The "Peanuts" Business Isn't Peanuts for DHX Media Ltd.

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DHX Media (NASDAQ: DHXM), a leading producer and distributor of family-friendly media content, reported earnings Tuesday night. The release covers the first quarter of fiscal 2018, which was the first full quarter after DHX's acquisition of Iconix Brand Group. Read on to see how having full control over the Peanuts brand and an 80% stake in Strawberry Shortcake affected DHX Media's results.

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

The following financial results are stated in Canadian dollars, since DHX is based in Halifax, Nova Scotia. On average, one Canadian dollar was worth $1.25 during the reported quarter. One year earlier, the average exchange rate stood at 1 Canadian dollar per $1.30 in American currency, indicating a 4% year-over-year strengthening of the U.S. currency against its northern neighbor.

Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Revenue

CA$98.6 million

CA$53.8 million

83%

Net income

CA$8.1 million

CA$1.4 million

479%

GAAP earnings per share (diluted)

CA$0.06

CA$0.01

500%

What happened with DHX Media this quarter?

  • Armed with a much larger portfolio of household-name characters and story material, DHX Media more than doubled its content production budget from CA$22.7 million to CA$56.7 million.
  • Consumer products revenue skyrocketed thanks to the Iconix deal, rising 828% year over year to land at CA$36.2 million.
  • The company now targets a final tally of CA$11 million in annual cost savings and production synergies based on the Peanuts acquisition, starting with savings of CA$5.8 million in fiscal 2018.

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Management doubled down on its fiscal outlook for fiscal 2018, as presented three months ago with a handful of adjustments:

  • Adjusted EBITDA profit should still land near CA$140 million, which would work out to year-over-year growth of approximately 13%.
  • Free cash flow should stop at roughly CA$70 million, up from a CA$60 million target in the fourth-quarter guidance announcement. Free cash flow was negative in fiscal 2017.
  • The company will use most of its free cash to reduce debt balances and make strategic investments in more TV and film content. This fiscal year, DHX expects to spend roughly CA$25 million on production and acquisitions of new content.

What management had to say

DHX is still trying to ignite American consumer interest in the rebooted Teletubbies brand, without much success. The company is working under a distribution contract with Viacom's (NASDAQ: VIA) Nickelodeon platform, but management is already discussing new distribution deals with mostly ad-based video-on-demand partners. That property is doing better in the original U.K. market, and management indicated strong early results in Germany and China.

"In terms of traction, we're still about the same places we were at the end of the year," said DHX Media CEO Dana Landry, according to a Seeking Alpha transcript. "So no real update there, in terms of the U.S., but in Germany and in the UK, for instance, the brand continues to perform above expectations. We are also getting quite excited about China going forward." 

Looking ahead

The Peanuts deal led to a reorganization of DHX Media's U.S. operations, moving the production studios from Los Angeles to combine with the established Peanuts team in New York. This brand is actually hurting DHX Media's gross margins right now, because of complicated business relationships that include large royalties to the estate of Peanuts creator Charles M. Schulz.

Synergies and cost savings should reverse that trend over time, maturing in 2019 and beyond.

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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.