WildBrain Ltd.
Q3 2021 Earnings Call Transcript

Published: 12 May 2021

[Operator:]

Hello and welcome to WildBrain's fiscal 2021 third quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. . I would now like to turn the call over to Nancy Chan-Palmateer, Director, Investor Relations at WildBrain. You may begin your 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.

[Eric Ellenbogen:]

Good morning and thank you Nancy. Thank you everyone for joining our call today. Our content and our brands continued to perform quite well in this third quarter, driven by a robust production slate and strength in our consumer products segment. WildBrain Spark saw further improvement in advertising rates as well as growing revenue and emerging areas of direct ad sales, paid media and digital production. And looking forward to fourth quarter of 2021, we will at last have Spark results fully comparable to Q4 a year ago, factoring in the impact of both COVID-19 and the Made-for-Kids changes. Of course, there is always going to be seasonality across the year, however, we expect Spark's revenue to grow more than 50% in the forthcoming quarter, over last year's Q4. We are also realizing the strategic value of WildBrain Spark's massive audience engagement and its reach to secure comprehensive multi-revenue stream deals with brand owners that leverage our ability to exploit IP across content, licensing and audience delivery. And this includes a recently announced year partnership with the emoji company to launch emojitown, which is a brand new digital-first series and consumer products extension of the emoji brand.

[Aaron Ames:]

Thanks Eric. In Q3, we successfully refinanced our senior secured term loan and our revolver on highly favorable terms. Credit markets have taken notice of our strong and improved pipeline, financial performance and earnings trajectory, enabling us to extend the maturity of both of these instruments while removing the financial maintenance covenant on the term loan. This enhanced capital structure affords us significant strategic and financial flexibility to further driver digital continent brand strategies. Looking at the key numbers for Q3. Revenue grew 4% to CAD102.2 million in the quarter compared with CAD98.3 million in the prior year quarter driven by strength in our consumer products business. The Q3 net loss improved to CAD30.9 million versus a net loss of CAD221.7 million last year. The net loss this quarter was primarily due to non-cash, non-operating items of CAD3.5 million related to the refinancing and the change in fair value of embedded derivatives related to our convertible and exchangeable debentures of CAD23.5 million resulting from the higher share price. Adjusted EBITDA was CAD17.2 million in Q3 2021, slightly lower than the CAD17.9 million in Q3 2020. Now I will turn the call back to Eric.

[Eric Ellenbogen:]

Thanks Aaron. We have been hard at work over the last 20 months repositioning our assets for meaningful long term growth. With two major IP deals announced in the past six months and a robust deal pipeline, we are now well on our way to executing on our strategic vision. I think I have said this previously, no deal before it's time. It's about market opportunities that we are pursuing that will drive the business substantially over the coming years. This is about using our unique collection of assets and platforms to go after our share of the tens of billions of dollars in the kids and family space across digital ad sales, toys, consumer products and underexploited territories like China. Behind the scenes, we have a lot going on. Our team is constantly moving the business forward and we look forward to meaningful announcements in the coming weeks and months. And before we open up to questions, I wanted to give an update on our Analyst Day. We are narrowing in on the exact date, likely shortly after our next quarterly earnings in late September or early October. And I look forward to providing you hopefully in person with a deep look at everything we have been up to since my arrival and why I am so excited about where we are going. So next, let's open up for questions.

[Operator:]

. We have our first question coming from the line of Aravinda Galappathige with Canaccord Genuity.

[Aravinda Galappathige:]

Good morning. Thanks for taking my question. Obviously, good numbers on the WildBrain Sparks side as you kind of come out the other side. I was interested in the disclosure you gave with respect to the other initiatives, the direct ad sales led new initiatives which you disclosed grew 185%. Just so that the analyst in the street can kind of size up what that upside could look like, at least roughly, could you give us a sense of what you are seeing when you strike these deals with plans? When you compare the programmatic CPMs with the rate, the pricing you are seeing on the direct ad sales front, how much of a variance to the upside are you getting there? And just as a follow-up to your comments about including more third-party content within WildBrain, so content that is not owned by WildBrain, where does that mix lie today? And do you see yourself significantly moving in that third-party direction where perhaps less than 50% of the continent would be non-WildBrain or third-party? Thank you.

[Eric Ellenbogen:]

Thank you for your question, Aravinda. I think we are doing really well in direct ad sales. It's why we are doubling down and investing in this area, which we think is building long term value. And the percentage numbers are high because we are starting from a small base. But we are seeing a lot of traction. We are building. We are signing deals. It's early, but we see very, very big opportunity.

[Aravinda Galappathige:]

Yes. It's with respect to the mix between WildBrain-owned IP within Spark versus third-party. Should we expect that third-party piece to materially get larger to perhaps more than 50% of WildBrain Spark? I mean with the model kind of moving rapidly in that direction, I just wanted some clarity on that.

[Eric Ellenbogen:]

Sure. So directionally, what we are doing is using our network for these holistic partnerships. And not in every case do we own the underlying IP. I mean the announcement we made last quarter, as an example, with Sonic and Netflix was really good news because it represented something in which we had a stake across every revenue stream. But technically, we don't own Sonic. So these are contractual participations but they have equal effect on long term earnings and our marquee properties with very significant upside. So on the Spark network, what we are doing is looking at holistic deals and we are beginning to enjoy the benefits of the cross-selling among the divisions and the use of that network to reap the rewards of the viewership that we bring to them. So not all of them are proprietary IP. I think I highlighted they are partner IP which we definitively favor and to be able to use our unique assets to switch on revenue in consumer products specifically but also across distribution and longer form content. So that is much of the migration that we are seeing on WildBrain Spark network. We are doing it for toy companies for things like emoji with emojitown as well as our own proprietary IP. There is Peanuts content that runs on that network and we use it emotionally to drive to other platforms. So I can't give you an exact quantification, but we are trying to favor transactions and they are coming to us, in fact, that drive multiple sources of revenue. And it's a portfolio approach. It gives us lots of at-bats and the opportunity for upside using the power of our network. So that is definitely directionally where we are taking the network and we are getting a lot of leverage.

[Aravinda Galappathige:]

Thank you so much. I will pass the line.

[Operator:]

Next question, we have David McFadgen with Cormark Securities. Your line is open.

[David McFadgen:]

Hi. Just a couple of questions. So first of all, just on the debt. I was just wondering if you could confirm that it's all variable? There is some concern out there that maybe interest is going to start to go up as inflation ticked up here. So I was just wondering on that. And then secondly, you talked about these nascent revenue streams growing at very high rates. Can you just kind of give us an idea of the actual dollar value of these revenue streams? That would be helpful. Thanks.

[Aaron Ames:]

Hi. David, it's Aaron. Yes, so our debt is currently variable, but we are looking at some solutions, as you could imagine. And then what was your second question?

[David McFadgen:]

So just on the solutions, I guess you would be looking at some sort of interest rate swap. Is that it?

[Aaron Ames:]

Yes. I mean there are various types of solutions that will looking into, so things like that.

[David McFadgen:]

Okay. And just on the nascent revenue streams, you cited a very high growth number. I was just wondering if you could give us some idea of the actual dollar value of those revenue streams.

[Eric Ellenbogen:]

So the number -- sorry, go ahead. Go ahead, please, Aaron.

[Aaron Ames:]

Yes. So the number is starting from a small base, but it is growing very, very nicely and we are doubling down and investing further to continue to grow those streams. Sorry, Eric.

[Eric Ellenbogen:]

I think that it's a very, very big opportunity. And I think that we are accelerating an ad tech in our data analytics. That's the currency for advertisers. We have a very good understanding of our audience, what they are watching, where they are watching, you know, length of views, et cetera. And so it is conversion. And again we are positioned very much like the big entrants in the AVOD market. And you can see where their numbers are going. They are doing extremely well. We have got the audience, though. We don't have to build it. There is virtually zero customer acquisition cost here. We are building off of a very, very large base. And it's the conversion of that very sticky, very engaged audience to dollars. And that I can tell you that YouTube and Google are very committed to this area. This is the number three highest viewing content on their network. They fully recognize that YouTube is now television and not mobile devices with most of the viewing now migrating to big TVs. So it's it has TV in every sense. And I think that we are totally committed to the area. We know how big the audience is. And we will be converting that to revenue. So it is a small base but it's growing quite rapidly in the multiple hundreds of percentages. And directionally, I think you are going to be hearing in subsequent quarters, how much growth there actually is.

[David McFadgen:]

Okay. All right. Thank you.

[Operator:]

Okay. Next question, we have from the line of Deepak Kaushal with Stifel GMP. Your line is open.

[Deepak Kaushal:]

Good morning guys. Thank you for taking my question. Eric, Aaron, I have a question about emojitown. Just curious if you could offer a sense of how you putting up the capital for creating the content? And how much worth of capital are you guys putting up and what's the capital profile? And in general, how does that compare to SVOD deals with Apple Peanuts or SEGA and Netflix when you are doing only AVOD?

[Eric Ellenbogen:]

Okay. So they are different. Thank you, Deepak, for your question. They are all sized differently. In the case of the SVOD deals, those tend to be license fees paid by the SVODs with no a certain reservation of rights, for example, in linear television where we exploit. They don't take any participation in licensing and merchandising. And the structure of those deals are slightly different. In emojitown, it's building off of and leveraging our long-standing relationship at WildBrain CPLG, our licensing agency. And we said the way to go with this is short form content that is produced and exploited on our Spark network, on our owned and operated network because the play there is a consumer products play. And just to kind of size the deal, I can't tell you exactly what the CP pro forma is. We kind of know what the base business is already and the appeal of the emoji company and it's IP because of our licensing experience with them across EMEA. But these represent relatively modest investments by us. The big investment is being able to put this on our network. And that's where there is this incredible multiplier effect because we can put this in front of our gigantic audience and convert those views to consumer products. I want to point out something else important about emoji which I didn't remark upon in my remarks at the beginning. And that is, the appeal of that particular property is in the 11 and up. It is classified as a made-for-kids content. And therefore, the advertising monetization of those views is going to have a different profile than the MFK because of the way that data collection, which you are well aware of, works on the YouTube network. And so this targeting is to a slightly older audience which consumes lifestyle licensed merchandise.And that's what the play is. But the investment, it's essentially a joint venture between the companies and is characteristic of the kinds of deals that we are striking to get this high-value kinds of partnerships on the Spark network. I am not sure if that answers your question but those are kind of the parameters and how it's distinct from some of the other deals that we do.

[Deepak Kaushal:]

Got it. And just from a high level, if I can follow-up. Aside from relative size, when I think of relative return on invested capital on an AVOD type of deal versus Netflix type of deal. I assume you are putting up less capital upfront for a longer trail and a potential high ROI. Is that how to think about it versus an SVOD deal? Or are they close to being the same?

[Eric Ellenbogen:]

So it's also a matter of magnitude. And so while we look at obviously what the IRR is and return on investment, it's extremely high. And we know, again we have pretty good experience with the emoji business because it's been a long standing client of CPLG. So we already know what the return is just across licensing and merchandising. And how this essentially becomes, it's in a way same way that toy companies operate, it's an infomercial, in a way it's entertainment. But will precipitate much greater consumer products. Orders of magnitude, hard to say. Obviously the Peanuts Apple TV+ businesses is gigantic with a huge operating history and is going much higher levels in view of the amount of content that we have on Apple TV+ on a global basis. So this is a different profile. This is using the Spark network. But it's all about ROI. And we are very comfortable with the level of investment and the returns just even based on the base business that we have with the emoji company.

[Deepak Kaushal:]

Okay. Thank you very much. I appreciate you taking my questions.

[Eric Ellenbogen:]

Sure thing.

[Operator:]

. There are no further questions over the phone lines at this time. I will turn the call back over to Nancy Chan-Palmateer.

[Nancy Chan-Palmateer:]

Thank you operator and thank you everyone for joining us today. Please stay well. We look forward to updating you on more exciting news in the next quarter. Have a great day.

[Operator:]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.