Cinedigm FY2012 Results Update

by Kris_Tuttle on June 26, 2012

Full-year results for FY2012, ended March, demon­strated accel­er­at­ing rev­enue growth (+31%), improved prof­itabil­ity, and a “restack­ing” of the busi­ness to align with prof­itable growth oppor­tu­ni­ties in soft­ware and content.

[To see this report in PDF for­mat (with dia­grams and IV table) please use this link CIDM_FY2012_Results_Update (PDF).]

CINEDIGM (CIDM — $1.40), FY 2012 RESULTS UPDATEJUNE 26, 2012

Kris Tut­tle, kris@soundviewresearch.com, +1–617-934‑1877

Fis­cal Q4 was a lit­tle weaker than planned due to a few soft­ware deals slip­ping out of the quar­ter and the com­ple­tion of a major acqui­si­tion (New Video) that will now serve as the foun­da­tion of the con­tent business.

For­ward guid­ance for the cur­rent fis­cal year came in a lit­tle below where most peo­ple were think­ing due to expected flat­tish deploy­ment rev­enues and planned invest­ments in new con­tent to sup­port long term rev­enue growth. We’ve recast our IV model and a pre­lim­i­nary ver­sion is included in this update.

Over­all, investors saw the report as a “mixed bag” made up of strong oper­at­ing results for the fis­cal year with greater planned invest­ments in the com­ing year to drive long-term rev­enue and prof­itabil­ity. We see it a bit dif­fer­ently because we expect that announce­ment of addi­tional con­tent acqui­si­tions will drive the stock before sub­se­quent rev­enue and earn­ings. Over­all man­age­ment has exe­cuted well, con­tin­ues to own ~40% of the equity and is mak­ing the right long-term moves that sup­port our cur­rent $5.62 IV esti­mate. Addi­tional details are below.

EXTENDED COMMENTARY 

Soft­ware and non-deployment rev­enues basi­cally dou­bled for FY 2012 but were flat­tish due to three cus­tomer accep­tance delays; these are sched­uled for com­ple­tion in the next two quarters.

For the rest of the fis­cal year we expect fur­ther devel­op­ment of the busi­ness in terms of new instal­la­tions, busi­ness pipeline and the launch­ing of new releases with addi­tional func­tion­al­ity. Cinedigm has also hired a head of soft-ware sales and mar­ket­ing to han­dle the grow­ing pipeline and more fully cap­i­tal­ize on the global mar­ket opportunity.

Based on the mar­ket demand, prod­uct pipeline, com­pet­i­tive posi­tion­ing and man­age­ment focus we expect the soft­ware growth rate to be sus­tain­able for the next two fis­cal years. By then we also expect a mean­ing­ful por­tion of the soft­ware rev­enues to be cloud-based and using the SaaS deliv­ery and busi­ness model. Over­all, we expect the growth and prof­itabil­ity of the soft­ware group to be the star in the medium-term while the con­tent busi­ness ramps up.

Turn­ing to con­tent busi­ness, the acqui­si­tion of New Video (NV) has already led to a num­ber of notable con­tent acqui­si­tions tar­geted to avid audi­ences in the­aters and sub­se­quently down­stream to mobile devices, tele­vi­sions and lap­tops through online con­tent providers (iTunes, Net­flix, Amazon.com, etc.)

For the first time the com­pany mapped out some details of their New Video con­tent strat­egy. The com­pany is in-vesting in new con­tent dur­ing the F2013 fis­cal year, which means acqui­si­tion and related costs will impact the P&L before rev­enues begin to kick in. Cinedigm FY 2012 Results Update June 26, 2012 2

In essence, the com­pany will be tak­ing a data and busi­ness model dri­ven approach to licens­ing and dis­trib­ut­ing con­tent that rep­re­sents a de-risking of the dig­i­tal con­tent mar­ket. Man­age­ment likes to describe this as the “Mon-eyball approach” to the con­tent indus­try. For those not famil­iar with the book and movie by the same name, it shuns gut feel­ings, big names, ego and other adverse selec­tion cri­te­ria in favor of an ana­lyt­i­cal, results-focused ap-proach that is geared to opti­miz­ing returns.

That doesn’t mean that the con­tent doesn’t have to be good. The New Video acqui­si­tion puts the com­pany at the nexus between a plethora of inde­pen­dent con­tent providers and the mas­sive global but frag­mented audi­ence of consumers.1

1 For more back­ground on the acqui­si­tion see: Cinedigm’s Acqui­si­tion into Con­tent and Dis­tri­b­u­tion, April 23, 2012. http://blog.research2zero.com/2012/04/cinedigms-acquisition-into-content-and-distribution/

As an investor, this means that Cinedigm pro­vides “last dol­lar in, first dol­lar out” cap­i­tal. They also receive a 25% dis­tri­b­u­tion fee and up to 20% of back-end prof­its after all fees and expenses. How­ever, these fa-vorable invest­ment terms won’t show up in rev­enues and prof­its until after newly-licensed con­tent gets into the release schedule.

The graph here illus­trates the dynam­ics start­ing in the quar­ter before release. Up-front mar­ket­ing costs must be expensed as incurred in ad-vance of rev­enue. As the film goes through release and then down-stream mon­e­ti­za­tion the expenses are recov­ered and period losses turn into period prof­its, which even­tu­ally result in a cumu­la­tive gain that ben­e­fits some from long-tail demand.

Each release will vary con­sid­er­ably in terms of details but the over­all shape of the busi­ness will be the same: pre-release mar­ket­ing and other expenses incurred and reported, fol­lowed by rev­enues. After a year results will be steady enough to off­set upfront invest­ments so the P&L will become more balanced.

VALUATION 

The bal­ance sheet and report­ing struc­ture of Cinedigm make it hard for some investors to under­stand val­u­a­tion, but the busi­ness has been sim­pli­fied and today it is much eas­ier to under­stand. We decon­struct EBITDA for all the com­pa­nies we fol­low any­way. Most man­age­ment teams find the notion of “adjusted EBITDA” appeal­ing but it must be parsed and reclas­si­fied for use in any sen­si­ble intrin­sic val­u­a­tion (IV) model.

In the case of Cinedigm we include all (core and non-recourse debt) inter­est expenses but exclude depre­ci­a­tion. On the side of the bal­ance sheet we include only core debt as part of the total cap­i­tal­iza­tion of the com­pany. Ap-plying this to the IV model using a10x earn­ings mul­ti­ple we arrive at our IV of $5.62. We’d also note that the “period share price” that mea­sures purely cur­rent num­bers comes to $3.00, also well above the cur­rent share price of $1.40.

Just for fun we ran a ver­sion of the IV model with the non-recourse debt included in the total. It drops the IV sub­stan­tially but it still comes out to $3.65 per share using a 10x mul­ti­ple. Cinedigm FY 2012 Results Update June 26, 2012 3

CONCLUSION 

Cinedigm has come a long, long way in just over a year and has entered a new phase of growth. Because they are blaz­ing a new trail in terms of the­atri­cal con­tent in a dig­i­tal world it’s going to take a lit­tle time for investors to embrace the busi­ness, but we expect that as more top flight con­tent comes to the big screen from Cinedigm with all the lit­tle screens fol­low­ing right behind, peo­ple will begin to take notice.

We will be cov­er­ing the newly dig­i­tal world of cin­ema more com­pletely in our next basic report on the company.

Mean­while, the upside in the shares pro­vides a strong incen­tive to put some patient money to work in this name.

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