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Edited Transcript of IDWM earnings conference call or presentation 23-Jan-20 10:00pm GMT

Q4 2019 IDW Media Holdings Inc Earnings Call

STAFFORD Jan 28, 2020 (Thomson StreetEvents) -- Edited Transcript of IDW Media Holdings Inc earnings conference call or presentation Thursday, January 23, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ezra Rosensaft

IDW Media Holdings, Inc. - CFO

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Conference Call Participants

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* Adam Walder

Raging Capital Management - Analyst

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Presentation

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Operator [1]

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Good afternoon and welcome to the IDW Media Holdings Fourth Quarter and Full Fiscal Year 2019 Earnings Call. In today's presentation, IDW's Chief Financial Officer, Ezra Rosensaft, will discuss the company's financial and operational results for the 3-month and the 12-month periods ended October 31, 2019. (Operator Instructions)

Any forward-looking statements made during this conference call, either in the prepared remarks or in the Q&A session, whether general or specific in nature, are subject to risks and uncertainties that may cause actual results to differ materially from those which the company anticipates. These risks and uncertainties include, but are not limited to, specific risks and uncertainties discussed in the reports that IDW posts periodically with the OTC market.

IDW assumes no obligation either to update any forward-looking statements that they have made or may make or to update the factors that may cause actual results to differ materially from those that they forecast.

Please note that the IDW earnings release is available on the Investor Relations page of the IDW Media Holdings corporate website.

I will now turn the conference over to Mr. Rosensaft.

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Ezra Rosensaft, IDW Media Holdings, Inc. - CFO [2]

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Thank you, and thanks to everyone on the call for joining us. Our Chairman and CEO, Howard Jonas, is traveling out of the country and sends his regrets that he's unable to join us today.

My remarks cover our results for the fourth quarter and full fiscal year 2019, the 3 and 12 months ended October 31, 2019. Throughout my remarks, I will compare fourth quarter fiscal 2019 results to fourth quarter fiscal 2018 results and full fiscal year 2019 results to full fiscal year 2018 results. I'll also discuss our outlook for fiscal 2020 and 2021.

Operationally, this is a remarkable quarter for IDW, starting with our IDW Entertainment segment. V Wars, a sci-fi vampire series starring Ian Somerhalder based on the successful IDW Publishing comic series by Jonathan Maberry, premiered December 5 on Netflix. After its launch, V Wars surged to the top of Netflix' trending and popular pages.

October Faction, a science fiction drama based on the IDW Publishing comic series created and written by Steve Niles and Damien Worm, premieres tonight, January 23, on Netflix. Having watched the first episode and as an ardent fan of sci-fi genre, I was fully absorbed and plan to binge-watch this, this weekend.

Locke & Key, a supernatural horror drama based on IDW Publishing's wildly popular comic series by Joe Hill, has been featured on various industry lists as one of the most anticipated new shows in 2020. We are eagerly looking forward to its premiere on Netflix in just 2 weeks' time. The show is being hailed as extraordinary for its superb production values, top caliber acting and immersive storyline.

IDW Publishing also had a strong quarter. Following on the prior quarter's outstanding success of George Takei's They Called Us Enemy, in Q4, we announced a new series by Joe Hill, Dying is Easy, as well as the 100th edition of Teenage Mutant Ninja Turtles. After the quarter closed, IDW Publishing unveiled an exciting new collaboration with The Smithsonian Institute to produce graphic books based on Smithsonian's unique cultural and scientific properties.

And finally, IDW Publishing announced a Spanish language initiative that will bring some of our most acclaimed titles, including George Takei's They Called Us Enemy, to the underserved North American Hispanic market.

Turning now to our fourth quarter and full fiscal year 2019 financial results. Our top and bottom lines improved significantly in the -- compared to the year ago period, even as we continue to work through the impact of legacy deals made years ago to finance V Wars and October Faction. With those 2 series substantially delivered in the fourth quarter, we are poised to achieve additional improvements in fiscal 2020 and achieve profitability in 2021.

Consolidated revenue in the fourth quarter of fiscal year 2019 increased to $33.9 million from $20.1 million. Full year fiscal 2019 revenue increased to $62.6 million from $58.7 million. The fourth quarter and full year increases were largely driven by revenue from V Wars and October Faction.

Under U.S. GAAP, the revenue for these shows and their associated production costs and recognized upon delivery of episodes, in this case, to Netflix, in the fourth quarter, we provided Netflix with the complete 10 episodes of V Wars season 1; and 7 out of 10 total episodes of October Faction season 1. Therefore, we recognized 100% and 70%, respectively, of both revenue and expense of the 2 shows.

Delivery of the shows boosted IDW Entertainment's fourth quarter 2019 revenue to $22.6 million from $8.6 million, an increase -- the full fiscal year revenue to $22.7 million from $16.9 million. In fiscal 2018, IDW Entertainment's revenue was generated predominantly by Wynonna Earp season 3, Dirk Gently and a Locke & Key pilot produced for Hulu that was not picked up.

At IDW Publishing, fourth quarter revenue was $5.8 million, unchanged from the year ago quarter. Full year revenue declined to $20.1 million from $21.9 million. The year-over-year decrease reflects continued softness in the direct, digital and book markets as well as decreases in game and licensing revenues. Two highly anticipated games, Metal Gear Solid and Teenage Mutant Ninja Turtles Adventures, were delayed until 2020 and are forecasted to bring in significant revenue upon release.

CTM's fourth quarter revenue decreased to $5.5 million from $5.7 million, while full fiscal year revenue held steady at $19.8 million.

Our consolidated loss from operations in the fourth quarter decreased to $17.2 million from $21.7 million, while the full fiscal year 2019 loss increased to $26.4 million from $25.6 million. The fourth quarter and full fiscal year losses reflect cost overages incurred in the production of October Faction episodes 1 through 7 and in V Wars as well as a $3 million write-down of the carrying value of Dirk Gently, which was not renewed for a third season.

The loss from operations at IDW Entertainment decreased to $17.2 million in the fourth quarter from $21.4 million. The full year fiscal 2019 loss decreased to $19.8 million from $21.8 million.

The loss from operations at IDW Publishing increased to $843,000 in the fourth quarter from $823,000, and increased to $5.2 million in the full fiscal year 2019 from $3.4 million. It's worth noting that IDW Publishing's fiscal 2019 results included several nonrecurring charges that increased its loss from operations by approximately $0.5 million. Changes are underway to return IDW Publishing, like all our businesses, to profitability.

Income from operations at CTM increased to $774,000 in the fourth quarter from $459,000, while the full fiscal year 2019 loss from operations was $1.3 million compared to a loss from operations of $491,000, primarily due to changes in the allocation of corporate expenses.

IDW's consolidated net loss was $17.1 million in the fourth quarter, $2.29 per share, a 35% reduction from $28.8 million or $4.69 per share in the year ago quarter. For the full fiscal year, the loss was $26.4 million or $3.90 a share compared to a loss of $36 million or $5.88 a share. Some of the improvement in our bottom line results reflect write-downs in the value of deferred tax assets in 2018. These were noncash events.

In the fourth quarter a year ago, we recorded provision for income taxes of $6.9 million compared to a benefit from income taxes of $57,000 in Q4 2019. The full year 2018 provision for income taxes was $9.9 million compared to a benefit from income taxes of $38,000 in fiscal 2019.

It is worth pointing out that as of October 31, 2019, IDW Media Holdings had an NOL carryforward of approximately $37 million.

Looking ahead to fiscal 2020, what I refer to as our hump year, we completed delivery of the final 3 episodes of October Faction season 1 earlier this quarter and expect to realize a Q1 loss of approximately $2.6 million as a result. This should be the final impact of this legacy production financing of our current productions.

We also have budgeted to provide Cineflix and SyFy with the complete 4 season packs of Wynonna Earp and generate meaningful positive EBITDA in both fiscal 2021 and 2022.

And finally, across our business, we are continuing to streamline our operations to support sustainable profitability. As a result, we may incur restructuring costs in fiscal 2020.

Working through these 3 items in 2020 and exclusive of fresh investments in growth initiatives, we expect that IDW will be profitable in fiscal 2021 with significant upside potential in that year and beyond, both from the potential renewals of our current lineup of shows and from potential deals based on the IP publishing pipeline and the development of the slate that Lydia Antonini, President of IDW Entertainment, and our staff are developing and pitching.

Turning to our balance sheet. We'll be pivoting to an asset-light model as the $39.7 million in bank loans that are -- financed production of V Wars and October Faction are paid off in 2020, and the $12.7 million in inventory we reported is substantially reduced upon delivery of the remaining episodes of October Faction. To be clear, the $39.7 million in bank loans will be 0 by December 31, 2020.

Our intention is to remain asset-light by leveraging our IP and expertise in future negotiations, so there are client's cash flow production. This is the approach we used for Locke & Key. We do not take out production loans or accrue inventory for shows, and we generate predictable returns while minimizing the downside risk of cost overages and nonbudget expenses such as those unfortunately incurred with V Wars and October Faction. As a result, we expect that Locke & Key will contribute significantly to our bottom line in fiscal 2020.

To support and accelerate our future growth, the time is right to strengthen our balance sheet by raising equity capital. We plan to utilize a portion of the new capital to pursue additional growth opportunities throughout the company and to retire a portion of the $9 million in debt owed to our Chairman.

This year, our Board has also directed management to explore uplifting our Class B common stock on a national stock exchange. An exchange listing in conjunction with a strengthened balance sheet and a clear path to profitability should enhance the liquidity of our stock and help ensure that our operational and financial success translates into appropriate market valuations.

All in all, the fourth quarter was extremely busy operationally and characterized by significant financial improvements, and our prospects have never been brighter.

Before I turn the call back to the operator, I want to express my sincere thanks to everyone at IDW for their hard work and willingness to pitch in to get the job done. I look forward to working alongside you as we get over the last of the hump in fiscal 2020 and become a profitable company in fiscal 2021.

Now I'll be happy to take your questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Adam Walder of Raging Capital.

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Adam Walder, Raging Capital Management - Analyst [2]

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Congrats on getting all the shows live on Netflix.

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Ezra Rosensaft, IDW Media Holdings, Inc. - CFO [3]

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Thank you. Please, everyone, watch them. And another one coming in a couple of weeks, Locke & Key.

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Adam Walder, Raging Capital Management - Analyst [4]

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Got it. I have something to look forward to this weekend. So I was kind of curious, what kind of early consumer feedback or buzz around these shows? Can you just give us a bit more color around any sort of indications you have?

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Ezra Rosensaft, IDW Media Holdings, Inc. - CFO [5]

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Sure. So the early consumer feedback, a lot of people like V Wars. Obviously, with any show, there's a fan base, and there are some who are mixed results. We're waiting to hear some firmer numbers from Netflix. And it's something that they keep tight. It's well known in the industry that they do not release numbers. But we should have a better indication within a few weeks. And this, of course, leads to any potential for further seasons. And we want to make sure we hit the right numbers with any such potential renegotiations going forward.

So V Wars, thus far, has a good following, a good buzz. October Faction launched today. People are already starting to watch it. I hope everyone binge-watches it. I plan on watching it myself. I've already watched a couple of episodes. And Locke & Key as well, which has fantastic cinematography and production values.

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Adam Walder, Raging Capital Management - Analyst [6]

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Okay. Great. And I just have a few more follow-ups, if you don't mind. So you mentioned that you intend to reach profitability in all business units by 2021. I just want to confirm, does that include publishing, which, I guess, has historically been a drag on the business?

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Ezra Rosensaft, IDW Media Holdings, Inc. - CFO [7]

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Right. So that's a great question, Adam, because it strikes at, number one, just thinking about the individual segment but also understanding the franchise approach to looking at the titles or properties. So historically, people looked at a title, if we can roll back the tape to 1999 when IDW Publishing was first founded, there's a title, there's a book, there's a publication and so on and so forth.

As a franchise approach though, the proper way to look at any of these properties is you think of a column one is publishing with a column of publishing, television, video games, so on and so forth. That's the proper approach looking at a franchise, not viewing in a silo. And the same thing is true for our segments.

However, there is a focus on ensuring that each of our segments, on an individual basis, based on how we're structured today, are profitable. And that is the goal for 2020 and certainly, '21 forward as the entire company will be free cash flow positive.

But I do want to be clear, just to rephrase that in case there's a question, that the franchise approach is not rocket science. It's the same approach that Disney or Marvel and others have, we're a little bit smaller than them, obviously, but a franchise approach. Historically, the way IDW had just grown organically, I should say, even perhaps maybe a little bit pruning required, it has not looked at it that way. And that is the way that management looks at it going forward, from a franchise approach, which is the correct approach.

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Adam Walder, Raging Capital Management - Analyst [8]

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Okay. That's very helpful. And on Locke & Key, you mentioned that it would be a positive contributor and contribute to your bottom half. Are you able to disclose any or give any sort of color around margins?

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Ezra Rosensaft, IDW Media Holdings, Inc. - CFO [9]

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So we're not able to talk about numbers specifically as part of our deal. It will be profitable out of the gate. As you know, there are 6 volumes of Locke & Key that were written. We're very hopeful that there are additional renewals beyond season 1, TBD. We're very hopeful. As I mentioned, the quality is just astounding. I would say it's Harry Potter-like, so like -- just on television though.

So it would drop to the bottom line as profit. And the same thing would be not just for our television specifically but also all the ancillary that comes along with a popular show. You can think of The Walking Dead, not quite that level of success yet, has generated multiple ancillary streams of revenue. The same thing is hoped for Locke & Key and therefore as well for renewals potentially. Hopeful, based on Locke & Key's success on Netflix.

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Adam Walder, Raging Capital Management - Analyst [10]

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Okay. And a final question. So you mentioned that several games were delayed to 2020. Can you just give a bit more detail there and your expectation around timing?

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Ezra Rosensaft, IDW Media Holdings, Inc. - CFO [11]

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Yes. So I mean the 2 major games, Metal Gear Solid and Teenage Mutant Ninja Turtles, were delayed. I mean there are some things that are out of our control. Those are 2 that were a bit out of our control, likely to be released, and we would recognize revenue and profitability in the first half of 2020.

I would roughly estimate that at approximately $2 million in revenue, and it's meaningful and on a go-forward basis as well to continue to bolster the game's franchise as well as other opportunities and thinking about how -- right, getting back to the core and recognizing, look, publishing today is not what it was 20 years ago. We all know that there's lots of other competition for the consumer eyeballs. Even within just the streaming works today, there's also competition of books, television, games, you name it. I'm sure you're busy with things as well. So the more we can get in front of that, the better to help occupy more of our time as a place for consumers to go.

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Operator [12]

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(Operator Instructions) As there are no more questions, this concludes our question-and-answer session and conference call. Thank you for attending today's presentation. You may now disconnect.