Mr. Eric Ellenbogen reports
WILDBRAIN REPORTS Q4 AND FULL YEAR FISCAL 2020 RESULTS
Wildbrain Ltd. has released its fourth-quarter and year-end results for the period ended June 30, 2020.
Eric Ellenbogen, Wildbrain chief executive officer and vice-chair, said: "Even in the face of continuing economic uncertainties, our results for fiscal 2020 reflect strong demand for our content, as well as the endurance of our television and consumer products businesses. Our studio is now in full production on new Peanuts,
Johnny Test, and Go, Dog. Go! content for Apple TV Plus, Netflix and DreamWorks, respectively, contributing to a 46-per-cent increase in [fourth-quarter] production revenue. Additional premium projects are in development, including an original animated Green Hornet series with acclaimed filmmaker Kevin Smith. While we expect market pressures to persist in coming quarters, in recent weeks we've started to see modest improvements in advertising rates and revenue at Wildbrain Spark, following declines precipitated by changes at YouTube and COVID-19 impacting global advertising. To fully monetize Wildbrain Spark's extensive viewership, we're building our direct ad sales team to better access the $4.5-billion (U.S.) spent annually in global kids' advertising, and tap into the more traditional and very large branded segment of this market. Our incredible reach and engagement present a compelling solution to brands as they seek to reach families in a safe and trusted environment."
Mr. Ellenbogen continued: "Over the last year, we've made great strides in realigning operations, and intensifying our focus on creativity, digital media and brands. We're continuing to invest in these areas to unlock the long-term earnings potential of our assets and [intellectual property]. And in fiscal 2021, we're expecting to see returns on those investments in our key brands and the monetization of the large viewership on Wildbrain Spark that's drawn to our quality, kid-safe curated content."
Aaron Ames, chief financial officer of Wildbrain, added: "In fiscal 2020, we improved our financial position. By implementing our disciplined investment strategy related to our content production requiring less cash outlay, as well as better management of working capital, we increased free cash flow by 160 per cent to $27.1-million. We also took decisive actions to reduce operating costs to offset lower revenue in certain parts of our business, moderating the impact of COVID-19 on adjusted [earnings before interest, taxes, depreciation and amortization]. During the year, we paid down debt by $58-million, and also secured $25-million in growth capital to fund accretive opportunities and invest across the company. While we remain vigilant on managing our costs, we will continue to invest responsibly in initiatives to grow our business for the long term."
Q4 2020 performance -- executing on priorities
Grow brands and build awareness on Wildbrain Spark:
- Wildbrain Spark's on-line audience increased by 24 per cent to over 11.6 billion views in the quarter versus Q4 2019. More than 72.1 billion minutes of videos were watched, up 55 per cent from Q4 2019.
- Fiscal 2020 viewership increased 35 per cent to 43.9 billion views versus fiscal 2019. More than 239.6 billion minutes of videos were watched on the company's AVOD (advertising video-on-demand) network in fiscal 2020, up 45 per cent from the year prior.
Create premium kids' content to drive franchise brands:
- Grew production slate with higher-margin, proprietary projects as evidenced by a 46-per-cent increase in production revenue to $26.3-million versus Q4 2019;
- Premium original productions under way include more new Peanuts content for Apple TV Plus, a new Johnny Test global exclusive for Netflix and a co-production with DreamWorks on Go, Dog. Go!;
- New seasons of Fireman Sam and Polly Pocket in the works supporting the company's partner brands with Mattel, where it shares in merchandising royalties. In fiscal 2020, consumer products revenue derived from such brand partnerships increased 14 per cent versus a year ago.
Improve cash flow and balance sheet:
- Positive free cash flow of $9.3-million in Q4 2020 versus free cash flow of $4.1-million in Q4 2019. Fiscal 2020 positive free cash flow of $27.1-million versus free cash flow of $10.4-million in fiscal 2019;
- Net leverage ratio (3) was 5.4 times at June 30, 2020, versus 5.92 times at June 30, 2019.
In fiscal 2021, the company will continue to create premium kids' content with priorities focused on growing key brands, monetizing its large audience on Wildbrain Spark viewership, and improving cash flow and the balance sheet.
(in millions of dollars)
Three months ended June 30, Year ended June 30,
2020 2019 2020 2019
Revenue $92.9 $108.8 $425.6 $439.8
Gross margin $39.6 $48.0 $187.8 $186.8
Gross margin (%) 43% 44% 44% 42%
Adjusted EBITDA attributable to Wildbrain $18.7 $20.2 $81.8 $79.6
Net income (loss) attributable to Wildbrain $4.0 $(62.8) $(236.0) $(101.5)
Basic earnings (loss) per share $0.02 $(0.47) $(1.51) $(0.75)
Free cash flow $9.3 $4.1 $27.1 $10.4
Q4 2020 revenue was $92.9-million compared with $108.8-million in the same prior-year quarter. The decrease was primarily driven by declines at Wildbrain Spark, resulting from changes in "made for kids" content policy made by YouTube and the negative advertising impacts of COVID-19, as well as consumer-products-owned revenue, which was also impacted by COVID-19. These declines were partially offset by higher production revenue. Fiscal 2020 revenue was down 3 per cent to $425.6-million versus $439.8-million in fiscal 2019, primarily due to decreases at Wildbrain Spark and in the company's consumer-products-owned business.
Production revenue increased 46 per cent to $26.3-million in Q4 2020 versus $18.0-million in Q4 2019, driven primarily by premium proprietary projects, including new content for Peanuts, Go, Dog. Go!, and Johnny Test, which are ramping up to full run rate. Fiscal 2020 production revenue rose to $86.1-million versus $84-million in the same prior-year period.
In Q4 2020, distribution revenue (excluding Wildbrain Spark) was $13.4-million compared with $16.6-million a year ago, indicative of the fluctuations the company sees in revenue quarter by quarter due to the timing of deals. Fiscal 2020 distribution revenue (excluding Wildbrain Spark) remained steady at $59.2-million compared with $59.8-million in the same prior-year period.
Advertising pressures from changes on YouTube, implemented in January, 2020, and from the onset of COVID-19 in March, 2020, contributed to a 64-per-cent decline in Wildbrain Spark revenue in Q4 2020 to $6.5-million versus Q4 2019. The company expects a recovery in advertising as the COVID-19 pandemic begins to wane. In response, the company is reducing costs and reallocating resources to growth areas, including direct ad sales and data analytics. As audience engagement continues to climb, the company sees considerable opportunities to monetize the large and growing audience on its AVOD network. In Q4 2020, Wildbrain Spark reached 11.6 billion views, up 24 per cent from the prior year. More than 72.1 billion minutes of videos were watched on the company's AVOD network in Q4 2020, up 55 per cent from the prior-year quarter. In fiscal 2020, Wildbrain Spark's revenue was $62.3-million versus $69.0-million in the same prior-year period and continued to contribute to overall EBITDA.
Consumer-products-owned revenue was $29-million in Q4 2020 versus $38.6-million in Q4 2019. For fiscal 2020, revenue declined 4 per cent to $154-million compared with a year ago. The declines in both the current quarter and full year were due to the disruption in the global retail sector caused by COVID-19 and the expiry of the MetLife contract for Peanuts in December, 2019. Normalizing for MetLife, revenue declined by 17 per cent in Q4 2020 and increased slightly in fiscal 2020 versus the same prior-year periods.
Gross margin was 43 per cent in Q4 2020 versus 44 per cent in Q4 2019. Fiscal 2020 gross margin increased to 44 per cent compared with 42 per cent the year prior. Gross margin for fiscal 2020 was positively impacted by IFRS (international financial reporting standards) 162 and growth in production revenue derived from a growing slate of higher-margin, proprietary projects.
During Q4 2020, the company completed its previously stated reorganization initiatives and expensed approximately $10.9-million in one-time costs for fiscal 2020. This resulted in annual estimated savings of $10-million, the majority of which were redeployed back into creative, the AVOD business and brands.
Positive free cash flow for q4 2020 increased to $9.3-million, compared with free cash flow of $4.1-million in Q4 2019. In fiscal 2020, the company generated positive free cash flow of $27.1-million versus free cash flow of $10.4-million in fiscal 2019. The period-over-period increases were driven by lower cash outlay due to a targeted production slate and timing of working capital, including higher collection of tax credits and trade receivables in fiscal 2020.
Adjusted EBITDA was $18.7-million in Q4 2020 compared with $20.2-million in Q4 2019. The adoption of IFRS 162 positively impacted adjusted EBITDA by $2-million in Q4 2020. Normalizing for this impact, adjusted EBITDA declined $3.4-million compared with Q4 2019. Fiscal 2020 adjusted EBITDA was $81.8-million compared with $79.6-million in fiscal 2019. In fiscal 2020, IFRS 162 positively impacted adjusted EBITDA by $8-million while the first quarter of fiscal 2019 benefited from $1.3-million related to a higher ownership stake in Peanuts for part of that quarter (4). Normalizing for these items, adjusted EBITDA declined by $4.5-million in fiscal 2020 versus the year prior. Early mitigating actions to reduce operating costs together with government wage subsidies have helped to moderate the impact of COVID-19 on adjusted EBITDA.
Q4 2020 saw a net income of $4-million versus a net loss of $62.8-million in the same quarter last year. This increase was largely driven by lower selling, general and administrative expenses, lower non-cash impairment charges, and a higher non-cash foreign exchange gain in Q4 2020 compared with Q4 2019. In fiscal 2020, net loss was $236-million versus a net loss of $101.5-million in the same period a year ago. The higher net loss in the full year was primarily due to higher non-cash impairment charges resulting from the $184.5-million goodwill impairment1 recorded in third quarter 2020, which was taken due to the impact on advertising revenue from YouTube's changes to targeted ads as well as potential impacts of global economic uncertainties from COVID-19.
In Q4 2020, the company completed a $25-million financing with Fine Capital Partners LP, the company's largest shareholder. Fine Capital subscribed for an initial $16.5-million of exchangeable debentures convertible to variable voting shares of Wildbrain at $1.45 per variable voting share. The remainder of the funds can be drawn down at the company's discretion prior to maturity on June 24, 2023. Concurrently, the company issued Fine Capital five-year warrants to purchase five million variable voting shares at a price of $1.45 per variable voting share, which vest immediately. The financing structure does not increase the company's net leverage ratio (3) for covenant purposes under its term facility. The net proceeds will be used to finance accretive growth investments across Wildbrain, especially in its AVOD business.
(1) The non-cash goodwill impairment charge of $184.5-million excludes goodwill held in the company's Peanuts and television cash-generating units (CGUs).
(2) The company implemented the IFRS 16 accounting standard in first quarter 2020, which introduced a single accounting model, and eliminated the distinction between operating and finance leases for lessees. The adoption of IFRS 16 affected adjusted EBITDA and net income. Adjusted EBITDA was positively impacted by $8-million and $2-million in fiscal 2020 and Q4 2020, respectively, due to the adoption of IFRS 16. See note 3 in the fiscal 2020 consolidated financial statements.
(3) Net debt includes long-term debt and bank indebtedness less cash, and excludes interim production financing. Net leverage ratio as discussed in this press release is a reference to the total net leverage ratio as defined in the company's senior secured credit agreement available on SEDAR.
(4) On July 23, 2018, the company sold a stake in Peanuts, reducing its ownership from 80 per cent to 41 per cent in the franchise. As a result of the sale, Q1 2019 adjusted EBITDA attributable to Wildbrain included 23 days of its 80-per-cent ownership and 69 days of its 41-per-cent stake.
(5) Free cash flow, gross margin, adjusted EBITDA and adjusted EBITDA attributable to Wildbrain are non-generally accepted accounting principles financial measures. Free cash flow is defined as operating cash flow less distributions to non-controlling interests, changes in interim production financing and repayments of lease liabilities. Gross margin means revenue less direct production costs, and expense of film and television programs produced (per the financial statements). Adjusted EBITDA represents income of the company before amortization, finance income (expense), taxes, reorganization and development expenses, impairments, equity-settled share-based compensation expense, and adjustments for other identified charges. Adjusted EBITDA attributable to Wildbrain means adjusted EBITDA excluding the portion of adjusted EBITDA attributable to non-controlling interests. Further details on the definitions of and reconciliation to free cash flow, gross margin, adjusted EBITDA and adjusted EBITDA attributable to Wildbrain can be found in the non-GAAP financial measures section of the company's fiscal 2020 MD&A.
Q4 and fiscal 2020 conference call
Wildbrain will hold a conference call on Sept. 23, 2020, at 10 a.m. ET to discuss the results.
To listen, call 1-888-231-8191 toll-free or 1-647-427-7450 internationally, and reference conference ID 3474779. Please allow 10 minutes to be connected to the conference call. Replay will be available after the call on 1-855-859-2056 or 1-416-849-0833, under passcode 3474779, until Sept. 30, 2020.
The audio and transcript will also be archived on the company's website approximately two days after the event.
About Wildbrain Ltd.
Wildbrain makes great content for kids and families. With approximately 13,000 half-hours of filmed entertainment in its library, one of the world's most extensive, Wildbrain is home to such brands as Peanuts, Teletubbies, Strawberry Shortcake, Caillou, Inspector Gadget, Johnny Test
and Degrassi. The company's shows are seen in more than 150 countries on over 500 telecasters and streaming platforms. The company's AVOD business, Wildbrain Spark, offers one of the largest networks of kids' channels on YouTube, with over 168 million subscribers. The company also licenses consumer products and location-based entertainment in every major territory for its own properties as well for its clients and content partners. The company's television group owns and operates four family entertainment channels that are among the most viewed in Canada. Wildbrain is headquartered in Canada with offices worldwide and trades on the Toronto Stock Exchange (WILD).
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