CSSE Should Beware the Buybacks that Put Netflix in the Soup

CSSE May Forego a Cash Cushion Against a Slowdown

 

Memories are short in Hollywood. That’s no excuse for Chicken Soup for the Soul Entertainment to repeat the mistakes of Netflix.

Chicken Soup for the Soul Entertainment (ticker: CSSE) announced financial results Tuesday that included a notable surprise. In addition to reiterating a heady growth forecast for 2018, when revenue is expected to more-than triple and EBITDA more-than double, the company announced a share-repurchase authorization of up to $5 million, equivalent roughly 6% of its fully-diluted shares and a larger percentage of its float.

The temptation to buy back shares is obvious. Like most Reg A IPOs, CSSE has traded poorly since listing in part due to short sellers who have bet against its stock. On top of goosing any shorts, the buybacks would of course reduce the share count and boost earnings per share.

But it’s worth remembering the danger of spending money on shares when growth is heady and access to cash isn’t guaranteed. A prime example is Netflix, which went on a stock-buying binge while simultaneously trying to grow at a heady pace.

Consider Netflix’s buyback story. Between 2007 and 2011, Netflix spent over $1 billion on share buybacks, all the while gaining operational momentum with new subscribers. All seemed well until the summer of 2011, when the company lost some subscribers and flagged an upcoming annual loss. The upshot was that the company had to sell shares at $70 each in a secondary offering to hlep meet content-purchase commitments. Just months earlier, the stock had peaked at over $300 a share.

In the end, Netflix wound up surviving the rough patch and the stock eventually reached new highs years later. But the episode was an embarrassment and might have caused heads to roll.

So it would also be prudent for CSSE to avoid such a gamble. While it’s business has important differences from Netflix (for example it depends on sponsorships and advertising rather than subscribers), there is always the chance that growth slows and it wish it had extra cash to spare.

Indeed on the earnings call Tuesday, CEO Bill Rouhana pointed out that CSSE has a practice of securing sponsors to pay for programming costs, but that the company often pays upfront. CSSE is also pushing for aggressive growth of Popcornflix, its recently-acquired online video service that competes with the likes of Hulu and Sony’s Crackle. The company said on the conference call that marketing spending gives Popcornflix a big boost.

All this suggests that access to cash may be more critical to CSSE’s growth targets than investors realize.

Of course, CSSE may feel flush at the moment with plenty of cash on its balance sheet and a proposal on the table for fresh debt financing. But it’s undeniably aggressive to buy back stock just months after going public and making a transformative acquisition, as CSSE has done. Anyone watching Netflix in 2011 has seen this movie before.