DHX Media Ltd. is taking itself off the auction block and shifting its strategy to adapt to massive changes in kids' viewing habits, acknowledging it was too slow to respond to the rise of streaming giants such as YouTube and Netflix.
The Halifax-based producer of children’s entertainment content such as Caillou, Teletubbies, Inspector Gadget and the Peanuts franchise, announced the move after a tumultuous year. DHX has seen its market value plummet, announced the departure of key executives and has undergone a strategic review that included examining a sale of all or part of the company. DHX now plans to focus much more heavily on digital content, to reflect the fact that kids are spending much less time watching TV – and much more time on watching videos on iPads, smartphones and other digital devices.
“It became clear a couple of years ago that streaming, a new medium, was affecting the nature of the content,” DHX executive chairman and chief executive Michael Donovan said in an interview on Tuesday. “It took us a few years to adjust. The strategic review allowed us to think through every aspect of the company – its processes, but also its approach to content creation. Something we should have done quicker, but which we are doing now.”
DHX is now pursuing a dual strategy of producing the kind of lower-cost, short-form video that does well on YouTube, where it can draw advertising revenue; and more premium longer-form shows – including under the Peanuts and Strawberry Shortcake brands in which it owns a stake – that it hopes will lead to deals with subscription streaming services such as Amazon and Netflix. The move will also put it in competition with deep-pocketed global companies such as Disney and Apple, which recently announced plans to get into streaming. Television, which used to be DHX’s first driver for producing shows, will now be a much smaller priority in its content strategy.
The strategic review began last October, after the company reported disappointing financial results that triggered questions about its management in light of significant debt DHX had taken on to fund acquisitions. Last year, DHX spent US$345-million for an 80-per-cent stake in the beloved Peanuts brand, as well as Strawberry Shortcake. As part of the review, DHX sold roughly half its stake to Sony Corp. for US$185-million, which it used to pay down debt. DHX now owns 41 per cent of the brand, while Sony owns 39 per cent and the family of Peanuts creator Charles Schulz the remaining 20 per cent. Earlier this year, it also announced the departure of CEO Dana Landry, with executive chairman Mr. Donovan resuming a role he left in 2014; and the hiring of former Postmedia Network Inc. chief financial officer Douglas Lamb to replace outgoing chief financial officer Keith Abriel. DHX also had “a number of discussions” about selling part or all of the company, Mr. Donovan said, but ultimately decided against it.
“We only really needed to do one thing: deleverage. Because we had really too much debt,” he said. “At least, the market perceived that we had too much debt. ... And that’s what we did."
The stock has lost roughly three-quarters of its value in the past year; the stock rose a little more than 10 per cent in Tuesday’s trading, to $1.50.
In concluding the review, DHX announced on Monday evening that it had signed a five-year agreement with CAA Global Brand Management Group LLP, a division of Global Brands Group, to represent the Peanuts brand in Asia and grow its presence through licensing deals.The company said that China, and the region as a whole, are a priority for the Peanuts brand, and it expects revenues there to increase by 35 per cent over the next five years.
DHX also announced it would suspend its dividend in order to free up roughly $10-million annually to continue paying down its debt and to invest in creating content for WildBrain – the division of the company that focuses on advertising-based streaming, largely on YouTube.The WildBrain-branded YouTube channels, as well as channels dedicated to individual brands the companies represent such as Caillou, have a combined subscriber base of more than 50 million according to the company.
DHX reported a net loss of $14.1-million, or 10 cents a share, in the year ended June 30, compared with a loss of $3.6-million in the previous year. The company’s revenues increased to $434.4-million from $298.7-million the previous year, which was largely attributable to the Peanuts acquisition, as well as growth in the WildBrain business.
The company is focusing on selling more content to subscription streaming services such as Netflix, which means the cost of those productions is going up. Whereas producing a typical show in the past might have been $350,000 to $450,000 an episode, the cost has ballooned to “north of $1-million,” Mr. Donovan said, as these services compete to draw in subscribers. An example of the kind of high-end show that is now the norm is Netflix’s coming reboot of Carmen Sandiego, which has tapped DHX as its animation studio.
“As a content creator primarily specializing in kids and animation, it’s been kind of the same approach for 30 years. … The emphasis now in the world of streaming is toward larger budgets, more immersive productions,” he said. “We’ve tried to respond by retooling our approach to creation.”
On television, kids’ content was not as easily accessible to families and was difficult to monetize because advertising to children is heavily regulated and limited, he added. Streaming opens up new opportunities to reach viewers and to find revenue. DHX also has a television business – The Family Channel – which is preparing for what could be difficult negotiations in renewing contracts for the channel with cable and satellite companies. However, Mr. Donovan believes there is still a role for television.
“People are switching to iPads and that sort of thing, and they’re switching to the streaming services. … But I think [TV] complements everything else we’re doing," he said. "It’s obviously in a process of reinvention. But I think it’s got a future.”