WildBrain Ltd

TSX:WILD

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, and welcome to WildBrain's Fiscal 2021 Second Quarter Earnings Call. [Operator Instructions] 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 future investments by the company; the impact of COVID-19 on the company and its business; the business strategies and operational activities at the company; the markets and industries in which the company operates; and the future financial and operating performance of the company and its assets, including the leverage position of the company. Such statements are based on information available currently and 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 up in the company's most recent MD&A and annual information form. Please note that all currency numbers are in Canadian dollars. [Operator Instructions] Please note that we are all in separate locations so we do appreciate your patience as we encounter any lumpiness as we steer through the call. I will now hand the call over to our CEO, Eric Ellenbogen.

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

Thank you, Nancy. Good morning. Thanks to everyone for joining us today. Last week, we announced yet another major project that capitalizes on our unique capabilities to manage, monetize and grow brands across content and licensing. In partnership with SEGA, we're producing a new Netflix original series called Sonic Prime, which is based on the highly popular gaming franchise Sonic the Hedgehog, and production is now underway in our Vancouver studio. This is an incredibly meaningful deal for WildBrain. Like our Peanuts agreements with Apple, these multiyear exclusive Sonic contracts with SEGA and Netflix add yet another premium project to our creative pipeline that translates into excellent visibility for contracted, high-quality earnings streams for years to come. We're partners in a property that has tremendous momentum and massive consumer reach. Sonic the Hedgehog is one of the most popular entertainment brands in the world. And since its video game debut in 1991, over 1.14 billion game units have been sold and downloaded. Only last year, the theatrical feature film Sonic the Hedgehog grossed USD 320 million worldwide, and it broke through a major box office milestone to become the #1 grossing video game movie of all time in North America. And given the success, the sequel to the feature is already in development from producers Sega Sammy and Paramount. And we expect that our new animated series will connect with and expand the enormous global fan base for all things Sonic.I want to emphasize this is not a service project for our studio. This is a true partnership as WildBrain and SEGA was sharing production, distribution and licensing revenues. We're honored to have this partnership with SEGA and believe it speaks volumes about our capabilities in managing world-class brands. We've witnessed firsthand the enduring popularity of this brand through strong and steady global demand for our library of legacy Sonic series, which comprises 132 half hours in the WildBrain library. We've also seen the strength of Sonic in consumer products, and we've seen that first hand through our preexisting licensing agency representation in Sonic across Continental Europe. We expect that business to grow as we now layer on representation of Sonic Prime in that territory. This partnership is yet another example where we get all the benefits of premium content production, delivering steady-state, high-quality, predictable earnings, plus the considerable upside potential across distribution, including on our own AVOD network and in consumer products licensing. As I said to you on our last call, we have a robust pipeline of premium content. Our Sonic announcement is just a preview of further coming attractions. And like Sonic, in the coming quarters, we expect to be talking to you about other affiliations for properties from our deep library. One of my top goals when I joined this company was turning it into a premier creative force in kids and family entertainment, and a big part of that is diving into our library and servicing evergreen brands that have strong potential to renew and reinvent for today's audience. We're making great strides on these goals. We've turned into account an asset base that we have to build franchises, which we expect will continue to improve the value of our library. This great new content drives further high-margin distribution and consumer product opportunities, opening up enormous option value across our business and our IP portfolio. Premium franchises command premium dollars across the entire value chain, and we believe top-flight creative, coupled with our unique capabilities to unlock and to exploit IP will create a virtual flywheel of growth and value creation for years to come. Our unique capabilities in development, production, distribution, licensing and audience delivery deployed against our own library are also drawing in these premier partners. Another example of that is our new animated series Go, Dog. Go!, coproduced with DreamWorks. The series began streaming on Netflix January 26. Within a couple of days, it became a top 10 show on the platform in both Canada and the United States. This series is a case in point of doubling down on top-flight creative, which is clearly resonating with audiences who are recognizing that quality on the screen. Likewise, our newest Peanuts series, The Snoopy Show, just premiered on Apple TV+ last Friday and has been getting great rave reviews. And Apple is launching a major marketing push for The Snoopy Show not only on their own platforms but also with an extensive global advertising campaign. Just last Friday, the Peanuts gang staged a global takeover of the apple.com website. Our studio meanwhile is hard at work on more original Peanuts content for Apple, including multiple family specials and season 2 of Snoopy in Space.In the quarter, we deployed capital from the Fine Capital growth fund to acquire rights that we didn't already own in the Caillou series from PBS. We perfected our rights ownership, importantly giving us control over Caillou to reach an even broader audience, including on our WildBrain Spark network, and to increase exploitation of the property across various business areas. I've said previously that we'd invest in rounding out the IP rights in our library, and this is just one example with an enduring property that we know well. Caillou is one of the top brands in our AVOD network, and our data analytics tell us that there are opportunities to reignite and to grow this property. Turning now to our AVOD business, WildBrain Spark. We're really encouraged by further sequential improvement as advertising revenues continue to rebound from the pressures of COVID-19 and the YouTube policy changes. In the second quarter '21, revenue at WildBrain Spark improved sequentially by 74% from $8.9 million in Q1 '21, reflecting the build-out of our proprietary data analytics tools, which are driving growth in multiple new revenue streams, including direct advertising sales on our own network, paid media and digital production fees and some seasonality. These nascent revenues grew by 365% in the second quarter '21 versus '20. Now I need to contextualize that growth as building on a relatively small base. We're surely not expecting to see triple-digit growth every quarter. But the growth that we're experiencing shows that our investments are starting to pay off, and so we'll continue to make those investments. We know the opportunity is big and it's burgeoning, and we're in high gear to build out our teams and to expand our service offerings to both grow and monetize our engaged audience. We're highly focused on benefiting from the secular shift in ad dollars from linear to digital. The tide continues to rise as these dollars shift. And to capture as much of this revenue as we can, we're creating a -- stand by. I'm sorry, technical difficulty. So further to that, our network offers advertisers an enormous scale, plus enormous breadth and a variety of safe content, and we believe our competitive advantage lies at the intersection of this massive advertiser-friendly network and our pioneering capabilities in proprietary data analysis. An important variable for monetizing content is watch time, and that's a metric that tells us how much time people spend watching our content on YouTube. The more time people spend watching our content, the more ads we can serve. In Q2, for example, watch time increased 15% versus Q2 last fiscal to 59.7 billion minutes. Kids watching content on our platform spent 6 minutes and 16 seconds on average per view, which was up 20% from Q2 2020, and viewership remained strong at 9.5 billion views in Q2 '21. Our direct ad sales efforts are benefiting from a shift in family viewing patterns to connected TVs, which accelerated during the pandemic. Households are increasingly using connected TVs to watch ad-supported streaming services like WildBrain Spark on YouTube. This important trend was confirmed by our commissioned research report titled Making Screen Time Family Time, which we released in December. We surveyed 3,000 U.S. households with kids and found that a very large percentage of parents on the order of 90% see free AVOD services as important video sources for their children. We also learned in that study that connected TVs are the most popular platforms for family viewing in over 60% of households. Our data further indicate a very high rate of family viewing on our trusted network where parents are watching high-quality curated content on YouTube with their kids, and this unlocks advertising opportunities for family consumer products and brands targeted at parents and kids in a COPPA compliant environment. The majority of WildBrain Spark viewing in major markets is now on connected TVs, and the majority of that viewing is content that's at least 30 minutes long. That means in family living rooms, WildBrain Spark is directly competing with linear television on the very screen that linear once owned. This is a trend that we're confident will accelerate the shift in advertising budget because, as I've often said, advertising dollars follow eyeballs. We're after our fair share of the $4.6 billion of global kids advertising. And with that, I'll hand the call over to Aaron.

[Aaron Sholom Ames, Chief Financial Officer]

Thank you, Eric. During Q2, we continued our disciplined approach to content investments and the management of costs and working capital as reflected in our continued generation of positive free cash flow. We are also making significant investments to support our growth in premium production and licensing and to expand our development pipeline. In Q2, we further accelerated the build-out of our proprietary data analysis and ad sales teams at WildBrain Spark to support growth in our own and partners' brands. These continued investments were driven by strong adoption we are seeing from the marketplace from these initiatives we launched last year. Our leverage ratio remained steady from Q1, and we remain on track to be in the mid-4 level or below by the end of our fiscal 2022. If you look at the last 3 years or so, the source of our deleveraging has primarily been from free cash flow generation or asset sales and, to a lesser extent, EBITDA growth. As you look out to next fiscal year and beyond, we expect EBITDA growth to take over as the principal driver in accelerating the deleveraging process, amplified by improving free cash flow generation. Turning now to our Q2 results. Revenue in Q2 grew 17% to $142.3 million compared with $122.1 million in Q2 last year. The increase was primarily driven by the large deal for the Peanuts library with Apple TV+ announced in October. Q2 2021 net income increased to $11.3 million versus a net loss of $2.3 million in Q2 last year. This improvement was driven by higher gross margin, a higher noncash foreign exchange gain and other income from litigation settlements, together with lower expenses related to reorganization, development and finance costs in Q2 2021 versus Q2 2020. Positive free cash flow in Q2 increased to $23.5 million compared to $13.3 million in Q2 2020. The increase was partly driven by improvements in collection of production financing, other income earned in Q2 2021 and lower distributions to noncontrolling interest in the current quarter. Adjusted EBITDA increased 14% to $29.1 million in Q2 2021 compared with $25.6 million in Q2 2020, principally driven by the Peanuts library licensing deal, continued strength in our content production and distribution businesses and other income of $4.4 million from the litigation settlement. The funds from the settlement are being invested to meaningfully accelerate growth areas, principally in our proprietary data and analysis tools, direct ad sales and our licensing capabilities. Now I'll turn the call back to Eric.

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

Thank you, Aaron. Overall, we are realizing positive momentum in every sector, as evidenced by our Q2 financial results. We're delivering on our long-term strategy of, number one, creating premium kids content to grow key brands; number two, monetizing our large audience on WildBrain Spark; and number three, improving our cash flow and balance sheet. And most importantly, we're striking meaningful deals supported by our 360-degree strategy to grow our own IP and partner brands by leveraging the strength WildBrain has across development, production, distribution, licensing and audience delivery. There are many more such deals to come, so as I've said on past calls, watch this space. And finally, before opening the call to questions, I'd like to mention that we're looking at holding an Analyst Day this year, probably mid-summer, early fall. I've now been with the company for 18 months, and I could not be more confident about this huge opportunity before us. So I'd like to spend some time at Analyst Day to spell out the size and the scale of that opportunity, with more details to follow. So now I'd welcome your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Aravinda Galappatthige from Canaccord Genuity.

[Aravinda Suranimala Galappatthige, Managing Director]

Congrats on the quarter. I'll start with my main question, and I have a follow-up. In terms of the trends that you're seeing at WildBrain Spark, obviously, you are now lapping the impact of the YouTube rule changes. I was wondering if you can talk to sort of the shape of the recovery that you're starting to see and anticipate. And connected to that, obviously, the initial takeaways from the development of the direct ad sales initiative, I was wondering if you can expand a little bit on that. And then as my follow-up, with respect to the Sonic the Hedgehog deal, can you talk to sort of WildBrain's share of merch revenues down the road? Is that something you can disclose or give us some general indications of?

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

Okay. So let me take your question about direct ad sales and how those results are coming forward. It's going quite well. I think one of the things you pointed out is the change in YouTube policy, which, we've highlighted previously, were made for kids, which happened last January. And for those not familiar, it basically prohibited kids content providers from collecting -- or YouTube collecting data on individual viewers and therefore, needing to move to a more contextual advertising model, not dissimilar from linear television. So we made significant investments this quarter in direct ad sales, which we believe will build long-term value, and those are the numbers that I highlighted in my earlier remarks. So if I can share with you what advertisers are looking for: number one, incredible reach. And that's something that we have in abundance. Secondly, they're looking for brand safety and want to know their ads -- where their ads are being placed. Obviously, the advertising environment is critical, and we're signing lots of deals. We have huge aspirations in this area. We're seeing a shift in revenue not just from the adjustment in the YouTube algorithms, which are beginning to favor scale networks like ours, adjusting for the changes made and made for kids policy, but also in campaigns and switching on new revenue services across WildBrain Spark. And one of the things that we're offering, which we think is incredibly compelling, is a customizable solution. It's premium content based on viewing trends and data insights that we've compiled. And we've also invested heavily against data analytics and ad tech with some proprietary technology that helps us better serve our audience with content that they're looking for as well as helping advertisers understand better the audience that they're reaching. So it's probably not dissimilar, as an example, from linear television, from understanding lead-in programming and what leads to the next, and that allows us to optimize what we're doing. So -- and the other thing we're benefiting by clearly, and this isn't us, is the shift of ad dollars from linear to digital. And so as I pointed out, we expect to harvest our fair share of that $4.5 billion that are being spent globally each year on kids advertising and with an incredibly engaged audience. Can I ask you to repeat again your second question?

[Aravinda Suranimala Galappatthige, Managing Director]

Yes. It relates to the Sonic the Hedgehog agreement which you announced. And I apologize if I didn't hear that during the prepared remarks. Can you talk to your share of merchandise sales or any kind of product sales down the road as per this agreement?

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

I'll ask Josh to address that. I'm not sure that we hear Josh.

[Josh Scherba, President]

Apologies. Can you hear me now?

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

All right. There we go.

[Josh Scherba, President]

Okay. Sorry about that. So certainly, I would characterize this deal with SEGA truly as a partnership. We're going to be sharing in all revenue sources related to this IP outside of video games and the feature film. So it begins with production of great creative, and we couldn't be more excited about the series. It's truly a landmark series for us in terms of creative scope and ambition. It, in every sense, will be a premium project. And then once we get it out into the world, we're going to be managing exploitation outside of North America, so representation through our CPLG group as well as utilizing our WildBrain Spark division to ensure that we're driving amplification of the brand and ultimately, ancillary revenues. So it really is a great example of our ability as a 360 company to really wrap our arms around a brand, and we couldn't be more thrilled than to be doing it with SEGA on Sonic.

[Operator]

Your next question comes from the line of Drew McReynolds from RBC.

[Drew McReynolds]

Yes. Just a quick follow-up on the SEGA partnership and relationship, either Josh or Eric. Clearly, under the new management team here at WildBrain, we're kind of seeing better execution and certainly, better execution on the premium side, and these aren't insignificant deals you're signing.How did this partnership come about? If you could provide a little bit more granularity there. And then I have a follow-up after that.

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

So Drew, thanks for your question. I'll let Josh talk to you about how the partnership came about. But one of the things I'd point out, which is somewhat axiomatic, is the scale of this deal is significant. Obviously, we have to provide a disclosure as a consequence of materiality. So you can obviously take away from that how important the transaction is for the company and that we've struck a partnership deal. This is not service work, as I pointed out in my earlier remarks, but rather a very extensive relationship building on a pre-existing relationship that our CPLG licensing group has had across EMEA. And I'll let Josh talk to you about the genesis of the transaction.

[Josh Scherba, President]

Yes. So it's been -- Drew, it's been a couple of years really that we've been cultivating this partnership with SEGA and really taking a methodical approach to be creative and what we would do in a series related to Sonic moving forward and finding the right partner, which ultimately was Netflix. So it's a process that certainly takes time, but overall, our direction into premium, our -- the improvements we've made at our studio, they all really help our case in terms of proving ourselves to premium partners like SEGA.The other thing that I would highlight, and Eric mentioned it a little bit in his script, but the tremendous momentum Sonic has as a brand right now. The feature film last year did incredibly well. There are -- there's a multitude of plans in the coming years around the brand, including a second feature. And then ultimately, it's going to culminate in this premium series on Netflix. So sometimes when we're working on brands, it's a full reboot, and you're trying to kind of get momentum started. In this case, we're really standing on the shoulders of some tremendous momentum that's starting to build. And so that's why we couldn't be more excited to be partnered here.

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

I'd add one other thing, is this -- just in contrast to -- because I know you've followed the company some time, to the old DHX. I'll borrow from Orson Welles no wine before it's time. This is really just an example. I think in contrast to the way the library properties and relationships were brought forward in the old DHX versus what we're doing today: as Josh mentioned, highly methodical, careful development, grand plans, really growing the IP, understanding the DNA and then going to market. And I think it isn't just about quickly harvesting these relationships and IP and our library, but rather a very, very careful approach that takes time. And so, so many of these things that we planted, the Apple/Peanuts example, now Sonic, they will bear fruit for many, many years to come. So it's not churn and burn. And we thank everybody for their patience, which I think, is going to be rewarded amply with transactions like this and happily, things that we'll be announcing in subsequent quarters.

[Drew McReynolds]

That's great. And a logical follow-up to that, and it's a little bit of a bigger picture. It does seem that with that refocus here and the execution, clearly, I think investors have wondered how capital constrained the company is. And as you kind of climb out of the balance sheet, the extent to which you have to balance kind of growth in free cash flow, is it a fair comment to say that the way these deals are currently being structured that versus the old days, it's a little less capital intensive for the company to build these franchises? And specifically talking about some of the OTT deals where you're going to get funded a little bit better upfront. And I apologize for my son's trumpet playing downstairs in the basement, if you can hear it.

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

Well, hopefully, he's on WildBrain Spark at the moment. I'll let Aaron take that question.

[Aaron Sholom Ames, Chief Financial Officer]

Yes. So I guess -- I think it has 2 sides to it. Obviously, we had to make the investments that we did do in the studio to increase the premium production. We have to be making the investments in our audience engagement in Spark. So we had to actually build those tools, give the teams the tools to do the work that they're doing, which is why they want to come to us. But from the production side, I think you're right, given the way that the SVODs fund content, that is a lesser constraint on us. But however, we do have to make the investments that we made to have the creative, to have the right people and to have the right tools. So I think it's still both things that are important. But I don't think there's a lack of capital to do those types of things. I think that's the way we're going to grow, and that's what we are focused on.

[Operator]

Your next question comes from the line of Deepak Kaushal from Stifel.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Just one and a quick follow-up. On the distribution side, in AVOD versus traditional linear, I'm just wondering if you could give us a sense of the difference in the margin profile. So if I can ask it maybe a little differently. In the past, you had an army of distribution agents delivering content, lobbying content to linear broadcasters around the world. How does that sales process change in the AVOD world, in global distribution? And what kind of margin benefits can you get from that model going forward? And then I've got a follow-up.

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

So I'll let Aaron address some of the margin considerations. What I would say, Deepak, is that we are the -- in many ways, the captains of our own ship now and not subject to a lot of the vicissitudes that you suffer from disintermediation. We're addressing directly our consumers. We're talking to our advertisers and sponsors. And that's been, I think, the kind of the seismic shift and frankly, opportunity that's been created around MFK. So it isn't just about the passive royalties. We're able to generate campaigns and unique offerings on our AVOD network and to work with advertisers and sponsors in various ways. And that's the business I referenced earlier that is burgeoning considerably. And I think had it not been for that change in YouTube policy, I don't know that we would have embarked as soon as we did in the direct ad sales market. I'll let Aaron address the margin issues.

[Aaron Sholom Ames, Chief Financial Officer]

Yes. And then -- I'll talk a little bit about margin, and then I will pass it over to Josh on the -- how the sales happen. I'll say we're very unique in the space from the ad -- the audience engagement and the WildBrain Spark perspective because we have one of the largest libraries after the studios, which everyone knows. And so because of that, our margins are -- when we put ads on that content, we own the content, and that's a big distinction. A lot of platforms are looking for content. We have a platform and we have the content. And so that creates a much higher-margin profile for us as opposed to other companies. But I'll pass it over to Josh. He's on...

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

You're on mute.

[Josh Scherba, President]

Yes. Deepak, just one thing I would add in terms of the difference between the old world of licensing directly to broadcasters and AVOD, is that in the old world, it was more about doing your one deal -- doing your deal, supplying some marketing materials and then kind of getting on to the next. When it relates to AVOD -- and obviously, WildBrain Spark, it's one thing to talk about our emphasis on YouTube. But on the other AVOD platforms, it is more of an ongoing partner management. So it's seeing how our content is performing, working with them to make adjustments to potentially help grow. And one of the areas that we've actually been using across our company, some of the strengths we have is in content curation and -- which actually comes from our television group, who've -- who have decades of experience of knowing what content is going to fit best together. And we tap into that expertise to help work with these various AVOD platforms who are often new to kids content and really giving them more of a tailored offer. So it is different from the old world, but we actually have a lot of advantages in that space given our different businesses we're in.

[Deepak Kaushal, Director and Technology & Communications Analyst]

That's very helpful. And then as a follow-up to that, you mentioned other platforms briefly there. When we think about beyond YouTube, platforms like TikTok, Instagram, Facebook, I assume you have plans for diversification into broader platforms. What can we expect in the next 12 months or 18 months regarding that size relative to the YouTube footprint?

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

Deepak, we're pursuing an always-on strategy with our content. And so not that we've dropped a press release every week as we strike these new network deals with Samsung and some of the other surprising networks that have popped up, and we're seeing all kinds of new spigots turning on for revenue. But we're -- basically, we're going to be everywhere. And you can see, as an example, WildBrain channels popping up really across the spectrum. One of the things that we're learning, and it's for us an R&D process, particularly with our proprietary content, is the ability -- for example, the launch of Teletubbies channel and sort of see what the audience attraction of that may be or specialized channels with a mix of our product. And it's -- one of the advantages that we also have for me of our Spark network is these data analytics tools that really guide us in the way that the content is compiled and curated.I don't know if, Josh, you have anything to add to that on the distribution side.

[Josh Scherba, President]

No, no, I think that's right. And we are active on a wide variety of AVOD platforms and leaning into the ones that are getting traction. And we'll -- we're really early adopters in this space, which gives us a big advantage. So we will continue to be there and lean into the ones that are getting traction.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Okay. Great. And...

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

Deepak, I was just going to add one other thought for you, which I may have highlighted previously, but it was a real revelation to us. We have a very important library property that we had. Josh and his team were in negotiations with a licensee in the on-demand space. And we're particularly impressed with what was being offered versus what we believe to be the value of that content. And instead, we went through a rev share model in the AVOD space. And I think it's safe to say, we produced in 1 year a greater amount of revenue than we would have under a 3-year license that was a conventional license where there was no sharing of revenue. So these are emerging platforms, technologies. And fortuitously, we have the content and the reach in order to be on all of those platforms and figure out how to optimize revenue from various streams. But there is this aspect as well, there's so many leading brands that we have which is -- to kind of be everywhere. And that's proving to be outstanding across all of the platforms and licensing and merchandising, helping our distribution business. It's frankly attracting a lot of partners to us as in the case of SEGA Sammy.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Well, it's great to hear that you guys are back on the cutting edge and looking forward to some new opportunities.

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

Great. Thank you, Deepak.

[Operator]

Your next question comes from the line of Jeff Fan from Scotiabank.

[Jeffrey Fan]

There's a lot of mention about analytics. Wondering, Eric, if you can just elaborate a little bit on that journey, where you are now with respect to the data collection that you're doing and where would you like to get to and perhaps maybe the build process and maybe the cost or investment that may be required to get you there. So I wonder if you could elaborate a little bit on that.

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

Sure. Thanks for the question, Jeff. Look, we already know about views, about regions, having a massive network of millions of data points. And what that scale of network allows us to do is we get greater insights where viewers are coming from and going to languages, et cetera. I want to emphasize though it is not about individual viewer data that has been changed with MFK policies. It's about understanding how the algorithms work, how different brands and franchises relate to one another. And that's where we are emerging with some great proprietary tools in data analytics and ad tech. And I would say but for the changes in policy, I don't know that we would necessarily have developed those tools. They are a -- that policy has been the mother of invention of our need to be able to define our audience and frankly, better serve the audience with the content that we're delivering. So we can now look at the viewing data, as an example, for every episode. You can see which characters are performing. We analyze the content. We can flag, as an example, when a character, an idea is working, and we can adjust the creative accordingly. We've been doing this for a while now on Caillou, which I mentioned earlier, where we've consolidated rights. And that data, of course, is not only incredibly powerful for advertisers, but we're also looking at this across a lot of business lines and opportunities. As far as the investment is concerned, we -- was that your question, about the investment in the data analytics?

[Jeffrey Fan]

Yes. Just whether that's already been done or whether that's kind of an ongoing investment that we need to account for.

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

Okay. Ongoing. And we are -- it's obviously tuned to the results that we're getting out of it, but we think that these proprietary technologies put us at a significant market advantage. And we've seen that in the discussions that we've had with media buyers, brands, agencies of what we're able to offer them and have great case studies now on campaigns that we've been putting up. So you know what, we're going to keep investing against it. It's -- as I pointed out, the enormous growth that we've experienced on a percentage basis is granted on a relatively low base, but it is sequentially improving and we'll continue to invest against it. I think that those data tools are invaluable in helping us understand the market not only for advertisers, but as I pointed out, to better serve our audience.

[Aaron Sholom Ames, Chief Financial Officer]

Yes. I guess I would just add to that, that the 2 key focus areas for us where we're investing is IP and licensing and, of course, in WildBrain Spark and audience engagement. And that's where we have been investing, but we doubled down this quarter and invested even more significantly because that's where the growth is coming from.

[Jeffrey Fan]

And my follow-up is -- Eric, you made a comment that piqued my interest. You talked about that you're captain of your own ship. You have control over -- more control over the process. At what point, given your size and scale and the library that you have, do you think it might be worthwhile to consider, from a distribution perspective, going direct to consumer, i.e., have your own app, have your own AVOD/SVOD opportunity as opposed to going through other distributors like YouTube. Wondering if that's kind of in the cards down the road.

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

Interesting question. So I think we're finding out about that through the ubiquitous distribution of our content across every platform. And they're evolving to be sure, but it is about an on-demand universe. That is inevitable force of gravity now in our business.That said, YouTube is where the audience is, and it's a massive, massive audience. And so I think, at the moment, our specific focus is the optimization, maximization of the YouTube audience and engaging in these direct ad sales. Just as an example though, which you may or may not be familiar with, is in the direct ad sales category, one of the deals or the way that it works with YouTube in direct ad sales as opposed to revenue that comes through the YouTube auction that they're selling ads is that when we place media, provided that we sell at or above the YouTube rate card, we keep the difference. So the more effective we are, the more pinpoint these campaigns are and are effective, we are able, with our premium content, to charge premium rates for the advertising. And that's, again, something afforded by the scale of the network we have.So I've often been asked, "Do you like the YouTube economics?" I don't know that there's any content supplier that loves them, and there's certainly like a more generous split. But that having been said, the audience delivery is unmatched, and it's a matter of doing the things we are doing to maximize the opportunities around YouTube ad sales, some of the direct campaigns that we produce for advertisers which frankly don't touch YouTube revenue, there isn't a share there; where it's a bespoke program; where we're creating content, as an example, for a sponsor. So those are where the opportunities live. And that's why I say being the captain of our own ship is beginning. It's extremely rewarding and is putting us closer to the audience as well as the advertisers.

[Operator]

Your next question comes from the line of Dave McFadgen from Cormark Securities.

[David John McFadgen, Director of Institutional Equity Research]

Yes. I just have a question on the adjusted EBITDA. So I noticed that it includes the litigation settlement of $4.4 million. So if you stripped that out, it'd be down slightly. So obviously, the Peanuts deal is in here, and that would be obviously additive. So it seems like the other revenue for some reason has much lower margin on it this quarter. And I'm just wondering, is that the correct interpretation? And if so, why would that be?

[Aaron Sholom Ames, Chief Financial Officer]

Sorry, David. It's Aaron here. Can you just explain your question a little further? I'm not sure I fully understand it.

[David John McFadgen, Director of Institutional Equity Research]

Sure. Okay. So you had attributable EBITDA in the quarter of $29.1 million, and the prior year was $25.6 million, right? So it was up $3.5 million. You had a litigation settlement in there for $4.4 million. So if we strip that out, it's actually down slightly year-over-year.And -- but at the same time, you had a Peanuts licensing deal in there. So obviously, that's additive. So to be flat when you factor in the Peanuts deal, it seems as though the margin on the non-Peanuts revenue was down quite a bit year-over-year. And I'm just wondering why that would be.

[Aaron Sholom Ames, Chief Financial Officer]

Yes. So I think on your math, I think what you're missing is there's like significant investments that we're making in the quarter with respect to growing the ad sales business and investing in the ad tech. And so I think we can go through that offline, but I think you're missing part of the other things that happened in the quarter so...

[David John McFadgen, Director of Institutional Equity Research]

Okay. And then just a follow-up. Obviously, the Peanuts library deal drove the revenue nicely in the quarter. I was just wondering, can you provide any commentary on the outlook for the balance of the year in terms of distribution revenue?

[Aaron Sholom Ames, Chief Financial Officer]

Yes. Our pipeline is very strong, and we feel very comfortable with our -- with how we're going to do for the rest of this year and that we will have some growth over the prior year. So again, we have that visibility now and are feeling good about this year.

[Operator]

Your next question comes from the line of Tim Casey from BMO.

[Tim Casey, Equity Research Analyst]

Just a follow-up on the SEGA deal and then a question on television. On the SEGA deal, Eric, you mentioned it was material enough to press release. I know you can't give specifics, but is there any way you could frame the scale of the investment or the resources you're deploying in this deal relative to, say, Peanuts or some of the other franchises? And Aaron, could you direct us as to how we should think about the impact of this deal flowing through the P&L? Like does it start immediately and it's kind of linear? Or is it going to be lumpy, bigger chunks, a year or 2 or something like that? And then just on television, there's been some speculation in the trade press about a potential challenge for distribution on Family Channel. I'm just wondering if you can comment on that and how you're thinking about the stability of those subscriber revenues going forward.

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

Tim, so I'll let Josh take up the last question, but just to talk to you about the Sonic deal and our disclosure requirements around that. I first -- forgive me, I guess, this is the kind of awkwardness of doing these calls remotely. But I wanted to pick up on something that James (sic) [ Jeff ] said, if I may, in the last question after Aaron's explanation, which is -- and I know there's always this relentless focus on quarter-to-quarter EBITDA movements, et cetera. I take a slightly different view. And again, to get me -- I come from 14 years of working for private equity in the entertainment and media business with a relentless focus on long term. And perhaps I should be more concerned about it, but these minor puts and takes on a quarter-to-quarter basis, I don't find disconcerting. As a matter of fact, I find them comforting because it's a big play for the long term, and it's about setting up this pipeline, which you guys are seeing now and we're experiencing. So that's my focus, the way that I manage the company and have often nipped in the bud some deals that were not good and that didn't play for the long term in maximizing and turning into the account the value of our IP. So I just want to point that out. The other thing is that -- with those investments which is human CapEx. Look, there were funds that we deployed from Fine Capital with an incredible boost to our business but obviously hit EBITDA because they go into SG&A. So I just want to point that out. I view it as a positive development and not one that's a detraction at all. On the EBITDA side for what that looks like on Sonic, we just executed the deal. We're in production. We're ramping up. And I would say that the largest impact in studio is to be expected in the next fiscal year. Consumer products will follow, I would say, in fiscal '23 after the rollout of the new series. But the other thing that we always see, in this case because of the likely Paramount/SEGA Sammy movie coming through the pipeline, is a lot of interest at retail and among licensees. And it's drip, drip and then it's a flood. So our focus is on sustainability, and that's the case not only for Sonic but across all of our IP. I know you had a question in the middle of that as well. And if I could ask you to repeat that, and then Josh can talk to you about the TV business.

[Tim Casey, Equity Research Analyst]

It was more just if you could -- for any perspective on how big the Sonic deal is to the company maybe relative to some of your other major initiatives.

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

I think in terms of scaling, what I can say is probably the biggest single transaction to come through the studio. And one of the things that we're excited about is this is a CG 3D series, and that helps build the capability that we've already developed in the studio and really augments our efforts around that technology for an animation. I don't know if, Josh, you want to add anything to that as well as the TV question.

[Josh Scherba, President]

Yes. No, I think that's it as it relates to Sonic. And wow, it's a miracle, I actually wasn't on mute as I began to speak here. Yes. No, I think you hit the nail in the head there in terms of scale of the project. It is the largest CG series that we've ever taken on in the studio. As it relates to your question, Tim, on television, I mean, we don't comment on any specific ongoing commercial negotiations, but it's just -- it's standard course of business. And in terms of the viability of our linear business, we continue to be confident that we can manage our cash flows well into the future. I think we've shown our track record in doing that, where we've got great cost controls and can manage the bottom line quite well, and we're confident we're going to be able to continue to do that.

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

Tim, one more thing, which is just to line it up. This SEGA Sonic deal represents the fourth series that we now have at Netflix, along with Johnny Test, Chip & Potato, Go, Dog. Go!, all of which are performing exceedingly well. So again, it's just a constant build. They're a great partner as is Apple and the other SVODs that we deal with. And in moving up that performance, obviously, it just attracts more partners, and it's that flywheel that I'm talking about, the sequential growth that we're pretty excited about. We're really beginning to see those returns. And it's not just slamming shows in there. It's about tending to those franchises. And I think I said before, if it grows like a weed, it's generally a weed. And we're kind of -- we're going for the oak, not the weed.

[Operator]

Your final question comes from the line of Adam Shine from National Bank Financial.

[Adam Shine, MD, Head of Montreal Research & Research Analyst]

I'll just ask one question given that we're coming up on the hour. Eric, you touched on EBITDA, and I certainly don't want to fixate on one particular quarter. As we look ahead, as you build some revenue growth into the business, can you speak at all to some of the efficiencies that you gain as you layer on some of these new big productions, some of the operating leverage that inherently comes in the business going forward? Acknowledging, as you did earlier, that there are some evolving investments that are being made for ad tech, maybe for human capital to scale the production side of the business or even distribution for that matter, the look ahead in terms of operating leverage efficiencies and perhaps margin expansion going forward.

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

Good question, Adam. So you've actually identified the areas in which we're making those investments. And certainly on the human, we're -- to me, it's about talent. It's where I've spent my career.We have a team of 5 in China now, and we're continuing to build that out. Watch that space, please. I think some exciting developments in that business. That will give us operating leverage and reach. The -- what we're also doing is integrating those business units across the entire spectrum of our company. And that's where I think we're getting an operating leverage as well, is that the previous structure, honestly, was somewhat [ vulcanized ] with each of the business units. They are operating in harmony now. We're -- as an example, taking our capabilities in research, which have been deposited in each of the business units, and now combining that so that we just have a lot of intel across the entire company. The same thing in the ad tech space in our insights and data analysis in AVOD, not just on YouTube but sort of across, understanding what audiences want. So those synergies, if you will, are beginning to bear fruit. And I think that the foundation is incredibly solid. I'm excited about the team now, and they're taking on more and more. My brands group as an example, and we hired a superstar in that area. He's built out an amazing brands team, and they are sequentially working through the many franchises in the library. And we'll be hearing soon about some of the properties that we're going to be bringing forward, I think, in unique ways, some of them on a digital-first basis using our AVOD network. So as far as quantification, yes, sequential growth long term. I can't give you a specific number, but feeling very, very good about the build that we're experiencing, looking at over -- looking at it on a multi-quarter basis. I hope that answered your question.

[Adam Shine, MD, Head of Montreal Research & Research Analyst]

It does, but I'll follow up. And I imagine where we'll come this summer.

[Eric Ellenbogen, CEO & Vice Chairman of the Board]

You got that right.

[Operator]

That concludes our Q&A over the phone lines at this time. And I will now turn the call back to Nancy Chan-Palmateer.

[Nancy Chan-Palmateer]

Thank you, operator, and I want to thank everyone for joining us today. And please stay well. We look forward to updating you in the next quarter. Have a great day.

[Operator]

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