Spin Master Corp
TSX:TOY
Earnings Call Analysis
Q3-2023 Analysis
Spin Master Corp
The latest earnings call brought some exciting news about the PAW Patrol franchise, which has been a cornerstone of the company's growth. Paramount's release of 'PAW Patrol: The Mighty Movie' garnered over $170 million at the global box office, a strong performance indicating the brand's robust appeal. With the movie set to enrich the digital landscape of Paramount Plus and DVD shortly, this expansion is expected to continue to captivate new audiences and uphold the franchise's #1 position in preschoolers' watch time on Nick Junior.
The company's digital arm experienced substantial growth, with total revenue surging 30.9% to $45.3 million, primarily due to increased 'Toca Life World' in-app purchases. This expansion is evident with monthly active users hitting a new record, rising 11% year-over-year. The Piknik app subscription bundle's launch also contributes to this segment's success, demonstrating the company's ability to innovate and keep up with digital trends. Similarly, the PAW Patrol Academy app's launch shows promising growth, ranking as a top app for children in key markets.
The announcement that the company plans to acquire Melissa & Doug focuses on strengthening its position in the children's entertainment industry. With a forward-looking approach, the company is confident in creating long-term value for shareholders from this strategic decision, expected to close early in Q1 2024.
The company produced a solid quarter with revenue climbing to $710 million, up 13.8%, and adjusted EBITDA growing 40% to nearly $235 million. However, the market faces economic headwinds due to inflation and rising interest rates, leading to reduced consumer spending and conservative retailer ordering. This cautious environment is expected to impact Q4 sales, leading to a high single-digit decline in gross product sales for 2023. Despite these challenges, the company has raised its 2023 adjusted EBITDA margin expectations, signaling confidence in its entertainment and digital games revenue streams.
The company is adapting its toy strategy by introducing products at more affordable price points to address consumer financial needs without diluting sales or margins. As the holiday season approaches, significant sales drivers such as PAW Patrol toys, Hatchimals, and Gabby's Dollhouse are expected to benefit from traditional spending patterns, even amidst a struggling market. Additionally, the company is prepared for late consumer purchasing behavior and events such as Turkey 5, which are anticipated to catalyze sales.
The entertainment content from the company saw a notable increase, particularly from the theatrical release of the second PAW Patrol movie, which contributed significantly to the period's revenue. Licensing and merchandising from this success story are expected to further strengthen the financials in the coming years, enhancing the entertainment arm's overall profitability.
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Good morning, ladies and gentlemen, and welcome to the Spin Master Corp. Third Quarter 2023 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, November 2, 2023.
I would now like to turn the conference over to Sophia Bisoukis. Please go ahead.
Thank you, and good morning. Welcome to Spin Master's Financial Results Conference for the Third Quarter ended September 30, 2023. I am joined this morning by Max Rangel, Spin Master's Global President and CEO; and Mark Segal, Spin Master's Chief Financial Officer. For your convenience, the press release, MD&A and interim consolidated financial statements are available on the Investor Relations section of our website at spinmaster.com and on SEDAR plus. Before we begin, please note that remarks on this conference call may contain forward-looking statements about Spin Master's current and future plans, expectations, intentions, results, level of activity, performance, goals or achievements and any other future events or developments.
Forward-looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that certain estimates and/or assumptions will provide -- will prove to be correct. Many factors could cause the actual results to differ materially from those expected or implied by the forward-looking statements.
As a result, Spin Master cannot guarantee that any forward-looking statements will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. Except as may be required by law, Spin Master has no obligation to update or revise any forward-looking statements, whether because of new information, future events or otherwise. For additional info on these assumptions and risks, please consult our cautionary statements regarding forward-looking information in our earnings release dated November 1, 2023. Please note that Spin Master reports in U.S. dollars and all dollar amounts to be expressed today are in U.S. currency unless otherwise noted.
I would now like to turn the call over to Max.
Good morning, everyone. Thanks for joining us. We delivered a third quarter characterized by strong performance across all 3 of our creative centers. Digital games and entertainment grew revenue double digits for the quarter and highlights the strength of our diversified platform. Digital games revenue has now returned to year-over-year growth on a year-to-date basis. This past quarter, we celebrated several milestones and achievements in support of our strategy to reimagine everyday play.
Within entertainment, together with Paramount and Nickelodeon Movies, we released our second feature film for our preschool powerhouse PAW Patrol, which opened as the #1 film worldwide and has recorded more than $170 million at the box office, already exceeding the total from the first PAW Patrol movie. In digital games, we launched our first in-house developed app for the PAW franchise, the PAW Patrol Academy to coincide with the movie launch.
We also introduced our new value-added subscription bundle, Piknik, providing unlimited access to Sago Mini, Toca Boca Junior and originator apps for 1 monthly fee. In toy, we were awarded a significant preschool toy license for Paramount's new animated preschool series, Dora, from the award-winning Dora The Explorer franchise. Just after the quarter, we were excited to announce our agreement to acquire Melissa & Doug, a trusted leading brand in early childhood play with deep knowledge in the creation of open-ended play toys and reach relationships with parents.
This is a strategically compelling acquisition, the largest in our history and has the potential to accelerate our long-term growth and strengthen our relationship with parents in the earliest years of their child's life. Let me now review each creative center. Toy revenue increased 8.9% from stronger gross product sales, which were 9.9%. Order volumes were higher as retailers increased inventory levels in anticipation of the holiday season. As we have discussed, the 2023 toy season has returned to historical seasonality relative to 2022.
Turning to POS. Circana data shows that the G10 toy industry was down mid-single digits in Q3. This was the fourth consecutive quarter of industry decline, and we believe this is due to consumers delaying holiday purchasing, which is slowing POS in the category. It's worth noting though that the toy industry remains above 2019. Despite the industry's decline, we outperformed the industry globally, declining 7.5%.
As a result, we grew our market share 20 basis points and improved our position in the quarter to #4 toy manufacturer globally per Circana. From a geographic perspective, we saw strong performance internationally, which helped to offset the decline in the U.S., which has been a far more volatile environment. Internationally, we've had a strong year and in Q3, we increased POS outside the U.S. by 0.7% compared to the industry, which was down mid-single digits.
In the G10, we grew our POS in 6 countries. The U.S. market has been challenged this year, and that trend continued in Q3. U.S. toy industry sales declined high single digits in Q3, and we were down 11.5% per Circana. We are encouraged that for the first 3 weeks of October, Circana data shows that Spin Master was ahead of the U.S. market by 350 basis points, which we attribute to the support of the PAW Patrol movie and new toy innovation. Overall, we believe that the challenged industry performance has caused retailers to pause or reduce planned orders particularly from mid-October onwards in order to avoid potential post-season inventory issues.
Continuing the trend we saw in H1, our retailer inventory levels were down 8% year-over-year globally. And at the end of Q3, we were down 22% year-over-year in the U.S. We remain highly focused on ensuring that we manage both our on-hand inventory and our inventory at retail. We continue to demonstrate our strength in preschool. In Q3, Spin Master had the top 2 of the -- 2 of the top 10 U.S. infant preschool toddler category items as defined by Circana, including Gabby's Dollhouse Purrfect Playset and PAW Patrol, the Mighty Movie Vehicles Assortment.
Despite a strong performance with new items and for PAW Patrol, Circana data indicates that global sales were down 9.2% in Q3. Overall, the health of the franchise is strong, with PAW Patrol remaining the #1 preschool property globally in Q3. For the first 3 weeks of October, the U.S. infant toddler preschool category performance was negative, down double digit year-over-year, while the PAW Patrol property grew 13% during this time per Circana. Gabby's Dollhouse continues to take share in the infant preschool toddler category internationally, but has seen signs of slowing in the U.S. as share was down in the quarter.
Despite the decline in POS in the U.S., Gabby's Dollhouse was the #7 infant toddler preschool property globally in Q3 '23, and the show on Netflix is the fifth most watched show in the U.S. among kids, ages 2 to 5. Within those and Interactive, Bitzee is Spin Master's innovative breakout toy for 2023. A digital pet that you can actually touch. Bitzee has received numerous awards for most innovative Toy of the Year. In Q3, we gained 670 basis points of market share in youth electronics as we launch Bitzee and [indiscernible] per Circana. Bitzee was the #1 item in the youth electronic super category in 2 of the 10 top countries across G10 and top 3 in 7.
In robotic interactive playmates, Bitzee was #1 across 5 countries and top 2 in 8. This performance continued for the third -- for the first 3 weeks of October, where Bitzee was the top-selling robotic interactive item in the U.S. in both dollars and units per Circana. Within Wheels & Action, we experienced mixed performance in Q3. Bakugan and Tech Deck declining POS in Q3, but Monster Jam outperformed the category as the #2 property in vehicles with POS up 13.6% globally. Monster Jam has been the #1 global license within vehicle super category for the tenth straight quarter per Circana, and we're excited about our innovative items in the lineup for this holiday as well as continued strength from our small vehicles which are great for stocking stuffers.
In Activities and Games in Q3, Kinetic Sand remains the #2 global property in the reusable compound class, and core items are performing well. Our new Cool Maker item, Popstyle Bracelet Maker was a #4 item in the Craft Kids class in the U.S. Rubik's Cube was the #9 brand globally in the Activities and Games super category and continues to trend well with POS up 8.9%. This fall, we launched the Coach Cube, designed to help make solving the cube easier and launch a special edition Disney 100th anniversary Cube. We are now planning to celebrate Rubik's 50th anniversary in 2024, which will be a momentous year for the brand globally. Turning to entertainment.
We had a strong quarter with revenue increasing over 70%, driven by higher distribution revenue from content deliveries, including the PAW Patrol movie, Rubble & Crew, Unicorn Academy and Vida the Vet. I previously mentioned a PAW Patrol, The Mighty Movie debuted at #1 worldwide in the box office. You will recall that the first movie was released in August of 2021 during the pandemic.
In September, Paramount was able to release the film to over 800 theaters. We've always been very proud that the PAW Patrol East Canadian make content, and the team was super excited to learn that PAW Patrol, The Mighty Movie earned the largest North American opening for any Canadian film in the past decade. The response to the film has been incredible, and the global box office is now, as I said, over $170 million. We will continue to reach new audiences when the film goes to Paramount Plus mid-November and on DVD, Blu-ray, December 12.
Earlier this year, we expanded the PAW Universe and introduced Rubble & Crew, our first PAW Patrol spinoff. Since launch, Rubble & Crew has been in the top 5 series on Nick Junior with kids ages 2 to 5. PAW Patrol also continues to capture the highest share of preschoolers watch time on Nick Junior, maintaining its #1 leadership position. Today, our new fantasy adventure series, Unicorn Academy will premier globally on Netflix. Over the past several months, we have begun building a fan base for the new franchise with curated content for TikTok and YouTube as well as integrations with the leading Roblox games. Our early preview in Roblox generated almost 2.5 million views and has provided us with powerful insights as to the characters that are resonating.
If you have Netflix, I urge you to watch the premier so you can see for yourself how magical the series is. Building on the amazing story telling and captivating animation, toys will be available for fall 2024, and to round out the franchise, digital games team is working on developing the companion action adventure mobile game for Unicorn Academy. Following the premier of Unicorn Academy, our next major content launch is for Vida the Vet, a 2D animated series. Retailer reception to the content has been overwhelmingly positive, and we will launch toys for the series in 2024 after the episodic debut.
Finally, within digital games, total revenue grew by 30.9% to $45.3 million, primarily from the higher ENAP purchases in Toca Life World. Average Toca Life World monthly active users increase again in Q3, up 11% year-over-year to just over [ 60 ] million annual high. The soft launch of our new Toca Days multiplayer game continues to roll out with continued constructive feedback and performance enhancements. We can't wait to share Toca Days with our highly engaged Toca Life World fan base in 2024. Sago Mini soft launched Piknik, our app subscription bundle which includes thousands of top-rated activities created by parents, child development experts and kids.
The Piknik bundle celebrated its full launch on October 5 with apps including Sago Mini World, Sago Mini School, Sago Mini First Words, Toca Boca Jr. and Toca Boca Hair Salon 4. The bundle provides significant savings while offering families a convenient, simplified approach to digital play time. The offer is proving popular with 26,000 Piknik subscriptions by the end of Q3. Our PAW Patrol Academy app is off to an excellent start with over 17,000 subscribers currently, ranking it as 1 of the top apps for kids on the Apple App Store in the U.K., the U.S. and Canada.
PAW Patrol Academy seamlessly integrates phone learning for preschoolers while leveraging episodic PAW Patrol content. Ratings of the app have been positive, and we look forward to continued momentum in Q4 and beyond. Total subscribers across our portfolio at the end of Q3 was 347,000 and is already currently trending over 375,000, an all-time high, driven again by Piknik and PAW Academy. In August, some of you joined us in Stockholm to better understand our digital game strategy and test games in development. One of those products was Rubik's Match. This is a new mobile casual game, which allow us to get into a different and larger new player segment. The game is currently in late testing and on track for worldwide release in 2024 to coincide with the Cube's 50th anniversary.
Overall, 2024 will be a big year for our Digital Games creative center and we are ready to level up. Before I turn it over to Mark, I want to summarize a few key points. We are expecting the toy industry in Q4 to be challenging because of economic headwinds, including continuing inflationary pressure and rising interest rates, which has reduced consumer spending, POS and orders for toys. We expect consumers to purchase very late in the season, which will reduce our replenishment potential and for retailers to remain risk-averse to avoid inventory risk. Our team is highly focused on delivering operational excellence to ensure sustained profitability, and we are managing all areas of spend to ensure we get the right ROI.
In addition to managing our bottom line, we continue to make internal investments across each of our 3 creative centers from physical toys to content and digital playgrounds to strengthen our long-term position. We are also investing in the future, highlighted by our plans to acquire Melissa & Doug. We are looking forward to closing the acquisition early in Q1 2024. We are confident that our investment in Melissa & Doug will build upon our legacy as leaders in the children's entertainment industry now and into the future and position us to create long-term value for shareholders.
We're highly focused on executing our long-term growth strategy, and we continue to make significant progress by leveraging our deep expertise in play, well established global network and innovation capability to unlock growth and inspire future generations.
I will now turn the call over to Mark to provide further commentary on our performance.
Thank you, Max, and good morning. Our team delivered a solid quarter with strong revenue and profitability growth highlighting our commitment to building 3 integrated creative centers and investing in long-term growth. Consolidated Q3 total revenue grew to $710 million, up 13.8% and adjusted EBITDA grew by 40% to nearly $235 million. Q3 consolidated gross margin was 54.5% compared to 56.2%. Gross margin was lower from the dilutive effect of more entertainment content deliveries in Q3, including the PAW Patrol movie. Despite being dilutive initially, these content deliveries will produce long-term favorability as higher-margin revenue streams evolve.
The decline in gross margin in the quarter was partially offset by the benefit of favorable product mix and ocean freight rates compared to '22. SG&A of $202.1 million was up year-over-year in dollars, but at 28.4% of consolidated revenue was down compared to $195.3 million or 31.3%. Marketing costs were down $4.2 million at 5% of revenue compared to 6.4%. Administrative expenses increased by $6.2 million, primarily due to professional fees for the Melissa & Doug acquisition. Adjusted SG&A was $191 million or 26.9% of consolidated revenue compared to $190.7 million or 30.6%, a significant improvement.
In Q3, net income was $155.4 million or $1.45 per diluted share compared to net income of $141.4 million or $1.33 per diluted share. Adjusted net income in the quarter was $143.6 million or $1.34 per diluted share compared to $114.4 million or $1.08 per diluted share. Adjusted EBITDA was $234.9 million compared to $167.6 million. Adjusted EBITDA margin was 33.1%, up from 26.9%. Adjusted EBITDA, excluding the PAW Patrol movie distribution revenue was $219.3 million with an adjusted EBITDA margin of 31.6%. Looking at Q3 performance by Creative Center, despite industry declines, our toy gross product sales increased by nearly 10% to $678.6 million.
Foreign exchange benefited gross product sales by $13.5 million and on a constant currency basis, gross product sales increased by 7.7%. Toy gross product sales grew as we saw more traditional order volume and seasonality in Q3 compared to last year. As a reminder, shipments in Q3 2022 were lower as customers ordered earlier in the year in advance of anticipated supply chain disruptions. The largest year-over-year increase in gross product sales was in the Preschool and Dolls & Interactive product category, which grew 22%.
Q3 toy adjusted EBITDA was up $40 million at $166.8 million compared to $126.9 million at a margin of 27.7% compared to 23%. Higher adjusted EBITDA was driven by increased gross profit and lower SG&A. In Q3, entertainment revenue increased by $26.4 million or 71.4% to $63.4 million from higher distribution revenue from new content deliveries, including the PAW Patrol movie, which contributed $15.6 million, Unicorn Academy, Rubble & Crew and Vida the Vet. Adjusted operating income was $24 million, down 17.8% and adjusted operating margin was 37.9% compared to 78.9%. The decrease in entertainment profitability was driven by higher amortization of production costs from the additional content deliveries this year. I want to take a moment to review the second theatrical movie release of PAW Patrol and how it will be reflected.
We have previously advised you that in Q3, we estimated we would earn approximately $17 million of distribution revenue from Paramount with the equivalent amount in amortization. In fact, in Q3, we recognized distribution revenue of $15.6 million from Paramount and amortization of $11 million, providing a gross profit of $4.6 million. The lower revenue and amortization are reflective of lower final net production costs from higher tax credits and foreign exchange as the Canadian dollar was weaker against the U.S. dollar compared to our estimates.
Also, if you recall, in 2021, the PAW movie released in theaters and streaming on [ P Plus ] day in date in August. We earned $26 million of distribution revenue from Paramount in Q3 2021. Our second movie had a theatrical only release at the end of September, which will be followed by a streaming release on P Plus mid-November. We now have 2 distinct promotional windows. Although we appear to be earning lower revenue upfront compared to the first PAW movie, we will now be participating in the subsequent revenue share much earlier. This has proven to be a good approach. As given the movie's box office success, we now expect to see additional revenue from our share of proceeds as early as Q4 2023 and into 2024 and subsequent years.
The additional amortization related to the remaining capitalized intangible asset will also partially flow through Q4 and into 2024 and beyond as income is earned. Licensing and merchandising revenue from the movie will flow into Q4, but mainly into 2024 and subsequent years. Q3 revenue in digital games grew 30.9% or $10.7 million to $45.3 million, mostly from Toca Life World strength.
Adjusted operating margin in Q3 was 34.2%, up from 28.9% due to lower marketing and administrative spend. On a year-to-date basis, digital games revenue is now up just under 6% over 2022 and 8% in constant currency. Turning to our balance sheet. Our on-hand inventory at the end of Q3 continues to be in good shape at just over $153 million compared to $179 million last year. We generated $145.3 million in operating cash flow and used $25.1 million in investing activities, $8.2 million of which was for PP&E and $17.2 million for intangible assets.
Free cash flow in Q3 was $118.9 million compared to $175.3 million, primarily from lower operating cash flow. We ended Q3 with just under $651 million in cash, up marginally from the 2022 year-end position of $644 million.
We continue to be in an extremely strong liquidity position with unutilized liquidity of over $1 billion. As we discussed in Q2, our top priorities from a capital allocation perspective continue to be investments in innovation, content development and M&A. After the quarter, we announced the acquisition of Melissa & Doug, for $950 million plus a potential additional contingent earn-out consideration of up to $150 million. We plan to fund the $950 million purchase with approximately $450 million of cash and debt financing of $500 million.
The acquisition represents a strategic deployment of our capital resources. Pro forma the transaction, we expect to have a leverage ratio of under 1x EBITDA. This allows us to preserve our financial flexibility. We will continue to generate strong cash flow, and we intend to maintain our dividend as well as preserve capacity for opportunistic share buybacks. Turning now to our outlook. We now expect 2023 gross product sales to decline high single digits. This reflects the challenging macroeconomic environment particularly in the U.S. that Max described earlier. Consumers are under pressure. And whilst consumer spend remains high overall, consumers are allocating their spend to travel and experiences.
Toy industry POS for October was disappointing and well below retailers' plans. Retailers have adopted a more conservative order position and particularly from mid-October, started reducing their orders for November and December delivery to prevent potential overstocking. We are still outperforming the global market in POS, but with retailers slowing their orders into Q4, we believe it is prudent to lower our gross product sales expectations for 2023. It's worth noting that since our IPO in 2015, we have grown gross product sales at an 8% CAGR compared to 1.7% for the global toy industry, evidence that we have successfully met our growth strategy objectives set in 2015.
We remain committed to continuing our long-term growth strategy. As a result of lowering our expectations for toy gross product sales in 2023, we are also lowering our expectations for 2023 revenue from flat compared to '22 to down mid-single digits compared to '22, excluding the PAW movie distribution revenue. Our teams are working incredibly hard to manage all cost areas tightly in Q4. In toy, we expect to see sales allowances in the 13% to 14% range for 2023 and for marketing to be in the 10% [ M2S ] range for the full year.
We continue to see strong performance in our entertainment and digital games creative centers from both a revenue and margin perspective. On a net basis, we are raising our 2023 adjusted EBITDA margin expectations. We now expect adjusted EBITDA to be up over 2022, excluding the PAW movie distribution revenue compared to flat to slightly higher as previously guided.
To conclude, let me say that amidst the challenging macroeconomic environment, we are well positioned strategically, financially and operationally, and we remain committed to continuing to execute our strategy for long-term growth and shareholder value creation. That concludes our prepared remarks. We will now be pleased to take questions. Operator, please open the line.
[Operator Instructions]
Your first question comes from Adam Shine with National Bank Financial.
Maybe we could go backwards just starting with the outlook, Mark, pretty clear in terms of what you're saying in regards to the top line pressures. Clearly, some offsets around entertainment and digital games, which maybe I'll follow up with after, but just specifically around adjusted EBITDA margin -- is there any additional color you can add just in terms of what up necessarily represents and in particular, the context of where Street estimates might have been in terms of EBITDA and how that specifically might be affected.
Yes. I think in my comments, I think I explained it in terms of the major areas that are moving, Adam. But let me just say again, obviously, with the drop in gross product sales and the impact that has, that is a negative impact on EBITDA. We are seeing sales allowances going up. We expect to be quite aggressive on promotions and pricing in Q4. But we are actually seeing some tailwinds from lower freight and supply chain. So that's a nice offset.
And then in particular, we're actually seeing some upside from our digital games business, particularly with Toca Life World strength, which is high margin revenue. And then also from entertainment, and it's really important to understand that our strategy in entertainment is working nicely because we took more risk upfront on the movie.
And because of the movie's success, we're actually now seeing some box office sharing coming in earlier in Q4, which we did not expect in our previous outlook. And so that is margin accretive to us. And -- which is when you put that all together, the reason why we've been adopting a slightly more positive tone in our adjusted EBITDA margin and moved it up from flat to slightly up to up.
Okay. Maybe I'll follow up with you after on that. Just in the context of the PAW Patrol movie and the additional distribution for Q4, is it just a matter that you're not entirely clear as to what that might be? Or frankly, you just don't want to share it at this time in the context of what appears to be some pretty clear visibility around the fact that it heads to streaming in a couple of weeks, right?
Well, just keep in mind that the movie economics have got multiple dimensions to it, right? The movie economics revolve around our share in the box office, also the licensing fees we get from P Plus as well as licensing and merchandising income and gross product sales.
So if you look at gross product sales, we'll pick up some gross product sales for the movie in Q3 and mostly in Q4. Most of our licensing and merchandising income will come in 2024 in subsequent years. We've indicated because of the movies' box office success that we're now going to actually be sharing in the box office earlier than we otherwise anticipated, which is a big component of our adjusted EBITDA margin raise.
And so we're not going to quote specific numbers for that, Adam. We never have. But we are positive and the movie will actually have a significant impact from a margin perspective in Q4 and in 2024 and in subsequent years. It's high-margin income for us in terms of that revenue share from the box office.
Okay. Just lastly, just around digital games. Obviously, as Mark alluded to -- sorry, Max alluded to very strong results in the quarter. Is there a way to just maybe dissect a little bit more in terms of the core business excluding some of the new apps being launched, was the core business the main driver of some of the recovery in terms of year-over-year growth?
And if so, what might have changed in terms of consumer behavior? What is it, more content launches and/or other marketing that you might have done to sort of stimulate greater activity in the core business? Or was a lot of the upside surprise in Q3 helped by at least some of the initial traction on the new app launches.
So I'll go first, and then I'll pass it over to Max to give you some context. So the revenue in Q3 was primarily from Toca Life World to the Toca franchise, but we did see strength in our Piknik app as well, which contributed, although that came in very late in the quarter. But we have not launched the new games and the new games did not generate any meaningful revenue in Q3 nor will they do so in Q4, to be clear. Most of what we're talking about in terms of our digital games business is in relation to Toca Life World and our Sago Mini and Piknik franchise. So Max, would you like to give some color on what's happening?
Absolutely. So I think it boils down to 2 things, and they're beautifully in our core. Let's start with Toca Life World and why. First and foremost, downloads were up, okay? And that's really important. So we already told you in the script that engagement was up because we had a new high watermark for basically monthly active users. So if you have monthly active users go up and downloads go up, they went up about 8% quarter-on-quarter and about 5% versus a year ago. That's 1 positive building block.
On top of that, the spend went up as well. So it went up about 15% quarter-on-quarter and about 40% versus a year ago. So those are very important increases, and we're super excited that the consumer once again came back from a behavior. It was mostly weekends. But I have to give our team a lot of credit. The content resonated and we had content basically in Q3, that was really robust, and it extends into Q4.
That's the first building block. The second building block is our Piknik and PAW Patrol apps truly added, quite late, but still added, and that's really positive. And so remember, those launched later in the quarter, but they were very positive, too. And so we have a lot of expectations for those businesses as we now get into Q4 and into the new year 2024. So I hope that clarifies it for you.
Your next question comes from Martin Landry with Stifel.
I wanted to touch on the PAW Patrol toy line. Max, I believe you said that the toys, I think point of sales were up 13% in the first 3 weeks of October, which looks like a nice performance in light of the industry. So wondering if you can just discuss a bit more the impact of the movie on the PAW Patrol toy line and your expectations for the remainder of the year.
In fact, it did. And the numbers that we quoted, as you were keenly paying attention, we're basically October numbers. Remember, movie goes up, and then we basically give you the October numbers, and the October numbers are vastly outperforming the market.
But the market for Preschool is down double digits, right? So even though we're up 13% in a down market, we have more families who are going to come to the category, it's just a matter of time. And so we have expectations for Q4 for the PAW Patrol movie range to do significantly better. And so we have November 1 today, where basically 1 big retailer in America is beginning to activate very aggressively. So we're going to get some wins from that and expect that. Then we have mid-November, another retailer doing yet another big event.
And then we have what you have now come to realize as Turkey 5, the period between Thanksgiving Thursday and Cyber Monday, where we have a lot of activity on PAW Patrol. So we do have expectations. And on top of that, we have the extension into P Plus, which will basically add eyeballs and repeated watch of the movie. So I think that is really important. So when you get more eyeballs once Paramount Plus basically gets the movie and other streamers. And it's going to be incredibly important to basically watch how those kids would basically be getting moms and parents to basically buy the toys. So -- the other piece that I would tell you for the remaining of the year is that we are adjusting dynamically pricing on our range to make sure we actually meet consumers' financial needs on our more expensive items so they could be affordable. So we're doing that, too. I just think that's the context for PAW Patrol, and I hope that clarifies the situation.
Yes. That's great color. Maybe just switching gears. In the last earnings call, you had mentioned you were talking about average prices this year, which I think were down as a strategy to make your products more affordable given inflation and interest rate pressures. And I think you alluded as well to 2024 prices, that the average price of your toy line could be down 10%. So -- when I think about that at first glance, it seems like a big headwind to overcome with volumes in order to keep your dollars stable on a year-over-year basis for '24. So help me understand a little bit. First, is that strategy still the same -- you expect to bring your average price down? And how is that going to impact your volumes for next year?
So I think it's an and, not an or, just to be clear, right? So we basically will have -- if you think about Bitzee at $30, a great toy, earning all sorts of accolades doing incredibly well at retail, and right around $30.
That is 1 expression of a $30 toy against nothing in that area in the previous year base. So that's $30 [ times ] in units that we didn't have before. I don't think that's depressing the ability for us to earn revenue on something that is white space. And you can expect that we will do the same going forward. It's not just Bitzee. If you think about Hatchimals Alive, another great place with a multitude of opportunities for a play pattern at around $30. So we do have that.
So we're going to continue to innovate and bring WOW products at the right price point. It may not be [ 129 ]. That's really what Mark may have alluded to, and I did allude to as well. It may be [ 99 ]. But the percentage of those sales, Martin, is not the most prevalent percent of our total volume sales, to be very clear. The opportunity for us beyond that is to make sure we come up with toys that offer a value, and there's going to be about 40 or 50 SKUs that we're going to basically be coming up with, which are indeed more lower price point. And it's an area that, once again, from a volumetric perspective, it's a white space for us.
We don't have that volume base in this year's volumes. So that becomes incremental revenue for us as you do the multiplication of the units we would get from penetrating that consumer's home times that number of dollars would get for that purchase. So happy to work with you on your model, but that's basically the way we're approaching it. We would not want to dilute ultimately going forward, both our margin or our sales.
Your next question comes from Sabahat Khan with RBC Capital Markets.
Great. I guess provide a little bit of color on the outlook commentary. I was just hoping you could maybe talk about maybe puts and takes that could lead to Q4 POS maybe being better or worse than you expect? Obviously, the industry has topped down the POS numbers for the full year. But I'm just thinking, what are kind of the big needle movers for you that could go well or go against you as it relates to the top line over the next couple of months here, any brands or platforms or launches maybe?
Yes. So I would tell you that PAW Patrol is 1 of the key drivers, as I explained earlier in the call in terms of the expectation for those toys to sell through as parents basically gear to [ by ] for the holiday. And I think 1 thing that's really important to understand is that parents are basically going from season or from tradition to tradition. And if you follow the traditions and you basically went basically -- beat your back-to-school and you understand how much you spent and you got through that and you put some of that in credit card debt. And then you now went to basically Halloween, and you know that Halloween had a good season and a lot of it came at the very end of the season, and it was October 31, and it was really -- I don't know how much you spent on Candy for the girl, Sabahat, but the average consumer spend about $100, and that's not what they spent last year.
It was about 12.8% more than they did last year. So people were basically waiting for that last day and the season did come for Halloween. And so as we gear for the next 1.5 months, it's the same pattern for toy. And so I basically just told you that some retailers have begun to get that going.
So we expect between PAW Patrol, Hatchimals Alive, obviously, Gabby's Dollhouse -- we have a lot of great innovative items in our line, and we are very excited about it. We actually have begun to get some already tailwinds reported in this quarter 3, which Mark alluded to in our POS and I did too. Europe is doing well. The numbers are coming off. I think we've got some markets that are really posting really nice numbers for us. I would tell you it's not just the U.S. It's really global for us, a wonderful counterbalance to the U.S.
I guess, picture we're navigating through. So those are some of the biggest things we have. And Bitzee, Sabahat, continues to do incredibly well. So Bitzee has multiplied what we would sell in the next 6 to 8 weeks versus what we would have expected, only 10 weeks ago in the U.S. in the international markets, Bitzee is really -- is doing incredibly well. But in the U.S., particularly in October, it has truly shot up in a very nice way to #1. So those are some of the highlights.
Okay. And just maybe a quick follow-up on that. I guess, it sounds like the kind of the brand momentum is strong, but is it, I guess, the caution more related to the comments Mark had earlier around maybe increased promotional activity and maybe some pricing just to drive that POS because of the macro. Is that the right way to think about it?
No. I think what we are -- what we saw and basically what you should think about is this. Imagine you're a retailer and a year ago, you were sitting on the inventory numbers you would have been sitting at that point, and you were still pushing with hope that the season would basically get through. Well, fast forward a year, which is today, and inventory at retail is down, okay? Inventory for us is down at retail.
So -- so the question is, if you would have looked at the last few weeks of POS in the industry, particularly in the U.S. That POS has not picked up as retailers and [ us ] expected against a year ago base that was low. And that is what basically causes people to be cautious and to not get ahead of themselves because they don't want to wake up Gen 1 with another inventory issue. That is what's happening.
Okay. Great. And just 1 on kind of the cost side. It looks like freight was a benefit here on the margin this quarter. Looks like freight costs are down significantly, but we're hearing that they have sort of bottomed here. Maybe you can just walk us through how long in advance you lock in freight and how long that could be a benefit before the cost sort of normalized. Any color on that would be great.
Yes. So Saba, we have seen freight come down quite significantly since Q3 '22 and Q4 as well. So we don't anticipate any material increases at this point or any major changes at all. If anything, our supply chain at this point overall is stable -- stable to declining actually from a cost perspective. We don't lock in freight long term -- in total. We do lock in some. So we have some contractual rates, which we're taking advantage of now.
But our supply chain team is also quite situational and opportunistic, and they go into the spot market and buy depending on what is actually happening in the market as well. It's similar to our currency hedging, where we don't hedge 100%. So there's an element of contractual and an element of spot acquisitions. Overall, I think we're in a good place for 2023 and for '24 as well.
Your next question comes from John Zamparo with CIBC.
I wanted to ask about the Dora deal and the licensing deal. I don't imagine you're going to quantify your expectations for that arrangement. But can you give some context into the relevance and size of that brand? The duration of that deal, any exclusivity? And in the context of past licensing deals you've announced, how would you say -- how important is this one? And do you believe this opens up more opportunities for you?
Sure. It is, as you can expect, a multiyear deal. Paramount is absolutely doing an incredible job with the content. We're super excited. They're bringing this property. I mean it's a property Mike has group with, and so I know it well. And what I've seen so far is absolutely mind-blowing. So we're excited about that. That's just to level set the fact that we have a great franchise with great 2024, '25 modern content, it's beautiful.
And we basically have 3-plus years on this deal with -- is the global master license for Spin Master. So we have the whole thing. And we're trying to get to fall 2024 with toys and that is basically what we have in store for Dora. We're very excited.
All right. That's helpful. And then on both Unicorn Academy and Vida the Vet, assuming these 2, what you think they're capable of, can you walk through the timing of the expected impact? What quarters would we see meaningful revenue increases from each of your 3 creative centers related to these 2 forms of IP?
Sure. I'm going to start, and then I'll pass it on to Mark. So the great news is that we've already seen revenue for Unicorn Academy as we actually deliver content, right, and Netflix will start airing today. Today's the debut for the 72-minute movie. So that's really great. So you would have seen already revenue in our current year. And what happens is now we have the series that follows that first episode.
And basically, you're going to have kids that would be engaging with the franchise for the next 6 to 9 months, and you can expect that in 2024, in the second half, you're going to get 2 things. You're going to get toys primarily and some licensing and merchandising revenue as well, which will then carry on to 2025 and beyond. But that is a sequencing of what we see and how you would want to model it.
So just to complement that, John, just to make sure you get this right for your model. Entertainment revenue is already occurring now, and we recognize revenue in Q3 and will continue through 2024 as we deliver the show. The toys will launch in late '24, not exactly sure of the date right now, it's late Q3 or early Q4, but we'll be recognizing toy revenue in '24. And then in '25 and beyond, we'll start generating licensing and merchandising revenue for Unicorn Academy. For Vida the Vet, we -- again, we've launched the show now. We're recognizing entertainment revenue now. We'll be launching the toy in 2024, so we'll get toy revenue in fall of 2024 as well.
And similar to Unicorn Academy, we'll be generating licensing and merchandising income in '25 and beyond. On the digital game, it's a little bit different. The digital game will launch late in '24 or early '25. So really, most of the unicorn Academy digital games revenue will be in 2025. And for Vida The Vet, we don't have a digital game as of yet. But so that's the timing of everything. And just a reminder, because it highlights a key principle for us in that we view our entertainment creative center as a catalyst. So when you think about content deliveries, as I said in my script earlier, the content deliveries precede the other revenue streams like toy or licensing and merchandising. And those content revenue streams are often margin dilutive earlier, but then become margin accretive as the toy and the licensing and merchandising kicks in, which is much higher margin. I hope that helps.
Your next question comes from Luke Hannan with Canaccord Genuity.
And Mark, thank you for the earlier commentary on the call about the expectations for Q4 when it comes to margin. I know 1 of the drivers for that was higher L&M revenue that's going to begin to be recognized in Q4, but it does sound like 2024 as a whole is going to have L&M be a much bigger driver overall. But I'm curious, particularly as it relates to the PAW Patrol movie, if you can help us give us more context or dimensionalize the L&M opportunities or partnerships, what have you -- how that's going to manifest itself in 2024 and contrast and compare that to what happens as far as L&M goes for the first PAW Patrol movie as well, whether it's the number of partnerships, the depth or magnitude of those partnerships, et cetera?
Yes, sure. So Luke, let me just clarify something. The actual nature of the revenue that we're talking about for Q4 and for '24 as it relates to the box office share is not classified as L&M. It's actually distribution revenue, right? So it's -- the share of the box office proceeds that we get is actually classified as distribution revenue. So when I talk about it, you'll hear me saying distribution revenue, just to be clear, okay?
So again, just to repeat this because this can be confusing. We get the initial distribution revenue from the actual distribution of the movie, the first window of the greenlight revenue, which is what we recognized in Q3, that's the $15.6 million. Then the box office comes alive, and we start generating our share of the proceeds because of the success. That's going to be flowing into Q4 of 2023 earlier than we expected, and it's going to be flowing into '24 and '25, given the success of the movie. We then have the toy, which is in Q3 and Q4 and will actually likely be some in Q1 as well. And then we have licensing and merchandising. So when we talk about licensing and merchandising revenue, we're talking about shoes, apparel bedding, pajamas, that kind of stuff. That revenue is going to be very limited in 2023, will mostly flow into '24 and '25 as it relates to the movie. Does that clarify for you?
It does. So my question is on that last piece there. I guess what I'm asking is as compared to the movie in 2021, do you have more partnerships? Or is there more plans from an L&M perspective?
We actually -- sorry, I forgot about that question. We actually have 25 blue-chip CPG licenses. And just remember, when we talk about L&M, we actually have Paramount and Nickelodeon managing this part of the relationship. So we actually share this with them. They manage the front end. And we have 25 blue-chip CPG licensees lined up for the movie and those are actually in over 50 countries, which is definitely a bigger program than we had for the first movie.
So we're excited about the potential for L&M in '24 and beyond. And by the way, once we're on the topic, we also have a very strong licensing and merchandising program for Unicorn Academy, which we are managing ourselves. So that is something that we are doing exclusively on our own without any partnerships, which is, again, margin accretive for us. And we have a very strong program for L&M for Unicorn Academy.
Okay. And that's going to show up in 2025.
Yes, that's going to be in '25. The toy is going to be in '24 and the L&M will be in '25 mostly.
And I think, Luke, just to add it will -- just this last quarter, we actually were still getting PAW Patrol movie #1 L&M revenue flowing into the P&L, just so that you can think about from a perspective of time. 2 years later, we still get that benefit.
Okay. My follow-up here, and then I'll pass the line is just on the managing the rollout of Toca Days. And I guess, what you guys are baking into expectations as far as, one, maybe potentially a migration of the player base from Toca Life World to Toca Days in 2024, but also what your expectations are for maybe capturing a demographic that may not already be included in Toca Life World just given that, I think, Toca Days caters to a little bit older of a player base than Toca Life World?
You're correct. And so I think the intention on Toca Days as it enters its next phase of soft launch in fiscal '24, the teams are focusing precisely in driving that retention and monetization as we actually get to that new segment, we're trying to get -- to engage with the property. So I think it's really important. And so that is what's basically going to happen in 2024 and so we'll basically continue to tweak. And in soft launch. And then basically, you can expect that come the second half, we basically will scale that up. That's the current plan.
[Operator Instructions]
Your next question comes from Andrew Lopez with TD.
A lot of my questions have been answered here, but I just want to go back, not to be diverse here, but on the PAW Patrol O&M revenue and the box office you're seeing sharing with Paramount. I'm wondering if you could just provide a little cover on the revenue contribution side for both of those in aggregate, if you don't want to provide an individual detail for those?
Yes. So Andrew, we're not breaking out individual numbers for any of these streams. So -- so unfortunately, I can't quantify it for you. But what I would say to you is that relative to our investments, it's very attractive and high margin. And so we're excited about it. But we're not going to quantify the individual streams.
Okay. And then just on the -- just 1 follow-up here, kind of switching gears. If you could just provide a little bit more kind of color and update on the launch of Toca Days, [ Kubrick ] and Rubik's Match. I know you just spoke a little bit on Toca Days, but some of those other things coming out of there Kubrick and Rubik's Match as well.
Sure, Andrew. So Rubik's and Toca Days are basically going into soft launch in -- and basically, they are in soft launch and extending soft launch into 2024 first half and then expect it to scale up in the second half. That's basically those 2 games. And then, obviously, you PAW Academy is off to a great start and doing really well. Unicorn Academy would be 2025. And I think Kubrick is still in soft launch. And we have not determined yet what window we will launch it more beyond the soft launch phase that it's in.
Your next question comes from David McFadgen with Cormac Securities.
Great. So just a question on the margin profile on the L&M. So are you expensing all the content costs to create the PAW Patrol Movie against the distribution revenue so that when the L&M revenue kicks in, it's probably very high margin because you're probably just getting a royalty right, like 5% of retail. Is that the way things are going to work?
Yes. So David, thank you. Great question. We actually amortized as you saw this quarter, $11 million. We have about $14 million or $15 million remaining on the balance sheet to amortize over the course of the revenue that we generate. Most of that capitalization -- and sorry, most of the amortization will go against the distribution revenue we earn from the box office and from the P Plus licensing fees. And then you're correct in assuming that the licensing and merchandising income will be very high margin because it will mostly be amortized at that point to be very little to amortize by the time the L&M kicks in. So that's highly margin-accretive revenue for us.
Okay. And so when do you expect that revenue to kick in the L&M -- would it be the latter half of '24? Or is it more a '25 story?
Yes, it's going to kick in, in '24, I would say, I don't want to pinpoint a specific quarter. I think it will start in 2024 and then move in to '25. As Max just said, the tail on that L&M revenue can be quite long. And so when you think about it, it's going to be at '24 and '25 and potentially even '26 income stream for us.
Okay. And then just lastly, on your updated guidance for '23, that does include -- I guess it does include the additional distribution revenue you're expecting in the fourth quarter from the box office and then the other streaming services. And the adjusted margin, excluding PAW Patrol, would be based on the same, correct?
Yes, that's all correct. It does. Thanks. Well, operator, we're actually at time. So I don't think there's any more questions. We are at time. Let me thank everybody for attending this morning's call. And we look forward to talking to you again at the end of February when we release our full year and Q4 results. So thank you very much, everyone. Take care.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.