IDW Media Holdings Inc

OTC:IDWM

Earnings Call Transcript

[Operator]

Good evening, and welcome to the IDW Media Holdings Second Quarter Fiscal 2022 Earnings Call. [Operator Instructions]

I will now turn the call over to John Nesbett of IMS Investor Relations.

[John Nesbett]

Thank you, operator. Good day, and welcome to the IDW Media Holdings Investor Conference Call for the Second Quarter and 6 months ended April 30, 2022. With me on the call are Ezra Rosensaft, Chief Executive Officer; and Brooke Feinstein, Chief Financial Officer.

I'd like to begin the call by reading the safe harbor statement. On this call, all statements that are not purely historical facts including, but not limited to, those in which we use the words, believe, anticipate, expect, plan, intend, estimate, target, and similar expressions are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

While these forward-looking statements represent our current judgment of what may happen in the future, actual results may differ materially from the results expressed or implied by these statements due to numerous important factors, including, but not limited to, those described in our annual report on Form 10-K for the fiscal year ended October 30, 2021, under the heading Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations and subsequent quarterly reports on Form 10-Q. We under no obligation and expressly disclaim any obligation to update the forward-looking statements on this call, whether as a result of new information, future events or otherwise.

Now I will turn the call over to Ezra Rosensaft. Please go ahead, Ezra.

[Ezra Rosensaft, executive]

Thank you, John, and thank you to everyone on the call for joining us. My remarks today will review our strategy and execution during the second quarter of fiscal year 2022, which closed April 30. At the conclusion of my remarks, Brooke Feinstein, our CFO, will provide details around our financial results, and then we'll be happy to take your questions.

This quarter came in where we expected. Strategically, we made tremendous progress as we continue to execute on IDW's new enhanced model of expanding our IP, intellectual property portfolio and utilizing derisked entertainment financing models and our asset-light balance sheet to drive results. When you look at the quarter, the elephant in the room is no revenue on the entertainment side. Importantly, though, we do not expect any in the quarter. As we scale the new IDW model, revenue on the entertainment side of the business will continue to fluctuate. We have already seen this occur in the first 6 months of fiscal '22, very strong revenue in Q1 and no meaningful revenue in Q2.

In Q3 and Q4, we expect to see entertainment revenue from Surfside Girls and Locke & Key Season 3. So we don't currently evaluate the progress we are making on the entertainment side of our business on a quarter-to-quarter basis. Rather, we look at it on a trailing 12-month basis, particularly as the business scales. Taken from that perspective, our entertainment business is performing well and a tremendous runway for potential growth as we continue to create more and more original content.

To that end, we remain laser focused on expanding our library of original content by attracting and partnering talented and visionary creators. The authors and creators we work with are amongst the most talented and innovative in the industry. But don't just take my word for it. Recently, IDW original titles received 12 nominations from the Will Eisner Comic Industry Awards, including best graphic novel for Ballad for Sophie, best publication for early readers for Chibi Usagi: Attack of the Heebie Chibis and best U.S. addition of international material for The Shadow of a Man to name a few. We will continue to leverage our relationships with renowned authors and creators as well as our own reputation as an innovative independent publisher of comics and graphic novels to cultivate our pipeline, which we believe will transition very nicely across our platform.

Along those lines of leveraging our relationships, during the second quarter, we announced a strong slate of 9 new graphic novel and comic books scheduled to be published in July 2022. Currently, we have over 100 original titles in our library with 40 new titles at various stages in development pipeline, and the goal is to add 40 quality original titles each year. I can't stress enough the importance of our original IP as a key economic driver of the business and also as a creative engine providing us access to new genres and the audiences they attract.

Currently, as we build on our existing legacy of Horror, Sci-Fi and Thriller titles, we are also targeting the large audiences through genres that are new to us, including Young Adult, Middle Grade, Tweens, Drama and Comedy. As I already mentioned, after recording strong first quarter fiscal '22 revenues in the Entertainment segment related to our delivery of Locke & Key Season 2, during the second quarter, we recognized no measurable revenue from IDW Entertainment. As we further expand our roster of greenlit entertainment projects, we expect to deliver a more consistent revenue cadence from our Entertainment segment.

Looking ahead, during the second half of fiscal '22, we expect to recognize revenue from the delivery of both Season 3 of Locke & Key and Season 1 of Surfside Girls appearing on Netflix and Apple, respectively. So a lot to look forward to as we move through the balance of this fiscal year.

We're energized by the progress we're making and the potential we see for the concurrent co-development of content for both publishing and entertainment, and we're exploring opportunities to work with international animation partners with the goal of converting kid-focused IP into media properties. Likewise, we're exploring expansion into film and narrative podcast opportunities, which can be promising vehicles for our original content.

We know from experience that when we can leverage our original titles on the entertainment side of our business, we'll benefit from increased visibility as this exposure has been proven to drive increased publishing sales, creating a virtuous cycle between our publishing and entertainment segment. This is an exciting and busy time for our company. As we move through the remainder of fiscal '22, we believe we are well positioned to capitalize on our refocused strategy, the strength of our content pipeline and the flexibility of our balance sheet, which provides a solid foundation from which we can accelerate our growth.

I will now turn the call over to our CFO, Brooke Feinstein, to go over our financials for the second quarter and first 6 months of 2022. Go ahead, Brooke.

[Brooke Feinstein, executive]

Thank you, Ezra. My remarks today will focus on the second quarter and first 6 months of our fiscal year 2022. The 3 and 6 months ended April 30, '22. Except where I indicate otherwise, I'll be comparing the second quarter of fiscal '22 results to the second quarter of fiscal 2021, and I'll be comparing the first 6 months of fiscal '22 to the first 6 months of fiscal '21.

IDW Media Holdings second quarter consolidated revenue decreased 40% to $6.1 million from $10.1 million a year ago. Publishing revenue improved slightly to $6.1 million in the second quarter compared to $6 million in the same prior year period, primarily due to an increase in direct-to-consumer revenue of $384,000 related to Sonic The Hedgehog, 30th anniversary, as well as increases in direct and non-direct markets publishing revenue, driven by strong sales of the title They called Us Enemy.

Entertainment generated no measurable revenue compared to $4.2 million primarily related to the delivery of episodes from Wynonna Earp for $820,000 in tax credits for V Wars and October Faction, totaling $3.3 million in the second quarter of '21, as compared to no delivered episodes in the second quarter of 2020.

For the first 6 months of fiscal 2020, consolidated revenue decreased to $17.9 million from $18.6 million in the first 6 months of fiscal '21. Publishing revenue for the first 6 months of fiscal '22 increased to $13.6 million from $11.6 million in the first 6 months of fiscal '21. The increase was primarily driven by an increase in games revenue of $2 million, driven by the fulfillment of the direct-to-consumer games campaign for Batman Adventures and increases in both other publishing revenue and nondirect market publishing revenue.

Entertainment revenue for the first 6 months of '22 decreased to $4.3 million from $6.9 million in the first 6 months of fiscal '21. Revenues in the first 6 months of 2020 included full delivery of Locke & Key Season 2 for $4.2 million and the French Canadian license received for V Wars.

Our consolidated loss from operations was $2.2 million in the second quarter compared to income from operations of $433,000 in the prior year period, primarily driven by increase in operating losses on the Entertainment side of our business of $2.9 million. IDW Publishing's loss from operations was $267,000 compared to a loss from operations of $509,000 in the second quarter of fiscal '21.

IDW Entertainment's second quarter loss from operations was of $1.7 million compared to an income from operations of $1.2 million in the second quarter of '21. Consolidated loss from operations for the first 6 months of fiscal '22 was $260,000 compared to a loss from operations of $4.7 million in the first 6 months of fiscal '21.

IDW Publishing's income from operations was $246,000 in the first 6 months of '22 compared to an operating loss of $883,000 in the same prior year period. IDW Entertainment income from operations was $294,000 in the first 6 months of '22 compared to a loss from operations of $3.3 million in the first 6 months of fiscal '21.

Net loss in the second quarter was $2.3 million or a loss of $0.17 per diluted share compared to net income of $2.5 million or $0.25 per diluted share in the year ago quarter. Net loss for the first 6 months of fiscal '22 was $264,000 compared to a net loss of $3.7 million in the first 6 months of fiscal '21.

Turning now to our balance sheet. At April 30, we held $13.7 million in cash and cash equivalents and had no debt. Working capital, current assets in excess of current liabilities totaled $19 million. As Ezra mentioned earlier, this quarter's revenues reflect how our revenue recognition continues to vary quarter-to-quarter, particularly related to the timing of delivery of shows and films in our Entertainment segment.

As we continue to grow our roster of entertainment projects, we expect revenue generation to become more consistent and predictable over time. Our balance sheet remains strong with a solid cash position and no debt, providing the flexibility to continue building our IP library to expand our projects on both the publishing and entertainment sides of our business.

As we continue to shift our focus to prioritize original content, we believe that we are well positioned to grow our IP library and [indiscernible] entertainment segment to generate consistent high-margin revenues going forward. That concludes my remarks. Now Ezra and I will be happy to take your questions.

[Operator]

[Operator Instructions] The first question comes from [ Todd Higgins ] with Washington St. partners.

[Unknown Analyst]

So can you give any more color around how we should be thinking about the pipeline on entertainment and how we should think about it in the back half of the year?

[Ezra Rosensaft, executive]

Todd, thanks for asking question. It's Ezra. Excellent question. So we have our publishing pipeline that feeds our development fleet, and we have announced that has been seen Locke & Key and Surfside Girls will be airing. Locke & Key has been announced air date, Apple has not yet announced the date of Surfside Girls. We continue to work on quite a bit in the publishing space and also on the development slate, of which we can't announce because those deals have not yet been publicly announced by the buyers.

So while there's a lot in motion, we don't give future guidance and discuss publicly what we cannot probably talk about. Other than that, I would recommend everyone to review our investor presentation on the website.

[Operator]

The next question comes from [indiscernible] with RMR Capital Partners.

[Unknown Analyst]

I actually had the same question a gentleman before me, just more on the pipeline and what you guys have in store. So just going off of that, in terms of the revenue is expected for the rest of the year. So we have Season 3 for Locke & Key and then Surfside Girls that's supposed to be coming in this year as well?

[Ezra Rosensaft, executive]

Correct. We anticipate recognizing revenue for Season 3 Locke & Key and Surfside Girls. No other shows have been announced. And what everyone knows, right, it takes time to go from start, adoption to delivery, typical in the industry is 12-month-ish. While some things are in discussions so on and so forth, I'm not at liberty to disclose what is in motion at the moment. So there would be nothing else anticipated for entertainment, just to squarely answer your question. Locke & Key Season 3, yes. Surfside Girls Season 1, yes.

[Operator]

The next question comes from Edward Reily with EF Hutton.

[Edward Reily, analyst]

Ezra, yes, just to piggyback on the previous 2 questions. Just was wondering if you're expecting delivery of the shows to be more or less in line with the release dates this year?

[Ezra Rosensaft, executive]

Excellent question, Eddie. So as we know, in entertainment accounting, and I'll actually turn this over to Brooke, delivery and air dates don't line up in how accounting is recognized on our books. Let me turn it over to Brooke to answer that a little more fully. And -- especially, I would just add that the air date for Apple and Surfside Girls has not been announced where Locke & Key has been. So Brooke, go head.

[Brooke Feinstein, executive]

Sure. So far with Locke & Key, we actually have -- it's like full delivery of everything, which we're going to try and ensure is going to be the same time as when it is being aired, so that one, yes. Now, in regards to Surfside Girls, we have different streams of revenue. So there's episodic fees, which would be on each -- delivery of each episode and then the remainder, a number of back-end possibly, but the remainder would be on full delivery of everything together, which is based off the final budget. So that one is a little bit more spread over time.

[Edward Reily, analyst]

Okay. Got you. So just to reiterate that for Surfside Girls, basically, you receive delivery. You recognize revenue per episode and then talk more about lump sum delivery at the end of the season?

[Brooke Feinstein, executive]

Yes. And then a possible back-end at a later time Yes.

[Edward Reily, analyst]

Okay. Great. Great. That's very big. And then I know I asked a similar question last quarter. But gross margin, again, it looks to be higher than it was last year. I know last quarter, that was mostly attributable to the Batman game. I was wondering what you would attribute to the increased gross margin to this quarter?

[Brooke Feinstein, executive]

Yes. So in the prior year, we also had a write-off of games obsolescence of about $300,000 or so. So that also assisted with the gross margin increases here.

[Edward Reily, analyst]

Okay. Great. And then just looking at some general news, I wanted to try and kind of get a feel for the demand environment for content. Netflix had slashed their budget, I believe. Just wanted you guys to comment on the general environment for content right now versus maybe a year or so ago?

[Ezra Rosensaft, executive]

Right. Great question. So we always keep an eye certainly on our business, but also on the overall media landscape. That's true for looking at the really big players and what's happening in terms of cable and broadband, so on and so forth. But down to really what matters to us, which is your question of the buyers of content, whether you're talking about the Disneys of the world or Comcast or we all know the major players. And it's about 8 to 10 really major buyers that we speak with on a regular basis, plus smaller players, they could be international, they could be niche and so on.

I will say the demand is there. Every buyer we speak with, and that's on a regular basis, we have meetings. They don't have enough supply. And it always comes down to a comment made by one of them, they need something for everyone. So while not everyone is going to watch Squid Game Season 2, I'm sure everyone has seen articles about it, it's coming out soon, there will be some people and some people who won't. And that's okay, right? that's okay. They don't build their business that way. But they'll also have -- they also have children's content. And so that will be served up an algorithm and so on.

And yes, while Netflix is the largest, we obviously need to pay attention to the other players, and they are meaningful buyers. Every one of the meaningful buyers are spending billions. I mean Disney is the largest because they spend a lot in-house, but even they are supplementing their content with external from pure plays such as IDW which I would say there aren't that many. So I feel we are in a very strong position given our publishing pipeline, the renewed focus on originals and our push on the development slate across everything that we have in all media rights.

So the demand is there, and we hope to be successful in our sales to the buyers who have the voracious appetite and the money there. So we got to make good on great shows. That's what we're after.

[Operator]

The next question comes from [ John Lee ], Private Investor.

[Unknown Attendee]

So I have 2 questions. So the first one is the publishing business has become more focused by discontinuing the game and tourist business. What should -- the operating margins investors should expect over the long term with the original titles strategy?

[Ezra Rosensaft, executive]

Thanks, [ John ]. So a very interesting question. And we would need to pull apart the 2 segments to fully understand that. And that goes a little bit into future guidance that I don't want to talk about. So there's the publishing side of the business, which is a little more predictable, and you can see the gross margins over time and did you fluctuate and we're improving them and so on and the net margin as well, which we are improving.

So gross margins are in the 40%-ish and net margins are 10% plus. On the Entertainment side, if you look historically, it's all publicly available, the gross margin was based on a very high revenue stream because the company had a very different financing model. And we've spoken about this and it's on our investor presentation as well, where the company would take a loan and therefore, recognize full revenue, but it also meant that the gross margin differed quite a bit from what we see today and what we spoke to and Brooke alluded to, we recognize the fee that we're receiving from Netflix or from Apple TV just for our content and not for -- the production fee for our content and not the overall sale to Netflix.

So a simple example is if some companies sold the show for $50 million, you would see giant costs, which by the way, [ a whit ] your balance sheet to you to giant cost of, let's make it up $40 million. That's a very different gross margin. Then if you recognize the fees as you can on to more publicly see what we received for Locke & Key of $4 million to $5 million, and the gross margin is something to the tune of 80% because all we're paying is a production service company fee. So that's the derisked business model, and it goes back to looking at the balance sheet carefully where the company no longer has debt, no longer takes out loans. We have cash, we're debt free and everything we do minimizes our risk because we're not taking that out. And that impacts the margins. I know it's a long answer to your question.

And also, we have gotten away from games, should be piece of it. So the originals, it drives margin on publishing, and you have to think about that in terms of -- they may not be right away great revenue and margin. Locke & Key is an excellent example. As you would imagine, most books, think of [ Flylight ]. You're not sure about sales initially, but eventually it ramps up, and there's a tremendous gross margin because it does very well and you're making pure profit.

When it comes to originals on the entertainment side, that is a very different model, and we don't do deals unless it's going to be profitable. The past is in the past, and you can look at the public filings on that. But going forward, all of the entertainment revenue and therefore, the gross margin, therefore, the EBITDA margin will be based on profit only. There's not going to be a scenario where we would be plenty.

[Unknown Attendee]

Okay. Great. And my second question is kind of like a general broad question. So does IDW earn revenue when a published top shelf series becomes a show?

[Ezra Rosensaft, executive]

I'm sorry, could you repeat it one more time? I am unable to hear your question.

[Unknown Attendee]

Sorry. So does IDW earn revenue when like published top shelf series become the show? So for example, like Essex County.

[Ezra Rosensaft, executive]

So some of the historical deals and shows did or didn't have all media rights. Let me push it to Brooke for a moment because a lot of that goes with track. Certainly, going forward, I would say, generally, yes, without getting into individual shows. But let me push it to Brooke to talk about some of the historical ones because it's a great question.

[Brooke Feinstein, executive]

Right. So for this one example, I know that the rights actually were somewhat lost. We will get some partial fees from it. But as long as we hold the rights, which now structuring all the contracts for all the new originals, we are going to be doing that and renewing options and stuff, that would be the case. But so that the intercompany revenue from that would be eliminated. They wouldn't go to publishing just with entertainment, right?

[Ezra Rosensaft, executive]

And [ John ], just to reiterate what Brooke said to your question, which is a very important one to strike to the heart of the business. For everything that we do, unless it's an exceptional author or director, we go after all media rights, right? That's the strategy. We have our publishing pipeline that feeds the development slate. So publishing segment [ or either ] entertainment, all media rights.

And while we're talking a lot about books and television, we also alluded to other platforms, certainly in the presentation, podcast or all the platforms that everyone on this call is familiar with which are new untapped revenue sources that we hope to go after in the near future.

[Operator]

The next question comes from [ Devin ] [indiscernible] with North First Capital.

[Unknown Analyst]

I just had 2 quick ones. From a cash flow burn perspective, just back of the envelope, with publishing maybe minus 2 each quarter, Locke & Key and then Surfside Girls. Is it right to kind of assume max, maybe $2 million of cash burn for the rest of the year?

[Ezra Rosensaft, executive]

It's a good question. So the cash flow burn -- remember, there's ins and outs, so generally speaking. So we have the incoming from Locke & Key and Surfside Girls and we have the outgoing on 2 points. One is the general SG&A and the other is on development of the business. So your number that you threw out was $2 million. We don't give guidance, so I'm a little bit hesitant to get into a lot of detail just to clarify, and then I want Brooke to elaborate a bit more. Are we saying $2 million per quarter, or $2 million for the rest of the year?

[Unknown Analyst]

Just total.

[Ezra Rosensaft, executive]

Okay. So Yes -- great question, excellent question. Let me have Brooke add some information on the CFO front and see if anything I want to add to that.

[Brooke Feinstein, executive]

Sure. So cash right now is being used to invest in originals. There's advances and there's lots of money being put in there that we actually won't see the P&L and cash inflows in for 3 or 4 years out even. So I think that -- we can't say exactly, but approximation for now, somewhat accurate. The cash inflows from even some shows like Surfside Girls, it's over some period of time. So let's say, approximately, yes, but no, hoping to get some of that cash inflow and not being positive once kind of we get the money from the originals and that kind of feeds back into the entertainment [ related ] things.

[Ezra Rosensaft, executive]

I would just add -- yes, I would just add, for the sake of sort of obvious clarity is that media companies other than really large ones who are super well capitalized with hundreds of million dollars on the balance sheet, which we don't have. Generally speaking, companies should not sit on cash, but should use it to develop properties, but we are very careful not to burn more than, like, let's say, $2 million, it's a good estimate. We wouldn't want to burn more cash than necessary by investing in 1,000, right, 1,000 titles because we wouldn't be able to sustain that. So we're very careful and selective in top quality, which means something that will be monetizable, not just in publishing, but in its payment. And that goes through a rigorous process of starting with many submissions that come in ultimately to what we decide to print and entertainment to 5G pitch and hopefully sell. So it's a great question because it strikes at the heart of the business of how we reinvest the money we receive and how we monitor the balance sheet.

[Operator]

As there are no more questions, this concludes our question-and-answer session and conference call. I'll now hand the call back to Mr. Rosensaft for closing remarks.

[Ezra Rosensaft, executive]

Thank you, operator. Everyone, thank you for joining us today. Have a great summer. We look forward to speaking with you at our next quarter. Be well, stay safe and healthy.

[Operator]

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.