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

Hey guys, welcome or welcome back to the channel McNallie Money, your home of all things, stock investment and personal finance related. In today's video, we're going to be joined by Andy Heyward. He's the Chairman and CEO of Kartoon Studios. This is one we've covered on the channel previously. A lot of excitement heading into 2025 for this company, and that's what we're going to be discussing in today's video. Before we get into it, take a second, smash the Like button you guys, big help to myself and the channel, specifically in getting this content to other people like you who may find value. If you're not already subscribed, McNallie Money, feel free to join. And let us know in the comments section below if you're currently holding shares of Kartoon Studios, if you've heard of this company before and your outlook for the remainder of 2025. Now with that being said, let's get into today's video. Okay, guys. So that's right. Today's interview, we're joined by the Chairman and CEO of Kartoon Studios, Andy Heyward. We've covered this stock on the channel previously. However, 2025 is shaping up to be a huge and transformational year for this company. And as a result, we've invited Andy back to the program to talk all about it. Andy, thanks so much for making the time. Welcome back to the show.

Thank you. My privilege.

Hey, so we wanted to kick things off. It's been quite some time since we did our initial coverage on Cartoon Studios. Can you give us an introduction on yourself and how you got involved with this company or brand?

Well, myself, I've been in the cartoon business my whole life. I graduated college and I started writing cartoons at Hanna-Barbera. I used to write on Scooby-Doo, The Smurfs, the Flintstones, all of the cartoons of Hanna-Barbera, produced them. Then started my own company and over the years, have produced 6,000 episodes of cartoons. I think, my son says my dad has made more cartoons than Walt Disney. Inspector Gadget, Alvin and the Chipmunks, Dennis the Menace, Heathcliff, Super Mario Bros, Sonic the Hedgehog, Teddy Ruxpin, Captain Planet, Strawberry Shortcake, Care Bears, Ghostbusters. Did I say the shows that we are doing today. We have the #1 kids show in the world, CoComelon, which we produce out of our Canadian studio; Barbie, which we also produce out of our Canadian studio, the #1 toy show in the world; CoComelon is the #1 kids show in the world. But most exciting for me is what we're doing right now, of course, which is Winnie-the-Pooh and Stan Lee. Winnie-the-Pooh, I think you know a little bit about it. We talked a little bit earlier, but I'll refresh your memory. It has been the single most successful brand in children's entertainment. It's done $80 billion of sales. Let me give you a data point to put that in perspective. That's more than Star Wars. That's more than Harry Potter. That's more than the Avengers, more than all of the Avengers, more than Super Mario, more than Sonic, more than Power Rangers, more than Barney, more than anything that's ever been -- more than Mickey Mouse. And the copyright expired 2 years ago, 75 years after the death of the original author, A.A. Milne. We gave notice to the Walt Disney Company that we were going to do our own version. We worked very closely with a number of AI companies to develop a look, and we have something that we're very proud of. It's really spectacular. We debuted it at Sundance Film Festival this last week, and it will be released at the end of this year. We're going to do over 200 6-minute episodes. We'll do 5 1-hour specials: Christmas, Halloween, Thanksgiving, Easter and Back-to-School, and have a very broad consumer products program going alongside it. So -- and of course, Stan Lee is something we're parallel developing on another path. And for those of you who don't know Stan Lee, I'm sure you do, Bryce, Stan Lee is the most successful creator of all time. The mind behind everything of Marvel, 15 of the top 50 movies, I believe, were created by Stan ranging or co-created, ranging from Spider-Man, Iron Man, X-Men, The Avengers, of course. Guardians of the Galaxy, Black Panther, Fantastic Four, so many others. All of these comic books created by Stan Lee. When Stan passed away, he was kind of my mentor. We became the steward of all of his IP. So that means the 200 properties that he left behind, which we control through Stan Lee Universe. His name, his lightness, his signature, his voice, all of these properties and the consumer products based on them. So those are the 2 brands that we're pushing forward now. Winnie-the-Pooh the third part of our profile is the distribution platform, which is anchored by Kartoon Channel. So I've been speaking a lot. I'm sure you have questions, and I will defer to you now.

No, that's great. I wanted to get a breakdown of kind of the company structure. Obviously, the IP or intellectual portfolio here is a big asset. And as you list off some of those names, Inspector Gadget, for sure. Care Bears and I read Winnie-the-Pooh books to my kids now every night. So it's hard to imagine any kid in the world that hasn't interacted with one of those brands.

Can you talk to us a little bit more about the distribution side of things, Andy. You've obviously got this huge portfolio of cartoons of IP. How do you get that out to the masses?

Well, we have our own distribution system. We've been investing in for the last 4 years. We've put a lot into it for the infrastructure. We put a lot in, in terms of acquisitions of content and production of original content to drive it forward. And I'm excited and proud to say that the distribution system is now profitable. The anchor of it is cartoon channel, though we have a preschool younger channel called Ameba, and we have an older -- older kids distribution platform called Frederator channels. But the 3 of them together make up Toon Media Networks, and they are profitable. It took these last 3 or 4 years to get to that space, which I should add is probably twice as fast as Netflix did, but we see it now growing rapidly on a hockey stick. If you go -- interestingly enough, if you go into the Apple App Store and you look up the user rankings of the channels, you will see that Kartoon Channel is ranked ahead of YouTube Kids, ahead of Netflix, ahead of Disney+, ahead of PBS Kids, ahead of Max, ahead of Cartoon Network and ahead of Nickelodeon, number one. How did this happen? This upstart channel that has been only going for a couple of years. It stands for something. We have a very tight ethos on this channel. I'm a parent. We have 6 kids, and it's very important to me what they watch, what they see is nothing that is going to be damaging, and the quality stays high. So you will never find any negative images, violence, inappropriate language, negative stereotypes, glorifying anything of violence. It's just -- it's got to be a refuge of safety because that's where we want our kids to be. And in many ways, that's what attracted me to Winnie-the-Pooh, not just that it was such a powerful brand and property that was created by A.A. Milne. But when you think about Winnie-the-Pooh, it's an oasis of goodness. It's about family, it's about friendship, it's about kindness, it's about love. It's got gentle wisdom all throughout. It's about getting along. It has so many wonderful values in it. There's not a cell phone anywhere to be seen in the 100-acre wood. And there's a place for screens and screen time. That's how we make our living, of course, but there's also a limit that it should be as well. The humility of the forest is celebrated in Winnie-the-Pooh, the importance of nature, so many wonderful values, bees. Pooh is always looking for honey, but bees are so important in our world today, and people are starting to realize that and thinking about bees. Bees are in Winnie-the-Pooh. So we're going to be distributing it. It will be either on one of the major streamers and we have already a commitment from one of them. We may go in another direction. We're really trying to tighten this up very closely right now, and it will be supplemented by our own system of Kartoon Channel. Kartoon channel is ubiquitous. It's carried everywhere. We're on Apple TV, Apple iOS, Amazon Prime, Amazon Fire, Android mobile, Android TV, Comcast Cable, Cox Cable, Tubi, Roku, Pluto. Samsung Smart TV, hasn't been announced yet, but we have something coming up significant with Samsung. And it's ubiquitous. And that will be part of the strategy as well as YouTube because you need to have a YouTube strategy in the kids business today.

Yes, you certainly do. One near and dear to my heart. Now Andy, you talk about the platform of content you have, the brands that you have. Let's talk about the investment thesis here a little bit as well. So you've mentioned 2025 is really a transformative year. You just told us that the distribution component of the company is now profitable. You're bringing on Winnie-the-Pooh, Hundred Acre Wood, which is the most profitable kids series ever. Why is 2025 such a pivotal year for Kartoon Studios?

Well, a number of reasons. One, we've invested in the infrastructure. We've spent a lot of money building this infrastructure out to the place where it is today. Two, we have our key properties now that will be tent-pole drivers for us. And when they come to the marketplace, we'll be bringing on advances and guarantees and all of the things that drive the consumer products. Consumer products in the kids business, the kids entertainment business is unique. There's no other area of entertainment that has dual income stream. The content, everybody talks about the box office of a movie. But in the kids business, you've got the box office. When you see a big Disney movie, you know you're going to see in the stores as well, toys, video games, music, publishing, backpacks, sleepwear, school supplies, party goods, bedding, footwear, pretty much everything. When we did Strawberry Shortcake, which I made several years ago, we started with 1 single video. Five years later, that had progressed to a number of videos. We produced it for $300,000. Five years later, we had 300 licensees. We had 1,000 SKU products in the marketplace. In the kids business, if you have a strong property, you have a good show, it follows like night follows day. You're going to have all the consumer products. When I worked at Hanna-Barbera as a young writer, one of the first shows I worked on was the Flintstones. I'll never forget this because the Flintstones today, you can go to any supermarket, you're going to find Pebbles and Bamm-Bamm cereal. If you go to any drug store, you're still going to find Flintstone vitamins. If you have a successful brand in the kids business, they tend to be -- they go on forever and ever and ever. Look at Tom & Jerry, it was produced in 1939. Kids are discovering Tom and Jerry fresh every single day. So we think Winnie-the-Pooh is that type of property. We think the Stan Lee Universe is going to be that property. The first one we're rolling out is called The Excelsiors. Before Stan passed away, he told me he thought where the Avengers left off, that's where the Excelsiors will begin. We have some extraordinary creative people on this, Michael Uslan, who has been the executive producer of Batman and all of the Batman films from beginning to end. He's our show-runner driving this brand. There's a lot coming forth, and we believe that in 2025, all of this starts to hit critical mass and the company becomes profitable from all of the investment that we've made. By the way, I should say that pretty much everybody in the company is coming from the Walt Disney Company or Warner Bros. or Hasbro Toys or somewhere where they have been a part of strong success and brand building already.

It's incredible to hear that. Now the other component I wanted to talk about as I was reading for or preparing for this interview, reading through some of the press releases, the impact of artificial intelligence on your industry. So one line that stuck with me saying this, Winnie-the-Pooh production wouldn't have even been possible just a year ago had it not been for artificial intelligence AI. So can you talk to us a little bit about how your company, Kartoon Studios is really on the forefront of this technology?

Well, we've been engaged in this for a few years now. I reached out to NVIDIA the first time 2.5 years ago, spent a lot of time up there with them. They've been down here in L.A. And we designed -- well, first of all, if we were going to just do Winnie-the-Pooh the same way Disney did it, there'd be no point to do it because Disney made a fabulous product, and you can't fault it in any way at all. We had to do something different that we felt would be more attuned to how kids are consuming media and what they're seeing in these days. So with the advent of AI, we were able to design extraordinarily unique characters. All of the characters are made in a yarn-like look, the world of the 100-acre forest, the backgrounds, everything is yarn-like. It's really so beautiful and so unique. So we were able to do that. We're able to do it at a fraction of the cost of if we were to have only human animators doing these designs. So that's one is the look. Then is the nature of the production from the beginning to the end is going to be supported and costs will come down dramatically, which will enable us to get to profitability sooner because of the AI. Let me give you an example. When we dub our shows into different languages, normally, the dubbing cost is between $100 to $500 a minute. We dubbed them in different languages, of course, so we can take the shows around the world. Dubbing costs now with AI have been reduced from $100 to $500 to between $1 and $5 a minute. So 1% of the previous costs. And there are many examples of this throughout the production and ways that we will be able to use AI, and we already have started. We are not sharing the secret sauce quite yet, but we have an AI product that we call Stan Lee AI that we are using across our entire production platform.

Yes. Very exciting. We've got new technology. We've got profitable distribution, this banner brand in Winnie-the-Pooh coming online in 2025. So I know we've covered a lot here already today, Andy, but I wanted to give you an opportunity to close out and mention any potential catalysts or news items that we may have missed.

Well, we do have a few potential catalysts, but I'm not going to say them quite yet. We'll just say that along the world of AI in the world of crypto, there's things coming forth that we are going to be taking advantage of this year that we think will be part of the overall transformational story. I think you may know, but I produce every year for Berkshire Hathaway, the Annual Shareholder Meeting, an animated film starring Warren Buffett and for many years, Charlie Munger when he was alive as well. And I had the privilege to do a TV series for kids with Warren called the Secret Millionaires Club, starring him, where he taught lessons in financial literacy for kids. He placed himself in animation. He wrote the entire curriculum for the show. In doing so and having been close to Warren for many years, I've learned a lot. And one of the things I've learned is not to get disheartened when the stock market goes up or down, just to keep your eye on the ball because I've asked him many times different questions, and he always said, do your blocking and tackling, run your business, the stock market will always take care of itself in the end. We're building assets. We're building our cash flow. We've built our infrastructure. We've got great content coming into the market. We have an incredible team, highly pedigreed who've been to the promised land and know the road. We're very excited about where we're going this year, and we're looking forward to good things for our shareholders.

As are we. And one of the many words of wisdom from the great Warren Buffett. So Andy, we appreciate the time today. We look forward to continuing this story as new press releases come out. Congratulations to you and the team for what seems to be a very exciting and event-filled year that we're only just beginning. Feel free to subscribe. We'll see you back here tomorrow.