eResearch | Last week, WOW! Unlimited Media (TSXV: WOW), released its Q2/2021 results for the period ending June 30, 2021, and posted revenue of $18.8 million, an increase of 63% from $11.5 million in Q2/2020, and up 25% from the previous quarter.
WOW! operates an Animation Production division to create animation for third parties as well as its own animation intellectual property (IP), and also runs a Networks and Platform division to manage entertainment content for film, television, and online distribution channels.
Headquartered in Toronto, Canada, the Animation Production division runs Frederator Studios in the U.S. and Mainframe Studios in Canada, with animation studios in Vancouver, Los Angeles, and New York City.
The Networks and Platform division manages media distribution across various platforms, including 2,500 YouTube channels, through its subsidiary Channel Frederator Network, as well as WOW! branded programming on Crave.
Quarterly Results Building on Q1
In the second quarter, revenue was $18.8 million and the breakdown between the Animation Production and the Networks and Platforms segments was $11.5 million and $7.3 million, respectively, with both reporting segments generating positive operating income and profits.
WOW! reported its fourth consecutive quarter of positive operating EBITDA at $1.9 million in Q2/2021, an improvement of $2.5 million as compared to an EBITDA loss of $0.7 million reported in the same quarter last year. The Company also reported a net income of $0.5 million in the quarter as compared to a net loss of $2.1 million in Q2/2020.
The operating EBITDA gain was mainly due to the delivery of IP during the quarter and the Company also benefited from the Paycheck Protection Program loan forgiveness. During the current COVID-19 crisis, the U.S. Small Business Administration (SBA) provided SBA-backed loans to help businesses keep their workforce employed and certain businesses qualify for loan forgiveness.
The Animation Production segment benefitted from the delivery of various animated projects such as Madagascar: A Little Wild, seasons 5 through 8 of the Octonauts, and the last episodes of the fourth and final season of Castlevania.
The Networks and Platform segment EBITDA was $0.35 million and the Company disclosed that revenue and EBITDA gains were primarily the result of an increase in advertising revenue generated on the YouTube channels compared to the same quarter last year.
FIGURE 1: WOW! Quarterly Revenue and EBITDA
Backlog Fuels Revenue for Next 24 Months
As of June 30, 2021, WOW! had a backlog of $77.5 million in signed contracts, IP, and distribution agreements. The Company expects to book most of its current backlog in revenue within the next 24 months, and the backlog does not include $3.3 million of contracts signed after the quarter-end.
New Business Lines Growing Revenue
WOW! announced a company expansion with Mainframe Studios opening a virtual studio in Toronto in August 2021. It will be virtually connected to Mainframe Studio’s project pipeline with no additional lease requirements.
In addition, WOW! started work on projects in the 2D Animation and Live Action Programming markets.
Mainframe Studios started an original IP production on a 2D-animated series called “The Guava Juice Show” in partnership with Studio71 and YouTube celebrity Roi Fabito, based on his “Guava Juice” channel on YouTube with over 16.5 million subscribers.
WOW! also started production on the Ukulele U project in August 2021 with key principals being music producer Bob Ezrin and award-winning performer Melanie Doane. It is a live-action preschool series for the Canadian Broadcasting Corporation (CBC) in Canada with the potential for international broadcasting and merchandising licenses. The Company expects to deliver it by the end of 2021.
Michael Hirsh, Chairman & CEO, commented, “The Company delivered its fourth consecutive quarter of positive EBITDA and both reporting segments continued to generate positive operating income. We announced critical growth initiatives – Mainframe’s foray into 2D production and live action, as well as the addition of a virtual studio in Toronto. We remain focused on execution of our significant animation pipeline and to delivering a strong finish to the remainder of 2021.”
Strong Company Outlook
Other production highlights in the quarter included new Barbie projects for Mattel, Inc. (Nasdaq:MAT), Seasons 5 through 8 of the series Octonauts for Silvergate Media, Bee & PuppyCat: Lazy in Space for Netflix (Nasdaq:NFLX), and a new project with Spin Master Corp. (TSX:TOY), a multi-category children’s entertainment company.
WOW! expects to stay focused on purchasing and investing in IP that enable it to keep ownership and share in future revenues. Moreover, WOW! is interested in IP that could potentially further develop its distribution channel, brand awareness, global licensing, and merchandising opportunities.
Global Animation Market Expected to Grow at 11.7%
With the COVID-19 pandemic leading to government-imposed lockdowns, there was a large rise in the demand for entertainment at home, leading media and entertainment companies to improve and expand their video content.
In addition, the launch of new streaming services in the past year, including Disney+, HBO Max, and NBCUniversal’s Peacock created a strong demand for new content.
A report from Grand View Research estimated that the Global 3D animation market size, which was valued at US$16.6 billion in 2020, is expected to reach US$40.3 billion by 2028, growing annually at 11.7%.
Undervalued Compared to Comps
WOW! closed today at $0.88, with a Market Cap of $28.8 million and trading at Enterprise Value to Last-12-Months Revenue (EV/LTM Revenue) of 0.9x and Enterprise Value to Last-12-Months EBITDA (EV/LTM EBITDA) of 10.9x, compared to comps trading at 4.6x EV/LTM Revenue and 41.7x EV/LTM EBITDA.
In April 2021, the Board of Directors announced that it was analyzing ways to maximize shareholder value. Mergers, acquisitions, financings, and other strategic transactions could be undertaken to achieve its goal.
With its animation studio production capabilities, and current media distribution channels and content, the Company is a potential acquisition target for larger media players.
Recently Grom Social Enterprises, Inc. (Nasdaq:GROM) closed the acquisition of Curiosity Ink Media, LLC for US$20.4 million. We estimated that this transaction was valued more than 4.0x EV/LTM Revenue, which bodes well for a takeout value for WOW! as it is currently trading at only 0.9x EV/LTM Revenue.
FIGURE 2: WOW! 1-Year Stock Chart
Notes: All numbers in CAD unless otherwise stated. The author of this report, and employees, consultants, and family of eResearch may own stock positions in companies mentioned in this article and may have been paid by a company mentioned in the article or research report. eResearch offers no representations or warranties that any of the information contained in this article is accurate or complete. Articles on eresearch.com are provided for general informational purposes only and do not constitute financial, investment, tax, legal, or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this information should consult with a financial advisor. The article may contain “forward-looking statements” within the meaning of applicable securities legislation. Forward-looking statements are based on the opinions and assumptions of the Company’s management as of the date made. They are inherently susceptible to uncertainty and other factors that could cause actual events/results to differ materially from these forward-looking statements. Additional risks and uncertainties, including those that the Company does not know about now or that it currently deems immaterial, may also adversely affect the Company’s business or any investment therein. Any projections given are principally intended for use as objectives and are not intended, and should not be taken, as assurances that the projected results will be obtained by the Company. The assumptions used may not prove to be accurate and a potential decline in the Company’s financial condition or results of operations may negatively impact the value of its securities. Please read eResearch’s full disclaimer.
