IDW Media Holdings Inc

OTC:IDWM

Earnings Call Transcript

[Operator]

Good evening, and welcome to the IDW Media Holdings First 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 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 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 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, 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 first quarter of our fiscal year 2022, which closed January 31. 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 Russian 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 segment. 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. Our 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 advanced, 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 exceptions 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 adults, 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 repeating high-margin revenues through a relatively low cost or derisked 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 $4.2 million in high-margin revenue to our top line. In addition to the significant return on our entertainment investments, the increased visibility that film and television brings to original franchises drives increased publishing sales, creating a virtuous cycle between our publishing and entertainment segment. 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 to 5 entertainment projects per year. In the second half of fiscal 2022, we expect to realize revenue from the delivery of Season 3 of Locke & Key and Season 1 of our new project, Surfside Girls, being aired on Apple TV.

Entertainment revenue will fluctuate as we scale. But over time, we expect that our entertainment division will deliver a more consistent cadence of high-margin revenue in the coming years as we create more originals and sign more deals, 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, executive]

Thank you, Ezra. My remarks today will focus on the first quarter of our fiscal year, the 3 months ended January 31, 2022. Except where I indicate otherwise, I'll be comparing the first quarter of '22 results to the first quarter of fiscal '21.

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 '21. 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 issuance #1 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 $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 income from operations swung to a positive $512,000 compared to a loss from operations of $373,000 in the first quarter of fiscal '21, 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 '21. 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 31, 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 -- and 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 deemphasizing or closing unprofitable business lines. On IDW Entertainment, we expect to generate additional high-margin revenue as early as the second half of '22 upon delivery of both Locke & Key Season 3 and Surfside Girls Season 1.

That concludes my remarks. Now Ezra and I would be happy to take your questions.

[Operator]

[Operator Instructions] Our first question is from [ Walter Bellinger ] with [ Mayflower Capital ].

[Unknown Analyst]

So there's been a lot of consolidation in the industry. So clearly, there's a premium being put on good content and libraries. But what I'm wondering is 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. So is the consolidation a good thing or a bad thing for that?

[Ezra Rosensaft, executive]

It's Ezra. It's a great question. So yes, there's been a lot of consolidation in the industry, that's one point, given the focus on content in particular. In terms of attracting creators, we think it has helped us tremendously. We've maintained very strong pure brand. And many creators are working with us, independent, and 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. And some of the best creators are gravitating to IDW given that support and creative freedom that we offer them. So relative to comparable opportunities and within our enhanced entertainment team, there's an excellent opportunity given the consolidation in the industry. Great question.

[Unknown Analyst]

Okay. Great. And then just pivoting a little bit, you've mentioned in the past how management has been 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. But has there been additional important changes to the management team other than that?

[Ezra Rosensaft, executive]

Another great follow-up question. So yes, absolutely. I always believe that while content is king and distribution is King Kong, any companies, especially ours, the most valuable assets are our people. So we have a very strong head of Publishing and Entertainment, both Nachie Marsham and Paul Davidson, respectively. But that's the tip of the iceberg. We have a Head of IDW Entertainment VP for kids, family, animation. He comes from Disney. We have a new Director of Animation. We have Senior VP of original content. We have a new VP of series, a new Editorial Director of originals who spent 1.5 decades at DC Comics. So there's a real, real quality of bench strength that ultimately will manifest itself in excellent high-quality titles that we will monetize for many years to come.

[Operator]

[Operator Instructions] The next question comes from Ed Reilly with EF Hutton.

[Eddie Reilly, analyst]

I note in the press release that you said new titles are going to drive growth going forward in 2022 on the publishing side, which really produced exceptional results this quarter from what seems to be 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 agreement that's coming to fruition in June of this year.

[Ezra Rosensaft, executive]

Great question, Eddie. It's Ezra. I'll take that. So just to pull that apart, the Penguin Random House deal, we're now seeing the full effect as we no longer have Diamond. I think everyone is aware of that. Previously, we had Penguin Random House and Diamond as 2 different distributors, one to book market, one to the trade or specialty market. A lot of companies have ultimately worked in Diamond. Penguin Random House now has our entire business. It's an excellent distribution company with significant leverage with all of the major players. That works to our advantage. In terms of -- I'm sorry, the earlier question. The beginning was -- remind me one more time?

[Eddie Reilly, analyst]

Yes. Just the new titles driving growth in '22.

[Ezra Rosensaft, executive]

Yes. So new titles, right. Your content is the lifeblood of the business. And new titles that we put into the mill, right, X hundred submissions result in Y greenlit and hit the shelves, makes great entertainment, we're going to see that in '22 and '23. It's going to ramp up. We're conscious of shelf space both with our own titles as well as competition. But where you see a lot of high-quality titles coming to market, we see a lot of development opportunity to take that entertainment and other platforms. Content is king, as we're mentioning. It's a trite statement but very true, everyone knows. We'll see those quality titles coming to market in '22 and '23, and it will increase. We see 40 per year, and we will keep up that clip. There's a lot of great content coming.

[Eddie Reilly, analyst]

Okay. Great, great. And 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 books generated revenue for you guys?

[Ezra Rosensaft, executive]

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

[Brooke Feinstein, executive]

Why don't you start first and then I can add on to it?

[Ezra Rosensaft, executive]

Yes. So there's a mix that traditionally the company has had. The gross margin on the publishing business that you can see historically has been in the 40% range and is improving. And on originals, think of something Locke & Key just 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 once it came back around?

So the gross margin will continue to expand and rolling and especially as you move into originals, where we have much more control over that -- uncontrolled, those are things like paper, we will watch the macroeconomics of the world. But where we can control, we have an extra opportunity to keep -- advance competitive yet appropriate. That will drive expanding gross margins and ultimately our EBITDA.

[Brooke Feinstein, executive]

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

[Operator]

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, executive]

Thank you, and 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]

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