DHX Media Ltd. (DHXMF) F2Q 2016 Earnings Conference Call February 16, 2016 8:00 AM ET
David Regan - EVP, Strategic and Corporate Development
Michael Donovan - Executive Chairman
Dana Landry - CEO
Keith Abriel - CFO
Deepak Kaushal - GMP Securities
Robert Peters - Credit Suisse
Rob Goff - Euro Pacific Canada
Bentley Cross - TD Securities
Good morning, my name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the DHX Media Second Quarter Results 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]. Thank you.
Executive Vice President, Strategic and Corporate Development, David Regan, you may begin your conference.
Thank you, operator, and thank you everyone for joining this morning. On the call with us today are Michael Donovan, our Executive Chairman; Dana Landry, our Chief Executive Officer; and Keith Abriel, our Chief Financial Officer. Also with us today in the room is Ms. Nancy [Chantomater], whom I am pleased to report has joined us as director of investor relations. Nancy is a 25 year veteran and we are very high happy to welcome her on to our team.
Before we proceed though, we have some standard cautionary statements. The matters discussed in this call include forward-looking statements regarding the business strategies of DHX, the forward financial and operating performance of DHX and its subsidiaries, the timing for implementation of DHX's business strategies and the markets and industries in which DHX operates. Such statements are based on information currently available and subject to a number of risks and uncertainties. Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors, including the Risk Factors set out in the company's MD&A and the company's annual information form, which also form part of the company’s annual report on Form 40-F.
With that, I will now turn it over to our Executive Chairman, Michael Donovan to kick things off. Michael.
Thank you, David, and thanks everyone for dialing in today. We’re very pleased to announce our 7th consecutive quarter of growth in both revenues and adjusted EBITDA on a quarter-over-quarter basis. We’ve posted double digit growth across key metrics today and I’d like to congratulate the team on the strong numbers.
These results underscore and I believe prove our differentiated strategy of focusing on enduring kids content in the transformational digital environment that is now materially changing how content is delivered and being experienced throughout the world.
In the second quarter, we signed two very significant partnerships; first, we announced a content pact with DreamWorks Animation to co-produce a 130 half hours of original animated content for DHX Television and to license more than 1300 half hours of the digital DreamWorks content for DHX Television. This makes DHX Television effectively the exclusive linear broadcaster in Canada from many of DreamWorks top shows such as The Mr. Peabody and Sherman Show, All Hail King Julien, and The Croods as numerous others.
We are in proud to be in business with DreamWorks as the exclusive partner in Canada. Secondly, we announced in the quarter a partnership with Mattel to co-produce and distribute new episodic content for four of their top brands; Bob the Builder, Fireman Sam, Little People and Polly Pocket, and DHX would also distribute the back library for these brands and we are also proud to collaborate with Mattel on such tremendously powerful and enduring family brands.
I’ll turn the call now over to Dana.
Thank you Michael and thank you everyone for joining us this morning. We’re pleased today to be announcing such strong results in a never shifting media environment. This is the record Q2 for us, and also the second strongest quarter in the history of the company.
If you will indulge me, I’d like to take this opportunity to dip in to that history and provide a quick snapshot of the last 10 quarters. During that period going back to Q1 fiscal 2014, DHX has posted an average quarter-over-quarter revenue growth of 70% and an average EBITDA growth of 104%.
The growth reflected by these numbers is driven by our steadfast commitment to be a go-to-kids content company. Since the start of this calendar the markets have seen volatility that has left many observers puzzled. To paraphrase one analyst, there seems to be a certain amount of disconnect between pricing and fundamentals.
Many media companies have not been immune to this volatility and to the disruptive technologies that are reshaping our industry. And some have fallen short of the expectations in their earnings. I cannot speak for the other companies, but where DHX is concerned my response is that as illustrated by our strong numbers over the past 10 quarters, we are greatly benefiting from this disruption and these forces are fueling our exceptional growth.
To state it plainly, we are not a traditional media company. DHX is a next wave content company. We create and require high quality well renowned kids content. We license that content to broadcasters and VOD platforms around the world, and we leverage the option value of that content worldwide through merchandizing and licensing consumer products, gaming apps, and live events.
The issues faced today by traditional media companies such as court cutting competition for VOD services and declining advertising sales do touch us to a minimal degree in our Canadian TV business, but any of that downside is eclipsed by the enormous benefits we reap from the new environment created by the global proliferation of the VOD platform such as Netflix, Amazon, Hulu, YouTube and dozens of others.
If you want to understand DHX, I would encourage you not to dwell on the performance of the traditional media companies, while trying to compare us to them. We are unique, as pure a play a kids content company that you’re going to find throughout the globe.
To repeat, DHX is a next wave content company with global growth profile and we are built for the future.
With that I would like to review some highlights for our Q2. Overall today’s represents organic growth and a revenue of 21%, above Q2 2015. This is again a testament to the exceptional and integrated platform we have built.
Revenue for the quarter was up 27% and adjusted EBITDA was up 16%. Net income came in at 11.7 million or a basic earnings per share of $0.09 up from $0.05 per share in Q2 2015. This represented a 6.1 million increase in absolute dollars over Q2 last year.
As mentioned, content creation is the corner stone of our business. In Q2, we added 92 half-hours of high quality content to our libraries, compared to 58 half-hours for Q2, 2015, representing quarter-over-quarter growth of 59%.
Global distribution of the content is equally important, and we are pleased to report 46% growth in our distribution revenues over Q2 2015. We will note that this was at the top end of management’s expectations.
Next, I would like to complement our CPOG team for their tremendous execution in our merchandizing and our licensing represented business, which came in well above the high end of management’s expectations again this quarter, showing a 130% increase over Q2 last year.
This was driven exceptional performance from Universal’s Despicable Me and Minions and by triple digit growth from nine additional represented brands. Keith will provide a closer look at the numbers shortly, I’d like to now talk about some recent deals and further growth drivers for our business.
Michael mentioned how proud we are that both DreamWorks Animation and Mattel have selected DHX to partner on their brands. As IP owners ourselves we understand that just how critical it is to have partners that inspire confidence.
Last year our studios delivered outstanding content to both of these studios. In the case of DreamWorks, our Vancouver studio delivered The Mr. Peabody and Sherman Show, which can now be enjoyed in Netflix and from Mattel our Halifax studio delivered Little People, which will soon be appearing on Sprout in the US and other channels internationally.
From these content arrangements, the relationships have now evolved. Going forward DHX will hold a significant financial stake in the IP for all the new content produced under the arrangement. That means revenue share across multiple revenue streams including production, distribution, consumer products, all of which we believe will drive significant growth for years to come.
In the case of Mattel, in addition to the revenue share for new IP, DHX has also become the global distributor for the back library of shows across the four Mattel brands. This instantly adds approximately 300 half-hours to our distribution library, which we expect to be accretive to our results in fiscal 2016 and beyond.
Such deals are not entered in to lightly. That DreamWorks Animation and Mattel chose to partner with DHX on their brands is in our view recognition by two industry leaders of our proven ability to develop, produce and distributed world class content.
Switching gears now, I want to talk a bit about toys and consumer products. I spoke earlier about leveraging the option value of content through merchandizing and licensing. This is something we are really excited about and must be focusing on since 2014, the time when we launched DHX brand, which our dedicated brand management and consumer products item.
The brand’s team unit have realized some great accomplishment so far, most notably the first wave of Teletubbies toys hit retailers in the UK in mid-January of this year. This is the first batch of new Teletubbies toys to enter the market in almost 20 years and it is a perfect example we are able to take an iconic show and leverage the optionality of the brand.
Since CBeebies has commissioned the new series in June 2014, we have signed more than 50 licensing deals for Teletubbies worldwide and they are more to come. The toys are in the UK is just the start of a variable flood the Teletubbies consumer products that’s been prepared for a global roll-up. By this time next year, in addition to playing with Teletubbies plush dolls, we expect kids around the world to be reading Teletubbies books, carrying Teletubbies backpacks, learning from Teletubbies electronics, and much, much more. Needless to say, we are excited about the potential for this brand.
Teletubbies premiered in the UK in November as CBeebies number one show. While it is still a bit early to share any methods around Teletubbies toy sales, what we can say is that we’re off to a very fast start.
In addition to two of our other preschool brands Twirlywoos and In The Night Gardens have now firmly established merchandising and licensing programs in the UK. Twirlywoos season one premiered on CBeebies in February 2015 and toys first hit UK stores in June. By December, Twirlywoos had entered the top 10 UK sales charts, and the brand was the 11th biggest preschool brand overall in the UK for 2015.
Five items of the toy line finished the year in the top 100 preschool chart. This is a tremendous result to achieve in only a six month timeframe.
The In The Night Garden has experienced a huge resurgence and is an extraordinary example of how an evergreen property can be rejuvenated and extended. Just to provide some context; in 2017, In The Night Garden will be celebrating its 10th anniversary. The show has been a long standing staple for preschoolers and parent co-viewing in the UK and has enjoyed expanded viewership because many parents now use it as a part of the children’s bed time routines, viewing it on smartphone and tablets throughout the world.
We acquired In The Night Garden alongside Teletubbies in September 2013, at which time the shows merchandizing and licensing potential was under represented in the market. Last year, our brands team devised the relaunch, they redesigned the packaging, the logo, built a new website and rolled out a new social media campaign, simultaneously working with the brand’s master toy partner Golden Bear that developed an expanded offering of new innovative toys. The result in the UK were outstanding.
In The Night Garden was the fifth best-selling preschool brand in the UK for 2015. The new In The Night Garden musical activity train was the UK’s third bestselling overall preschool toy, and 10 items from the toy line placed in the UK’s overall pre-school top 10 list last year.
We’ve spoken before about the power of evergreen brands; In The Night Garden is a fantastic example of how option value can be realized from such a property. As announced this January, we’ve renewed Golden Bear’s master toy license for this brand and anticipate the launch of even more new and exciting products this year including a new nursery line called In The Night Garden Baby.
Now I’d like to briefly touch on what we’re seeing as the next big potential growth opportunity. Mobile viewing and gaming apps; since 2010 the time spent per adult consuming media content on mobile each day in the US has increased from less than 30 minutes to almost three hours.
Younger consumers for instance in the UK meanwhile have increasingly access to mobile devices as well. Approximately 86% of UK two to six year olds have some form of access to a tablet type device such as an iPad, Samsung Galaxy or Kindle Fire, with approximately 15% currently owning one. And one-third of pre-schoolers watch VOD every week on mobile and tablet devices.
The overall mobile apps industry meaning everything across some two dozen categories from music to weather to books and beyond is projected to generate just over US $50 billion worldwide in revenues this year, and approximately 75 billion next year. Out of that, approximately 50% is projected to come from gaming and apps, and the rest from mobile viewing.
As content producers and IPO owners, mobile viewing and gaming is a category of great interest to us, representing a huge potential growth opportunity. We see this as the next wave for DHX. So this is what the future looks like at DHX; happy kids around the world from Canada to China, embracing adore toys and playing games on the DHX shows they love, shows they watch on their TVs or Mom’s smartphone or Dad’s tablet, shows produced in our studios by the very best creative talents we can find, shows that have evergreen qualities and the potential to appeal to generation after generations.
We go forward with tremendous optimism confident in our abilities to create real fast content that audiences love and to license that content to broadcaster and VOD services around the globe, and to commission and broadcast the content using our own channels, and to deliver toys and other products of content to adoring fans.
Call it a virtual circle, but please don’t call it traditional media. With that, I’ll turn the call to Keith.
Thank you Dana and thanks to everyone for dialing in today. Management is pleased to once again highlight very strong growth this quarter. Revenues are up 27% to 81.5 million this quarter from 64.3 million for Q2 2015. Adjusted EBITDA for the quarter was 27.8 million, up 3.9 million or 16% compared to Q2 2015.
Net income for the quarter was 11.7 million or $0.09 a share representing an increase of 6.1 million in absolute dollars over Q2 2015. The growth this quarter was led by record breaking product revenues, proprietary production came in at 20.7 million, which is 66% above Q2 2015 and producer and service fee revenues came in at 11.5 million, 74% over Q2 2015.
We added 92 half-hours to our library in Q2, of which 76 half-hours were for proprietary titles. This was above the high end of management’s previously announced expectation for the quarter and was a result of certain titles being delivered ahead of schedule. Management expect deliveries and revenues to track to the previously announced annual expectations.
Our distribution business also posted a very strong quarter, with revenues up 46% over Q2 2015 to 18.6 million from 12.8 million in Q2 2015. This quarter was driven by the continued proliferation of new digital customer, platforms and territories around the world and was at the top end of management’s quarterly pacing expectations.
As Dana mentioned, our merchandizing and licensing represented business also had a standout quarter, setting a record at 7.1 million in revenues up 130% over Q2 2015. This was also above the high end of management’s expectations.
On the merchandizing and licensing own side, with our live tours on hiatus for the quarter, Q2 revenues for M&L-owned decreased 34% to 4.3 million as compared to Q2 2015. However, excluding the live tour revenues, M&L-owned revenues were up 38%. DHX Television revenues came in at 18.8 million. And even though they reflect a 14% decrease compared to Q2 2015, they were at the high end of management’s quarterly expectations.
Gross margins for DHX Television meanwhile came in at 67% or 12.6 million, which were above management’s expectations for the quarter. It’s management’s view that this actual performance from DHX Television validates the recent rebranding of our channels and also validates the role of our Canadian TV business as a mechanism for commissioning new content and is part of our integrated content strategy.
Along with today’s strong overall results, management reconfirms its outlook for fiscal 2016, subject to a few minor adjustments to selected business units, which can be found in the company’s Q2 2016 MD&A.
Gross margin for Q2 2016 was 44.3 million, an increase of 18% or 6.8 million in absolute dollars over Q2 of 2015. The overall gross margin for Q2 2016 at 54% was towards the low end of management’s quarterly expectations, however this was due to positive factors driven by our integrated content strategy, such as higher than expected percentage of live action deliveries in our proprietary production business and higher percentage of new shows being licensed by our distribution arm.
Turning to SG&A expenses; SG&A expenses for Q2 2016 increased to 18.3 million or 24% over Q2 2015. This includes all SG&A associated with the Echo Bridge and Nerd Corp acquisitions and also reflects increased levels of SG&A associated with DHX brands and DHX distribution as management has continued to add resources in these key areas to take advantage of growth opportunities.
The Q2 SG&A includes 1.8 million in non-cash share based compensation compared to 1.0 million for Q2 2015. When adjusted, cash SG&A at 16.5 million was at the high end of management’s quarterly SG&A expectations. For further specifics on our Q2 2016 results, as well as additional information on management’s fiscal 2016 outlook and various other information including our reconciliation of GAAP and non-GAAP financial measures, I would refer you to the company’s 2016 Q2 MD&A which was posted on CEDAR and EDGAR this morning.
I’ll now turn it back to David for a summary of some recent developments and deals.
Thanks for the Keith. I’ll just touch on a couple of recent activities and then we’ll get to analyst questions. But of note, in China we continue to explore new relationships and potential business opportunities. Management has made a number of trips to China over the past few months, and while we cannot disclose any deals at this juncture, we feel positive about the discussions we’ve had with potential Chinese counterparts.
I can tell you that to date we have licensed 5000 half-hours of DHX content to Chinese video on demand services. So we are seeing very strong early appetites for our shows. We’re also seeing great interest in our content globally, and I want to touch three such examples; endangered species is one of the superb animated series that came in to our library with our Nerd Corp. acquisitions.
We recently announced seven deals with broadcaster and video on demand services for this show. Most notably CBBC has picked up the show for broadcast in the UK and Turner Broadcasting has licensed it for its Cartoon Network and Boomerang channels in Latin America. Additionally, the show has been licensed by Gulli Russia for its Univerkids channel, Plus Plus Channel in Ukraine, Zoom in Israel, Daekyo Kids TV in South Korea and iflix in Southeast Asia.
Backstage is an original DHX television series that we’re very excited about. This is a scripted series shot docudrama-style like the Next Step, lots of singing, music and dancing. It follows the lives of a group of teens at the high school for the performing arts. The show will be premiering on Family Channel this spring, and outside of Canada we have licensed it to Disney Channel for the US, UK, Europe, the Middle East, Africa, Australia and New Zealand.
This is the third DHX Television original series to have been licensed by Disney Channel in the last six months. So needless to say we’re quite excited that these shows are garnering such interest worldwide and clearly have a great quality and we expect to be well received by our audiences.
Finally, Armageddon is a show that we’re thrilled to be making with the creators of Robot Wars. In Armageddon, teams of kids compete with each other to fly radio controlled drones in a series of competition and challenges inside a huge arena.
The first two seasons are now being made with producer CBBC who will broadcast the show in the UK. DHX Televisions’ Family Chrgd will carry in Canada. DHX handles global distribution and licensing for Armageddon and we think it has tremendous potential as a global brand.
I will open up the lines for questions from analysts, operator.
[Operator Instructions] our first question comes from the line of [Sheraf Turpin] with Canaccord. Your line is open.
I wanted to start off with CPLG, clearly a solid quarter, and when I look at the annual guidance number, I see the biggest change in this line item as well. Can you just help us break out the FX impact specifically in this line item, and is there any upside on the annual targets because of FX going forward?
Yeah, thanks for that. We’ve been continuously impressed, a couple of years ago I’ll remind the callers that we did a bit of a look in to the CPLG business and really did a strategic review and focused clearly on those key relationships and strategic properties and that’s sort of paying dividends. And so really it’s across all as I mentioned, I think there’s about 11 brands that are up triple digit growth over the previous year.
So that is definitely not all the FX, it’s hard to generally comment because these are very fluid relationships. But my stance would be about three quarter’s related to just pure business increase and a quarter would be related to FX. So as the Canadian dollars continues obviously there’ll be some tailwinds related to that. But really the focus is, our team is executing on a strategy which we set in place a couple of years ago and that’s really paying off.
And I just want to hear your views in the Mattel deal. It’s a clear endorsement to not just be a content creation ability, but also on the distribution side. In that context, can you give us your thoughts going forward? What are the kinds of different doors it will open similar deals with other content creators maybe? And from a modeling perspective, is there any one-time or otherwise cost related to the Mattel deal that we should be thinking about?
Okay, so there’s multiple questions there. I’ll try to remember them as we go through or maybe come back to you. So just as a general statement, the Mattel relationship is what I’ve been saying is sort of in my view the next leg of step function for DHX. Really gets us deep in to a new relationship with obviously the largest toy company in the world. Having access to their team for research, development and retail engagement is tremendous.
Mattel has businesses in a 150 countries, and so that’s access we would never be able to get. So that really just extends our brands potentially forward and obviously in existing brands that they have. On the second piece I would say is, yes its’ an absolute vote of confidence in our team. For quite a while, from an industry perspective we’ve been sort of moving up the ranks in terms of content creation and really we’re at the very top now and this is really a short in the arm for that.
So it could open many, many more doors. We’re having lots of phone calls come in as a result of it, and we look forward to new strategic partnerships. Really for us, it’s also focusing our strengths on content and utilizing our capacity to the best of our ability.
Obviously we can move some shows off that more of a service quality and in to shows that we own more signs of IP or more angles on to revenue growth, and obviously that is something that we’re looking forward to. I guess [Sherif] I got all the questions or is there any piece of it? About one time cost, there is enough front payment. I don’t think we will disclose that, but it’s below [three] years and it’s an investment for the life of the agreement.
There will be some probably modest SG&A pickup as a result of that, but we think that will be obviously accretive as I mentioned in my opening in 2016 and beyond.
Okay, that’s very helpful and the last one from my side. On the TV segment are there any update you can share around the Video affiliation grievance?
We have made a statement in the MD&A saying that we’ve agreed to what’s the wording we use Keith to all of the - we can’t comment on any specific deal obviously, but we’ve agreed to all material contracts that have been up for renewal within in the near term. So we’re locked and loaded and moving forward.
And the majority of the underlying economics are multi-year agreements.
Your next question comes from the line of Deepak Kaushal with GMP Securities. Your line is open.
Deepak Kaushal - GMP Securities
You reiterated your guidance for the year, and you presented a strong quarter in to December. Can you contrast what you’re hearing from customers from the fall versus what you’re hearing since January? You probably see a different macro environment, maybe you can tell us if there’s any difference in your discussions with customers or any caution on their part.
No, not all Deepak. I think what we’re seeing is, is we’re seeing where our growth is coming from the disrupted technologies, and all of them are continuing on unabated and certainly if you look at and that’s what it says in the example. We’ve seen that they’ve made announcements to go global very quickly and we know we are obviously well positioned to realize some organic growth there. We’ve also had a real tremendous uptick again in our YouTube business, we’ve got a real focused team that’s executing on the strategy there, and so we’re seeing upside there.
And as David said in his remarks, we’re also seeing the traditional linear channels like Disney that are also out there getting or looking for content that could pay for it and in some cases in the case of the Backstage and others are wining.
So what we’re seeing really is that, what we’ve seen in the past and other technological cycles where the capital comes in to the system and that capital causes disruption and then that moment where there hasn’t really been clear leaders although you could say Netflix is a clear leader than [Aspen]. In other categories there are many others that are coming on strong Amazon, Hulu and many other of course.
The linears or the traditionals are also stepping up and competing for market share. And so for us, as an IP owner, we are greatly benefiting. So we’re originally not seeing anything in terms of caution from our customers.
Deepak Kaushal - GMP Securities
And then just from a financial perspective, according to my math it looks like another cash burn in the quarter, is that correct?
Yeah, we did a pretty significant detail in the outlook section page, Keith can get for you. But essentially we are ramping up greatly here in production and content. We’ve got a bit of a cash burn as we do that. You’ll recall that for the first three months we were double paying on our former (inaudible) rays and plus our own content, and in the quarter I think we had about eight wide option shows that were in progress. The good sign of it is, we are delivering to Keith’s point delivering earlier, but obviously in order to fuel that growth there’s a short term cash for which, as we’ve said multiple times in the fullness of time we fully expect that to repatriate the working capital going forward.
Deepak Kaushal - GMP Securities
Right. So that high investment in working capital is a timing issue and should reverse. Is that a correct interpretation?
Deepak Kaushal - GMP Securities
Great. Can you give us a sense of EBITDA to cash from ops conversion for the year and for next year? Do you have a target?
Yeah, I think this is always a hard one to generalize, but I would say that in media the average is sort of mid-50s the very high end, low 60s for us this year because we have a new step function of ramping up. I suspect it’s probably more closer to than the 40 range. But also ultimately I think last year if you look at our numbers, I think we generated just under 50 on 90 million, so we were slightly above the average last year, and fully expect to get back in the near term.
Deepak Kaushal - GMP Securities
Okay, fantastic. Last question from me if I may, you talked about the new opportunity in mobile viewing and gaming. I was wondering if you could elaborate on your planned strategy to target this market. Is it going to be like before a combination of in-house or combination of third party partners and then acquired new titles. What can we expect on that strategic line?
Yeah exactly. It’s something that we’ve been - thank you for that question, we’ve been watching quite clearly, obviously will they begin a new world. I mean those of you that have kids on the call or no kids, they don’t get anywhere without their mobile, their latest smartphones or tablets. And in my (inaudible) sold in particular the only sites we have is about screen time, not about did they do their homework or not.
So there’s just a tremendous appetite for content out there and that’s really fueling many new platforms and really we’ve been sort of growing our YouTube business for quite some time, which in a lot of ways is a content one click to obviously viewing and video.
We feel the next wave of future is going to be content clicks to retail for consumer products and anything else, and so what I often say is, if you want you going forward. If you want to download a video, if you want to buy a concert ticket, if you want to buy a t-shirt or a book, a set of pajamas, you’re going to have to come through us as the IP owner, and that’s what we’re building here. A scarce group of very powerful assets with a very strong providence for it, ever green attendances that will last we think for many, many years in the future.
Deepak Kaushal - GMP Securities
Okay. So just a quick follow-up on that. For example on the gaming side, should we expect that you’re going to go out and acquire video game brands and turn it out in the (inaudible).
No, that’s not really. Our thinking here really is to leverage our strengths. Our strength is the content creator and really just taking our own, why worry. If we can get some creative ability within that sort of app development interactivity world, we will definitely look towards that. But we will stick to sort of our strengths which is content creation. So any acquisition or strategic view that you see on this will be two fold, one, to get that expertise, either build that in-house or obtain it through acquisition, and then two, obviously leverage your deep broad library.
I mean we’re seeing tremendous potential and many, many opportunity and really we see this as the next leg of extension of our monetization plan for our IP, and so those would be the kind of the two highlights.
Our next question comes from the line of Robert Peters with Credit Suisse. Your line is open.
Robert Peters - Credit Suisse
May be just touching on the other side of the cash flow equation on CapEx, we saw a little bit more outflow in this quarter and I know you mentioned the investment you’re making in the Vancouver office. One, how should we think about CapEx going forward? And maybe, two, shifting focus to the Vancouver office, how should we think about any potential synergies we should have once that’s up and running in 2018.
Let me make some general comments and then I’ll turn it to Keith for his specifics. Generally other than investing in our content, we don’t have as you know Robert, a very capital intensive business. We do from time to time have to ramp up in terms of software and technologies related to keeping on top of the game for content.
And so really we are looking at the Vancouver situation as an opportunity where we can take two operations and combine them in to one and we will obviously see some benefits, efficiencies going forward in terms of just shared services etcetera. So we’re looking forward to that. It’s a little bit of early days to figure out exactly what the quantum of that is, but we certainly think there’ll be savings there.
And in general, we’re looking at those as sort of a little bit of one-time anomaly cost of getting that studio up and running, not unlike what we have a couple of years ago when we did Halifax. But going forward we expect that that would normalize in to our normal range of what we would call normal CapEx 4 million to 5 million. Keith I don’t know if there’s anything else.
Rob we’re tracking on that 4 million to 5 million path this year. We’re actually tracking a little bit below that, and we’ve given a range in terms of the Vancouver studio to be incurred from ’16 through ’18 on the construction of the leaseholds there.
Robert Peters - Credit Suisse
Yes I saw that. Thank you for the color. May be shifting focus to there should be some size of the business and you highlighted on a call the fact that Netflix is going global, and I think that’s a big opportunity for you guys, and I was wondering when we think about that opportunity and we think about the current licensing agreement you have with them now, are there are any that are kind of multi-regional or is it literally you do it on country by country basis with them.
Well certainly its evolved overtime. I think we’ve probably done somewhere between in excess of 25 different deals with Netflix over the last 6, 7, 8 years. In the beginning they were non-exclusive, generally for individual territories. And as those have been renewed, those have been extended their other territories and that’s sort of one big piece of business that we do with them. That’s probably still 60%-70% of our business.
The next piece is sort of what we would call the Netflix originals obviously in which case they get the exclusive rights for a term let’s say five years for all of their territories. If they add new territories, depending on the title, there may be incremental revenue going forward.
So, there is incremental revenue opportunities for us as they go and expand globally is the short answer.
Our next question comes from the line of Rob Goff with Euro Pacific. Your line is open.
Rob Goff - Euro Pacific Canada
My question would be on the distribution side, could you talk to what the pricing trends are there? And further on the mobile side, could you talk about the pricing impact to your ability to bundle in mobile rights with other linear or digital sales?
So on the pricing trends, what we’ve seeing I would say is that in the very early stages of our growth, a lot of move has been driven by a lot of vibrate titles. And I think what’s happening now is, since Keith mentioned in his comments, there’s a lot of the current content that’s being sold as well.
Typically there’s a positive and an emergent consequence of that though. So in terms of balance, I would say, we’re moving more towards a 50-50 approach, where we would have 50% of our distributions from current library, see what’s called within the last couple of years, a third catalog and then a library catalog as well.
On the newer stuff, obviously because there are new and you haven’t knocked at the ability to forecast revenues forward, the amortization on those tend to be a little more aggressive, so the margins tend to be a little smaller. However, its’ a hugely positive trend going forward because that content is in demand in multiple places.
And the last thing I would say on that is, typically the per half-hour on the new stuff is higher. So pricing is actually trending upwards. So that is feeding some of the growth. In terms of mobile rights, this is just another category for us. As you’ve seen now that you’ve been with us Rob for quite a while.
You’ve seen when we went to YouTube, we had a tremendous opportunity and that was really because of what we’ve talked about for many, many quarters that we have a largely unencumbered very large library, and so we represent for a perfect partner to go in to any new technology. And mobile is just another technology that we see has huge potential.
And so we’ve kept back for the most part the vast majority of those mobile rights. So as we move forward and see opportunities the same as we did in the (inaudible) with the YouTube, the same way as we did in the [S Spot] with Netflix, Amazon and Hulu, we’ll look to take advantage of that in the mobile space.
Obviously we’ll try to start here at home in leveraging some of the strengths that we have in our family brand, but also the US with some of our strong content.
[Operator Instructions] Your next question comes from the line of Bentley Cross with TD Securities. Your line is open.
Bentley Cross - TD Securities
A few questions though, I just wanted to push back on the guidance a little bit. Obviously organic growth has been 30% plus for most of the key lines, but when I look out for the balance of the year; to me it looks like you’re essentially guiding to mid-to-high or may be 15%ish ball park of organic growth. Wondering what is causing hesitancy there, I know it hasn’t in the last quarter but --.
Right. I think it’s really just looking at the pipeline and seeing how it develops. I think there’s some upside there for sure. It’s a little early to sort of uptake that. What I would say though Bentley is, you’ll recall last year in Q3, we had a very, very strong quarter, I think revenue distribution in the 30s, and there were some elements of one-time nature of it in terms of some Amazon stuff somewhere in 5 million to 6 million, 7 million. So, that is going to present a bit of a tough comp for Q3. But if the pipeline is very robust and we’re executing very well, we’re only here for a short period in the quarter.
We expect that we - we’re optimistic that we can go and tweak that going forward, but for now, we are leaving it at that time, sorry at those ranges and we’ll look in Q3 once we’ve obviously executed on that quarter. We come back and looked at revising.
Bentley Cross - TD Securities
That’s somewhat reassuring. And then on the Mattel deal, I just wanted to clarify there was roughly $50 million in tangible asset payment, is that Mattel payment included there in this quarter or is that still to come.
Yeah, that is largely the Mattel payment and present value of future payment as well.
Bentley Cross - TD Securities
And the related to that, when you guys are thinking about deals like this with Mattel or whether it’d be acquisitions or buying back more stock, how do you think about the return mechanics and how do you choose your battles here.
It’s a great question, the question that we debate multiple hours every day on. But essentially we’re pretty simple, our targets are 20% return on capital. So if there’s any sort of growth opportunity inorganic or organic that we see, we’ll look to put capital to work. We’ve successfully exceeded that 20% for quite some time, so I really feel like our team has done some great job at ferreting out opportunities number one, presenting solid business cases, aligning them with the core strategies and then obviously executing on those, and whether that be through acquisition or through organic.
So going forward when our stock dips to a ratio that we feel it falls above that, we’ll look to deploy that capital through the share buyback. However, having said that, we’re seeing lot of opportunity out there for additional acquisitions. But what’s great about the platform that we’ve built is you can see in quarters like the first two quarters where we did not close any acquisitions, we still had tremendous organic growth. But yes, there’s still lots of opportunities for acquisitions coming forward and I would say the quality and quantity is accelerating.
It’s always been strong, but particularly strong right now and that’s been one of the benefits of tough market when the people at the top struggle, the people at the bottom struggle, and when people at the bottom struggle, you tend to get to capitulation and then you tend to get assets the top up, and we’re in a very, very good position to take advantage of those.
Bentley Cross - TD Securities
And the just more and more housekeeping. Just in terms of live tours, can you remind us what’s expected for this year and what came in last year just so I’m not digging off guard for the balance of the year?
Live Tour there’s one significant Live Tour that’s currently scheduled, and been announced.
The Next Step Live Tour is actually starting now, it’s started two weeks ago. It will wrap up towards the end of this quarter and a little bit of it will run in to Q4. We would expect the magnitude of that to be 25% to 30% more than it would have been last year.
There are no further questions at this time. Presenters I turn the call back over to you.
Thank you Operator and thank you everyone for joining us today. For more information please feel free to consult the investor relations section of our website at www.dhxmedia.com or get in touch with us directly. Thank you and good bye.
And this concludes today’s conference call. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!