WildBrain Ltd.

Hello and welcome to Wildbrain's fiscal 2023 Key 1 earnings call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To ask a question during that time, please press star then 1 on your telephone keypad. If you'd like to withdraw from the queue, please press star 2. I'd now like to turn the call over to Kathleen Persaud, Vice President of Investor Relations at Wildbrain. You may begin the conference.

Thank you, Keith, and thank you, everyone, for joining us today for Wildbrain's first quarter 2023 earnings call.

Joining me today are Eric Ellenbogen, our CEO, and Aaron Ames, our CFO. Also with us and available during the question and answer session are Josh Sherba, our president, and Danielle Neese, our EVP of Finance and Chief Accounting Officer. Before we begin, please note 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, 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, which are available on the investor relations section of our website at wildbrain.com. Please note that all currency numbers are in Canadian dollars and less otherwise stated. After our remarks, we will open the call for questions. I'll now turn the call over to our CEO, Eric Ellenbogen.

Thank you, Kathleen, and thanks, everyone, for joining us this morning. Fiscal 2023 is off to a strong start with solid revenue growth, which has been driven by content production and distribution. Previously, I've detailed our strategy of unlocking IP through the sequential production of premium kids' content. and then exploiting that content across the entire distribution and consumer products value chain. The layering of those productions, one after another, is leading to the growth, sustainability, and quality of our earnings. And this quarter in particular reflects the success of that strategy with robust revenue growth and content. As part of our strategy, over the past three years, we've made myriad investments in the business to support sustainable growth. And those investments, the bulk of which are now complete, are concentrated in areas where we expect to see meaningful returns over time, namely creative talent in our production business and our consumer products business with its recent expansion across APAC. These areas will drive our business for many years to come So I'd like to take a few minutes to talk about these focused investments. First, our investment in creative. In our industry, it all comes down to IP and creative talent. And not only do we have a deep vault of IP, but over the past three years, we've invested in creative talent to ignite key properties with the very best in class of content production. And through our strong IP, exciting projects, and by making Wild Brain a great place to work, we've succeeded in attracting top-tier animation artists, creators, writers, showrunners, directors, and producers. And those teams have produced some of today's most popular shows for kids and families, such as The Snoopy Show, Snoopy in Space, Caillou, Mallory Towers, Chip and Potato, and Go Dog Go, to name just a few. And premiering on Netflix before Christmas are two more great shows, Sonic Prime, and the reimagined Teletubbies, both of which are eagerly anticipated by fans, judging by the high levels of social media engagement that we've been seeing for many months. And looking towards the latter part of the year, we have a very full pipeline of content in development and production, with new shows like Yo Gabba Gabba and many others. I should add the most topical and significant of these was our announcement just last week, of a first-look deal with one of the most accomplished animation producers in Hollywood, Bonnie Arnold. Bonnie was a colleague of mine at DreamWorks and is the Oscar-nominated producer behind such smash hit as Toy Story from Disney and DreamWorks' How to Train Your Dragon franchise, which has grossed more than $1.6 billion worldwide. Bonnie is going to spearhead numerous long-term projects for us, including episodic series, TV specials, and features. And among our initial projects, Bonnie is developing Which Way to Anywhere, which is the latest best-selling novel from Cressida Cowell, who's the very same author of How to Train Your Dragon. We're thrilled to have such an incredible talent at our studio like Bonnie, whose track record of global success speaks for itself. Now, this quarter was very strong for content revenue. I just want to remind shareholders that we're not chasing quarterly results. There will always be variability in revenue from quarter to quarter, given the schedule of projects that roll off production lines at our studio. Ours is a long-term play, and we're confident that we have the pipeline in place for sustained growth, but content production is the engine of our 360-degree business, driving distribution and consumer products. My second investment focus is consumer products and APAC. So another significant concentration of investment over the past three years was in our consumer products licensing business. Our dedicated and wholly owned licensing agency, WildBrain CPLG, is a unique differentiator in our business. We are the only independent media company with such global capabilities in-house that provide a vital link to complete the integrated 360-degree circle of IP spanning production, distribution, and consumer products. This gives us a tremendous competitive advantage, and not only for growing our own franchises, such as Teletubbies and Strawberry Shortcake, but also to attract top third-party IP owners looking for global turnkey licensing solutions. Indeed, Wildbrain CPLG takes a global view and strategy while executing at a very local level. With 20 offices serving some 90 countries, especially with our recent expansion into the Asia Pacific region, we have truly global reach. And for our boots on the ground territory expertise, we can create and execute bespoke solutions for our partners across entertainment, lifestyle, and sports. Our experienced licensing team is a huge competitive asset And we're a trusted partner worldwide for high-quality clients and brands, such as Sega's Sonic the Hedgehog, Hasbro's My Little Pony and PJ Masks, MGM's Pink Panther and the Addams Family, Paramount Global's Paw Patrol and SpongeBob, and Sony's Ghostbusters and Karate Kid. And I should add as well, Dr. Seuss, Sesame Street, Emoji, Spin Master, and many more. Over the last three years, Wild Brain CPLG has also expanded its exclusive agency rights for the peanuts brand across multiple territories. There are investments in this business. CPLG's representation of peanuts now extends across the entire Asia Pacific region, including greater China, as well as all of EMEA and India. Global annual merchandising sales for peanuts now exceed $2.5 billion at retail. And as we continue to roll out our new Peanuts content on Apple TV+, as well as on additional platforms in China, we believe there's plenty of runway to continue to grow the brand. We've built out Wild Brain CPLG into a major player on the global licensing stage and laid the foundation for growth in Asia Pacific where we look forward to announcing deals for our own and partner brands over time. Our 360 degree of business launching franchise brands is built on the tenet of delivering content to kids and families wherever, whenever, and however they're watching. If content is the engine of our 360 degree business, then audience engagement is that engine's fuel. And under our always-on approach, that engine is perpetually running, fueled by continuous audience engagement on platforms around the world. And nowhere is this more true than our own YouTube AVOD network, Wild Brain Spark. In today's digital world, it is essential for kids' brands to be on YouTube. And even with all of the emerging new outlets, YouTube is and remains the most important and popular platform for brand relevance. And while results of Wild Brain Spark were affected this quarter by the global downturn in advertising that's impacting even the largest companies, Google, Microsoft, Meta, it's really important to recognize that the true value of Spark lies in its audience engagement and the insights that we capture from that engagement. And in turn, this converts to discovery of new content and the sustained popularity of our proprietary and partner IP, and ultimately, it drives the much larger opportunity in consumer products. Accordingly, we continue to see high engagement rates, indeed very high engagement rates, among kids on Spark, particularly for our own brands. As I've mentioned before, and it's worth noting again, we believe Spark is in an elite class of kids' content providers on YouTube, having crossed the threshold of one trillion minutes of watch time since 2016. We have enormous learnings from this audience engagement, which we leverage to understand viewing trends and audience appetites, and to identify, enhance, and monetize the most popular brands in our portfolio. Take one example, Caillou has garnered over 75 billion minutes of watch time, and Teletubbies, another example, has captured over 38 billion minutes. In addition to streaming the classic Caillou and Teletubbies series on Wild Brain Spark, we've also released new short-form content for both brands. And with Caillou, this rollout of new content has been robust during the past three years, while Teletubbies is just ramping up. Nonetheless, delivering these brands to audiences worldwide on Wild Brain Spark is driving deep engagement, and the insights that we glean from that engagement on YouTube has served as a springboard for reactivating the brands and leveraging both new and classic content off YouTube across multiple platforms, including all the SVODs, AVODs, FAST, and linear channels. For our own brands, and also for partner brands, Spark is an incredibly powerful launchpad for reaching audiences where they're most engaged. We create incredibly compelling content and then expand that brand awareness through YouTube and distribution deals with SVODs and other platforms, all of which serves to drive consumer products growth, which completes the IP circle. At the risk of boasting, simply no other independent entertainment company has this breadth of capabilities in-house. We are uniquely positioned to unlock the power of our brands and to provide a turnkey solution to partner brands for producing content, reaching audiences on YouTube and other global platforms, and then completing the play with consumer products on a global scale. This is exactly what we've been building over the last three years, and I couldn't be more proud of what we've accomplished.

With that, I'll turn the call over to Aaron to review our results in detail. Thanks, Eric.

First quarter of 2023's results reflected strong top line growth with a 12% increase in revenue over the prior year. EBITDA was $19.9 million, which is consistent with the prior year, and gross margins were down about 200 basis points with a step up in live action production. We recorded a net loss of $7.6 million compared to a net loss of $21.4 million in the year-ago period. primarily due to a non-cash foreign exchange loss of 12.5 million in the current quarter from revaluing U.S. dollar debt into Canadian dollars. Free cash flow was negative 8.9 million in Q1 2023 compared with negative free cash flow of 19.9 million in Q1 2022. Free cash flow for Q1 2023 reflects a significant growth in accounts receivable associated with larger deals An additional SG&A for growth initiatives and working capital timing. Subsequent to the quarter, we increased our revolving credit facility from $30 million to $40 million U.S. dollars for working capital purposes. Our leverage at the end of the quarter was 4.2. The leverage may fluctuate from quarter to quarter, but overall, we expect it to continue to glide down over time through EBITDA growth and free cash flow generations. We reaffirm our guidance for fiscal 2023, expecting revenue of approximately $525 million to $575 million, and we expect adjusted EBITDA of approximately $95 million to $105 million. As Eric mentioned, over the last three years, we've made investments to support our future growth, including investing in creative talent, consumer products, and our expansion into Asia Pacific. These investments provide a platform which we are leveraging significant profitable growth. We expect going forward that these investments will be at a less aggressive pace and that SG&A will moderate over the balance of the year as we start harvesting returns on these investments. I'll now hand the call back to Eric.

Hey, thanks, Aaron. At Wildbrain, we are a standout in the media and entertainment industry. We're the owner of a deep vault of IP. We're a powerhouse of creative talent, a leading global player in consumer products licensing, and curators of deep audience engagement. And I can think of no other independent media company that comes close. Leveraging our capabilities to provide both premium originals for SVODs and digital first content to reach kids wherever they are has led to a solid start for fiscal 23. We're lining up a creative pipeline with meaningful consumer products upside and building a book of business for years to come. We're really excited and energized by the opportunities ahead. And with that, I'll turn it over to the operator and open up for questions.

Thank you. At this time, if you'd like to ask a question, please press star, then 1 on your telephone keypad. If you would like to withdraw from the queue, please press star 2. Please stand by while we compile the QA roster.

Thank you for waiting.

Your first question comes from Sid Delwary with Cormark Securities. Please go ahead.

Hey, guys. Thanks for taking my question. I guess the first one, I just wanted to dive a little bit deeper into WildBrand Spark. You know, just although acknowledging the overall macroeconomic headwinds, I would have expected digital and programmatic to be a bit more resilient. Can you maybe talk about some of the verticals where you saw the aggressive pullback in AppSpend during the quarter and then you know, just your outlook for the rest of the year for Wild Reds Fire.

Sure. Thanks for your question, Sid.

It's macro. You look across any of the ad-supported platforms, which YouTube is the greatest, and there's been significant pullback. I think kids often come first, and, you know, we've obviously seen the vicissitudes of this market according to the economy and as dollars move from linear to digital, as YouTube algorithms are adjusted and such. But what I think is worth pointing out is that what hasn't changed is the level of audience engagement. And I've often said we will get paid for those eyeballs and that engagement. And that comes through ad sales as the market moves up and down. It comes through consumer products, importantly, and building great loyalty. It is discovery and an on-ramp for new content, driving that across the entire distribution chain. And if you're not on YouTube, you're not in the kids' business. And that is, as I pointed out in my script today, that's unchanged. That has not changed at all. So we're seeing the engagement. We're pushing out a lot of new content. Teletubbies is a very good example where we have a show going up on Netflix and we have new episodes that we're unrolling on the YouTube Spark network. Caillou is another great example with the Insights. and analysis that we have from that platform. We were able to place new content production on Peacock while we continue to have episodes running on Wild Brain Spark. It is quite a virtuous circle, and that's really the name of that game. We're also, I should mention, one of the investment areas that I didn't necessarily cover was our technology and insights group at Wild Brain Spark. And, you know, we're now sitting with, you know, six years of incredible proprietary data around those views. And with that information, we're able to glean all kinds of insights that are useful in content selection and placement. So I don't know if that answers your question fully, but that's kind of what we're seeing in that division.

Yeah, no, that's helpful. And then, sorry, just on the outlook for the rest of the year, like, do you think this is to continue for the rest of the year? I know, again, it's macroeconomic, but, you know, just from a programmatic perspective, do you expect this to slow down a little bit in the next few quarters, or do you expect this sort of decline to continue in the next few quarters?

Look, on the ad sales side, I will borrow yours or anybody's crystal ball on what that looks like. The good news is if history is a lesson here, as the economy begins to roll back, ads come right back on. And as quickly as they will limit spending and move from one platform to another, they'll come back into the market. So hard for me really to say about that. Where we're really, really focused is uh on growing these brands which the platform is is serving to a fairly well and converting that engagement to consumer products that again we we look at the aggregation of value across the entire margin chain and since you know we by and large fully own these brands or whether with partner brands have incredibly good deals that monetization that takes place in consumer products, I look at as part of the content P&L. And it is, you know, the full brand P&L that we look at. So it's all those sources of revenue that are aggregated across the entire value chain at Wildbrain. And the other point that I was making is we have all the links in the chain. And hence the ability to monetize at at every point of content, um, uh, life cycle, uh, as well as every source of revenue, uh, conceivable. So, um, hard for me to say like, you know, short-term forecast on, on what that looks like specifically, but I'm, you know, incredibly cheered by the growth that we've had in consumer products quarter over quarter, and no doubt it's about being on everywhere.

Okay, that's very helpful, thanks. And then maybe just one for Aaron, you know, just in the content production and distribution business, you know, revenue growth was 40%, maybe some of it was timing and some of it was, you know, organic, obviously organically driven. How should we think about seasonality for this line item for the rest of the year?

Yeah, so what...

We are seeing continued growth, but we're not managing the business on a quarter-to-quarter basis. And we've issued our guidance. And in general, it's broad-based. So we see going forward growth in consumer products as well as some continued growth in our content, which is based on a well-known IP. Okay. which is resonating well in the market. So we're affirming and we've reaffirmed our guidance as well.

Okay, I'll pass the line. We'll take our next question from Dan Kernos with Benchmark.

Please go ahead.

Great, thanks. Good morning. Eric, let me ask maybe the Spark question in a much different fashion because, yes, we've clearly seen everyone else's results and YouTube's obviously under pressure at the moment. I think the bigger question, Eric, is maybe because we've talked about this before and you continue to highlight it more as a data mining operation, not to say that we're not pleased that you get revenue from it, but just in terms of what we're seeing in the broader marketplace, if I can maybe kind of expand the thought process to we're seeing a lot deeper integrations now between, you know, the producers of not just the content, but also some of the, some of the CP guys, you know, you're seeing retailers get deeper integrations too with, you know, SFPs. And as you think about WildBreeze placed in the ecosystem and sort of the data that you've been able to collect through YouTube, like how do we think about, your ability to expand that onto other platforms? Not to diminish YouTube, Eric, but, you know, to kind of think as, you know, TikTok goes to shopping and as, you know, we get more spin-up of Fast and Avod, you know, is there a way for Wild to continue gathering incremental data points and become sort of a linchpin within that ecosystem as we get these more integrated partnerships?

All right. Good morning, Dan. Thank you.

That's a really interesting question. And so here's how I think about it. And I want to just, you know, come back to the first thing that you said in your question, which is, you know, looking at this as a data and insight light, which it is. But it's a lot more than that. It's the engagement. And it is the ability to launch new content, and franchises, which is the way we've been going with Strawberry Shortcake as an example. It is the, you know, reinvigorating of previously produced content as we did with Teletubbies. And then we pivoted to create a new series for Netflix with the awareness that has been built and maintained for years now on our YouTube Spark network. The data and insights group that we have built originating at Spark now serves the entire organization. So that doesn't sit exclusively within the Spark organization. That gives us all kinds of information upon which to make our decisions in each of the business units. It serves Spark. It serves consumer products. It serves production. research, when we look at potential acquisitions of new IP, it is really multifaceted. But it's the engagement piece that is critical. And when you talk about TikTok and Instagram and some of these other platforms, we've been building out presence. Teletubbies is a really good example. We have, I don't know, something worth of a half million subs in social media. Young adults who are following this franchise And so we are definitely taking those insights and what works and we see immediately given the number of likes and the number of subscriptions, whether we're hitting home with the content that we're creating. So the answer to your question is yes. And we get varying levels of data from our AVOD partners. And that incidentally has helped us drive some really interesting content distribution deals is by gathering up the data and then going to an SVOD and saying, look, we want to show you globally the views that we're getting. And we can take a look at this even region by region and know where our strengths are. And that's incredibly appealing. I don't know anybody else who's doing that, honestly. And so it puts us in a pretty privileged class as we do that. as we distribute to more and more platforms and as they, you know, also spring up, you know, regionally, for sure, we have a very local approach to those things. I can see this as being of great utility. I don't know if that answers your question, but it's really an engagement story as well as a data and insight story.

Well, I mean, it's directionally kind of where I was going, Eric, and maybe this is way over my keys on this one, but, you know, the fact that you've built a rather large library of short form now. You know, creative is not like advertising, although advertising is a form of creative, right? But, you know, to the effect that you can sort of have more fluidity in addressing all of these developing streaming channels and essentially almost try to capture some of the media entertainment budgets out there. You guys can act not just as a content producer for larger shows, but even as a lead-in or, an engagement driver or kind of teaser for some of the broader guys by absorbing some of these data insights. That's kind of where I was trying to get at and see if you have kind of reached that level of critical mass and fluidity yet.

That's very good. And you know what? I can also ask Josh to pitch in on this. But we have companies coming to us all the time now, more than ever before. to do exactly what you're talking about. And it is to use our platform to drive awareness and discovery of their content, which is playing off on other platforms. And it is, you know, you go on any of the SVODs and a dizzying number of tiles come up. And only to an extent, Is the discovery and programming guide engine useful? It's like, how do you find out about stuff? And this is the way, this is the on-ramp. Josh, I don't know if you have anything to add to that, but we're seeing that a lot right now.

Yeah, yeah, for sure. I would say we're having more conversations in that area than ever before. I mean, really, you know, really brand owners and SVOD platforms, they have a challenge in front of them. And that challenge is making sure that they're actually building affinity and love for kids IP in an increasingly fragmented world. And, you know, the idea of an SVOD service dropping, whatever, six or seven episodes, and then nine months later dropping another six or seven episodes. Well, kids forget what they're into. And really having an always-on approach and having a consistent flow of content on YouTube makes the difference in terms of building that affinity over time. We've built up great expertise in terms of producing content that's really specific for the YouTube platform, that's complementary overall to these brands and continues to drive engagement. And so really, it's an interesting moment to continue to be having these conversations in different ways with brand owners.

Got it. That's super helpful. And I'll squeeze one last one in and pass along. But Eric, my crystal ball is broken. So I don't know, maybe yours works better. But as we look at, you know, kind of CP, right, we're entering at least domestically anyway, and Europe's got its own issues with energy prices a lot harder hit. But You know, we're entering sort of the weirdest recession where consumers supposedly have no money but are yet spending thousands of dollars on travel and entertainment. So how do you think about sort of demand for CP both in the holiday period and then, you know, given that we do have massive pushes and need for monetization from all of the SBOB players, you know, they kind of have to successfully have CP expansion. So just love to kind of get your higher level thoughts if you have them.

Yeah, so let me put a little bit of super glue on my broken crystal ball and just say this much. And by the way, there was one other thought I had to your last question, Dan, which our listeners may not know. And that is, we have a specialized short form production unit nested at Spark. And to Josh's point, it's about producing content that is specifically tailored to that platform, which is very different, by the way, than what we would do for a SVOD service. So the short-form content production is something that we've been practicing at for some time now and I think have developed a really one-of-a-kind expertise in how to do that. But going to the retail market question, I have absolutely no idea. Look, here's what we do know, and I think we can just borrow a page slightly from the pandemic where retailers favored classic brands, well-known content, and that's what we've got. So we did incredibly well in the peanuts business during the pandemic because it was – comfort brand but also one where retailers really knew and understood uh quantities and velocity and you know brand affinity and so forth so that's that's kind of what i'm thinking we you know we have not gotten any specific indications from the retail market about any pullbacks but um i don't think we or anybody else is really going to know the full story until we get through uh calendar q4 um but uh You know, there haven't been, at least we aren't feeling any adverse effects. Our CP sales are up. And, again, a lot of it has to do with price points and durables. And, you know, most of our consumer products, merchandise, is very affordable stuff. And Q4 is a very important quarter for us, no doubt.

Got it. Thanks for bearing with me and for all the conversation. Thank you, Dan.

There are no further questions on the phone lines at this time, so I will turn the call back to Kathleen Persaud.

Thank you, everyone, for joining us today. We look forward to updating you in the new year.

Ladies and gentlemen, this concludes today's conference. Thank you all for your participation. You may now disconnect.