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

Okay, guys. So that's right, today's video, we're joined by Andy Heyward, the CEO; and Brian Parisi, the CFO of Kartoon Studios, going to get some more insight on their growth strategy trajectory in 2025. Gentlemen, thanks so much for making the time today.

Thank you.

Thank you.

Thank you for having us.

Can you talk to us a little bit about why right now you feel Kartoon Studios represents a great value proposition to investors?

I don't look at kind of what's our share price or what's our market cap. I look at what are the fundamentals of the business that's going to naturally drive that. And I look at it in 4 different areas. One is we have a diverse and robust division and business model of the company. We do the creative, we do the production, we distribute. We have a media buying business, and we have a very robust consumer products and licensing group on the back end. So we are across all of those divisions. And we're in a very durable kids animation market. So we sit, I think, in a very great sweet spot. And again, we're across all those different sort of disciplines that we can start to monetize across those over time. That's number one. Two is we have tremendous upside from these projects. Winnie-the-Pooh, Stan Lee, we're doing a project called Andrew the Big BIG Unicorn with our Mainframe Studio up in Canada, which is brand-new IP that we're excited about. And just like if you look at a Disney or a Warner, if they have a couple of big hits in a year for them from an IP perspective, that's great. It might move the needle a little bit, but we're a small-cap company. If we get any of these to hit in any material way, we're talking massive upside to revenue, massive upside to cash flow and net income, and we're going to see that in the stock price. But if we execute right, the rest will take care of itself. And then the third thing I look at is really the discipline around the financials. And again, we've seen the trajectory in '24 and into '25. So we are doing all the right things. We need to stay disciplined and focused on our ability to do that. And really, the fourth thing we look at in terms of why we're a good investment is we have such a great management team here. I realized that when I came on and I met with Andy and the team here in late '23 when I started, I realized immediately that the pedigree, the experience and the knowledge of this team is world-class. So our ability to really execute on the plan is wildly derisked because we have the right people in the right place to really execute.

Now Andy, I know we had you on the program recently talking about Winnie-the-Pooh. Why are you guys so bullish for the upcoming year here?

It's hard not to be excited about Winnie-the-Pooh. We started investing in this almost 2 years ago, and it's going to be coming to the marketplace this year. Think about this property, it's the biggest children's preschool property of all time. It eclipses them all. They did nearly $80 billion worth of sales on this brand. Historically, it's -- there's nothing like it. It's been bigger than Star Wars, bigger than Harry Potter, bigger than The Avengers. So I've been in the kids business decades. I've never seen a team like this. We have Linda Woolverton. Linda Woolverton wrote The Lion King. She wrote Beauty and the Beast. She wrote Maleficent. She did Alice in Wonderland. She's our Executive Producer. We have our showrunner, Elise Allen. She did all the Barbies. She's done work for Jim Henson, and she's just a powerhouse in her own right. And then we have John Rivoli as our Creative Director, who has done the designs for, oh my goodness, Harry Potter, SpongeBob SquarePants, Batman, Looney Tunes. He put all of these consumer products together, programs. So when you think about that, you put this team together, you've got this incredibly successful property, came off copyright, as we know. At the same time, to protect ourselves, we were able to acquire 2 very valuable trademarks, Winnie and Friends and the Hundred Acre Wood. So we think it's going to be just a smash, and we're very enthusiastic about where it's going.

Phenomenal. Now you can see in the background there the very interesting unique characters featured in the new Winnie-the-Pooh series, the yarn-based look. I know you talked about this 3-pillar strategy and approach. Can you guys build out on that a little bit and why you think this is such a unique addition to the current landscape, I guess, for children's entertainment?

This is an unusual look. It was sort of a combination of hand drawing and CGI and AI-developed characters to have this yarn-based look. It's very original. Nobody has seen or done anything like this before. It translates into consumer products, and we're going to see that as a big part of our business. And then we're just getting into the characters in a much deeper, let's say, the neurodiversity of these characters. It's about friendship, it's about family, it's about kindness, it's about love, it's about loyalty. It's just got so many wonderful attributes that we're just very bullish on what this property is going to do.

I know you are planning the premiere in December for the series. Is that still the targeted launch date?

We're going to do a launch on Christmas Eve. It's not going to be the Christmas movie, though. We'll talk about it more as time gets closer, but that will be the 100-year anniversary of the first publication of Winnie-the-Pooh.

Yes, looking forward to it. Now Winnie-the-Pooh is obviously very exciting, a big catalyst for the company, but you've got a lot more under the hood. I know Stan Lee's portfolio, The Excelsiors, is another big one on the agenda this year. Can you talk to us a little bit about the plans for the IP or intellectual property under that asset?

Yes. Well, as you know, we've had this developed through Michael Uslan, who is a very close collaborator of Stan and, in his own right, is a very highly respected creator and producer. He did all the Batman movies, every single one. He did all the Batman animated shows, every single one. He was executive producer on them and the vision behind them all. So he's been developing this, and we're very excited where it's going. It's the largest group of characters that Stan Lee ever did. He said to me before he passed away, where The Avengers leaves off, that's where The Excelsiors is going to begin.

So I know you recently reported fiscal year and Q4 results. Are you able to walk us through the top line or highlight numbers there?

So we had a really very good year and a very good quarter in 2024. And we really finished the year strong. We had a revenue growth of 7% over prior quarter. And if you look at full year '24 versus full year '23, our costs were reduced by 37%. And then that, coupled with the revenue growth, we actually reduced our losses by over 50%. And that's millions and millions and millions of dollars that we are saving to the bottom line. So it's very impactful for our business. Now as good as that news is, though, the most important thing for us, and we talked about it a lot throughout '24, is the trend. Now we've been talking a lot about the recovery of the business, the recovery of the industry, and we saw that in '24. Our revenue improved every quarter in '24, and our losses got smaller and smaller. And we improved that line in the overall operations very effectively throughout the year. And if you squint a little bit more into the numbers, you'll find out that we started moving a lot of our divisions to profitability. What we saw in 2024 is our Beacon Media division turn to profitability, which was a great feat from where they were in '23, and we have some really great ideas and expectations for them going into 2025.

In your mind, what is different about 2025 compared to prior years?

Well, look, I think it's everything we just talked about in terms of the trend. And the trend is so important for us because what we saw in '24 was this constant growth to get to '25. Now we didn't mention that our production unit, Mainframe Studios, was profitable in '24 because they weren't, but they're getting there. And they're going to really catapult us to a very, very profitable 2025. They're going to be the engine that's going to help us do that. The trend line that we see and that we saw in 2024 is going to continue in '25. And I could say that our revenue is going to grow by double-digit growth. I mean we're effectively a start-up company. We're kind of an emerging start-up company. Most of the investment we made -- and when we started to grow is in '21 and '22, that's 2 or 3 years ago. So yes, we did absolutely incur losses in those years. We did absolutely incur some negative cash flow because we are investing in the business. And really, we're back, and we've recovered from a difficult '23 and early 2024.

Well, I would add to that, if I may, that Mainframe, as Brian said, how that's going to drive revenues for this year, they have 90% of their revenues in 2025 already contracted and significant visibility into '26, which we think will be bigger than '25.

I know Kartoon Studios raised a considerable amount of money recently or over the past few quarters. This obviously leads to dilution. And as a retail investor, a lot of times very sensitive to that word or that topic. Can you talk to us a little bit about the strategy here and how this funding is going to look going forward?

Yes, it is dilutive, but the reward is going to be much greater down the road. We don't have any long-term debt on the books, and not having a debt service to deal with every month or every quarter is extremely valuable to us from a cash flow perspective and a financial results perspective. So -- and we rely on the equity markets to raise capital. And this last raise we did is -- the whole purpose of it was to get us and kind of bridge us to profitability that we're going to achieve in 2025. So we did it in late December, I mean it's right before Christmas. And we raised enough capital, again, to bridge us to where the business has already turned around, and it will take us to profitability to where we're not going to need to go back to the capital markets any further.

I also want to just -- if I can add on to what Brian said in your question about dilution, of course, dilution is an issue for everybody. I think I'm personally the largest shareholder, so I suffer the most dilution. But when we do dilution, when we issue new shares, we're doing so because we are doing -- using the proceeds of that either to acquire something that is accretive because of its own earnings or we are investing in the company to make the company more valuable than the dilution that we would be otherwise incurring from the issuance of those shares.

Andy, Brian, this has been very informative. Obviously, a lot going on this year. We've talked about the portfolio, the distribution, obviously, the talent you have at Kartoon Studios. You guys, if you have any questions for the leadership team that we weren't able to get to today, feel free to leave them in the comment section below. Hit the like button, feel free to subscribe. Andy, Brian, thank you so much for your time. We look forward to having you back soon.

Thank you, Bryce.

Thank you.