DHX Media Ltd. Sinks on Dreadful Q3 Results

Family-friendly media company DHX Media (WLDB.F 0.57%) reported third-quarter earnings early Monday morning. Investors didn't see much to like in this business update, and the stock closed 19.7% lower at the end of the day.

Here's why.

DHX Media's third quarter by the numbers

This Nova Scotia-based business reports its results in Canadian dollars. The average exchange rates in this reporting period called for 0.79 U.S. dollar per Canadian dollar. In the year-ago period, a Canadian dollar was worth $0.76 in American coinage. That's a 5% year-over-year difference, with the Canadian dollar strengthening against its U.S. counterpart.

With that in mind, I will be talking about DHX's results in the original Canadian currency for the most part.

Data source: DHX Media. CAD = Canadian dollar.

In a prepared statement, CEO Michael Donovan admitted that these results were below his expectations.

"We have taken corrective steps to return to sustainable growth, including executive changes, additional streamlining of costs and a refocusing of our business to enhance margins and cash generation," Donovan said.

A plethora of big changes

The third quarter was an extremely busy period with lots and lots of important changes to manage.

• Donovan added the CEO title to his chairmanship of the board on Feb. 26, just two weeks after the second-quarter report. Ex-CEO Dana Landry waved farewell to "pursue other opportunities." At the same time, CFO Keith Abriel stepped down to make way for Doug Lamb as his successor.
• Two months later, DHX continued to revamp its management team with three new C-suite appointments and the departure of co-founder Steven DeNure. Two separate executives now fill his dual roles as COO and president.
• This Sunday, DHX announced a partnership with Sony's (SONY 0.31%) music entertainment division that gives the Japanese media giant 49% ownership of DHX's interests in Peanuts. This deal added 237 million CDN ($185 million) to DHX's coffers, taking some weight off the debt load that was created when the company spent $345 million on Peanuts and Strawberry Shortcake. The Sony agreement is expected to close in June.
• And alongside this earnings report, DHX decided to simplify its dual-class stock structure on the Toronto Stock Exchange, bundling its two stock classes together in a single class with a single ticker. Thanks to Canadian media regulations, this single bucket of stock will still be treated differently based on the shareholder's citizenship -- Canadians always get one vote per share but the portion of votes owned by non-Canadians can never exceed one-third of the total vote count.

All of these drastic changes are part of DHX Media's ongoing "strategic review," which might end up in a complete exit from the public markets. The additions of Peanuts and Strawberry Shortcake to DHX's content portfolio have failed to kick the company into a state of next-level growth. Interest payments and other financing expenses exceeded the company's selling, general, and administrative costs in the third quarter. That's a heavy anchor to carry, though the Sony deal should lighten it a bit.

Image source: Getty Images.

The upshot: DHX Media is struggling here

It's no surprise to see the company acting distracted by a wholesale cleanup of the executive suite. Even if Michael Donovan has served as the chairman of the board for many years, including an earlier stint as CEO, his supporting team can't claim similar levels of hands-on experience. And over the entire turnaround effort hangs that ominous strategic review tag, which could lead to many types of quick exits.

All things considered, there are more question marks than exclamation points around DHX Media right now. Uncertainty breeds sinking share prices, and that's what's going on here. The stock is trading 55% below its 52-week highs.

The stock is trading at all-time lows now and it will probably take several quarters of solid improvements to move it off this rock-bottom floor. Very patient turnaround gamblers might be interested in DHX Media at these levels, but it's a risky bet with no guaranteed payoff. I'm happy here on the sidelines.