UFO Moviez India Limited (UFO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the UFO Moviez Limited Q3 FY '20 Earnings Conference Call, hosted by Dolat Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Himanshu Shah from Dolat Capital. Thank you. And over to you, sir.

Thank you, Faizan. At the outset, we would like to thank all the participants for taking time out this afternoon for the UFO Moviez call. We would also like to thank the management team of UFO Moviez for giving us this opportunity to host the call. We have with us Mr. Kapil Agarwal, Joint Managing Director; Mr. Ashish Malushte, CFO; Mr. Ashwin and Shruti Mangar from the Investor Relations team. Over to the management for their opening remarks.

Thank you, Himanshu. Greetings, everyone, and thank you for joining us on the UFO Q3 and 9-month FY '20 earnings call. Let me first quickly run you through the headline numbers and key operating highlights for the quarter and 9 months ended December 31, 2019, before we open the floor for questions. In Q3 FY '20, consolidated revenue stood at INR 1,426 million. EBITDA stood at INR 360 million, lower by INR 46 million compared to Q3 FY '19 because of weaker advertising -- advertisement performance due to slowdown in the economy. PBT stood at INR 179 million [Audio Gap] and significantly on deferred tax assets amounting to INR 124 million were recognized post the scheme of arrangement between UFO and VDSPL. That transfer Caravan division to UFO was sanctioned by NCLT. As a result, PAT grew by 87.2% Y-o-Y to INR 274 million. Total advertising revenue during the quarter stood at INR 427 million, the in-cinema advertising revenue declined by 25.2% to INR 419 million during the quarter. Both government and corporate advertising revenues were under immense pressure during the quarter. Government revenue declined by 45.7% to INR 128 million, and corporate revenue was lower by 10.4% to INR 291 million. Uncertainty continues to loom over the media spends, and we will have to wait -- really wait patiently for the economy to regain its teeth and for the advertisement spend to revive. During the quarter, net D-Cinema VPF revenue impact on EBITDA was INR 12 million, in line with the planned sunset, which we have been informing the market. In 9 months FY '20, consolidated revenues stood at INR 3,946 million, EBITDA at INR 919 million, PBT at INR 428 million and PAT at INR 320 million. The in-cinema advertisement revenue declined by 16.5% to INR 1,180 million during the period ended December 31, 2019. Corporate advertisement revenue during these 9 months grew marginally by 2.1%, while the government ad revenue declined by 38.8% to INR 394 million. Moving to the balance sheet items. As of December 31, 2019, net cash has moved to INR 890 million compared to INR 697 million as of September 30, 2019. Also, DSOs were 88 days for the quarter ended 31 December 2019 compared to 90 days as on September 30, 2019. I'm pleased to inform you that in December, we introduced our new brand identity as UFO Cine Media Network, reinforcing our focus on in-cinema advertising. Along with the launch of the new vibrant logo, we also realigned our advertisement network into 2 powerful channels, which is Prime screens and Popular screens. The Prime screens consist of multiplexes and the Hollywood release centers across the country. And Popular screens are stand-alone and mass appeal screens. We continue to boast a strong network of 3,643 high-impact advertising screens comprising of -- so basically, the Prime and the Popular are almost half and half divided, prime screens being slightly higher than the Popular screens. So out of 3,643, we have 1,847 prime screens and 1,796 popular screens. With the presence over 1,227 cities and towns across the country, UFO had a wide presence in the country in terms of Prime screens compared to even the major multiplex chain. Finally, I would like to mention that we announced an investment of up to INR 200 million by way of convertible instruments over a period of 3 years in Cinestaan Digital Private Limited post our last earnings call. Cinestaan Digital is a media company and its flagship product, cinestaan.com, is an entertainment-focused destination. That is massive database of Indian cinema. It has also created several unique technology-driven products that have synergies with UFO like Pocketwala, exhibition business through FMCG stores, and Cinestaan sentiment tracker. Pocketwala is an Android app that allows a user to get -- watch and share content like movies, educational videos and shows off-line. To that extent, it's a very unique app. Pocketwala can be a good fit for advertisers, for UFO's advertisers who are trying to reach media dark area. Then the exhibition business through the FMCG stores. Cinestaan also proposing to provide opportunities to existing FMCG store owners in rural India to become cinema exhibitors by making minimum investment. This offering has the potential to add substantial number of cinema screens in the rural areas under a low-cost franchise model on the UFO network. The last product which I mentioned, Cinestaan sentiment tracker. It's an online tool that tracks the conversation and sentiment for a movie across all online sources, including social media, online new sources, message boards, blogs and search trends on various search engines in real time. This tool can be added by UFO as an add-on initially as part of its digital processing services and will be a differentiator with other market players. We will really start working on announcing these products and services and begin rolling out them out to the market gradually. We believe that these will help us expand our product and service offering in Tier 2 and 3 towns and beyond in the long run. So in the short run, there is not really a major impact immediately, but these are all long-term initiatives, as I said. So this is a strategic investment, and the benefit from this investment will start accruing after -- in the long run. With that -- I think I've covered everything. With that, I would like to open the floor for your questions.

[Operator Instructions] The first question is from the line of Vikram from Maybank.

Sir, my question is something similar to the -- so in the last few quarters of this year, we saw INOX and PVR come out with a loyalty point scheme. And I understand, obviously, we don't own the screens. But is such an idea even possible with the 3,000-odd screens that we have? Because we have some amount of control, and obviously, you guys will know the owners and all to create such a loyalty point scheme such that we have the data directly with us and that can be used some kind of a data mining, data analysis because this tool was introduced by PVR and INOX for the same reason because of lack of data. And will such a thing even be possible in our case?

You see ours is a -- Vikram, ours is a B2B business, not a B2C business. The diversity in the way these 3,643-odd screens across the country, the way these businesses are run across the country are -- is so widely different. And everybody's thought process and these are owned by probably more than 3,000 people. I mean given the multiplexes and multiscreen owners, leave them out, over 3,000 people, actually. So we really concentrate on the B2B part, not really on the B2C part. To the extent of B2C part, what we do is that, yes, we collect, collate data. We have been trying to roll out our impact system, which gives us very valuable data, which we can extrapolate for the purpose of selling to the advertisers. Our loyalty schemes are there, but they are basically B2B loyalty schemes, under which we try to retain these theater owners with us, that they should remain with us because if theater is with us, then the distributor has to be with us, consumer will come there, the advertiser is with us. So the exhibitor is the most important part of the value chain in our business. So we do conduct loyalty schemes for them, not really for the general public at large.

Because a lot of the screens are as -- they are not run by a huge chain. And they may not have the capacity to introduce their own loyalty points -- loyalty schemes and you guys being such a big player in the entire ecosystem, I thought -- since you were the pioneers of digitization when it came to screen, I thought if such a thing is even possible, an idea that can even be moved in that direction.

I'll take it back. It's a great suggestion that you have given, let's keep our thinking caps on. I'll take this idea back and see if something can be exploited. Honestly, so far, we have not really thought about it. We have always concentrated on retention of the exhibitors, one. Secondly, on data analytics for the purpose of enhancing our advertising revenue. So to that extent, we collect the consumer data, we extrapolate that data and we see how best we can utilize that data. But we are not concentrated on any loyalty schemes. And I agree with you. You see, I go to watch movies in PVR, which is close to my house. And I never book tickets on the BookMyShow for PVR, I always book it on PVR app, because I get the 5% discount, 5% loyalty points. It's a great idea. I'll take it back.

All right. There is a big jump in the digitization revenue in this particular quarter, any particular reason for that one?

No. This is basically because last year, in December, we had acquired a company called Scrabble Digital Limited. Now prior to that, we owned 33% of that company. So it was being clubbed only as an associate. So the revenue was not being clubbed with us, only the bottom line -- 33% of the bottom line used to be consolidated with our accounts. In December, we acquired the balance 2/3 of the company last year. Last year means December '18. So now -- in December '18, because we had just acquired it, it was -- those numbers were not their top line numbers, and this year, those numbers are -- have been clubbed fully as 100% subsidiary.

All right. Understood. And my last question is regarding the VPF D-Cinema. So the long-term target or rather a more constant figure that we are -- that we thought we were getting to is around INR 40 crores. So we are almost there, if we have to analyze our 9-month number. So can one assume that the fall in VPF D-Cinemas is more or less done, and this is the standard number now from next year onwards?

Yes, it's more or less done, it's in the last leg. And I can certainly -- Ashish can certainly share the figures -- anticipate expected figures, also estimated figures also with you, what is left for next 2 to 3 quarters.

Vikram, so as we had given the indication about the planned sunset losses in D-Cinema, the remaining ones are in the -- last quarter, we're expecting about INR 6.5 crores of reduction in net level revenue. And in the next year's first 3 quarters, we would have a total further sunset of about INR 5 crores. So this is INR 6.5 crores plus INR 5 crores, INR 11.5 crores at a net level is a reduction that we are looking at. And it was more on a net level that we used to give an indication about where we are seeing the D-Cinema VPF revenue stabilizing. So what you're looking at is a gross number of INR 41 crores. But at net level, we are expecting it to be settling around INR 20 crores, INR 22 crores on an ongoing basis.

[Operator Instructions] The next question is from the line of the Dipan Mehta from Elixir Equities.

Yes, sir. Sir, is there some structural change in the way the government advertising is happening? Because we've been factoring and banking on government advertising, but last so many quarters for some reason or the other, it was elections earlier, then something else, then something else and that particular revenue source has just never picked up for us last at least for many quarters that I have been observing. So is there some structural change in the thinking that medium such as yours should be given lower allocation?

Well, there is no structural change. So number one, it is not only for us, the government has stayed away from -- central government has stayed away from advertising in the last few quarters, 3 to 4 quarters. If you see any medium which has been heavily dependent, heavily means like our revenue was half and half, 50% was government, 50% was the corporate. So I would say it's heavy dependent. Half of our revenue comes from the government. So any medium, including TV, including news channels, including radio, if you see all of them, all of them have been tremendously impacted, whosever has been depending on government advertising. Government at -- central government advertising is down by -- in this year, almost by 70% to 80%. They've been -- they're hardly advertising, central government. Why we are able to recover? Partly, our degrowth has not been that bad, not 70%, 80% because we also put a lot of effort in getting advertising from the PSUs and from the state government. Therefore, the impact has been less on us. On some other medium, the impact has been very heavy. I would say there is no structural change. That's not the sense that we get. I think because of what we've discussed with various mediums and with the government, advertising being discretionary expense, and this year, there is a huge deficit which the government is chasing, that the sense that we are getting. Because of a lot of budget concessions, we have had 3 budgets in the last 9 months. So all the budget concessions, which are being made by the government, that is where the axe is falling on the advertising expense. So government has stayed away from advertising currently. We are sure that this advertising should get revived. There is no structural change as such.

I don't think so, sir. I think you should be budgeting for lower because this fiscal position of the government are not going to change. We all know what the problems are with the government finances. So that's just my feedback to you. Second question is regarding Caravan. I mean why such a huge drop, and it was supposed to be a sunrise sector for us and you have invested a lot of your effort if not money into growing that particular business, and that also you are seeing 88% drop in revenues, urban revenues?

I completely agree with you. It is a disappointment for us as well. And you're absolutely right, we are putting a lot of effort. It's a special project for us, and we believe we see a lot of potential in it. The drop is largely because last year, it was, again, largely the government advertising, which was there. And some corporate advertising is there. So this year, corporates are staying -- corporate budgets have fallen, the media budgets have fallen. And the easiest target is the rural advertising that is where Caravan concentrate and government has been completely absent. So both these things have been affected. During the current quarter now, as we speak, we are seeing some activity happening in the corporate sector, which, of course, we will report in the next quarter.

Sir, last question was, how much is the D-Cinema loss of revenue in this particular quarter?

E-Cinema?

Yes, the D-Cinema, we keep on losing that revenue over there because of sunset loss?

The D-Cinema. D-Cinema, you're saying, right?

Yes, sir. D-Cinema, D-Cinema.

Right. So on the net level in this quarter, there was a loss of INR 1.2 crores, which was a planned loss, planned reduction in revenue, net level. INR 1.2 crores.

[Operator Instructions] The next question is from the line of Urmil Shah from IDBI Capital.

Congrats on being able to contain the impact on profitability despite revenue weakness. Sir, I just want to hop again on the advertisement revenue. So if we look at Q4, which is generally very important for government advertisement given that -- or we are towards the end of the second month, should we expect the weakness similar to the first 9 months or given that it is an important quarter or the weakness can be more?

Urmil, we are not -- we have not seen any uptake in the government advertising in Q4 so far. It continues to be bad.

Sure. Got that. Sir, and you had mentioned about new initiatives in the impact advertising. I'm talking more about on the measurement things which we wanted to bring to market. It would be good if you could share some update on that.

If you recall in the last quarter, I had briefed all the investors that this is study which was commissioned for Nielsen. It was jointly commissioned by UFO and Qube. And the sample of the combined network was being considered to drive the results. However, since Qube had withdrawn, so we had to actually give up that study. We could not continue with that study. So therefore -- so after that, last time, I had also said that now we are working out an alternative strategy.

That's right.

Yes. So what we have done now is that, as I said -- so the new initiatives in order to uptick the revenues -- advertising revenues is one, we have introduced a new brand identity and which we are creating a lot of buzz around it. And we are getting noticed by the corporate advertisers. We are -- we have realigned our entire network to say, to call it, Prime, because ultimately, we were always considered that, Oh! we are in the rural areas. While more than 50%, almost 52% of our network is the network of Prime screens, which are either the multiplexes or the Hollywood release centers all over the country. And we are present in more than 1,200 cities. We never highlighted that network because we are banking heavily on that study of Nielsen, before that IMRB that is -- bring us the result. Now once we have realized that we have to go solo. So we have relaunched our identity. We have realigned the entire network. We are -- so you'll be surprised that the total prime network, while we are considered as a rural cinema company, our prime cinema network is more than the combined strength of the major multiplex chain. So this is only a realigning. Of course, we are not comparing ourselves with the multiplex chain. And this is how we are trying to realign our selling and which I'm sure -- and we are seeing interest in the market because people didn't know this abstract, we never sold it from their abstract. So we are just realigning it, and we are putting our renewed efforts, and we are creating a lot of buzz. But we have also put marketing budgets behind the whole effort. So earlier, we were pushing more sales. Now a lot of marketing is also happening around that. And I'm sure you might have noticed certain activity in the past couple of months.

Yes, yes, sir. Sir, on -- also on the in-cinema advertisement, please correct me if I have got it wrong. The impact on the blended pricing has been relatively more given the weakness. So -- and will we still have a good headroom as regards capturing more volume? So if we had to look from a more long-term point of view, one, to your point of view, keeping into account that the advertising market does not revive very strongly, how should we look at the movement in the volume and pricing?

I think -- see, it's really a very delicate balance on a day-to-day basis that we have to manage, to be honest with you. While there is pressure on volumes, so there is tendency to drop the prices, but you don't want to drop the prices even at the cost of losing some volume, so that -- because once you drop the prices, taking them up is not really easy. And so far, until unless we inch towards becoming a 9-, 10-minute utilization network, we are really in the -- not in the sellers market than the buyers market. So it's a delicate balance that we maintain to be able to achieve a good final -- good mix of ultimate pricing, the average pricing. There are -- as I have always mentioned in the past also, there are long-term clients who are willing to give you annual business, 6-month business, are willing to put money movie after movie instead of just banking on big movies or big weeks. That is, obviously, we give a very different pricing. People who are opportunistic and who only come to -- for the big weeks or the big movies, their pricing is very different. And that also brings me to the point which you asked last time, the way we are also now driving -- trying to drive the market, another effort, is we are now educating the market that don't think that perceived big movie means that -- and where you are putting your marketing dollars, it doesn't mean that those movies are going to be extremely successful, like look at the example of the latest 3 movies of the Khans. They all didn't work out in the box office. And while the movies like Uri, Badhaai Ho and so many other small-budget movies, which were not anticipated, they worked. So while we are educating the market also and which people are receptive, which is a shock to the people because people always want only big movies is we are presenting that data to the market. And we are telling the market here that listen, ultimately, at the end of the day, you should buy weeks, you should buy -- you should continuously be present for 3 months, 6 months in the market without bothering about the movie because the exhibitor is very intelligent. He is going to run the movie where he can ensure maximum footfalls. And all these sleeper hits, which are happening, which you cannot budget for. So ultimately, this is the kind of capacity utilization you are going to get. And if you only go to the big movies, and if that movie flops, all your marketing budget is gone. So people are receptive, obviously, it will take some time for people to digest that. So that is how we are realigning our offering also.

Sure. Sir, if I can take one more. As regards the last solution that Cinestaan has basically the tracker. I just wanted to understand the synergies because I found that quite interesting.

No, no. It's a tracker where when the buzz of the movie starts, so 8 weeks before the movie starts, they start collecting data of the buzz of the movie, 8 weeks before that from all platforms. And they centralize that data. Now that data becomes very interesting from the point of view of a release of the movie for the distributors. Because what buzz they are having, where they have to do the marketing, where they are weak, they get that indication. So they had this product, it is not really a product which they utilize. Now after our coming in, we are trying to strengthen this product and also market this product through UFO channels. So that industry starts using this product more actively and start -- once the industry, film industry also see success that, oh, okay, I'm weak here. Let me just before, 2 weeks before the release of the movie, let me take care of this area, and they will start seeing the success. So that is what this tracker is. And as I said, it's nothing short term. We are really investing in this company for the long term. And we see a lot of synergy in the long term.

Got that, sir. Just to clarify on this, in the long term, can this actually potentially open up avenues for advertisement revenue are aside than the In Cinema? Maybe digital line of it?

Well, like Pocketwala. Pocketwala, I mentioned it's an Android app, and Pocketwala is an app where off-line, without the use of any Internet, this can be downloaded. And all the data, once any one person in the -- that whole value chain who have downloaded the content, off-line content, even one person connects, he gets all the data. So that is where now -- and this is largely a rural product. So -- and we are seeing a lot of interest. People are downloading content on this. So it won't be really for the in-cinema advertising so much, rather it will open new avenues of advertising in the rural areas through this app.

[Operator Instructions] The next question is from the line of Ankur Periwal from Axis Capital.

Yes, sir. Continuing with the earlier discussion on the advertisement bit, now unable to understand why our realization is dipping because if I refer to your earlier comments wherein you did not want to cut the realization because, as you rightly mentioned, it's very difficult to increase the rates later on. My thought was that because of the slowdown, the minutes should get impacted. But in our case, the ad yield itself is correcting probably steadily over the last maybe 6, 7, 8 quarters? Your comments on that, please?

Well, it's a marginal impact. When the markets are bad, it doesn't affect -- as I said, this is a very delicate balance that we need to do between the minutes -- volume and the pricing. And if you see the impact is not that much. It's a marginal impact, 7%, 8% impact. So obviously, when the markets are bad, when the dollars are not there and everybody is chasing those marketing dollars, obviously, you have some compromise in the pricing as well. But all I was saying was that we are not drastically reducing the pricing that at half the price, I'll start selling the inventory so that I can get those volumes. When I mentioned about the volume, price, delicate balance, that's what I meant. But I -- it's not a major impact. And if you see every quarter, quarter-on-quarter, it keeps going up and down. It keeps about -- like Q2 -- Q3 revenue, the average pricing is higher than Q2, the average pricing.

No, sir. So my reference point here was more -- not actually quarterly, but more sort of over the last, maybe, 3 years, wherein barring Q4 FY '18, wherein we saw a sharp jump in our advertisement revenue on a per screen basis. There was a steady dip in the ad realization. Now one can consider that change in the movies slate, big budget movies, small movies. But over the years, that should not have played out, which is...

I don't think it is the -- that Q4 example is a right example because the pricing of government is fixed. Q4 had a very, very large share, both the years, FY '18 and FY '19, both the years. The government advertising was very heavy in Q4, both the years. And -- so both the years, when you look at the average pricing -- but when you look at the government pricing, average pricing will be high because there is more share of the government advertising in the Q4, and government advertising is at a fixed price, which is higher than the corporate price. So that is where the Q4, you will see.

Sir, related to that, have we taken any price hike for our corporate customers over the last 2, 3, 4 years?

Of course, we -- as I said, that it all is a delicate balance between volume and pricing. I repeat that point. There is no such thing like you take a jump in the pricing. It purely depends on deal to deal, unlike the government business, which is fixed revenue, which is a fixed pricing, it really depends. If somebody is coming to me for a 6-month platform, his pricing will be very different as compared to a guy who is coming only for a blockbuster movie or a blockbuster week and you'll be surprised that difference can be as high as 4, 5 times. So there is no -- in the corporate sector, there is no pricing that you take a price high or there is a rate card. It really purely depends on the negotiation on a deal by deal basis.

Sure. Sure. And has there been any sort of not exactly cross-selling, but are we selling Caravan along with our in-screen advertisement, especially to the corporate guys, maybe in FMCG companies?

Yes. So it is basically the same team now. So earlier in the -- earlier as our Caravan business was being run independently and there was an independent sales team, now the entire process of selling has been merged with the existing corporate and government teams of UFO. Now it is the same people who are bundling the product and who are trying to sell it together.

Sure. And sir, so with this sharp decline in the government advertisement. Essentially, if I look at total ad revenue from in-screen cinema that we'll report this year. We are probably back to, maybe, FY '16 in terms of absolute number. Now government being -- since the nature of the business is slightly different, how do you plan to scale up the corporate advertisement, given that earlier we were expecting the survey to come in and then probably things will turn around, but now even survey is also not there? So how -- what are your thoughts in terms of increasing the share from the corporate or the retail advertisers?

I think I'll have to repeat exactly what I just answered to Urmil in the previous question, realignment, a new brand identity. Realignment of screens between Prime and Popular channels, selling differently because now you don't have the luxury of those numbers, which -- as I said earlier, which took away our 2 years. Putting more marketing effort and marketing the money behind the product selling, so these are all the efforts that we have taken. And we are certainly, and being present on various platforms, creating a lot of buzz around our own advertising, repositioning ourselves. So that is what we have done in the last couple of months. And we are seeing interest emerging, but only numbers will tell us good, when the numbers start coming.

Sir, just one follow-up on that. So when you say creating more buzz or creating more marketing, my sense is we would have already reached out to our corporate or the retail customers there to push. So is there something incremental we are doing, if you can highlight that will be helpful.

You see earlier -- okay. So there was no marketing buzz, which was created around it. If you see in the overall budget, in the overall marketing spend in the country, cinema is really the most ignored medium. And cinema is just like 1% market share of all the advertising, while it certainly deserves more. So when I say marketing, this is exactly creating the cinema -- the market for the cinema advertising, educating people in that more actively and taking our rightful share in that or slightly more because we are actively working on it in the long run from those announced budget.

[Operator Instructions] The next question is from the line of [ Ritesh Bakshi from Padmee Capital ].

Two questions. First, since the last 2 quarters, your presentations do not talk of Nova Cinemaz. I'm sure they are kicking in revenues, profits. Could you just shed some light on it? And why isn't it a part of the overall financials?

Well, so first of all, we are actively concentrating on Nova Cinemaz. Why we haven't -- why we have been silent on this has been because this is really in the project phase right now, it is not in the revenue phase. So revenues are significant. But if I may give you some numbers since you are asking me that question, we already have, under various models -- you see in Nova, we don't create cinemas, we don't invest in the cinemas or on their own. What we do is that we cooperate with the existing cinema owners, on the prospective cinema owners who want to put up a cinema, we help them. We renovate or refurbish the existing cinemas, which are in a bad shape to be able to -- announce their revenue, we do the brownfield, we do programming so that they start getting the content, people who are not getting the content. We have created our own brand, and we do the franchising. So these are the 4, 5 different models, under which we are working very, very flexibly. So just to give you numbers, so what is important is not the revenue at the moment because this is a long-term initiative. Right now, we have 51 operational screens under different models, total. And we have another 39 screens, which are currently under various stages of fulfillment. So total of 90 screens is what we have today, apart from what we are -- additional screens that we are talking about.

Okay. So you're talking on 90 plus 39 in the future, right?

51 now, 39 which are currently under installation in different stages, which we should be completing in the next 2 to 3 months. So within another 3 months, I would say, 3 to 4 months, we would have 90 screens under our belt, and obviously, whatever gets added, a lot of other additional screens are under negotiation right now at different stages, but 90 is committed. 51 is operational, 39 under installation, construction, renovation, whatever model they fall in, so that is where we are.