Here's How DHX Media Ltd. Stumbled in Q4

DHX Media (NASDAQ: DHXM) reported fourth-quarter results on Sept. 27. The Canada-based content producer and brand manager, focusing on child-friendly names such as Peanuts, Teletubbies, and Strawberry Shortcake, ran into some unexpected issues in the period ended June 30, and share prices closed 16% lower the next day.

DHX Media's fourth-quarter results: The raw numbers

The following results are in Canadian dollars:

One Canadian dollar was worth $0.80 as of Oct. 3. A year earlier, the exchange rate stood at 1 Canadian dollar to $0.76.

What happened with DHX Media this quarter?

On the last day of the fourth quarter, DHX Media closed its US$345 million acquisition of Iconix Brand Group's entertainment division, giving the company 80% ownership of the Peanuts portfolio and full control over Strawberry Shortcake. While the all-cash deal will provide plenty of new business opportunities and cost-reduction synergies in the future, the closing also distracted DHX Media from its existing day-to-day business.

As a result, DHX Media's fourth-quarter revenues were approximately CA$15 million below the expected tally. Management broke the shortfall down into five specific areas of execution-related disappointment, each accounting for a couple of million Canadian dollars of the final miss.

• Two live-action shows under development were abandoned during the quarter.
• The high-budget relaunch of the Teletubbies brand in the U.S. market did not gain as much audience traction and advertiser interest as expected.
• Consumer product revenues came up short in the back-to-school season.
• DHX Media's production and distribution slates ended up slipping behind their original schedules.
• Finally, currency exchange effects and other accounting changes reduced fourth-quarter sales by CA$1 million -- the smallest of the five outlined headwinds.

In fiscal 2018, DHX media expects to hit the following performance targets:

• Adjusted EBITDA profits should land near CA$140 million, which would work out to year-over-year growth of approximately 13%.
• Free cash flows should stop at roughly CA$60 million. Free cash flows were negative in fiscal year 2017. Management said 2018 will be "year one of our corporate shift to focus on cash."

What management had to say

The Teletubbies launch may be spinning its wheels in the U.S., but that franchise's reboot is doing well in some other key markets.

"Teletubbies is performing ahead of management's expectations in the United Kingdom, where the brand continues to occupy a top five position, based on toy sales," said DHX Media CEO Dana Landry in an earnings call with analysts. "Management is further encouraged by the early signs for the Teletubbies in Germany and also in China, where the new series has received almost 50 million views since launching on streaming platforms last June."

Executive chairman Michael Donovan clarified that the success in other markets points to an opportunity in North America too, and that a better marketing push should unlock that value over time.

"This is not uncommon for children's intellectual property, when it's relaunched, to take sometimes more than one initiative to succeed," Donovan said.

Looking ahead

At this point, DHX Media is hard at work integrating the Iconix Brand Group acquisitions and positioning them for long-term success. Management is also taking another look as the company's Teletubbies marketing plans. Distribution efforts are now built around digital streaming and downloading solutions, and Donovan noted that DHX Media will have "an announcement in that regard" at some point in the near future. It remains to be seen whether that's a tighter partnership with existing digital media distributors, a DHX-owned streaming platform, or a completely different type of digital-media project.

On Oct. 2, the company also announced a strategic review that could lead to reorganization, asset sales, or perhaps even a merger with another media company. DHX Media has not yet hired an investment bank to manage this process, which is run by the board of directors and the management team.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool recommends DHX Media. The Motley Fool has a disclosure policy.