-margin channels from our broad streaming portfolio of enthusiast networks. As I've noted before on these calls, unlike many of our competitors who have a single streaming channel and only one or two revenue models, our 26-channel streaming portfolio and multiple revenue streams give us the ability to truly manage our business as a portfolio. This provides us with the unique ability to call lower-performing channels, particularly those where we are not getting enough content from our partners to refresh programming on a timely basis. So we are doing this aggressively as we focus on the bottom line even at the expense of lower-margin revenues. We saw the impact of that in our results this quarter, where our advertising revenues dropped versus last year, mainly as a result of these channel optimization activities. Erick will cover that in more detail in a few minutes. However, I want to emphasize that we are committed to continuing this process of trading off lower-margin channels and related businesses for higher performers when we have the opportunity to improve our margins and operating results, which is exactly what we saw this quarter for the $2.5 million reduction in operating costs and 41% reduction in our operating loss versus last year. Despite the drop in advertising revenues, we were pleased to report overall growth in our Streaming and Digital business for this quarter despite fewer channels, the tough advertising market environment and a seasonally slow revenue period. Streaming and Digital revenue increased 5.8%, a record total of $10.5 million from last year's first quarter, primarily driven by our paid subscription streaming business, which was up 44.7% versus last year and led by growth on our Screambox horror channel and also by digital content licensing, which grew 105.9% on the strength of our library sales and new releases. The number of paid subscribers to our channels also increased significantly versus last year, up 38%. As Erick will detail, we expect a rebound in our advertising revenues to complement this subscription and digital sales growth going forward, particularly as we aggressively leverage our new ad services group and head into the political advertising season. In addition to all of that, last fall's theatrical phenomenon, Terrifier 2, continues to be a monster performer for us in home entertainment. Released last October, the film has already generated $11.2 million in revenues for the company. We are planning a theatrical reissue of the film late this year, where we will debut a teaser of the highly anticipated franchise follow-up, Terrifier 3, slated for release in the fall of 2024. All of this has been driven by our unique 360-degree approach to marketing, which utilizes all the promotional power of our 26 streaming channels, 70 million monthly active viewers, robust podcast business, and the viral social media influencer and editorial capabilities of our Bloody Disgusting horror division. This cost-efficient and highly effective marketing approach helped turn Terrifier 2 into a horror phenomenon and is one of our key competitive advantages going forward. Erick will cover this in more detail. However, let me speak for a minute about what we see as one of the most important and unique initiatives we have undertaken to reduce costs and maintain our goal of sustained profitability, Cineverse Services India. Having been involved with key Cineverse personnel in India for over nine years, having acquired 100% of our Matchpoint technology operation almost three years ago, and having seen the exciting new streaming and content management technology innovations they have developed, including our current push into AI, we now see Cineverse India as not just a platform for industry leadership in streaming and AI technology, but as a unique and battle-tested operation that can offshore the majority of our support functions in the U.S. at a dramatically reduced cost and with improved efficiencies at the same time. This is why we formed Cineverse Services India and announced it in our last earnings call. What makes this unique for us is that we are offshoring, not outsourcing, domestic positions to a Cineverse Services India operation that is already a trusted and high-functioning division of the company. This is why we are so confident that this initiative, which we plan to complete by the end of this fiscal year, will not only contribute several million dollars in cost savings but will improve workflows and efficiencies across the board. It is a unique competitive advantage that we are aggressively leveraging. I also want to mention that an independent third party valued our 65,000-title content library this quarter at $26 million to $30 million. That compares to a $2.9 million book value for the library as of June 30, 2023. Our stockholders' equity as of June 30 was $45.6 million, and we had over $12 million in cash at hand on that date. Cineverse's other assets include a 26-channel enthusiast streaming portfolio with more than 70 million monthly active viewers and Matchpoint, our industry-leading content management, streaming, and AI technology platform that was the driving force behind the $68 million in total revenues we generated last fiscal year. As of today, we have $0 debt including a $0 balance on our EastWest Bank line of credit, which we just extended for another 12 months. All of those facts underscore why we believe our equity is so significantly undervalued at this point in time. We need to do a better job of stressing these points to the investment community, and we still have a stock repurchase program in effect into the first quarter of next year. Finally, while Erick will cover the specifics of this in a few minutes, I do want to speak to our status and future as an almost fully technology-driven company. Cineverse is at its core an innovative technology company. We led the charge in the game-changing conversion of theaters to digital technology, which saved the industry billions of dollars in distribution costs and made the theatrical business technologically competitive again with the TV business. We spent years developing Matchpoint with a team of talented world-class engineers now at Cineverse India, and it is now an industry-leading content management, streaming, and emerging AI technology platform. We were a pioneer in the FAST streaming business with connected TVs, now the fastest-growing segment of the business. Beyond that technological heritage, it is now very clear that our proprietary Matchpoint technology is the very foundation of all our lines of business. From OTT and streaming to content distribution, to ad sales in ad tech. Frankly, we've done a lousy job of communicating this critical point in the past, and we aim to do better going forward by hammering that point home. Matchpoint is the backbone of our business. So the reason we have had success in establishing partnerships with leading OEMs and tech brands such as TCL and Amagi and bringing in top channel brands like Bob Ross, Sid & Marty Krofft, and GoPro, among many others. It is already recognized as a leading entertainment technology, and we are confident the recently announced MatchpointAI initiative will also become an industry leader, attract the same quality, and generate significant high-margin revenues in the future. To recognize all of this, we hope to provide additional disclosures in the future to reflect the fact that our Matchpoint technology is already directly responsible for generating a very significant percentage of our revenues and operating results and will likely represent an even greater percentage of our results in the future. We believe Cineverse should be viewed as a core technology company, and our reporting needs to reflect that. Look for more on this as we move through the next couple of quarters. All that said, powered by Matchpoint, we believe we are well positioned to continue growing our streaming technology and content business. Our proprietary technology, now moving into AI, our substantial portfolio of streaming channels, our 65,000-title content library, and our differentiated 360-degree marketing approach together make up the secret sauce driving Cineverse's growth strategy going forward. Supported by our initiatives such as Cineverse Services India, we remain committed to delivering improved financial performance for fiscal year 2024 as we continue to reduce operating costs and improve margins, working toward our goal of achieving sustainable profitability. And with that, I'll turn it over to John to go over our financial results for the fiscal 2024 first quarter.

Thank you, Chris. For the fiscal first quarter ended June 30, 2023, Cineverse reported total revenues of $13 million, which compares to $13.6 million in the prior year period. 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. Total Streaming and Digital revenue increased 6% to a record $10.5 million, driven by our robust channel portfolio, increased platform distribution, and paid subscription. This was led by a 45% increase in subscription revenue and a 106% increase in digital content licensing. Erick will provide additional detail on the operational drivers behind our financial results. Gross margin for the period was 46.2%, which is in line with our previously provided guidance of between 45% and 50% for fiscal year 2024. Total OpEx decreased nearly $2.5 million or 14% from last year's first quarter, driven by a reduction in SG&A expense of nearly $2 million. This is a direct result of the cost-cutting initiatives we've implemented since fiscal year 2023, and we expect to gain even greater efficiencies as Cineverse Services India gains momentum in the second half of fiscal year 2024. As a result of the decreased total OpEx, net loss attributable to common stockholders narrowed to negative $3.6 million or $0.37 negative per diluted share, a significant improvement from net loss of $6.1 million or $0.69 negative per diluted share in the prior fiscal year period. Adjusted EBITDA loss narrowed to $1.5 million negative from adjusted EBITDA loss of $2.2 million negative in the prior year fiscal period. We had $12.1 million in cash and cash equivalents on our balance sheet as of June 30, 2023, and we maintain a small revolving working capital facility as additional dry powder for key content acquisitions. Having paid down $5 million on our revolver subsequent to quarter-end, we currently have no outstanding balance on that facility and we have no long-term debt. As Chris mentioned, we just extended that facility for another year. We feel well positioned to be able to execute on our growth initiatives over the next several months given our strong financial position. We are reiterating the previously provided guidance for fiscal year 2024, which is total revenue of between $62 million and $70 million, direct operating margins of between 45% and 50%, and adjusted EBITDA of between $2 million and $4 million. Please keep in mind, these guidance assumptions are based on, among other factors, the company's existing business, current view of existing market conditions and assumptions for fiscal year 2024. With that, I'll turn the floor over to Erick to discuss the market environment and our growth initiatives.

Thank you, John, and thanks, everyone, for joining the call today. First, let me briefly discuss the current streaming business climate, and I'm going to discuss our top line streaming results, provide some updates on our go-forward channel strategy and review our technology initiatives. So first, regarding the current streaming macro environment. Despite a lot of hand-wringing and negative sentiment, both in the press and investor community, the streaming business is showing signs of re-accelerating growth after the post-COVID hangover in the last 12 months. According to Comscore, both subscription and ad-supporting streaming grew a combined 25% in the first half of the year in North America. And despite many claims of market saturation, the average household time spent streaming grew 19% year-over-year. Additionally, the number of services subscribed per household grew to 5.4, up from 4.7 in the prior year. While CTV advertising has been down around 7% to 8% according to Kantar for the first half of the year, most large-scale platforms such as YouTube, Meta, and Hulu are showing modest gains in the last quarter. This pre-stage is an improvement in the overall CTV ad environment, and the sentiment for the back half of the year has grown more optimistic among our agencies and demand partners. However, despite the significant audience shift to streaming, today, only 15% of the estimated $70 billion of video ad spend in North America is spent on streaming. And with the number of households subscribing to cable falling below 30 million range, we see that the long-term trend is very favorable on the ad front. So to sum it all up, all of the key streaming macros, subscribers, time spent, services subscribed to, CTV ad share, indicate there are many years of industry growth remaining driven heavily by a shift from legacy platforms over the next five years. So in the face of all of this, Cineverse has a diversified approach to streaming combined with the technological ability to achieve superior margins over our peers, positions us very well to compete. Now let's discuss a few of the business highlights in more detail from the quarter. Streaming and Digital revenue increased 5.8% to a record $10.5 million, primarily driven by an increase in our digital licensing to other streaming platforms as well as growth in our paid subscription streaming business. Total subscription revenues were $3.2 million, up 45%, and total subscribers to our streaming services were approximately 1.21 million, up 38%, driven by the success of new releases and library acquisitions for our flagship services, particularly our Screambox horror channel. We also saw significant growth in our documentary streaming service, Docurama, which grew 42% during the quarter. Total ad-based revenue was $3.6 million, down 39.3%. As Chris and John noted, during the quarter, we wound down several lower-margin channel partnerships. These are predominantly third-party channels, not channels we own, which included the El Rey Network, The Country Network, The Elvis Presley Channel, and several proprietary FAST channels as well. We finalized their wind down during the period, including the Docurama FAST channel, not the subscription channel and CONtv anime. Additionally, we had a mandatory plan technology migration with a major FAST channel platform partner. Due to this migration, we experienced a significant reduction in monetization with that partner during the transition in May and June. We saw significant recovery subsequent in July and expect to be at pre-transition levels for that partner in the critical busy period at the back half of the year. In the quarter, we continued our key strategic shift away from the COVID era approach of high top line revenue and KPI growth at the expense of profits to more measured growth with a focus on efficiency and profits. One area we're going to continue to focus on is leveraging our 65,000-title library to generate revenue. As Chris noted, our business generating revenues from our streaming library was up 40% year-over-year. In prior years, our focus has been to emphasize our own streaming service at the expense of revenues generated with third-party services. However, over the last year, we've seen little to no cannibalization in subscribers by making our titles more broadly available, and we plan on dramatically expanding that effort. In addition, we plan on leveraging Matchpoint to scale up the volume of the annual releases of new titles by hundreds, which should have a significant and material impact on overall revenue. As we noted earlier, we began to focus on eliminating streaming business lines that are unprofitable or far from profitability targets with the priority on winding down deals for channels we don't own outright or require significant capital expenditures to maintain deal rights. As I noted earlier, we ended our relationship with Authentic Brands on The Elvis Presley Channel and also wound down several other channels. We estimate that the P&L benefit from these changes will take effect over the next few quarters. We think we'll see about a 30% margin improvement in our third-party channel business, which should translate to an estimated 6% to 7% improvement in our streaming gross margins as those shutdowns fully wind off. Docurama, as I mentioned earlier, is a great case study on proactive improvements and the strength of us having multiple revenue streams business model. So we originally operated that service as a subscription offering and expanded it into a FAST channel in 2019. However, as has plagued many predecessor documentary linear networks, that channel struggled to find an audience as a linear network. As it turns out, most people don't like to tune in to documentaries in the middle of the show, which is the most common way for FAST channels to find an audience. So we shuttered the FAST channel during the last quarter and instead refocused our efforts on the subscription model. The net result has been extremely positive in a short time frame. Operating expenses were down by hundreds of thousands of dollars while our subscriber base grew by more than 42% during the quarter. So going forward, our approach to third-party channels is going to be very different from prior years. Rather than capital-intensive co-partnerships that require significant investment in capital expenditures and streaming rights, we're going to focus on fee-based managed technology services and exclusive advertising partnerships. These businesses require little to no risk capital and time to market is days to weeks rather than months or even sometimes years. Our overall approach to the ad market is changing as well. As advertisers focus on supply path optimization, we're currently ramping up the direct and sponsorship portion of our ad business significantly to capture the best results from calendar Q4. We recently expanded our ad sales team and in the quarter, we secured direct ad and sponsorship deals with Ancestry.com, Hershey's, Taco Bell, Sony Pictures, A24 and more. The majority of the benefit is coming in the current quarter on these, but we signed those in the prior quarter. So our approach is focused on selling omnichannel web, mobile, audio, and CTV at a 120% premium to our current CPMs, so think in the $35 range. The biggest shift for us is also a focus on managing the exclusive monetization for partner channels. As I noted earlier, we prefer this approach to launching new channels because when we work with that partner, the channel is already live, it has predictable and forecastable revenues and cash flows, has no capital expenditure risk like there is with building a new channel and could be launched rapidly into the market. For example, we recently struck an exclusive monetization partnership with The Preview Channel. From deal to live, we were generating revenues in approximately 3 weeks and have since tripled the partner's daily revenue run rate. We're also pursuing this model on the audio side, signing large podcasts with scale audiences to our network. We plan on rapidly scaling this business over the next two years with a focus on owned and exclusively monetized channels. Finally, I'd like to close out by discussing what's in store for our technology and the implications for our business. As Chris noted, our proprietary streaming platform suite known as Matchpoint is the engine that makes everything we do possible. Indirectly, it's responsible for the vast majority of our revenues, and we estimate that it directly enables the generation of up to half of the company's overall revenue. At its heart, the Matchpoint system enables the scale analysis, processing, distribution, monetization, and reporting of professional video content. We built it to replace a patchwork of dozens of SaaS companies and service vendors, all on top of a highly scalable architecture that allows us to do far more than just our 65,000-title library. Matchpoint is increasingly becoming critical infrastructure for channel operators, OEMs, and content producers, mainly because it's a single source solution. It goes far beyond just operating streaming channels and supports a full stack infrastructure that modern media companies need, including rights and media management, content processing, digital delivery, apps, data intelligence analytics, customer reporting, royalties and payments, and accounting support. As the only end-to-end operating system for media content in the market today, it eliminates dozens of vendors and dramatically simplifies operations, and our cloud infrastructure and modularity make it affordable and scalable while also being extremely cost-efficient. If that was the only thing Matchpoint did, we think that would be a great business to offer partners. But the Matchpoint platform goes far beyond the businesses of today; it's also perfectly suited to take advantage of the business needs for media companies of tomorrow. Here's a few examples of how we're helping partners get ready for the consumer needs in the next era of streaming. First up, AI-based content processing. This ties right back into the recent announcements we made around our AI marketplace. We're using computer vision and machine learning to dramatically improve the speed and quality of adding complementary data around video assets, from captioning, meta tags and scene descriptions, to more esoteric elements like mood, tone and pacing; these data points are the building blocks of critical services for recommendation engines. But in the future, this data can be used to dramatically improve generative video AI and large language learning models. Those generative video models run on datasets known as text-to-video pairs or text that describes what's happening in a given video. Most available datasets are open source, very old, extremely limited and heavily rely on short-form and web video content to feed the models. We believe that our capabilities and technology are going to allow us to generate extremely valuable, highly enriched textual data that will enable advanced generative video models for partners in businesses. Also, let's talk about enhanced next-generation user interfaces. Despite streaming's rapid rise, the means of interacting and finding content has changed very little over the last 15 years. We believe that the next generation of streaming user interfaces will be natural, intuitive, and dramatically improve the relevancy and experience of services for consumers. We're actively working on the commercialization of this effort and expect some major announcements to come very soon. Next up, FAST 2.0. We've talked a lot on these calls about free ad-supported streaming television and how it's rapidly replacing cable. However, the current user experiences and use cases, which are preprogrammed linear channels and electronic program guides, are basically 80-year-old technology and simply can't compete with the engaging hyper-personalized video apps like TikTok and Reels for user engagement and time spent watching. We are currently working on a complete reimagining of the FAST experience for users that will have the comfort, look, and feel of cable with the hyper-personalization experience users love from their social video services. With simple, intuitive onboarding, the user experience will be so customized that no two users will have the same service. To sum it up, not only does Matchpoint provide a single enterprise solution as a streaming operating system for the use cases of today, but we're bringing next-generation technology to support FAST 2.0, feature-based AI chat and data support for generative video AI. We are deep in this market, and I can say that most companies are struggling with video delivery and are years away from even thinking about these kinds of solutions. However, we believe that leveraging our extensive India team, we can bring these services to market rapidly. To sum it up, we're quite optimistic about the upcoming quarter with continued growth in our subscription and licensing businesses. Our ad business recovery should be strong as well with the launch of new channels, new distribution, and a focus on direct sales and sponsorships. And we remain focused on gross margin improvement, managing our cost structure and exiting low and negative margin businesses. And finally, we're committed to investing in technology and scaling Matchpoint with a robust new customer base as we scale up and commercialize its next-generation features. Again, thank you for joining today's call, and we look forward to sharing our Q4 results in the coming months. With that, operator, let's open it up for Q&A.

Yes. Maybe just Chris and Erick, if we think about the strategy and everybody is obviously being cautious with cash flow right now and sort of this uncertain environment. I guess I just want to understand from you guys, a lot of you talked about some, I'll probably call it a pivot, but certainly a lot more technology-oriented. You referenced that directly in your comments, Erick. And I guess I just want to get a sense for you guys as we think of things like we used to think about, the umbrella channel and kind of a broader portfolio, how do we kind of reframe the narrative? Does that change at all with the O&O strategy? And then, I don't know if you're a little bit more cautious in how you go after O&O additions at this point. And then a year from now, if you've got an enterprise solution for Matchpoint, does that start generating and soliciting revenues on its own? I guess how do we think about kind of the revenue mix and kind of the strategy or just the overall framing of what you want us to kind of take away from what you said today?

Thanks, Dan. This is Chris. You just threw an awful lot at us, and I'll let Erick handle the bulk of the response on this. But we don't look at it as a pivot. We see it more as a recognition of something that we should have recognized all along. But what has always given us a competitive advantage and driven the business forward is our technology. And that's what Matchpoint is doing right now, driving us into new business areas like AI as well as Erick described. And when we took a look at our results and we looked at each piece of our business, it was directly attributable to the fact that we own this industry-leading technology. We looked at ourselves and said, 'Hey, that deal, that's about 50% of our business right now.' And we probably really should be taking a hard look in how we report going forward. In terms of our channel strategy, I mean, you've sat on these calls for years, and we've always said at the very beginning when we were adding channel after channel that probably, if people asked us, when are you going to have 100 channels someday? We said probably two dozen specific enthusiast channels was probably our limit, and we got up to more than 30. And that's when we stepped back and said, you know what, we've got a unique opportunity as a portfolio company with a portfolio of channels really to implement business 101, which is pull the underperformers and focus your resources against the stronger performers. We haven't stopped the idea of Cineverse as the Spotify of streaming. We're moving forward very aggressively on that, as you saw from the Amagi announcement. So I wouldn't call this a pivot, I'd call it a recognition of what we're good at, our rationalization of our portfolio strategy that we always intended to do and, more than anything, an overriding focus on cutting costs and driving toward profitability by the end of this year versus just focusing on the top line and adding revenues for revenue's sake even if they're lower-margin revenues. So I'll stop and let Erick finish the answer to the question. Go ahead, Erick.

I just want to add that our scale channel strategy with Cineverse aligns well with our renewed focus on Matchpoint. A key part of Cineverse's growth strategy involves collaborating with OEM partners who lack their own large-scale streaming services. This goes beyond just offering an operating system, like what Comcast is doing with Xumo or Roku. We're providing partners with a branded or co-branded experience that includes many titles and the complete infrastructure to support it efficiently. This approach will allow us to grow this segment of our business rapidly. Through our partnership with ROW8, we have transactional capabilities, and our agreement with Amagi gives us access to tens of thousands of titles. When we work with these partners, they can launch Cineverse, whether as Cineverse or a co-branded version, offering a fully functional product similar to Pluto, Roku Channel, or Tubi without enduring the lengthy build-out period that typically involves significant capital expenditure and employment costs. This is an appealing proposition for many partners, and we believe it provides a clear path to scaling up Cineverse. Regarding our broader channel portfolio, as Chris mentioned, it's crucial to maintain focus given our size. We aim to avoid pursuing small, unprofitable channels while concentrating on significant opportunities like Matchpoint, Cineverse, and our thriving horror business. Our emphasis will be on these core verticals, along with Cineverse and Matchpoint, where we will direct a significant portion of our time and resources moving forward.

Got it. That's really comprehensive and helpful. Erick, just as a follow-up just on sort of underlying trends if you stripped out the channel pruning, how did Q2 look from an ad perspective? And are we expecting kind of normal seasonality this year? We keep hearing kind of choppiness in the general market in Q3 with some hopes of sort of a normal Q4. I just want to know what your thoughts are. I'd appreciate it.

Yes. If we consider the timing of the necessary technical changes, the positive aspect is that these changes were initially planned for the fourth quarter of last year, and we delayed them to avoid impacting our busiest period, which proved to be the right decision. We were aware of these changes, but we weren't certain about their significance. I can't share too many specifics because we can't disclose the partner or platform for confidentiality reasons, but it is a significant partner and a major source of revenue for us. The good news is that this situation is behind us. It will take time to rebuild our audience after removing channels from the program guide and from viewers' favorites, which had been available for years. However, we are seeing that rebuild underway. My estimate for the year-over-year decline, excluding those factors, would be in the high single-digit range, with approximately 25% of the decline attributed to the annual drop. We are still experiencing an impact on our business’s year-over-year ad growth. Our focus has been on diversifying our revenue streams, allowing us to pivot towards subscription services while we refine the ad business to emphasize direct sales. Our outlook shows good improvement this quarter, with significant year-over-year gains anticipated. For our calendar Q4, which corresponds to our fiscal Q3, we expect strong performance and an expected return to double-digit annual growth, probably in the range of 15% to 20%. While this is still positive and aligns with the overall CTV landscape, it doesn’t compare to the exceptional growth during the pandemic years. Nonetheless, we remain optimistic and have numerous strategies to mitigate any unforeseen challenges in the business.

This is Shervin on for Brian. Congrats on a solid quarter. To start, there's a couple of parts to it. How many theatrical releases do you have planned within the next 12 months at this time? And what percentage of them do you expect to contribute a meaningful amount of revenue? And would you say that the planned releases are weighted towards any specific quarter?

We have at least five more theatrical releases planned between now and the end of the year, including titles like Warrior King, On Fire, and the reissue of Terrifier 2. These releases are primarily concentrated in the third and fourth quarters. The Terrifier franchise is expected to significantly impact our business going forward. In just over nine months, Terrifier 2 generated $11.2 million in revenue for us, having been acquired for under $1 million, with only $100,000 spent on marketing. We're looking forward to the reissue of Terrifier 2 later this year, which will include a teaser for the highly anticipated Terrifier 3, scheduled for release in late 2024. We hope to see a continued positive effect on our home entertainment business, which Terrifier 2 helped boost, particularly in terms of increasing subscribers for our Screambox channel and strong transactional video on demand sales beyond just streaming, including physical DVD sales. We plan to maintain this trend while also building the franchise further. We are collaborating with producers to develop additional content, such as podcasts and making-of documentaries, centered around the franchise. This will be our primary driver for new theatrical releases moving forward. If Yolanda Macias, our Chief Content Officer, is on the call, she'd like to add anything further.

Yes, Chris, you covered all the key points. I want to emphasize that we are focused on building franchises. We will continue to concentrate on horror films, with around five theatrical releases scheduled for the fourth and third quarters. Additionally, we are shifting towards more collectibles in the physical format to support that growth and enhance our franchises.

And I would also add one thing. In addition to film titles that are coming, just give everybody a quick update on the various channels. So we're currently deep in GoPro, our partner roundtable, to hit a little bit of a snag. They've been editing video assets pretty aggressively, creating feature-length episodes out of the GoPro assets. So we expect that channel is moving along pretty rapidly. We expect it to be ready to go to market in the early part of calendar Q4. Sid & Marty Krofft is being remastered. If you've ever seen this content, it’s Land of the Lost, 1970s, very cool content, very, very millennial and Gen Z favorites, but it needs to be restored and that process is ongoing. So we're pegging that for a fiscal Q4 launch for the channel, but we anticipate commercial products to start coming out at the end of this calendar year. In terms of the Entrepreneur channel, that channel is rapidly going and ready to go, and that one should be coming within the next quarter or so. We have some other properties that we're working on that we will be announcing in the coming weeks.

No. Not yet right now because we're an indie and we're not signatory, it really hasn't affected us at this point. We'll see if the strike drags on, but we don't really anticipate any for the foreseeable future.

In fact, we received waivers for our talent to promote our upcoming film, On Fire.

Great. That's good to hear. It's good to hear about the progress on the direct ad sales team. How large is the team now? And are you still continuing to expand upon it? And how long would you say it takes for a new hire to be fully onboarded, trained, ready to go? And then last point on the direct ad sales. With the success that you've been having, can you quantify the direct ad pipeline at all or maybe as a multiplier compared to last year, how much more we should expect?

Sure. Currently, our direct team consists of five members, with the latest addition being a skilled sales executive from Morning Brew who has significant experience with luxury and upscale providers. We are in the process of expanding this team and plan to add one or two more sales representatives. Our coverage is strong, and the group is led by someone with sales experience, ensuring efficiency. We believe we have the right number of personnel at this stage. We may consider bringing in one more senior position along with additional support for proposals and branded content. The industry standard indicates that having up to 30% of total inventory sold directly aligns with the largest platforms. While our target is around one-third of our inventory for direct sales, we consider this a solid approach for our owned portfolio this fiscal year. There is significant potential for growth, especially among connected TV providers who own monetization rights but lack sufficient resources to build a sales team. Our sales team is exceptional, with a strong track record and an extensive list of potential partners. The Preview Channel we announced represents one of many partnerships where we take on the advertising management role for our partners, distinguishing our approach from traditional ad networks. We handle the complete monetization of the channel for them, which we believe is a highly sought-after service across the CTV sector, including apps and FAST channels. With our Matchpoint offering and other capabilities, we expect to grow and scale this business rapidly, indicating a significant potential beyond just our owned properties.

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

Yes. Hi, this is Chris. So thank you all for joining us today. Please feel free to reach out to Julie Milstead or our Investor Relations firm, The Equity Group, with any additional questions you might have. We look forward to speaking to you all again at our next quarterly call. Thanks very much.

That concludes today's conference call. Thank you for your participation. You may now disconnect your line.