WildBrain Ltd.
Q3 2022 Earnings Call Transcript

Published: 6 May 2022

[Operator:]

Please stand by. Hello and welcome to WildBrain 's Fiscal 2022, Third Quarter Earnings Conference Call. Today's call is being recorded. 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'd 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. 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 the value of 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 audits 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. For the question-and-answer session that will follow, we ask that each analyst keep to one question with one follow-up so that everyone has an opportunity to ask questions. If you'd like to ask an additional question, please rejoin the queue. I'll now turn the call over to our CEO, Eric Ellenbogen.

[Eric Ellenbogen:]

Thanks, Nancy. And thank you to everyone for joining our call today. In Q3, we delivered double-digit growth in both revenue and EBITDA, compared to Q3 of last year, reflecting the success of the 360 degree IP strategy that we've rolled out over the past 2 years. We're now seeing the returns from investments in our IP Library and premium Productions, now driving momentum across multiple earnings streams. And all parts of our content business are showing growth driven by that 360 strategy. And so today I'd like to provide a little bit more color on how that strategy actually, plays out in our financial results. As I've shared with you on previous calls, when we sign significant content deals, it sets up a cascade of revenue that flows through our financials over a period of years. And in the near-term, we often benefit from the licensing rights to our library with revenue recognized in the same quarter in which the library is delivered. And then, in the medium-term, we realize the production revenue as we ramp up and deliver the new series and our specials. And finally, the newly produced content taken with the library, drives viewer awareness and engagement, which depending on the property, creates long-term consumer product opportunities. And I should add in every instance adds to be enduring underlying value of our proprietary IP. Let's take a look at some examples in the strategy reflected in our Q3 numbers. First, our recent Degrassi deal, HBO Max, and which we signed and announced in Q3, and spoke to you about on last quarter's call, it's a two-part deal. So to start with, there is a library license for U.S. rights to be entire 14 seasons of the franchise's most popular installment. Degrassi

[Aaron Ames:]

Thank you, Eric. In Q3, 2022, we delivered a strong quarter reflecting growth across all our content-driven businesses. We're aggregating margin across studio, distribution and licensing, which is responsible for another quarter of EBITDA growth. We're delighted with our teams early execution of deals which we'd expected to be concluded later in our fiscal year. And we're on track to deliver at the upper end of our fiscal 2022 revenue guidance of 480 million to 500 million. On EBITDA, we continue investing to grow our business and we maintain our adjusted EBITDA guidance of between $87 million to $93 million. Looking at the key numbers for the quarter, revenue grew 27% to $129.5 million compared with a $102.2 million in the prior year, reflecting growth across content production and distribution, Spark and Consumer Products. Net income in Q3 grew to $21.3 million versus a net loss of $26.5 million in Q3 2021, reflecting higher gross margins. We generated positive free cash flow of $8.1 million in Q3, 2022, and perfect negative free cash flow of $3.3 million in Q3, 2021. As discussed last quarter, our cash flow reflects the higher deal volume and increasing revenue. We are growing. So there are short-term needs for working capital as we execute on content deals and build receivables, and to accelerate our growth in fiscal 2023, and beyond. We are seeing an incredible step-up in proprietary live action production, and by late this summer, we expect to have 5 live-action series in various stages of production, further building on our proprietary IP library. This live-action production also requires short-term working capital. By way of contrast, the production cycles for live-action are typically less than 12 months versus 24-month lead times for animation. We delivered $30.2 million of adjusted EBITDA in Q3, an increase of 75% compared with $17.2 million in Q3 2021. This was driven by the Degrassi library licensing deal, distribution agreements of Amazon Prime and BBC, and a robust pipeline of premium Productions. Now, I'll turn the call back to Eric.

[Eric Ellenbogen:]

Thanks, Aaron. Our proprietary pipeline is incredibly robust. We're continuously adding more deals behind those that have already been announced. And as I've already said, we're not chasing the quarter. It's a long game. Q2 results, you're now seeing the start of what's to come. These deals and many more in our pipeline and in development set us up for a phase of accelerated earnings growth for many years to come. As said -- I said, that's what we're going to do. We're now doing it, and it's coming through in our results. So now, if I may, let's open up to questions.

[Operator:]

Thank you. Please stand by while we compile the Q&A roster. And we'll first hear from Drew McReynolds of RBC.

[Drew McReynolds:]

Yeah, thanks very much. And good morning. And Eric, thanks for walking through the way you did in your opening remarks pretty crystal clear. So I appreciate that. So just to from maybe three or four for me and hopefully relatively quick here. Just on fiscal 2022 guidance, obviously, the year-to-date performance has been fantastic. I'm assuming that Q4 is just typical volatility that pulls back a little bit, but I'm just wondering why that guidance would it be higher but just could be climbing? And then second, just with respect to the overall content cycle, is there any change or shift that you're sensing out there, particularly on the streaming side that is there, obviously, with a lot of focus on what's happened in Netflix in the last few quarters or month. And perhaps the answer is absolutely no, there's no change, but just curious to see if the streaming world is entering a new phase from your perspective. And I have a couple of quick ones after.

[Eric Ellenbogen:]

Great. Good morning, Drew. And thanks for the question. What I'd like to do is perhaps take your second question first, and then turn it over to Aaron to discuss the guidance issues and where we stand, which as you correctly said, we're way ahead of plan here in Q3. A lot of it's timing, but he can give you that in detail. So clearly, the Netflix announcement, getting a lot of attention. And curious how we see it both, if I may, from both the WildBrain perspective and then more generally, which may be less interesting to you, just as an industry observer about what's going on. So look, let me state the obvious. Netflix changed the nature of content consumption. And there are, of course, corrections happening to be sure. They still have 220 million subs. They are -- they have been and continue to be an incredible partner to us. And here's how we see it changing the business a bit. It is sort of an equilibrium that was bound to happen where there needs to be a closer alignment between audience delivery and cost of production. And when you see some of these live action shows kicking out at over $20 million in episode with relatively small audiences that's difficult to rationalize. Multiple a $100 million, incredible theatrical quality films. It's where most people take their content these days and very aggressive international expansion which highly favors us. It reflects a Netflix themselves have said this. A change in the competitive landscape, which frankly favors us. We are suppliers to all of the major services. For us, as well, we produced a content, a fraction of those license fees clearly have the advantage of vertical integration with our Vancouver studios, which are busier than ever. And there's a flight to quality that also favors us. An important play, a migration to known, famous brands, which we have in quantum. And it's probably not unlike an movie business where you saw TV shows that would trend into theatrical feature films and the like because they represent pre -sold marketing and they bring in audiences. And, yeah, the last point that I would make around that is that for all of you who are industry observers know that kids content persists as a way of generating subscribers. I mean, look at the takeoff at Disney +. It's remarkable. As well as subscriber retention, keeping down churn. So I think we're really well-positioned as the market changes. I think there will be some fits, and starts, and re-examining strategy, but by in large, these are changes that were bound to happen. But make no mistake, the course of media consumption has been changed forever. And I think we're in a great place when it comes to our content and our cost of production. So maybe more than you wanted to hear on the subject, but let me just go to Aaron with your first question.

[Aaron Ames:]

Yeah. Thanks, Eric and thanks Danielle, our -- our distribution on production teams really did a terrific job. Their execution was great and they completed a number of deals earlier than expected in our fiscal year. So the timing really favored us and accelerated revenue recognition on those deals n the fiscal year. So, I mean, those deals were already in our numbers and -- and that's why we remain in our track to deliver in the upper end of our -- our annual guidance on revenue. On EBITDA, we have always said since the beginning that we would invest incremental revenue in EBITDA, to -- to grow, continue to grow our organization, and -- and to accelerate growth in fiscal 2023 and beyond. And so we're doubling down to do that. And -- and that's why we -- we retain our guidance from an adjusted EBITDA from 87 to 93.

[Drew McReynolds:]

Okay. Now that's makes a lot of sense and it kind of addresses my housekeeping kind of up here. If I look at SG&A cost, just say for Q3, a bunch of moving parts in there. But are we really at that kind of run rate going forward? And then last question for me, just on the lower non-controlling interest in the quarter, just if there's anything there that needs to be unpack. Thank you.

[Aaron Ames:]

Yeah. So I'll just pass it over to Danielle, and she can talk a little bit about SG&A and non-controlling interest.

[Danielle Neath:]

Yes. So as Aaron mentioned, we are reinvesting the incremental revenue to growth areas. So we are seeing a bit higher SG&A, but also, we had higher variable compensation accruals. So given that strong performance in Q3, similar to Q2, given that those were the higher EBITDA quarter. So we are expecting that Q4 SG&A would fall in line with the Q1 SG&A level. So $23 million to $24 million. And sorry, if you could repeat the --

[Eric Ellenbogen:]

I'm sorry, Danielle, go ahead.

[Danielle Neath:]

I was going to say that the question on NCI, if you could repeat that one, and then I'll let Eric jump in to add.

[Eric Ellenbogen:]

Yeah, I was just -- I think it was a little bit lower than what we've seen, and just wondering if there's anything to fly there or just a normal course volatility in that item.

[Danielle Neath:]

Yes, that would just be the normal following Consumer Products revenue. There was nothing unusual there.

[Drew McReynolds:]

Okay. Thank you.

[Eric Ellenbogen:]

What I was going to add at the risk of some redundancy is that every incremental EBITDA dollar I can get a hold up is going back into investments. And it is all about bringing on those revenue streams in '23 and beyond, just as we're doing with the content strategy, the 360 that I described earlier. It is -- we are rich with opportunity, and I'm investing everywhere I can.

[Drew McReynolds:]

Crystal clear. Thank you for all the color, Eric. That's great.

[Operator:]

Next, we'll hear from Daniel Kurnos of National Bank Financial.

[Daniel Kurnos:]

Thanks a lot. Good morning, Eric. Maybe one for you. Just in terms of these productions that you're talking about, is there a new financing model emerging at all? We don't quite see any material tick-up really in tax credits as some of the production activity steps up. So just curious if perhaps there's less reliance there and if there's any evolution to how deals have been structured in the past.

[Eric Ellenbogen:]

I don't know that we're really seeing a material change in the nature of the financing structure. As you well know, we a re not deficit financiers, there is margin in every deal that we make. One of the things that we are seeing, and it's a shifting landscape is the nature of the rights acquired by some of the streaming services. So it's a mix. You have certain services, Peacock among them and to an extent, HBO Max, we talked about that in the context of the Degrassi deal, where they are acquiring just U.S. rights, leaving to us the distribution of that content, new as well as library, in international territories, including Canada. So I won't say that the financing model is at all changing. The opportunity is because maybe early on what we were seeing as an example from Netflix with their Originals was the acquisition, outside of China, of global rights. So I think that is what I can describe as the landscape. And changes all the time as these services go international. But what really is, is about very high-margin due to our proprietary brands. And that's why we are putting emphasis in development and production, and it allows us to 360 in terms of monetization. So that isn't really a financing plan. It is an exploitation one that we've really hit the accelerator on. Does that answer your question?

[Daniel Kurnos:]

Yeah, it does. Thanks for that. I appreciate it.

[Operator:]

Next, we'll hear from Daniel Kurnos of the Benchmark Company.

[Daniel Kurnos:]

Great. Thanks. Good morning. Apologies, I'm in a little bit of a crazy morning. So at the risk here, Eric, just going back to the original line of questioning. I would think in this environments that you now have a huge opportunity to press deeper and fast, which we're seeing kind of explode here. No doubt that there was, let's call it plus the team on the SVOD side. And so I think a combination of that and then subsequently with the proliferation that we're seeing in AVOD in content out there, it feels like any -- for example, we just felt paramount come out with Sonic three now I think as you already have a relationship on that side, so to the extent that these guys probably are trying to right-size their checkbooks as it were between content costs. It feels like they need to increase their monetization. So I'm wondering if you are getting incremental views on toy production, just other ways that these guys know that they need to monetize their own IP beyond what you're doing kind of with your existing portfolio.

[Eric Ellenbogen:]

Do you know what I might ask Josh to address that question? Dan, good morning.

[Josh Scherba:]

Sure. Yeah. Look, we certainly agree with your assessment of the market and the competition being a positive for all the reasons that Eric spoke about earlier. I think what you're referring to is really just some of these streamers looking for additional revenue streams around consumer products. Is that the nature of the question?

[Daniel Kurnos:]

Yeah. I mean, I would say, look, I think you have an opportunity maybe more in fast space, and they clearly need to justify the massive streaming losses that they're accruing at the moment. And a lot of that feels like it will have to come through things like consumer products and other alternative channels that you can probably help them with given your expanding relationships with a lot of these companies.

[Josh Scherba:]

Yeah. So I would say there are unique deal structures that are happening where we are in certain deals excluding some AVOD rights, which is definitely a positive for us. I would just reiterate our capabilities of being a premium producer but at costs that are lower than if these streamers were to fully produce this content in-house. So I think that that really continues to be a larger opportunity for us to be a better partner to these streamers when they look at their overall cost structure. And then you layer on the fact that we've got known IP and that's a really great opportunity for them. I think we were excited with the Sonic push that Netflix gave this week and we're really -- we're really bullish on how they're going to promote that series. So yeah, the -- these independent known IP brands, efficient production models, I think those things put us in a really good place and then you layer on of our ability to do alternative forms of distribution, and yeah, I think we're set up as a great partner.

[Daniel Kurnos:]

And I'll ask the follow-ups either to you guys or Eric. Just in terms of the deals that -- Eric, obviously, you have a lot more in the pipeline, unsurprisingly. As you think about yield structure, your -- and we've talked about it a little bit on the call already. The way that you're signing deals with say like, with an Apple, or for example, it certainly has differed from how you considered signing deals in the past. And I'm wondering if windowing exclusivity, how you're thinking about things like that right now, given what the content gold mine that you're sitting on and the need for these guys to retain subscribers and/or viewers in this marketplace. You have the ability to also ramp content substantially. So I'm just -- I'm wondering if you have multiple bites of the Apple with expanded deals, and maybe even reduce exclusivity where you can still keep prices high, if that's an option you should choose or how we should think about that.

[Eric Ellenbogen:]

It's a good question. So look, the -- from this perspective, and we are a bit of a unicorn in the business because we are a vertical company. We have this amazing marketing and amplification network in Spark. There is a recognition, clearly, by all of the services that the always on quality content and brand is an enhancement to the rights that they are. And when I answered the question a little bit earlier about financing structures, again, it varies by service, whether they are seeking to acquire only domestic rights, which gives us an incredible library and a flow of new content for international channels and buyers. And take with that, what we're doing now on a global basis in Consumer Products with CPLG, and we favor things like Apple. The Peanuts content, and I think you know this and something you've observed is and has been largely unknown outside of the United States. It's been a character property granted 75 years and going stronger than ever. But now what we have is that Saturn rocket Apple content, that is day and day distributed on a global basis and is persistent content as it remains on the platform. So we're also seeing among a number of the services, both legacy ones and new ones, a desire to participate in consumer products. I think that that is going to be a recognition and they need partners like us. Many of them do not even have the ability to exploit consumer products on a global basis. They don't have the footprint that we do. So I think we are seeing they need to switch on additional sources of revenue you're seeing things emergent and SVOD services potentially going AVOD but it is about the ubiquity of content and the presence of the brands. And we've got the brand, so we celebrate and welcome all of those development. I think they favor us incredibly well.

[Daniel Kurnos:]

Got it. That's helpful. Thanks for the color guys. I appreciate it.

[Eric Ellenbogen:]

Sure thing. Thank you.

[Operator:]

Next, we'll hear from Aravinda Galappatthige of Canaccord.

[Aravinda Galappatthige:]

Good morning. Thanks for taking my question. I wanted to focus a little bit on the Consumer Products side. Obviously, you continue to grow very nicely, I think is about 24% year-to-date growth in fiscal '22. Obviously still led very much by Peanuts. Eric, considering some of the comments that you've made, it's that cycle going from library sales, to production, to IP. As we think about fiscal '23, do you see -- we're getting to that timeline where that CP growth can diversify beyond Peanuts. Do you see that mix chain bit starting to happen by next year? Or should we -- is that more of a fiscal '24 event? I wanted to get your thoughts on that. And my follow-up, I guess, for Aaron, given some of your comments around working capital and SG&A. You've successfully delevered down to the targets that you talked about 4.3 now net debt to EBITDA. Considering that you were having good EBITDA growth, the business is gaining good traction and industry backdrop is still good. Is it -- are you thinking along the lines of being fairly comfortable at that four times range? Or as we look to '23, do you think that the level of delevering that's happening can continue? Thanks.

[Eric Ellenbogen:]

Thanks Good morning. On the Consumer Products timing, it really break spy, which IP we're talking about. We'll rebuild the content base distribution, ubiquity of that content across multiple platforms and that is sort of drop one. We then do marketing, cross-promotions, etc. For example, Strawberry Shortcake, you may have seen in the current quarter, our big roll out at grocery, which we're doing programs with Sunkist and companies and so forth. It's really intercepting consumers where they shop, reminding them about brand, delivering more content on our YouTube network and then distributing that broadly, putting up content now on Netflix and a number of high-quality specials around the brand. And then by and large, for that, you'll see Consumer Products role on 24. For things like Sonic, where they have been essentially gigantic successes in theatrical merchant pictures and a very well-known persistent brand in the marketplace in gaming. There could be some pickups in '23 just off the coattails of all of its amazing activity on our premiering of the Sonic show on Netflix. So it really varies. I want to say our expectation is that this stuff begins rolling in the latter part of '23 and into '24. And we are in the main berry. Just in terms of the way revenue recognition works is that we don't take the MGs into revenue. We are -- it's really about the sell-through and the royalty receipts that we get. And that takes a while to flow through the financials. But it's a building process, and we're just layering one after another, after another, so that we will, I think, fully expect the diversification in the Consumer Products revenue. But the Peanuts business is a very well oiled machine now. And we've talked about territory expansions. That's going to continue to spur increases in revenue across Consumer Products. But I think that's probably where I come down on the timing question. And Aaron can answer your second question.

[Aaron Ames:]

Yes. Thanks, Eric, and Aravinda. We're very comfortable within our leverage and where we are. And we have a terrific amount of visibility because of the pipeline and all the deals that we've doing and growing that pipeline in production, distribution, starting to grow the Consumer Products. So I feel very good about our visibility. Our visibility is better than it's ever been before. And so, historically, we were doing the leveraging with some asset sales. And then to illustrate EBITDA growth, now we shift -- as we look out to '23 and beyond, we're shifting to grow in EBITDA to take over as the primary means and driver of accelerating any future deleveraging augmented by improving free cash flow. So a little bit of for shift there, but feeling very good about our leverage.

[Aravinda Galappatthige:]

Excellent. Thank you.

[Operator:]

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

[Eric Ellenbogen:]

Nancy before you pick up, I want to use my soapbox for one more thing is really just to publicly acknowledge and thank the amazing team that I have for what they're delivering. It's really fun to go to work these days. I think that everybody is excited about what we have and what we've switched on. And the attention that we're getting, the critical acclaim. These are great properties. They're doing great work with it, and I just want to thank all of my colleagues. And now back to Nancy.

[Nancy Chan-Palmateer:]

Thanks, Eric. And thank you, Operator and everyone for joining us today. We look forward to updating you on more exciting news in the next quarter. So thanks and have a great day.

[Operator:]

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