IDW Media - Q1 2023

Executive Summary

• Revenue fell 44% year over year to $6.6M as IDW Entertainment recognized no meaningful revenue in the quarter; Publishing drove all revenue, supported by print strength in TMNT: The Last Ronin and retailer exclusives like Sonic the Hedgehog.
• EPS swung to a loss of $0.15 from profit of $0.15 in Q1’22 and from $0.03 profit in Q4’22 as the prior-year quarter benefited from $4.3M of Locke & Key Season 2 delivery and ~$1.9M of DTC games revenue (Batman Adventures) that did not recur.
• Management emphasized a “building year” with a focus on steady Publishing revenues, digital/direct-to-consumer expansion (Shopify migration in two phases during FY23), and advancing ~9–12 optioned Entertainment projects; expenditures on TV shows have “declined a bit,” heightening timing uncertainty.
• No quantitative guidance was provided; liquidity is adequate with $9.3M cash and working capital of $16.8M, and management expects cash inflows plus working capital to sustain operations for at least the next 12 months.

What Went Well and What Went Wrong

What Went Well

• Publishing print titles continued to show resilience with strong sales in TMNT: The Last Ronin and retailer exclusives for Sonic; book market revenue rose $734K YoY and retailer-exclusive revenue rose $551K YoY.
• Management advanced a digital strategy to drive more consistent revenues, including a two-stage Shopify migration in FY23 to deepen direct customer connections.
• Entertainment pipeline breadth improved with ~9–12 optioned projects and progress on Earthdivers (Hulu/20th Television) to a pilot script—often the step before a pilot decision.

What Went Wrong

• Entertainment had no meaningful revenue in Q1’23 versus $4.3M in Q1’22 from Locke & Key S2, creating a difficult comparison and driving the consolidated revenue decline and operating loss.
• Segment profitability deteriorated: IDWP shifted to a $0.3M operating loss (vs $0.5M op income in Q1’22), and IDWE posted a $0.5M loss (vs $2.0M op income in Q1’22).
• Overall operating margin dropped sharply as consolidated operating income swung from +$2.0M in Q1’22 to −$2.0M in Q1’23; management highlighted the unpredictability of Entertainment revenue timing amid softer TV content spending.

Transcript

Allan Grafman (CEO)

Good evening, and welcome to the IDW Media Holdings first quarter fiscal 2023 earnings call. During management's prepared remarks, all participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star zero. After the prepared remarks, you're invited to participate in the Q&A. To ask your question, please press star one on your touchtone phone. To withdraw your question, please press star two. I will now turn the call over to Jen Belodeau of IMS Investor Relations. Thank you. You may begin.

Jen Belodeau (Investor Relations)

Good evening. I'll take a brief moment to read the safe harbor. Any forward-looking statements made during this conference call, either in the prepared remarks or in the Q&A session, whether general or specific in nature, are subject to risks and uncertainties that may cause actual results to differ materially from those which the company anticipates. These risks and uncertainties include, but are not limited to, specific risks and uncertainties discussed in the company's SEC filings. IDW assumes no obligation either to update any forward-looking statements that they have made, may make, or to update the factors that may cause actual results to differ materially from those that they forecast. Please note that the IDW earnings release is available on the investor relations page of the IDW Media Holdings corporate website. I'll now turn the conference over to Allan Grafman. Go ahead, Allan.

Allan Grafman (CEO)

Thank you, operator, and thank you to everyone on the call for joining us today. My remarks on this call will provide an overview of our results for the first quarter of fiscal year 2023 and a few words on our focus strategy for the rest of fiscal year 2023 and beyond. After my remarks, Brooke Feinstein, our CFO, will provide details around the financial results, and then we will be happy to take your questions. The first quarter results demonstrated solid performance at IDW Publishing. Consolidated results did not compare well with Q1 2022 for several reasons. Among those reasons are the long timeline to prepare, sell, develop, produce, and deliver entertainment projects. We are driving entertainment publishing and our digital initiatives with urgency. In fact, we just finished doing an IDW strategy plan for actionable steps in 2023 and beyond.

We've identified more than 20 possible initiatives to fuel our growth, including many which take IDW into digital platforms to correct directly with IDW fans. We identified these initiatives as near term, intermediate, and long term. These new initiatives are designed to do four things for us. First, lift our current publishing and entertainment businesses. Second, bring IDW into new digital arenas. Third, solidify IDW as the creative partner of choice. Fourth, reward long-term shareholders. Let's focus on our most recent results. Our first quarter 2023 results had a challenging comparison with the first quarter of 2022, primarily based on the fact that in Q1 of 2022 we recognized $4.3 million in entertainment revenue from the full delivery of Locke & Key – Season 2, while IDW Entertainment generated no meaningful revenue in fiscal year first quarter 2023.

Contributing to the negative comparison, in Q1 2022, we generated almost $2 million in publishing revenue related to the fulfillment of the direct-to-consumer games campaign for Batman Adventures. Let's take a closer look at our individual business segments. A primary focus at IDW Publishing is to continue driving increased print sales of both original and licensed properties. Print sales are a consistent source of revenue for our business, with relatively steady revenue performance. We anticipate that our print titles will continue to provide reliable, predictable revenues moving forward. Anchoring our print distribution is our solid partnership with our distributor, Penguin Random House. In a meeting with their CEO last week, they and their leadership told me that IDW is viewed as a partner of choice. In addition to our print revenues, we are working to increase revenues through digital initiatives.

We are migrating to a new digital platform to be hosted by Shopify. It's going to be completed in two stages in fiscal year 2023. This migration will give us greater control and ability to have a direct connection with our loyal customers. At IDW Entertainment, the strong results in Q1 2022 illustrate the positive financial rewards that entertainment transactions produce. However, for entertainment, moving from original idea to development agreement to production and finally delivery to a buyer, it takes a considerable amount of time, consistent effort, and patience. It's important to remember that as we continue to scale the entertainment side of our business, there will be quarters where we are rewarded by our ability to take a creative vision all the way to TV or other platforms.

There will be other quarters where we won't recognize much revenue from our IDW Entertainment as we shepherd projects through the process. We view fiscal 2023 as an important transition year for IDW and a crucial part of our journey towards creating sustained shareholder value. Our publishing division has established a strong reputation around its ability to discover new creators and maximize the potential of their unique content. We partner with creators to help them reach new audiences and at the same time grow our IP library. Our entertainment business has already demonstrated the ability to develop and deliver premier projects such as Locke & Key, Surfside Girls, Wynonna Earp, and V-Wars to top-tier partners like Netflix, Apple TV, and Syfy.

While expenditures on TV shows have declined a bit recently, it is still an enormous addressable market, and IDW Entertainment only needs a few shows to go into production that is greenlit to be successful. We have nearly a dozen projects that have been optioned and are in various stages of development that we are pushing forward. To summarize, IDW's strategy is, first, continue to increase our industry recognition so that we are the first name that comes to mind when talented creators are looking for a home to develop their original content. Second, publish inventive and compelling comics and graphic novels that resonate with broad audiences. Third, further develop our published content entertainment vehicles for streaming services, TV shows, and other platforms. Fourth, move into new sectors where we can monetize our IP with a focus on digital and direct-to-consumer.

There is a lot of work to be done. IDW is well positioned to fully exploit our content library to develop and deliver premier projects throughout our entire business. We are focused on the opportunity that we are seeing to drive long-term growth and value as a leading independent media entity. We remain one of the very few ways, perhaps the only way, for investors to participate in the comic book graphic novel television sectors. Your entire IDW leadership team is co-committed to fulfilling IDW's potential. Now, I'll turn the call over to Brooke Feinstein, our CFO, to go over our financials for the first quarter of 2023.

Brooke Feinstein (CFO)

Thank you, Allan. My remarks today will focus on our first quarter 2023 results, the 3 months ended January 31st, 2023. Except where I indicate otherwise, I'll be comparing the first quarter of fiscal 2023 to the first quarter of fiscal 2022. IDW Media Holdings first quarter consolidated revenue decreased 44% to $6.6 million compared to $11.8 million a year ago. Publishing revenue for the first quarter of 2023 decreased by $954,000 compared to the prior year period, primarily due to a decrease in games revenue of $1.9 million, driven by fulfillment of the direct-to-consumer games campaign for Batman Adventures in the prior year period, and a decrease in direct market revenue of $462,000 due to strong sales in the prior year quarter.

This was partially offset by an increase in book market revenue of $734,000, driven by strong Teenage Mutant Ninja Turtles: The Last Ronin hardcover, and an increase in retailer exclusive revenue of $551,000 predominantly related to Sonic the Hedgehog. Sales returns improved compared to the prior period, in part due to targeted incentives with accounts to reduce return rates. In the first quarter of 2023, IDW Entertainment did not generate meaningful revenue as the division did not deliver any entertainment projects in the quarter. In the first quarter of 2022, IDW Entertainment generated revenue of $4.3 million, which included revenue from the full delivery of Locke & Key – Season 2, as well as revenue related to the French-Canadian license received for V-Wars.

Consolidated loss from operations was $2 million in the first quarter of 2023 compared to consolidated income from operations of $2 million in the first quarter of 2022. The consolidated operating loss in the first quarter of 2023 is due to an operating loss from IDW Entertainment of $445,000 and an operating loss from IDW Publishing of $335,000, in addition to an increase in non-allocated corporate overhead of $712,000. IDW Publishing's loss from operations in the first quarter of 2023 was $335,000 compared to income from operations of $512,000 in the prior year period. IDW Entertainment's loss from operations in the first quarter of 2023 was $445,000 compared to income from operations of $2 million in the prior year period.

Consolidated net loss in the first quarter was $2 million or $0.15 per share, compared to the net income of $2 million or $0.15 per share in the prior year period. Looking at our balance sheet, at January 31st, 2023, we had cash and cash equivalents of $9.3 million and working capital current assets less current liabilities totaling $16.8 million. As we move through fiscal 2023, we anticipate that our expected cash inflows from operations during the next 12 months, combined with our working capital, will be sufficient to sustain operations for at least the next year. That concludes my remarks. Alan?

Allan Grafman (CEO)

Thank you, Brooke. Now, I would welcome your questions. Operator, back to you for Q&A.

Operator (participant)

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask your question, you may press star one on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Edward Reilly with EF Hutton. Please proceed with your question.

Edward Reilly (Analyst)

Thanks for taking my question. Looks like SG&A remained relatively flat year-over-year, despite the inflationary backdrop. Are you guys taking any cost-cutting measures? I'm just kinda wondering, you know, what that might look like for the rest of the year.

Allan Grafman (CEO)

Let me try to answer that, Ed, and thank you for the question. The answer is yes. Let me give a few examples. There are two open positions, direct reports, that we have not filled in anticipation of a journey to becoming cash flow breakeven. We have also taken other measures to assure that we are effectively using the resources that we have. We, I would have to say, every week look at the types of expenses that we have. We take measures that are prudent. We don't want to adversely impact the opportunities that we have in publishing, in entertainment, and digital. There may be future changes, but the answer clearly is yes. We are cognizant, and we are active, and we are ever mindful.

Edward Reilly (Analyst)

Okay. Got it. Thanks. On digital seems like a nice opportunity. Just wondering maybe how you're gonna be driving potential customers to the platform, and maybe if you could dive into what the value proposition is for that potential customer.

Allan Grafman (CEO)

Let me give 2 or 3 answers to that question. First, Ed, we conducted, I believe it was 2 weeks ago, at the end of February and the 1st week of March, we conducted what I'm going to call our 1st ever, but 1st ever for me for certain, strategic plan and review. It was 2 days. It was on-site. We didn't go off-site. That's partially an answer to your 1st question. We came up with over 20 initiatives that the company could consider addressing. We then put those with our core businesses that we're currently active in, and then we assigned are these near term, intermediate, or long term.

We parsed them, which of those were digital, which we gave a higher profile to, and which of those were not digital, and which of those we didn't think were good ideas. I can specify a few that we are actively looking at, but let me pivot to a second thing that we are doing, which you've heard previously. As you may recall, we are pivoting to having a more robust web presence, and we will be on the Shopify platform. We have signed a developer. This was something that I identified within the first 4 to 6 weeks of joining the company. If anyone's ever been involved in a software conversion process, you tend to pick up momentum.

We expect to be, and we plan to be in working to have a migration from an old system to a new system on May first. We plan to have a second plateau, which I'm calling Shopify 2.0, which will allow for a much greater fan experience and a much greater interaction with the fans of the properties that we publish. Those are two areas that we are pushing forward on.

Edward Reilly (Analyst)

Okay. Okay, great. Maybe if you go into the pipeline for new publishing titles throughout the year and what your expectation is there, that'd be great.

Allan Grafman (CEO)

For this year, Ed, we will be publishing approximately 1,400 total SKUs. It's a significant, it's robust, and it's a very productive pipeline. That will consist of approximately 1,200 comics. That's a very large number. Understand that about 300 of those are comics of titles that you know, like Sonic and Star Wars and other properties. A large number of the approximately 900 are variant covers. They're specialty items. Approximately, as I say, approximately 1,200 comics. We have about 113 collections and original graphic novels. Some of those are licensed, some of those are original, and some of those are from Top Shelf, our high-end, I'll say graphic book publisher.

On the original, it's more than we've done in the past, and we are putting a particular emphasis on having an ownership position. We have more licenses to speak to and are in the process of negotiating. We have a very robust publishing pipeline, which is keeping everyone fully engaged. Importantly, as you heard, we have a very important relationship with Penguin Random House Distribution Services. I met with them two weeks ago, and that is a very important competitive advantage even. They selected us. We've had a relationship with them for a while, and we recently amplified it to include a broader swath of the market.

Edward Reilly (Analyst)

Okay, great. Thank you for that. That's it for me.

Operator (participant)

As a reminder, it's star one to ask a question. Our next question comes from the line of David Marsh with Singular Research. Please proceed with your question.

David Marsh (Equity Research Analyst)

Hi, everybody. Thanks for taking the questions. first, I wanted to follow up on one of the prior questions with regard to SG&A. Were there any non-recurring type SG&A charges in the first quarter or charges that, you know, happen in the first quarter of the year, like Nasdaq listing fees or, you know, anything of that nature that might fall out as we go forward?

Allan Grafman (CEO)

Brooke, can you answer that please?

Brooke Feinstein (CFO)

Yeah. Our fee, I mean, for the New York Stock Exchange is we do spread it over the year, so it wouldn't just impact the first quarter. You know, sometimes we would have big events in certain quarters, but in this quarter there isn't anything particularly that would miscue the numbers.

David Marsh (Equity Research Analyst)

Okay, great. Then, just with regard to your comment on the titles, I think that's great news. Could you give us a sense of how much of an increase year-over-year we are talking about in titles versus prior year?

Allan Grafman (CEO)

David, I wish I had that at my fingertips. I can give it to you by title, but it would take me a while to add it up. I do not have that at my fingertips.

David Marsh (Equity Research Analyst)

Okay. Directionally it's meaningfully more titles this year. Is that a fair statement?

Allan Grafman (CEO)

Yes, but let me respond to you in writing because I want to make certain that we have if you could pose your question to us in writing with the specifics.

David Marsh (Equity Research Analyst)

Sure. Sure.

Allan Grafman (CEO)

I'd be happy to try to answer it accurately as opposed to, an estimate.

David Marsh (Equity Research Analyst)

Absolutely. Not a problem. Just lastly from me, with regard to the media side, it's great to hear that you guys have so many projects, kind of percolating. Is there anything that you are, you know, you feel like you guys are reasonably close on where, you know, you might be able to at least give us genres with regard to titles that we might expect to see in the current year?

Allan Grafman (CEO)

David Marsh, let me try to give a comprehensive answer to that question because I'm sure it's of interest to everyone on this call. We have somewhere between 9 and 12 properties that have been optioned, and they are with people like 20th Television, with Amazon, New Republic Pictures, Lionsgate, AMC Studios, Warner Bros., Warner Bros. Animation, Universal Pictures, Lionsgate, BBC. You can tell I'm reading from a list. These are people that have committed and engaged in a transaction that is the beginning of the process. People who come often to this call will tire of hearing me say that. To answer your specific question, yes.

I can tell you that, in the past two days, we've been very heartened to have news that two projects have moved far along the process to where the next step has been taken. Let me be specific because I can be specific in one instance. We have a project, an original project called Earthdivers. As some of you may know, it was announced late last year. We partnered with 20th Television and Hulu, and we took a best-selling author and his comic book series, Earthdivers, and I can't get into specifics, but the buyer has moved it forward and committed to a pilot script. Writing a pilot is sometimes, one could even say often, but not always, the last step before a buyer or streamer or network determines if it will go into production.

For those of you who have heard all this before, that means they're spending money on a transaction that they committed to months before, and they will have a script which will allows their vision with IDW's to be presented to them for action. That action can lead in a couple of ways. The first is they could set it aside for a rainy day. The second could be they may want to rewrite. The third is they could go to pilot and, you know, a home run could be they commission it for production. We don't know and we never know, but we're urgently and focused on pushing it along. It's a multi-step process. We got news on two different projects within the past 24 hours, and we're heartened by this progress.

That's a long answer, but I hope it answers all the questions that our listeners may have. Certainly welcome more questions.

David Marsh (Equity Research Analyst)

That's a great answer. Really appreciate it. Thank you, guys. That's all for me.

Operator (participant)

Our next question comes from the line of Jeff Silver with Corrado Financial Group. Please proceed with your question.

Jeffrey Silver (Chief Investment Officer)

Thank you. Hello, Allan.

Allan Grafman (CEO)

Hey, Jeff.

Jeffrey Silver (Chief Investment Officer)

The cash flow from operations was $614,000 to the negative, I guess, in the first quarter. Is there any way that you can perhaps guide us, or maybe guiding is the wrong word, but to help us to understand whether the quarterly cash burn should be in that neighborhood going out for the next 3 quarters or the rest of the year? Or do you expect an increase? I know this is sort of an offshoot of the SG&A question, but maybe you can help us because obviously given the environment we're in and given the stock price and the enterprise value, et cetera, you know, certainly you wouldn't wanna have to go out and raise equity capital in this kind of an environment.

You know, can you talk a little bit about the quarterly cash burn rate?

Allan Grafman (CEO)

Jeff, yes. Let me answer that in a couple ways. There are 3 things we can do. We can raise more revenue. We can cut costs. The 3rd, which currently is not anticipated, could change. We do not anticipate at this time going out to raise additional capital. We have cash on our balance sheet right now that allows us to execute the strategy. We're focused on revenue and costs. On the revenue side, as you heard, there was not significant revenue on the entertainment side. We can't predict when that will change. We do have between 9 and 12 projects. Whether those generate meaningful revenue in the next quarter or during this fiscal year, we are pushing for that, but we cannot predict.

On the cost side, we have more control of that, and we are reviewing on an ongoing consistent basis our costs. I would not straight line this quarter's results. Publishing is largely a wonderful, steady business, and many investors appreciate that. Entertainment is almost wildly cyclical, unpredictable life of its own. It takes time. When you have a success, it rewards richly. I'll point to Locke & Key, which took many years to get to its success platform. I will also point out to something that many of you may have witnessed in the film business, which we are not in. A24 was a 10 year journey for them to be as successful where they won 6 of the major awards.

It was reported in The New York Times, I believe, that they have a multi-billion dollar valuation. Our aspirations are more within our grasp. So that's again, a, I hope, a long and hopefully complete answer to your question.

Jeffrey Silver (Chief Investment Officer)

Sure. I have one other question about the digital platform. What, you know, what kind of, I would say, either content or, what should we expect to see on that digital platform?

Allan Grafman (CEO)

I'm going to give, again, I'm gonna try to give a multi-pronged answer. You should see familiar, you should see something slightly different, and there's a third category which is harder to describe. The familiar. You should see the digital representations of the books that we publish in print. Currently, those are available on different platforms, whether it's our website or ComiXology or other platforms. That is a digital representation of the print books. That's familiar. A second would be what I'm calling, well, what the industry would call is user-generated content. User-generated content can be original content or it could be extracts modified by the artist or possibly modified with the artist's permission by fans. That's a robust area that we're exploring. There's been a lot of failure, by the way.

There's been a lot of money raised, a lot of attempts, and we're looking at it very carefully. There's a third category, which I will call motion comics or short videos, which we're exploring. Those would take like a property that we control, Surfside Girls. By way of example, and we're not in the process of doing it, but it would put motion comics of the book. It would look something between a book and a video. We're looking. Obviously, we're active in the first. We're actively exploring the second and the third. We will actively, judiciously, and frugally explore both door number 2 and door number 3.

Jeffrey Silver (Chief Investment Officer)

That's very helpful. Thank you. It sounds promising. Do any of the three doors, as you call them, is Penguin Random House involved or in any of those, well, in the platform, in the digital platform in any way?

Allan Grafman (CEO)

Let me break that into 2 categories. 1 is on the distribution side. The answer is yes. On the platform side, not to my knowledge. I met with them 2 weeks ago. It did not come up, so I'm reasonably confident. Brooke, do you have any amplification of my answer?

Brooke Feinstein (CFO)

Currently all of our direct-to-consumer stuff on the digital platform does not go through them. It's just the kinda direct and book market that we use them to distribute physically to physical stores and comic stores. Yeah, that would just be through our own 3PL system. Sorry, not 3PL. If they're buying online, but digitally, it would just be all online.

Jeffrey Silver (Chief Investment Officer)

Terrific. You know, I appreciate the detail, and the answers to, you know, to all the questions that have been asked. It's helpful. Thank you.

Allan Grafman (CEO)

Thank you. Thank you so much.

Operator (participant)

There are no further questions in the queue. I'd like to hand the call back over to Mr. Grafman for closing remarks.

Allan Grafman (CEO)

My closing remark is, I'm delighted that you took time to join us. The entire leadership team is focused, and the sole focus is making certain that long-term shareholders are rewarded. We recognize that the history of the company has had some ups and downs. We can't predict. We can't predict the outer market. We can't predict really a lot, except we can predict that we are making every effort to make certain that long-term shareholders are rewarded. I'm hoping that that came across and all of you leave this call understanding that that is the case. Thank you very much for joining us.

Operator (participant)

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.