WildBrain Ltd.
Q2 2022 Earnings Call Transcript

Published: 9 Feb 2022

[Operator:]

Hello, and welcome to the WildBrain's Fiscal 2022 Second Quarter Earnings Call. Today's conference is being recorded. I'd now like to turn the call over to Nancy Chan-Palmateer, Director, Investor Relations at WildBrain. You may begin the conference.

[Nancy Chan-Palmateer:]

Thank you, operator. And thank you, everyone, for joining us today. Speaking on the call today are Eric Ellenbogen, our CEO; and Aaron Ames, our CFO. Also with us and available during the question-and-answer session are Josh Scherba, our President; and Danielle Neath, our EVP of Finance and Chief Accounting Officer. First, we have some standard cautionary statements. The matters discussed on this call include forward-looking statements under applicable securities laws with respect to WildBrain, including but not limited to statements regarding investments by the company, commercial arrangements of the company, the business strategies and operational activities of the company, the markets and industries in which the company operates and the future objectives and financial and operating performance of the company and its assets. Such statements are based on factors and assumptions that management believes are reasonable at the time they were made and information currently available. Forward-looking statements are subject to a number of risks and uncertainties. Actual results or events in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors, including the risk factors set out in the company's most recent MD&A and annual information form. Please note that all currency numbers are in Canadian dollars unless otherwise stated. I'll now turn the call over to our CEO, Eric Ellenbogen.

[Eric Ellenbogen:]

Thank you, Nancy. And thanks, everyone, for joining us today. We delivered positive performance in the first half of fiscal '22 with meaningful growth across our core businesses driven by great IP. And as with each of the past five successive quarters, our results today are again an improvement. However, what you're not yet seeing in our numbers are the considerable revenues which we'll be realizing from signed production deals, and that's both live-action and animation and the consumer products upside, which many of those shows will produce. As we discussed at our Analyst Day in October, after two plus years of rebuilding, we're now entering a phase of accelerated growth. I think the team has done a terrific job during this period, and we have a succession of important IP projects rolling forward, though they're at the earliest stages of their life cycles. And I'll talk a bit more about product life cycle in a minute, but first, I'd like to take a look at our newest project announcements and how the overall pipeline is shaping up. So strong demand for our branded content continues unabated in a highly competitive market among streaming platforms. And we're producing more and more premium shows for these global services who increasingly favor exactly the kind of known IP that we own. The latest and most notable evergreen brand activation is an all-new Degrassi series, which is going to launch exclusively in the U.S. on HBO Max. In addition, HBO Max has licensed the entire 14-season 788-episode library of the franchise's most popular installment but not the only 1

[Aaron Ames:]

Thank you, Eric. We delivered strong Q2 2022, especially given the high comp to Q2 2021. This was highlighted by double-digit revenue growth in Consumer Products and at WildBrain Spark. We're building on our core earnings base from which we expect increasing momentum next year and beyond as new IP activations are brought to market and start to contribute to our results. Looking at the key numbers for the quarter. Revenue grew 8% to $153.2 million compared with $142.3 million in the prior year, reflecting growth at Spark and strong performance in Consumer Products. Net income in the quarter was $4.6 million compared to $11.3 million in Q2 2021. This was primarily due to high gross margins, lower distributions to non-controlling interest, offset by higher SG&A related to growth initiatives and a lower foreign exchange gain in the current quarter. Free cash flow for Q2 2022 was negative $0.8 million compared with free cash flow of $23.5 million in Q2 2021. This was primarily due to significant growth in accounts receivable associated with the larger deals we are doing and increased Consumer Products business and to timing of working capital settlements. This is a favorable development, reflecting the increasing revenue and deal flow coming through the company, which are driving returns across our business as you're already seeing in our financial results. Adjusted EBITDA was $27.3 million in Q2 2022 compared to $29.1 million in Q2 2021, primarily driven by higher gross margins and lower distributions non-controlling interest, offset by higher SG&A, including growth initiatives, excluding other income of $4.4 million from a litigation settlement and $1.2 million of government wage subsidies, both in Q2 2021, adjusted EBITDA increased 16% in Q2 2022 versus the same prior year quarter. Now I'll turn the call back to Eric.

[Eric Ellenbogen:]

Okay. Thank you, Aaron. We had another strong quarter and it's a great start to the year - calendar year. As promised, we're layering on more and more premium content deals, launching and re-launching IP to grow our long-term earnings base, and the strategy is already beginning to show results. So it's still early days as we continue to leverage our 360° capabilities to switch on IP, and we're lining up a creative pipeline with meaningful Consumer Products upside and holding a very large book of business for years to come. It's a sizable opportunity ahead so as I've said before, please stay tuned. So over to questions now.

[Operator:]

Thank you. We'll take our first question from the line of Aravinda Galappatthige. Your line is open. Please go ahead.

[Unidentified Analyst:]

Thanks, good morning. Congrats on the strong quarter again I wanted to start with because obviously, you're developing a lot of these deals. And I want to make sure we keep track of all of them. Can you just help us with the timing, in particular, Eric, the brands that you talked about, the Yo Gabba! deal, the Degrassi, Strawberry Shortcake, Jonny Classic. Can you sort of help us with the timing of these deliveries so we have sort of an accurate senses of when the financial benefit would accrue? And secondly, with respect to - I see really strong Consumer Products numbers yet again, particularly so in Q2 actually. Can you help us with how that flows to profitability, especially when it's driven by Peanuts? I know the 41% holding, that's known. But the other pieces, the other sort of claims against sort of that top line, can you sort of just help us work that out as we try to assess sort of the impact on EBITDA and profitability in general? Thank you.

[Eric Ellenbogen:]

Thank you, Aravinda. I'll take part of this and I'll certainly welcome Josh to join in regarding the studio and specific delivery of content. But first of all, you're seeing nothing from Gabba or Degrassi in our numbers yet. The only exception I would say that, that is on the distribution side, where there's money that I alluded to as well as views flowing through our AVOD distribution and Spark distribution of that content. The nice part about the live-action piece is it happens pretty quickly. And we're in preproduction or production on all of those announced shows. Jonny Jetboy is animation, however, so we'll talk about the timing of that in a minute. But that stuff that comes in basically in a 12-month period, depending, obviously, on how many episodes are in a order, whereas lead time on animation can be as long as 24 months as the production numbers go. That doesn't even begin to touch, though, what happens in Consumer Products because as I've said before, it is a past practice which I have not followed, is we wait until the market is ready on consumer products. We don't lead with it. We chase with it after there's a fan base and audience engagement, and that's when it starts turning up in the numbers, and that can be something like as we're looking at Chip & Potato, it's going into its third season. We just struck a toy deal there. So there are these multiple streams that are layering, some in live-action and some in animation, it really depends, as well as things that you alluded to, to Peanuts in the second part of your question, that has always been - that's a character property that's always had character demand just without any filmed entertainment content. I think what you're seeing right now in the strong CP numbers, particularly as it relates to Peanuts, is the effect of absolutely fantastic new content that's rolling out on a global basis. And that is creating significant new demand for Peanuts. I've talked before and I think I did so at Investor Day what an amazing marketing partner Apple is and how dedicated they are to this franchise. That's led to a great deal of growth. Let me see if Josh has anything to add to that and then can certainly come back to you to make sure I answered everything.

[Josh Scherba:]

Yes. Thanks, Eric. Just a couple of more details. So specifically on Degrassi, yet nothing is reflected in our numbers to date. Next quarter, we'll see some distribution revenue hit as a result of this deal. But next year will be when the revenue from the new production will be reflected in our numbers. Likewise, with Gabba, we've seen some distribution numbers reflected but really the production is very early days and won't really take full effect until next fiscal year. Also, on Strawberry, nothing reflected in our numbers related to the current production right now. That will all start to build in subsequent quarters. Aaron?

[Aaron Ames:]

Yes. On the CP question, Aravinda, as you know, and Eric mentioned it in his remarks, CPLG is a critical component of our CP strategy because we have our own in-house agency. And so the more that we do on that business, we get our 30% margin, which improves our margin, significantly on not only Peanuts but also on other brands, especially our own brands. So as we continue to build on our own brands, we have a massive built-in synergy that will start to really kick in next year on top of Peanuts.

[Unidentified Analyst:]

Thanks. I just wanted to follow up on what Josh said. So when you talk about distribution for Degrassi and Yo Gabba hitting this year, if you take Degrassi for example, that 385-episode library, that licensing, that hits 2022? Is that fiscal '22? Is that - sorry, fiscal '23, is that correct?

[Aaron Ames:]

Yes, that's correct.

[Unidentified Analyst:]

Okay. Is that fiscal '22 or fiscal '23? Sorry.

[Aaron Ames:]

It's fiscal '22, to be clear. And then the production revenue will hit next year - next fiscal year.

[Unidentified Analyst:]

Okay. Okay, got it. Thank you. And just a quick follow-up on Spark. Obviously, it continues to grow nicely but we're still some ways from sort of the prepandemic, let's call it, pre-Made for Kids time period. How do you see that - the shape of growth there? And maybe just touch on some of the drivers that be?

[Eric Ellenbogen:]

Yes. What we're seeing in Spark, and I make this characterization in general, Aravinda, which is like let's not get overly obsessed about quarter-to-quarter. You're seeing a layering in of all these production deals, a switching on of the IP. And Spark, in some sense, this is no different. It's a content-driven platform as it sees ebbs and flows. YouTube, Google turns the dials in various ways around the business. Optimization continues. What I can say is this, double-digit growth this quarter, double-digit growth next quarter and on a full year basis. So our revenue is up year-to-year. It's healthy. Advertising rates are continuing to recover, increasing monetization of a large audience. And we're benefiting as a provider of very curated quality content and optimizing that content, and it's a fight to quality and network scale. So we're at least refining there. We're seeing meaningful increases in ECPM You're also seeing YouTube favor quality networks, favoring networks exactly like ours because they're TV now. I mean, they're every bit on your smart TV start-up screen as television. So we can think of them not just as mobile content or as they originally started, cat videos. This is a real, real network and we look at it as part of the mosaic of distribution platforms. But it's really about this kind of 360° engagement, for example, about emerging talent that's now a YouTube, a small media and the way we manage it. So it's about audience engagement. That's what we're going for. And it's about those quality views. And it's just, again, part of the puzzle of content management that we have. But I can say with unequivocally, double-digit growth next quarter and full year.

[Unidentified Analyst:]

Thank you. I'll pass the line.

[Operator:]

We'll take our next question from Dan Kurnos with The Benchmark. Your line is now open.

[Dan Kurnos:]

Great. Thank you. Obviously, strong results, guys. I guess the question for me at this point, Eric, is I know we're only halfway through the year here, but you have some pretty big momentum building. You're telling us that a lot of these new deals aren't in your numbers, and I know that a lot of this will fall into '23, so we'll get kind of a step-wise function. But you almost comp against your Apple deal last year, you almost met the numbers in calendar Q4. So I guess what I'm trying to get at, Eric, is as we - is there any way to kind of size how we think about the stepwise function, like where we go from here? I know you're probably reluctant to give any granular forward guidance. But I'm just trying to get a sense of how big you have currently in the pipeline, like what this is going to add. And frankly, in the back half of the year, if you have this momentum, it feels like your current guidance is somewhat conservative.

[Eric Ellenbogen:]

Thank you, Dan. We like to be conservative. Look, we're super comfortable with where we're at. We reaffirm that guidance, and there's really no reason to change. And I would just remind, we're still investing and putting money back into projects and opportunities where we see layering in for future growth. I think I can reiterate though, just as far as what's going to fall in fiscal '22, you and your colleagues are well familiar with our requirement to accrue large library licensing deals in the order in which the content is delivered. So that will be showing up. And then obviously, the pipeline, which I'm feeling really good about, that will take us into fiscal '23. So, so much of that work has been done without even putting anything new on the books that we have a very, very solid platform. So I think that the trajectory is just in the right direction. And we do get a little bit of noise in the system, as you understand, and we have to accrue these very, very large deals like Peanuts, which happened last year when these large library deals are concluded. So that's basically what I can say. Super confident about our long-term targets. And even though we're looking at improvements in this quarter and most of our deals and Consumer Products upside, they just aren't in our numbers. And that includes Peanuts, which I know this is funny to say about a property that's as old as Peanuts, but it's just getting going. If you saw what happened just in terms of our Swatch deal and Lacoste and huge media spend against those properties, we're really seeing terrific momentum. And we're just layering on one at a time, long-term, high-return deals, first-class partners, not rushing anything, though. And so that's - again, I know you're not - you're looking for more granularity. I don't have it for you but we're sticking to our guns.

[Dan Kurnos:]

All right, fair enough. The Jay Ward portfolio, you want to talk about tugging at the old heartstrings, Eric, super quality. Obviously, you guys have a chance to do some good stuff. This is the second quarter in a row you've announced a pretty meaningful partnership, plus you've got the China deal for Jonny Jetboy. I'm just curious from your vantage point and given sort of the macro backdrop and what's going on here and your growing momentum, is this - I don't want to sort of front-run your further announcements. But is this kind of the cadence we should expect to hear from you guys in terms of new partnerships? How does the pipeline look from that perspective?

[Eric Ellenbogen:]

As to the pipeline when it comes to the kind of the M&A and partnership-related deals, they kind of have their own timetable. It's nothing that we try and sync up to a quarterly announcement. So there's a really good pipeline there, and we continue to work on deals that not only about the monetization, activation of the IP library but also acquiring other stuff. I mean, I just saw yesterday, Fox picked up Gumby. It's the way of the world. That consolidation continues unabated. But I have to say it's like - it's so personally gratifying for me when Tiffany Ward was - I was the first phone call she made after the NBCUniversal deal expired. And we're getting back together again, and I know that, that's going to be an incredibly fruitful and fun relationship. I should also mention apropos of nothing that I think that George of the Jungle series, Peabody and Sherman and the Rocky & Bullwinkle series, which we made together or - and one was for Netflix, the other is for Cartoon Network, another one of the shows was for Amazon. All were done coincidently because of creative excellence at our predecessor studio in Vancouver, which is now a WildBrain studio, but it was a Studio B. And the animators fought for the opportunity to work on it. So that's really - and I know you're looking for numbers, but that created a snowball effect like great content, great development, creative excellence. That's the stuff that delivers. It takes time. And -- but that's the build. So yes, the trajectory is exactly as you described but we're not kind of deal timing to quarters. And Degrassi was in the incubator for quite some time, and we had opportunities to move with it earlier with different creative teams, but we waited to get the exact right team on that. And we've done that with each of the properties, and we're just going to take our time on it. But what it does is just delivers the sort of steady state and a real shot at the Consumer Products upside. And that's what we're going for. So no change in plans.

[Dan Kurnos:]

Got it. And if I could just sneak one last one in. Obviously, there's upward pressure or tailwind from you on CPMs. I'm just curious in this environment, in an inflationary environment and given the amount of crazy spend on media, especially in the kid's category. If A, you're seeing any benefit on either episode pricing or licensing deals; and then excuse my ignorance, but on the CP side, knowing that you don't take inventory, do you get any flow-through if toy prices continue to rise due to supply chain issues?

[Eric Ellenbogen:]

So let me start with your last question first. And I'm hardly an economist, so I can't really gauge the inflationary effects of these things but just tell you kind of what we're seeing. If wholesale prices go up, we get higher royalties, absolutely because our licensing deals are generally pegged to the wholesale received by our licensees. So yes, to that question for sure. It's also the case that as you sell more expensive stuff, and that would be like some of our big halo licenses, those are much chunkier fees that we get out of those licenses. Fewer articles sold than mass. We love mass deals, but they help define the franchise, and that's often part of the strategy that we go into licensing with is you start upstairs and then you kind of work your way down. And it's just part of that product life cycle. As to whether we're seeing inflation hit the content licensing market. I don't really -- I haven't seen any of that going on yet. I mean, because each IP is its own thing. And I think it's more, Dan, about the competitive pressures where we have multiple buyers for properties, and they just have to bid for it. And it's just like the good old days. I don't think that, that has changed at all in terms of having to bid up a price for either library content or the rights to new production. And I think if anything, where there's pressure on wages, I think that the streamers and licensees understand that. And there's pretty good transparency in the industry around what things cost to make and they're going to have to come up with the difference. Speaking of which, I just got my notice from Netflix that my price went up to $20, so that just equals more acquisition budget to me.

[Dan Kurnos:]

Amazon is charging me more now, too, so I hear you. But yes, that sounds like pricing power to me, Eric. That's kind of what I was getting at. And I appreciate it. Thanks for indulging me and keep up the momentum.

[Eric Ellenbogen:]

Not at all. Thanks for your questions, Dan.

[Operator:]

There are no further questions at this time. Ms. Chan-Palmateer, I'd like to turn the conference back to you for any additional closing remarks.

[Nancy Chan-Palmateer:]

Thanks, operator. And thanks, everyone, for joining us today. We look forward to updating you again further on our next call in May. So thanks, everyone, and have a super day.

[Operator:]

That concludes today's conference. You may now disconnect.