IDW Media - Q1 2022

Transcript

Operator (participant)

Good evening, and welcome to the IDW Media Holdings first quarter fiscal 2022 earnings call. During management's prepared remarks, all participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After the prepared remarks, you are invited to participate in the Q&A. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then two. I will now turn the call over to John Nesbett of IMS Investor Relations.

John Nesbett (Founder and President)

Thank you, operator. Good day, and welcome to the IDW Media Holdings first quarter fiscal 2022 earnings call. With me on the call are Ezra Rosensaft, Chief Executive Officer, and Brooke Feinstein, Chief Financial Officer. I would like to begin the call by reading a safe harbor statement. On this call, all statements that are not purely about historical facts, including but not limited to those in which we use the words believe, anticipate, expect, plan, intend, estimate, target, or 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 under the headings Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations, which may be revised or supplemented in subsequent reports on SEC Form 10-K, 10-Q, and 8-K. We are 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. Go ahead, Ezra.

Ezra Rosensaft (CEO)

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 first quarter of our fiscal year 2022, which closed January 31st. 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. I'd like to first begin by noting that our thoughts and prayers are with those suffering as a result of Russia's invasion of the Ukraine, as well as the many people still struggling with the lingering effects of the COVID virus worldwide. IDW delivered a strong start to our 2022 fiscal year, highlighted by significant first quarter revenue growth and enhanced profitability across both our publishing and entertainment segments.

Our focused, consistent strategy of an integrated media company with a unified business plan drove the improvements we saw this quarter. IDW is a very different company than it was a year ago. In addition to strengthening the management team and transforming to our asset-light balance sheet, we made a game-changing strategic shift to focus on aggressively growing our library of original titles. As we've discussed on past calls, we leverage our relationships with renowned authors and creators, as well as our reputation as an innovative, independent publisher of comics and graphic novels, to curate a robust pipeline of original content submissions.

From there, we rely on the judgment of our professionals and their extensive experience in the publishing and entertainment field to identify the titles that will resonate with and grow our target audiences, which comes down to the simple goal of creating quality original titles to key up IDW's value creation process. Original and/or controlled IP, intellectual property or content, is the source for many of IDW Publishing's most successful novels and comics, complementing sales of licensed IP titles while delivering significantly enhanced economics. Currently, we have over 100 original titles in our library, with 40 new titles at various stages in the development pipeline. Our goal is to continue adding 40 quality original titles each year. Original IP not only improves our economics, it enhances our ability to delve into new genres and open new markets for audiences worldwide.

It gets us more at bats, so to speak, because volume is indeed important, especially high quality and monetizable IP. At IDW Publishing, while expanding our development of originals, we are also harvesting revenue and cutting costs from marginally profitable legacy businesses such as tabletop games, which has not consistently contributed to our bottom line, with the occasional go forward exception such as the success of the Batman Kickstarter in the first quarter. We are shifting these resources to acquire new IP, reach larger audiences, and expand into new genres including young adult, middle grade, tweens, drama, comedy, as well as build out our existing library of horror, sci-fi, and thriller titles. Currently, approximately 75% of publishing titles are profitable. No company in the media landscape has a perfect batting average, and we expect to improve on that percentage as the business expands.

Our growing IP pipeline also feeds the entertainment segment of our business. Note that an original title is capable of generating significant and recurring high margin revenues through a relatively low cost or de-risked model, as we've also discussed in the past, that requires no leverage on our end. The earning power of this model is illustrated by our delivery of Locke & Key Season 2 during the first quarter, which added $40.2 million in high margin revenue to our top line. In addition to the significant returns on our entertainment investments, the increased visibility that film and television bring to original franchises drives increased publishing sales, creating a virtuous cycle between our publishing and entertainment segments.

This refocused strategy has played an integral role in our transformation into a much stronger company with the right people, processes, content pipeline, and balance sheet in place to provide a solid platform from which to continue accelerating our growth trajectory. While the significant contribution that Locke & Key made to our top and bottom lines this quarter is both an encouraging return on our investment and a strong indicator of our potential to continue realizing high margin revenue through our entertainment segment, it's important to remember that we are still growing our entertainment business and its revenue and cash flows remain lumpy as they are contingent upon the timing of deliveries of episodes from a small number of projects. We are currently targeting 3-5 entertainment projects per year.

In the second half of fiscal 2022, we expect to realize revenue from the delivery of season three of Locke & Key and season one. Thus leading to less so-called lumpiness in future quarters. In fact, we are currently in various stages of discussion and negotiation on several development deals, quite a few publicly available on our investor presentation on our website, with the goal of bringing several to market this spring. Before wrapping up, I also want to point out that as the industry consolidates, and we remain independent, it gives IDW ongoing advantages and prospects with talent and within the industry for even more creators and content. That concludes my discussion of our strategy and execution. Now I'll turn the call over to Brooke Feinstein, our CFO, for a more detailed review of the first quarter's financial results.

Brooke Feinstein (CFO)

Thank you, Ezra. My remarks today will focus on the first quarter of our fiscal year, the three months ended January 31st, 2022. Except where I indicate otherwise, I'll be comparing the first quarter of 2022 results to the first quarter of fiscal 2021. IDW Media Holdings first quarter consolidated revenues increased 40% to $11.8 million from $8.4 million a year ago, reflecting increased revenue at both IDW Entertainment and Publishing. Publishing revenue increased 34% to $7.5 million from $5.6 million in the first quarter of fiscal 2021.

The increase was driven primarily by a $2.1 million increase in sales from the fulfillment of Batman Adventures, a tabletop game, and strong book market sales, partially offset by a decrease in direct market sales as a result of the exceptional success of Teenage Mutant Ninja Turtles: The Last Ronin, issue number one in the year-ago quarter. Entertainment revenue increased to $4.3 million from $2.8 million. Recognition of revenue from the delivery of Locke & Key Season 2 episodes contributed all but a $100,000 to the revenue increase. Consolidated operating income increased $7.1 million in the first quarter to $2 million, compared to an operating loss of $5.1 million in the prior year period.

IDW Publishing's income from operations swung to a positive $512,000, compared to a loss from operations of $373,000 in the first quarter of fiscal 2021, predominantly reflecting the impacts of Batman Adventures, partially offset by higher shipping and other direct-to-consumer costs. However, as a percentage of revenue, SG&A decreased to 43% from 50%. IDW Entertainment's first quarter income from operations was $2 million, compared to a loss from operations of $4.6 million in the first quarter of 2021. The strong improvement in revenue largely dropped through to income from operations as Entertainment's SG&A expense increased by just 1.2% year-over-year.

First quarter net income was $2 million or $0.15 per share, compared to a net loss of $6.3 million or $0.62 per share in the year-ago quarter, including the impact of $1.1 million loss from discontinued operations. Now turning to our balance sheet. At January 31st, we held $17 million in cash and cash equivalents, and we had no debt. Working capital, current assets less current liabilities totaled $21.6 million. To wrap up, our financial results this quarter were exceptionally strong. The success of our Batman Adventures game and strong book market sales drove the improved results at IDW Publishing, while we recognized high-margin revenue from the delivery of Locke & Key Season 2 at IDW Entertainment. Our balance sheet remains solid, debt-free, with ample liquidity to pursue growth initiatives and continue to build our original IP library.

Looking ahead at IDW Publishing, we are shifting our focus to prioritize franchises, ramping up our investment in original IP to increase our returns on investments in the long term and de-emphasizing or closing unprofitable business lines. At IDW Entertainment, we expect to generate additional high-margin revenue as early as the second half of 2022 upon delivery of both Locke & Key Season 3 and Surfside Girls Season 1. That concludes my remarks. Now Ezra Rosensaft and I would be happy to take your questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press Star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Walter Bellinger with Mayflower Capital. Please proceed with your question.

Walter Bellinger (Analyst)

Yeah. Hey, thanks for taking my questions. There's been a lot of consolidation in the industry, so clearly there's a premium being put on good content, and libraries. What I'm wondering is, you know, how this impacts IDW's ability to attract the best creators, which at the end of the day, is clearly the most important aspect of driving long-term value. Is the consolidation a good thing or a bad thing for that?

Ezra Rosensaft (CEO)

Hi, Walter. It's a great question. Yes, there's been a lot of consolidation in the industry. That's on point, given the focus on content in particular. In terms of attracting creators, we think it has helped us tremendously. We've maintained a very strong, pure brand, and many creators are working with us as independents. They enjoy working with us because while larger companies tend to put perhaps some in the box, we give a lot of creative license, and the IDW name resonates with creators accordingly. Some of the best creators are gravitating to IDW, given that support and creative freedom that we offer them. Relative to comparable opportunities and with an enhanced entertainment team, there's an excellent opportunity given the consolidation in the industry. Great question.

Walter Bellinger (Analyst)

Okay, great. Then just pivoting a little bit, you know, you've mentioned in the past how management has been, you know, significantly improved. I know, Ezra, that you're relatively new and you also brought on a new head of publishing and a new head of entertainment, I believe. You know, has there been, you know, additional important changes to the management team other than that?

Ezra Rosensaft (CEO)

Another great follow-up question. Yes, absolutely. You know, I always believe that while content is king and distribution is King Kong, any company's, especially ours, most valuable asset are our people. We have a very strong head of publishing entertainment, both Mark Doyle and Paul Davidson, respectively. That's the tip of the iceberg. We have a head of entertainment, IDW Entertainment VP for Kids, Family Animation. He comes from Disney. We have a new director of animation. We have a Senior VP of Original Content. We have a new VP of Series, a new editorial director of Originals, who spent a decade and a half at DC Comics. There's a real quality of bench strength that ultimately will manifest itself in excellent high quality titles that we will monetize for many years to come. Thank you.

Walter Bellinger (Analyst)

Okay, great. Yeah, that's it for me. Thanks for taking my questions.

Operator (participant)

Again, if you have a question, please press Star then one. The next question comes from Ed Reilly with EF Hutton. Please proceed with your question.

Ed Reilly (Analyst)

Hey, guys. Thanks for taking my call. Noted in the press release that you said new titles are gonna drive growth going forward in 2022 on the publishing side, which really produced exceptional results this quarter from the Batman game. I was wondering how sustainable you think this level is that was currently generated in the quarter and what the impact might be from the Penguin Random House distribution coming to fruition in June of this year.

Ezra Rosensaft (CEO)

Great question, Ed. Ezra, I'll take that. Just to pull that apart, the Penguin Random House deal, we're now seeing the full effects as we no longer have Diamond. I think everyone's aware of that. Previously we had Penguin Random House and Diamond as two different distributors, one for the book market, one for the trade or specialty market. A lot of companies have also moved away from Diamond. Penguin Random House now has our entire business. It's an excellent distribution company with significant leverage with all the major players that works to our advantage. I'm sorry, the earlier question in the beginning was one more time?

Ed Reilly (Analyst)

Yeah, just the new titles driving growth.

Ezra Rosensaft (CEO)

Yeah.

Ed Reilly (Analyst)

In 2022.

Ezra Rosensaft (CEO)

Yeah. New titles, like, your content is the lifeblood of the business. New titles that we put into the mill, right? X hundred submissions result in Y greenlit and hit the shelves, makes way to entertainment. We're gonna see that in 2022. In 2023, it's gonna ramp up. We're conscious of shelf space, both with our own titles as well as some. We see a lot of high-quality titles coming to market. We see a lot of development opportunities to take that to entertainment and other platforms. Content is king, as I keep mentioning. It's a trite statement, but very true. Everyone knows. We'll see those quality titles coming to market in 2022 and 2023, and it'll increase. We take 40 per year, and it'll keep up that clip because there's a lot of great content coming.

Ed Reilly (Analyst)

Okay, great. I was wondering what drove the increased gross profit margin on the publishing side. It looks like it's about 50% versus Q4 was 43%. Was that just driven by the lack of direct-to-consumer folks generating revenue for you guys?

Ezra Rosensaft (CEO)

Brooke, do you wanna take the financial question or do you want me to answer in a qualitative way?

Brooke Feinstein (CFO)

Why don't you start first and then I can add onto it.

Ezra Rosensaft (CEO)

Yeah. You know, traditionally the company has had gross margin on the publishing business, as you can see historically, has been in the 40% range and is improving.

Ed Reilly (Analyst)

Mm-hmm.

Ezra Rosensaft (CEO)

On originals, think of something like Locke & Key, just as an example because it's publicly available. Once we get past the initial advance and whatever gross margin might be, the gross margin increases tremendously once we reach economies of scale in terms of publishing, in terms of entertainment, in terms of the halo effect. Think about something like Twilight, right? Can you imagine what the gross margin on Twilight books were if it came back around? The gross margin will continue to expand, Matthew Rolnick, and especially as you move into originals where we have much more control over that. You know, uncontrollables are things like paper. We all watch the macroeconomics of the world. But where we can control, we have an excellent opportunity to keep advances competitive, yet appropriate, that will drive expanding gross margins and ultimately our EBITDA.

Brooke Feinstein (CFO)

Right. Just to add on to that, the Batman game Kickstarter was kind of the outlier this quarter. It netted us in about $1 million bottom line. I think everything across the board is generally the same except for that. That would be the increased reason.

Ed Reilly (Analyst)

Okay. Okay. Gotcha. Thanks, guys. Appreciate it. That's it for me.

Operator (participant)

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

Ezra Rosensaft (CEO)

Thank you. Thank you, everyone. We're grateful for your ongoing interest and support, and we look forward to speaking with everyone in the next quarter. Have a great week, quarter. Stay safe and healthy. Be well.

Operator (participant)

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