WildBrain Ltd

TSX:WILD

Earnings Call Transcript 2023-Q1

[Operator]

Hello, and welcome to WildBrain's Fiscal 2023 Q1 Earnings Call. Today's conference is being recorded. [Operator Instructions]

I'd now like to turn the call over to Kathleen Persaud, Vice President, Investor Relations at WildBrain. You may begin the conference.

[Kathleen Persaud, executive]

Thank you, Keith, and thank you, everyone, for joining us today for WildBrain's First Quarter 2023 Earnings Call. Joining me today are Eric Ellenbogen, our CEO; and Aaron Ames, our CFO. Also with us and available during the question-and-answer session, Josh Scherba, our President; and Danielle Neath, our EVP of Finance and Chief Accounting Officer.

Before we begin, please note that 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, 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 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, which are available on Investor Relations section of our website at wildbrain.com.

Please note that all currency numbers are in Canadian dollars unless otherwise stated. After our remarks, we will open the call for questions.

I'll now turn the call over to our CEO, Eric Ellenbogen.

[Eric Ellenbogen, executive]

Thank you, Kathleen, and thanks, everyone, for joining us this morning. Fiscal 2023 is off to a strong start, solid revenue growth which has been driven by content production and distribution. Previously, I detailed our strategy of unlocking IP through the sequential production of premium kids content. And then exploiting that content across the higher distribution and consumer products value chain. The layering of those productions, one after another, is leading to the growth, sustainability and quality of our earnings. In this quarter, in particular, reflects the success of that strategy with robust revenue growth in content.

As part of our strategy, and over the past 3 years, we've made myriad investments in the business to support sustainable growth. And those investments, the bulk of which are now complete or concentrated in areas where we expect to see meaningful returns over time, namely creative talent in our production business and our Consumer Products business with its recent expansion across APAC. These areas will drive our business for many years to come. So I'd like to take a few minutes to talk about these focused investments.

First, our investment in creative industry, it all comes down to IP and creative talent. And not only do we have a deep vault of IP, over the past 3 years, we've invested in creative talent to ignite key properties with the very best-in-class of content production. And through our strong IP, exciting projects and by making WildBrain a great place to work, we've succeeded in attracting top-tier animation artists, creators, writers, showrunners, directors and producers.

And those teams have produced some of today's most popular shows for kids and families, such as The Snoopy Show, Snoopy in Space, Caillou, Malory Towers, Chip & Potato and Go, Dog. Go! to name just a few. And premiering on Netflix before Christmas are 2 more great shows, Sonic Prime and the reimaging Teletubbies, both of which are easily anticipated by fans judging by the high levels of social media engagement that we've been seeing for many months. And looking towards the latter part of the year, we have a very full pipeline of content and development and production with new shows like Yo Gabba Gabba! and many others.

I should add the most topical and significant of these was our announcement just last week of a first-look deal with one of the most accomplished animation producers in Hollywood, Bonnie Arnold. Bonnie was a colleague of mine at DreamWorks and is the Oscar-nominated producer behind such smash hit Toy Story from Disney and the DreamWorks How to Train Your Dragon franchise, which has grossed more than $1.6 billion worldwide. Bonnie has been spearheaded numerous long-term projects for us, including episodic series, TV specials and features.

And among our initial projects, Bonnie is developing Which Way to Anywhere, which is the latest best-selling novel from Cressida Cowell, with the very same author of How to Train Your Dragon. We're thrilled to have such an incredible talent at our studio like Bonnie, whose track record global success speaks for itself.

Now this quarter was very strong for content revenue. I just want to remind shareholders that we're not chasing quarterly results. There will always be variability in revenue from quarter-to-quarter given the schedule of projects that roll off production lines at our studio. Ours is a long-term play and we're confident that we have the pipeline in place for sustained growth with content production as the engine of our 360° business, driving distribution and consumer products.

My second investment focus is consumer products and APAC. So another significant concentration of investment over the past 3 years was in our consumer products licensing business. Our dedicated and wholly owned licensing agency, WildBrain CPLG, as a unique differentiator in our business, we are the only independent media company with such global capabilities in-house that provide a vital length to complete the integrated 360° circle of IP, spanning production, distribution and consumer products. This gives us a tremendous competitive advantage. And not only for growing our own franchises, such as Teletubbies and Strawberry Shortcake, but also to attract top third-party IP owners looking for global turnkey licensing solutions.

Indeed, WildBrain CPLG takes a global view and strategy while executing at a very local level with 20 offices, serving some 90 countries, especially with our recent expansion into the Asia Pacific region. We have truly global reach and through our boots on the ground, territory expertise, we can create and execute and spoke solutions for our partners across entertainment, lifestyle and sports. Our experienced licensing team is a huge competitive asset and we're a trusted partner worldwide high-quality clients and brands such as Sega, Sonic the Hedgehog, [Indiscernible] My Little Pony and PJ Masks, MGM's Pink Panther and the Addams Family; Paramount Global's PAW Patrol and SpongeBob; and Sony's Ghostbusters and Karate Kid. And I should add as well, Dr. Seuss, Sesame Street, Emoji, Spin Master and many more.

Over the last 3 years, WildBrain CPLG has also expanded its exclusive agency routes for the Peanuts brand across all territories. Through our investments in this business, the CP's representation of Peanuts, now extends across the entire Asia Pacific region, including Greater China, as well as all of EMEA and India. Global annual merchandise sales for Peanuts now exceeds $2.5 billion of retail. And as we continue to roll out our new Peanuts content on Apple TV Plus, as well as on additional platforms in China, we believe there's plenty of runway to continue to grow the brand. With our WildBrain CPLG into a major player on the global licensing stage, and lay the foundation for growth in Asia Pacific where we look forward to announcing [Indiscernible] our own and partner brands [Indiscernible].

Our 360° business -- excuse me, of business launching franchise brands is built on the tenant of delivering content to kids and families wherever, whenever and however the watch. If content is the engine of our 360° business, and audience engagement is that engine's fuel and under our always-on approach, that engine is perpetually running, fueled by continuous audience engagement on platforms around the world. And nowhere is this more true than our own YouTube AVOD network, WildBrain Spark.

In today's digital world, it is essential for kids brands to be on YouTube, and even with all of the emerging new outlets, YouTube is and remains the most important and popular platform for brand relevance. And while results of WildBrain Spark were affected this quarter by the global trend in advertising that's impacting even the largest companies, Google, Microsoft, Meta, it's really important to recognize that the true value of Spark lies in its audience engagement and the insights that we capture from that engagement. And in turn, this converts to discovery of new content and the sustained popularity of our proprietary and partner IP and ultimately it drives the much larger opportunity in consumer products.

Accordingly, we continue to see high engagement rates and very high engagement rates among kids on Spark, particularly for our own brands. As I've mentioned before, and it's worth noting again that we believe Spark is in a lead class of kids content providers on YouTube, having crossed the threat of 1 trillion minutes of watch time since 2016. We have enormous learnings from this audience engagement, which we leverage on viewing trends and audience appetites and to identify, enhance and monetize the most popular brands in our portfolio.

Take one example, Caillou has garnered over 75 billion minutes of watch time. And Teletubbies, another example has captured over 38 billion minutes. And in addition to streaming the classic Caillou and Teletubbies series on WildBrain Spark, we've also released new short-form content for both plans. And with Caillou, this rollout of new content has been robust during the past 3 years, while Teletubbies is just ramping up. Nonetheless, delivering these brands to audiences worldwide, on WildBrain Spark is driving deep engagement and the insights that we gain from that engagement on YouTube has served as a springboard for reactivating the brands and leveraging both new and classic content off YouTube across multiple platforms, including all the SVOD, AVOD, FAST and linear channels.

For our own brands and also for Partner Brands, Spark is an incredibly powerful launchpad, for reaching audiences where they're most engaged. We create incredibly compelling content and then expand that brand awareness through YouTube and distribution deals with SVODs and other platforms, all of which surge to drive from a products growth, which completes the IP circle. And at the risk of boasting, simply no other independent entertainment company has this breadth of capabilities in-house. We are uniquely positioned to unlock the power of our brands and to provide a turnkey solution to partner brands for producing content, reaching audiences on YouTube and other global platforms and then completing the play with consumer products on a global scale. This is exactly what we've been building over the last 3 years, and I couldn't be more proud of what we've accomplished.

With that, I'll turn the call over to Aaron to review our results in detail.

[Aaron Ames, executive]

Thanks, Eric. First quarter of 2023's results reflected strong top line growth with a 12% increase in revenue over the prior year. EBITDA was $19.9 million, which is consistent with the prior year, and gross margins were down about 200 basis points of the step-up in live-action production. We recorded a net loss of $7.6 million compared to a net loss of $21.4 million in the year-ago period, primarily due to a noncash foreign exchange loss of $12.5 million in the current quarter from revaluing U.S. dollar debt into Canadian dollars.

Free cash flow was negative $8.9 million in Q1 2023 compared with negative free cash flow of $19.9 million in Q1 2022. Free cash flow for Q1 2023 reflects a significant growth in accounts receivable associated with larger deals and additional SG&A for growth initiatives and working capital timing.

Subsequent to the quarter, we increased our revolving credit facility from USD 30 million to USD 40 million for working capital purposes. Our leverage at the end of the quarter was 4.2. The leverage may fluctuate from quarter-to-quarter, but overall, we expect it to continue to glide down over time through EBITDA growth and free cash flow generation. We reaffirm our guidance for fiscal 2023, expecting revenue of approximately $525 million to $575 million, and we expect adjusted EBITDA of approximately $95 million to $105 million.

As Eric mentioned, over the last 3 years, we've made investments to support our future growth, including investing in creative talent, consumer products and our expansion into Asia Pacific. These investments provide a platform, which we are leveraging significant profit growth. We expect going forward that these investments will be at a less aggressive pace and that SG&A will moderate for the balance of the year, as we start harvesting returns on these investments.

I'll now hand the call back to Eric.

[Eric Ellenbogen, executive]

Thanks, Aaron. While branding, we are a standout in the media and entertainment industry, we're the owner of a deep vault of IP or a powerhouse of creative talent, a leading global player in consumer products, licensing and curators of deep audience engagement, and I can think of no other independent media company that comes close. Leveraging our capabilities to provide both premium originals for SVODs and digital-first content to reach kids wherever they are has led to a solid start for fiscal '23. We're lining up a creative pipeline with meaningful consumer products upside and building a book of business for years to come.

We're really excited and energized by the opportunities ahead.

And with that, I'll turn it over to the operator and open up for questions.

[Operator]

[Operator Instructions] Your first question comes from Sid Dilawari with Cormark Securities.

[Siddhant Dilawari, analyst]

I guess the first one, I just wanted to dive a little bit deeper into WildBrain Spark. Just although acknowledging the overall macroeconomic headwinds, I would have expected digital and programmatic to be a bit more resilient. Can you maybe talk about some of the verticals where you saw the aggressive pullback in Aspen during the quarter? And then just your outlook for the rest of the year for WildBrain Spark?

[Eric Ellenbogen, executive]

Sure. Thanks for your question, Sid. It's macro. You look across any of the ad-supported platforms, which YouTube is the greatest. And there's been significant pullback. I think kids often come first. And we've obviously seen the destitutes of this market according to the economy, and as dollars move from linear to digital, as YouTube algorithms are adjusted and such. But what I think is worth pointing out is that what hasn't changed is the level of audio engagement. And I've often said we will get paid for those eyeballs and that engagement. And that comes through ad sales as the market moves up and down.

It comes through consumer products, importantly, and building great loyalty. It is discovery and an on-ramp for new content, driving that across the entire distribution chain. And if you're not on YouTube, you're not in the kids business. And that has, as I pointed out in my script today, that's unchanged. That has not changed at all. So we're seeing the engagement. We're pushing out a lot of new content. Teletubbies is a very good example where we have a show going up on Netflix, and we have new episodes that we're enrolling on the YouTube Spark network. Caillou is another great example with the insights and analysis that we have from that platform.

We were able to place new content production on Peacock while we continue to have episodes running on WildBrain Spark. It is quite a virtuous circle. And that's really the name of that game. We're also -- I should mention one of the investment areas that I didn't necessarily cover was our technology and insights group at WildBrain Spark. And we're now sitting with 6 years of incredible proprietary data around those views. And with that information, we're able to glean all kinds of insights that are useful in content selection and placement. So I don't know if that answers your question fully, but that's kind of what we're seeing in that division.

[Siddhant Dilawari, analyst]

Yes. No, that's helpful. And then sorry, just on the outlook for the rest of the year, like do you think this is to continue for the rest of the year? I know, again, this is macroeconomic, but just from a programmatic perspective, do you expect this to slow down a little bit in the next few quarters? Or do you expect this sort of decline to continue in the next few quarters?

[Eric Ellenbogen, executive]

Look, on the ad sales side, I will borrow yours or anybody's crystal ball on what that looks like. The good news is if history is a lesson here as the economy begins to roll back, ads come right back on. And as quickly as they will limit spending and move from one platform to another, they'll come back into the market. So hard for me really to say about that where we're really, really focused is on growing these brands which the platform is serving to a fairly well and converting that engagement to consumer products. That -- again, we look at the aggregation of value across the entire margin chain.

And since we by and large, fully own these brands or whether with partner brands have incredibly good deals, that monetization that takes place in consumer products, I look at as part of the content P&L. And it is the full brand P&L that we look at. So it's all those sources of revenue that are aggregated across the entire value chain at WildBrain. And the other point that I was making is we have all the links in the chain and hence, the ability to monetize at every point of content life cycle as well as every source of revenue conceivable.

So hard for me to say like short-term forecast on what that looks like specifically. But I'm incredibly cheered by the growth that we've had in consumer products quarter-over-quarter. And no doubt, it's about being on everywhere.

[Siddhant Dilawari, analyst]

Okay. That's very helpful. And then maybe just one for Aaron. Just on the content production and distribution business, revenue growth was 40%. Maybe some of it was timing and some of organic, obviously, organically driven. How should we think about seasonality for this line item for the rest of the year?

[Aaron Ames, executive]

Yes. So what -- we are seeing continued growth, but it's -- we're not managing the business on a quarter-to-quarter basis. So -- and we've issued our guidance. And in general, it's kind of -- it's broad based. So it's -- we both -- we see going forward, growth in consumer products, as well as some continued growth in our content, which is based on a well-known IP, which is resonating well in the market. So we're affirming and we've reaffirmed our guidance as well.

[Operator]

We'll take our next question from Dan Kurnos with Benchmark.

[Daniel Kurnos, analyst]

Eric, let me ask maybe the Spark question in a much different fashion because, yes, we've clearly seen everyone else's results. YouTube is obviously under pressure at the moment. I think the bigger question, Eric, is maybe because we've talked about this before and you continue to highlight it more as data mining operation, not to say that we're not pleased that you could get revenue from it.

But just in terms of what we're seeing in the broader marketplace, if I can maybe kind of expand the thought process to, we're seeing a lot deeper integrations now between the producers of not just the content, but also some of the CP guys, you're seeing retailers get deeper integration to with SSPs and -- As you think about WildBrain placed in the ecosystem and sort of the data that you've been able to collect through YouTube, like how do we think about your ability to expand that onto other platforms? Not to diminish you to, Eric, but the kind of thing is, tick-tock goes to shopping and we get more spin-up of FAST and AVOD. Is there a way for a while to continue gathering incremental data points and become sort of a linchpin within that ecosystem as we get these more integrated partnerships?

[Eric Ellenbogen, executive]

Thank you, Dan. That's a really interesting question. And so, this is how I think about it, and I want to just come back to the first thing that you said in your question, which is looking at this as a data and insight light, which it is, but it's a lot more than that. It's the engagement. And it is the ability to launch new content and franchises which is the way we've been going with Strawberry Shortcake, as an example. It is the reinvigorating of previously produced content as we did with Teletubbies. And then we pivoted to create a new series for Netflix with the awareness that has been built and maintained for years now on our YouTube Spark network.

The data and insights group that we have built originating at Spark, now serves the entire organization. So that doesn't sit exclusively within the Spark organization. That gives us all kinds of information upon which to make our decisions in each of the business units. It serves Spark. It serves consumer products. It serves production, research, when we look at potential acquisitions of new IP. It is really multifaceted. But it's the engagement piece that is critical. And when you talk about TikTok and Instagram and some of these other platforms, we've been building out presence. Teletubbies is a really good example. We have, I don't know, something north of 0.5 million subs in social media, young adults who are following this franchise. And so we are definitely taking those insights and what works and we see immediately given the number of likes and the number of subscriptions whether we're hitting home with the content that we are creating.

So the answer to your question is, yes, and we get very levels of data from our AVOD partners. And that incidentally has helped us drive some really interesting content distribution deals is by gathering up the data and then going to an SVOD and saying, "Look, we want to show you globally the views that we're getting, and we can take a look at this even region by region and know where our strengths are." And that's incredibly appealing.

I don't know anybody else who's doing that, honestly. And so it puts us in a pretty privileged class as we do that. And as we distribute to more and more platforms and as they also spring up regionally, for sure, we have a very local approach to those things. I can see this as being a great utility. I don't know if that answers your question, but it's really an engagement story, as well as a data and insight story.

[Daniel Kurnos, analyst]

Well, I mean, it's directionally kind of where it was going, Eric, and maybe this is way over my skis on this one. But the fact that you've built a rather large library of short form now -- Creative is not like advertising, although advertising is a form creative, right? But to the effect that you can sort of have more fluidity in addressing all of these developing streaming channels and essentially, almost try to capture some of the media entertainment budgets out there, if you guys can act not just as a content producer for larger shows, but even as a lead-in or an engagement driver or kind of teaser for some of the broader guys on -- by absorbing some of these data insights. That's kind of where I was trying to get out and see if you have kind of reached that level of critical mass since [Indiscernible]

[Eric Ellenbogen, executive]

That's very good. And I know what I can also ask Josh to pitch in on this. But we have companies coming to us all the time now more than ever before to do exactly what you're talking about. And it is to use our platform to drive awareness and discovery of their content, which is playing off on other platforms. And it is -- if you go on any of the SVODs and a dizzying number of tiles come up and only to an extent is the discovery and programming guide engine useful.

[Audio Gap]