Earnings Transcript for GNUS - Q2 Fiscal Year 2018

Operator: Greetings, and welcome to Genius Brands International Incorporated Investment Community Update Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Matthew Abenante, Senior Vice President at Porter, LeVay & Rose.

Matthew Abenante: Thank you very much. And thank you everyone for joining us today. Certain statements on today's call constitute forward-looking statements within the meaning of the federal securities laws. Words such as may, might, will, should, believe, expect, anticipate, estimate, continue, predict, forecast, project, plan, intend or similar expressions or statements regarding intent, belief or current expectations are forward-looking statements. While the company believes these forward-looking statements are reasonable, undue reliance should not be placed on any such forward-looking statements which are based on information available to us on the date of today's call. These forward-looking statements are based upon current estimates and assumptions, and are subject to various risks and uncertainties, including without limitation, those set forth in the company's annual report on Form 10-K for the fiscal year ended December 31, 2017 under the headline Risk Factors and other filings with the Securities and Exchange Commission, not limited to Risk Factors relating to its patent business contained therein. Thus, actual results could be materially different. The company expressly disclaims any obligation to update or alter statements whether as a result of new information, future events or otherwise, except as required by law. And now, with that, I'll turn the floor over to Andy Heyward.

Andy Heyward: Okay. Thank you, Matthew. And welcome everybody. Good afternoon on the East Coast. Good morning on the West Coast. Today, we are going to be filing our 10-Q for first quarter 2018. Revenue was uneventful, since as expected there were no deliveries in this quarter and our revenues come in quarters where we deliver our programs. Generally, those are the fourth quarter. We did elect the write-down of our series SpacePOP, which domestically has not met expectations and with our policy of keeping our balance sheet clean and not carrying any impaired assets. What is important to note, however, is the emergence of three strong drivers of revenues and earnings on Genius Brands, which we will see later in this year and in 2019. They are two immediate content brands as well as the Genius Brands distribution system. The content brands are Rainbow Rangers, debuting on Nickelodeon on November 5, and Llama Llama already on Netflix and now greenlit by Netflix in production on its second season. Rainbow Rangers will be the first to have an impact led by Mattel toys. We currently have 22 different companies who have become licensees of the Rainbow Rangers brand. And they are manufacturing product across every major category including toys, publishing, apparel, bedding, sleepwear, accessories, youth electronics, paper [ph], stationary and school supplies, health and beauty, sporting goods and a live touring stage show. Additionally, we are in active negotiations, which we intend to complete shortly with footwear, games, oral care, crafts and activity kits, bath products, sunglasses and vitamins. There are approximately 377 SKUs or different products coming into the marketplace on Rainbow Rangers and being manufactured as we speak. They will debut in third quarter 2019. The consumer products' presence is led by our global master toy licensee, Mattel, who itself will be manufacturing three inch dolls, six inch dolls, large dolls, plush dolls, play sets, vehicles, role-play and various accessories. All of these have significant minimum guarantees to Genius Brands and cumulatively total many millions of dollars. The Mattel toy guarantee alone is almost $5 million. The shows will begin delivery in November and will be complete in March 2019. And revenues can be recognized upon delivery to Nickelodeon in the U.S. and broadcasters worldwide, many of which are already in place and with many more to come. Of course, we have every reason to believe that the series [ph] of Rainbow Rangers will be successful and then successful stimulate [ph] consumer product sales and volumes significantly beyond the minimum guarantees. A large success in the order of Power Rangers or Ninja Turtles or Strawberry Shortcake generates billions of dollars in retails sales and many tens of millions of dollars of royalty income, and in fact, not infrequently, even hundreds of millions of dollars of royalty income. This is not uncommon. And myself and our team, which comes largely out of The Walt Disney Company and Hasbro toys has had the privilege of being a part of several such brands in the past. As previously stated, the creators we have brought in on Rainbow Rangers were the director of Disney's Lion King and the co-writer of Disney's Frozen, both major blockbusters, of course. I've been saying for some time that such success is very much a possibility with the brands we have positioned in the marketplace. And I believe that to be the case more so now than ever. Llama Llama with the hit series now on Netflix has a similarly robust lineup as Rainbow Rangers with 14 licensees in key categories including toys, publishing, games, puzzles, sleepwear, apparel and over 177 different product SKUs coming into the market, with additionally juvenile products, bedding, bath, footwear and oral care products also under active negotiation. Simply put, we have not one, but two major content brands now, positioned for success with, of course, perfect storms behind them. They have top-tier creative teams, top-tier broadcasters, Nickelodeon and Netflix, a broad array of consumer product companies, almost all of which are Disney licensees and the top company in their class, manufacturing hundreds of products coming into the marketplace, based out of these characters and strong retail support, starting with Walmart, Target and Amazon. I've been in this business for many years. And I honestly can't recall ever having seen one company other than the Walt Disney Studios, which has not one but two major brands poised to impact the marketplace. The third driver that we have coming forward is our distribution system known as the Genius Brands Network. The system is composed of two kids' channels

Operator: [Operator Instructions] Our first question comes from Ishfaque Faruk, WestPark Capital. Please proceed with your question.

Ishfaque Faruk: Hi, good morning, Andy.

Andy Heyward: Good morning.

Ishfaque Faruk: A couple of questions for me. First of all, for Llama Llama, do you have any updates on the production side and the timing of the holiday specials as well as season two in terms of delivery and when Genius Brands will get - recognize payment?

Andy Heyward: I don't have that in front of me. We'll find that information and we'll get back to you. The production has started. We have - the entire production team is in place. Writers are writing. The director has been engaged for the second season. We've made all of our studio deals that would do the subcontract animation for us in Asia. Everything is in place and has started. As far as the deliveries of the various elements, the specials and the series itself, I'll find that information and we'll get it back to you.

Ishfaque Faruk: All right. Perfect. Okay, yeah. And my second question, in terms of Rainbow Rangers, you mentioned that, it's going to be delivered to Nickelodeon in November. Do you have a sense for - preliminary sense for if there is going to be a potential for renewal in the coming months?

Andy Heyward: Well, of course, we'll find that out very quickly. The show goes on the air November 5. We have very high expectations for the show, as Nickelodeon, they're running it, as you may know five days a week, not once, which is typical of them. They start to show one day a week, and in success they move into five days a week. We're going in a five-day-a-week rotation right from the beginning. They've chosen to put the show on in the November sweeps, which is the most important period for a broadcaster. That's when advertising rates are determined for the full year. And they've done this based on all the materials that they've read, seeing rough cuts and being very intimately familiar with the production from beginning, since it's started. So I would suspect that by the end of November, we'll have some instincts there. I can tell you that internally, we've already started developing a theme for the second season. We've been working very closely with Mattel. I've been to New York twice in the last two weeks to review with them the second year brand line and the extension where we're growing. And we've also internally at Genius started development of the spinoff series in anticipation of success, when that will be aimed, at a slightly different target. So we don't cannibalize the existing business that we're going to have and we'll be able to add-on to it with the clout that we expect to enjoy and leverage with Nickelodeon afterwards.

Ishfaque Faruk: Okay, yeah. So you're pretty optimistic regarding the renewal for Rainbow Rangers. And also you mentioned a spinoff, that's going to be a spinoff from Rainbow Rangers or some other property?

Andy Heyward: No, from Rainbow Rangers, we're working on that right now. We have a writer engaged and we're down the road. And by November, when the show is on the air and assuming it's successful, we will be right in Nickelodeon offices offering this to them.

Ishfaque Faruk: All right, wonderful. Thank you, Andy.

Operator: Our next question comes from Jeff Silver, Berson & Corrado. Please proceed with your question.

Jeffrey Silver: Hi, Andy. I have a few questions. I just wanted to get clear on one or two things. The 377 SKUs with respect to Rainbow Rangers, and we know it airs November 2018. Did I hear you say that the SKUs or the merchandise hits in third quarter of 2019 or are we going to start to see that in 2018?

Andy Heyward: The bulk of the merchandise will be in 2019 quarter three. The reason for that, and this is very much an art form of when do you put merchandise on the shelf, was really triangulated for us by Mattel research. It's very important that the appetite is very strong with the audience. If you put product on shelf the time that the show goes on the air, the appetite hasn't built up yet enough. We're going to need three quarters of broadcast. And as Mattel likes to say, those failed Google searches looking for product, so that when suddenly product goes on shelf there'll be a frenzy for it.

Jeffrey Silver: Right and that makes sense. And if I recall, I guess, standard in the industry is that you recognized revenue - license revenue a quarter in arrears, is that correct?

Andy Heyward: I am not sure how licensing revenue is recognized. And I'm going to refer you to our CFO, Bob Denton, and I'll ask him to be in touch with you directly afterwards. Broadcast revenue is recognized when the shows are delivered, and have been accepted and available for broadcast.

Jeffrey Silver: Great.

Robert Denton: Andy, I can answer that now, if you'd like, Andy.

Andy Heyward: Wow, go ahead, Bob, sorry.

Robert Denton: Well, the licensing and merchandise contracts are recognized either the straight line method over the term on the license or in the instance when the minimum guarantee has been earned out and now they're paying royalties, we'll record those as received. So initially it's set up straight line over the term. But once it's successful you start recognition royalties quarterly as the money comes in.

Jeffrey Silver: So with respect to the licensing arrangements with Rainbow Rangers, we're really looking at fourth quarter 2019, first quarter calendar 2020, correct?

Robert Denton: Yes.

Jeffrey Silver: Okay. Andy, can you clarify for us, the Kid Genius Cartoon Channel on Amazon is - are you lumping that into the 80 million potential viewer number? Or is that something separate? And can you tell us at least qualitatively, because it's not showing up in the numbers, how that program is doing?

Andy Heyward: Yeah. The other program, we are talking about Amazon Prime, which is an S-Part [ph] program as opposed to the Amazon Fire program. That has been a slow build, but it is a consistent build. It's been gaining about 15% every month since we launched it. And we've seen, in fact, it's growing a little bit more recently. But it starts off slow and we're being very cautious about money that we put behind it to promote it. We're talking to a number of digital marketing companies right now to help accelerate that for us. That is a separate universe from the 80 million that we are in everywhere else. Amazon Prime has its own universe, which I think by itself is - it's close to 100 million now, and I think it's going to be - it's forecast to be 200 million within the next three years.

Jeffrey Silver: Okay. And I want to get back to content. But first on, so on the Genius Brands Network, if I recall correctly, and I think you alluded to this, there is an advertising share component for Genius Brand. Can you refresh our memory as to how that works?

Andy Heyward: Well, when you say share components, you're talking about with the various broadcast constituents themselves or are you talking about with third party, okay.

Jeffrey Silver: Correct - no, the broadcast constituents.

Andy Heyward: Yeah. Okay. Every case is different. With Comcast, for example, which is the largest cable provider in the U.S., we have a 50-50 deal with them. They are all pretty much in that area, but some of them have some variations to it. In addition, of course, we've acquired a lot of products, some of which we paid cash for and some we'd licensed. Some of which is simply on a revenue share basis based on how much revenue is generated, allocable to the particular shows that we've acquired.

Jeffrey Silver: Okay. And so if we can just focus on content acquisition or - for a while, so you've got Amazon Prime, and you've got Genius Brands, and you've got Rainbow Rangers on Nickelodeon, and Llama Llama on Netflix. How do you - how are you rationing or determining, what content to buy and where to place it? How are you managing that, that part of your business?

Andy Heyward: Well, the very first year content that we produce, we'll go right now on first year broadcaster like Nickelodeon and Netflix, a Disney Channel or whoever. We have to get those properties out there with an explosion right from the start. The channel that we have will have some first year product, not our own. And we'll also have a lot of catalog product. And that's more of a business of volume and having a lot of different content out there. We take a property like Llama Llama, for example, these are very expensive shows to produce. Llama Llama as well as Rainbow Rangers are very expensive shows to produce. And they couldn't be justified by putting them on our own channel right now, because they're not going to earn back that money in advertising and/or subscription fees and/or sponsorships at this point in time. As the channel service grows and becomes more robust with more and more subscribers to it, then there will be time where we will do that. But we're trying to balance, where we take our top-tier properties and we get them out very quickly with an explosion, and where we get them to places that are going to pay us a lot. Netflix pays - they paid more money than anybody today. So it's very important when we started with Llama Llama that we had all the money that was required to produce this show and to do it in a first-class way, similar to - with Rainbow Rangers.

Jeffrey Silver: I mean, I would imagine that you're looking for the next Rainbow Rangers or Llama Llama. I guess, the question is, what - where are you in the evolution of that part of the business, where you are sourcing? And are you able to either raise money specifically for these kinds of shows or generate the capital internally? And in another words, are you - what are the sort of the gating factors of embarking on the next Rainbow Rangers or Llama Llama?

Andy Heyward: Yeah. Well, the first thing is to find the right talent. One of the important things with Rainbow Rangers was being able to secure these two key people from Disney Theatrical. And I underscore Disney Theatrical. They didn't come out of Disney Television. We've got Rob Minkoff, who is the director of Lion King, and we had Shane Morris who is co-writer of Frozen, probably Disney's two-biggest hits ever. And we brought them in on this property. And they will enjoy a taste of it themselves, which is not available for people like inside The Walt Disney Company. Having close relationships with a creative community, with the publishing community, with the toy community, the video game community, the talent agencies in Hollywood, the various kids' publishers, these are all critical. And staying very close to them, and them feeling confident that we can get these shows made, put on the air and licensed, distributed worldwide, and that they're going to have an ongoing participation. It is key for us to get this talent. We have some very important things coming forth, as I alluded to, brand names with tremendous amount of brand equity in them that are very presold, with a lot of marquee value. And we'll be talking about them more in the coming quarter, when we announced them. It's a very competitive marketplace out there. And you got a zig when everybody else is sagging and Disney is a monster of a competitor. And we are always looking for the niches that we can find our way into, that they're not in right now. So as far as raising money for these, when we need to raise money for the shows either we're going to get them from the license - the broadcast licensee that we have. Or we'll raise money on the outside. Key is doing it on intelligent terms. There is always free cheese in every mousetrap. So we are trying to be smart about how we go about that.

Jeffrey Silver: Thanks. I just had one last question. We haven't heard anything for a while about Sony. I know you can't be specific that anything that may be in the works there. But how was that relationship evolved for you since their investment in some of the original announcements? Is it still - are you still [indiscernible] still doing exciting things?

Andy Heyward: Sony is still an investor in the company. We have a close relationship with them, we anticipate to continue to. I think their own strategy right now in kids is unclear. And I expect we'll become - they've had a lot of personnel charges. That's as everybody knows. It's no. And I'm sure that will become clarified in the coming quarters. Right now, it's business as usual for us though.

Jeffrey Silver: Thanks. Thanks, Andy. Good luck.

Andy Heyward: Thank you. My pleasure.

Operator: [Operator Instructions] Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Andy Heyward for closing remarks.

Andy Heyward: Closing remarks, so thank you everybody for being here. And keep your eyes open. I neglected to mention that on November 5, when we debut Rainbow Rangers, there will be a live event at NASDAQ in Time Square. And it will be live-streamed as well with a number of our key partners and licensees there. And if any of our investors would like to come, you're more than welcome. Be in touch with us and we'll organize that for you. Thank you. Everybody, have a great day.

Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.