DHX Media / Wildbrain Bonds, Short Term, High Yield, Fixed Income Investment, Yielding Over 9.5% YTM

  • WildBrain Spark revenues jumped 37% year-over-year.
  • Consolidated revenues increased by 8% over the same quarter last year.
  • Adjusted EBITDA was up 13% over Q1 last year.
  • Cash flow from operations was $18.7 million versus a loss of $10.0 million last year.

This week, Durig’s weekly bond review takes another look at a Canadian company that focuses on children’s content and brands. You may not have heard of WildBrain (formerly DHX Media), but you may know some of its beloved characters, which includes the Peanuts gang, Teletubbies, Inspector Gadget and the Degrassi franchise. WildBrain released its first quarter results for fiscal year 2020 (three months ending September 30, 2019). The company’s wildly successful YouTube Channel, WildBrain Spark, has continued its outstanding growth from the past few quarters. Along with the great news on WildBrain Spark, there were other wins in the quarter as well (see bullets above).

(all currency quotes are in Canadian Dollars, CAD)

With new management, new original content (the Snoopy in Space series was released exclusively to Apple TV last fall), and the continued growth of the most popular kids channel on YouTube, WildBrain has stacked some impressive wins in its corner. With its solid performance in this most recent quarter, the company’s 2024 bonds, which are yielding around 10%, look to be a great portfolio addition for diversification and competitive yield-to-maturity.  Durig already holds a position in these 2024 bonds. Given WildBrain’s continuing successes, these bonds make an excellent candidate for additional weighting in Durig’s Fixed Income 2 (FX2) High Yield Managed Income Portfolio, the aggregated performance of which is shown below.

FY 2020 First Quarter Results

WildBrain has continued to build on its solid results posted for both its fourth quarter and full fiscal year 2019. Most impressive were the results from the company’s WildBrain Spark, the most popular kids channel on YouTube. In addition to that, the company released new, original content in Snoopy in Space, a series that debuted exclusively on Apple’s new streaming service, Apple TV. Here are some of WildBrain’s notable accomplishments in its first quarter.

  • Revenues increased 8% to $112.3 million in Q1 2020 versus $104.0 million in Q1 2019.
  • WildBrain Spark revenues were up 37% year-over-year to $22.1 million.
  • Cash flow from operations increased to $18.7 million in Q1 2020 as compared to negative cash flow of $10.0 million in Q1 2019.
  • Adjusted EBITDA rose to $19.6 million compared to $17.3 million in Q1 2019.
  • Gross margin increased to 44%, up from 41% a year ago.

Eric Ellenbogen, WildBrain’s CEO was pleased with the company’s first quarter performance:

“We continue to make good progress across our core initiatives, creating premium content, growing our ad-based video-on-demand business, AVOD, both in viewership and improving cash flow.” 

About WildBrain

WildBrain (formerly DHX Media Ltd. -TSX: DHX; NASDAQ: DHXM) is a global children’s content and brands company, recognized for such high-profile properties as PeanutsTeletubbies, Strawberry Shortcake, Caillou, Inspector Gadget, and the acclaimed Degrassi franchise. One of the world’s foremost producers of children’s shows, WildBrain owns the world’s largest independent library of children’s content, at 13,000 half-hours. It licenses its content to broadcasters and streaming services worldwide and generates royalties through its global consumer products program. Through its subsidiary, WildBrain Spark, the company operates one of the largest networks of children’s channels on YouTube. Headquartered in Canada, WildBrain has offices worldwide.

WildBrain Spark –  Continued Success

WildBrain Spark, WildBrain’s ad-supported video on demand (AVOD) is one of the largest networks of children’s channels on YouTube. The first quarter of fiscal year (FY) 2020 displayed the continued strength of this part of WildBrain’s business. In Q1,  Wildbrain Spark revenue grew by 37% over the previous year period. In addition, WildBrain Spark’s online audience grew by 66% to over 12 billion views in the quarter versus first quarter of fiscal year 2019. During Q1 2020, WildBrain Spark averaged more than 4 billion views per month. In terms of revenue, WildBrain Spark revenues rose 37% to 22.1 million as compared to $16.2 million in the first quarter of FY 2019.

WildBrain’s New Leader

WildBrain is changing more than just its name. Indeed, the company recently brought in a new Chief Executive Officer, someone with solid tenure in the entertainment business. Eric Ellenbogen, who has had top executive roles at both Marvel Enterprises and Dreamworks Animation, took over as Chief Executive Officer in September 2019. Now just a few months into his WildBrain lead role, Eric has already begun tackling some major issues, beginning with a management reorganization that is projected to result in an annual cost savings of $10 million. He is tenaciously committed to building WildBrain’s library of content, focused mainly on high-quality, original content that can be monetized over various delivery platforms.  A good example of this is the recently released Snoopy in Space. This series was developed, created, and produced by WildBrain’s creative team. It has received excellent reviews and debuted on Apple TV last fall.

Convertible Feature

These 2024 notes from DHX Media / WildBrain are convertible bonds. This means that they can be converted into common stock at a conversion price of $8 per share. In addition, DHX / WildBrain has the option to redeem these bonds early, any time after September 30, 2020 if the company’s stock market price is 135% of the conversion price, or $10.80 per share. Also, bondholders should be aware that DHX / WildBrain has the right to repay the principal of these notes through issuing common stock at a share price that is 95% of the stock’s current price on the redemption date. Over the past year, DHX Media / WildBrain stock has ranged from a low of $1.34 to a high of $2.90.

Interest Coverage and Liquidity

Interest coverage is an indication of a company’s ability to service its existing level of debt. For its most recent quarter, WildBrain had operating income (without the effect of non-cash amortization charges) of $13.1 million and interest charges of $11.7 million, for an interest coverage ratio of 1.1x. Also, investors should note that after the quarter end, the company executed a rights offering which resulted in enough capital to pay down its debt by $50 million.  In terms of liquidity, as of September 30, 2019, WildBrain had cash on hand of $39.6 million.

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The risk for investors is whether WildBrain can continue to monetize its content, not only on its WildBrain Spark channel, but also through other platforms, like traditional television programming and subscription services like Apple TV.  WildBrain Spark has been wildly successful and has grown robustly over the past year. Also, WildBrain’s original content, Snoopy in Space, was well received by Apple TV viewers and has the potential to create a new viewer base within a new generation of kids. The company is in the process of producing additional original content and should be able to monetize that as well. And with new leadership who is committed to making the company successful in the long-term, the company should continue on its current trajectory.

Generally, there is reduced risk for investors who invest in Durig Capital’s FX2 managed income portfolio due to its diversification across many bond issuers and industries, as compared to the purchase of individual bonds. Historically, the FX2 Portfolio has significantly outperformed when compared to portfolios where investors have chosen bonds individually. Durig currently holds this bond in its FX2 Portfolio.

In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments.  Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.

Summary and Conclusion

WildBrain has found the sweet spot with kids content. They realize that much of their library of content is somewhat timeless and can be monetized repeatedly and adapted to different cultures and countries. WildBrain Spark is watched by children all over the world and has been experiencing explosive growth over the past year. The company’s first Peanuts original content was well received and has set the bar for the production of additional original content for the company. New management is committed to focusing on long-term growth, not just wowing the markets quarter to quarter. This strategy should serve the company well over time. With Durig already holding a position in these 2024 bonds, these are an ideal candidate for additional weighting in Durig’s Fixed Income 2 (FX2) High Yield Managed Income Portfolio.

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Issuer: DHX Media / WildBrain
Ticker: DHX (TO)
Conversion Price: $8.00 / share (CAD)
Current Price (as of January 8, 2020): $1.50/share (CAD)
Coupon: 5.875%
Maturity: 09/30/2024
Pays: Semi-annually
Price: ~ 85.0
Yield to Maturity: ~ 9.75%

About Durig

Durig Capital provides investors with a specialized, transparent fiduciary service at a very low cost. Our FX2 (Discretionary Management) Portfolio over time has greatly outperformed our FX1 (Non-discretionary) Portfolio, giving significantly higher (at times double) the returns of FX1. Our professional service enables access to a broad spectrum of bond, high yields, and lower price points that are often found in less efficient markets, but not evidenced in many bond services.

Most of our client accounts are custodied in their own name at TD Ameritrade Institutional, a large discount service provider that is SPIC insured, or at Interactive Brokers. We have now started offering our highly successful FX2 service to clients of other Registered Investment Advisors through segregated accounts at TD Ameritrade. Please ask us to learn how this might work for you and your current advisor.

We track thousands of bond issues and their underlying fundamentals for months, sometimes years, before finding any that achieve or surpass the targeted criteria we have found to be successful.  Our main priority is to provide the best opportunities for our clients. Our bond reviews are first distributed to our clients, then published on our website and our free email newsletter, and lastly on the Internet and distributed to thousands of prospective clients and competitive firms. Bond selections may not be published if they have very limited availability or liquidity, or viewed as not being in the best interests of our clients. When high yielding bonds with improving fundamentals are acquired at lower costs, Durig Capital believes that investors will appreciate earning higher incomes with our superior high income, low cost, fiduciary services.

Disclosure: Durig Capital and certain clients may hold positions in DHX Media/Wildbrain September 2024 bonds.

Risk Disclaimer: Any content on this review should not be relied upon as advice or construed as providing recommendations of any kind. It is your responsibility to confirm and decide which trades investments to make. Invest with only with risk capital; that is, with money that, if lost, will not adversely impact your lifestyle and your ability to meet your financial obligations. Past results are no indication of future performance. In no event should the content of this correspondence be construed as an express or implied promise or guarantee.

Durig Capital is not responsible for any losses incurred as a result of this article Information provided in this correspondence is intended solely for informational purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.

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