WildBrain Ltd

TSX:WILD

Earnings Call Transcript 2022-Q4

[Operator]

[Operator Instructions] Hello, and welcome to WildBrain's fiscal 2022 Q4 and Full Year Earnings Call. Today's conference is being recorded. [Operator Instructions] I'd now like to turn the call over to Nancy Chan-Palmateer, Director, Investor Relations at WildBrain. You may begin the conference. Please go ahead.

[Kathleen Persaud;EVP, Investor Relations, executive]

Thank you for joining us. Speaking on the call today are Eric Ellenbogen, our CEO; and Aaron Ames, our CFO. Also with us today and available on the Q&A are Josh Scherba, President, as well as Danielle Neath, EVP of Finance and Chief Accounting Officer. I'm Kathleen Persaud, the new EVP of Investor Relations, and our outgoing Director of IR, Nancy, is on as well. 

First, we have contained our cautionary statements. The may discussed in this call include forward-looking statements under applicable securities laws with respect to WildBrain, including [ aligned ] to statements of global investments in by the company. Commercial openings of the company and the business strategies and operational objectives and financial and operating performance of the company and the value of the assets. Such statements are based on factors and assumptions that management believes are reasonable and at the time were made the information currently available.

Forward-looking statements are subject to a number of risks and uncertainties. Actual results based on the future could materially differ and adversely from those described in forward-looking statements as a result of important factors, including the risks factors that are [indiscernible] in MD&A and annual information form. Please note that all currency numbers are in trading dollars unless otherwise stated. For the question-and-answer session the [indiscernible] to one question and one follow-up. If you like to ask additional questions, please join the queue. I'll now turn the call over to our CEO, Eric.

[Eric Ellenbogen, executive]

Good morning. Thank you, Kathleen, and thank you all for joining us today. Fiscal '22 was yet another successful year for WildBrain as we continue to execute on the strategy that we put in place starting in 2019. Our focus on the 360-degree platform for the end-to-end reactivation, the beloved entertainment brands from our deep goal of IP led us to a return to growth in 2021, and that trend has accelerated in 2022. Over the last 3 years, we've delivered, we built the resources and teams needed to create and integrate this unique 360-degree platform. I believe we are the only independent kids and family entertainment company with a fully integrated suite of in-house capabilities that span production, distribution, digital media and consumer products licensing. And our global reach and our ability to leverage IP across this platform positions us as true unique and valuable in today's media landscape. Aaron is going to give you the details on our results, but I'd first like to take a few minutes regarding the highlights of the year.

We generated growth in revenue and EBITDA for the second year running. We have an incredibly strong content pipeline, an unparalleled executive team, and we're building earnings and growth momentum as we bring more and more of our branded IP to market, we align up more consumer products opportunities in coming years. In content production and distribution, we continue to reactivate treasure brands from our Evergreen live road. And just recently, we announced that Peacock has commissioned 52 brand-new 11-minute CG animated episodes of Caillou for the U.S. market and are picking up as well 5 new CG specialists for the brand. This deal followed last year's announcement that Cartoon Network has picked up the classic Caillou library following our repatriation of U.S. rights for the brand and PBS. And since we repurchased U.S. rights for Caillou, we've achieved more than a 50% return.

[ Underscoring ] the value of being an [indiscernible]. This is entirely consistent with the strategy for Caillou driven by our visibility and the popularity [indiscernible] on the YouTube or Spark YouTube network. It also bears mentioning here that in Q4, our WildBrain Spark digital platform across the threshold of 1 trillion minutes of wage time since being unveiled in 2016. Let's not mistake, that's 1 trillion [ means worth of team ]. And to our knowledge, this puts Spark in an elite class of kids content providers on YouTube. Within WildBrain Spark, many of our brands are posting spectacular viewing numbers but non-more popular than our own Caillou, which has garnered over 75 billion minutes of watch time.

And in addition to streaming the classic Caillou series on low brand Spark, we've also been steadily releasing new short-form Caillou content. Delivering the series to audiences worldwide on Wild Brain Spark is driving deep engagement for Caillou. It's growing the audience and out to find the brand. And this popularity was a spring board for reactivating the brand and leveraging new and classic content across multiple platforms, including SVOD, AVOD and linear. In the past, it's been misreported that Caillou has been canceled.

But as you can see from the deals and the numbers, Caillou is stronger than ever. Then [ if you follow the SVOD ], you read about how streamers are refining their content plans and moving to premium programming, quality premium programming, all of which favors us. And while this may lead to some short-term reductions in certain new commissions across the industry, we think we're extremely well positioned in a changing environment. 

The Netflix strategy, in particular, has favored WildBrain as evidenced by our overgrowing relationship. Demand remains extremely high for [ known ] Kids IP and that drives subscribers. It keeps down [ churn ], and we are the foremost independent owner and producer of that current content. We had an incredibly strong content pipeline. And as I've said at the top if today's remarks, we're building earnings momentum as we launch more and more of our branded IP. On just Netflix, as an example, our new Sonic primes, which is coproduced with Saga, is set to launch in winter 2022.

There's tremendous positive buzz for Sonic Prime, and we've already begun signing global toy and merchandise deals for the new series with consumer products such rollout calendar 2023. This builds on the already burgeoning Sonic franchise following the launch of enormously successful feature film from Paramount. Which had grossed over $720 million worldwide to date and a third film slated for release in 2024. And please bear in mind, this is not a work for hire project. We are full partners in the profits of Sonic Prime as well as being additionally compensated as producers, distributors and licensing agents and consumer products.

I should note as well also on Netflix, which was announced just last week, a refreshed version of our 2015 Teletubbies series was launched in small number. This new version has been updated for U.S. audiences with press elements, including new narration, music videos and diverse sun babies, already imagining another beloved brand from our library for today's generation. And it's also worth noting that on our own WildBrain Spark platform, Teletubbies has garnered over 44 billion minutes of watch time since just 2016.

And we're going to be making additional exciting announcements about the Teletubbies franchise in the coming weeks. So please stay tuned. Also on Netflix was the announcement of Season 4 Chip and Potato, which we'll be launching this fall. Chip and Potato was a terrific example of our brand capabilities, extending from development and production through global distribution, consumer products licensing and even new toys launching at retail this fall. Chip and Potato is really a great example of leveraging our 360-degree capabilities which start with owned IP, producing creative content, engaging viewers and finally, moving to consumer products [ upside ].

And last but certainly not least, Netflix is also behind to our original Strawberry Shortcake Series[ there] in the big city. And as we continue to ramp up the launch, relaunch, I should say, of Strawberry Shortcake, looking forward to the exclusive launch on the platform next year of 4 new CT animated specials for the brand. So in addition to Netflix, our outlet [ CV ] relationship remains stronger than ever. Apple TV last month on the platform launched our latest peanut family special Lucy's School as well as additional episodes of the Snoopy show. So in total now, there are 4 family specials on the platform, multiple seasons of 2 original Peanut series, 48 series episodes [indiscernible]. In addition, there are 2 original documentaries and 13 classic Peanuts specials. Apple TV is the greatest home ever for Peanut, and there's a lot more to come in that pipeline.

Let me turn to Consumer Products. Within our wholly-owned CPLG business. We secured the rights as the exclusive licensing [indiscernible] for the Peanuts brand in Asia Pacific, which bolstered the recently announced expansion of our agencies business into that region. And the deal consolidates CPLG's long-standing Peanuts licensing relationship across EMEA. And more recently, we added India, which has seen Peanuts featured an extensive cross-category promotions for apparel, toys, games, homeowners and more. Global annual consumer product sales to Peanuts now exceeds $2.5 billion at retail. As we continue to roll out our new Peanuts content on Apple TV Plus as well as additional platforms in China. We believe there is plenty of runway to continue to grow the brand. So with that, I'll turn the call over to Aaron to review our details -- excuse me, on our results in detail.

[Aaron Ames, executive]

Thanks, Eric. In Fiscal 2022, we delivered a strong year, reflecting growth across all our content-driven businesses. Growth accelerated with revenue of $507.2 million, reflecting a 12% increase over fiscal 2021 and EBITDA was $88.8 million for a growth of 7%. Excluding one-time items in fiscal '21, adjusted EBITDA increased 23% versus the prior year. We also saw double-digit growth across content production and distribution, Spark and consumer products.

Net income grew to $5.6 million compared to a net loss of $7.1 million in fiscal 2021, reflecting higher gross margins. Fiscal 2022 free cash flow was negative $17.4 million compared to positive free cash flow of $31.5 million in fiscal 2021, reflecting higher accounts receivables associated with larger deals, growth initiatives and working capital timing. One of the drivers in the working capital timing was a catch-up related to the Canadian production expenditure for our broadcast business due in part to COVID-related live action production delays. We also had a step-up in proprietary live agent production, which requires short-term working capital, which we talked about last quarter.

As we discussed in the past, we're in a growth phase, so that our short-term working capital needs as we execute on content deals and bills receivables. Turning to the quarter results. Revenue was $112 million, consistent with $112.6 million in the year-ago quarter. Net income was $1.1 million compared to net income of $11.4 million in Q4 2021. Adjusted EBITDA was $11.4 million compared with $19.2 million in Q4 2021. Free cash flow was negative $4.7 million in the quarter compared with positive free cash flow of $13.9 million in Q4 2021. Looking forward to 2023, we expect revenue of approximately $525 million to $575 million. We expect adjusted EBITDA of approximately $95 million to $105 million. Our guidance is based on our current pipeline and timing of revenue recognition. Before handing the call back to Eric, I'd like to take a moment to thank Nancy Chan-Palmateer for her service to the company as our Director of Investor Relations over the last 7 years. Nancy is leaving WildBrain at the end of this month. She's been a very valuable member of the team and will be missed. So thank you, Nancy, for your time. And I'd also like to welcome Kathleen Persaud, our new VP of IR, who has recently joined the company and will be managing Investor Relations going forward. I'll now turn the call back to Eric.

[Eric Ellenbogen, executive]

Thank you, Aaron. So looking ahead, we're going to continue to focus on the execution of our integrated 360-degree strategy. We're investing in the business to harness new opportunities for both [ own ] and Partner IP. And we'll also continue targeting new partnerships and strategic acquisitions that will cement our position as the foremost independent producer of kids and family content in today's market. With our strong management team and our deep IP portfolio, we're extremely well positioned to drive future growth. Before we open up to questions, I'd just like to say on both a personal and professional note, how excited I am for the road ahead, having recently renewed my contract with the company for another 3 years.

And we've spent the past 3 years completely realigning our business. We've laid the foundations and we're building for the future. Options which are now beginning to show considerable returns in our financials. We have an incredibly strong management team. I think one of the best in the entertainment industry, and I'm delighted to continue working with this talented group to propel WildBrain at its next stage of growth. I'd like to send out my thanks to all of our dedicated, hard-working employees across the global WildBrain organization without whom none of this would be possible. And also to my fellow Board members for their continued support. It's really an exciting time for everyone in WildBrain as we look to the future. And I'm now happy to open up to questions from analysts.

[Operator]

[Operator Instructions] Your first question comes from David McFadgen from Cormark Securities.

[David McFadgen, analyst]

A couple of questions. First of all, I was just reading through the MD&A, it was mentioned about the graph. And I was just wondering if can you give us an update on that? Because you said you're in negotiations with HBO Max and production has been halted. So just wondering what's happening with the new shows there.

[Eric Ellenbogen, executive]

No other update, David, other than we're in constructive discussions with them right now. HBO has indicated, I think, widely a change in strategy. What hasn't changed is the streaming of our deep library on HBO. And as soon as we have more information regarding the Degrassi series, we'll definitely share it.

[David McFadgen, analyst]

Okay. Do you expect them to continue with this year or you just can't comment right now?

[Eric Ellenbogen, executive]

We really can't comment at the moment and -- but a huge fan base, great success story around Degrassi. One of our great franchises but as soon as we have more news, we'll definitely share it.

[David McFadgen, analyst]

Okay. And then just on the TV revenue, I noticed there was a rate adjustment. I'm just wondering, does that impact the future revenue of that business? Is it going to be a bit lower now? Or is that just a purely one time item?

[Eric Ellenbogen, executive]

Let me give that to Aaron to speak on that point.

[Aaron Ames, executive]

Yes. Our TV business continues to perform and is a very good contributor for revenue and EBITDA, and we're continuing to manage the business efficiently through cost controls. And so this is absolutely a one-time item, and we'll continue to manage it the way we have historically.

[David McFadgen, analyst]

Okay. And then just on the free cash flow this year, the free cash flow is negative. I was just wondering what your thoughts are for fiscal '23? Do you expect it to be positive? And then sorry, just one last one after that. In the past, you gave an indication of leverage and where you thought that would go. And so it's decreased this year. I was just wondering what your thoughts are for leverage when -- at the end of fiscal '23.

[Eric Ellenbogen, executive]

Yes. So I'll start with the latter one on leverage. Our leverage over the last couple of years continue to decline, and we feel be very comfortable with where our leverage is and that will continue to decline over time. I think you mentioned about free cash flow. Obviously, we're right now in growth mode. And with all this activity that requires a short-term cash need. And in the -- we have -- as you can see, I think approximately $80 million increase in accounts receivable. And so that, of course, results in some negative cash flow. But that reflects the higher volume and the increasing revenue that we are doing. And what's great is it gives us a lot of visibility on our future cash flow because we will collect those receivables and therefore, it will generate cash flow going forward. So our future cash flow is positive and looks positive. -- and we're excited to keep growing our business.

[Operator]

We will now take our next question from Dan Kurnos from The Benchmark Company.

[Daniel Kurnos, analyst]

Great. Eric, first, let me just congratulate you on the contract renewal. I think you've done a terrific job turning the story around even the equity markets don't exactly recognize it yet. So I'm looking forward to see what you come up with next. I have a couple 2-parts questions. First, I can't help but notice that all of your new deals with Netflix seems to be coinciding with their brand-new AVOD launch. Maybe I'm reading too much between the lines here. But it feels like others are going to need to come up -- to keep up with this content arms race, perhaps it may be more thoughtful cost structures, Eric?

So other than on Disney and maybe Paramount to an extent a little. Obviously Sonic Prime is doing really well there. It feels like there's a lot of green fields for your phone to keep ringing. So how are you thinking about the landscape? And as the second part of that question, there's obviously this tack-on CP opportunity, which all of these guys clearly need to make some money, given how much they're spending. So how do we think about the CP upside opportunity relative to the guidance -- Relative to your guidance depending on, sort of how we could really become to the ecosystems monetization push.

[Eric Ellenbogen, executive]

Thank you, Dan. So first about the landscape, again, widely reported, a lot of analysts taking a look at this. I think these are course corrections as each of the services refines and defines their identity and place in the competitive marketplace. What we aren't seeing is any [ original ] in spending. I saw a number yesterday, actually, which I thought it was surprising in a good way the level of what Amazon [ has funded ]. I think the number was something on the order of $15 billion in content commitments. And the great part for us and Netflix is a prime example is that branded content counts.

And to the best of my knowledge, I am not seeing any announcements, shows that they've taken down or cut back that are global brands. And I think it's the reason that, that relationship thrives and grows. And I think the other services are sort of in the same place. As to the AVOD piece, it's only what I've read that Netflix is not intending to put advertising against kids' content. That isn't, of course, the case in the other AVOD networks where we broadly distribute our content and sort of always-on strategy with a lot of us. I mean [indiscernible] takes out there, myriad networks.

Teletubbies as well. And the way we go about [ ubiquiting ] with our content, which, to your point, is the consumer product [ driving ]. And what I would just say in general is that it's the layering of each of these new content launches. And so as you see these announcements, and I think you picked up on this, what we're talking about is results that come in '23, '24, '25 and beyond. Peanuts is just a fabulous example of that because we probably have the most new content associated with that franchise. And we're seeing the results globally. You're seeing it come through in double-digit growth in consumer products. It just takes time getting that traction. Again, the distribution, that's the great part about these platforms as most of them are global and those that aren't are definitely making plans to do so. So I would say that's kind of the way we look at it. It's just about those brands. And the vault is deep and not mentioning, in addition to Teletubbies, Yo Gabba Gabba, we're also super excited about Sonic Prime, which I mentioned in my talk. I think that's just a monster property and has incredible global popularity -- and as I noted, we are full partners in that business. So lots and lots of exciting developments here. Now the landscape has changed, but I have to say, we have not yet to see the effect of that where branded content is concerned, I really don't see a change. Pretty confident.

[Daniel Kurnos, analyst]

To your point on Netflix, Eric, I believe they also, at one point, so they've never have an AVOD product either. So I'm not sure I exactly believe a lot of what they [indiscernible] entrenched around maybe monetizing kids' content with advertising. But no, I mean, I think quite the opposite. I think you're sort of in an efficient cost production outlet for many of these guys looking for branded kids content. So I'd be surprised if there aren't more partnership or licensing deals in your future or near future.

Aaron, maybe just on the guidance, and Eric, you can obviously feel free to chime in, too. I guess, last time that we spoke, I just want to get a sense of, obviously, everybody is paying attention to what's going on in the macro. And obviously, there's a sort of war between inflation and then the jobs market not pointing to a recession. But CP could be impacted by macro. So I was just curious how much conservatism you think this sort of [ baked ] into your guide just around sort of uncertainty, maybe offset by the increased visibility you have as you pointed out your accounts receivable and obviously, a lot of these licensing deals that you have in the pipeline?

[Eric Ellenbogen, executive]

Sure. I'll take part of this and then Aaron can pick up on it. But just going back to the [ advertising ] note. I'm a product of Saturday morning TV and I did not suffer any trauma as a result of all the serial advertising I saw. I think as far as the macro environment, we've taken great caution in reflecting that and where we're thinking, where we're going into guidance and very conservative about what's going on in the advertising space, et cetera. So I think we've been very, very cautious. And obviously, I can see what's going on there. But I have to say, we're pretty agnostic about the macro environment. I know as an example, when it came through the COVID period, we did extremely well with consumer products. And we're deep in product and delivery on so many of these franchises. So it's -- These things are so many of them are kind of set in stone right now as we roll out franchises. But I'll let Aaron speak of any other aspects of that.

[Aaron Ames, executive]

Yes. Dan, so what I would just add to what Eric said is we've been adding and signing contracts and building our book of business and our pipeline with quality partners and that's what gives us the confidence and visibility in our growth trajectory for our earnings from '23 and the future years because we continue to layer on, there on more and more deals, which build that pipeline. And so -- and as Eric said, it's all about the branded content, of which we have a tremendous amount of and because we did see also in that over time that people tend towards branded content and growth will continue to scale as those new franchises and deals continue to flow through our financial statements. So that's why we're confident.

[Daniel Kurnos, analyst]

Got it. And if I may sneak in just one last one. Your EBITDA guidance is pretty much in line with, I think, where we were sort of in that range. And so I just want to get a sense from you, I guess, Eric, or maybe here in [ June ], just how much of that is a choice at this point, again, growth mode. So how much of that is you guys making some incremental investment decisions versus obviously, you guys are clearly getting premiums. And I think we've all heard what the crazy CPMs are being asked for out there. So how much of that you could pass through versus how much that is a choice at this point.

[Eric Ellenbogen, executive]

Our guidance is based on our latest projections and our current pipeline. So our plans are [ baked ] into our guidance at this point. And we're planning to continue to invest in IP and build that IP and continue to grow our business in production and distribution and in consumer products going forward. And that's [ baked ] into our -- [ counter victim ] into our guidance.

[Operator]

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

[Kathleen Persaud;EVP, Investor Relations, executive]

Thank you, operator, and really thank you, everyone, for joining us today. We look forward to updating you on more exciting news in the next quarter.

[Operator]

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