Garth Russell - Investor Relations, KCSA Strategic Communications
Bruce R. Foster - Chief Financial Officer
Alfred R. Kahn - Chairman and Chief Executive Officer
4Kids Entertainment, Inc. (KDE) Q1 2010 Earnings Call May 5, 2010 11:00 AM ET
Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the 4Kids Entertainment first quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session.
(Operator Instructions) I would now like to turn the call over to Garth Russell of KCSA Strategic Communications. Please go ahead, sir.
Thank you Brandy and good morning, everyone. Welcome to 4Kids Entertainment first quarter 2010 conference call. Before we begin, I must state that the information contained in this conference call other than historical information consists of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may involve risks and uncertainties that could cause actual results to differ materially from those described in such statements.
Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors beyond the company’s control including general and economic conditions, consumer spending levels, competition from toy companies, motion picture studios and other licensing companies, the uncertainty of public response to the company’s properties and other factors that could cause actual results to differ materially from the company’s expectations.
At this time, I would like to now turn the call over to Bruce Foster, Chief Financial Officer of 4Kids Entertainment. Bruce, the floor is yours.
Bruce R. Foster
Thanks Garth and good morning. I’d like to spend the next few minutes with you reviewing the company’s first quarter of 2010 financial results. Revenues by reportable segment for the company as a whole are as follows: in the licensing segment, first quarter of 2010 revenue was approximately $3.3 million as compared to $5.6 million in 2009, a decrease of approximately $2.3 million.
These decreased revenues were primarily attributable to reduced licensing revenues on the Monster Jam and AKC Properties domestically of approximately $1.5 million and $0.4 million respectively as well as reduced licensing revenue on the Teenage Mutant Ninja Turtles property worldwide of approximately $0.4 million.
In the advertising, media, and broadcast segment, the first quarter of 2010 revenue was approximately $0.1 million as compared to $0.8 million in ’09, a decrease of approximately $0.7 million. This decrease was primarily attributable to a decline in rating which caused a decrease in the sale of network advertising time in the CW4Kids of approximately $0.3 million as well as decreased revenue from the sale of internet advertising on the company’s websites of approximately $0.4 million.
In the television and film distribution segment, first quarter of 2010 revenue was approximately $1 million as compared to $2.5 million in ’09, a decrease of approximately $1.5 million. This decrease was primarily resultant from decreased international broadcast sales from the Dinosaur King and Yu-Gi-Oh! television series of approximately $0.8 million and $0.2 million respectively.
Decreased contract revenue from the Huntick television series of approximately $0.1 million as well as decreased revenue from the Pokémon movie approximately $0.1 million, all partially offset by increased contract revenue from the Yu-Gi-Oh! television series of approximately $0.2 million.
In the trading card and games segment, there was substantially no revenue in the first quarter of 2010 as compared to $0.4 million in ’09, a decrease of approximately $0.4 million. This was primarily attributable to decreased retail sales which were negatively impacted by diminished popularity of the Chaotic property accompanied by the continued global economic downturn.
As a result, many retailers maintained reduced inventory levels and the company’s trading card and game distribution segment as negatively impacted by the resulting cutback by the company’s distributors on orders placed with TC Digital. Additionally, due to overall lack of demand for the Chaotic property, the company has granted allowances and promotional markdowns to these distributors equal to approximately $0.3 million for the three months ended March 31, 2010.
Turning to the expense side, selling, general, and administrative expenses decreased approximately $5 million or 41% to approximately $7.1 million for the three months ended March 31, 2010 when compared to the same period in ’09. The decrease was attributable to broad cost cutting initiatives implemented throughout the company including decreased personnel related costs of approximately $3.7 million, decreased advertising and marketing costs of approximately $1 million, and decreased international [selling] expenses of approximately $0.8 million.
Cost of sales of trading cards represents finished goods inventory relating to the Chaotic trading card game. Cost of sales decreased $0.1 million to approximately $0.4 million for the three months ended March 31, 2010 when compared to the same period in ’09. The decrease was primarily attributable to the overall decrease in trading card revenue.
Based on the diminished popularity of the Chaotic property, the company’s trading card and game distribution segment experienced a reduction in orders from TC Digital distributors.
Amortization of television and film costs for the first quarter of 2010 was approximately $1.4 million as compared to $1.2 million in ’09, an increase of approximately $0.2 million. The increase in amortization of film costs for the three months ended March 31, 2010 when compared to the same period in ’09 was primarily due to the increased amortization of the Chaotic television series offset by decreased amortization of the Teenage Mutant Ninja Turtles and Yu-Gi-Oh! television series.
Interest income decreased approximately $0.3 million to $0.1 million for the three months ended March 31, 2010 as compared to the same period in ’09, primarily as a result of lower cash balances and the company’s investments yielding lower interest rates than the prior period.
Income taxes – as a result of the valuation allowance, the company did not record a benefit from income taxes for the three months ended March 31, 2010 and 2009. As a result of the above mentioned items, the company had a net loss for the first quarter of 2010 of approximately $4.5 million as compared to a net loss of approximately $4.1 million in ’09.
Loss per share on a diluted basis was $0.34 per share for the first quarter of 2010 on approximately 13.4 million diluted shares as compared to a loss per share on a diluted basis of $0.31 per share for the same period in ’09 on approximately $13.2 million diluted shares. Under the new accounting guidance found in FAS 160 effective January 1, 2009 the net loss attributable to 4Kids Entertainment for the first quarter of 2010 was approximately $3.5 million or a loss per share on a diluted basis of $0.26 per share as compared to a loss of approximately $2 million or $0.15 per share in ’09.
Now turning to the balance sheet, as of March 31, 2010, the company’s cash and cash equivalents as well as short and long term investment balance was approximately $21 million. Of that total amount, the company had approximately $26.9 million in auction rate securities which have been written down in the balance sheet to approximately $11.7 million. Based on the company’s projected cash flows, current cash and cash equivalents and its overall cash position, the company expects to have adequate liquidity to fund its day to day operations through 2010.
Working capital consisting of current assets less current liabilities was approximately $4.1 million as of March 31, 2010 and approximately $4.8 million as of December 31, 2009. Now I’d like to turn the call over to our Chairman and CEO, Mr. Al Kahn.
Alfred R. Kahn
Thank you, Bruce. Good morning everyone. Before discussing the first quarter, I’d like to bring you up to speed on a new development late Friday night, May 7. The company received a non-binding indication of interest of a third party to acquire 4Kids for a price representing a premium over the recent closing prices for the company’s common stock. This non-binding indication would be subject to the satisfactory completion of due diligence and negotiation of definitive agreements during a requested exclusivity period.
A special committee of the Board of Directors formed in 2009 in connection with the valuation of strategic alternatives met yesterday and authorized the company’s management to provide the potential acquirer with the due diligence information requiring the company’s assets and operations and [inaudible] to enter into discussions with the potential acquirer regarding exclusivity and the acquirer’s indication of interest.
Given the timing of the delivery of the non-binding indication of interest, we have not yet spoken to the third party regarding the substance of the indication of interest. We will obviously be in contact with the third party later today in accordance with the decision of the Board. Let me suggest that obviously this is in continuum of what we had started over a year ago in terms of trying to increase shareholder value in any which way possible.
First quarter of 2010 was below expectations. We had budgeted for a loss of about $1.5 million in our seasonally weak first quarter instead of our first quarter 2010 loss totaled roughly $3.5 million. There were several contributors to the higher loss recognized in the first quarter of 2010. First while our merchandise licensing revenue came in on budget, our television and internet advertising revenue was less than projected.
The first quarter 2010 advertising revenue shortfall resulted from our need to provide some of our fourth quarter 2009 advertisers with additional commercials during the first quarter of 2010 at no charge. These audience deficiency units or make goods provided in the first quarter of 2010 reduce the amount of commercial inventory we have for sale thereby depressing the first quarter 2010 advertising revenue below our expectations.
Since the advertising market generally has strengthened in 2010, we expect television advertising and revenues to improve over the course of the year. We’ve also taken steps to increase the ratings and the awareness of our network. We will be rebranding our network completely for September of 2010/2011 series year with a complete rebrand and one of the initial new shows that will be a part of that rebrand is a new series called Dragon Ball Kai which right now is one of the top 5 shows in Japan.
Dragon Ball Kai is based on the Dragon Ball Z series which was broadcast for many years on Cartoon Network and generated solid ratings. We’ll also be adding some additional series as I mentioned to continue the rebranding and the name of the rebrand and other activities associated with that will be forthcoming later in the conference call.
Second, our first quarter 2010 results were negatively impacted by some additional film and television amortization expense resulting from collections during the first quarter of 2010 of Chaotic related revenue. Our first quarter from the television cost amortization roughly $1.3 million comprises more than 50% of the total budgeted 2010 amortization costs of our film and television library. Therefore, amortization charges in the subsequent quarters of 2010 will be substantially less than budgeted.
Please keep in mind that film and television amortization costs being expense represent for the most part cash outlays made by the company in previous years when producing the various television episodes. The $1.2 million amortization charge that hits the P&L but did not affect the company’s cash flow.
Third, certain delays in the production of additional animated content for the network resulted in a direct expensing during the first quarter of 2010 of certain 4Kids production costs. These expenses ordinarily would be amortized over a longer period as part of future amortization of film and television costs rather than being 100% expensed as incurred. In other words, we have signed up a number of new shows that are going to be localized but the problem has been that a number of the materials coming from our licensor have been delayed and those materials were the things necessary to start the dubbing and start the localization processes.
So those costs that would have been associated with that dubbing and localization would have been amortized as we’ve amortized other film and production costs. Because the people were on board ready to work on these projects, we had to take those expenses as a direct P&L hit as opposed to the amortization.
In summary, although the company reported a P&L loss of roughly $3.5 million during the first quarter of 2010, the actual cash loss from operations after backing out our $3.6 million tax refund was substantially less, totaling about $400,000. Although this is still not satisfactory, it’s indicative of the cost controls that we have put into place to reduce cash spending.
The company finished in the first quarter of 2010 of about $9.2 million of cash and $11.7 million of investments. Therefore, the first quarter of 2010 reported loss of $3.5 million did not by and large negatively impact the company’s liquidity. Obviously as I said as we move forward, those non-cash numbers should diminish substantially.
As I said, we expect amortization and SG&A expenses to decline further as we continue to reap the benefits of our restructuring and expense reductions. For example, we’ll be consolidating our New York offices at our 23rd Street office effective September 30, 2010 when our lease expires on our main office space at 58th and 6th Avenue. The expiration of our 58th Street lease will save the company more than $1.25 million annually in actual cash. This is an actual cash cost because obviously it’s a rent that we pay on a monthly basis.
As I mentioned, the company is also taking a variety of actions that should help our rebuilding and restructuring efforts and ultimately create additional shareholder value. First, the company is in the process of signing representation agreements for a variety of new properties. We will be showing at least 5 new properties at a licensing show in Las Vegas during early June and that obviously when all is said and done for 2010, we will be introducing a minimum of 12 new properties that we will start selling during 2010.
Of those new properties, 8 will be what we call children’s licenses that will fall under 4Kids Entertainment and 4 will fall under our subsidiary 4Sight Licensing Solutions which has basically been established to develop licenses that appeal to a broader spectrum of demographies and not necessarily children.
Of those 12, probably 5 of them will be introduced at a licensing show in June and the rest will be introduced as we go forward in the rest of 2010. We believe that we have a promising pipeline of new properties which will hopefully begin continuing to contribute to revenues during the second half of 2010 and during 2011. We’ve always been able to come up with hits every couple of years and now obviously if our track record is any indication of what we’ve been able to do, it’s time for us to now be able to bring out some things that we hope will generate some significant revenues.
Second, the company is in the process of renegotiating its deal of the CW. If concluded, the new deal will result in a lower minimum guarantee effective for the current broadcast season as well as a more favorable split of the advertising dollars between the company and the CW. This new deal should change the network from being roughly at breakeven or slightly profitable to being a potential source of substantial profits for the company.
Third, the company will be rebranding its 5 hour Saturday morning block on the CW network. We’ll be re-emphasizing bringing Japanese animated content to American audiences. If you look at the history of our business, we as a company have obviously made very significant amounts of money by bringing in some wonderful Japanese properties both from a television standpoint and also from a merchandising standpoint.
The television network will be rebranded called [Tunes I] which will be actually a Japanese bent block. If you think about other Japanese blocks that have been on American television, one of the most successful blocks of all time was Toonami on Cartoon Network. We would think that our advertisers who have seen our new branding are very excited about it and think that it’s actually going to be something that they will be very, very interested in participating in as an advertiser.
We are excited on acquiring the television broadcast rights to Dragon Ball Kai, a show which is a ratings winner in Japan. We also will be announcing some additional Japanese content which we believe will enhance our block and garner improved ratings as well as give us additional opportunities in the licensing arena.
Fourth, although our representation agreement with Montgomery and Company expired in early march 2010, the company is continuing to evaluate strategic alternatives including looking for a strategic partner for its business and as I mentioned, we do have something on the table that we will be investigating more fully in the next coming weeks.
Fifth, the nominating committee of the Board of Directors nominated two new candidates to serve on the Board of Directors and replace two of our directors who are retiring. The new candidate standing for election at our May 28 shareholders meeting are Duminda DeSilva of Prescott Capital and Wade Massad of Cleveland Capital. Both Prescott Capital and Cleveland Capital have been significant shareholders of 4Kids for many years. I believe these two gentlemen will be of great assistance going forward.
We’d also like to thank our retiring directors, Richard Block and Randy Rissman, for the years of service on the board. As I previously announced on March 23, 2010, the company received a notice from the New York Stock Exchange that resulted in substantial first quarter write offs of approximately $40 million. The company’s shareholder equity is below the minimum of $50 million of shareholder’s equity required to be maintained by the companies listed on the New York Stock Exchange.
We had about $36 million in equity at the end of that period which again would have put us under that $50 million. We were given the opportunity to give the New York Stock Exchange an outline how the company over the next 18 months intends to increase its shareholders’ equity to more than that $50 million. The New York Stock Exchange then evaluates such a plan and if accepted, permits the company to remain listed.
Unfortunately another area of listing criteria is of the company’s three day trading average market capitalization is below the $15 million minimum. There is no possibility of submitting a plan to the New York Stock Exchange to remedy this problem. The company’s market cap based on the average 30 day trading day price of the company shares has been around $14 million and change. Our shares may therefore be de-listed by the New York Stock Exchange. Since the company does not meet the listing requirements for NASDAQ or for the American stock exchange, if the company shares were de-listed from the New York Stock Exchange the company shares would trade on the pink sheets.
I believe that on a cash flow basis the smaller, leaner 4Kids business has more or less been stabilized. We have sufficient liquidity and capital to rebuild our business and it’s now up to us and the company to show results and to increase the amount of licensing revenue that we get from new properties.
I’m encouraged that our revenue on Yu-Gi-Oh! for the first quarter of 2010 was up more than 10% from the previous period last year. We were advised that Yu-Gi-Oh! trading card sales in the US are strong. We are working on a number of Yu-Gi-Oh! tenth anniversary initiatives to continue our support and promote the brand.
I also believe that our rebranding of the 5 hour block and the new deal with CW should result in the network becoming a profit center for the company. We have a promising new pipeline of properties as I mentioned. A minimum of 12 will be available to start selling and hopefully garnering some revenues. If we can get meaningful revenue contributions from just one or more of these new properties and generate profits from the network and internet advertising, the company should and will begin to return to profitability.
Again, I want to thank all the shareholders who have stood by the company during these incredibly difficult years and I now entertain any questions.
(Operator Instructions) There are no questions at this time.
Alfred R. Kahn
I want to thank you for your participation in this call. I think you can see that the company is operating on a number of initiatives to return this company to profitability or to find a strategic partner that will add shareholder value to the shareholders’ holdings. We will continue to keep you apprised of any resulting information in regards to any of these activities and would appreciate your continued support while we move to bring the company back to a solid footing which incorporates profitability and obviously shareholder value.
Thank you very much.
Thank you. This concludes today’s conference call. You may now disconnect.