WILHELMINA INTERNATIONAL, INC. 10-Q

Overview

Wilhelmina is a leading fashion model management company headquartered in New York City. The company was founded in 1967 and has grown to include operations in Los Angeles, Miami, and London, as well as a network of licensees. Wilhelmina provides traditional, full-service fashion model and talent management services to various clients, including retailers, designers, advertising agencies, media, and catalog companies.

Trends and Opportunities

The company expects its operations to be more resilient to industry changes and economic swings compared to smaller firms, due to its main base in New York City, the industry’s capital, the depth and breadth of its talent pool and client roster, and its diversification across various talent management segments.

North America is the world’s largest advertising market, with total annual expenditures on major media estimated to have exceeded $280 billion in recent years. Advertising expenditures on television, internet, magazines, and outdoor are particularly relevant for the fashion talent management industry, including Wilhelmina.

However, traditional retail clients in the fashion and beauty industry have faced increased competition from digital, social, and new media, reducing their budgets for advertising and model talent. Wilhelmina reviews the mix of talent and resources available to best operate in this changing environment.

Strategy

Wilhelmina’s long-term strategy is to increase shareholder value through the following initiatives:

• Increase brand awareness among advertisers and potential talent
• Expand the women’s high-end fashion board
• Expand the Aperture division’s representation in commercials, film, and television
• Expand celebrity and social media influencer representation
• Expand the Wilhelmina network through strategic geographic market development
• Promote model search contests and events and partner on media projects (television, film, books, etc.)

The company makes use of digital technology to effectively connect with clients and talent, utilizing video conferencing and other digital tools to identify opportunities to grow the careers of the talent it represents and expand its business.

Key Financial Indicators

In addition to net income, the key financial indicators that the company reviews to monitor its business are revenues, operating expenses, and cash flows. The company analyzes revenue by reviewing the mix of revenues generated by different divisions, geographic locations, and significant clients.

Salary and service costs, which include payroll and related costs and travel, meals, and entertainment, represent the largest part of the company’s operating expenses. Other key expenses include office and general expenses, amortization and depreciation, and corporate overhead.

Analysis of Consolidated Statements of Operations and Service Revenues

Service revenues increased by 2.2% for the three months ended June 30, 2024, compared to the same period in 2023, driven by higher commissions from core model bookings in Q2 2024. However, this growth did not fully offset the lower commissions experienced in Q1 2024, resulting in a 2.4% decrease in service revenues for the six months ended June 30, 2024, compared to the same period in 2023.

License fees and other income, which include franchise revenues from independently owned model agencies and various services provided by the company, remained unchanged for the three and six months ended June 30, 2024, compared to the same periods in 2023.

Salaries and service costs increased by 2.3% and 2.6% for the three and six months ended June 30, 2024, respectively, compared to the same periods in 2023, primarily due to personnel hires and payroll changes to better align Wilhelmina staffing with the needs of each office and geographical region.

Office and general expenses decreased by 18.2% and 20.4% for the three and six months ended June 30, 2024, respectively, compared to the same periods in 2023, primarily due to decreased legal expense, computer and office expenses, bad debt, and recruiting fees, partially offset by an increase in model apartment expenses and bank fees.

Amortization and depreciation expense decreased by 21.4% and 17.8% for the three and six months ended June 30, 2024, respectively, compared to the same periods in 2023, primarily due to decreased depreciation of capitalized furniture and leasehold assets at the company’s new New York City office.

Corporate overhead decreased by 5.3% and 0.8% for the three and six months ended June 30, 2024, respectively, compared to the same periods in 2023, primarily due to decreased audit costs incurred with the change of auditors in Q2 of the previous year, reduced Director’s Fees with a smaller Board of Directors, and lower corporate travel costs.

Operating income and operating margin increased for the three and six months ended June 30, 2024, compared to the same periods in 2023, primarily due to the increase in revenues and the decrease in operating expenses.

The company realized foreign currency losses of $7 thousand and $14 thousand for the three and six months ended June 30, 2024, respectively, compared to losses of $61 thousand and $79 thousand for the same periods in 2023, due to fluctuations in currencies from Great Britain, Europe, and Latin America.

Interest expense increased slightly for the three and six months ended June 30, 2024, compared to the same periods in 2023, primarily attributable to interest on finance leases.

Income before income taxes increased for the three and six months ended June 30, 2024, compared to the same periods in 2023, primarily due to the higher operating income.

The company’s effective tax rate was 47.9% and 45.7% for the three and six months ended June 30, 2024, respectively, compared to 115.9% and 51.3% for the same periods in 2023. The higher effective tax rate is primarily due to certain valuation allowances on deferred tax assets, amortization expense, foreign taxes, and corporate overhead not being deductible, as well as income being attributable to certain states with relatively high tax rates.

The company had net income of $247 thousand and $338 thousand for the three and six months ended June 30, 2024, respectively, compared to a net loss of $14 thousand and net income of $145 thousand for the same periods in 2023. The increase in net income was primarily due to the increase in operating income.

Liquidity and Capital Resources

The company’s cash balance decreased to $5.7 million at June 30, 2024, from $6.1 million at December 31, 2023, primarily due to $0.8 million net cash used in operating activities, partially offset by $0.5 million net cash provided by investing activities.

The company’s primary liquidity needs are for working capital associated with performing services under its client contracts. Management believes the company has sufficient liquidity to meet its projected operational expenses and capital expenditure requirements for the next twelve months and beyond.

Non-GAAP Financial Measures

The company reports certain non-GAAP financial measures, including Gross Billings, EBITDA, Adjusted EBITDA, and Pre-Corporate EBITDA, to provide users of its financial information with additional useful information in evaluating its operating performance. These measures are key operating metrics of the company’s business and are used by management in its planning and budgeting processes, to monitor and evaluate its financial and operating results, and to provide stockholders and potential investors with a means to evaluate the company’s financial and operating results against other companies in its industry.