Shemaroo Entertainment Limited (SHEMAROO) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Shemaroo Entertainment's Q3 FY '20 Earnings Conference Call hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Yogesh Kirve. Thank you. And over to you, sir.

Thank you, Sruthi. Good afternoon to all the participants, and thank you for joining in. We, at Batlivala & Karani Securities are pleased to host this earnings call for Shemaroo Entertainment. To discuss the results and the business outlook, we have the senior management of the company represented by Mr. Hiren Gada, CEO and CFO; and Ms. Kranti Gada, COO. I would now hand over call to Mr. Gada for his opening remarks which will be followed by a question-and-answer session. Over to you, sir.

Good afternoon, everyone, and thanks for joining our conference call for the third quarter ended financial -- third quarter financial FY 2020 ended December 31, 2019. For the third quarter, operational income was INR 97 crores which has a decline of around 35% on a year-on-year basis. EBITDA for the quarter was INR 19.5 crores with a EBITDA margin of around 20%. Profit after tax was at INR 8.5 crores with the PAT margin of 8.76%. The net expenses on our various new initiatives for the quarter was around INR 7 crores. So if you exclude those, our EBITDA and PAT margin were actually in line with our historical performance of recent quarter. Coming to the year-to-date performance, the operational income for 9 months was approximately INR 390 crores. EBITDA was reported at INR 80 crores with EBITDA margin of around 20.5%. Profit after tax was INR 44 crores with a PAT margin of 11.3%. Again, the year-to-date expenses on various new initiatives were around INR 15.7 crores. For the third quarter, digital media revenues grew by 13.2% to around INR 48 crores from INR 42 crores. In the same quarter last year for the 9 months ended, digital media -- sorry -- and for the 9 months ended, digital media revenues have grown by around 20% year-on-year to INR 152 crores from INR 127 crores last year. Our performance on YouTube continues to grow well. Shemaroo FilmiGaane was the 6th most viewed channel in India and 36 -- 6th most-subscribed channel in India, actually, and the 36th most-subscribed in the world. We crossed 30 million subscribers on YouTube -- on our YouTube channel FilmiGaane and 20 million on ShemarooEnt. Traditional media revenues has been a big contributor to the overall decline in the top line. And traditional media revenues have declined by 54% to INR 49 crores from INR 106 crores in the same quarter last year. And for the 9 months ended December, traditional media business has degrown by about 23% to INR 238 crores from INR 309 crores. Overall, as you are aware and as we have discussed in the previous earnings call also, the macroeconomic environment conditions have been [ very telling ], I mean, for the media industry, primarily due to reduced advertisement spending. Overall economic slowdown and sectoral challenges faced by pretty much all sectors, and especially the FMCG and automobiles which are large [ vendors ] have resulted in a reduced or delayed advertisement spend and this in turn has reduced the content investments by our client base, therefore affecting our traditional media business. And this was evident across the entire -- overall media sector as well. It is important to note that this segment is highly cyclical in nature and linked to microeconomic factors. However, we have been seeing certain sector certification getting resolved as early as -- or as late as January of this year. And there have been some improvement in sentiments since January therefore. Also, we have taken various organization and cost rationalization measures in order to offset the impact. Despite the economic slowdown, we continue to strategically yet cautiously invest in our future and we remain confident of our business model. Many of these initiatives are at [ a latent ] stage of investment and hence have impacted the overall margins. Most of the investments are expected to reach breakeven levels in FY '21 and start contributing thereafter. Keeping this in mind, this year, apart from investing in our regular business of acquiring titles, we have invested in new people and adding new initiatives. We have mentioned before that we are going to gradually transition from B2B, B2B2C and B2C. With this in mind, we launched ShemarooMe at the end of the last financial year which is our subscription-based OTT digital platform, working primarily on our B2B2C partnership model and available on existing platforms like telecom -- telcos like Vodafone Play, Airtel, et cetera as well as various new platforms. Attraction on this platform so far has been encouraging and we have launched ShemarooMe globally and is now available in 150 countries. In this quarter, we also signed strategic partnership with MX Player where -- for ShemorooMe and it has been made available in addition to that on Cloudwalker TV, TCL TV, Android TV globally and Roku devices in U.S. Our Preloaded Devices launch -- which were launched in Q1 of this financial year have also seen a very good response and appreciation from consumers. We are currently focusing on building our distribution there and we expect to reach critical mass of distribution approximately by the end of the current financial year. We launched 2 new preloaded audio speakers in this quarter which are Amrit Bani which is a Sikh devotional speaker and Sai Bhajan Vaani, both were launched in this quarter. As you know, our core strength is on enhancing monetization of intellectual property rights. The company has over the years built a strong regional library in addition to Hindi movies. In order to entrance [ ourselves deeper ] and announce the distribution and monetization of our existing Marathi title, we launched a free-to-air Marathi movie satellite channel called Shemaroo MarathiBana in December 2019. They are currently available on DD Free Dish and leading DTH and cable operators. Lastly, let me conclude by saying that the management would like to assure you that we are very attuned to the headwinds of facing the sector currently. And everyone in the company is working diligently to counter this. And we are confident that in the long run, our overall strategic initiatives will bear fruitful outcome. Now I open the floor for questions.

[Operator Instructions] We have a question from Mr. Sachit Khera from Smart Equity.

I have 2 really brief ones. Firstly being, Vodafone, historically, you've mentioned as a reasonably large customer in our telecom vast segment. I mean, considering the scenario that is playing out and considering the investment options that they have in front of them, would that be a further strain in our future digital revenues?

At this point, I can say that we have not seen any such concern payout in our operating relationship with Vodafone and the operations and the business with them continues to be normal as it has been for last several years. If there are any challenges, we understand the whole AGR issue is affecting the -- at least through incumbent telecom operator. At this point, it has not been -- I would say that it has not been affecting any of the existing operations in any way. So we don't know how it will play out in future.

Fair enough. But as a worst case scenario, if we were to model, what kind of digital revenues might potentially be impacted if they [indiscernible]

I'll put it slightly differently. See India has a certain historic base of telecom consumers, right? So if 1 operator were to exit, ultimately the consumer has to migrate to 1 of the other 2 operators, where again, we are present in adequate measure. So in that sense, I don't see too much of a risk of the business. I mean, there will be a transition probably. But ultimately, I don't see that behind the core there is consumption happening. And that I don't think goes away in any way. So yes, I mean, maybe instead of -- so to give you another perspective at some point, there were more than 10 telecom players, today there are 3. So even on -- so ultimately the consumers have migrated to 3 out of 10, right? So our revenues would have earlier come from 10 accounts, today it is coming from 3 accounts.

Okay. But I mean -- all right, never mind, sir. Maybe if I can proceed to the next one. And as we see most of the broadcast networks are investing quite heavily in their own OTT platforms. And I believe that other than the macro headwinds, their investment in the Bollywood movies are -- the tradition what [ regional space ] has. Henceforth, they [ back feed ] if I may. Do you think this can continue to be a slightly structural story then, obviously there might be a rebound from the current loans? But it might be that if they have future funds available, they'll continue on their OTT platforms with the fresh content rather than requiring more liabilities from players like us.

So 2 things I would say. One is, we own a very strong library on digital side also. So any move towards investment in digital side, in a way, for us, we are at a point in diagnostic for us because for us we have platform and technology diagnostic being a content owner. So that's one aspect. But more specifically to answer whether this is structural or technical, at this point, what I can say is that because of revenue contribution, television is a substantially higher revenue contribution to everyone. Yes, everyone has been investing in building their digital libraries, so to say, or digital originals or whatever you may, digital content to feed their digital platforms. But let's not discount the fact that overall television continues be a very strong revenue share for -- revenue buy for each of them. And therefore, it is highly improbable that they will reduce investment in something which is their core bread earnings kind of an impact. What currently is probably happening is part of the cash flow generated here is being kind of diverted to invest in the digital side. I don't see that as a structural change. Also -- I'll also add in terms of -- if we see the consumption trends on television, they continue to remain very strong. So currently the monetization of that consumption is -- has taken a hit due to the economic environment. But the consumption trend on television continues to remain very, very strong.

Yes. We -- as investors, we expected that the subscription growth will offset the ad revenue decline, but that hasn't happened because we have very aggressively reduced investment in their traditional space.

Yes. In fact, so -- so what also happened the subscription is very new and to a certain extent, I would say, there is at least on the first 2 quarters all uncertainty on the subscription side due to the NTO settling, the new tariff order settling in. But now it's kind of getting, to some extent, a little or new tariff order impact is there.

For the subscriptions...

[ Uncertainty on ] subscription.

Yes. The [ increase in ] subscription revenue was -- seemed to offset the loss in ad spend due to the new tariff order impact, not due to the economic slowdown impact. So the issue that -- larger issue that is taken is the macroeconomic issues which the subscription revenue can offset definitely loss in the viewerships or whatever and therefore the impact of the ad revenue, but it cannot offset the larger macroeconomic impact.

And as far as current scenarios are concerned, you don't see ad budgets return -- sorry, the investment budgets of your customers returning?

No, I don't think that is the case because this is a consumable -- content is a consumable for them. I mean, if someone has a [ 5-year ] period, every day they are consuming that period on a daily basis. So if they can probably postpone it by some period but the [ underlying ] base comes back and hits viewership, it hits the competitive position, many things get hit. So...

We have a question from Mr. Nishit Shah from Nepean Capital.

My question [indiscernible] on the digital media business. So [indiscernible] you mentioned that around 20% to 25% growth would be expected going forward. But in this quarter again, we've seen a 13% growth and the base should grow at this point. It's not really high. So what is the reason that this kind of growth is taking place?

So on the digital media side, one of the few things that we have earlier also been discussing or in fact on the first quarter of this year, is about the decline on the telco business. The telco business which was probably 1.5 years back had more than 50% and now in this quarter it declined to in the range of 20% to 25% of the overall contribution. It is a mix of [indiscernible] that business has actually gone down, so it has pulled down the overall growth by a few percentage points. But the business on YouTube continues to grow well, syndication business and ShemarooMe, I mean, all the 3 have been contributing to the growth. It's the telecom business which is currently at 20%, 25%, we think that it may probably settle in at around between 10% to 15% of the overall business of top line.

Okay. So just moving further on the YouTube and ShemarooMe kind of things. So one question is what proportion of your digital media revenue is YouTube? And second is, if you can give any metric to track ShemarooMe subscribers or the daily active users on this -- on ShemarooMe?

Okay. So -- so the overall breakup for our -- the digital business is telecom business is around 20% to 25%, YouTube is between 35% to 40% which was below 25% -- below 30% just 3 or 4 quarters back, so that has grown, and the syndication and ShemarooMe combined is at between 35% to 40%. So the telecom business is now given way to these 2 other revenue streams. So that was what I was alluding to that -- the mix has kind of changed. And secondly, so ShemarooMe, as we discussed earlier also that this is not a B2C kind of a business, so the whole focus is B2B partnerships. So the usage metrics are derived from our B2B tie-ups from different telecom operators as well as different platforms where we are partnering, like, for example, as I mentioned earlier that we have MX Player or VR. Now each of these are very, very, varied -- different arrangements as well as different consumption metrics and user metrics are there. So this is -- it is difficult for me therefore to, at this point, give you -- give a better picture on the overall number because different players are skewing in the same way and therefore, the numbers are, at this point, not in a position where we can -- I mean, for us, it's breakup, the way we also look at it is each partnership is viewed differently. So at an aggregate level, it's kind of not giving a clearer picture.

Okay. So another question was based on the new businesses with the preloaded participant receive targets, I mean -- so if [indiscernible] on the number or revenue of that? Or is it early days on that front? And I have another question...

Just to finish with, I have mentioned earlier also, that the distribution rate is still expanding. I mean, some key distribution has gone onstream as late as last week. So we still haven't reached that critical mass on that -- on that distribution. Until that time, again the number it's -- we are not -- we can't talk of the numbers in any case until that time.

Sir, Mr. Nishit Shah's line is disconnected. I'll just take the next participant until then. Ms. Shikha Mehta from Equitree Capital has a question.

On last -- on the last con call, we had suggested that this year we'll see a negative single-digit growth in the traditional media. But this quarter, it's degrown quite significantly. And if you see for the 9 months also for almost 23% of the degrowth. So for the next quarter, what are we suggesting? Are we still going at a single-digit negative growth? Or is it going to be higher?

When we were -- the last call that we had was in the mid -- in the second half of October and subsequently, what we saw a play-out in the rest of the quarter actually was quite disappointing even for our team in terms of the overall traction on that front, which -- so obviously it has skewed the picture to that extent. And therefore, definitely, the growth for traditional media or rather, I will say, the degrowth for digital media will be in double-digit for the full year -- for traditional media, sorry, for traditional media, I'm sorry.

So it will be around 20% to 25%?

It's very early days to, at this point, comment on that because as I mentioned during my opening comments that there has been an upturn in the sentiment, how much of that gets translated to final closure of this prior to this end of the financial year will be difficult to at this point [indiscernible].

All right sir. And so the amount is invested in our new initiatives. So far this has been around INR 15 crores. So is that how it's going to be going forward sequentially? Or is that a bit skewed for the last 9 months and will be less going forward?

So it will continue...

At the same run rates?

So I think at least if you ask me, the quarter run rate definitely will continue last quarter for -- at least for this next quarter. Now next financial year, at this point, I'm not able to comment. And as I said even earlier in my opening remarks is that, we expect that most of them should turn or get through their investment phase in the next financial year.

Right. So when you say the quarterly run rate will continue, you mean that of INR 7 crores or you mean INR 15 crores for 9 months, that run rate?

No, I meant INR 7 crores. Yes. But to be honest, I -- is very difficult at this point to give more specifics, but...

But these are long-run strategic initiatives and in the next 3 to 4 quarters, we will definitely invest to strengthen them so that they can contribute significantly in the future.

And can you give some details on what these initiatives are?

Well, I've listed out a few of them in my opening comments, like the ShemarooMe, the devices business. So there are 3, 4 different initiatives.

All right. And could you give some guidance on the ShemarooMe revenue?

As I just mentioned to the previous question also is that at this point in time, I'm not in a position to give that.

Okay. And could you just -- the inventory [indiscernible] gross additions?

Sure. I'll -- so the working capital, this is inventory and receivables combined has actually -- it's been flat. Inventories have gone up marginally where receivables have come off. That is the overall picture versus September balance sheet.

Okay. And could you give cash flows from operations?

So cash flow from operations has been negative. The exact picture I can note down and give you the figure -- we can give it a little later.

Okay. And also could you comment on whether we're still maintaining IRR of 18%? Or when you will be changing that?

There is no [ question to ] clarify on the cash flow, I'm sorry. What I meant is that if we factor in this investment, then with that the cash flow definitely would be negative. How much it is, I will be able to do, but to suffice to say that, if we look at the overall profitability picture, net of the investment, actually the EBITDA margins are fairly in line.

Okay. So without the INR 7 crores investment, your cash flows would be positive, right?

I'm not able to comment right now. So I have -- that's what said that we will just give it a little later.

Yes. And could you mention something on the IRR of 18% that we normally maintain? Are we still maintaining that or what?

In our sales that we have booked this year -- this quarter, at least, we have maintained that. As we have earlier discussed in Q1 that we had done a few low-margin [ add-ins ]. But in this quarter, at a portfolio level, whatever we've done business, it's at 18% benchmark.

Sir, we have Mr. Nishit Shah on the line.

Hello? Yes. Yes. So just wanted to know one more thing with respect to restaurants. So we have opened 2, 3 cloud kitchens in Bombay. So what is the idea behind that? And what kind of investment are we doing in that respect?

Sure. So as -- in fact, we shared this last quarter also, is that, overall, the whole idea for us is that we have -- for us everything is linked to Bollywood and how we can further monetize the content IP on everything we have, beyond just the traditional ways of monetizing it, whether it's television or even the new emerging digital space. And what we had looked at a small experiment in terms of saying that, can we add a Bollywood factor to food and that was a part that we had put across. And we -- to kind of put a different -- the thing is, it's not just -- I mean, so we have been discussing the different players across different categories to see if their licensing opportunity -- so different kind of way how we can look at adding Bollywood to different day-to-day kind of categories or activity that we do. So this was...

It's like a proof of concepts.

Yes. It is a proof of concepts.

So that we can showcase that we can actually add value to realize -- to create differentiation for this industry, and hence, it was a small experiment that we are running.

Yes.

Yes, but going ahead, what are the plans for this? Are we planning to invest more? And what is the amount which is invested currently at this point of time?

Yes. All I can say is that the investment is miniscule. It's actually less than INR 1 crore. And at this point, still the proof of -- the PoC is still going on. We are experimenting with different assets in terms of the overall Bollywood experience and packaging and things like that. At the same time, we also -- so at this point, the way forward has not yet been finalized for that.

Okay. And how has the response been?

Until now I feel the response has been extremely encouraging. The user comments are extremely good. The user ratings on the platforms are phenomenally good. The repeat orders are very good. So initially that at least gives us a good confidence that there is a traction or people are connecting to the whole concept and the Bollywood films. But it's too early days and food is not a core business for us, which is why even we are very cautious in terms of how we want to take it forward overall. So there are different possibilities in future, but right now, it's too early to comment on any of that.

Yes, [indiscernible] on the call. So just wanted to know, with respect to the Bhajan business, the preloaded speaker, what are the volumes with respect to that?

Sorry, I can't share that due to strategic reasons at this point due to strategic reasons.

We have a question from [ Ishant Gavesh ], an individual investor.

My question is, what will be the strategy going ahead on content acquisition? Because as of late, the recent Bollywood releases which we have seen already have streaming tie-ups with either Netflix or Amazon Prime. So going ahead, what will be your strategy on content acquisition?

So as we've in the past elaborated on the business model is that we typically come into the second monetization cycle of the business which is normally post the initial 5 to 7 years. So most of the current deals that we are seeing from new films are -- continue to be in that 5 to 7-year period time frame. And therefore, there's good availability of content pipeline for content which has completed 5 to 7 years of release. So to that extent, I think we are -- I don't see that as any challenge.

So we'll be buying this content after 5 to 6 years from this opening [indiscernible].

Yes. That is added now and even current strategy has been defended in the second, third or later cycles, it's only when we enter the content. Pre-release risk is something that we have not been -- we've been avoiding as much as possible. And even for cycle risk also -- for cycle investment also is something that we have not been doing. But if you look at, for example, we bought the movie like Jab We Met or a movie like Welcome, which we [ won or ] Golmaal, Golmaal Returns, et cetera. They were all bought in the second or third -- physically second or subsequent cycle of monetization post their release. So that really -- for us, that is the -- has been the strategy of our progress for several years and that's kind of elaborated in the business model also.

We have our next question from Mr. Sarvesh Gupta from Maximal Capital.

Sir, one thing on the traditional media side, we have been looking at various industries as well as within media also companies and print area, other sectors. So obviously, all of them have been affected. But nowhere I have seen more than 7%, 8% impact, even on a Y-o-Y basis. In your case, you have this all of almost 50%, I think this is unprecedented. So how would you -- what is the reason behind it? I mean, is it a lack of execution or, sir, sounds very scary if the revenues come off by 50%. Other companies are also facing challenges, but degree of damage is just too much in our business.

So I understand what you're saying. And even I -- to an extent, I would agree to that, that at least, it seems quite a steep fall. Two things I would just say here. One is that the core fundamental -- the core traditional media business which is -- which we indicate to basically the broadcaster is to that extent a deal-based business. And therefore, there is a certain amount of lumpiness in that business. So if you -- therefore even in the past I have said this, that a quarter picture sometimes may skew things around. But if you look at a longer period of a year or so, that's when you get a better picture is what -- in the past also I have said and that continues to be because it is a deal-based business. And sometimes the large deals got postponed by a couple of weeks, it goes into the next quarter. So that is one of the aspects. And other is that, the whole content investment for many of the platforms has been definitely highly muted for multiple reasons. And to some extent, the movie category got affected probably disproportionately, now even I would also think. So in -- there's a third aspect also, like, in addition to the macro issues, there were some structural micro issues -- sorry, structural is not the right word, but some micro sectorial issues also with some specific players. So it's difficult for me to elaborate clear specific challenges, but I can say that some players were going through some mergers or those kind of things. So there were some slow down even linked to those kind of issues.

Understood. So second point is, of course, movie category getting disproportionately impacted during this slow down. But first and third are related to your own business, which is on the customer side as well as your deals not happening in this quarter. So can you quantify a bit as to what can be the spillovers? Or what can be the average revenues that you could have earned or can earn going forward in this business? What will be your normalized level of business in this quarter or coming quarter?

We were hoping, as I had even mentioned in the previous con call also, so that we were hoping to have a year of degrowth by a single-digit percentage. That was where we were kind of hoping. Now some of these issues -- and if I have to even rewind back a little bit over last few years or quarters, it's not the first time we are seeing a technical slowdown in the industry or business. Typically, in the past, these technical slowdowns have lasted probably a few quarters and they have bounced back and moved on because, as I said earlier also is that, finally, it's a consumable. So the content created is getting consumed. If I license 5-year period and you -- 3, 4 quarters down the line, your period is down to 4 years kind of a thing. So you -- your -- the pressure to replenish your library or invest kind of comes back immediately. This time, however, there have been multiple issues right from new Harry Potter and all of that, which has kind of prolonged the whole cycle beyond what, I think, almost anyone could have probably imagined. Including, as I said, a few sector-related challenges also. So if I were to combine that, I think this quarter has definitely been slower than what all of us had anticipated and expected. So if not -- you would have -- we were, as I said, the outlook at the beginning of the year or -- probably, at the beginning of the year but somewhere in the middle of the year, definitely, for us also was a negative single-digit kind of a thing for traditional media.

Yes. But this quarter, how much did we lose out on -- with regard to specific issues of the customer as well as some deals not happening within the quarter close because of lumpiness? So can we expect a INR 75 crore quarter coming in Q4 or -- -- because the INR 100 crores has come down to INR 50 crores, so where are we in the normalized scenario right now given the environment?

So it is very difficult at this point to give you specifics. But as I said even in my opening comments that the sentiment has improved in the first few weeks that we have seen. There is a level of [ worry ] and conversations with different kind of clients that's going on [indiscernible], et cetera so -- but how much again of that will we get -- will actually close and translate in this financial by 31st March, it's too early days for me to comment on that.

Okay. And can you comment on our -- so debtors would obviously come down in our business because the revenue has taken a huge beating. But can you tell me about the increase in your net inventory and debt?

Sure. Debt has gone up by -- 1 second. Debt has gone up by around INR 20 crores. INR 22 crores to be more specific, INR 22 crores.

And so that is September balance sheet?