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Hello, and welcome to the WildBrain's Fiscal 2022 Third Quarter Earnings Conference Call. Today's call is being recorded. [Operator Instructions] Now I'd now like to turn the call over to Nancy Chan-Palmateer, Director, Investor Relations at WildBrain. You may begin the conference.
Thank you, operator. And thank you, everyone, for joining us today. Speaking on the call today are Eric Ellenbogen, our CEO; and Aaron Ames, our CFO. Also with us and available during the question-and-answer session are Josh Scherba, our President; and Danielle Neath, our EVP of Finance and Chief Accounting Officer. First, we have some standard cautionary statements. The matters discussed on this call include forward-looking statements under applicable securities laws with respect to WildBrain, including but not limited to statements regarding investments by the company, commercial arrangements of the company, the business strategies and operational activities of the company, the markets and industries in which the company operates and the future objectives and financial and operating performance of the company and the value of its assets. Such statements are based on factors and assumptions that management believes are reasonable at the time they were made and information currently available. Forward-looking statements are subject to a number of risks and uncertainties. Actual results or events in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors, including the risk factors set out in the company's most recent MD&A and annual information form. Please note that all currency numbers are in Canadian dollars unless otherwise stated. [Operator Instructions] I'll now turn the call over to our CEO, Eric Ellenbogen.
Thanks, Nancy, and thank you to everyone for joining our call today. In Q3, we delivered double-digit growth in both revenue and EBITDA compared to Q3 of last year, reflecting the success of the 360-degree IP strategy that we've rolled out over the past 2 years. We're now seeing the returns from investments in our IP [indiscernible] and premium productions, now driving momentum across multiple earnings terms. And all parts of our content business are showing growth, driven by that 360 strategy. And so today, I'd like to provide a little bit more color on how that strategy actually plays out in our financial results. As I've shared with you on previous calls, when we signed significant content deals, it sets a state of revenue that flows through our financials over a period of years. And in the near term, we often benefit from the licensing of rights to our library with revenue recognized in the same quarter in which the library is delivered. And then in the medium term, we realized the production revenue as we ramp up and deliver the new series and our specials. And finally, the newly produced content taken with the library drives zero awareness and engagement, which depending on the property, creates long-term consumer product opportunities. And I should add in every instance, adds to the enduring underlying value of our proprietary IP.
So let's take a look at some examples of the strategy reflected in our Q3 numbers. First, our recent Degrassi deal, HBO Max, which was signed and announced in Q3 and spoke to you about on last quarter's call. It's a 2-part deal. For the [indiscernible], there's a library license for U.S. rights to the entire 14 seasons of the franchise's most popular instalment, Degrassi the next generation. And revenue from that license, which is distribution revenue appeared in our Q3 results.
And the second part of that deal is the commission from HBO Max for U.S. rights through a brand-new 10 episode Degrassi series which will go into production this summer. This production revenue will flow through our financials in fiscal 2023. And since we retained all distribution rights outside of the U.S. to both the new Degrassi series and the full library, we will soon realize additional revenues from territories and media worldwide. Let me take another example. Our Peanuts partnership with Apple TV+, as I've told you about on past calls, this is an extensive multiyear agreement, which includes not only rights to the Peanuts liver but also numerous new series and specials. And the first of that content began rolling out about 2 years ago, and we're now in continuous production, a great deal more content, we will continue to premier for years to come. And we're just in the early days of delivering the largest slate of new content in the history of the Peanuts brand. Production revenue from the Apple deal has already been reflected in our financials for a number of quarters and will continue for the foreseeable future. Our most recent results only reflect production revenue from the first 2 series, Snoopy in Space and the Snoopy Show, and from the first 3 multiple new peanut family specials that we're making for Apple TV+. These deals were executed a couple of years ago. So you can see there's a cadence to how the revenue from these large premium production deals come into our results over time. And as I said, there's a lot more Peanuts content in that pipeline that flow into our financials for many years to come. Now things get really interesting from a revenue perspective when we look at consumer products for brand left Peanuts. All that new content, meaning the steady years long rollout of new, very high-quality content on one of the world's top streaming platforms, not to mention the world's best marketer, that not only creates a predictable flow of revenue for us that also drives massive brand awareness and engagement, which in turn generates ever-increasing consumer product revenues and the synergies of our licensing agency, CPLG, managing multiple territories around the world for Peanuts further contributes to the growth that we're delivering in our consumer product sector, so that's Peanuts. Let me highlight one more example.
Sonic Prime is the new series for the Smash hit character Sonic, the hedgehog, we're producing for Netflix in partnership with SEBA. That deal was announced in February 21 and we've been taking production revenue into our earnings over the past few quarters. Sonic is, of course, one of the most popular animated and gaming brands in history. The brand celebrated its 30th anniversary last year. It is more popular than ever with 2 hit movies that together have grossed over $600 million worldwide in just the past 2 years. Netflix, in fact, just released a new promotional trailer of their animation slate this week, which featured the teams of the new Sonic Prime content and fans are buzzing of excitement. So, this frenzy for the franchise, perfectly sets up our series to launch on Netflix later this year and we're already seeing more consumer product opportunities for Sonic. Let's take a look at those Sonic prime consumer products economics work for us. First, because we manage the licensing for the Sonic Prime brand in multiple territories to our agency CPLG, we get a meaningful commission on every consumer dollar. That's the agency piece of consumer products. Then, because WildBrain is a stakeholder in the IP alongside SEGA, we also receive a material percentage of net profits for consumer products. So, a deal like this is really a triple play. It generates production revenue, agency commission and assure in consumer products process.
So these are 3 examples, Degrassi, Peanuts and Sonic Prime, all have the 360 holistic strategy that we've [indiscernible] creates multiple revenue streams from the very same deals. This is the strategic model we're using to structure our partnerships across the business. And for the last 2 years, we've been filling the pipeline with such deals. These also include Strawberry Shortcake, Teletubbies, Yo Gabba Gabba!, Johnny Test, Chip & Potato, Caillou, Emoji Town, Akedo, Go Dog, Go and so on soon.
And as these deals and many others would like them, we're working on behind the scenes make their way through the pipeline of development, production and distribution. We are layering on more and more revenue over the coming years. We also continue to extend our licensing reach to drive our Consumer Products business. WildBrain CPLG is further strengthening its global footprint with expansion across the Asia Pacific region and the launch of new dedicated offices in Singapore, Taipei and Seoul. And additionally, our licensing team or part of WildBrain's existing Shanghai operations will be expanded and renamed WildBrain CPLG China. The new and existing operations will service the entire APAC region across approximately a dozen countries.
So with that, over to Aaron.
Thank you, Eric. In Q3 2022, we delivered a strong quarter, reflecting growth across all our content-driven businesses. We're aggregating margin across studio, distribution and licensing, which is responsible for another quarter of EBITDA growth. We are delighted with our team's early execution of deals, which we had expected to be concluded later in our fiscal year and we are on track to deliver at the upper end of our fiscal 2022 revenue guidance of $480 million to $500 million. On EBITDA, we continue investing to grow our business and we maintain our adjusted EBITDA guidance of between $87 million to $93 billion. Looking at the key numbers for the quarter. Revenue grew 27% to $129.5 million compared with $102.2 million in the prior year, reflecting growth across content production and distribution, Spark and consumer products. Net income in Q3 grew to $21.3 million versus a net loss of $26.5 million in Q3 2021 with something higher gross margins. We generated positive free cash flow of $8.1 million in Q3 2022 compared with negative free cash flow of $3.3 million in Q3 2021. As discussed last quarter, our cash flow reflects the higher deal volume and increasing revenue. We are growing, so there are short-term needs for working capital as we execute on content deals and build receivables and to accelerate our growth in fiscal 2023 and beyond. We are seeing an incredible step-up in proprietary live-action production and by late this summer, we expect to have 5 live action series in various stages of production, further building on a proprietary IP library. This [indiscernible] production also requires short-term working capital. By way of contrast that production cycles for live action are typically less than 12-months versus 24-months lead times for animation. We delivered $30.2 million of adjusted EBITDA in Q3, an increase of 75% compared to $17.2 million in Q3 2021. This was driven by the Degrassi library licensing deal, distribution agreements with Amazon Prime and BBC and a robust pipeline of premium production.
Now I'll turn the call back to Eric.
Thanks, Aaron. Our proprietary pipeline is incredibly robust. We're continuously adding more deals behind those that have already been announced. And as I've always said, we're not chasing the quarter. It's a long game. The Q3 results, we're now seeing the start of what's to come. These deals and many more in our pipeline and in development set us up for a phase of accelerated earnings growth for many years to come. I said that's what we're going to do. We're now doing it, and it's coming through in our results.
So now if I may, let's open up for questions.
[Operator Instructions] And we'll first hear from Drew McReynolds of RBC.
Eric, thanks for walking through the way you did in your opening remarks, pretty crystal clear. So I appreciate that. So just some maybe 3 or 4 for me and hopefully relatively quick here. Just on fiscal 2022 guidance obviously, the year-to-date performance has been fantastic. I am assuming that Q4 is just typical volatility that pulls back a little bit. Just wondering why that guidance wouldn't be higher, but it just could be timing. And then second, just with respect to the overall content cycle, is there any change or shift that you're sensing out there, particularly on the streaming side? There's obviously a lot of focus on what's happened in Netflix the last few quarters or months. And perhaps the answer is absolutely no, there's no change. But just curious to see if the streaming world is entering a new phase from your perspective. And I have a couple of quick ones back.
Great. Drew, thanks for the question. What I'd like to do is perhaps take your second question first and then turn it over to Aaron to discuss the guidance issues and where we stand, which as you correctly said, we're way ahead of plan here in Q3, a lot of it is timing, but he can give you that in detail. So clearly, the Netflix announcement had a lot of attention. And here's how we see it both, if I may, from both a WildBrain perspective and then more generally, which may be less interesting to you, just as an industry observer about kind of what's going on? So look, let me state the obvious.
Netflix changed the nature of content consumption. And there are, of course, corrections happening to be sure. They still have 220 million subs. They are -- they have been and continue to be an incredible partner to us. And here's how we see it kind of changing the business a bit. It is sort of an equilibrium that was bound to happen where there needs to be a closer alignment between audience delivery and cost of production.
And when you see some of these live action shows, kicking out at over $20 million in episode with relatively small audiences that's typical to rationalize multiple-hundred million dollars, incredible theatrical quality films. It's where most people take their content these days and very aggressive international expansion which highly favors us. It reflects a -- and Netflix themselves have said this, a change in the competitive landscape which frankly, favors us. We are suppliers to all of the major services. For us as well, we produce content a fraction of those license fees, clearly have the advantage of vertical integration with our Vancouver studios which are busier than ever. And there's a flight to quality that also favors us and importantly, in migration to known famous brands which we have in quantum. And it's probably not unlike in wholly your earn movie business where you saw TV shows that were turned into theatrical feature films and the like because they represent presold marketing and they bring in audiences. And the last point that I would make around it is that for all of you who are an industry observers know that kids content persists as a way of generating subscribers. I mean, look at the take-off of Disney plus, it's remarkable as well as subscriber retention, keeping down churn. So I think we're really well positioned as the market changes. I think there will be some fits and starts and re-examining strategy. But by and large, these are changes that were bound to happen. But make no mistake, the course of media consumption has been changed forever. And I think we're in a great place when it comes to our content and our cost of production. So maybe more than you wanted to hear on the subject, but let me just go to Aaron with your first question.
Yes. Thanks, Eric. And thanks, Drew. Our distribution and production teams really did a terrific job. Their execution was great. And they completed a number of deals earlier than expected in our fiscal year. So the timing really favored us an accelerated revenue recognition on those deals in the fiscal year. So, I mean, those deals were already in our numbers and that's why we remain on track to deliver in the upper end of our annual guidance on revenue. On EBITDA, we always said since the beginning that we would invest incremental revenue and EBITDA to grow-- continue to grow our organization and to accelerate growth in fiscal 2023 and beyond. And so we're doubling down to do that. And that's why we retain our guidance from adjusted EBITDA from 87 to 93.
Okay. No, that makes a lot of sense. And it kind of addresses my housekeeping [indiscernible] here. If I look at SG&A costs, just say, for Q3, a bunch of moving parts in there, but are we really at that kind of run rate going forward? And then last question for me, just on the lower non-controlling interest in the quarter, just if there's anything there that needs to be unpacked?
Yes. So I'll just pass it over to Danielle, and she can talk a little bit about SG&A and [indiscernible].
Yes. So, as Aaron mentioned, we are reinvesting the incremental revenue to Rosaria, so we are seeing a bit higher SG&A. But also, we have higher variable compensation accruals. So given that strong performance in Q3, similar to Q2, given that those were the higher EBITDA quarters. So we are expecting that Q4 SG&A was well in line with the Q1 SG&A level, so $23 million to $24 million. [indiscernible].
I'm sorry, Danielle, go ahead.
I only take that as a question on NTI if you could repeat that one, and then I'll let Eric jump in.
Yes, I was just -- I think it was a little bit lower than what we've seen and just wondering if there's anything that flies here just kind of normal course volatility in that item?
Yes. Yes, that would be normal following consumer products revenue, so nothing unusual there.
What I was going to add at the risk of some redundancy is that every incremental EBITDA dollar I can get a hold of is going back into investment. And it's all about bringing on those revenue streams in 2023 and beyond, just as we're doing with the content strategy, the 360 that I described earlier. It is-- we are rich with opportunity and I'm investing everywhere I can.
Next we'll hear from Adam Shine of National Bank Financial.
Eric, maybe one for you just in terms of these productions that you're talking about, is there a new financing model emerging at all? We don't quite see any material pickup really in through tax credits as some of the production activity steps up. So just curious if perhaps there's less reliance there and if there's any evolution to how deals have been structured in the past.
I don't know that we're really seeing a material change in the nature of the financing structure. As you well know, we are not deficit financiers. There is margin in every deal that we make. One of the things that we are seeing, and it's a shifting landscape is the nature of rights acquired by some of the streaming services, so it's a mix. You have certain services, Peacock, among them and to an extent, HBO Max, we talked about that in the context of the Degrassi deal, where they are acquiring just U.S. rights, leaving to us the distribution of that content new as well as library in international territories, including Canada. So I won't say that the financing model is at all changing. The opportunity set though is because maybe early on what we were seeing, as an example, from Netflix with their original was the acquisition outside of China of global rights. So I think that is what I can sort of describe as the landscape, and it changes all the time as these services go international. But what really is, is about very high margin due to our proprietary brands. And that's where we're putting emphasis in development and production and it allows us to 360 in terms of monetization. So that isn't really a financing plan. It is an exploitation one that we really hit the accelerator on. Does that answer your question?
Yes, it does.
And next, we'll hear from Dan Kurnos of Benchmark Company.
So at the risk here, Eric, just going back to kind of Drew's original line of question, I would say, in this environment, you now have a huge opportunity to cross deeper into fast, which we're seeing kind of explode here. No doubt that there was, let's call it, plus fatigue on the [indiscernible]. And so I think a combination of that and then subsequently, with the proliferation that we're seeing in AVOD and content out there, it feels like -- I mean, for example, we just saw Paramount come out with Sonic [indiscernible], I think, as you already have a relationship on that side. So to the extent that these guys probably are trying to right size their check books as it were between content costs, it feels like they need to increase their monetization, so I'm wondering if you are getting incremental views on toy production, just other ways that you guys know that they need to monetize their own IP beyond what you're doing kind of with your existing portfolio.
I'm going to ask Josh to address that question, Dan.
Sure. Yes, look, I mean, I certainly agree with your assessment of the market and the competition being the positive for all the reasons that Eric spoke about earlier. I think what you're referring to is really just some of these streamers looking for additional revenue streams around consumer products. Is that the nature of the question?
Yes. I mean, I would say, look, I think you have an opportunity maybe more in fast-paced and they clearly need to justify the massive streaming losses that they're accruing at the moment. And a lot of that feels like it will have to come through things like consumer products and other alternative channels that you can probably help them with given your expanding relationships with a lot of these companies.
Yes. So I would say there are unique deal structures that are happening where we are in certain deals, kind of excluding some AVOD rights, which is definitely a positive for us. I would just kind of reiterate our capabilities of being a premium producer, but at costs that are lower than if these streamers were to fully produce this content in-house. So I think that really continues to be a larger opportunity for us to be a better partner to these streamers when they look at the overall cost structure. And then you layer on the fact that we've got known IP. And that's a really great opportunity for them. We were excited with the Sonic push that Netflix gave this week and we're really bullish on how they're going to promote that series. So yes, these independent known IP brands, efficient production models, I think those things put us in a really good place and then you layer on our ability to do alternative forms of distribution. And yes, I think we're set up as a great partner.
And I'll ask kind of the follow-up either to you, Josh or Eric. Just in terms of the deals that, Eric, obviously, you have a lot more in the pipeline unsurprisingly, as you think about deal structure, you're – you talked about it a little bit on the call already, the way that you're signing deals would say, like with an Apple, for example, it certainly has differed from how you consider signing deals in the past. And I'm wondering if windowing exclusivity, how you're thinking about things like that right now, given sort of what the -- with the content gold line that you're sitting on and the need for these guys to retain subscribers and/or viewers in this marketplace, you have the ability to also ramp content substantially. So I'm just -- I'm wondering if you have kind of multiple rights of the Apple with expanded deals and maybe even reduce exclusivity where you can still keep prices high, that's an option you should choose or how we should think about that?
It's a good question -- so look, the -- from this perspective, and we are a bit of a unicorn in the business because we are a vertical company. We have this amazing marketing and amplification network in Spark. There is a recognition clearly by all of the services that the always on quality of content and brands is an enhancement to the rights that they own.
And when I answered the question a little bit earlier about the financing structures, again it varies by service, whether they are seeking to acquire only domestic rights, which gives us an incredible library and a flow of new content for international channels and buyers. And take with that, what we're doing now on a global basis in consumer products with CPLG and we favor things like Apple, the Peanuts content, and I think you know this and something you've observed is and has been largely unknown outside of the United States.
It's been a character property, granted 75 years and going stronger than ever. But now, what we have is the sort of Saturn rocket of Apple content that is day in date distributed on a global basis and is persistent content as it remains on the platform. So we are also seeing among a number of the services, both legacy ones and new ones, a desire to participate in consumer products. I think that, that is going to be a recognition and they need partners like us, many of them do not even have the ability to exploit consumer products on a global basis. They don't have the footprint that we do. So I think we are seeing that they need to switch on additional sources of revenue. You're seeing things emergent in SVOD services potentially going AVON, but it is about the ubiquity of content and the presence of the brands and we've got the brand. So we celebrate and welcome all of those developments. I think they favor us incredibly well.
Next, we'll hear from Aravinda Galappatthige of Canaccord.
I wanted to focus a little bit on the consumer products side. Obviously, you continue to grow very nicely. I think it's about 24% year-to-date growth in fiscal 2022. Obviously, still led very much by Peanuts. Eric, considering some of the comments that you've made sort of that cycle going from library sales to production to IP.
As we think about fiscal 2023, do you see we're getting to that time line where that CP growth can diversify beyond peanuts, do you see that mix change sort of starting to happen by next year or should we -- is that more of a fiscal 2024 sort of an event? I wanted to get your thoughts on that. And my follow-up for, I guess, for Aaron, given some of your comments around working capital and SG&A.
You've successfully de-levered down due to the targets that you talked about, 4.3 now net debt to EBITDA. Considering that you are having good EBITDA growth, the business is sort of gaining good traction and the industry backdrop is still good. Is it -- are you thinking along the lines of being fairly comfortable at that 4 times range? As we look to 2023, do you think that the level of de-levering that's happening can continue?
Thanks, Aravinda. On the consumer products timing, it really breaks by which IP we're talking about. Will we build the content base, distribution, ubiquity of that content across multiple platforms and that is sort of job one. We then do marketing, cross promotions, etc., for example, Strawberry Shortcake. You may have seen in the current quarter, a big rollout at gross range, we're doing programs with Sunkist and very companies and so forth.
I mean it's really intercepting consumers where they shop, reminding them about the brand, delivering more content on our YouTube network and then distributing that broadly, putting up content now on Netflix and a number of high-quality specials around the brand. And then, by and large for that, you will see consumer products roll in 2024. For things like Sonic where they've been essentially gigantic successes in theatrical motion pictures and a very well-known persistent brand in the marketplace in gaming. There could be some pickups in 2023, just off the coattails of all of its amazing activity and our premiering of the Sonic show on Netflix.
So it really varies. I want to say our expectation is that the stuff begins rolling in the latter part of 2023 and into 2024. And we are in the main very -- just in terms of the way revenue recognition works, is that we don't take the MGs into revenue. We are -- it's really about the sell-through and the royalty receipts that we get, and that takes a while to flow through the financials.
But it's a building process, and we're just layering one after another after another, so that we will, I think, fully expect the diversification in the consumer products revenue. But the Peanuts business is a very well-oiled machine now. And we've talked to you about territory expansions that's going to continue to spur increases in revenue across consumer products. But I think that's probably why I come down on the timing question and Aaron can answer your second question.
Yes. Thanks, Eric. And Aravinda, we're very comfortable with our leverage and where we are. And we have a fit amount of visibility because of the pipeline and all the deals that we have been doing and growing that pipeline in production, distribution, starting to grow the consumer products. So we feel very good about our visibility, accessibility is better than it's ever been before. And so historically, we were doing de-leveraging with some asset sales and then to a lesser extent, EBITDA growth, now we shift as we look out to 2023 and beyond, we're shifting to growing EBITDA to take over as the primary means and driver of accelerating any future de-leveraging augmented by improving free cash flow. So a little in to shift there, but feeling very good about our leverage.
And there are no further questions over the phone lines at this time. So I will turn the call back over to Nancy Chan-Palmateer.
[indiscernible] be we pick up, I want to use my soapbox for one more thing. It is really just to publicly acknowledge and thank the amazing team that I have for what they're delivering. It's really fun to go to work these days. I think that everybody is excited about what we have and what we have switched on and the attention that we are getting, the critical reclaim, -- these are great properties. They're doing great work with that. And I just want to thank all of my colleagues. And now back to Nancy.
Thanks, Eric, and thank you, operator and everyone, for joining us today. We look forward to updating you on more exciting news in the next quarter. So thanks, and have a great day.
This concludes today's conference. Thank you all for participating. You may now disconnect.