Kartoon Studios Inc. (TOON) Earnings Call Transcript & Summary

Todd, Andy, good morning.

Good morning.

Good morning.

I never know what color glasses you're going to wear. I remember I watched the interview last time that you did with Luke, and you had the yellow glasses, I believe, and now you're rocking the white. I need you and I to communicate so I can have the same ones as you.

Well, I'll be in therapy for many years trying to figure this out. Thank you.

Well, I'm so happy to have you all on. We've got so much to talk about. But just give us a quick overview, for the folks that, for some reason, aren't familiar with your company.

Well, we make animated children's cartoons. We broadcast them, and we do consumer product licensing of those characters on a global basis. In its simplest form, that's what we do.

Yes. And I know you have a Stan Lee storefront that was just on Amazon. You've seen great success with that. You also have a dedicated channel on YouTube. How is that kind of integrated with the broader strategy to grow that brand and, of course, more importantly, to drive that revenue? Andy, we can start with you. And then, Todd, you can chime in.

Yes. Well, let me sort of start by saying that we are in a period now of very rapid and accelerating growth in our company. That's complemented by our new CFO and very strong financial disciplines that have been put into place. Our business is not affected by the price of gold, by interest rates, high inflation, by anything that's going on in the world because, essentially, we make cartoons. And children continue to watch cartoons no matter what. And children continue to want to buy the toys and all of the different products that come from the cartoons. So as far as the various initiatives that we have really exploding for us right now, the channel system, which is run by this very talented man next to me, and he actually always tells me it's not channels, don't call it channels anymore, has become a real incredible growth driver. And perhaps, Todd, you can talk a little bit about that.

Absolutely. Sure. So there's so many different and exciting things going on in the business right now. And I'm fortunate enough to be managing one of our fastest-growing businesses, which is Kartoon Channel!, and I oversee the overall media and streaming network. So that's Kartoon Channel! I'm the event moderator. And so each of those brands have some really exciting and significant growth happening currently. So I'm going to -- I'll give you guys a little bit of a peek on what's happening on Kartoon Channel! and Ameba, specifically, which is our streaming business, our direct-to-consumer streaming business. We had a phenomenal Q4 '23, and we had a goal to reach breakeven and profitability, and we've been able to hit both of those goals from Q4 of last year to this year, Q1, January and February. So that's been really exciting. And I can give you a couple of reasons why we've been able to do that, but it's been a really fun ride the last couple of quarters, particularly around the direct-to-consumer business.

And then if we take a look at the 20-year licensing agreement that you have with Marvel Studios, how does that play into the strategy and especially expanding the Stan Lee Universe itself?

Yes. Well, I think let's start off with who is Stan Lee, for those who don't know. Stan Lee is the most successful creator of all time. When I say that, I mean, bigger than J.K. Rowling, bigger than anything of Steven Spielberg or George Lucas. 14 of the top 50 box office movies were created out of the mind of this one man. They include Spider-Man, Iron Man, The Incredible Hulk, Captain America, Black Panther, Fantastic 4, Thor, the list goes on, and of course, the Avengers, the most successful film of all time. We were very fortunate to become the stewards of Stan's IP. And when we started on this 3 years ago, we had no idea it was going to become what it has become. Well, now we launched the store on Amazon. We have a number of consumer product initiatives coming. We are launching with our comic book colleagues at Legible, a publishing line with Stan. He has a tremendous amount of appeal to many, many different people and sectors. Right now, we have about 100 new properties in what we call The Book. The Book was what Stan left behind for us. Most of the things from Marvel were created in the '60s and '70s. Everything after Stan left Marvel is in this book, and we are rolling them out. And when we first took over the brand, I said it's going to be Marvel 2.0, anecdotally. It's actually, we call it Stan Lee Universe, and it's just starting to buzz right now. It was if we went into a drawer and we took out -- we opened up and we saw 40 songs from Lennon and McCartney. Nobody had ever known existed before. They're there. So we're rolling those out. Disney, of course, knows the value of Stan, and we've licensed to them the rights to have him in the theme parks for 20 years, for which they pay us royalties. We have a similar license with Marvel to use him as cameos in their movies. Both of these are nonexclusive licenses, I should add. So those became the basis of kind of growing this, and it's all being done under the creative stewardship of one of Stan's great collaborators, Michael Uslan, who has been the Executive Producer of all of the Batman movies and the Batman franchise for the last 25 years. He knows this brand inside and out. So we're very excited. There's a lot of wind in our sails with it.

There's two main things that I took away from that one is that it's nonexclusive, right? So you can go ahead and find other avenues of growth and revenue, if you would like. And also, there's a reason Mr. Wonderful loves the royalties. It helps with the cash flow. So that's some great insight on that. Speaking of money, how -- what's the game plan to have these successful shows like, right, your Rainbow Range (sic) [ Rainbow Rangers ]? I know I just watched with my niece, Shaq's Garage there as well. How are we going to go ahead and boost the subscriber growth? And what type of shows you're going to help make sure that the free trials turn into paid subscriptions?

I'll grab that one. So obviously, we've got great news on the Stan front. And then on the younger kids side, we are really leaning into a bunch of different things. So we've got a successful content strategy that was activated. We went after a lot of new acquisitions last year, and it really paid off in the fourth quarter, where we leaned into both seasonality and holiday content. So we drove a lot of subscription growth in Q4 from Halloween to New Year's when, seasonally, we know that there's a lot of consumption happening typically and align those with holiday promotions. We've really, really tightened our media efficiency and our kind of our subscriber acquisition campaigns and costs. So from the beginning of '23 to the second half of '23, we cut our acquisition costs in half, and we were still able to drive more growth than we were in the first half of the year. So we really hit kind of two home runs there. We brought costs in line and we doubled acquisitions. From a -- we're now also really leaning into tech and making some significant data-informed decisioning in real time or near real time. So one of the initiatives we did was really put a dashboard and data and insights together to allow us to make decisions around consumption, programming, media costs, acquisitions, churn, free trial conversions and start looking at those on a daily basis where that was never able -- we were never able to do that before. So all those things combined have really helped us grow the business. And I think that's a big part of it is to be able to see and strategize around what we can do around programming and what we can do around acquisitions. So both those things came in line, and we had some big growth towards the end of the year.

And I do want to point out that free trials and conversions to paid subscriptions did soar by nearly 50% in February compared to the same month last year. Final question for me. Andy, I'll start with you. International growth, right? You want to go ahead and get into those markets as well because you have billions of people that you can attract. What's the game plan there, especially because you have some cultural differences from, say, China, India and here in the U.S. and many, many other countries that you want to tap into?

Well, we have a very, very talented executive who's running our international business, his name is Paul Robinson. He's based in London. He was previously Managing Director of Disney Channel Worldwide, and he's been growing our footprint of the Kartoon Channel! distribution system dramatically. We're pretty much in every territory in the world now. If we're not actually up on air, we are contracted to be on air in the coming months. We have some very substantial deals that are going to be announced in the coming days with global broadcasters, and Paul is leading this charge there. Obviously, we have to dub our shows into various different languages around the world. And all of our shows are dubbed in everything that you could imagine. The obvious languages from French and Spanish and Italian and German and Urdu and Hindi and whatnot, we're pretty covered around the world right now. It's an exciting time for growth. It's a period where -- I should also add that I neglected to mention our Mainframe, the production system is growing quite dramatically as well. We have the #1 kids show in the world we produce, CoComelon. We have the #1 toy base show in the world we produce, which is Barbie. We have the #1 kids show on Netflix, Unicorn Academy. These are all coming out of our group. So it's an exciting time, and there's a lot of momentum with us going forward. And as Todd said, but I don't want this to be understated because it's a huge driver, the channel system went into -- the streaming system went into profit this year. So we already announced January and February. Our unaudited numbers in March, which we haven't announced anything yet, have even grown more. So there aren't a lot of streamers that are in profit. The only one I know, frankly, is Netflix and us now. So it's a very exciting time. We're building up a tremendous asset, and we see just a lot of wind in our sails going forward.

And I can quickly tell you, we were up 19% year-over-year towards the end of the year, and already in March, we're up 24%. So we continue to extend that growth and that momentum.

Well, hey, I appreciate you guys for hopping on. We covered so many different topics, but I do, at least, want to give you the floor real quick. Andy, Todd, any final thoughts from either of you before we wrap up?

Well, we're in a business that we take very seriously because we produce content for children. We have a very impressionable constituency. And I would say, the single-most important thing about our brand is safety. When parents are watching our shows and they're watching our channels, they know that their kids are safe, and they're not going to see anything that is going to be inappropriate or wrong. And I think that's where everything will stem from.

Absolutely. I couldn't agree more. I mean, I don't have any kids, but when I was taking care of my niece the other day, I'm like, how do I make sure this precious individual is protected, not just physically, but also what she may be consuming on TV as well. But thank you both so much for hanging out. And yes, look, I speak Urdu, I speak English. So if you need someone to do a little voice over, you just call me, I'm one flight away from you.

We'll be in touch.

Awesome. Thank you so much. That is Andy and Todd, President and CEO of Kartoon Studios, ticker on the NYSE American is TOON, and thank you all for watching All Access.