Cineverse (CNVS) Q2 2027 Earnings Call Transcript

DATE

Friday, Nov. 13, 2026

CALL PARTICIPANTS

• Chief Legal Officer, Secretary, and Senior Advisor - Gary Loffredo
• Chairman and CEO - Chris McGurk
• President and Chief Strategy Officer - Erick Opeka
• Chief Financial Officer - Sean McCabe
• Chief Motion Pictures Officer - Yolanda Macias
• Chief People Officer - Mark Torres

TAKEAWAYS

• Total Revenue -- $26.0 million, representing a 110% increase compared to $12.4 million in the prior year quarter due to the integration of the IndiCue and Giant Worldwide acquisitions.
• Net Income -- $3.2 million, or $0.11 per diluted share, reflecting an $8.8 million improvement over the prior year quarter primarily driven by a non-recurring $7.0 million decrease in the valuation of acquisition-related liabilities.
• Adjusted EBITDA -- $1.7 million, an increase of $5.4 million year over year and the third consecutive quarter of positive results despite operating in a seasonally slow period.
• Technology and Media Services Revenue -- 55% of total revenue, growing from less than 5% in the prior year quarter as the company transitions its business model toward automated platform services.
• Direct Operating Margin -- 38%, which represents a 300 basis point improvement over the first fiscal quarter despite a $4.6 million sequential decline in seasonal revenue.
• Selling, General and Administrative Expenses -- $10.1 million, a $1.3 million reduction versus last year reflecting cost rationalization initiatives that offset the overhead added from two major acquisitions.
• Full-Year Revenue Guidance -- $115 million to $120 million, reaffirmed by management based on forward momentum and the expected impact of seasonally stronger quarters.
• Full-Year Adjusted EBITDA Guidance -- $10 million to $20 million, reaffirmed with technology revenue expected to represent more than 50% of the total mix.
• September and October Revenue -- Over $10 million in September and approximately $15 million estimated for October, driven by political advertising and theatrical releases.
• Cost Reduction Program -- $9 million in annualized savings implemented to-date, with the total target increased from $10 million to $14 million by the end of the fiscal year.
• Content Library Valuation -- $45 million, representing a valuation more than sevenfold higher than the $6.0 million book value as of Sept. 30, 2026.
• Streaming Engagement -- 4.05 billion total minutes streamed, an 8% increase year over year, or 36% growth when excluding three discontinued channels.
• Subscriber Count -- 1.44 million total subscribers, up 2% year over year, with Cineverse channel subscribers specifically growing 62%.
• Dove Channel Performance -- 854 million minutes streamed, representing its most watched quarter on record with 80% year-over-year growth.
• Cash Position -- $3.6 million in cash and cash equivalents at quarter end, with the company's line of credit remaining active.
• Net Working Capital -- Negative $9.7 million, though management noted $8.0 million of related acquisition liabilities can be settled in equity rather than cash.
• Theatrical Marketing Investment -- Over $1.5 million incurred during the first two fiscal quarters to support three upcoming theatrical releases in the second half of the year.
• Acquisition Liabilities -- $4 million in cash-based M&A liabilities settled as of the call date, with only $400,000 remaining to be paid in Jan. 2027.
• Jason Universe Franchise -- Secured 25-year North American rights for the 13th film in the franchise, which management intends to fund internally without third-party capital.
• Home Entertainment Growth -- EST revenue rose 18.8% and VOD revenue rose 16.7% year over year, supported by record pre-orders for the Pan's Labyrinth 20th anniversary release.

Need a quote from a Motley Fool analyst? Email pr@fool.com

RISKS

• CFO McCabe stated, "Net income... was partially offset by... $0.6 million in interest cost from higher utilization of our line of credit and convertible note interest," noting the impact of debt servicing on profitability.
• CFO McCabe stated, "Our reported net working capital as of September 30th was -$9.7 million," identifying a potential liquidity challenge despite equity settlement rights.
• Opeka indicated that the company implemented subscription price increases averaging 25% to 40%, which management acknowledged could lead to temporary subscriber churn.

SUMMARY

Cineverse Corp. (NASDAQ:CNVS) reported a transition to a technology-centric business model as Advertising Technology and Media Services now generate more than 50% of total revenue. Management reported that the integration of recent acquisitions has driven significant top-line growth and a third consecutive quarter of positive adjusted EBITDA, even during a seasonally slow period. The company stated it is executing a $14 million annualized cost-saving program, largely through the migration of manual workflows to its Matchpoint platform and shifting operational roles to lower-cost regions. Management reaffirmed its full-year guidance for fiscal 2027, citing strong momentum in streaming engagement and a high-profile theatrical slate highlighted by the acquisition of rights to the Jason Universe franchise.

• President Opeka stated, "The gap between those two numbers is our market, and you cannot put AI on top of supply chain that still moves by hand," emphasizing the opportunity for the Matchpoint platform to serve media companies transitioning to AI-ready workflows.
• The company increased subscription prices across all services by an average of 25% to 40% between late Oct. 2026 and Nov. 2026 to align with market rates and improve margin per subscriber.
• Management completed the migration of the first Giant Worldwide customer onto Matchpoint, reducing processing time by approximately 40% compared to previous manual workflows.
• Cineverse is expanding its offshore presence by moving into a larger facility in Poland and increasing headcount in India and Moldova to maintain SG&A discipline.
• The company announced plans to roll out its technical integration with Vizio beginning in the fourth fiscal quarter of 2027 following successful trials with four scale customers.
• CEO McGurk stated, "our technology business now solidly represents the majority of our revenue and growth," marking a shift away from traditional content-only revenue dependencies.
• Management intends to fully fund the theatrical release of the upcoming Jason Voorhees film internally, citing the low-risk economics of its distribution model and marketing ecosystem.

INDUSTRY GLOSSARY

• AVOD: Ad-supported video on demand; a model where content is free to viewers but includes advertisements.
• CTV: Connected TV; television sets connected to the internet through built-in capabilities or external devices.
• FAST: Free ad-supported streaming television; linear channels delivered via streaming platforms without a subscription fee.
• Matchpoint: Cineverse's proprietary software platform used for automated content distribution, packaging, and monetization.
• SVOD: Subscription video on demand; a service that allows users to access a library of content for a recurring fee.
• VAUDIO: A proprietary advertising platform that extends audio-based brand campaigns into the connected TV environment.

Full Conference Call Transcript

Operator: Hello, everyone. Thank you for joining us, and welcome to the Cineverse Second Quarter Fiscal Year 2027 Earnings Call. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Gary Loffredo, Chief Legal Officer, Secretary, and Senior Advisor. Gary, please go ahead.

Gary Loffredo: Good morning, everyone. Thank you for joining us for Cineverse's Second Quarter Fiscal Year 2027 Financial Results Conference Call. The press release announcing Cineverse's results for the fiscal second quarter ended September 30, 2026, is available at the Investor section of the company's website at www.cineverse.com. A replay of this broadcast will also be made available on Cineverse's website after the conclusion of this call. Before we begin, I would like to point out that certain statements made on today's call 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 the information discussed in this call is as of today, November 13, 2026. 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 am Gary Loffredo, Chief Legal Officer, Secretary, and Senior Advisor at Cineverse.

With me today are Chris McGurk, Chairman and CEO, Erick Opeka, President and Chief Strategy Officer, Sean McCabe, Chief Financial Officer, Yolanda Macias, Chief Motion Pictures Officer, and Mark Torres, Chief People Officer, all of whom will be available for questions following the prepared remarks. On today's call, Chris will briefly discuss our second quarter fiscal year 2027 business highlights. Sean will follow with a review of our financial results, and Erick will provide further details on our two recent acquisitions. I will now turn the call over to Chris McGurk to begin.

Chris McGurk: Thank you, Gary, and thanks everyone for joining us on this call today. We recorded another very strong quarter, both operationally and financially. Our revenues increased by 110% versus the prior year, driven in large part by the significant positive impact of the two key acquisitions we made toward the end of our last fiscal year, Giant Worldwide and IndiCue. Net income was $3.2 million, or $0.11 per share, a $0.42 per share increase over the prior year quarter. Adjusted EBITDA for the quarter was $1.7 million, a $5.4 million increase, and our third consecutive quarter with positive and growing adjusted EBITDA results.

Importantly, we delivered these strong results during one of our seasonally slowest periods of the year across all our businesses. Even more importantly, our momentum is continuing going forward. In September, we generated over $10 million in consolidated revenues and estimate, on a preliminary basis, that we will record approximately $15 million in revenues in the month of October, our biggest revenue month since the release of Terrifier 3 two years ago. These revenues will be booked in our fiscal third quarter. Very clearly, the promise, synergies, and financial impact of the acquisitions of Giant Worldwide and IndiCue are now being realized across the entire company.

As a result, our technology business now solidly represents the majority of our revenue and growth. We have already seen enormous value and synergies from the technology, customer base, business relationships, and expert leadership brought to Cineverse through these acquisitions, with ad tech and media services representing the largest factor in our more than doubling our quarterly revenue versus last year. Additionally, our successful targeted content acquisition and distribution strategy continues to deliver results.

The most recent example of this was the October 9th Fathom event release of Guillermo del Toro's 20th anniversary edition of Pan's Labyrinth, one of the most acclaimed films of all time, which is also a very worthy addition to our film library and will be a profitable title as well. Combined with the continued growth of our streaming channels and podcast businesses, as well as the significant cost-saving initiatives we continue to implement, we remain very bullish about our competitive position in the evolving entertainment, media, and technology ecosystem.

As such, and given our strong forward operational and financial momentum, we reaffirm our full-year fiscal 2027 guidance of $115 million-$120 million in total revenues and $10 million-$20 million in adjusted EBITDA. Adding to that forward momentum, this morning, which just so happens to be Friday the 13th, we announced that we have secured long-term rights to the latest feature film in the Jason Universe franchise. Bringing back to the big screen one of the biggest and most successful horror film icons of all time, the legendary Jason Voorhees.

This highly anticipated sequel, the 13th in the series, should be another high-impact theatrical and ancillary market release for us, and a tremendous addition to our library, as we have all rights in all media in North America for 25 years on the title. Importantly, despite the high profile and highly anticipated nature of this new Jason franchise property, which we plan to widely release in the theatrical market, we intend to fully fund it internally with no third-party capital. That is because of the unique aspects of our theatrical business model, the low-risk, high-potential return on investment approach we employ, and also the low out-of-pocket economics of our marketing ecosystem.

All six of our last wide film releases, including Pan's Labyrinth, will be profitable, add value to our library, and drive viewers and subscribers to our streaming channels, which is our overall objective with this business. Expect a lot more news with additional specifics on the plans for this exciting, high-potential Jason franchise film release in the near future. Even before this potentially huge franchise film addition, Cineverse's film library was just valued at approximately $45 million, more than 7x higher than its current book value. That is just another indication of how we continue to believe the company's equity is vastly undervalued at present. Finally, we are very pleased to nominate Dr.

Samrat Ganguly for election to our board of directors at our upcoming annual meeting of stockholders. Dr. Ganguly, a former long-term Apple global infrastructure leader with a distinguished decades-long technology and academic career, is the technology pioneer and founder behind our industry-leading Matchpoint platform. Dr. Ganguly is now an AI infrastructure entrepreneur. We look forward for Dr. Ganguly to help Cineverse plan and execute both our technology and our AI future. With that, I will now turn things over to Sean. Sean?

Sean McCabe: Thank you, Chris. To provide a few highlights from our second fiscal quarter, revenues were $26 million, up 110% from the $12.4 million in the same quarter last year. This was primarily driven by our new ad tech and media services revenue streams. Our direct operating margin for the quarter was 38%, down from the prior year quarter of 58%, as anticipated following our Q4 acquisitions of IndiCue and Giant. This quarter's margin, however, represents a 300 basis point improvement over our first quarters, despite a decline in revenue during our seasonally slow period.

We expect to continue to see direct operating margins improve in the second half of the year as the company benefits from seasonal and theatrical revenue increases, and we complete our cost rationalization initiatives. Thanks to these cost rationalization initiatives and overall cost discipline, our reported SG&A for the quarter of $10.1 million is now lower than it was in the prior quarter, even after adding the overhead associated with two substantial acquisitions, and now with revenue more than doubled since. Adjusted EBITDA for the quarter was $1.7 million, an increase of $5.4 million over the prior year quarter, an increase of $1.2 million over just last quarter.

This is continued progress during our seasonally slowest quarter, and also the third consecutive quarter of positive and improving adjusted EBITDA, with only one theatrical release during this time period. This improvement in our operating performance can also be seen by the $17 million improvement in our cash flow from operations compared to the prior year-to-date, despite an increase in content advances of $4 million. Net income attributable to common stockholders for the quarter was $3.2 million, an $8.8 million improvement over the same quarter last year.

In addition to the items included within adjusted EBITDA, $7 million of this increase was driven by non-recurring decrease in the valuation of our acquisition-related liabilities, which was partially offset by higher depreciation and amortization of $1.6 million, driven by purchase price accounting from our Q4 acquisitions, and $0.6 million in interest cost from higher utilization of our line of credit and convertible note interest. The second half of the year includes the U.S. midterm elections, holiday shopping season, our three theatrical releases, with more than $1.5 million in theatrical marketing for these films already incurred during the first fiscal two quarters.

With these lifts to revenue and our cost rationalization program in full swing, which has already actioned $9 million in annualized savings to-date, we look ahead to an exciting second half of the year, which enables us to reaffirm our previously announced guidance of $115 million-$120 million of revenue and $10 million-$20 million of adjusted EBITDA for fiscal year 2027. From a liquidity standpoint, we ended the quarter with $3.6 million of cash and our line of credit still effective. Our reported net working capital as of September 30th was -$9.7 million. However, the company has the right to settle $8 million of this amount in equity.

During the quarter, the company also secured a $3 million loan from BondIt for Pan's Labyrinth to better align the timing of our theatrical commitments and the related revenue so that we can maintain the pace of investment in our company's initiatives to promote growth and profitability. We have also settled the vast majority of our cash-based M&A liabilities, with more than $4 million paid as of today and only $0.4 million remaining to be paid in January.

As Chris mentioned, even though the new Jason Voorhees film we will be distributing is part of one of the biggest and highest profile horror franchises, we believe we will fully fund our investment in the film's release internally and do not foresee a need for outside financing on the project. With that, I'll turn it over to Erick to discuss our operating highlights in greater detail.

Erick Opeka: Thanks, Sean. Last quarter, my comments focused on our execution, integrating the acquired businesses and taking out costs. Today, I want to cover four things. First, the market environment, which is building in our favor and is the reason we built the company the way we did. Second, how those initiatives are already showing up in our cost structure. Third, the five levers we're pulling to keep expanding margin from here. And fourth, where we stand on the cost rationalization program and in streaming. Let me start with the market. We see three forces converging. The first being restructuring.

As we all know, in the recent past, Lionsgate separated from Starz, Comcast spinning its cable networks into Versant, and then most recently, Paramount closed its $110 billion acquisition of Warner Bros. Discovery. There are many other examples, and everyone is either creating a separation or an integration, and behind each one sits years of library reversioning and redelivery that has to be done much faster and less costly than it was done before. The second is AI readiness. There was a recent Adobe 2026 media survey that found nearly half of media companies are describing their content supply chain as largely linear and resource-intensive.

A separate industry survey found that 94% of media executives expect AI to be the biggest operational change this year, while most say they are not ready to deploy it at scale. The gap between those two numbers is our market, and you cannot put AI on top of supply chain that still moves by hand. The third is scale. U.S. connected TV advertising expected to reach approximately $38 billion this year, and political spend for the current quarter was about $2.7 billion in this cycle, more than double the 2022 midterms. Omdia expects global CTV ad revenue to double again to $81 billion by 2030.

There are more channels, more versions, more ad decisionings, more need for ad execution and software in volumes that manual operations just cannot keep up with. All three point to the same requirement, a platform that automates and orchestrates how content and advertising move and interact. That is Matchpoint, and we believe it is the best in its class. These acquisitions gave us the customer scale and monetization level to put that all to work. An example that scales, you can see it in our SG&A. Over the past year, we added more than 120 people.

We took on operations in Poland through these acquisitions, expanded our team in India, absorbed these two new businesses, and carried the full marketing amount behind our theatrical slate. But despite all of that cost base, SG&A came in at $10.1 million, and that is $1.3 million below the same quarter a year ago and roughly $1.5 million behind the first quarter of fiscal 2027. That was with revenue seasonally lower by $4.6 million. Meanwhile, adjusted EBITDA tripled to $1.7 million. Our direct operating margin expanded 300 basis points despite the lower revenue. We have built the company to work this way, and it is starting to show up ahead of our strongest seasonal quarters.

We are going to keep pressing on margin because that is where the next step up in EBITDA is going to come from, and there are five levers that we are focused on. The first is price. Our subscription services on third-party platforms had not been substantially repriced since before COVID, but between late October and last week, we raised prices across every single service, with increases averaging 25%-40%. We expect a meaningful lift in subscription revenue that will far outweigh any temporary churn. Second, our ad-supported footprint.

We are intending to double our podcast network revenue over the next six to nine months, and we are also putting our apps and Bloody Disgusting to work, driving film views and ad impressions across our own properties, so really ramping the ad footprint on those properties. Third, automation. During the quarter, a major broadcaster became our first scale enterprise customer running fully automated on Matchpoint. That work carried software margins, and because the workflow is now built, every subsequent order from that customer is going to carry the same economics. Two of our longest standing customers that are Giant are moving into this model next. This is the margin transition we described last quarter.

It is now starting to show up in real workflows. Fourth, where the work is getting done. We have close to 200 people across India, Poland, Moldova. Poland is expected to double and is moving into a larger facility. Over time, the majority of the work and the hiring in our tech business is going to be in those regions. Poland also is a beachhead in Europe, which is a very small part of our revenue today and will not stay that way. The last is technology. We launched the new version of the IndiCue platform during the September quarter that is already driving margin expansion, and we believe it can be a meaningful contributor in the second half.

We are going to leave the specifics there, as the design is proprietary, but it is working demonstrably well. On Vizio, the technical trials have gone very well. We have signed four scale supply and demand customers during the trial, and we expect the wag to roll out beginning in our fiscal fourth quarter. Now, onto the cost rationalization program. We expanded it by another $1 million-$14 million annualized, with over $9 million implemented. Some of that will be organizational, but most of what is remaining is contractual. We have existing long-term technology agreements with cloud providers and other partners.

Those contracts set the timing, and that is why much of the remaining savings left is going to land in the third and fourth quarters, and we expect to exit the fiscal year at that full $14 million run rate. Normal attrition, shifting roles to our offshore campuses are going to add further benefit next fiscal year. Put together, SG&A growth should stay very modest even as revenue continues to ramp. A few highlights from streaming, where the same discipline applies. Our total minutes in the period grew 8% year-over-year to 4.05 billion, and 36% excluding three channels that wound off during the quarter.

Dove delivered its most watched quarter on record, up 80% to 854 million minutes, with its audience up 43% and minutes per viewer up 26%. People are not just finding Dove, they are staying on Dove. The Dog Whisperer and Yu-Gi-Oh! channels also set records, and our Midnight Pulp cult channel grew 280% on its co-pilot launch. On subscription, our flagship Cineverse channel hit another all-time high, up 60% year-over-year and growing every month since January 2025. RetroCrush set a new high as well, and Roku subscribers across our channels are up 62% over the year. We ended the quarter at 1.44 million subscribers, up around 2%.

With repricing in place, our focus for the coming year is revenue and margin per subscriber, not subscriber counts for its own sake. Quite simply, the market is moving towards automation, and we own the best-in-class DVR platform. The cost base is set, the margin levers are in motion, and this back half is bringing the political advertising, as Chris previewed, plus our film slate and strongest seasonal quarters. We are exactly where we want to be. With that, operator, we can open up the line for questions.

Operator: Thank you. We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Dan Kurnos with StoneX. Your line is open. Please go ahead.

Dan Kurnos: Yeah, great. Thanks. Good morning. Terrific results, guys. I guess first just on Jason on Friday the 13th. Very cute, Chris. I think the question just is, you guys have been steadily de-risking the film slate side of the portfolio. Obviously, the family is producing and financing the film. You guys have distribution rights on this thing. So maybe just talk about sort of the view on capital allocation process, and clearly the 25-year North American media rights, all rights media, et cetera, is going to clearly help continue the strength of profitable films. So maybe just start there, and then I've got some tech questions.

Chris McGurk: Okay. Thanks, Dan, and that's the first time someone has said what I said was cute, but good for you. Yeah, we're very pleased with this Jason deal, and I can't get into too many specifics, but you know it's one of the biggest horror franchises in history, and everyone has been waiting for the next movie.

But what we've been able to do with our film slate and performance in the marketplace is based on the performance of our movies, and particularly the Terrifiers, the way we cut our deals where we share the backend with our producers, and kind of the low out-of-pocket spending that we do from a marketing standpoint, we've been able to attract smart producers and directors. Guillermo del Toro is an example, and the Barsamians are another example, who really look at the economics, don't want to work in the studio system, and understand they have much bigger upside working with us, particularly if we can perform like we performed on Terrifier.

So what I will say on this movie, without getting too specific, is that even though the producers are financing it and the budget is higher than Terrifier 3, our all-in investment is going to be much lower than Terrifier 3. And so we're very excited about that. There's a huge appetite out there in the marketplace that obviously Bloody Disgusting and others have been tracking for this movie, and they've got a TV series that's very, very successful. And we think this can be a big franchise property for us with virtually de minimis risk on our part.

This model now on this movie is something that we want to try to apply even more and more going forward, because again, as I've said, our objective with this business is not to try to compete with the major studios or anything. It is really to add value to our library and have properties that are going to drive subscribers and viewers to our channels. I think Jason is going to be a perfect example of that.

Dan Kurnos: Got it. That is helpful. Just trying to keep you on your toes, Chris. I did appreciate the Friday the 13th announcement. Erick, maybe for you, look, it sounds like Giant and IndiCue are going really well right now. Obviously, political was a boost, but it seems like the underlying trends are also strong, so maybe just kind of parse out those two aspects, what you are seeing kind of post-political. How you are seeing either product development from the IndiCue side and what is driving the strength there, and then clearly, as you pointed out, ton of consolidation in the broader media space.

So it feels like ripe opportunity for you guys to help with library conversion, translation, et cetera, along that path.

Erick Opeka: Sure. So you are correct. So we had an incredibly strong ramp up into and through the political season. As you would expect, following the third, obviously you do not sustain those rates. But we are still seeing strong revenues post and going into the holiday season. So we still believe that this will, given that the dynamics of everything, we still expect this to be an incredibly strong quarter, both off the tailwinds but off the strong performance. We have been working incredibly hard on technology to increase margins on the platform, which we think will be reflected in this quarter.

On top of that, focus on the top line growth by adding new strong demand nodes and partner nodes on the SaaS side. We announced yesterday or the prior day, a deal with. They have about $8 billion worth of media at the end of the years for pretty large advertisers. So that is a very welcome addition to the roster and should make a substantial difference in our results next year. Beyond that, also continuing to improve the supply footprint by strengthening our relationships with our existing OEM partners and labels that we have been adding.

So all on top of that, we have been in technical trials and working with partners to get that product fully ready for deployment by the end of this fiscal year to early Q4, hopefully in January is the target. So we think that will be a contributor to Q4 in this fiscal year and a big pillar of growth into the next fiscal year. So all in all, lots of very strong and positive elements. On the Giant side, obviously, we love the way things have broke out with Skydance in terms of our positioning with our media services business.

We fit right in the sweet spot of where we believe that business's expectations are, which is being able to do more at a lower price. That's our entire thesis. On top of that, we like the team that we've been working with is the continuity team over there. So we feel very strongly that there's significant opportunities there. We've also been expanding our relationships with several of the other studios pretty dramatically over the last quarter in terms of volume. Look, we see the whole industry moving towards a volume base, given the shift towards AVOD, given the midterm to longer-term shift towards AI-based content.

The scale and volume is going to be very hard to manage, and we have really one of the few opportunities to manage that at scale with a platform.

Operator: Your next question comes from the line of Brian Kinstlinger with Alliance Global Partners. Your line is open. Please go ahead.

Kevin Pimental: Hi. Thanks. You just spoke a little bit about Giant, but I guess the follow-up is, as you leverage Giant's relationships to sell Matchpoint into the major studios, how is the sales cycle and consumer adoption progressing?

Chris McGurk: Erick, you want to take that?

Erick Opeka: Sure. There's really two different routes in working with large-scale enterprise partners. As you know, any large-scale Fortune 500 enterprise deployment is a longer sales cycle just due to lots of decision makers, budget cycles, compliance, and other factors. What's interesting for us is we really have the managed services lever where somebody could sign a contract, start working with us in a few days, leveraging the benefits of the platform without having a SaaS contract. Effectively, we manage the deployment of their assets or business on our platform without them having to license or deploy it in a seat-based model. We do both.

We're getting benefits, and I think typically what I think the long-term vision is those servicing agreements that allow us to operate at incredibly high margins using the platform- really becomes a strong, demonstrable sales pitch for them moving on other enterprise products that we have. We think that sort of dual punch, that's part of the reason why we acquired Giant in the first place, was, I wouldn't call it a Trojan horse because it's a way into these organizations, allow them to see and demonstrate the technology, us generate high margin, scalable revenue while doing so, and then land and expand and sell other products. I think that cycle is very short.

The longer SaaS cycle is typical for these big deployments, six-12 months. That's sort of the mix you're looking at.

Kevin Pimental: Got it. Thanks. This is Kevin on for Brian, by the way.

Erick Opeka: Hi, Kevin.

Kevin Pimental: Can you give us some more color on recent CPM trends across the AVOD business? Are you seeing improvement in pricing, fill rates, or advertising demand, and how are you thinking about the trajectory into 2027?

Erick Opeka: Yeah. So this is really a tale of two stories, obviously, because when you have the political season, everything is exaggerated. Fill, CPM, volumes increase. I think we had seen a downward trend in CPMs due to the massive amounts of volume of entrants into the market over the last couple years that have outstripped the demand and pushed CPMs down, especially for kind of undifferentiated or lower tier inventory. I think we've seen those trends start to stabilize and revert in some buckets, in some categories, as the market is, you're still seeing double-digit growth in that segment relative to television. So we think ultimately, CPMs are stabilizing.

Inventory expansion, especially on the OEMs, is not moving as fast as it was a few years ago. It's allowing prices to start to stabilize and increase. So I think, obviously, we're seeing seasonal lift. I think the long-term trends are, we've seen the lower and mid ends of the market kind of bottom out. They're still at the higher end. Your top tier premium is still commanding very high CPMs. But I think, generally speaking, we're seeing the trends going in a positive direction.

Operator: Your next question comes from the line of Laura Martin with Needham & Co. Your line is open. Please go ahead.

Laura Martin: Good morning. A couple things. One is, I know you guys are shifting to a technology-based company, so I am really surprised to hear you talking about adding people in Poland and other countries. I think Wall Street is looking for people to be replaced with technology. Since you are a tech company now, why are we adding people and not replacing people with tech platforms? That is my first.

My second is, taking pricing on your subscriptions up by 40% says to me strategically you are getting out of that business, since I assume even if demand is inelastic, it feels like you are going to make a little more money, but you are going to lose a lot of subs with that kind of big price increase. So I am interested in strategically where that business fits in your future. Then I really wanted to talk about this working capital number. So, $9.7 million use of working capital and the total revenue was like $26 million. Could we go into what is happening in the working capital components that is driving such a big use of cash?

Thank you.

Chris McGurk: Thanks, Laura. This is Chris. Thanks for joining the call. I will take the first question that you asked, and then I will let Erick and maybe Sean take the next two. We are not adding bodies. As you can see by our results on SG&A, the costs are coming down. What we are doing is we are shifting bodies from the U.S. to lower cost positions in India and Poland and Moldova, while we automate more and more and more and save more money. So, as Erick said, you are going to continue to see significant cost savings going forward. We have realized about $9 million in total right now.

Our full target, including contractual stuff above the organizational savings, is going to be $14 million. So, we are not adding headcount. We are shifting some headcount to much lower cost operating centers overseas. Erick, do you want to take the second question?

Erick Opeka: Yeah, sure. The price changes have been both structural. Smaller independents like us have had less leverage in the past to change pricing. I think our prices have not kept up with the price increases market-wide, so we were pretty dramatically under market on pricing. Some of our services were as cheap as $3 or $4 subscriptions. On a relative basis, they are still going to be very cheap. We are just doing a lot of catch-up. Rather than graduating it, we are accelerating it. We are not planning to exit the subscription side of the business. In fact, we are making improvements and investments in that business in terms of better content, better technology to attract more users.

We already did a Even though our DTC side of our revenue is a smaller base relative to our third-party distribution, we already enacted those price changes earlier than this, and we did not see a meaningful churn. We think, just given that these are niche vertical products with a lot of sticky subscribers, we are not seeing the same churn that maybe one would expect. Ultimately, we will see how that plays out with the third-party services. Some of these services were going from $5-$7 and so on, or $3-$5 and so on. We are coming from an extremely low base already. Sean, I think you can discuss the working capital question.

Sean McCabe: Yes. Yeah. Working capital, the position on the balance sheet, just to baseline, is -$19 million last quarter. It is -$9.7 million this quarter. We highlighted that $8 million of this relates to the valuation of our deferred consideration and earn-out liabilities, which we have the right to settle in equity. With the $1.7 million that is remaining, I would say right now, we are building towards theatrical releases, which happen in the second half of the year. That means marketing, content, spend.

Before we are incurring those costs in advance of the revenue, and I would say on the cash flow from operations side of things, the number there is -$4 million, which is actually very in line with the growth in our content advances. If that helps.

Operator: There are no further questions at this time. I will now turn the call back to Chris McGurk for closing remarks.

Chris McGurk: Thank you all for joining us today, and if you have any further questions, please feel free to reach out to Michael McHugh with those questions. We look forward to speaking with you all again on our next quarterly call. Thank you very much.

Operator: This concludes today's call. Thank you for attending. You may now disconnect.

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.