This company, which primarily creates content for kids and distribute by TV and digital channels earning revenue from advertising, licensing fees (copy rights and trademarks of consumers’ products), physical media products, and affiliate fees (including subscription), has been grouped into kids content maker – music& cartoon sector in video &audio goods and service industry.
It seems that demand for subscription for paid linear kid’s channels has been weak and presented a general downturn trend for most of companies in this sector. To lower costs of subscribers and deal with declining demand for TV channels, the linear platform operators of distribution decrease bundles of channels, which caused large difficulties for many less popular TV channels such as kid channels in maintaining their viewers. In the downward trend of TV industry, companies’ revenue of advertising has declined accordingly as well.
However, strong demand for high quality content has been able to bring revenue for companies in this sector by distributing them in more popular channels (including Netflix).
Some of companies have also found a way to regain subscription for their channels in third party OTT platform.
Demand for consumer products seems to have declined significantly.
The general decrease in subscription of paid TV has hurt profitability of those TV channels makers in this sector, which seems not to be offset by increased revenue from OTT and content distribution for companies in this sector. The typical company in this sector has an about 36-40% gross margin in 2018 with a SG&A as percentage of sales of about 20% and operating margin of 16-20%.
The typical enterprise price/EBI ratio is 32 (12 months trailing)/29(forward based on first quarter performance).
It seems that its revenue (advertising) from the new OTT channel of this company has started increasing since 2017 probably attributable to increase in subscription of this channel on digital platform. Licensing revenue based products has declined in the past several years. Channel revenue from linear TV and paid TV has declined but demand from Netflix is strong for high quality content.
The first quarter of fiscal 2018 compared with 2017(ended Mar 31, 2018)
Net revenue decreased 53% attributable to the decrease of 56% in licensing of consumer’ products and the decrease of 91% in linear TV (including Netflix) and DVDs offset by increase in digital channels (amazon).
Fiscal 2017 compared with fiscal 2016
Net revenue increased 516% attributable to the increase in new distribution to Netflix and increase of 2% in licensing and products and increase in digital channels (amazon).
Fiscal 2016 compared with fiscal 2015
Net revenue decreased 5% attributable to the decrease of 5% in licensing of consumer’ products and the decrease of 11% in linear TV and DVDs.
Revenue earned by new release of TV series in 2017 was improved largely and leverages its heavy expenses of SG&A significantly. Its gross margin has been down to about 17% in 2018 (12 month trailing). Its SG&A as percentage of sales decreased to about 115%. And we have seen that its operating margin down to -98% in 2018.
Stock performance
Currently this company has an enterprise price/sales ratio of about 4.5(12 month trailing). We think this stock may be overvalued considering its relatively huge loss compared with its revenue. It may be not easy for this company to cut expenses in SG&A or improve margin in its new content and thus may be not easy to offset it current about $5MM loss in cash flow.
