Funimation Financial Shortfall Explained

posted on by Christopher Macdonald
Navarre Conference Call Provides Insight into Funimation's Business

A significant portion of Navarre's recent third quarter 2006 earnings conference call was dedicated to speaking about FUNimation Entertainment and provided insight into the operation of Funimation.

Earlier reports had stated that Funimation was performing "below expectations." Comments made by Navarre executives during the conference call put the earlier statements into perspective.

Cary Deacon, President & COO of Navarre, explained that Funimation's core business of anime home video, which accounts for approximately 80% of the company's revenue, was performing "above expectations" in the anime sector, but very poorly in the non-anime sector.

Funimation's two other areas of business, merchandise licensing and broadcast, were the areas performing below expectations. Merchandise licensing refers to income made from licensing rights to create merchandise based on Funimation properties. Broadcast income does not refer to the FUNimation Channel, but rather income from licensing TV shows to broadcasters such as Cartoon Network.

Regarding the shortfall in licensing and broadcast, Deacon said that those areas are "Very unpredictable on a quarterly basis," but stable over an annual basis.

In regards to the FUNimation Channel, which has not yet been picked up by any cable or satellite networks, Deacon stated that they were "buoyant and positive about where it is headed." He stressed that The FUNimation Channel is a 5-year plan, not a 12-month plan, and that they are "Pretty well on track with what we believed would happen. " He explained that this project would allow them self control of what properties were broadcast on TV.

Eric Paulson, Chairman & CEO of Navarre, added that the FUNimation Channel was a part of their strategy in terms of content acquisition and licensing because broadcast drives those markets.

In terms of properties, Deacon stated that Funimation had invested in some children's (G rated for kids 12 and under) properties that had not performed as hoped. He pointed out that that market was performing poorly across the board with their competitors as well, pointing to 4Kids Entertainment, a company firmly rooted in the children's market. Going forward, they are re-directing Funimation back towards its core anime market (12+ age groups) which continues to perform well, and they have recently invested close to $8 million in license acquisitions. They expect to see results from that investment starting in their coming fiscal second quarter.

Finally, Deacon pointed out that the anime business has typically seen a 12-month turnaround on products, referring the time of the company's initial investment, to the time the product reached the market and started earning income. He said that they were working with their partners to decrease that period to 9 months, meaning that the company would release anime with 3 months less delay.

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