IDW Media - Q2 2022
June 14, 2022
Executive Summary
- Revenue was $6.05M, down 40% year over year (vs. $10.14M) and down sequentially from $11.85M, driven by zero entertainment revenue in Q2 while publishing grew modestly; consolidated net loss was $2.25M ($0.17 per share) vs. net income of $2.54M ($0.25) in Q2’21.
- Management reiterated H2 timing: revenue expected in Q3 from Surfside Girls and in Q4 from Locke & Key Season 3 under the derisked entertainment financing model; no debt and cash of $13.68M provide flexibility to invest in originals.
- Publishing loss from operations improved to $(0.3)M vs. $(0.5)M YoY, aided by direct-to-consumer and retailer exclusives; IDWE swung to a $(1.7)M operating loss on zero revenue vs. $1.2M profit in Q2’21.
- Catalysts: delivery/recognition of Surfside Girls and Locke & Key S3 in H2, expanded original IP slate (100+ originals, 40+ in development) and 12 Eisner Award nominations supporting pipeline visibility.
What Went Well and What Went Wrong
- What Went Well
- Publishing revenue increased 1.1% YoY to $6.1M; loss from operations improved to $(0.3)M vs. $(0.5)M YoY, with SG&A ratio improving to 50.9% from 52.0%.
- Balance sheet strength: $13.68M cash, $19.0M working capital, and no debt, enabling investment in original IP and derisked entertainment projects.
- Strategic pipeline advances: “we expect to generate improved results… realize revenue… deliveries of both Season 3 of Locke & Key and Season 1 of Surfside Girls,” and 12 Eisner nominations highlighting content quality.
- What Went Wrong
- Consolidated results deteriorated: loss from operations of $(2.24)M vs. +$0.43M YoY; net loss $(2.25)M vs. +$2.54M YoY as entertainment revenue was absent in Q2.
- IDW Entertainment posted zero revenue (vs. $4.2M YoY) and an operating loss of $(1.7)M (vs. $1.2M profit YoY), underscoring quarter-to-quarter revenue lumpiness tied to deliveries.
- Segment mix pressure: consolidated SG&A of $4.6M on $6.05M revenue compressed profitability in a quarter with no entertainment contribution.
Transcript
Operator (participant)
Good evening, and welcome to the IDW Media Holdings second 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 your question, you may press star then one on your touchtone 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 investor conference call for the second quarter and six months ending April 30th, 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 a 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 30th, 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 are under no obligation and expressly disclaim any obligation to update the forward-looking statements in 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 (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 second quarter of fiscal year 2022, which closed April 30th. 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 to utilizing de-risked entertainment financing models and our asset-light balance sheet to drive results. When we look at the quarter, the elephant in the room is no revenue on the entertainment side. Importantly, though, we did 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 six months of fiscal 2022. Very strong revenue in Q1, then no meaningful revenue in Q2. In Q3 and Q4, we expect to see entertainment revenue from Surfside Girls and Locke & Key Season Three. 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. Taking from that perspective, our entertainment business is performing well and has 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 with talented and visionary creators.
The authors and creators we work with are among the most talented and innovative in the industry. 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. Edition 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 platforms.
Along those lines of leveraging our relationships, during the second quarter, we announced a strong slate of nine new graphic novels 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 library of horror, sci-fi, and thriller titles, we are also targeting 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 2022 revenues in the entertainment segment related to our delivery of Locke & Key Season Two, 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 2022, we expect to recognize revenue from the delivery of both Season Three of Locke & Key and Season One of Surfside Girls, appearing on Netflix and Apple respectively. 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.
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 to 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 segments. This is an exciting and busy time for our company. As we move through the remainder of fiscal 2022, we believe we are well-positioned to capitalize on our refocused strategies, the strength of our content pipeline, and the flexibility of our balance sheet, which provide 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 six months of 2022. Go ahead, Brooke.
Brooke Feinstein (CFO)
Thank you, Ezra. My remarks today will focus on the second quarter and first six months of our fiscal year 2022, the three and six months ended April 30th, 2022. Except where I indicate otherwise, I'll be comparing the second quarter of fiscal 2022 results to the second quarter of fiscal 2021, and I'll be comparing the first six months of fiscal 2022 to the first six months of fiscal 2021. 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 the Sonic the Hedgehog 30th anniversary, as well as increases in direct and indirect market 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 2021, as compared to no delivered episodes in the second quarter of 2020.
For the first six months of fiscal 2020, consolidated revenue decreased to $17.9 million from $18.6 million in the first six months of fiscal 2021. Publishing revenue for the first six months of fiscal 2022 increased to $13.6 million from $11.6 million in the first six months of fiscal 2021. 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 non-direct market publishing revenue. Entertainment revenue for the first six months of 2022 decreased to $4.3 million from $6.9 million in the first six months of fiscal 2021.
Revenues in the first six months of 2020 included full delivery of Locke & Key Season Two 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 an 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 2021. IDW Entertainment's second quarter loss from operations was $1.7 million compared to an income from operations of $1.2 million in the second quarter of 2021.
Consolidated loss from operations for the first six months of fiscal 2022 was $260,000 compared to a loss from operations of $4.7 million in the first six months of fiscal 2021. IDW Publishing's income from operations was $246,000 in the first six months of 2022 compared to an operating loss of $883,000 in the same prior year period. IDW Entertainment's income from operations was $294,000 in the first six months of 2022 compared to a loss from operations of $3.3 million in the first six months of fiscal 2021. 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 six months of fiscal 2022 was $264,000 compared to a net loss of $3.7 million in the first six months of fiscal 2021. Turning now to our balance sheet. At April 30th, we held $13.7 million in cash and cash equivalents and had no debt. Working capital, current assets less 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 feed our 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 (participant)
Thank you. 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. The first question comes from Todd Higgins with Washington Street Partners. Please proceed with your question.
Todd Higgins (Analyst)
Hey, guys. Thanks for taking my question. 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, you know, the back half of the year?
Ezra Rosensaft (CEO)
Hi, Todd. Thanks for asking the question. It's Ezra. Excellent question. We have our publishing pipeline that feeds our development slate, and we have announced Locke & Key and Surfside Girls will be airing. Locke & Key has been announced the air date. Apple has not yet announced the date for 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. While there's a lot in motion, we don't give future guidance and discuss publicly what we cannot publicly talk about, other than I would recommend everyone to review our investor presentation on the website.
Todd Higgins (Analyst)
Got it. All right. Thanks. That's helpful. Thank you.
Operator (participant)
The next question comes from Moe Shaltout with RMR Capital Partners. Please proceed with your question.
Moe Shaltout (Partner)
Hey, hey, Ezra. I actually have the same question as the gentleman before me, just more on the pipeline and what you guys have in store. Just going off of that, in terms of the revenues expected for the rest of the year, we have season three for Locke & Key and then Surfside Girls that's supposed to be coming in this year as well?
Ezra Rosensaft (CEO)
Correct. We anticipate recognizing revenue for season three of Locke & Key and Surfside Girls. No other shows have been announced, and what everyone knows, right, takes time to go from start, inception to delivery, typical in the industry, 12-month-ish. While something's in discussion and so and so forth, I'm not at liberty to disclose what is in motion at the moment. There would be nothing else anticipated for entertainment, just to squarely answer your question. Locke & Key season three, yes. Surfside Girls season one, yes.
Moe Shaltout (Partner)
Got it. Thank you.
Operator (participant)
The next question comes from Edward Reilly with EF Hutton. Please proceed with your question.
Edward Reilly (Managing Director and Senior Equity Research Analyst)
Hey, Ezra. Yeah, just to piggyback on the previous two 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 (CEO)
Excellent question, Eddie. 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.
Brooke Feinstein (CFO)
Sure.
Ezra Rosensaft (CEO)
Especially, I'll just add that the air date for Apple and Surfside Girls has not been announced, whereas Locke & Key has been. Go ahead.
Brooke Feinstein (CFO)
Sure. For 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. That one, yes. Now in regards to Surfside Girls, we have different streams of revenue. There's episodic fees, which would be on each delivery of each episode and then the remainder of the back end possibly, but the remainder would be on full delivery of everything together, which is based off the final budget. That one's a little bit more spread over time.
Edward Reilly (Managing Director and Senior Equity Research Analyst)
Okay. Gotcha. Just to reiterate that, for Surfside Girls, basically you receive delivery, you can recognize revenue per episode and then, more of a lump sum delivery at the end of the season.
Brooke Feinstein (CFO)
Yes. A possible back end at a later time. Yeah.
Edward Reilly (Managing Director and Senior Equity Research Analyst)
Okay, great. That's perfect. You know, I know I asked a similar question last quarter. The 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. Was wondering what you would attribute the increase to gross margin to this quarter.
Brooke Feinstein (CFO)
Yes. In the prior year.
We also had a write-off of games obsolescence of about $300,000 or so. That also assisted with the gross margin increases there.
Edward Reilly (Managing Director and Senior Equity Research Analyst)
Okay, great. Just looking at some general news, wanted to try and kind of get a feel for the demand environment for content. You know, Netflix had slashed their budget, I believe. Just wanted you guys to comment on the general environment for content right now, which may be really slow, though.
Ezra Rosensaft (CEO)
Right. Great question. We always keep an eye, certainly on our business, but also on the overall media landscape. That's true for, you know, looking at the really big players and what's happening in terms of cable and broadband and so on and so forth. 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. There's about eight-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.
It always comes down to a comment made by one of them. They need something for everyone. While not everyone's going to watch Squid Game Season Two, I'm sure everyone has seen articles about it's coming out soon. There will be some people who won't. That's okay, right? Netflix says that's okay. They don't build their business that way. They'll also have children's content, and so that'll be served up and now delivered and so on. You know, yes, while Netflix is the largest, we also need to pay attention to the other players, and they are meaningful buyers. Every one of the meaningful buyers are spending billions.
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. 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 and all media rights. The demand is there, and we hope to be successful in our sales to the buyers who have that voracious appetite and the money is there. We got to make good on great shows. That's what we're after.
Edward Reilly (Managing Director and Senior Equity Research Analyst)
Great. Thanks, Ezra. Appreciate it.
Ezra Rosensaft (CEO)
Thank you.
Operator (participant)
The next question comes from John Lee, Private Investor. Please proceed with your question.
John Lee (Shareholder)
Thanks for taking my question. I have two questions. The first one is, the publishing business has become more focused by discontinuing the game interest business. What should the operating margins investors should expect over the long term with the original titles strategy?
Ezra Rosensaft (CEO)
Thanks, John. Very interesting question, and we would need to pull apart the two segments to fully understand that. That goes a little bit into future guidance that I don't want to talk about. There's the publishing side of the business, which is a little more predictable, and you can see the gross margins over time, and they do fluctuate, and we're improving them and so on. The net margin as well, which we are improving. Gross margins are in the 40%-ish, and net margins are 10%+. 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.
We've spoken about this, and it's on the investor presentation as well, where the company would take the loans and therefore recognize full revenue. It also meant that the gross margin differed quite a bit from what we see today. 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. A simple example is if some company sold a show for $50 million, you would see giant costs, which, by the way, would hit your balance sheet. You would see giant costs of, let's make it up $40 million.
That's a very different gross margin than if you recognize the fees, as you can come to more publicly see what we receive for Locke & Key of $4 million-$5 million. The gross margin is something to the tune of 80% because all we're paying is a production service to company fee. That's the previous business model. 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 it out. That impacts the margins. I know it's a long answer to your question. You know, we have gotten away from games, which is a piece of it. The originals, it drives margin on publishing.
You have to think about that in terms of there may not be right away great revenue and margin. Locke & Key is an excellent example. As you would imagine, most books think of Twilight. You know, 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 the past, and you can look at the public filings on that. Going forward, all of the entertainment revenue and therefore gross margin, therefore the EBITDA margin, will be based on profit only. There's not going to be a scenario where we would lose money.
John Lee (Shareholder)
Okay, great. My second question is kinda like a general broad question. Does IDW earn revenue when a published Top Shelf series becomes a show?
Ezra Rosensaft (CEO)
I'm sorry, can you repeat it one more time? I didn't hear the whole question.
John Lee (Shareholder)
Oh, sorry. Does IDW earn revenue when, like, a published Top Shelf series becomes a show? For example, like Essex County.
Ezra Rosensaft (CEO)
You know, 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 that. Certainly going forward, I would say generally yes, without getting into individual shows. Let me push it to Brooke to talk about some of the historical ones, because it's a great question.
Brooke Feinstein (CFO)
Right. For this one example, I know that the rights actually were somewhat lost. We will get some partial fees from it. As long as we hold the rights, which, you know, now structuring all the contracts for all the new originals, we are going to be doing that. You know, renewing options and stuff, that would be the case. The intercompany revenue from that would be eliminated. They wouldn't go to publishing, they'll just sit with entertainment, right?
Ezra Rosensaft (CEO)
John, just to reiterate what Brooke said in your question, which is a very important one, strikes at the heart of the business. For everything that we do, unless it's an exceptional author and, you know, or director, we go after all media rights, right? That's the strategy. We have our publishing pipeline that feeds the development slate. Publishing segment feeds entertainment, all media rights. While we're talking a lot about books and television, we also allude to other platforms, certainly in the presentation, you know, podcasts 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.
John Lee (Shareholder)
Okay, thanks.
Operator (participant)
The next question comes from Devin Hsu with North First Capital. Please proceed with your question.
Devin Hsu (Analyst)
Hey, thanks for taking my questions. I just had two quick ones. From a cash flow burn perspective, just back to the envelope with publishing maybe minus two each quarter, Locke & Key and then Surfside Girls, is it right to kinda assume max maybe $2 million in cash burn for the rest of the year?
Ezra Rosensaft (CEO)
It's a good question. You know, the cash flow burn, remember, there's ins and outs, so generally speaking. We have the incoming from Locke & Key and Surfside Girls, and we have the outgoing on two points. One is the general SG&A, and the other is on development of the business. 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 clarify and then I want Brooke to elaborate a bit more. Were you saying $2 million per quarter or $2 million for the rest of the year?
Devin Hsu (Analyst)
Just total.
Ezra Rosensaft (CEO)
Okay. Let me
Devin Hsu (Analyst)
Total.
Ezra Rosensaft (CEO)
Yeah. Great question. Excellent question. Let me have Brooke add some information on the CFO front and see if anything I wanna add after that.
Brooke Feinstein (CFO)
Sure. You know, 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 three or four years out even. I think that, you know, we can't say exactly, but approximation for now, so that's somewhat accurate. You know, the cash inflows from, you know, even some shows like Surfside Girls, it's over some periods of time. Let's say approximately yes, but, you know, hoping to get some of that cash inflow and that being positive once kind of we get the money from the originals and that kind of feeds back into the entertainment sphere of things.
Ezra Rosensaft (CEO)
I would just add.
Devin Hsu (Analyst)
Got it.
Ezra Rosensaft (CEO)
Yeah. I would just add, you know, for the sake of sort of obvious clarity, that is, you know, media companies other than really large ones who are super well capitalized with, you know, hundreds of millions of dollars in balance sheets, which we don't have, generally speaking, media companies should not sit on cash but should use it to develop properties. We are very careful not to burn more than, like, let's say $2 million. It's a good estimate. We wouldn't wanna burn more cash than necessary by investing in 1,000 titles because we wouldn't be able to sustain that. We're very careful and selective in top quality, which means something that will be monetizable, not just in publishing but in entertainment.
That goes through a rigorous process of starting with many submissions that come in, ultimately to what we decide to print and entertainment decides to pitch and hopefully sell. 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.
Devin Hsu (Analyst)
Got it. Great. Thank you so much.
Brooke Feinstein (CFO)
Thank you.
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, operator. Everyone, thank you for joining us today. Have a great summer. We look forward to being with you at our next quarter. Be well, stay safe and healthy.
Operator (participant)
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.