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Eros International PLC  (NYSE:EROS)
Q3 2019 Earnings Conference Call
Feb. 21, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Eros International Plc's Third Quarter Fiscal Year 2019 Earnings Conference Call. Today's conference is being recorded. This call is being broadcast live on the Internet, and a replay of the call will be available on the company's website. This morning, the company published its earnings press release on its website, erosplc.com.

The company would like to remind everyone listening that during this call, it will be making forward-looking statements under the Safe Harbor provisions of the federal security laws.

The company's actual results may differ materially from those projected under forward-looking statements. During the call, the company will also discuss non-GAAP financial measures in talking about its performance. You can find a reconciliation of these measures to the GAAP financial measures in this company's press release.

I would now like to turn the call over to Mr. Kishore Lulla, Executive Chairman and CEO of Eros International Plc. Please go ahead, sir.

Kishore Lulla -- Executive Chairman and Group Chief Executive Officer

Good morning, everyone. Thank you for joining this earnings call today. It is with great pleasure we share with you a very strong set of results this quarter, cementing our market leadership position, solid business fundamentals and continued growth in our digital platform, Eros Now. Our passion for creating, developing and innovative distribution of premium content continues to grow as our company evolves.

As we continue to grow our digital platform and adapt to the dynamic global media landscape we operate in, I wanted to take this opportunity to reflect on the journey we had made so far. It has been over five years since we have went public on NYSE, but our journey started long before that. Our company was founded in 1977 by my father, may God rest his soul in peace. The heart of our company is very much the marriage of premium content and innovation. Adaptation of innovative formats run through our 40 years history from pioneering of the Indian home video market in 1980s with Betamax and VHS to launching a digital film channel in '90s to adapting to DVD in 2000, and creating the first premium Indian content through destination Eros Now.

At the core of our strategy is innovation, both in new technologies, new markets, new methods of distribution. The distribution network, and know-how we built over years allowed us to create the first fully integrated Indian studio model in mid-2000. Though the studio model we created transparency across the film ecosystem, which helped attract more talent and investment in the industry. This also came with increased competition, which we welcomed. Now we find ourselves in the position of having the largest integrated studio as well as the largest OTT platform something that has never been achieved anywhere worldwide in the media landscape.

From a market position, we are second to none by any measure. 36 out of the top 10 -- 110 highest grossing box office films over the past last 11 years came from Eros Now and -- from Eros, sorry. And our Eros Now platform has largest content library over 12,000 titles and most paying subscribers,15.9 million of any Indian OTT platform. This gives us a significant competitive advantage over rivals, a position which has taken years to achieve and is unrivaled.

The potential opportunity we see for Digital India and what that means for Eros Now is enormous. This opportunity is quickly turning from dream to reality. Internet adoption has been taking place before our eyes at the rate faster than anywhere else in the world, save China. Similar to China and unlike the US and Western markets, in India the Internet is mobile. Only two years ago, we were predicting smartphone users to reach 400 million by 2020. Current forecast now say the number is 750 million. Our goal is to be the ultimate destination for people to watch high-quality premium Indian content globally.

As we continue to grow our curiosity for innovation has not been curbed (ph). As the lines slowly blur between real and reel world, we are in process of creating an alternative reality experience for our consumers, which will change the way we all consume content today. The Eros Now Extended Reality experience will be second to none, and we look forward to telling you more about it and experience it soon in the future.

Thank you and I would like to get Rishika to come and address. Thank you.

Rishika Lulla -- Chief Executive Officer-Eros Digital

Thank you, KL. Good morning, everyone. [18:30] great pleasure to announce that we met our annual target of 16 million paid subscribers within nine months this financial year. Our monthly paid subscriber base grew by 22%, reaching 15.9 million paid subscribers and our registered users have grown to a sizable community of 142 million.

This quarter has been particularly exciting for us as we premiered a host of new original shows. Both Side Hero and Smoke gone at max critical acclaim being the best rated shows in India on IMDB, as well as winning over 10 awards across multiple platforms in categories such as Best Marketing Campaign of the Year, Best Use of Video in Social Media, Best Launch et cetera.

Additionally, our show 'Smoke' has also been nominated by South by Southwest in the 'Title Design' category. Other nominees include Aquaman, Black Panther, Deadpool, Spider-Man, Mowgli et cetera. With the launch of our flagship originals, digital first film premieres, we further decided to enhance our content offering to tailored to the unique needs of the user wanting to access quick consumable content. The launch of Eros Now Quickie enables us to deeply engage with users in a smaller timeframe with high quality short form original content. With over 23 premieres across originals, films and Quickies this year, this was the first step in the direction of 'Binge Watching' content on the platform, leading to an average 25% increase in subscriber session time, with average viewing time now over 75 minutes, well above the industry average.

At the heart of great content creation is our data analytics, constantly fueling us with a host of information enabling us to make informed decisions with green-lighting our originals and premiering digital films. This in turn has led to 200% plus subscriber growth and 100% plus engagement growth in the past year. India itself presents a unique opportunity with a huge subscriber opportunity as the country continues to undergo a digital revolution. There are 1.8 billion South Asian audiences around the world and the democratization of video distribution via online has garnered the potential reach that the creator can drive for a specific piece of content. Eros Now aims to be the platform providing that reach, as we believe we can achieve over 50 million paid subscribers with at least 20% being direct-to-consumer over the next three years.

Thank you. I'd now like to pass you on to Mr. Prem.

Prem Parameswaran -- Executive Director and Group Chief Financial Officer and President of North America

Thanks, Rishika, and good morning to everyone, and apologies for my voice, I'm just a little under the weather. But thank you again for joining us today on our conference call.

We had one of the best quarterly performance in several years and I'm very proud to share with you some of the major financial and operating highlights. We will then take your questions. This quarter, we generated $86.6 million in top line gross revenues before the impact of IFRS 9 and 15 compared to $67.5 million in Q3 fiscal year 2018 on a like-for-like basis.

Adjusted EBITDA for the quarter was $31.4 million compared to $23.6 million last year, which represents an increase of 33%. Moreover, our adjusted EBITDA margins expanded significantly over the prior year period to 40.9%, reflecting our focus on ramping content and strategic investments, while at the same time, maintaining and managing the cost base. I had guided the market that we will finish the fiscal year with adjusted EBITDA margins above 30% and we feel very comfortable about achieving that goal. We ended the quarter with $135 million of cash on our balance sheet. On a 12-month trailing basis, our net debt as of December 31, 2018, is $159.1 million and our net leverage ratio remains conservative at 1.5 times. The majority of our debt has a long-term maturity profile.

Now, turning back to the revenues. Our digital and ancillary business had posted its strongest quarterly result ever, generating $35.7 million compared to $22.9 million in third quarter 2018, which represents a growth rate of 56%. This was largely due to the contribution from our growing Eros Now platform.

We released several original series recently, including the critically acclaimed Smoke as well as the launch of our short form content platform Quickie, which Rishika just went through. Our theatrical business generated $21.8 million in revenue this quarter compared to $12.9 million in the third quarter 2018. Eros released 25 films this quarter, two medium and 23 small budget as compared to four films in third quarter 2018, four small budget.

Our TV syndication business generated $19.3 million of revenue this quarter compared to $29.4 million in the fourth quarter 2018.

As of December 31, 2018, our Eros Now platform had over 142 million registered users and 15.9 million paying subscribers. That is a huge ecosystem. We had previously guided the market to achieving 16 million paying subscribers by fiscal year-end 2019. We are pleased to announce our early achievement of that target in only nine months. The Eros Now business continues to grow at a very fast pace buoyed by increasing consumer demand, higher broadband penetration and most importantly, creating and marketing of our compelling content.

I wanted to take this opportunity to highlight a few of our key strengths that often come in conversations with our shareholders and partners, which I thought would be worth going over for the benefit of the new and existing shareholders alike. There are five major points: one, we have a stellar bluechip institutional investor base, which we are proud of Capital, Domestic, Paradise, Gilder, Gagnon, Jupiter, TIAA CREF, BlackRock, Morgan Stanley, State of New Jersey and Millennium to name a few.

Two, our financial policies are prudent and we have a very conservative balance sheet with net leverage at 1.5 times. Three, Eros International has been in the entertainment business for over 40 years and has always been a pioneer of new Indian content and distribution technologies from Betamax to VHS to DVD to OTT. Four, the Eros Now strategy is very unique as we are going after the mass market in India covering a population of 1.3 billion people as well as approximately 250 million people around the globe, excluding China who focus on the Indian content. And finally, our library and market share in India both digital and theatrical are second to none by any measure. We have the deepest and richest Indian library.

Thanks for listening and now we are happy to take your questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) We will take our first question today from Tim Nolan from Macquarie. Please go ahead, your line is open.

Tim Nolan -- Macquarie -- Analyst

Hi, thank you. I've got three, if you don't mind, please. First, I was just -- just a couple of minutes late joining the call and I don't know if I missed this, but could you explain the difference between the gross and the net revenues as I guess it's referred to? I understand it's an IFRS accounting, if you could explain what lines that falls into and how that works?

Secondly, a question I asked a few times on these calls is with the paid sub number, it's a huge growth figure, it's a very impressive number. Could you talk about the price that you're getting on that? If there's any upward momentum on the telco distribution pricing agreements, or if there are any other direct-to-consumer deals coming through that might be pushing price up. And then lastly, a more general question. In the past you've talked about your historical film production business, given the relationships that that you have with directors and actors and actresses. I just wonder if that -- how that changes, how different that maybe in a digital first world if Eros Now is taking precedence and then of course with competition from Amazon, Netflix and many others in India. Thanks.

Kishore Lulla -- Executive Chairman and Group Chief Executive Officer

Good morning, Tim. I will take the last two questions and then I'll have Prem take the gross revenue. So on the scenario of this -- let's take the question number three on the scenario of changing worlds in the production business, the studio business. We had predicted in 2015 that how (ph), with the digital world, which is coming. The grosses of the big-budget films are not going to happen and that's what you saw in the last two years. The grosses of the big-budget films are falling, in fact, that's what we are calling the tent-pole films. And in fact the medium budget and the small budget films that grosses are growing bigger than the tent-pole films. That is expanding the audience from the big stars movies, which we were doing and that's where the strategy of the Eros has paid off and that's how you are seeing the increase in the EBITDA margins of the business because you have seen that we were investing in the tent-pole films about seven years ago and that the investment in the tent-pole have gone down. And in fact, the new stars and the content driven movies are doing well on the box office as well as on the television syndication and as well on the Eros Now and the digital platform. So that's the changing dynamics and it puts the Eros in a better position than the stars for the negotiation of the deals. So we are currently innovating new stars every year and also having the contract with the talent which is whether the producer, director who have produced different kind of movies. And that's the reason we have seen even the increase in the number of movies to 25 in this quarter, which has also given us a good EBITDA margin. So that's the changing dynamics, which is going in our favor.

Second, on the Eros Now subs. You see, when we started the business and the Eros Now business in 2013 -- '12-'13, we saw there is huge opportunity of the Internet boom and the mobiles going to be in India. Now, with the smartphone now is going to go to 750 million (ph) and the major consumption is going to come from smartphone. Our strategy has paid off, whereby we first integrated with telcos, which was the B2B2C model, whereby without spending a lot of money on acquisition of subscribers, we were gaining momentum in the acquisition of subscribers. That means the subscribers through the telcos and telcos are offering the data deals included this Eros Now subscription into that offering and the subscribers went on consuming the content. And in the last quarter, we saw our originals getting more traction and our engagement time getting better and better. So in that way, what is happening is the subscribers are getting more and more traction from our content, the premium content, which we are producing and that will help us to gain more market share in the next quarters to come, whereby the subscribers will grow and this ARPU growth will come slowly and slowly, whereby the telcos are also increasing their ARPU per quarter and they're not going to subsidy.

Operator

Thank you. We will go to our next question today from Jason Bazinet from Citi.

Jason Bazinet -- Citi -- Analyst

Yeah, I just had two questions. First, can you describe some of the underlying dynamics that allowed you to hit your 16 million sub number a quarter early? Was it more the dynamics in the mobile market? Was it greater sort of adoption among sort of whatever your model assumed in terms of mobile growth? And then, second , can you talk a little bit about that cadence as we pivot toward direct-to-consumer side, you said 20% over three years. Is that sort of it -- it starts slow and then goes parabolic sort of toward that 20% if you hit the goal? Or is it -- do you expect more of a linear progression? Thanks.

Operator

(Technical Difficulty) Ladies and gentlemen, we are experiencing a momentary interruption in today's conference call. Please remain on the line. Thank you. Mr. Jason Bazinet, apologies. Please go ahead with your question.

Jason Bazinet -- Citi -- Analyst

Thanks. I just had few questions. First, can you talk qualitatively about what do you think allowed you to beat your 16 million sub guidance coming in 90 days early? Second, on the pivot to direct-to-consumer, you said 20% over the next three years. Do you expect that transition to be linear or is it more sort of parabolic as -- are you sort of back-end loaded? And then third on the Reliance JV, can you just remind us the benefits of that JV to you and to Reliance and since they sort of bought in at $15 a share, has anything changed that's worse in the business since that deal was announced? Thanks

Kishore Lulla -- Executive Chairman and Group Chief Executive Officer

Hello?

Prem Parameswaran -- Executive Director and Group Chief Financial Officer and President of North America

Hi, Kishore, I'm back.

Kishore Lulla -- Executive Chairman and Group Chief Executive Officer

Hi, Prem.

Operator

Hi.

Prem Parameswaran -- Executive Director and Group Chief Financial Officer and President of North America

Is the operator on?

Operator

Please go ahead. Your lines are now open.

Prem Parameswaran -- Executive Director and Group Chief Financial Officer and President of North America

Next question please, operator.

Jason Bazinet -- Citi -- Analyst

Hi, it's Jason. Can you hear me?

Kishore Lulla -- Executive Chairman and Group Chief Executive Officer

Good morning, Jason. Sorry about this. Yes, we can hear you. We were thrown off.

Jason Bazinet -- Citi -- Analyst

Okay, great. All right. You want me to repeat the questions?

Kishore Lulla -- Executive Chairman and Group Chief Executive Officer

Yes, Jason, because we were not there only.

Jason Bazinet -- Citi -- Analyst

Okay. So I just had -- I had three questions. One, from a qualitative standpoint. Can you just describe why you think you beat your sub guidance by hitting that 16 million sort of a quarter early? Two, in terms of the 20% direct-to-consumer over three years, do you expect that to be more of a linear progression over the next three years or something that is more sort of back-end loaded? And then third, can you just remind us going back to the Reliance JV, what benefits you're getting from it? What benefits they're getting from it? And since they bought in at $15 a share, has anything changed in the business that suggests the -- the company's worth less today than it was when that JV was announced? Thanks.

Kishore Lulla -- Executive Chairman and Group Chief Executive Officer

Perfect. So I'll start with the number three question, the Reliance JV, you know, whether the companies worth more than $15. I think the company's worth north of $15, it could be worth as you -- with your reports and with every analyst reports, which is there. If you calculate the DCF method, you'd to calculate the EBITDA multiples, you calculate every method the company's totally undervalued. I think the company's value is anywhere between north of $30 or $50 today. Also, if you take different methods of and the peers competition and the library valuation we have. See, if you look at the library, we have the largest library on all formats. We have the largest library for even the digital rights. Then, look at the OTT platform, we are the largest in the paying subs and as well as on the registered subs. Then, also JV with China reaching out in the different markets, low debt company. I think you're very well aware of all those factors when Reliance invested in at $15. So I don't think so nothing has changed. In fact, the company value has grown from that date.

Second, the JV which we have formed, as we have -- this is for the content production and on the movies. There are the films which are getting developed, that it -- the JV got completed in October or November, the formation of the LLC, whereby these films will be greenlighted and the company -- each company will put in 50%-50%. Eros get 7.5% as the distribution fee from the net revenues and after that, basically, we do the profiting 50-50. And on the digital, Jio also exploits and Eros now exploits on all platforms and that way it's a great partnership will be there whereby we get the Jio's distribution network in India, which is the largest today.

Second question on the Eros Now subscribers, front loaded or in three years whether back ended. I reckon this 20% could be achieved front end. I hope to achieve this as soon as possible because the traction is getting better and better. And I think with the current scenario, whereby the telcos will start increasing their ARPUs in India now and they will concentrate more on D2C. So you will see a lot of traction from the next quarter, whereby we will gain a lot of traction in this D2C and the B2C subscribers directly and also with the big hits of our originals which has taken place, whereby we'll see lot of traction coming from and we can play with the windowing (ph) of the premium and the basic service that will really help us to get the traction and the focusing on that. And I think we're seeing a lot of traction already in the conversion. So we'll be pretty much surprised, how we were surprised in getting the 16 million subscribers earlier than our guided this thing. The first question, I didn't get, Jason, can you come again on that please?

Jason Bazinet -- Citi -- Analyst

Yeah, just what allows you to hit that 16 million sort of a quarter early, was it something that had to do with just the Indian mobile market growing more quickly than you thought, it is something around more usage of your app, like what if you had to guess what the swing factor was to get in ahead of your expectations, what do you think it might be?

Kishore Lulla -- Executive Chairman and Group Chief Executive Officer

Perfect. Yeah. Rishika, can you take that?

Rishika Lulla -- Chief Executive Officer-Eros Digital

Sure. Sir, in terms of our growth, I would really put it down to the originals we launched and we had a whole host of premieres this quarter as well. So it's Smoke which was the super kind of large budget glossy originals, Side Hero, with the launch of Quickies and we also had two large post-theatrical digital premieres on the platform as well that really drove a lot of the usage time, subscription, everything up this quarter quite aggressively. So we really do believe that we will continue to experience high growth, especially since the roll out of our originals is already well under way

Jason Bazinet -- Citi -- Analyst

Perfect. Thank you.

Operator

Thank you. (Operator Instructions) We have a follow-up question now from Tim Nolan from Macquarie. Please go ahead.

Tim Nolan -- Macquarie -- Analyst

Hi, thanks. We got cut-off toward the end of the answer to the second question about the paid subs, which I think I got. But I missed any reply to the question of the gross versus net revenues, maybe, Prem, if you could help explain what line that falls in and just help us understand what that's about?

Prem Parameswaran -- Executive Director and Group Chief Financial Officer and President of North America

Yeah, sure. So sorry, Tim. One thing I was going to refer you to page seven on our press release, so it goes through all of our revenues. But really the IFRS revenue impact basically relates to longer-dated contracts that are present valued at a discounted rate. So it's really a more conservative approach, which is in line with IFRS accounting guidelines. But there is a detailed explanation on page seven on the press release

Tim Nolan -- Macquarie -- Analyst

Okay, thanks.

Prem Parameswaran -- Executive Director and Group Chief Financial Officer and President of North America

Welcome.

Operator

Thank you. (Operator Instructions) Thank you. We have no further questions at this time. I'd like to turn the conference back over to you for any additional or closing remarks. Thank you.

Kishore Lulla -- Executive Chairman and Group Chief Executive Officer

I would like to thank on behalf of our team for your continued support and taking Eros to new heights. Thank you very much, ladies and gentlemen, and all our shareholders and stakeholders. Thanks a lot.

Operator

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

Duration: 34 minutes

Call participants:

Kishore Lulla -- Executive Chairman and Group Chief Executive Officer

Rishika Lulla -- Chief Executive Officer-Eros Digital

Prem Parameswaran -- Executive Director and Group Chief Financial Officer and President of North America

Tim Nolan -- Macquarie -- Analyst

Jason Bazinet -- Citi -- Analyst

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