DHX Media's (DHXM) CEO Dana Landry on Q4 2016 Results - Earnings Call Transcript

| About: DHX Media (DHXM)

DHX Media Ltd. (NASDAQ:DHXM)

Q4 2016 Results Earnings Conference Call

September 28, 2016, 09:00 AM ET

Executives

Nancy Chan-Palmateer - Director, Investor Relations

David Reagan - EVP, Corporate Development

Michael Donovan - Executive Chairman

Dana Landry - CEO

Keith Abriel - CFO

Rob Goff - Echelon

Analysts

Aravinda Galappatthige - Canaccord Genuity

Deepak Kaushal - GMP Securities

Rob Goff - Echelon

Bentley Cross - TD Securities

Rob Peters - Credit Suisse

Jeff Fan - Scotiabank

Operator

Good morning, my name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the DHX Media Fourth Quarter and Full Year 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. I would now like to turn the call over to Nancy Chan-Palmateer, Director, Investor Relations. You may begin your conference.

Nancy Chan-Palmateer

Thank you, operator, and thank you everyone for joining us this morning. On the call with us today are Dana Landry our Chief Executive Officer, Keith Abriel, our Chief Financial Officer and David Reagan, our Executive Vice President of Strategy and Corporate Development. Also joining us on the call will be Michael Donovan our Executive Chairman.

Before we proceed, we have some standard cautionary statements. The matters discussed in this call include forward-looking statements under applicable securities laws with respect to DHX, including, but not limited to, statements regarding DHX's library, the goals of the company, the business strategies and operational activities of DHX, and timing thereof.

The allocation of resources of the company, the growth and financial and operating performance of DHX, its subsidiaries and investments including fiscal 2017 revenue outlook for the company and the markets and the industries in which the company operates. Such statements are based on information currently available and are subject to a number of risks and uncertainties. Actual results or events 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 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

I would also like to add for the question and answer session that will follow, we’d appreciate if each analyst could keep to one question with one follow up so that everyone has a chance to ask a question, have the opportunity to do so. If you would like to ask additional question, please rejoin the queue.

With that, I turn the call over to Dana Landry, our CEO.

Dana Landry

Thank you, Nancy. First, I wish to thank everyone for participating in the call this morning and also I wish to congratulate the team for their hard work and the staff for achieving yet another solid year of growth both top and bottom line. Shortly you’ll hear from Keith who will provide a detail with respect to our 2016 results as well as our plans for 2017.

For the last several years growth in media has been driven by a transition of audiences from viewing content by way of the broadcast medium to viewing it on the new streaming platforms. In the next several years, we expect growth in streaming worldwide will continue to increase audience engagement, both in SVOD that’s streaming video-on-demand and in AVOD advertising video-on-demand. And the latter is exactly what we were seeing at WildBrain, our AVOD multi-channel network headquartered in the U.K.

WildBrain has demonstrated incredible growth since its started three years ago, both in terms of revenue and most critically in number of minutes watched. In fact the network saw its best day ever in both metrics just this past weekend.

As the owner of the world’s largest independent library of children’s and family content, we are well placed to leverage our library into this transformational new growth platform.

There have been numerous studies that showed that children love YouTube and they love using mobile devices, such as Tablets and Smartphones that’s consumed [Ph] YouTube content on. It is that the intersection of AVOD and mobile where our young viewers live and that is where we intend to focus much of our energies to unlock the value of AVOD.

I’ll dive a bit deeper into the WildBrain opportunity in a moment, but first I’d like to take a quick look at some of our achievements in Q4 and fiscal 2016. First off, I wanted to report that we are very proud in Q4 that the company had generated nearly $8 million in cash from operations as some of our working capital we have been investing in content is beginning to repatriate and Keith will have more of this later.

With this confidence, I’d also like to mention that in our recent board meeting the directors have approved an increase of 12.5% to the dividend for the quarter upto $1.08 on each common voting share and variable voting share outstanding for the shareholders of record at the close of business on October 11 to be paid on October 21.

Lastly, I wanted to say that we are obviously continuing to see a global demand for our much loved children’s content and brands and the new paradigm of on-demand continues to propel our growth.

For fiscal 2016, we posted solid results across many key metrics. On a year-over-year basis the company delivered 15% revenue growth, 15% EBITDA growth and 42% growth in net income.

As a content company, our mission is to create and leverage children’s content that inspires, entertains and connects the global on-demand generation. In fiscal 2016, we marked a number of achievements that resulted from our steadfast focus on this mission.

I just like to remind everybody of the three key imperatives that drive our business and help us fulfil our mission.

First, is creating engaging high quality content for kids and families. Second, is distributing our content worldwide to pursue growth across all media and platforms, and third is leveraging our content to create high profile global brands with increased merchandised and licensing opportunities.

I’ll speak a bit about each of these three starting with the content creation. As you know, we all know world’s largest independent library of children’s content which has growth this year from 11,500 half hours to more than 11,800 half hours. A big part of this library of growth was the addition of 215 fresh new half hours of proprietary content in fiscal 2016. This was up 20% from last year.

As a result, we also saw a 14% rise in proprietary production revenue over fiscal 2015. During the same year-over-year period we also added 150 hours of third party titles with distribution rights, a 233% increase and a direct result of synergies associated with owning studios, distribution, television channels and merchandising and licensing businesses.

Next, I’d like to talk about how our large library drives our distribution business. Each new episode of content added to our library, both in the proprietary and third party rights category represents a potential recurring revenue generator. We realized enormous benefits of scale from our library as reflected in our distribution revenues, which for fiscal 2016 rose 11% over fiscal 2015.

DHX Media has become veritable [Ph] one stop shop for streaming services and broadcasters worldwide looking for children’s content. We are able to provide outstanding shows for girls and boys across every demo from preschool to kids, to twins and teens.

On Monday of this week for example, we announced a content deal that underscores our expanding relationship with Amazon Prime video. That deals sees Amazon’s SVOD services in the U.K. and Germany licensing more than three dozen of our shows. This deal includes a number of SVOD exclusives for Amazon in those territories, most notably season one of our new Teletubbies series for Amazon U.K. service.

I’ll speak more about the Teletubbies in a moment, but I wanted to highlight this milestone for the brand as it marks the first expansion into the SVOD territory for the hit series in the U.K. which is a critical market for Teletubbies as we stated many times in the past offering -- key children’s content like Teletubbies has become essential for SVOD services.

Platforms are competing to attract and retain subscribers and we are seeing that dynamic reflected in the value of deals we are signing. Like never before, the viewing appetite and habits of children are a major consideration in family hassles when deciding which content platforms they use.

Last July, the significance of children’s content for Amazon was underscored when they became the exclusive premium streaming service in the U.S. for most of the children’s shows controlled by the PBS Kids Library. This major deal is indicative of Amazon’s stated commitment to become a leader in the delivery of kids and family content. We also announced a deal with Amazon Prime Video last July, which saw the SVOD lock in our terrific new animated series loop on an exclusive basis in the U.S.

This was in addition to multiple seasons of DHX Media the library titles such as The Busy World of Richard Scarry and Madeline. Our two recent Amazon prime video deals one announced this week and one in July highlights our extending relationship with Amazon. Today, those deals taken alongside with other DHX titles that were already on the service means that Amazon Prime members in Europe and the U.S. have access to more than one tenth of the titles in DHX Media’s library.

The competition between SVOD is to provide the best show for kids and family have created a boon for content companies like DHX, but of course SVOD is not the only space where demand for kid’s content is high.

AVOD is the other space that we spoke about, which is the highly popular with kids. Last April, we unveiled the WildBrain multi platform kid’s network, our branded network of more than 350 kid’s channels on YouTube.

For 2016, WildBrain’s gross revenue was more than $18 million representing a 53% increase over 2015. Management believes there is a tremendous potential with WildBrain and the evolving AVOD space in general.

Earlier this year, the youth and family market research firm, Smarty Pants surveyed more than 8,100 U.S. hussles [Ph] and found that YouTube the world’s leading AVOD platform was the most loved brand among kid’s six to twelve. In the middle of all that goodwill sits WildBrain, one of the largest networks of Children’s content on the platform.

WildBrain’s business is simple; we connect the owners of children’s content with advertisers. That includes not only ourselves but notable other brands such as Fireman Sam, Bob the Builder, Polly Pocket, Lazy Town, Strawberry Shortcake and many others.

By leveraging DHX Media’s large library on the WildBrain network and by contractually managing third party content brought into the network and by producing and acquiring new content, WildBrain has almost tripled its revenue since 2014 at a compounded annual growth rate of 66%.

In fact, in fiscal 2016 WildBrain attracted more than 32 billion minutes of watch time on YouTube compared to over 20 billion in 2015 and over 11 billion in 2014 for a CAGR of 67%. Watch time is highly significant on YouTube because it points to consumer engagement.

Watch time tells how long people actually stuck around and watched your content. For WildBrain, the networks overall daily watch time for fiscal 2016 increased by almost 60% over fiscal 2015. The higher the watch time, the higher your consumer engagement and the more attracted your network is to your advertisers. We believe there is a huge amount of room for WildBrain to capture a much higher quantity of YouTube viewers for children’s content and to deliver those eyeballs [Ph] to advertisers.

As a result, we have provided for the first time in our outlook section revenue guidance on WildBrain and that guidance is $24 million to $31 million for 2017. Today’s young viewers live at the intersection of AVOD and Mobile and we intend to make WildBrain a significant focus of the company. We will do this by continuing to produce high quality content and leverage it on WildBrain, building strong relationships with other content owners and brand marketers, investing in people and infrastructure needed to grow the business and to this end in Keith’s notes you will note that we have added it more than $1 million in our SG&A line in Q4 2016 to pursue this growth, also aggressively pursuing acquisitions that leverage mobile platforms. Through these metrics we believe we can cement and consolidate our position as the leader in the children’s AVOD space.

Moving on now before I hand it over to Keith, I’d like to talk about merchandising and licensing and our growing business and specifically provide a brief update on Teletubbies.

As the flagship property in DHX Media strategy to build global brands, Teletubbies continues to perform extremely well and is gaining global momentum. This morning, we announced the appointment of a licensee called FieryLight production to create and produce an international touring [Ph] show for the new Teletubbies.

We expect this live theatre production to begin in the U.K. and Ireland in 2017 and to eventually tour in North America, Australia and Asia. This comes on the heels of our announcement earlier this month of a licensee fee to design and build solutions for location based Teletubbies attractions such as theme parks and family entertainment centers for the U.K. Continental Europe and the Middle East.

We are very excited about the launch of this new component of the Teletubbies merchandising and licensing program which will allow fans to extend their level of the brand and enjoy a more immersive [ph] experience. We are also proud that Teletubbies now boast more than 85 consumer product deals complimenting the 23 broadcast deals for our new series and the Amazon SVOD deal I spoke about earlier.

Our licensees are reporting strong sell through on the first wave of products in the U.K. with some ahead of expectations. The show continues to score strong rating on CBeebies - the BBC's preschool channel and the Teletubbies is the number one new preschool toy property by sales in the U.K.

In the U.S. the consumer product rollout is set to begin in January 2017 and the show is off to a very positive start on Nick Junior where it is broadcast in the coveted 8 AM primetime spot. We expect to continue making tremendous strides with the Teletubbies brand for fiscal 2017 and beyond. We believe the future is very strong for DHX Media as we continue to execute on our strategy to create shows that kids love, distribute the content across all media platforms worldwide and leverage our content for high profile global merchandising and licensing programs.

With that, I’ll turn the call to Keith.

Keith Abriel

Thanks Dana, and thank you to everyone for dialing in today. Let’s discuss some of the high level results for fiscal 2016 and for the fourth quarter of fiscal 2016.

Revenues for fiscal 2016 were $304.8 million up 15% from $264 million in fiscal 2015. The increase was driven by higher revenues in distribution, proprietary production, merchandising and licensing and producer and service fees. This was offset by a decrease in DHX Television revenues and a decrease in new media revenues.

Gross margin for fiscal 2016 was $173.3 million, an increase in absolute dollars of $28.3 million or 19% compared to $145 million for fiscal 2015.

For fiscal 2016, adjusted EBITDA was $103.7 million up $13.5 million or 15% over fiscal 2015. Net income for fiscal 2016 was $27.7 million or $0.22 basic and diluted earnings per share, compared to net income of $19.5 million or $0.16 basic and diluted earnings per share for fiscal 2015. This represents an increase of $8.1 million in absolute dollars.

Turning now to the Q4 numbers, revenues for Q4 2016 were $75.3 million up 6% from $71.2 million in Q4 fiscal 2015. In absolute dollars this increase was due to strong growth in proprietary production revenues significantly higher distribution revenues and strong growth in both owned and represented merchandising and licensing revenues.

The increase was offset by an expected decline in DHX television revenues as well as declines in producer and service fee revenues and new media revenues.

Proprietary production revenues for Q4 2016 were $6.4 million, an increase of 25% compared to $5.1 million for Q4 2015; this was well ahead of management’s expected range for the quarter.

The company added 37 proprietary half hours to the library in the quarter up 23% versus 30 proprietary half hours in Q4 2015. For third party produced titles with distribution rights, the company added 30 half hours, a decline of 33% from 45 half hours in Q4, 2015.

For distribution, management is extremely pleased to report that in Q4, 2016 revenues were up 23% to $30 million from $24.4 million in Q4 of 2015. The Company continues to see strong growth and continued strong demand from new digital customers, platforms and territories. These results were at the top end of management’s expectation for the quarter.

The gross revenue for WildBrain for Q4, 2016 was $5.7 million up 101% versus Q4 2015 total up $2.8 million.

M&L-owned revenues for Q4 2016 were $5.5 million up 39% compared to $4 million for Q4, 2015. This included $1.2 million from The Next Step Wild Rhythm Tour, compared to Q4 2015, when the live tour revenues were negligible. M&L-owned revenues were slightly below the midpoint of managements expected quarterly guidance.

M&L represented revenues were up $2.7 million or 57% to $7.5 million compared to Q4 2015 at $4.8 million and were at the high end of management’s expectations. This was driven mainly by the strong over-performance of our represented brands Despicable Me and Minions and also significant growth in Sesame Street, Dora the Explorer, The Pink Panther, and Jurassic World.

Television revenues for Q4 2016 were down 20% to $15.8 million from $19.9 million for Q4 2015 and were within managements expected range as set out in the Q3 2016 MD&A. Management is pleased to report that while DHX Television revenue declined for Q4 gross margins increased to 76% above the high end of management’s expectations or $12 million for Q4, 2016 from 50% or $9.9 million in Q4 2015 as a result of lower external content costs.

Producer and service fees were $9.1 million for the quarter, a decrease of 18% versus $11.1 million for Q4 2015 which was near the low end of management’s expected range as a couple of service projects started a little later than expected during the quarter.

Gross margin for Q4 2016 was $44 million an increase in absolute dollars of $6.3 million or 17% compared to $38 million for Q4 2015. The overall gross margin for Q4 2016 at 58% of revenue was below the midpoint of management’s quarterly guidance as reported in the Q3 MD&A. For Q4 2016, adjusted EBITDA was $24.8 million up $2 million or 9% over $23 million for Q4 2015

Net income for Q4, 2016 was a net loss of $1.7 million compared to net income of $3.7 million for Q4, 2015. The net loss in Q4, 2016 was materially impacted by a net foreign exchange loss of $5.4 million for the quarter.

The foreign exchange loss for Q4 2016 was primarily driven by the impact of exchange rate fluctuations on foreign currency denominated balances, a significant portion of which were comprised within a company balances.

Turning to operating expenses, SG&A costs for Q4 2016 increased 29% to $21 million, compared to $16 million for Q4 2015. The increase in SG&A was attributable to a number of factors including as Dana mentioned, the continued ramp-up of WildBrain, a decision to take an aggressive marketing campaign for Teletubbies and higher than forecast incentive compensation at CPLG which reported a 100% revenue growth on a year-over-year basis.

SG&A also included $1.5 million in non-cash share-based compensation for the quarter. When adjusted cash SG&A at $19.1 million was above management's quarterly expectations as management continues to pursue growth opportunities for the company.

Along with these results management is very pleased to announce its outlook for fiscal 2017, the highlights are which are as follows; production revenue or proprietary production revenue is targeted in the range of $51 million to $56 million for fiscal 2017.

Producer and service fee revenue is also targeted in the range of $51 million to $56 million. Distribution revenue excluding the WildBrain piece of the business is targeted in the range of $76 million to $80 million, and WildBrain revenue for fiscal 2017 is targeted at $24 million to $31 million.

DHX Television revenue is targeted in the $63 million to $68 million range, and M&L-owned revenue is targeted at $28 million to $34 million for fiscal 2017, while M&L represented revenue is targeted at $18 to $23 million for the year.

For further specifics on our fiscal 2016 full year and Q4, 2016 results as well as additional information on management's fiscal 2017 outlook and various other information including a reconciliation of GAAP and non-GAAP financial measures I would refer you to the company's fiscal 2016 MD&A which was posted on SEDAR and EDGAR this morning.

With that, I'll turn it back to Dana.

Dana Landry

Thank you, Keith. To summarise, we're excited about the future and opportunities we have through production, distribution, television and M&L, and we continue to – as we continue to build this great company. We will continue with our mission to deliver amazing shows and brands loved by kids worldwide.

With that we'll turn the call over the operator for questions from analysts.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Aravinda Galappatthige from Canaccord Genuity. Your line is open.

Aravinda Galappatthige

Good morning. Thanks for taking my question. Recognizing sort of the – that growth is sort of the main impact this year at this point. I wanted to sort of flush out the for cash flow matter upfront. I know that free cash outflow this year was about $17 million, it was obviously quite strong last year, $34.5 million positive.

And it seems the big part of that is the program rights for broadcasting up from $28 million to $58 million. I'm wondering, Dana or Keith do you want to maybe kind of discuss the working capital swing and the magnitude of that and what that created. And also what that means for free cash flow going forward? Because you're seeing a lot of prepayments this year, it should be a tailwind to you next year.

Dana Landry

Yes. Thanks Aravinda and good morning. Thanks for that question. I'll maybe answer to the high level and then I'll turn to Keith on some of the specifics. So, I mean essentially you're exactly right, for this – for 2016 we've invested heavily in the content side of the business and Keith can give you the specific numbers. But in general, it was around and building the slates. We also had to replace our output arrangement which added to the cash drain. And remember when we're adding those properties we own them now for considerable period of time, so it was a considerable outflow in 2016.

We also had a bit of a double debt payment there because we had our outstanding, our output arrangement lasted through December of last year, so we had six months relating to that. So we had a lot. There was a fairly heavy invested year of cash flow. As we said throughout the period we expected that to start to reverse. As I said earlier in my remarks, I'm happy to report that has turn to reverse. We generated more than 8 million of free cash flow in Q4.

This quarter looks very solid and Keith has provided some further sort of guidance in the outlook section I believe of the MD&A relating to cash flow and what are expectations are for 2017. I don't know if you anything further, Keith to add.

Keith Abriel

I think the one thing on the broadcasting piece of the business and it’s good question Aravinda, is we did had a significant outflow during the year as we transitioned output agreements. We expect that to level outgoing forward and that cash outflow and amortization on the broadcasting business will be more or less level going forward.

Dana Landry

And what I would say obviously, I mean, this is what we do, invest in content. And so, we're extremely excited about the content that we've created and we're seeing growth related to that both from distribution side and on the M&L side. So that's part of what our core pieces areas. And we've made all those investments. We're expecting those to start to payoff.

Aravinda Galappatthige

Okay. Just to follow-up on that. So, on the broadcast side, the program rights went up from sort of 28 to 58 and I know that on the amortization level you probably looking at something like 20, 25, I mean that sort of the EBITDA hit to the broadcast side of the business. Was it fair to say that since you spend significantly more than you amortization this, the actual cash outflow next year should be notably lower than amortization or is that going to be offset by the addition of this content that you're going to be licensing?

Dana Landry

Yes. Great question. Now that's exactly right, Aravinda. There was bit of a one-time amount there. And Keith can give you the specifics. And yes, we expect that to normalize. If you actually look at the individual sort of free cash flow profile of TV, this year on the service you might look and say while it generate $25 million or $28 million whatever the number was on EBITDA, and that's the cash flow, but when you look at the actual cash, to your point it was actually 58. So the vast majority of the drain in free cash flow this year was relating to those investments. And many of those will not repeat and I would say going forward should be more normalized to what the amort [Ph] is.

Keith Abriel

Yes. We expect, Aravinda, it would be more or less levels going forward, possibly a small outflow in Q1 but levelling off the rest of the year unlike fiscal 2016 where we transition slates from essentially a pay as you go model to a pay upfront model.

Aravinda Galappatthige

And just a query of what you mean is levelling off at the amortization…?

Keith Abriel

At the amortization level, yes, exactly.

Aravinda Galappatthige

Okay. Understood. Thanks. And my quick follow-up before I hand over is on the free cash flow side itself. The Vancouver studio, you know, my understanding was that was going to be built over 2017, 2018, it sounds like from the MD&A that you're going to be building it entirely in 2017. So the entire CapEx hit is going to be in 2017. I was wondering if you can clarify that. And also maybe just touch on the benefits of that spent in terms of efficiencies and savings? Thanks.

Dana Landry

So, I'll turn to Keith on the actual CapEx and then I'll talk about benefits.

Keith Abriel

Yes. So the vast majority of that CapEx will hit in 2017. There maybe some final amounts going through, but basically the full amount will be in 2017.

Dana Landry

Yes. This is one of our core strength capacity, owning capacity. And we have almost the 1000 animators throughout the country and about 700 in Vancouver. So, we're really excited about bringing them all under one roof and seeing what they can create. Our brand, our DHX is highly coveted, not only from our proprietary slate, but also from our service slate.

So, capacity – we saw this a while back when we looked at some of the acquisitions we did on [Indiscernible] in the past and we saw that the demand for content was starting to swell and when you own capacity, really talented animators like we do it gives us tremendous advantage to execute on our strategy plan to invest a content that we own rights on that we can distribute throughout the globe and ultimately build brands that has consumer product potential.

Aravinda Galappatthige

Great. Thank you. I'll pass the line.

Dana Landry

Thank you.

Operator

Next question comes from Deepak Kaushal from GMP Securities. Your line is open.

Deepak Kaushal

Hi. Good morning, guys. Can you hear me, okay.

Dana Landry

Good morning, Deepak. Yes, fine.

Deepak Kaushal

Thanks. So, I just have a quick follow-up question on the free cash flow. I guess in the past typically you've been able to offset the working capital requirements of Interim Production Financing and in the past that's not necessarily been the case? What's going on there and I can ask the follow-up after that.

Dana Landry

Yes. So that's exactly the point. I mean, our core CCs from the beginning is we offload in terms the ultimate investment, the vast majority of the cost of our content. And so, really what that means is a dollar that we spend on content we really can pay that off in three years with the combination of our talent, subsidies -- the studios and also the presales that we do.

Last year the ability to access some of the Interim Production Financing became more difficult and getting constraint, given that we were making quick decisions to invest quickly because we wanted to get particularly on the family channel side of the things rolled up and ready to roll and I'll give an example like Degrassi for instance. We had the great fortune of getting an exclusive original for Netflix and they agreed with that on relatively short notice and it took a while for the contract to actually come together.

And from a banking perspective that's the critical piece of blocking an Interim Production Financing. But from our perspective knowing Netflix and being a great customer of ours, we took that and moved forward with it and invested that capital.

Now most of that is obviously starting to repatriate and so that always part of the plan, but it did create a bit of a burden on 2016, but going forward we'll look to try to do things a little more in real time and line up those interim production financing, but core always is that we know that working capital will repatriate and those investments are paying off.

Deepak Kaushal

Okay. Pardon me. So, shall we read through that here or are you seeing increased demands from guys like Netflix to use your balance sheet, help support their content growth or are you seeing any more Netflix storing their weight around in terms of pricing or financing requirements?

Dana Landry

Well, I think it’s the opposite. I think there is an opportunity right now for increased prices on the originals for those that step forward and moved quickly and not bureaucratic and that's truly where we try to live in that world. And so what we're going to try to do obviously better align some of our in term production financing things to be able to move those decisions quickly, but also be able to have the investments in those core brands that we can use to generate distribution revenue going forward.

And you know, I guess the other part that gives us what I would say, reiterate my comment at the top, we're confident enough and those repatriations that we're increasing the dividend, because obviously we know our model and we know what's to come.

Deepak Kaushal

Okay, great. And then, if I'm just doing quick math in the midpoint of your guidance range for next year and your operating expenses, roughly again adjusted EBITDA was 120 million. How much of that do you expect to convert to cash from op, are you back to that 50% to 60% range that you would see in a normal market or are you still ramping up?

Dana Landry

I don't think we're quite back to the 50% to 60% range, but we're definitely considerably higher than we were last, I would say, we were little more in the 30% to 50% depending on some of the timing.

Deepak Kaushal

Okay. Thanks. I'll pass the lines.

Operator

Next question comes from Rob Goff from Echelon. Your line is open.

Rob Goff

Thank you very much and good morning.

Keith Abriel

Good morning, Rob.

Rob Goff

Good morning. My question would be on the M&L-owned side. Could you talk to whether the guidance of $28 million and $34 million would include or fully include the Teletubbies touring or other tours that you said might be in the pipeline for Twirlywoos and into the Night Gardens?

Dana Landry

Yes. So, great question. I think the answer is not much. There can be upside and that maybe where we get to the top end of the range. Obviously that's a pretty late breaking new story that it's you know for us we're careful and putting things in our guidance. The one thing that really bears sort of stating on the Teletubbies in general as everyone on the call hopefully knows is that, is the build-out for M&L is a multiyear process and we're sort of in year two of our -- hopefully 15-year cycle here when it comes to Teletubbies.

And we've launched in the U.K. and we're expecting great result this Christmas. Next January we start in the U.S. and so we'll have some uptick in our 2017 results related to Teletubbies. But the future is very bright. We expect two in addition this year two to five new territories that will add at least in terms of that sort of initial phase and whether we get any MGs or Minimum Guarantees or revenues in 2017 that it will be probably tricky to get in 2017 but for 2018 and 2019 we're just continuing to build.

Rob Goff

And I may go little bit deeper into that. You gave the guidance of on a quarterly basis, 20-20, 30-30, what would the natural seasonality of that business be? And with the Q3 at 30% reflects your earnings through minimums?

Keith Abriel

Yes. That you could read through that, yes, absolutely, I mean I think that the -- there is probably some potential for upside and Q2 like they're always is. I think the challenge on reporting 45 days after quarter and lot of our reports will come after that, so given our first year, it would be unwise for us to make too many aggressive accruals and so we'll probably see a lot of that coming in our Q3 and onwards.

Rob Goff

Okay. Thank you very much. And I'll pass it on.

Keith Abriel

Thanks, Rob.

Operator

Your next question comes from Bentley Cross from TD Securities. Your line is open.

Bentley Cross

Good morning.

Dana Landry

Good morning, Bentley.

Bentley Cross

I wanted to ask about distribution margins, obviously this quarter was little bit of surprise to myself and some others on the streets. A, what drove it. B, what gives you the confidence that it will turnaround next year?

Dana Landry

Well, I guess what I would say is, clearly I mean turnaround is a strong statement. We're talking even on WildBrain now, 55% margins, so let's just be clear that these are solid margins. So yes, part of the thing that we've talked about in the past, Bentley as you know as you do have the quarter-by-quarter anomaly. Then WildBrain was such a strong quarter this quarter at a roughly 55% margin and it drove it down, probably we had it where we were wanting it to be.

Also on a lot of the properties, you do you best to forecast what those would be on an individual quarter and there is some lumpiness related to the individual titles that are the sold. So, I think we try to do – we gave very specific attention to this for 2017 in our guidance and you'll notice that we had a bit broader range in the quarters to hopefully account for some anomalies, but on the year-end we gave pretty tight guidance on where we think the annual will settle in. And I think that if you stick to that we think that we will achieve that.

Bentley Cross

And maybe I can just follow-up with that. There's been some chatter recently that some of the SVOD services are taking less library content, but putting more of a premium price on new originals, are you guys seeing the same or is library still selling more?

Dana Landry

Yes. I mean, that's a normal thing that you'd expect to happen. It has really translated for us. We still had – we were only down maybe I'd say 10% from 16 to 15 on library sales as far as the percentage of the overall. So, we're not really seeing that. And I think part of it might be because of our large library and our relationship with the Netflix's of the world and as they expand in new territories were a natural place to go as I said earlier we're kind of one-stop shop, so we're able to feed those in.

And there are some – there is some signs of consolidation related to specific markets in obviously like Canada. We've seen some of that this last week. But overall there's still the global growth. We're still seeing that and we're still getting a large percentage of that.

Bentley Cross

If I may just squeeze one more quick one in here.

Keith Abriel

Sure, go ahead.

Bentley Cross

I don't know if you have it on your finger tips, but could you maybe just put the number around it and tell us kind of what percentages of title sold this year versus last or something along those lines?

Dana Landry

Yes. I'll maybe I'll just give, I mean, I think that last – I would say two years ago we were probably 75% library, 25% current, I would say this year its more like probably 40% current, 60% library and going forward I think you assumed 50/50 that would probably a normal split, I don't know, Keith whether that's generally.

Keith Abriel

Yes. That's about right and certainly [Indiscernible] that's where it is.

Bentley Cross

Okay, good. Thanks guys.

Dana Landry

Thanks, Bentley.

Operator

[Operator Instructions] Your next question comes from Rob Peters from Credit Suisse. Your line is open.

Rob Peters

Good morning.

Dana Landry

Good morning, Rob.

Keith Abriel

Good morning, Rob.

Rob Peters

So just had a question, when you look at TV production you added about 215 half hours of proprietary production this year. I was just wondering to the extent you expect that to continue to grow, should we still see that be a prong [ph] for capitalize that business ramps up. And then maybe the second part of this is are you still targeting 100 to 200 half hours or would you think kind of a steady state production would be for you?

Dana Landry

Yes. So there is three pieces there is going to sort of target. So the first one on growth, we do think there's going to be growth with respect to the revenue line per sure and I think that's comes back to one of the earlier questions on pricing. We're still seeing prices expand as the competition heats up. 215 is a big number and I think that's an aggressive one to target going forward. It's probably at the high end of the range and if you look at that it's probably sort of 15 to 16 productions which would be right up there amongst the leaders. I don't even think Disney would do any more than that if they did it would be in that range. So we produce a fair bit. So I think that were – where the revenue increase is going to probably come on the per half hours.

The second but I think was on your drop [ph] question and I would say that again we apologize for the late posting. But when you do get into the MD&A you'll see that we gave some pretty specific guidance on where we think the drop for investment and content will be and I think please correct if I'm wrong, range we put for was 15 million to 25 million.

Keith Abriel

Yes. We think its about 15 million to 25 million and we expect the impact on working capital to be less than it would have been in fiscal 2016.

Dana Landry

Yes. So that's 2017.

Keith Abriel

Target fiscal, yes.

Dana Landry

Yes. So target going forward you'll also note in the MD&A we have increased our target based on our success in our growth. I think we now have that in the range of 150 to 225, so that would be our certain new stated target, little bit tighter range and still expecting sort of 1% to 2% growth on the library.

Rob Peters

Fantastic. That's great. And maybe just to follow-up and kind of switch gear slightly, when we look at the M&L represented guidance for next year, I was just wondering, I mean, obviously you've had extremely strong performance from your properties this year, I assume part of that is just making it a difficult comp, but was there any FX in that guidance as well?

Dana Landry

Yes. It's totally the first part, I mean, we just absolutely killed it on minions and couple of other properties and it would be very difficult to repeat that. You'll notice that if you look at compared to say, 2015, the guidance for 2017 is up considerably and so we do expect a bit of spill over on some of those properties, but we need to have another sort of big hit that comes in there to kind of repeat the 2016 numbers.

Rob Peters

Perfect. Thank you very much.

Dana Landry

Thanks, Rob.

Operator

Your next question comes from Aravinda Galappatthige from Canaccord Genuity. Your line is open.

Aravinda Galappatthige

Thanks. Quick follow-up. I know in the past you talked a little bit about international SVOD side of things and sort of attraction you're getting in China. Can you just talk about -- I know 2015 just about a $1 million, can you just talk about how that sort of played out in 2016?

Keith Abriel

Sure. Yes. We -- I mean the growth is a ridiculous number, but if you look at the total dollar value, I think we are just under $5 million in 2016 and we're expecting to grow that per sure we're targeting somewhere in the 50% range for growth. I mean, that's one area that we could drastically over achieve. It is very difficult to predict, because it's obviously highly regulated market. We want to make sure that our rights are protected. It's all incremental and upside to us, so we want to go carefully along that.

Our strategy there as we talked about in the past has been to partner with locals and we're having a lot of those key conversations and in fact our Head of Sales Josh Scherba is in China right now as we speak in series of meetings. So it's definitely a territory that we're focusing on and one that we expect to build over multiple years.

Aravinda Galappatthige

Okay, great. Thank you.

Keith Abriel

Thank you.

Operator

Your next question comes from Jeff Fan from Scotiabank. Your line is open.

Jeff Fan

Hi, good morning everyone. I want to ask the question about your production slate. If you look at your pull number of half hours produced in 2015, a number of these titles against were not produced again in 2016. And then in 2016 you've got a number of new green let [Ph] shows in the first season. We start to mix [Indiscernible] of the total hours, half hours produce. So I guess my question is when you look ahead I know this might be a tough question. What kind of – what your hit rate or what your percentage that you would expect that you see shows going into multiple seasons, because I would think that this would be a good leading indicator into your ability to feed the library and to have successful distribution in M&L revenues fall through. So I'm wondering if that's the way we're looking at it and if you can talk a little bit about looking ahead on multiple seasons productions?

Dana Landry

Yes. I mean, I think, obviously this is where the art comes in, it's more arts than science. But I think that one of the things that I would say is that, in owning the channel it allows us to pilot a lot of things and test things out. And what's great about owning the Canadian channels is that effectively kind of a U.S. light proxy over things that we think will work in the English speaking territories. And so we try things out, if they work we do them again. If they don't we try something new.

I mean every time we use the capacity whether that is to put a show on a channel or do a show in the studio, its to try to put our best foot forward and what we're focusing on is really what we call our studios are number ones and our number ones are the ones that we can generate revenue across all revenue streams. And so obviously on production we can sell our studios. We can put it on our channels and leverage there. We can grow through distribution for long term and ultimately get consumer products potential.

At the end of the day you got a chicken and egg scenario. You got to have a show that connects tickets in order to sell goods and services. So, you'll probably see us a little bit – be a little bit more nimble on that. I would say overall though based on the sales we're getting across the current slate and the new slate and the slate that's in development is really quite exciting. And you definitely you got to remember Jeff is that we're kind of two years in arrears to what the actual operating is, because these revenues are delivered and booked over two-year period.

So, we're starting green lighting things that won't be delivered until in some case in 2017 and 2018 and so we're already getting to the place where we know we think that what's working, what's moving and so this is a nice look back as a touch point, but those are things that we're focusing on. And if you look at over time what has become hits certainly animated shows have a better track record for doing things that sell toys and consumer products more so than live action. But having said that you want to make sure that you enough of a balance, so we'll look at both.

And of course the beautiful thing about adding that content is being able to test it out on WildBrain and what's great about WildBrain is we can start something on Monday and if it works we know it works by Wednesday and if it works we do more by Wednesday. And we can leverage that back and forth. We're using that as an effectively a pilot testing as well. And I think you'll see hopefully going forward [Indiscernible] be on the forefront of creating properties both ways from the new digital world and then back into the TV world and trying things like shows that have not necessarily half hours, but thing that are minutes or twos or for the new world.

Jeff Fan

Great. And then with respect to the new studio in Western Canada, does that increase your production capacity materially or is it just consolidation to existing?

Dana Landry

Yes. It probably increases a little bit, but I think I would think about it more about just efficiencies. Right now we have two studios in two different locations, not the best for efficiency purposes. So, putting it all under the one roof, we think its going to be much, much more efficient. We could have shared vision on the management side, shared vision on the development side which we can leverage that, that extreme talent that is in Canada which is a huge asset that we have to help us create these new shows that are going to connect in the global scale and allow us to distribute better and ultimately sell more products.

Jeff Fan

Okay, thanks Dana.

Dana Landry

Thank you, [Indiscernible]

Operator

Your next question comes from Deepak Kaushal from GMP Securities. Your line is open. Deepak Kaushal, your line is open. [Operator Instructions] And your next question comes from Rob Goff from Echelon. Your line is open. Rob Goff, your line is open.

Rob Goff

Can you hear me now?

Dana Landry

Yes we can hear you Rob.

Rob Goff

Great, thank you. You had expensed I believe it was $1.45 million related to acquisitions, could you talk to what you were seeing in the pipeline and what types of things you are looking at, what evaluations there may be in the market place?

Dana Landry

Yes, so there are no surprises really right back to our core strategy there are sort of three types of opportunities we are looking at. Number one, our global brands or brands that are currently global brands or ones that we think can be global that we can put into our infrastructure and be able to leverage revenue and cost synergies.

Number two, and I would say really something that will pay real significant attention to is opportunities in the wild range space to acquire new channels and/or new viewership to openly leverage that in a new and interesting way, and as I said perhaps use that to produce organically some fresh content related to those opportunities.

And then lastly, if there is areas around the globe where we think we can expand to allow us that more roots [Ph] on the ground we’ll look to that things like China and/or perhaps even Latin America. So those are the areas of focus for us and it’s still is the huge area of focus and you know we haven’t done one in a while, but I think -- we that you could say that that is for us it’s showing our discipline we believe to find the right deals.

Rob Goff

Thank you Dana.

Dana Landry

Thank you.

Operator

[Operator Instructions] Your next question comes from Deepak Kaushal from GMP Securities. Your line is open.

Deepak Kaushal

Hi guys, can you hear me now?

Dana Landry

Yes, Deepak we can.

Deepak Kaushal

Hi, sorry about that before. You know I know we are getting to the hour [Indiscernible] but I want to be quick. I just got a question on the AVOD business, the WildBrain business. Looks like good gross margins, I was wondering if you could talk about how the operating margins evolves for that business, other AVOD business as we look back seemed to have been challenged on the bottom line despite reducing gross margin, how is that different for you guys when you...

Dana Landry

Well it’s different for us if you think about it. I mean obviously we have our big partner on YouTube, which would take a lot of that, but beyond that really there is really very very little incremental costs that are set over SG&A which is still a relatively modest compared to I think we might have added what maybe total $5 million over the last year annually is probably in that range $4 to $5.

So and remember all those videos most of them the vast majority are things that are already are library so there is no cost of production associated with them. So it’s huge incremental margin to us both on the operating and gross side, but obviously we are going to look to invest to grow that and grow our share.

Deepak Kaushal

Okay, so should we expect profitability over the next 12 months, a significant profitability?

Dana Landry

Yes absolutely. I think that we look at and again a quick and dirty P&L now and if we booked $18 million in revenue on the gross the net is help me out Keith tenish [Ph] would have probably had SG&A of five, yes so it was definitely profitable.

Deepak Kaushal

Okay, great. We don’t have to wait for this thing to couple.

Dana Landry

No...

Deepak Kaushal

Fantastic. That’s it from me. Thanks so much guys.

Dana Landry

Thank you.

Operator

[Operator Instructions] We don’t have any questions at this time. I will turn the call over to the presenters.

Nancy Chan-Palmateer

Well we want to thank you for joining us today. And we look forward to speaking with you next quarter. Thank you everyone.

Dana Landry

Bye, bye. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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