Is it time for Cinedigm?

by Kris_Tuttle on November 3, 2010

When we started doing our work on 3D cin­ema as part of our RealVR theme, we ran across Cinedigm (NASDAQ: CIDM $1.46).  The com­pany is very small and a true nano-cap ($44M) so we focused instead on larger play­ers like RealD, which recently com­pleted an IPO, and XpanD which is a large, and still pri­vate, player inter­na­tion­ally.  [Our pub­lished reports on these com­pa­nies are avail­able on the fol­low­ing links:  RealD_IPO Pre­view and R2 Though Leader Inter­view Ami Dror of XpanD.]

The other rea­son we held off on Cinedigm is that their good story is some­what obscured by their fund­ing of equip­ment for the­aters, which has resulted in the com­pany car­ry­ing a large amount of debt ($253M) rel­a­tive to their size.  Investors gen­er­ally dis­like this type of “asset heavy” busi­ness, espe­cially in dig­i­tal enter­tain­ment.  The com­pany is also in the midst of a CEO search and work­ing on improv­ing their very lim­ited vis­i­bil­ity with the pub­lic and poten­tial investors.  But there are rea­sons to expend the effort in get­ting past all the mind-numbing financ­ing dis­cus­sions and view the com­pany as an attrac­tive play on dig­i­tal and 3D cin­ema tech­nol­ogy.  Not the least of which is that the equity appears to be sig­nif­i­cantly undervalued.

The Basics

Cinedigm offers movie the­aters and enter­tain­ment venues a full set of prod­ucts and ser­vices (includ­ing financ­ing) to help them trans­form from old fash­ioned film to net­worked, dig­i­tal enter­tain­ment cen­ters.  The com­pany inte­grates third party tech­nol­ogy like RealD into a total solu­tion, and has their own pro­pri­etary soft­ware and some net­work ser­vices that add value and pro­vide some dif­fer­en­ti­a­tion to their solution.

The com­pany divides their busi­ness into two seg­ments, Media Ser­vices and Con­tent & Enter­tain­ment.  Media Ser­vices (Media) includes dig­i­tal cin­ema deploy­ment and financ­ing rev­enues, and ongo­ing ser­vices like dig­i­tal con­tent deliv­ery and exhibitor soft­ware.  Con­tent & Enter­tain­ment (Con­tent) includes alter­na­tive con­tent such as live enter­tain­ment offer­ings and pre-show adver­tis­ing ser­vices.  In the most recently reported quar­ter, Media accounted for 78% of rev­enue and con­tent 22%.

I find it eas­ier to look at the com­pany as 1) a provider of deploy­ment assis­tance and financ­ing, and 2) a provider of ser­vices and con­tent.  On the deploy­ment side the com­pany is actively focused adding their deployed the­aters and has a stated goal of reach­ing 14,000 screens in two years.  We’re not going to get into the deploy­ment pic­ture too deeply here because it gets com­pli­cated in terms of “Phase I” and “Phase II” deploy­ments, financ­ing, etc.  How­ever, one client of ours sum­ma­rized this area best by not­ing that the com­pany has a fair amount of “some decent built-in EBITDA growth for the next two years.”  In fact, man­age­ment has stated that each addi­tional 1000 screens adds $2–2.5M of EBITDA to the income statement.

The ser­vices and con­tent seg­ment is more inter­est­ing.  This includes ongo­ing dig­i­tal film deliv­ery, secu­rity and man­age­ment, man­age­ment soft­ware, admin­is­tra­tion ser­vices, alter­na­tive con­tent includ­ing live events and inde­pen­dent films, and adver­tis­ing ser­vices.   Enter­tain­ment cen­ters like cin­e­mas have been going through some­thing of a renais­sance thanks to tech­nolo­gies like 3D. Feed­back from live sport­ing events and con­certs viewed on large screens with pow­er­ful sound have been very pos­i­tive and yet another rev­enue stream for venue own­ers and oper­a­tors.  Cinedigm is in a good posi­tion to cap­i­tal­ize on this trend.

They com­pany recently divested their IT host­ing and ser­vices busi­ness and is look­ing to sell their small exhi­bi­tion busi­ness. Although small divesti­tures, these moves should help sim­plify the com­pany story and stream­line operations.

In July the com­pany sold just over 347K shares for $1.44 to incom­ing direc­tor Peter C. Brown, a for­mer exec­u­tive of AMC Enter­tain­ment.  This is a strong vote of con­fi­dence for an indus­try insider and new board member.

Com­pe­ti­tion

The large exhibitors in the US (AMC, Cin­e­mark & Regal) formed their own entity, Dig­i­tal Cin­ema Imple­men­ta­tion Part­ners LLC (DCIP), to pro­vide the financ­ing and infra­struc­ture for their 14,000 or so screens.   This leaves the rest of the mar­ket, which con­sists of hun­dreds of smaller exhibitors ripe for Cinedigm to work with.

Some dig­i­tal cin­ema tech­nol­ogy com­pa­nies like Sony offer deploy­ment ser­vices, financ­ing and related tech­nol­ogy to com­prise a com­plete solu­tion.  How­ever, these ser­vices are focused only on the spe­cific offer­ings of that ven­dor which means they have lim­ited appeal. Cinedigm can work with any and all tech­nol­ogy providers includ­ing Sony, Dolby, RealD, Barco, GDC, NEC, Christie, etc.

There are also a few small providers of these ser­vices and another pub­lic player, Bal­lan­tyne Strong (AMEX: BTN $8.54, $121M mar­ket cap), which seems to be both a com­peti­tor and a part­ner depend­ing on the deal.  National Cin­e­Me­dia (NASDAQ: NCMI $18.43, $976M mar­ket cap) is in the space but focused on being the adver­tis­ing ser­vices plat­form for the big the­ater net­works (AMC, Regal, and Cin­e­mark).  Firms like XDC (based in Bel­gium) show up in inter­na­tional markets.

In short, direct com­pe­ti­tion is a smaller fac­tor for stock appre­ci­a­tion than con­tin­u­ing mar­ket adop­tion and com­pany execution.

Attrac­tive Valuation

We’ve applied our Intrin­sic Value model and come up with an ini­tial esti­mate of $5.25 for the stock.  We’ve kept the assump­tions fairly con­ser­v­a­tive, at least in terms of the mul­ti­ple (17.5x), growth (circa 10%), and allowed for quite a bit of dilu­tion from out­stand­ing war­rants.   As one of our favorite insti­tu­tional sales­man has com­mented, “if the idea still works when I cut your price tar­get in half it’s a keeper.”  That’s cer­tainly true in this case.

Improv­ing Visibility

So far the com­pany has been mak­ing efforts to get in front of investors wher­ever they can.  That’s been lim­ited to beg­ging their way into lower-end investor con­fer­ences but may be look­ing up as they begin to get a bit more rec­og­nized.  I fig­ured that a blog post here would at least help get some basic ele­ments of the story out there.

The com­pany is sched­uled to report earn­ings on Novem­ber 11th, par­tic­i­pate in a panel dis­cus­sion at a Piper con­fer­ence on Novem­ber 9th, and present at a small investor con­fer­ence on Novem­ber 16th.

[Dis­clo­sure: Some num­bers above are pro­vided by Cap­i­talIQ.  I have a small long posi­tion in CIDM stock at the time of this writing.]

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