Boat Rocker Media (TSX: BRMI): Q2 2024 update

The results:

Management reported including Untitled since the sale closed on June 28th, this makes the quarter look better than it actually is.

To be intellectually honest you need to look at continuing operations:

• Revenue $47.5M, -61% YoY

  • Television $36M, -64% YoY

    • Production $21M, -77% YoY

    • Service $11M, +27% YoY

    • Distribution $5M, +20% YoY

  • Kids & Family $11M, -41% YoY

    • Production $3M, -3% YoY

    • Service $7M, -49% YoY

    • Distribution $1M, -49% YoY

• Adj. EBITDA -$2.4M (vs $2.5M last year Q)

  • Television -$1M

    • Expenses down 62% YoY, almost enough to offset the decline in revenue

  • Kids & Family $3M, -39% YoY

• Cash available for use $77.7M

  • Up from $35.9M last quarter due to the Untitled sale

  • Came in a bit better of my estimate of $75M of available cash post sale

  • Means $1.38 of available cash per share

• Re-iterated guidance of $10M of EBITDA

  • Seasonally H2 is stronger and recovering from the strike

Quarter is bad as expected, very little content was delivered in Q2 as we’re coming off the tail impacts of the strike. This is pretty common in the content business, sometimes you get quarters where shows don’t get delivered, often in the summer.

Not too worried about the quarter itself.

A good sign of greenshoots is the Representation segment showing strong numbers. if you look at Adjusted EBITDA from discontinued operations which is Untitled, it reached $5M and is up 70% YoY.
If you think about the lifecycle of IP, representation gets paid first as the actors get commissioned, then service revenue gets paid next (you see that up nicely in the TV segment of BRMI), and then its production revenue and distribution revenue when the show is delivered.
Well if representation is inflecting back to growth after the strike, it’s a good sign that the other segments that BRMI retain could be next.

The environment however remains tough with management continuing to talk about a more depressed demand environment from streamers as they push for profitability. Note that this could be getting better seeing the inflection in profitability at most publicly traded streamers.

1st good sign: Insight stake purchase and why this could be very bullish

This is where I think this quarter is very interesting.

In the quarter, they announced having entered into an agreement to acquire the remaining 30% stake in Insight Productions they don’t already own.
While this initially looks like a negative (management doing M&A when they trade below cash), I actually think it’s fairly bullish.

First of all, Insight Productions is the company at BRMI responsible for all its Canadian content, it has a high mix of service work, and is a more reliable profitable engine with less risky productions than the big International and US scripted content.

BRMI acquired 70% of Insight in 2018, as part of the acquisition agreement came a put option for the minority shareholders that could force BRMI to buy out the remaining 30% in 2024 at “fair market value” assessed by an independent 3rd party.

Well they exerted that right which leads to BRMI buying this stake for what sounds like $7.5M (fair value estimate from management).
First of all, not to state the obvious, but that implies the remaining 70% is worth $17.5M, an amount definitely not priced in by the market today, but a potential indication of takeout value.

In terms of EBITDA this adds, the last figure we have is from 2020 where they laid out the expected EBITDA and the expected put option liability value:

If you go by this math, and the implied EBITDA valuation of 4.6x, then the 30% stake purchase could add $1.6M of EBITDA.

Here’s where it gets very interesting.
BRMI had been talking about doing M&A since going public, but they haven’t executed a meaningful deal virtually since going public.
Now in 2020-2022, valuations were extended, and management showed discipline, so it'd make sense why they didn’t buy anything.
But then in 2023-2024, with valuations depressed, if they really wanted to do a deal, and had Fairfax’s approval, then they would have done one. So how come they kept talking about doing M&A (which weighed on the stock) when they didn’t do anything?

Well if you look at the press release, MD&A and call transcript, management has given no indication of their intent to do M&A in the future. Every quarter they used to say they want to do M&A, now it’s gone from any of the earnings release language.

Considering the fact that the two executive chairmen are former lawyers, I think this was just good legal language, ahead of a forced deal with Insight.
I think their prior commentary around M&A wasn’t a signal that they wanted to burn the cash on fire by doing M&A, but a legal disclaimer that they were going to HAVE to do M&A as part of the 2018 Insight acquisition agreement.

I think this is an excellent sign, the fact that management has taken away all wording and hasn’t signaled any more willingness to do M&A seems to confirm my theory that Fairfax pushed for the Untitled sale, and is blocking any kind of deal (or management came to their senses, who knows).
This greatly reduces the risk of the cash balance being lit on fire.

2nd good sign: the buyback

BRMI has had an NCIB filed for some time, and they never used it.
It does seem like this time is different. The authorization is upped from 500k shares to 2M shares, and they’ve clearly voiced their intention to use it.

It’s also the first time BRMI publicly acknowledges the significant discount the shares trade at: “given the trading price in the Company's stock and the volatility in the markets, management and the Board believe that the market price of the company's subordinate voting shares does not reflect the intrinsic value of the Company and that the repurchase of stock would be in the best interests of the Company and its shareholders and would represent an attractive and appropriate use of available funds.”

3rd good sign: Freudian slip?

I could be overthinking this one, but on the conference call, when the analyst from TD Cowen asked management why consider any kind of organic content investment when you trade below cash (good question!) and when you could privatize yourself with the cash on balance sheet, the CEO answered in an interesting way.

I don’t have the exact quote because the transcript isn’t out yet, but he said that the NCIB is a good start, and that the board is looking at all sorts of ways to create shareholder value, and answering his question about privatization he said “Things you talked about will be on the table”.

I might be overthinking this, but any indication that privatization is on the table is a great sign.

The rest

The good

• Announced that they’re going to work on cost cutting with benefits as early as H2 2024, that’s the right thing to do given the strike and weakness in demand

• Content investments will be more focused on opportunistic, distressed type deals, instead of organic IP expansion

  • A bit of a pivot away from the high risk production, into projects that did a lot of the heavy work, but got stuck missing the last dollars to get to monetization

  • If you’re going to spend on organic IP rebuilding, this is by far the best way

The bad

• Beyond just the strike, the demand environment remains lackluster with big content buyers having built up inventory ahead of the strike that they’re now working down, and putting a bigger focus on profitability instead of growth at all cost

Conclusion

I think that as you dig below the surface of mediocre results which to me isn’t that surprising considering the timing of delivery and the writers guild and actors strike, there’s some very encouraging signs that BRMI might not be a value trap and that the steep discount to NAV it trades at could be closed over time.