Family friendly content studio DHX Media (DHXM +11.77%) reported first-quarter earnings on Tuesday morning. There seemed to be a surprise waiting around every corner in this report, pulling the financial results in many unexpected directions all at once.
Let's take a closer look.
DHX Media's first-quarter results: The raw numbers
|
Metric |
Q1 2019 |
Q1 2018 |
Year-Over-Year Change |
|---|---|---|---|
|
Revenue |
$104 million |
$98.6 million |
5.5% |
|
Net income attributable to DHX Media (loss) |
($2.4 million) |
$8.1 million |
N/A |
|
Diluted IFRS earnings per share |
($0.02) |
$0.06 |
N/A |
Data source: DHX Media. Reported in Canadian dollars, which weakened against the U.S. dollar by 3.8% over the last 12 months.
What happened with DHX Media this quarter?
- Accounting for currency exchange effects, DHX Media's top-line sales rose 1.5% to $79.1 million U.S. dollars. Any mention of dollar values below will refer to the original Canadian currency, unless otherwise noted.
- The company also adopted new accounting methods during this quarter. The new IFRS 15 policy moves content license payments away from lump sums up front and amortizes them over the life of each license. This accounting change reduced first-quarter revenue by $2.4 million, versus the IAS 18 procedure it replaced.
- The company reduced its selling, general, and administrative expenses by 3%. At the same time, direct content production costs increased 10% to $61 million, and the line item for development and integration rose by 19% to $1.9 million. The IFRS 15 policy change lowered DHX Media's production costs by $1.4 million, so the production budget's boost would be closer to 13% under constant accounting methods.
- A $229 million cash payment from Sony (SNE +1.01%), in return for a minority interest in the Peanuts brand, was immediately used to pay down $214 million of DHX Media's long-term debt. As a reminder, the $345 million (in U.S. dollars) Iconix buyout in 2017 was financed in large part by fresh long-term debt arrangements. The Sony deal took the edge off DHX's interest costs by reducing the interest-bearing debt load by 25% in the space of three months, but also reduced the company's effective Peanuts ownership from 80% to 49%.
Image source: DHX Media.
What management had to say
The WildBrain platform, which produces content for a bundle of popular kids' shows on YouTube, saw revenue rise 49% year over year to represent 15% of DHX Media's total sales. In the earnings call, CEO Michael Donovan leaned into the promise of WildBrain and his company's development efforts in that space. According to a transcript compiled by Seeking Alpha, Donovan said:
We have significantly underestimated the reach that WildBrain would get. We now know that worldwide, one-third of the approximately 830 million kids with access to YouTube watched at least one video on the WildBrain network in Q1. We can partner with brands that want to get quickly to markets, where in the past it would take two or three years to build the TV series. What we're finding, and these are the discussions we're having, is that we can fast-forward our kind of production program full on WildBrain in months -- weeks, even -- and have the new shows on to tie up to launches.
Looking ahead
This company is not known for providing detailed financial guidance. Instead, management painted its long-term goals in broad strokes, essentially underscoring what was said two months ago.
It's a three-part strategy, where DHX Media seeks to drive:
- more content development for WildBrain in order to keep the high growth going.
- more content and additional partner deals for premium brands like Peanuts, Polly Pocket, and Mega Man.
- cost cuts where possible, along with a stronger balance sheet.
As seen above, the company made strides against all three of these targets. All told, management hopes to drive the company's profit margins higher in 2019 and produce positive cash flows. For the record, DHX Media generated $2.4 million (again, Canadian) of free cash flows in fiscal year 2018.
