IDW Media Holdings, Inc.
Q1 2022 Earnings Call Transcript

Published: 14 Mar 2022

[Operator:]

Good evening, and welcome to the IDW Media Holdings First Quarter Fiscal 2022 Earnings Call. During management's prepared remarks, all participants will be in listen-only mode. After the prepared remarks, you are invited to participate in the Q&A. I will now turn the call over to John Nesbett of IMS Investor Relations.

[John Nesbett:]

Thank you, operator. Good day and welcome to IDW Media Holdings first quarter fiscal 2022 earnings call. With me on the call are Ezra Rosensaft, Chief Executive Officer; and Brooke Feinstein, Chief Financial Officer. I would like to begin the call by reading safe harbor statement. On this call all statements that are not purely about historical facts, including, but not limited to those in which we use the words believe, anticipate, expect, plan, intend, estimate, target or similar expressions are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. While these forward-looking statements represent our current judgment of what may happen in the future, actual results may differ materially from the results expressed or implied by these statements due to numerous important factors, including, but not limited to, those described on our annual report on Form 10-K under the headings risk factors and management discussion analysis of financial condition and results of operations, which may be revised or supplemented in subsequent reports on SEC Form 10-K, 10-Q and 8-K. We honor no obligation and expressly disclaim any obligation to update the forward-looking statements on this call whether as a result of new information, future events or otherwise. Now I will turn the call over to Ezra Rosensaft. Go ahead, Ezra.

[Ezra Rosensaft:]

Thank you, John, and thank you to everyone on the call for joining us. My remarks today will review our strategy and execution during the first quarter of our fiscal year 2022, which closed January 31st. At the conclusion of my remarks, Brooke Feinstein, our CFO, will provide details around our financial results and then will be happy to take your questions. I'd like to first begin by noting that our thoughts and prayers are with those suffering as a result of Russia's invasion of the Ukraine, as well as the many people still struggling with the lingering effects of the COVID virus worldwide. IDW delivered a strong start to our 2022 fiscal year highlighted by significant first quarter revenue growth and enhanced profitability across both our publishing and entertainment segments. Our focused consistent strategy of an integrated media company with a unified business plan drove the improvements we saw this quarter. IDW is a very different company than it was a year ago. In addition to strengthening the management team and transforming to our asset life balance sheet, we made a game changing strategic shift to focus on aggressively growing our library of original titles. As we've discussed on past calls, we leverage our relationships with renowned authors and creators, as well as our reputation as an innovative, independent publisher of comics and graphic novels to curate a robust pipeline of original content submissions. From there, we rely on the judgment of our professionals and their extensive experience in the publishing and entertainment field to identify the titles that will resonate with and grow our target audiences, which comes down to the simple goal of creating quality, original titles to key up IDW's value creation process. Original and/or controlled IP, intellectual property, or content, is the source for many of IDW Publishing's most successful novels and comics, complementing sales of licensed IP titles while delivering significantly enhanced economics. Currently, we have over 100 original titles in our library with 40 new titles at various stages in the development pipeline. Our goal is to continue adding 40 quality original titles each year. Original IP not only improves our economics, it enhances our ability to delve into new genres and open new markets for audiences worldwide. It gets us more at best so to speak because volume is indeed important, especially high quality and monetizable IP. At IDW Publishing, while expanding our development of originals, we are also harvesting revenue and cutting costs from marginally profitable legacy businesses, such as tabletop games, which has not consistently contributed to our bottom line, with the occasional go-forward exception such as the success of the Batman Kickstarter in the first quarter. We are shifting these resources to acquire new IP, reach larger audiences and expand into new genres, including young adults, middle grade, twins, drama, comedy, as well as build out our existing library of horror sci-fi and thriller titles. Currently, approximately 75% of publishing titles are profitable. No company in the media landscape has a perfect batting average, and we expect to improve on that percentage as the business expands. Our growing IP pipeline also feeds the entertainment segment of our business. Note that in an original title is capable of generating significant and repeating high margin revenues through a relatively low cost or de-risked model, as we've also discussed in the past that requires no leverage on our end, the earning power of this model is illustrated by our delivery of Locke & Key Season 2 during the first quarter, which added $4.2 million in high margin revenue to our top line. In addition to the significant returns on our entertainment investments, the increased visibility that film and television bring to original franchises drives increased publishing sales, creating a virtuous cycle between our publishing and entertainment segment. This refocused strategy has played an integral role in our transformation into a much stronger company with the right people, processes, content pipeline, and balance sheets in place to provide a solid platform from which to continue accelerating our growth trajectory. While the significant contribution that Locke & Key made to our top and bottom lines this quarter is both of an encouraging return on our investment and a strong indicator of our potential to continue realizing high margin revenue through our entertainment segment. It's important to remember that we are still growing our entertainment business and its revenue and cash flows remain lumpy as they are contingent upon the timing of deliveries of episodes from a small number of projects. We are currently targeting three to five entertainment projects per year. In the second half of fiscal 2022, we expect to realize revenue from the delivery of Season 3 of Locke & Key and Season 1 of our new project, Surfside Girls being aired on Apple TV. Entertainment revenue will fluctuate as we scale, but over time we expect that our entertainment division will deliver a more consistent cadence of high margin revenue in the coming years, as we create more originals and sign more deals, thus leading to less so-called lumpiness in future quarters. In fact, we are currently in various stages of discussion and negotiation on several development deals, quite a few publicly available on our investor presentation, on our website with the goal of bringing several to market this spring. Before wrapping up, I also want to point out that as the industry consolidates and we remain independent, it gives IDW ongoing advantages and prospects with talent and within the industry for even more creators and content. That concludes my discussion of our strategy and execution. Now I'll turn the call over to Brooke Feinstein, our CFO for a more detailed review of the first quarter's financial results.

[Brooke Feinstein:]

Thank you, Ezra. My remarks today will focus on the first quarter of our fiscal year, the three months January 31, 2022, except where I indicate otherwise I'll be comparing the first quarter of 2022 results to the first quarter of fiscal 2021. IDW Media Holdings first quarter consolidated revenues increased 40% to $11.8 million from $8.4 million a year ago, reflecting increased revenue at both IDW Entertainment and Publishing. Publishing revenue increased 34% to $7.5 million from $5.6 million in the first quarter of fiscal 2021. The increase was driven primarily by a $2.1 million increase in sales from the fulfilment of Batman Adventures, a tabletop game and strong book market sales partially offset by a decrease in direct market sales as a result of the exceptional success of Teenage Mutant Ninja Turtles

[Operator:]

Our first question is from Walter Bellinger with Mayflower Capital. Please proceed with your question.

[Walter Bellinger:]

Yes. Thanks for taking my questions. So there’s been a lot of consolidation in the industry, so clearly there’s a premium being put on good content in libraries. But what I’m wondering is how this impacts IDW’s ability to attract the best creators, which at the end of the day is clearly the most important aspect of driving long-term value. So is the consolidation a good thing or a bad thing for that?

[Ezra Rosensaft:]

Hi. It’s Ezra. It’s a great question. So yes, there’s been a lot of consolidation in the industry, that’s one point, given the focus on content in particular. In terms of attracting creators, we think it has helped us tremendously. We’ve maintained very strong pure brand. And many creators are working with us, independent, and enjoy working with us because while larger companies tend to put perhaps some in the box, we give a lot of creative license, and the IDW name resonates with creators accordingly. And some of the best creators are gravitating to IDW given that support and creative freedom that we offer them. So relative to comparable opportunities and within our enhanced entertainment team, there’s an excellent opportunity given the consolidation in the industry. Great question.

[Walter Bellinger:]

Okay. Great. And then just pivoting a little bit, you’ve mentioned in the past how management has been significantly improved. I know, Ezra, that you’re relatively new and you also brought on a new Head of Publishing and a new Head of Entertainment, I believe. But has there been additional important changes to the management team other than that?

[Ezra Rosensaft:]

Another great follow-up question. So yes, absolutely. I always believe that while content is king and distribution is King Kong, any companies, especially ours, the most valuable assets are our people. So we have a very strong head of Publishing and Entertainment, both Nachie Marsham and Paul Davidson, respectively. But that’s the tip of the iceberg. We have a Head of IDW Entertainment VP for kids, family, animation. He comes from Disney. We have a new Director of Animation. We have Senior VP of original content. We have a new VP of series, a new Editorial Director of originals who spent 1.5 decades at DC Comics. So there’s a real, real quality of bench strength that ultimately will manifest itself in excellent high-quality titles that we will monetize for many years to come. Thank you.

[Walter Bellinger:]

Okay, great. Yes, that’s it from me. Thanks for taking my questions.

[Operator:]

The next question comes from Ed Reilly with EF Hutton. Please proceed with your question.

[Ed Reilly:]

Hey guys. Thanks for taking my call. I note in the press release that you said new titles are going to drive growth going forward in 2022 on the publishing side, which really produced exceptional results this quarter from what seems to be from the Batman game. I was wondering how sustainable you think this level is that was currently generated in the quarter and what the impact might be from the Penguin Random House distribution agreement that’s coming to fruition in June of this year.

[Ezra Rosensaft:]

Great question, Eddie. It’s Ezra. I’ll take that. So just to pull that apart, the Penguin Random House deal, we’re now seeing the full effect as we no longer have Diamond. I think everyone is aware of that. Previously, we had Penguin Random House and Diamond as two different distributors, one to book market, one to the trade or specialty market. A lot of companies have ultimately worked in Diamond. Penguin Random House now has our entire business. It’s an excellent distribution company with significant leverage with all of the major players. That works to our advantage. In terms of – I’m sorry, the earlier question. The beginning was, may be one more time?

[Ed Reilly:]

Yeah, just the new titles driving growth in 2022?

[Ezra Rosensaft:]

Yeah. So new titles, right? Your content is the life blood of the business and new titles that we put into the mill, right? X-100 submissions results in Y-green lit and hit the shelves make way to entertainment. We're going to see that in 2022, in 2023, it's going to ramp up. We're conscious of shelf space, both with our own titles as well as competition. But we see a lot of high quality titles coming to market. We see a lot of development opportunities to take that entertainment in other platforms. Content is king, as I keep mentioning, it's a trite payment, but very true. Everyone knows. We'll see those quality titles coming to market in 2022 and 2023. And it'll increase we say 40 per year and it'll keep up that clip. So there's a lot of great content coming.

[Ed Reilly:]

Okay, great, great. I was wondering what drove the increased gross profit margin on the publishing side. It looks like it's about 50% versus Q4 was 43%. Was that just driven by the lack of direct-to-consumer folks generating revenue for you guys?

[Ezra Rosensaft:]

Brooke, do you want to take the center question or do you want me to answer in a qualitative way?

[Brooke Feinstein:]

Why don't you start first and then I can add on to it.

[Ezra Rosensaft:]

Yeah. So, there's a mix that traditionally the company has had, gross margin on the publishing business, as you can see historically has been the 40% range and is improving. And on originals, think of something lock and key just an example because it's publicly available. Once we get past the initial advance and whatever gross margin might be, the gross margin increases tremendously. Once we reach economies of scale in terms of publishing, in terms of entertainment, in terms the halo effect, thinking about some like Twilight, right. Can you imagine what the gross margin on Twilight books were when they came back around? So the gross margin will continue to expand gun rolling. And especially as you move into originals where we have much more control over that, uncontrollable things like paper, we all watch the macroeconomics of the world but where we can control, we have extra opportunity to keep advances competitive yet appropriate, that will drive expanding gross margins and ultimately our EBITDA.

[Brooke Feinstein:]

Right. And just to add on to that the Batman game kick starter was kind of the outlier this quarter. It netted us in about $1 million bottom line. So I think everything across the board is generally the same except for that. So that would be the increased reason.

[Ed Reilly:]

Okay. Okay. Got it. Thanks guys. Appreciate it. That's it for me

[Operator:]

As there are no more questions, this concludes our question-and-answer session and conference call. I will now hand the call back to Mr. Rosensaft for closing remarks.

[Ezra Rosensaft:]

Thank you. And thank you everyone. We're grateful for your ongoing interest and support and we look forward to seeing with everyone in next quarter. Have a great week, quarter. Stay safe and healthy, be well.

[Operator:]

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.