After a recent sale, Fairfax-controlled Boat Rocker trades below net cash with valuable B/S assets despite historical profitability, a lower-risk content strategy going forward, and potential buybacks
Great idea. Quick question about the business model: am I understanding it correctly that the production revenue is a fake revenue? Say a new production has a budget of 10M, the company pays 2M and 8M are covered by pre-sale. Then right after the delivery of the product, the company 'loses' or you could say invest 2M. For me this whole process is more like capital expenditure and the corresponding asset Investing in contents is like PPE. The point is to generate revenue from such 'PPE' in the future (distribution Revenue).
I know nothing about this industry so I could be completely wrong about this..
Thanks for reading as always and for the comment. As a side note, I’ve been going through your write-ups and they’ve been great. I’ll definitely be looking into your ideas in more detail.
On your question: It all comes down to how you view it. Production revenue is any licensing of rights prior to the greenlighting of production (i.e. production commencement; known as ‘pre-sales’).
For example, before the Company started production on the first season of Dino Ranch, it received pre-sales from Disney for the U.S. and Latin America regions and CBC in Canada. Those pre-sales may have included upfront advances, a minimum guarantee, and maybe even additional bonus payments based on the show’s ultimate performance.
Those pre-sales, along with whatever money the Company chose to invest itself and certain government tax credits, allowed Boat Rocker to actually begin producing the show (as all financing was in place). Interim production financing was then used to borrow against any licensing/distribution agreements and the tax credits to bridge timing differences to actual production costs.
In my mind, pre-sales are thus a form of financing. Dino Ranch wouldn’t have been produced unless the Company had those pre-sale commitments and could borrow against those agreements (and, importantly, have a sense of what their own investments would need to be).
But it’s important to understand that if the Company could have financed the entire Dino Ranch production with just the U.S. pre-sales, then any Latin America and Canada licensing after production commencement would have been recorded as distribution revenue. In that way, you are giving up the opportunity to exploit certain rights for that upfront financing.
Hopefully that makes sense. I agree with your PP&E point intuitively - It seems to me that the money is made from distribution revenue when the Company can exploit distribution, merchandising, etc. for successful properties over time. That’s why I mentioned this can be a ‘hit’ business. There's also, of course, the more stable service revenue line.
From my perspective, the important thing is that from FY20-FY23, the Company invested ~CA$750m in content investments but also received ~CA$1.1bn in deferred revenue cash collections. This is crucial to understand when thinking about any ROI calculation (rather than just looking at FCF losses).
Hi Roban, it's great that you like my write-ups. I'm sure some of my posts are not as good as I expect them to be, so please let me know if there is any comments/pushback.
Thanks for the detailed reply, I like specific example you gave which is always helpful for me to understand exactly how things work. You mentioned that
" if the Company could have financed the entire Dino Ranch production with just the U.S. pre-sales, then any Latin America and Canada licensing after production commencement would have been recorded as distribution revenue. In that way, you are giving up the opportunity to exploit certain rights for that upfront financing."
Could you give some examples of the 'certain rights'? Thanks!
No problem! Sorry if I wasn’t clear on a couple things:
‘Certain Rights’ - I’m just trying to say that customers aren’t giving Boat Rocker financing for free. For the Dino Ranch Disney pre-sale, the Company licensed out distribution rights for the U.S. and Latin America (meaning Disney had the right to broadcast Dino Ranch to its end-customers in those territories for a given amount of time, usually multiple years). Those pre-sales allowed Dino Ranch to be produced. Dino Ranch then generated distribution revenue by licensing distribution rights after production commencement in other countries/regions like Germany, France, Scandinavia, etc. - https://www.licenseglobal.com/streaming-tv/boat-rocker-studios-rounds-herd-dino-ranch-deals. Distribution revenue, in this case, is lower than it would have been if Dino Ranch was entirely financed by, say, just the U.S. distribution rights (as Latin American distribution rights would’ve been sold after production commencement and accounted for as distribution revenue). As I mentioned above, I see pre-sales as a form of financing, but hopefully this helps show why it is accounted for as revenue.
Content Investment - I’m simplifying, but the easiest way to think about this is that the Company actually spent ~CA$860m to produce content from FY20-FY23 (its own investments plus investments that it expected to be offset by tax credits). This is the total content investment value. This ~CA$860m amount is then financed by customers. Over this time period, Boat Rocker received ~CA$1.1bn in deferred revenue cash collections (largely buyer upfront advances, minimum guarantees, and bonuses associated with production revenue; I would say ~10% of this deferred revenue is in relation to non-production revenue streams). There’s some timing component here - Some of the deferred revenue receipts may be from content investments in FY19, for example. But the key point is that content production was largely funded by buyers (given cash collection in excess of the Company’s content spend over this period). I think that's important to understand when looking at the Company's negative FCF over the period. Hopefully that’s more clear.
Got it. Thanks for such detailed reply, I understand this much better now. It's interesting (and could be good for investors) that this presale model effectively gives the company large operating/financial leverage.
Thanks - Not too many new thoughts following the quarter and the earnings call (and of course the recent stock plunge, although would caution this is a very closely-held stock with minimal volumes). The Company still trades below cash and is making progress on cost-cutting initiatives. However, there wasn’t enough to evaluate management’s progress on their new ‘lower risk’ content strategy; Investment in new content remains low given industry conditions.
The lack of buyback is frustrating, but management continues to be adamant on being “very much on the same page” about how accretive buybacks would be at current levels. They interestingly referenced NCIB ‘rules’/‘restrictions’ currently impacting their ability to do buybacks - I don’t know exactly what they’re referring to, but they mentioned something similar during the Q4 FY23 earnings call and announced the Untitled transaction a few months later. Make of that what you will, but I’m willing to give them more time on this one.
A few more specifics on the results: Industry conditions are still weak, particularly in the U.S. and on the scripted side, driving fewer deliveries and margin contraction (fewer higher-margin premium dramas, less high-margin services work, and general operating deleverage). Despite this, they seem to be on track to hit their EBITDA guidance with some additional deliveries in Q4 (although the Company cautioned potential slippage into Q1). Notably, the Company seemed to indicate that demand envionrment remained tough on the scripted side, with improvements in FY25 but real normalization not really expected until FY26.
The better news is that we saw continued improvement/some green shoots on the Canadian unscripted side (which the Company will have more exposure to following the close of the Insight transaction) and Kids and Family. I would expect to see some additional deliveries (both scripted and unscripted) into Q4 and FY25, indicating a potential trough here (although always incredibly difficult to forecast).
Important things to continue watching here are deliveries/general industry conditions, improvements in profitability as a result of cost-cutting initiatives (generally showcasing that this is a business that can return to consistent profitability/cash generation), and buybacks (and anything else transaction-related).
Hope that helps - Feel free to let me know if any questions on anything.
Another thing I find interesting: they put 'Additions to investment in content ' into the operating cash flow. Weird choice no? If investment in content is amortized over time then this is a capitalized term (like I said like PPE). So this cash out flow should be put under the 'investment activities'. But I guess management think of 'investment in content' more like inventories.
Great idea. Quick question about the business model: am I understanding it correctly that the production revenue is a fake revenue? Say a new production has a budget of 10M, the company pays 2M and 8M are covered by pre-sale. Then right after the delivery of the product, the company 'loses' or you could say invest 2M. For me this whole process is more like capital expenditure and the corresponding asset Investing in contents is like PPE. The point is to generate revenue from such 'PPE' in the future (distribution Revenue).
I know nothing about this industry so I could be completely wrong about this..
Thanks for reading as always and for the comment. As a side note, I’ve been going through your write-ups and they’ve been great. I’ll definitely be looking into your ideas in more detail.
On your question: It all comes down to how you view it. Production revenue is any licensing of rights prior to the greenlighting of production (i.e. production commencement; known as ‘pre-sales’).
For example, before the Company started production on the first season of Dino Ranch, it received pre-sales from Disney for the U.S. and Latin America regions and CBC in Canada. Those pre-sales may have included upfront advances, a minimum guarantee, and maybe even additional bonus payments based on the show’s ultimate performance.
Those pre-sales, along with whatever money the Company chose to invest itself and certain government tax credits, allowed Boat Rocker to actually begin producing the show (as all financing was in place). Interim production financing was then used to borrow against any licensing/distribution agreements and the tax credits to bridge timing differences to actual production costs.
In my mind, pre-sales are thus a form of financing. Dino Ranch wouldn’t have been produced unless the Company had those pre-sale commitments and could borrow against those agreements (and, importantly, have a sense of what their own investments would need to be).
But it’s important to understand that if the Company could have financed the entire Dino Ranch production with just the U.S. pre-sales, then any Latin America and Canada licensing after production commencement would have been recorded as distribution revenue. In that way, you are giving up the opportunity to exploit certain rights for that upfront financing.
Hopefully that makes sense. I agree with your PP&E point intuitively - It seems to me that the money is made from distribution revenue when the Company can exploit distribution, merchandising, etc. for successful properties over time. That’s why I mentioned this can be a ‘hit’ business. There's also, of course, the more stable service revenue line.
From my perspective, the important thing is that from FY20-FY23, the Company invested ~CA$750m in content investments but also received ~CA$1.1bn in deferred revenue cash collections. This is crucial to understand when thinking about any ROI calculation (rather than just looking at FCF losses).
Hi Roban, it's great that you like my write-ups. I'm sure some of my posts are not as good as I expect them to be, so please let me know if there is any comments/pushback.
So the productions from FY20-FY23 cost around 1.85B given the company invested 750m and received 1.1B from presale?
Thanks for the detailed reply, I like specific example you gave which is always helpful for me to understand exactly how things work. You mentioned that
" if the Company could have financed the entire Dino Ranch production with just the U.S. pre-sales, then any Latin America and Canada licensing after production commencement would have been recorded as distribution revenue. In that way, you are giving up the opportunity to exploit certain rights for that upfront financing."
Could you give some examples of the 'certain rights'? Thanks!
No problem! Sorry if I wasn’t clear on a couple things:
‘Certain Rights’ - I’m just trying to say that customers aren’t giving Boat Rocker financing for free. For the Dino Ranch Disney pre-sale, the Company licensed out distribution rights for the U.S. and Latin America (meaning Disney had the right to broadcast Dino Ranch to its end-customers in those territories for a given amount of time, usually multiple years). Those pre-sales allowed Dino Ranch to be produced. Dino Ranch then generated distribution revenue by licensing distribution rights after production commencement in other countries/regions like Germany, France, Scandinavia, etc. - https://www.licenseglobal.com/streaming-tv/boat-rocker-studios-rounds-herd-dino-ranch-deals. Distribution revenue, in this case, is lower than it would have been if Dino Ranch was entirely financed by, say, just the U.S. distribution rights (as Latin American distribution rights would’ve been sold after production commencement and accounted for as distribution revenue). As I mentioned above, I see pre-sales as a form of financing, but hopefully this helps show why it is accounted for as revenue.
Content Investment - I’m simplifying, but the easiest way to think about this is that the Company actually spent ~CA$860m to produce content from FY20-FY23 (its own investments plus investments that it expected to be offset by tax credits). This is the total content investment value. This ~CA$860m amount is then financed by customers. Over this time period, Boat Rocker received ~CA$1.1bn in deferred revenue cash collections (largely buyer upfront advances, minimum guarantees, and bonuses associated with production revenue; I would say ~10% of this deferred revenue is in relation to non-production revenue streams). There’s some timing component here - Some of the deferred revenue receipts may be from content investments in FY19, for example. But the key point is that content production was largely funded by buyers (given cash collection in excess of the Company’s content spend over this period). I think that's important to understand when looking at the Company's negative FCF over the period. Hopefully that’s more clear.
Got it. Thanks for such detailed reply, I understand this much better now. It's interesting (and could be good for investors) that this presale model effectively gives the company large operating/financial leverage.
Anything worth updating for this dumpster fire?
Thanks - Not too many new thoughts following the quarter and the earnings call (and of course the recent stock plunge, although would caution this is a very closely-held stock with minimal volumes). The Company still trades below cash and is making progress on cost-cutting initiatives. However, there wasn’t enough to evaluate management’s progress on their new ‘lower risk’ content strategy; Investment in new content remains low given industry conditions.
The lack of buyback is frustrating, but management continues to be adamant on being “very much on the same page” about how accretive buybacks would be at current levels. They interestingly referenced NCIB ‘rules’/‘restrictions’ currently impacting their ability to do buybacks - I don’t know exactly what they’re referring to, but they mentioned something similar during the Q4 FY23 earnings call and announced the Untitled transaction a few months later. Make of that what you will, but I’m willing to give them more time on this one.
A few more specifics on the results: Industry conditions are still weak, particularly in the U.S. and on the scripted side, driving fewer deliveries and margin contraction (fewer higher-margin premium dramas, less high-margin services work, and general operating deleverage). Despite this, they seem to be on track to hit their EBITDA guidance with some additional deliveries in Q4 (although the Company cautioned potential slippage into Q1). Notably, the Company seemed to indicate that demand envionrment remained tough on the scripted side, with improvements in FY25 but real normalization not really expected until FY26.
The better news is that we saw continued improvement/some green shoots on the Canadian unscripted side (which the Company will have more exposure to following the close of the Insight transaction) and Kids and Family. I would expect to see some additional deliveries (both scripted and unscripted) into Q4 and FY25, indicating a potential trough here (although always incredibly difficult to forecast).
Important things to continue watching here are deliveries/general industry conditions, improvements in profitability as a result of cost-cutting initiatives (generally showcasing that this is a business that can return to consistent profitability/cash generation), and buybacks (and anything else transaction-related).
Hope that helps - Feel free to let me know if any questions on anything.
Another thing I find interesting: they put 'Additions to investment in content ' into the operating cash flow. Weird choice no? If investment in content is amortized over time then this is a capitalized term (like I said like PPE). So this cash out flow should be put under the 'investment activities'. But I guess management think of 'investment in content' more like inventories.
Classification of content investments in operating cashflow seems to be industry standard. Netflix has a few slides on its content accounting here that may be helpful and show that they also classify these expenditures in operating cashflow: https://s22.q4cdn.com/959853165/files/doc_downloads/2023/06/27/IR-Content-Accounting-Slides-June-2023.pdf
This is great reference. Thanks for sharing!