U.S. markets closed

Edited Transcript of RNK.V earnings conference call or presentation 29-May-20 1:00pm GMT

Q1 2020 Wow Unlimited Media Inc Earnings Call

VANCOUVER Jun 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Wow Unlimited Media Inc earnings conference call or presentation Friday, May 29, 2020 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Bill Mitoulas

Wow Unlimited Media Inc. - IR Officer

* Indranil Chakravarti

Wow Unlimited Media Inc. - President & COO

* John Vandervelde

Wow Unlimited Media Inc. - CFO, Executive VP & Corporate Secretary

* Michael Hirsh

Wow Unlimited Media Inc. - CEO & Executive Chairman

================================================================================

Conference Call Participants

================================================================================

* David John McFadgen

Cormark Securities Inc., Research Division - Director of Institutional Equity Research

* Gordon Hodge

Tracker Research, LLC - Manager

* Pooja Sharma

Echelon Wealth Partners Inc., Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the WOW! Unlimited Media Inc. 2020 First Quarter Financial Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to your first speaker, Bill Mitoulas, Investor Relations Manager, WOW! Unlimited. Thank you. Please go ahead.

--------------------------------------------------------------------------------

Bill Mitoulas, Wow Unlimited Media Inc. - IR Officer [2]

--------------------------------------------------------------------------------

Thank you, Stephanie, and good morning, everyone. Welcome to the WOW! Unlimited Media Inc. conference call to discuss the financial results for the first quarter ending March 31, 2020.

Before we begin, please let me remind you that during the course of this conference call, WOW! Unlimited Media's management may make forward-looking statements. These forward-looking statements are based on current expectations that are subject to risks and uncertainties that may cause actual results to differ materially from expectations. These results are outlined in the Risk Factors section of our listing statements filed on SEDAR. Any forward-looking statements should be considered in light of these factors. Please also note that any outlook we present is as of today, and management does not undertake any obligation to revise any forward-looking statements in the future.

With us on the call today are Chairman and Chief Executive Officer Michael Hirsh, President and Chief Operating Officer Neil Chakravarti, Executive Vice President and Chief Financial Officer John Vandervelde. Michael will provide us with a brief summary of the company's financial results for the quarter, and the Q&A portion of this call will be open to analysts questions to provide further insight into the company's performance, operations and go-forward strategy. For those of you who may happen to leave the call before its conclusion, please be advised that this conference call will be recorded and archived on the WOW! Unlimited Investor Relations website page. It will also be available for on-call replay, where dial-in instructions were provided in the news release disseminated yesterday.

With that, I'll turn the call over to Michael. Michael, please go ahead.

--------------------------------------------------------------------------------

Michael Hirsh, Wow Unlimited Media Inc. - CEO & Executive Chairman [3]

--------------------------------------------------------------------------------

Thanks, Bill. And thank you, everyone, for joining us this morning to discuss WOW! Unlimited Media's results for the first quarter of 2020.

I hope all of you and your families are in good health. The last couple of months have been unprecedented. And while we're all getting some visibility on the road ahead, the global economy is probably not going back to business as usual for quite a while. Given that, we've kept our focus on the most important areas: ensuring the well-being of our employees, carefully analyzing areas of risk; working closely with our clients and partners; and executing on our production pipeline.

For the first quarter of 2020, WOW!'s revenue was $13.7 million, and we had positive EBITDA of $0.1 million. That represents our third quarter in a row of positive EBITDA. Our animation backlog continues to be strong. As of March 31, the backlog was $72.4 million.

We are very pleased with the results to date from our transition to work from home using our global studio pipeline. In a matter of weeks, this transition has set us up to make what would otherwise have been a multiyear operational transition. Our team at Mainframe, led by Michael Hefferon and Kim Dent Wilder, have done an outstanding job. All our productions are moving along seamlessly, and we anticipate significant operating leverage in the quarters ahead from a blended model as we grow our animation business on-site and remotely. On the Networks and Platforms side, for the first quarter, we continued to see steady performance from our MCN. Our viewership across non-ADME channels grew from fourth quarter 2019 to first quarter 2020, and we continue to see a consistent trajectory in overall viewership.

With that, I'd like to thank you once again for joining us this morning and hand it back to Bill, and we will be taking your questions shortly.

--------------------------------------------------------------------------------

Bill Mitoulas, Wow Unlimited Media Inc. - IR Officer [4]

--------------------------------------------------------------------------------

Stephanie, maybe we can open up for Q&A, please.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of Pooja Sharma with Echelon Partners.

--------------------------------------------------------------------------------

Pooja Sharma, Echelon Wealth Partners Inc., Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

My first question is a 2-part question. Maybe first you could please discuss your pipeline in a bit more detail. And the ongoing impact of COVID-19, how has the demand changed with the halt in live in -- live-action production? And maybe the second part of this question would be, how has your internal priorities shifted in response? And the impact that we should expect to see in the coming quarters.

--------------------------------------------------------------------------------

Michael Hirsh, Wow Unlimited Media Inc. - CEO & Executive Chairman [3]

--------------------------------------------------------------------------------

Thank you for the question. In regard to the first part of the question, in terms of the pipeline, we're seeing a lot of additional new orders from long-time customers. And we're also seeing new clients and customers that are coming into it. So we will sort of address who the companies are when we're at liberty to disclose that. But what we're seeing is an increase in the number of customers, and we're seeing an increase in work with companies that we have successfully worked with in the past. And would you repeat the second part of your question regarding the COVID virus? I lost my train of...

--------------------------------------------------------------------------------

Pooja Sharma, Echelon Wealth Partners Inc., Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

Sure. Yes. So I was asking, how have the internal priorities shifted in response to COVID-19? And what impacts we should expect to see in the coming quarters.

--------------------------------------------------------------------------------

Michael Hirsh, Wow Unlimited Media Inc. - CEO & Executive Chairman [5]

--------------------------------------------------------------------------------

So in terms of COVID virus and how that's impacted on our thinking in our strategy and execution, we have really focused on the derisking of the business because there is uncertainty around the COVID virus. We are all feeling less uncertain than we did previously, but it's still a bouncing ball. And so strategically, the decision to build the global pipeline a number of years ago, which expedited our ability to work from home, has additional benefits as individuals find that they're enjoying working from home and are saying, "Gee, I'd like to stay home when I can -- even when the office opens up again." We're able to scale up and not have to get additional real estate in order to grow the studio. So we could imagine a scenario where we double or triple the studio without having additional space. It also makes us -- and we're in the process of doing that. Makes us think about what the studio should be looking like in the future as working from home becomes more common and more acceptable.

In terms of derisking the business, we've looked to limit expenses. We've looked to focus our expenses in a way that facilitates working remotely. So we've invested in a little more equipment to have this additional staff working remotely. We've talked before about the Teradici box, which is a device that facilitates that for us. And so we've committed some more investment in that direction. And I think that what we're seeing is that for the initial period or the period that's coming up, advertising is not performing in this COVID virus period. And so relying more on projects that are being sold to subscription-based buyers is a focus at the moment. And so it's kind of redirected a bit of our thinking in terms of who -- what are the best homes for shows that we want in terms of our own IP. And in terms of the commissions we're seeing, we're seeing a lot coming from people selling to, again, the subscription services. Does that answer your question fully?

--------------------------------------------------------------------------------

Pooja Sharma, Echelon Wealth Partners Inc., Research Division - Research Analyst [6]

--------------------------------------------------------------------------------

That does. And that sounds great. Next question is probably if you could talk about the changes that you have seen in the production financing environment, mainly in terms of production [prefinancing], government grants, et cetera.

--------------------------------------------------------------------------------

Michael Hirsh, Wow Unlimited Media Inc. - CEO & Executive Chairman [7]

--------------------------------------------------------------------------------

I'll ask John Vandervelde to answer that question.

--------------------------------------------------------------------------------

John Vandervelde, Wow Unlimited Media Inc. - CFO, Executive VP & Corporate Secretary [8]

--------------------------------------------------------------------------------

Yes. Thank you, Michael. Production financing, most of the company's business is still service related. Most of that revenue is service revenue that you see in first quarter. And our bank, we have a great bank and who understands the industry, and they're very happy to pay for the -- our client production service contracts and the associated tax credits. So our production financing is solid. And we're good with that. As far as if you're trying to ask about tax credits, how stable they will be, we haven't heard anything about that changing and in fact, well, I don't want to talk about rumors. We haven't heard anything about the tax credits going down anyway. So I think we're in good shape as far as production financing right now.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Your next question is from the line of David McFadgen with Cormark.

--------------------------------------------------------------------------------

David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [10]

--------------------------------------------------------------------------------

A couple of questions. So just on the Networks and Platforms, I see that ADME still was 40% of the revenues in that segment in Q1. Should we expect that it would -- that ADME will go away for Q2? Or are we still going to have some ADME revenue linger into Q2 and maybe even beyond that?

--------------------------------------------------------------------------------

Michael Hirsh, Wow Unlimited Media Inc. - CEO & Executive Chairman [11]

--------------------------------------------------------------------------------

Thank you for the question, David. I'm going to ask Neil to answer that for you.

--------------------------------------------------------------------------------

Indranil Chakravarti, Wow Unlimited Media Inc. - President & COO [12]

--------------------------------------------------------------------------------

Yes. David, yes, there was a lot of ADME in January of 2020. As you recall, we had transitioned out of ADME end of December. So most of the revenue -- an overwhelming percentage of the revenue was all in January. It's February and March had very, very low numbers. And that's mainly because a few small channels were being transitioned. And going forward, it would be safe to assume that ADME will not be a material part of the revenues beyond Q1.

--------------------------------------------------------------------------------

David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [13]

--------------------------------------------------------------------------------

Okay. All right. And then just on the convertible debenture, I noticed it expires in May -- sorry, December 2020. I was just wondering, would it be possible to maybe get an extension on the expiry of that debenture? Or if not, what are your plans to repay it?

--------------------------------------------------------------------------------

Indranil Chakravarti, Wow Unlimited Media Inc. - President & COO [14]

--------------------------------------------------------------------------------

Sure. We are looking at all the possibilities in terms of the debenture, whether it's renewing refinancing at this time. Typically, we may have started the process a little later, but given the uncertainty around COVID, we have begun the process actively as of -- and we are in it, in the middle of it right now.

--------------------------------------------------------------------------------

David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [15]

--------------------------------------------------------------------------------

Okay. And can you give us an idea on what you think some of the outcomes -- like the likelihood will be, some of the outcomes?

--------------------------------------------------------------------------------

Indranil Chakravarti, Wow Unlimited Media Inc. - President & COO [16]

--------------------------------------------------------------------------------

Probably speculative at this time, but obviously, we have had the $4.3 million on the balance sheet, and the company is in a much more comfortable position, and we've been comfortably servicing interest on that. So renewal of some sort, obviously, is one of the potential outcomes. And we feel that that's the amount of leverage we can comfortably handle at this point. So the most natural outcome feels like it would be another debt instrument of a similar nature. But then again, all options are available with us at this time.

--------------------------------------------------------------------------------

David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [17]

--------------------------------------------------------------------------------

Okay. And then can you give us an idea on the expected rollout this year in terms of quarters? And I'm just wondering what quarter would be higher and versus lower because it's tough to forecast on a quarterly basis. I don't know if you can provide any color on that.

--------------------------------------------------------------------------------

Indranil Chakravarti, Wow Unlimited Media Inc. - President & COO [18]

--------------------------------------------------------------------------------

Well, just because of the COVID situation, it makes things a little more difficult. But just broadly speaking, David, the first few quarters are -- we have a good backlog. And we are currently operating at full capacity, and we expect to keep operating at full capacity. So that's the first point. So unless something unforeseen comes about, we should be executing solidly on the backlog. As we have mentioned to you in quarters earlier, one of the benefits of full capacity is that operating leverage starts to come out of the business, which you're probably [seeing to] surface in terms of margin increment. As far as IP buildings, which typically adds more EBITDA, we don't expect any IP buildings now until the end of the year. So that should give you a sense of how the quarters are moving. So Q1 is probably a good proxy for, call it, Q2 and Q4 and -- sorry, Q2 and Q3 and then Q4 should see additional IP buildings.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Your next question is from the line of [Tim McAlwane].

--------------------------------------------------------------------------------

Unidentified Analyst, [20]

--------------------------------------------------------------------------------

Congrats on making the transition to a virtual studio. On kind of a less-pleasant note, contrary to your comments, Neil, from my perspective, it looks like the balance sheet continues to deteriorate; and as I understand, that a lot of the convertible debenture holders are not interested in refinancing -- or sorry, extending. So that leaves you in a position where you'll be looking at raising new capital, either debt or equity. Or the third option, of course, is to look at some type of strategic alternative. Can you go through in your minds and kind of explain to us how you think through these different alternatives?

--------------------------------------------------------------------------------

Indranil Chakravarti, Wow Unlimited Media Inc. - President & COO [21]

--------------------------------------------------------------------------------

Sure, [Tim]. We -- so on the convertible debentures, as far as the existing holders, there's also insider participation, strategic investor participation. And I'll -- probably appropriate not to comment any more on the existing holders for now. In terms of options we have, one would be doing another convertible, whether it's with partial participation from insiders and new parties. Additional options would be other debt. So whether we could increase senior debt or look at quasi-debt instruments. And obviously, theoretically, the third option would be equity as well. So at this point, we're looking at all the options. And we're optimistic that we will be able to have another instrument in place way before the end of the year.

--------------------------------------------------------------------------------

Unidentified Analyst, [22]

--------------------------------------------------------------------------------

Well, let me ask it a little bit differently, Neil, because you avoided the more important option from my perspective. I know it's been a difficult period, but in the 3 years since [federated] and Hirsh transaction occurred, like ballpark the top 5 insiders have received cash of some $5 million or $6 million. And shareholder returns, just going from audited financials, which, of course, excludes the benefits you got from the [accounting] change, the losses total some $30-odd million. So kind of from my perspective, I'd say you guys gave it a good shot. You did a lot on the revenue side. But isn't it the time now to say, all right, let's look to see if this makes more sense in someone else's hands rather than look at diluting existing shareholders through some type of instrument that I have a hard time thinking will be favorable to us?

--------------------------------------------------------------------------------

Michael Hirsh, Wow Unlimited Media Inc. - CEO & Executive Chairman [23]

--------------------------------------------------------------------------------

[Tim], this is Michael. I believe that the company is actually growing quite well, will grow very, very well over the next few years in that the best answer in terms of maximizing shareholder value is to enjoy the benefit of the investment we've made and grow the company organically. At the same time, if there was a transaction that we thought would maximize shareholder value more so, we would be looking at it and open and having discussions. And frankly, we have discussions all the time. At this point, though, we see a very, very bright future for this company. And I don't think that the market value of the company reflects the value of the company, and we are part of the trend that has undervalued micro-cap stocks, undervalued stocks in our industry. There's an industry -- there's a sector -- there's a lack of interest in the sector on the public markets, but that's a pendulum that does swing. But we're focused on making a great business, and I believe we are making a great business with great prospects. That's what we're focused on as management.

--------------------------------------------------------------------------------

Unidentified Analyst, [24]

--------------------------------------------------------------------------------

Yes, I hear you, Michael. And I obviously own stocks, so I wish you the best in that endeavor. I guess -- during this time when I've seen a number of different management teams significantly reduce their comp, I guess my question is, to you guys, in the quarter, we made $100,000 in EBITDA. Last year, looking at the proxy, between the [rental income], Michael, and the salaries, it was almost $2 million to the top 5 guys. Surely, one way to help with the cash flow situation is for everyone to kind of revisit their own compensation. Where are you guys on that?

--------------------------------------------------------------------------------

Michael Hirsh, Wow Unlimited Media Inc. - CEO & Executive Chairman [25]

--------------------------------------------------------------------------------

Yes. We don't believe that our -- we believe that we're on the low end of compensation already. This is not a group that's overly compensated, if you look at comparables. And everybody is working hard to build that business that will deliver the value. That's how we see it. And during this period, [Tim], I've invested a fair amount in investing in the company with my own cash, as have other members of management, and we continue to be ready to support, including coming into the next financial instrument. So I've been there on every investment thing at prices that were much above where we are now. But I'm confident in our ability to deliver value to shareholders in the long run. And so our focus really is how do we build a great business. Thank you for the question, Tim .

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Your next question is from Gordon Hodge with Tracker Research.

--------------------------------------------------------------------------------

Gordon Hodge, Tracker Research, LLC - Manager [27]

--------------------------------------------------------------------------------

The first one, Michael, you mentioned that you're having conversations or continued conversations with long-term customers and as well as new. And I was just curious. Your backlog has obviously grown. I'm sure that reflects Madagascar to some extent. But the -- I'm just curious. It sounds like maybe some of those conversations you're having relate to projects that are not yet reflected in backlog. And I was just curious if that was the case...

--------------------------------------------------------------------------------

Michael Hirsh, Wow Unlimited Media Inc. - CEO & Executive Chairman [28]

--------------------------------------------------------------------------------

That is the case. And some of them are reflected in backlog, but more of them are reflected in up-and-coming new projects.

--------------------------------------------------------------------------------

Gordon Hodge, Tracker Research, LLC - Manager [29]

--------------------------------------------------------------------------------

Terrific. And then I had just a question about Bell Media and Crave -- sorry, not -- the WOW! channel, just how that's going, if there's an update there.

--------------------------------------------------------------------------------

Michael Hirsh, Wow Unlimited Media Inc. - CEO & Executive Chairman [30]

--------------------------------------------------------------------------------

Sure. I'm going to ask Neil to address that question.

--------------------------------------------------------------------------------

Indranil Chakravarti, Wow Unlimited Media Inc. - President & COO [31]

--------------------------------------------------------------------------------

Okay. Thanks, Michael. Thank you, Gordon. On the channel, as we published in Q4 and Q1, there are discussions ongoing. But clearly, we are not looking to invest from the company to build the channel. We want to find a financial and strategic partner who will be the best-fit partner before launching any channel.

--------------------------------------------------------------------------------

Gordon Hodge, Tracker Research, LLC - Manager [32]

--------------------------------------------------------------------------------

And sorry, I was just thinking of their...

--------------------------------------------------------------------------------

Michael Hirsh, Wow Unlimited Media Inc. - CEO & Executive Chairman [33]

--------------------------------------------------------------------------------

Crave.

--------------------------------------------------------------------------------

Gordon Hodge, Tracker Research, LLC - Manager [34]

--------------------------------------------------------------------------------

Yes, Crave...

--------------------------------------------------------------------------------

Indranil Chakravarti, Wow Unlimited Media Inc. - President & COO [35]

--------------------------------------------------------------------------------

Okay. Yes. I can talk to that. So Crave -- with respect to Crave, I mean, if you look at the website or the app, you'll probably see that there is much more WOW! content on it today than you may have seen a few quarters ago. So I guess the overall takeaway we can provide you is that we continue to have a good relationship, and we continue to populate the kids' content, and there is more content being added every quarter as we speak.

--------------------------------------------------------------------------------

Gordon Hodge, Tracker Research, LLC - Manager [36]

--------------------------------------------------------------------------------

I guess I think at least when you started that, you -- there was quite a bit of an investment in -- you don't have a huge library. So you were buying content, I think, to fill that. And I was just curious if that investment is still ongoing and therefore perhaps muting the profitability that you're showing now. In other words, your core business might be actually going -- growing faster and be more profitable than what we're seeing at the bottom line.

--------------------------------------------------------------------------------

Indranil Chakravarti, Wow Unlimited Media Inc. - President & COO [37]

--------------------------------------------------------------------------------

I see. No, actually, at Crave, for the current year, it is not a net loss business. We have -- the initial investment period has -- is behind us now. And this is the second year of the relationship. We're doing more. And the idea was to have a business that is in the black and not in the red, and we're headed in that direction.

--------------------------------------------------------------------------------

Gordon Hodge, Tracker Research, LLC - Manager [38]

--------------------------------------------------------------------------------

Perfect. And last question, and I think it's probably for you, Michael, is you mentioned that advertising is not working as well, and I certainly understand that in the middle of a recession advertising is one of the first expenses that marketers cut. And we've heard slowdowns at Google, et cetera. But I am hearing quite a bit about AVOD and AVOD networks seeing huge spikes in traffic and viewership and so forth during this COVID-19 stay-at-home period, and I'm just wondering if you're starting to see more demand from some of those AVOD channels and seeing more conversations there that could be -- present demand down the road for your IP.

--------------------------------------------------------------------------------

Michael Hirsh, Wow Unlimited Media Inc. - CEO & Executive Chairman [39]

--------------------------------------------------------------------------------

Thank you for the question, Gordon. Definitely, all channels, including AVOD channels, are seeing increased viewership during this period of isolation. Secondly, the advertising rates, the CPMs that are paid by the advertisers on a per-minute basis have dropped throughout all media, from Google through to on-the-air broadcasters to AVOD channels. And we see, we do see more demand for the channels because they're launching and they're starting to fill in and they need shows. And in fact, Madagascar is for NBC Peacock, which is an AVOD offering. And basically, what we're seeing is that in the near run, we think advertising rates will continue to suffer, but on the other hand, viewership will be up. And that will be -- it will be good in terms of introducing these channels. It's a fantastic way to introduce channels into a growing audience, but on the other hand, the monetization of those channels is finding a difficult time. We also understand that a number of services that rely on advertising have frozen some of their production spending for a period. In some of these companies, it represents a huge portion of their income stream that's been affected.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

There are no additional questions at this time. I will turn it back over to management.

--------------------------------------------------------------------------------

Michael Hirsh, Wow Unlimited Media Inc. - CEO & Executive Chairman [41]

--------------------------------------------------------------------------------

Well, thank you so much, everybody, for joining us. Stay healthy and well. And we look forward to speaking to you for our next quarter results.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Thank you. This concludes today's conference. You may now disconnect.