IDW Media Holdings, Inc. (IDWM) Earnings Call Transcript & Summary

Good evening, and welcome to the IDW Media Holdings Fourth Quarter and Full Fiscal Year 2021 Earnings Call. In today's presentation, Chief Executive Officer, Ezra Rosensaft; and Chief Financial Officer, Brooke Feinstein, will discuss IDW's operational and financial results for the 3 and 12 months ended October 31, 2021. After the presentations, Mr. Rosensaft and Mrs. Feinstein will answer investor questions. [Operator Instructions] I will now turn the call over to John Nesbett of IMS Investor Relations.

Good evening, everyone. I will now take a moment to read the safe harbor statement. 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 company's SEC filings. 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 call over to Ezra Rosensaft. Please go ahead, Ezra.

Thank you, John, and thank you to everyone on the call for joining us. My remarks today will review the development of our fiscal fourth quarter and full fiscal year 2021, which closed October 31, 2021. I will also provide our outlook and strategy for 2022. Brooke Feinstein will provide details around our financial results, and then I'll be happy to take your questions. To start, I'd like to express my wish that each and every one of you are staying safe and healthy as the COVID pandemic continues. I'm optimistic that things will settle down soon. Before I get into the details of the fourth quarter and fiscal year, I want to take a moment to step back and look at the progress that the company has made over the past year and provide a refresher on the attractiveness of the economic model that we've established. We have put in place new management across the company, particularly on the front line, so to speak, with new heads of publishing and entertainment. Our current team is absolutely extraordinary. We brought our debt down to 0, have taken multiple steps to reduce costs, and we raised capital to strengthen our balance sheet. As discussed on prior calls, this has been a goal of ours for some time, and we have now achieved the desired asset-light balance sheet. So we have done much of the heavy lifting to put in place the building blocks and enhance the economic model and are now in an exciting time, where we have our foot on the gas pedal and are beginning to see signs of what we can do as we pursue our refined strategy. And the strategy is relatively simple. On the publishing side, we are increasing our focus on original content. Our unique model enables us to build our library and do it profitably at the operating level. This part of the engine is picking up speed. We have 40-plus original titles currently moving through our pipeline, which is a significant increase from previous years. With the engine cranked up, we'll have more and better shots on goal, as the IDW-owned intellectual property, with all media rights, moves through the pipeline to bring to market original movies or series on the entertainment side of the business on its development slate. And the ROI is exceptional when we make this happen. Importantly, we can realize these returns with a low-risk model, which does not require us to lever the company whatsoever. Those days are over. And encouragingly, we are seeing some progress. For example, we recently announced our deal with Apple+, Surfside Girls, and the pipeline of opportunities that we are pitching on the entertainment side, the house has never been stronger. As we begin moving through 2022, we believe we are a strong company with the right people, processes, content pipeline and balance sheet in place to provide a solid platform from which to continue accelerating our growth trajectory. I wanted to provide some color on our fourth quarter results at IDW Entertainment or IDWE for short. While Season 2 of Locke & Key aired on Netflix on October 2021 and we had expected to see revenue related to Locke & Key in the fourth quarter, for accounting reasons, we won't recognize that revenue until Q1 of 2022. As you may remember, under GAAP, revenue recognition is tied to the timing of the delivery of episodes to the streamer or distributor. I can confirm that Locke & Key Season 2 has been delivered, and IDWE will recognize revenue of $4.2 million in Q1 2022 related to the delivery of the series. Primarily as a result of the shift in timing IDWE recorded nominal revenue for the fourth quarter. Net loss at IDWE improved to a loss of $1.5 million from a net loss of $2.0 million in the fourth quarter of last year. We're excited about the franchises we're bringing to market and the momentum we're seeing on the entertainment side of our business. As I just mentioned, during the fourth quarter, we announced our deal with Apple+ for 10 episodes of our original live action series, Surfside Girls, based on IDW's popular graphic novel published via our Top Shelf in print. We remain focused on accelerating and expanding IDWE's development pipeline with a focus on our original IP and our content pipeline is robust. In addition to its series development strategy, IDWE has also established a renewed focus around leveraging capabilities to pursue opportunities in feature films and podcasts. Graphic novels have proven to be very successful as precursors to film vehicle, and we believe we have the creators and content to appeal to a broad and growing audience. I'm sure all listening today have a favorite podcast or 2 based on a favorite book or featuring a favorite journalist. We think the podcast platform can provide an effective, low-cost and low-risk setting for us to develop, test and measure the appeal of certain content to determine whether it translates to a successful feature film or TV vehicle, which brings me to IDW Publishing or IDWP. IDWP had strong direct market sales in 4Q of 2021, though these were offset by a decline in book market sales. We also faced a tough comparison as demand for Top Shelf titles during the fourth quarter of 2020 was exceptionally strong. As a result, IDWP revenue decreased to $6.9 million in 4Q 2021 from $7.7 million in 4Q 2020. Sequentially, though, revenue in the segment showed a modest increase from $6.8 million in 3Q 2021. Operating income decreased to $38,000 in the fourth quarter of 2021 from $491,000 in Q4. For full fiscal year 2021, IDWP benefited from surging direct market sales led by Teenage Mutant Ninja Turtles: The Last Ronin title and supplemented by strong increases in game sales. We are making tremendous progress executing on our strategy to require high-quality original IP, intellectual property, and are working with premier creators of comic books and graphic novels. We are expanding and transforming our library to reach broader reader audience, and we're excited by content we're seeing in new genres such as young adults, middle grade, tweens, drama, comedy as well as IDW staples, which is Sci-Fi and thrillers, and soon, manga-inspired comics. Looking ahead, as we move through 2022, we'll be working on varied opportunities to efficiently and profitably bring unique content to our platform. We believe we are strongly positioned with more than 40 original titles moving through the publishing pipeline and through the IDWE development fleet annually to benefit from the co-development of original content across both businesses. We continue to aggressively pursue new creators and titles as we build the best-in-class content library that will serve as the foundation for our growth moving forward. We are energized about the opportunities, and we're seeing the marketplace and energized for an incredible year ahead. Now I'll turn the call over to Brooke Feinstein for a more detailed review of our fourth quarter and fiscal year 2021 results.

Thank you, Ezra. My remarks today will focus on our fourth quarter and full year fiscal '21 results, except where I indicate otherwise. I'll be comparing the fourth quarter fiscal '21 results to the fourth quarter of fiscal '20, and I'll compare full year fiscal '21 results to full year fiscal '20. Our financial progress over the past several years and our current strong balance sheet positions IDW for continued significant improvement in the year ahead. As Ezra mentioned, we accomplished a considerable amount in fiscal '21, laying robust financial foundation for long-term success. We raised additional capital with strong support from our current investors and utilized the proceeds to eliminate the remaining debt, enhanced our liquidity and invest in growth initiatives, including ramped up original IP investment. At IDW Entertainment, we work through substantially all of our legacy production deals and are now poised to benefit from production finance models that provide predictable positive cash flows with limited downside risk. Finally, in the fourth quarter of fiscal '21, we enhanced our visibility in the investor community through our uplist to the New York Stock Exchange. Now let's look at our financial results. The fourth quarter consolidated revenue decreased to $7.1 million from $10.1 million. The decrease was driven by a decline in entertainment revenue, which fell to $225,000 from $2.4 million. Virtually all entertainment revenue in the year-ago quarter was recognized upon delivery of Wynonna Earp episodes. Looking ahead, we will book Locke & Key Season 2 revenue in Q1 of '22. Looking further down the road, we expect to deliver and recognize revenue from Locke & Key Season 3 and Surfside Girls Season 1 in the second half of calendar '22, not necessarily in fiscal '22. Keep in mind, though, that in this age of COVID, production can be delayed or shut down with little notice and therefore, delivery dates are difficult to forecast accurately. Publishing revenue decreased to $6.9 million in the fourth quarter from $7.7 million a year earlier, primarily because of exceptionally strong sales in the book market during the year-ago quarter, led by Top Shelf tiles, notably Congressman John Lewis' March and George Takei's They Called Us Enemy. The decrease in book market sales was partially offset by stronger direct market sales as comic shops and other retailers began to recover from the worst impacts of COVID-19. Revenue from digital games and licensing also declined. In the first quarter of fiscal '22, we expect our publishing results will get a boost when we realize approximately $2.2 million in game revenue from Batman Adventures, our best-selling game. However, this will be the last hurrah for licensed games as we are closing that line of business to sharpen our strategic focus on development of original franchises. Setting aside Batman Adventures, our decision to exit from the licensed game business will tend to reduce publishing's revenue in the remainder of fiscal '22. We generated $1.5 million in licensed games revenue in fiscal '20 and $1 million in fiscal '21. The licensed games has a marginally negative impact on our bottom line results in both years. For the full '21 fiscal year, consolidated revenues decreased to $32.4 million from $38.2 million. The decrease was entirely a function of the decline in entertainment revenue, which declined to $7.1 million from $14.3 million. In fiscal '20, entertainment recognized over $4 million in revenue from each of these 3 shows: Wynonna Earp, Locke & Key and October Faction. In fiscal '21, entertainment generated almost all of its revenue from a combination of the final episodes of Wynonna Earp and Canadian Revenue Agency production tax credits related to prior shows. Publishing revenue increased to $25.3 million in fiscal '21 from $23.9 million in fiscal '20, led by exceptionally strong direct market sales of Teenage Mutant Ninja Turtles: The Last Ronin title, partially offset by a decrease in book market revenue. Moving further down the income statement, IDW Media Holdings consolidated loss from operations increased to $1.9 million in the fourth quarter compared to $1.5 million a year earlier. IDW Entertainment fourth quarter loss narrowed to $1.5 million from $2 million. The legacy production financing deals that generated the majority of entertainment's revenue in the year-ago quarter incurred significant losses. As a result, entertainment's profitability improved in the fourth quarter of '21 despite generating minimal revenue. Income from operations at IDW Publishing decreased to $38,000 in the fourth quarter of '21 from $491,000 in the year-ago quarter. The decrease resulted from the exceptionally strong sales of higher margin backlisted book titles in the year-ago quarter and in the fourth quarter of '21, increased severance pay partially offset by a reduction in SG&A. Corporate overhead generated a loss from operations of $443,000 in the fourth quarter compared to positive income from operations of $14,000 a year earlier on an increase in severance and compensation expenses. For the full fiscal year, our consolidated loss from operations decreased to $8.7 million in '21 from $9.3 million in '20. At IDW Entertainment, the loss from operations in fiscal '21 decreased to $6.7 million from $8.6 million in fiscal '20, again reflecting the impact from the legacy production financing deals that impacted our results in fiscal '20 and to a lesser extent, in fiscal '21. In addition, IDWE's bottom line in fiscal '21 benefited from the $3.3 million in production tax credits, as I mentioned earlier, partially offset by the $2.1 million impairment we announced in the first quarter from the implementation of a change in accounting treatment of certain episodic television production costs. At IDWP, the loss from operations increased to $770,000 in fiscal '21 from $103,000 in fiscal '20. Our gross profit decreased from the decline sales of our backlisted book titles, while compensation marketing expenses increased. The loss from operations from corporate overhead increased to $1.2 million in fiscal '21 compared to a loss of $632,000 in the previous year on higher severance expense and compensation costs. The fourth quarter's net loss narrowed to $0.06 a share compared to $0.09 in the third quarter and $0.20 in the year-ago quarter as our bottom line results continue to improve. The full year net loss from continuing operations improved to $0.59 a share from $1.08 in the prior year. Including the impact of discontinued operations, the net loss improved to $0.51 per share in '21 from a loss of $1.54 in fiscal '20. Turning now to our balance sheet. At October 31, we had no debt. Working capital, current assets less current liabilities, totaled $19.5 million, and we hold $17.5 million in cash and cash equivalents. To wrap up, our balance sheet is strong with ample liquidity. Our bottom line results from operations improved significantly in fiscal '21 as we work through the remainder of the legacy production financing deals. With those impacts behind us, we are poised to benefit from several tailwinds in the year ahead. We expect to recognize high-margin revenue from Locke & Key Season 2 in the first quarter and from Locke & Key Season 3 and Surfside Girls Season 1 in the second half of '22 calendar year, provided that current production time frames hold. IDW Publishing revenue will also get a nice boost in the first quarter from sales of Batman Adventures. That concludes my remarks. Now Ezra and I will be happy to take your questions.

Thank you, Brooke. Now as mentioned, we welcome your questions. Operator, back to you for Q&A.

[Operator Instructions] Our first question is from Eddie Reilly with EF Hutton.

Nice to see strong publishing revenues sequentially in the quarter. Should we expect Surfside Girls to have similar run rate and margins as Locke & Key? Is this going to be using the new derisked model?

So Eddie, it's Ezra. The short answer is yes. Going forward, in the derisked model, we do not put up capital, not put leverage. We -- it's a little bit hard to hear you. I'm not sure if you can go on mute, while -- so everyone can hear the response. The derisked model means that we do not take on leveraging debt as people can see in historical financials. Very simply the buyer or streamer or network cash flows to production. We take our production fee and license fee, and we hire a tri-party to do the production services. So very simply put, you're correct. That is the derisked business model. That moves us away from where the company was when we talked about what the balance sheet used to be and now it's asset light.

Awesome. Awesome. And can you give us some more info into how strong the entertainment pipeline is for the next year? Do you think you're moving closer to your 2-year targets on TV shares and on film for a year or so? And do you see the projection of $11 million in revenue obtainable sales for the year that was projected in November?

So I think I heard most of your question there. So I don't want to get into particular projections of dollars on this call for various reasons, but we do see an increase. We do see 2022 as being an excellent year in terms of really, first, focusing on [ root ] content because content is king, as we all know. Distribution is King Kong. We need our buyers, and ultimately, flowing through to profitability. I don't want to get into particular guidance. We haven't given yet in the past. We do look forward to doing that in future years, but things are looking positive. I'll try to keep that neutral to avoid getting into hot water with counsel.

Okay, great. And apologies for the sound. Looks like you produced other income of $1.2 million in the quarter. Can you give us some color into what that was?

Yes. That was for the PPP loan forgiveness. We also had another one earlier in the year. This is the second one.

Our next question is from [ Walter Bellinger ] with [ Mayflower Capital ].

So as a competitor of yours, Dark Horse, was recently acquired, could you provide any color concerning how this might impact the industry and sort of how the acquisition might impact how we would look at your valuation?

Great question, [ Walter ]. Thank you. So there's a lot happening in the industry. What's interesting about media entertainment is that it's, on the one hand, something looked at as investments and also we're all consumers of media. Pick your station, podcast, streamer. It doesn't matter. So to the point, the acquisition really reflects the evolving landscape and in particular, the dearth of original content. And given Dark Horse being purchased by a gaming company, their focus may shift, but it still remains, and this is what's crucial, a huge opportunity for original IP, intellectual property. And the demand, by lots of streamers as we all know, is going to soon outstrip the supply because there are just so many, and Dark horse being acquired is one of them. From a valuation standpoint, it's tough to say since the purchase price was not made public, and I don't want to speculate even hearing things on the ground. But we believe the acquisition and other consolidation in the space makes us increasingly excited about the value of our IP. I don't want to give conjecture as to what the company should be valued at. I will leave that to everyone at their discretion. But just to give you a little more context, we don't get into the particular size of our library. But what I can say is that 100-plus original IP that is climbing very fast as we talked about 40-plus annually, which drives the publishing pipeline through to the development slate, IDWP, IDWE and in the industry, many use the metric of $1 million per original title. And it's very crude because obviously it depends on the quality. You could have -- Walking Dead is obviously worth more than $1 million per title, but that's the rough ballpark. So if you use that, you can begin to calculate our enterprise value of what it truly should be at. I won't speculate on why the price is what it is given the history. We're looking forward. We have content. We add to that weekly. It takes time to put out a great graphic novel. This is not a periodical business, but we have a lot of great content coming forward, and we expect that to be realized in the valuation shortly in the near future, whenever that may be, [ it will take ] over time, but certainly, valuation should increase, in my opinion.

Okay. Great. And then -- so obviously, a nice job on the cost side of your business this quarter. Can you just help us understand approximately how much of your costs during the year is related to the onetime financing uplisting?

Yes, sure. So that would be approximately about $140,000 for kind of legal, audit, accounting and transfer agencies that we won't see again.

Okay. And then just one more question. And just -- I just want to be clear on this. The Locke & Key revenue that was expected in Q4 has already been booked in Q1?

That is correct. The cash is already in, and it will be recorded and recognized in Q1.

As there are no more questions, I would like to hand the call over to management for closing remarks.

Thanks, Kyle, operator. Thanks, everyone, for joining and listening. Look forward to speaking with all of you in the future and have more positive news. Thanks, everyone, for coming and listening today.

Thank you for attending today's presentation. You may now disconnect.