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Eros International PLCÂ (ESGC)
Q4Â 2019 Earnings Call
Jul 15, 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 Fiscal Year End 2019 Earnings Conference Call. 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 provision of the federal securities 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 and talking about its performance. You can find a reconciliation of these measures to the GAAP financial measures in the 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 all for joining today's earnings call. We are pleased to share with you a very strong set of results cementing over 40 years of market leadership, positioned solid business fundamentals and continued growth in Eros now. This year results show that the business has evolved significantly from last year with 45% of combined revenue, generated from digital and ancillary business, and adjusted EBITDA margins expanded to 38%. This is truly a testament to our transformation, as we transition to a digital business driven by Eros Now growth.
As we continue to develop our digital platform and adapt to the dynamic global media landscape we operate in, I wanted to take the opportunity to reiterate our milestones along this journey. At the core of our company lays the ability to deliver premium Indian film entertainment to the masses with unparalleled distribution capacity. Almost 20 years ago, we developed the first vertically integrated film studio model in India, it's a testament to our leadership and DNA that we have been able to maintain and grow our market share in this rapidly changing industry.
Furthermore, Eros films have been among the most successful Indian films released in China, notably Andhadhun released in April 2019, which is now the third highest grossing Indian film ever to be released in China collecting over $43 million. Our recent successful releases in China mark our entry into significant market. We look forward to continued exposure in this region as we reach out to larger audiences in other countries. We are also blessed with one of our deepest and the richest Indian content libraries in the world.
Over the last decade Eros has been responsible for 36 of the top 10 -- 110 highest grossing Indian language films at the box office. Even in the digital age, premium content is still immensely available, we pioneered the first OTT studio model in India over seven years ago, backed by our rich library and forthcoming slate. Our industry relationship spanning over 40 years allow us to access to the best talent across the nation. Our library is constantly evolving and initiating new and innovative content appealing to the audiences globally. The recent distorted and the inaccurate campaign by the short sellers aimed at the damaging the company for simply a repetition of the court case that took against us, which was dismissed with prejudice as were their subsequent appeal. The board is assessing strategic alternatives that the object of maximizing shareholder value and (inaudible) took with this process. It is ongoing and the company will update accordingly as and when there are material developments.
I would really like to thank all our shareholders and stakeholders for their support. And I would like to ask Rishika to join us in this conference. Thank you.
Rishika Lulla Singh -- Chief Executive Officer, Eros Digital
Thank you, KL. Hello, everyone. I'm really excited to share with you momentous Eros Now growth. The last quarter witnessed the growth of the subscriber base by 18% to 18.8 million monthly paid subscribers. This growth surpasses the guidance at the start of the year and stands at a whopping 130% year-on-year growth compared to $7.9 million paid subscribers for FY '18. We would like to reiterate our target of 50 million paid subs in three years. Our registered user base is 155 million users which includes an additional 12 million registered users in the last quarter alone, nearly one-third of the space has been added in the last 12 months, which indicates that we have been able to increase our consumer funnel, but more importantly, a larger part of the funnel is being converted into the paid subscriber base.
From a distribution perspective, a very strong quarter for Eros Now in India, we concluded commercial deals and launched with two key partners in India, TATASKY and BSNL. Both partnerships are direct contribution to the surge on the direct-to-consumer play for Eros Now and have been the primary reason for serious surge on all metrics, including paid subscriptions and time spent.
To differentiate its strategy from the larger VoD universe in India with the launch of our partnership with Veriown to target viewers in rural India, wherein Eros Now as a service is up and running across five villages in Uttar Pradesh and launching in Rajasthan in the upcoming quarter. These partnerships are key to growing our base at scale within India. Additionally, our international distribution has seen two landmark deals, one with Virgin Media in the UK, and with Apple, we are launching in over 100 countries being the only international partner for their new services plan. Our compelling content proposition and intelligent technology are continually improved upon. Today, according to counterpoint research, 68% of Eros Now users come to the platform daily in comparison to 59% for Prime Video and 56% for HotStar. Eros Now is building for Tier 2, Tier 3 India, wherein we deliver the and frequent entertainment to the masses in an on-demand environment. Our promises to deliver the highest quality experience be at the customer journey, technology, content or customer service at the most affordable price.
The tango between movies and originals was beautifully as we drive walk-ins by a popular movie titles and ensure that originals get adopted and build episodic viewing patterns for cinematic content. With the most prolific distribution across telcos and distribution partners, we are the best suited to serve India and the diaphragm.
I'm now passing phone to Prem Parameswaran.
Prem Parameswaran -- Executive Director and Group Chief Financial Officer and President of North America
Thank you, Rishika. And good morning to everyone, and thank you for joining us again today on our earnings call. We have made many accomplishments this year, which we are proud of. I look forward to sharing them with you in more detail. This year, we generated $304.6 million in gross revenues before the impact of IFRS adjustments compared to $268.1 million in fiscal year 2018, which represents a 13.6% growth rate on a like-for-like basis.
Adjusted EBITDA for the year was $103.8 million compared to $83 million last year, which represents an increase of 25.1%. Moreover, our adjusted EBITDA margins expanded significantly over the prior year to 38.4% significantly above our initial market guidance of 35%. This is the first time since fiscal 2015, we have achieved over $100 million in adjusted EBITDA. We ended the quarter with $135.8 million of cash on our balance sheet. On a 12-month trailing basis, our net debt as of year-end was $145 million and our net leverage ratio remains conservative at 1.4 times. The majority of our debt has a long-term maturity profile and we have no significant near-term debt maturities.
Now turning back to the operations, our Digital and Ancillary business has posted its strongest annual results ever, generating $123 million compared to $85 million in fiscal 2019, which represents a growth rate of 44.8%. This includes our fast-growing Eros Now business. This is also the first year our digital business has generated more than our film and TV syndication businesses, which demonstrates our shift to digital is well under way.
Our theatrical business generated $69.5 million revenue this year compared to $79 million in fiscal '18. We released 72 films this year as compared to 24 films in fiscal 2018. Our TV syndication business generated $77.5 million of revenues this year compared to $97.2 million last year
As of March 31, 2019, our Eros Now platform had over 154 million registered users, and as Rishika pointed out, 18.8 million monthly paying subscribers. We had previously guided the market to achieving 16 million paying subs by fiscal year end, a target we were proud to achieve three months ahead of schedule. The Eros Now business continues to grow at a fast pace, fueled by increasing consumer demand, higher internet penetration, and most importantly, because of our compelling premium content.
To recap some of our highlights, our digital business grew 45%, over $100 million in adjusted EBITDA, 18.8 million monthly paying Eros Now subs and a conservative balance sheet. We want to thank you for being on this call and now we're happy to answer any questions.
Questions and Answers:
Operator
Thank you. (Operator Instructions) Our first question comes from the line of Tim Nollen of Macquarie.
Tim Nollen -- Macquarie -- Analyst
Hi guys, thanks very much. Got several things to ask here actually. Maybe first off on some fundamentals for the full year, it looks like your film release number was pretty good but your revenues were down. I assume that is because of the mix of big budget versus smaller budget films and you reference your shift to digital which is pretty clear with the Digital and Ancillary growth. Just want to make sure your film and your TV numbers were down, your Eros Now and Digital and Ancillary numbers were up quite a lot. This is all I assume part of the focused shift toward content production for Eros Now, and in some ways, I guess de-emphasizing the film and the TV distribution business. If you could just clarify that please.
Also on Eros Now, you talk about increasing conversion rates from 8% to 12% in your press release. Are we talking about like a two-fold or three-fold increase in the price per sub on those direct-to-consumer relationships, those were the types of numbers, I think we were talking about previously, I want to make sure those are still the types of numbers we're talking about now?
And then couple other things, you mentioned an impairment charge which is quite a large number, I thought, little surprised to see that given the monetization potential of your film content on Eros Now, so if you could please address that? And I guess lastly, you had -- I don't see a reference in the press release as to Sarbanes-Oxley Compliance, I think this was something that you were looking toward at some point, I wonder if you could update us on that please. Thanks.
Kishore Lulla -- Executive Chairman and Group Chief Executive Officer
So, yeah. Good morning, Tim. So I will take the first question. I think you're totally absolutely right. As stated before, that the focus is not on the high budget films, focus is, if you look at it, we had higher releases, but medium releases which have done well on the box office. But higher releases gave us a bigger amount of theatrical revenues last year. So we had one big high budget film which we didn't have any -- in this, we had medium budget and the low budget films. And the focus is in the next years to come is how do we become a digital company rather than only a theatrical or syndication company, that's what the focus is going to be.
Second question on the Eros Now. I will like Rishika to answer that on the conversion rates.
Rishika Lulla Singh -- Chief Executive Officer, Eros Digital
Hi, Tim. The conversion rates are bounced off from our own internal conversion rates in terms of how we've been able to convert our funnel over time, I mean, due to past performance. However, it's important to note that this doesn't include or involve any changes in ARPU, as we are trying to reach out to Tier 2 and Tier 3 cities in India moving out of metros to achieve scale. It's important for us to -- pricing to remain competitive and conservative as we plan to achieve that to hit 50 million subs over the next three years.
Prem Parameswaran -- Executive Director and Group Chief Financial Officer and President of North America
Hey, Tim, it's Prem. And let me answer the impairment charge. So the impairment charge was part of IAS 36 under the IFRS accounting rules, which require a company basically to reassess the carrying book value of assets both on a regular and annual basis and also in case of the irregular events. Examples of these irregular events include major change in market conditions or technology, expectation of future losses or a material change in the listed equity value or negative cash flows. In this purpose, the equity value of our company, our market cap has gone down.
During fiscal year end 2019, due to the significant decline in the market value, we test an impairment for carrying the value of net assets of the group exceeding our market capitalization and expenditure toward the purchase of contents and film rights, exceeding the positive cash flow from operations. Accordingly, we recorded a non-cash impairment loss of $423 million net of taxes as an exceptional item within the P&L. This impairment loss recorded has been reduced from the carrying amount of goodwill, trademark, content film rights and long-term advances to content vendors. This is a one-time exceptional item, which has no -- impact -- no cash impact on the business.
Kishore Lulla -- Executive Chairman and Group Chief Executive Officer
And also, this is reversible. As soon as the market capitalization of the company goes up, this could be reversed back too, the same values.
Prem Parameswaran -- Executive Director and Group Chief Financial Officer and President of North America
That's right.
Tim Nollen -- Macquarie -- Analyst
So can I jump in on that. So there is no change in your assessment of the actual real value of the film content, because it seems to me, it's -- the value is still there. I mean your Eros Now platform is growing, you should be able to monetize that more effectively, so it's the other items that are creating the impact?
Kishore Lulla -- Executive Chairman and Group Chief Executive Officer
That's right.
Tim Nollen -- Macquarie -- Analyst
Okay. And on your transition from small company status to Sarbanes-Oxley Compliant?
Kishore Lulla -- Executive Chairman and Group Chief Executive Officer
Yeah, I think we will be transitioned to the Sarbanes-Oxley Act, and I think when we will be filing our 20-F, so we'll be filing our status on that also, which will be in the next two weeks.
Tim Nollen -- Macquarie -- Analyst
Okay, so that will be for March 2019 year-end, you expect you will be Sarbanes-Oxley compliant in your 20-F. Okay, excellent. And actually, just related to that, this is your March quarter, you're reporting now and I understood that --
Kishore Lulla -- Executive Chairman and Group Chief Executive Officer
No, these are full year results, Tim. These are full year results.
Tim Nollen -- Macquarie -- Analyst
Yeah, I know it's full year results for the year ended in March. I wonder if you could give us any view on when you might be reporting your June quarter results? And if there's anything at all you can say about the June quarter?
Kishore Lulla -- Executive Chairman and Group Chief Executive Officer
See, I think as we've said that we -- our focus is on Eros Now and how do we grow the subscribers? As Rishika said, the three-year target of 50 million subs. We are -- the focus of the company's strategy is the digital revenues. And secondly, working on the theatrical releases is the second thing. So how do we strengthen the B2C customers also not only the telcos and not only the B2-B2C that's the focus the company is doing. So thereby growing the subscriber base and producing high premium content and higher EBIDTA. So you have seen the EBITDA margin has gone up to 38.4% that is resulting from the digital revenues as envisaged before.
Tim Nollen -- Macquarie -- Analyst
Okay. And if you don't mind me asking one last question please, I know it's a lot. The credit ratings downgrade that you had in India early June or so. I know you put a release out couple of weeks ago saying that you've paid all those bills and that should all be taken care of. Can you just update us on really what happened and are we really sure that that situation is taken care of? And is there something you can do now to get that credit rating reversed?
Kishore Lulla -- Executive Chairman and Group Chief Executive Officer
Yes. So I think the credit rating will be definitely -- we have taken up with the credit agency, yes, it should be reversed and there is nothing outstanding and we are in basically there is no short-term maturities are in the next 12 months. And there is no technical default of any banks today serving us of any default of any interest payments or any loan overdue or any loan at all due as on date today.
Prem Parameswaran -- Executive Director and Group Chief Financial Officer and President of North America
And if I could just add, Tim. Look we've previously communicated publicly that all outstanding interest payments have been made. Two, in terms of CARE, I've gotten used to CARE now having really used to S&P and Moody's but CARE obviously is an Indian credit rating agency. We are working with them to try to restore our investment grade status. It is highly unusual right to go 10 notches down, very unusual. And so we're working with them, there is a process in place to restoring your -- as per their guidelines, but I think we're trying to restore it sooner if we can. Two, there were reports or there was kind of fake news or false reports about Moody's in their withdrawal of their rating. Just to clarify for the record that we the company had asked Moody's to withdraw their credit rating -- withdraw their services quite frankly just because we do not have any institutional public bonds outstanding. We did the same thing with S&P as well.
Tim Nollen -- Macquarie -- Analyst
So you asked Moody's to withdraw coverage of Eros essentially?
Prem Parameswaran -- Executive Director and Group Chief Financial Officer and President of North America
That is correct.
Tim Nollen -- Macquarie -- Analyst
Okay. That's an important point, I think. All right, I've got more but I'll leave it to others and maybe jump on if there's time with some more. Thanks.
Operator
(Operator Instructions) And we have a follow-up question from Tim Nollen of Macquarie.
Tim Nollen -- Macquarie -- Analyst
Well, OK, I guess I'm back then. So the accusations that drove down your share price over the last couple of months. You referenced today in your press release that you had engaged Skadden Arps to do a full review, I think it was 2016 of everything basically. I just wonder is there anything that you can say that would be either the same or different now versus then in your corporate structure, your reporting systems? Anything that can reassure us that everything still holds from that Skadden review?
Prem Parameswaran -- Executive Director and Group Chief Financial Officer and President of North America
Yeah Tim, the -- obviously nothing has changed since the Skadden review came out per se, in terms of our internal reporting except they've gotten better. As you can -- attest we've had Grant Thornton as our auditor, the fifth largest auditing firm in the world, and it's consistently been auditing our reports. I think what's interesting too is, if you look at the class action that happened in the past with some of the similar nefarious people who have done it are back at it again.
You'll notice that that suit -- that class action was dismissed with prejudice, which is actually a pretty big deal. And then their appeal was also dismissed. So now you see some of these same types of things again. And it's really the short and distort crap for a lack of a better word that comes out. And it's quite frankly alarming to the market, alarming to companies like ours and others, and which -- it's something that we're going to take on.
Tim Nollen -- Macquarie -- Analyst
So is there anything with your corporate structure or your payment systems or anything like that, that is kind of brought about these attacks that you can do differently on board?
Kishore Lulla -- Executive Chairman and Group Chief Executive Officer
I think Tim we are just observing our internal controls also, so that it doesn't happen again. But the main point to note is any -- all the other short reports which have been published, there is nothing new which has not been dismissed by the appellate court with prejudice. So -- and which was not covered by the Skadden into their review. So that's the main point.
Tim Nollen -- Macquarie -- Analyst
Okay. Thanks.
Operator
And ladies and gentlemen, we have reached the allotted time for questions and answers today. I would now like to turn the call back over to Mr. Kishore Lulla for any additional or closing remarks.
Kishore Lulla -- Executive Chairman and Group Chief Executive Officer
Thank you, everyone. Thank you, all of our shareholders. Thank you, stakeholders for supporting the company. And have a good day.
Operator
Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.
Duration: 24 minutes
Call participants:
Kishore Lulla -- Executive Chairman and Group Chief Executive Officer
Rishika Lulla Singh -- Chief Executive Officer, Eros Digital
Prem Parameswaran -- Executive Director and Group Chief Financial Officer and President of North America
Tim Nollen -- Macquarie -- Analyst
