) enters 2013 with one of the largest independent film content
libraries and a stream of upcoming new releases. This year the
company will shift its content business from "investment mode" to
"harvest and invest" mode. This dynamic will help increase revenue
growth and expand margins.
Cinedigm is taking a low-risk/high-return approach in the film
business by acquiring distribution rights to completed films with
critical acclaim and knowable market opportunities. As an asset
class, films with relative low production budgets offer the highest
ROIC. Our tables show returns of 7-8x for the most successful big
films compared to 26x for the small ones on which Cinedigm is
Their software business continues to be thede facto platform for
distributing, programming and managing filmed content for both
theaters and studios. New customers have continued to help propel
the business forward and their new releases will begin to tap the
power of "big data" in the industry. Cinedigm has been working on a
cloud-based solution that brings together the disparate data
sources used to run the business today. This will take time but has
tremendous potential not just for Cinedigm but the industry
overall. This would be the first real application of big data and
cloud computing to this space.
After years of upgrading theaters to digital this work is
basically done (Cinedigm is still actively converting theaters
outside of North America for some time to come) and now the
downstream cash flows will be used to fund further expansion in
software and content and reduce the debt used to fund those capital
investments. This process started in 2012 and will continue. The
balance sheet will continue to improve and an upcoming rating of
the debt from Moody's is likely to highlight a potential upgrade to
investment grade. This will accelerate the progress the company has
already been making.
The formula for a much higher stock price is in place with 1)
faster growth in content and software which are "higher multiple
businesses" and 2) a relative decline in the theater servicing
business and the debt levels linked to the upgrade to digital
systems during the last few years.
Investors can expect a steady stream of generally positive news
regarding development in software, content deals, and new
cloud/SaaS offerings. Debt will come down steadily and there is
always the chance that a restructuring could accelerate that. Note
that our valuation above
the debt and related expenses.
Investors who can look beyond a quarter or two should be moved
by the opportunity to own what will be one of the leading digital
content and software businesses in entertainment at a very
depressed valuation. Our intrinsic valuation model suggests a stock
price of $7.34, which is well over a 300% increase from current
Software Reigns Supreme
Investors have figured out that proprietary software is often
the key to maintaining industry position and extracting profits.
Companies ranging from Oracle (
) to Apple (
) have demonstrated this beyond all doubt.
Cinedigm software dominates what might be called the "back
office" of the film business. Cinedigm has multiple products that
cover essential operations for film studios, theaters and theater
chains. Here's a simplified description of the major components and
(click to enlarge)
Major studios and distributors use the Cinedigm Theatrical
)) for planning, booking, delivery, payments, accounts receivable,
and reporting. Although it's a separate module we'd group the
Cinedigm Royalty Transaction Solution (RTS) in this segment. It
handles the licensing, royalties and management for titles,
copyrights and trademarks, which can get very complex, especially
Theaters rely on the Cinedigm Exhibitor Management System
((EMS)), the Theater Command Center((
)) , and larger chains also rely on the Cinedigm Enterprise
offering for integrating the operations of many theaters into a
unified operational system.
EMS handles the "other side" of the studio bookings on behalf of
the theaters. So it has parallel functions for planning, booking,
payments and reporting from the perspective of the theater. Once
they have films scheduled they use the TCC to basically "program"
all their screens with content including films, trailers,
advertising and track status of what's going on within the
The Cinedigm Enterprise software allows large exhibitors to
tackle the complexity that comes from many locations, lots of
screens, and overall consolidation of diverse operating elements.
Besides being necessary for visibility this software also provides
automation features and business process optimization for the
The Cinedigm software is analogous to some well-known examples
in other industries, like airlines (Sabre (SABR)), automotive
(DealerTrack (TRAK)), communication services (Amdocs (DOX), CSG
Systems (CSGS), and Synchronoss (SNCR)), and residential real
estate ((MLS)). Most well-developed industries have software
backbones that make all the basic interparty functions work.
Reinventing Content & Distribution
To paraphrase an old saying - "the new digital entertainment
infrastructure is willing but the industry players are weak."
The filmed entertainment business basically still follows the
same "big bang" modelit has used for decades; Toy Story, Hunger
Games, Zero Dark Thirty, and so on. This means big budgets, big
films, big stars and heavily promoted releases. For a small number
of films this works. But for the vast majority of films this model
doesn't work at all.
It's common knowledge that "the content and distribution model
for the industry is broken" but now digital distribution and
multiple content models provide the tools to fix it. The
specialized and "long tail" parts of the content market opportunity
Take an example like
which is a quality movie about yoga, a growing topic of interest to
many but it's certainly not a film that's going to pack people into
multiplexes across the country. But by keeping costs low and being
smart about distribution such a film can turn a nice profit.
Smarter distribution can enhance revenue generation and lower
distribution costs. This cuts across all the channels including the
theaters. In some places like New York City, SantaBarbara,
California, andBoulder, Colorado, a film like
will fill a theater. For any "niche film" there are dozens to
hundreds of theaters which have the demographic profile that's a
good fit. A theatrical release (even a limited one) is a big deal
for people who make movies. Films that have to bypass the theaters
and go "direct to DVD" still have a stigma attached to them.
Beyond the theaters there is of course iTunes,Amazon
(AMZN),Netflix (NFLX), VOD and various other digital services.
These services are all very immature, especially with respect to
the use of data, targeting and social networks. This creates a big
opportunity to use these powerful platforms to generate demand for
Cinedigm is already a dominant player in this channel with
relationships with iTunes, Amazon, Netflix and most of the dozen or
so other online outlets. Today they are acquiring more content to
continue to build their library and position here. But the big
payoff will come from exploiting more of the data to target
effectively. For a broader overview of big data in the media
industry please refer to our November 2012 presentation "Big Data"
for Media (see note #1).
Going back to
, there are about 16 million people doing yoga in America, with
over 100,000 employed in the yoga business which generates about
$7B in revenues. This is a pretty impressive market opportunity for
a niche film if you can effectively reach that group. Taking some
reasonable assumptions - let's say that 10% of the market might
want to rent or buy such a film - an average price of $5 translates
into an $8M gross. In the world of independent films this is a home
run since costs are often well under $1M.
But there are innumerable opportunities for this type of
content/market model right now which in aggregate reaches into the
billions of dollars. And that's only in what some might consider
the documentary format in areas from car racing to skate boarding
to biking, baseball, travel, etc.
This approach is by no means limited to documentary style
content and is effective for all major genres. Some samples are
included in the section below.
Cinedigm has over 12,000 movies and shows available in digital
formats and is a major contributor to online venues like iTunes
where they offer 1,700 of their feature films.
The new part of the story, though, is their recent acquisition
program where they are acquiring and releasing a dozen or so
top-flight films a year. Investors will see these releases coming
regularly this year and we expect the number and quality to
increase to 20 to 25 features per year over time.
Here are some examples of newer Cinedigm content:
Arthur Newman tells the tale of a man who fakes his own death to
escape his unhappy life. The film stars Colin Firth, EmilyBlunt and
Anne Heche supported by a screenplay from Oscar-nominated Becky
Violet & Daisy brings two teenage female girls to the screen
as assassins with a screenplay by Oscar-winning Geoffrey Fletcher.
The two female leads have received strong reviews already and are
joined by film star James Gandolfini in the cast.
In the "feel good" category we have Don't Stop Believin':
Everyman's Journey about a guy discovered on YouTube who became the
new lead singer for rock band Journey. Major festival buzz and
critical acclaim add to a promising demographic appeal.
Citadel is a good old-fashioned horror movie with a father fighting
off a twisted gang of feral children intent on killing his baby
girl. Kind of a "Children of the Corn" meets "The Walking Dead." It
may not win Oscars but it's got an audience appeal.
Like Water is an up-close-and-personal feature about a champion
"Ultimate Fighter" caters to a growing audience for the sport. UFC
championships have become increasingly popular world-wide and are
seen by four to five million viewers.
Up for an Oscar this year is The Invisible War, which has changed
the awareness of the plight of many women in the US Military. This
shocking and uncomfortable film has moved viewers up to and
including US military leadership who may finally take action.
These are high quality films with talented (and often acclaimed)
actors, writers and directors. The movies may not be "blockbusters"
but in aggregate they generate considerable sales at attractive
margins and low risk. One of the things Cinedigm needs to develop
more is the discovery process. There are many high quality films
here that viewers won't discover since they won't be heavily
promoted. Thankfully, social media will change that.
Advantages & Challenges
- Cinedigm has a
long-standing incumbent in the development of the
that the film industry has used to manage their business. It is
developing and extending this into a broader family of products,
data sets and services from a strong position.
- The acquisition of New Video in 2011 has given the company at
a stroke a
massive content library
, experienced content acquisition team and relationships
with all digital paths to small screens from Amazon to
iTunes to Netflix to Wal-Mart (WMT)
- A growing
base of over 12,000 cinema screens
provides cash flow plus a critical element to combine with online
distribution to disrupt some of the age-old conventions in filmed
Management has been substantially upgraded
to support a company 2-3x as large as the current Cinedigm. In
addition to determination and skills they bring to the day-to-day
management they have a long-term perspective with substantial
- Many equity
investors don't like to see debt
. The level and complexity of the debt used to finance the
digital cinema build-outs can put off some. However, debt will
continue to decline on both a relative and absolute basis as part
of the normal course of business.
- The economics of the content business (management will refer
to the "J-Curve") means that
Cinedigm recognizes up-front costs on new releases before
they get the revenue
. This tends to understate success the more aggressive they get
at building the business it increases near-term costs to support
additional revenues two or three quarters in the future.
Cinedigm has proven itself very effective at both divestitures
and acquisitions. Given the size of the opportunity combined with
their existing position investors should expect strategic
acquisitions to be an important element going forward.
We wouldn't expect to see any direct acquisitions into
distribution since that would be competitive with the existing
Cinedigm customer base.
There are some areas, though, which appear to offer some
significant strategic advantage to the company. We've no idea which
if any might unfold over time as management no doubt has their own
agenda and must be price conscious as well. But here are some
- The concept of social search has been around for years but thus
far has been poorly implemented, if at all, even by leading
companies like Facebook (FB), Apple, Amazon, Twitter and LinkedIn
(LNKD). Movies are a classic case where input from friends or
people with similar tastes is a home run. But so far even the basic
"collaborative filtering" is not very impressive. There are
opportunities to foster much better content discovery (and revenue)
- The creation of content is going through a revolution of its own
thanks to services like Indiegogo and Kickstarter. Cinedigm already
gets a benefit from this with more quality content being made and
looking for distribution but they could find an advantage with
either a partnership or some related initiative to help smooth the
path from creative idea to watching with popcorn on the big
- Lots of industries are finding ways to "route around" traditional
paths including rights acquisition and marketplaces. Cinedigm
already has some pieces of this in place on the software side but
having a more robust online marketplace that can handle rights
around the world might be a significant opportunity at some
- Everyone is keen on data analysis these days and Cinedigm is
already building a set of products and services around it. However,
there are additional sets of data along with tools that could
enhance the ability to target films geographically
source content for small screens.
- Cinedigm is generating sales around the world from their US base
but there are also other companies in foreign markets that might be
complementary, especially if they can be had at the right
- This concept may be a little out there with films but there are
additional opportunities for filmmakers if they license elements of
their content. This can be music, video segments, games,
characters, rights to use in education or specialty markets.
- Management has talked about the opportunity to "develop some
channels" of content that can provide regular incremental viewing
and revenue. The whole industry has struggled to figure out what
these can be. Some examples include sporting events, concerts and
cultural entertainment. A partnership in this area with content
that "clicked" and had critical mass might prime the pump.
We considered areas like front-end reservations and ticket sales
in the past but they no longer seem attractive now that Cinedigm is
a major content player.
For all of these we should also keep in mind that Cinedigm likes
to use a "date before marriage" approach so we should have some
opportunity to evaluate their strategy as it unfolds.
Theaters & new revenue streams
Theaters have always struggled to break out of their limited
hours of productive operation - evenings and weekends. Matinées,
occasional film festivals and one-off business events are practiced
generally today but don't do much to move the needle. It all still
comes down to Friday night and Saturday.
So far theaters have fought the more visible battle against
watching movies at home with better stadium style seating, upgraded
concessions and high end digital projection and sound systems; the
big screen still makes a difference in terms of experience.
Advertising has become common to the irked displeasure of
theater goers. Besides the fact that watching commercials is
painful, a special indignation is justified since the viewer has
paid for a ticket and feels entitled to an advertising-free
performance. This dynamic probably puts a limit on how much
theaters can push advertising without creating a risk that they
might drive people back home to iTunes.
The elephant in the room is the fact that the vast majority of
consumers can't go to the theater during the day. Other than the
occasional rainy day matinee or a chance to "play hooky from work"
once in a while this market doesn't really exist.
One area that Cinedigm is working on that could develop into
something meaningful for independent theaters is an ability to
participate in the "downstream" revenue from other viewing channels
like iTunes and Netflix. Theaters agree to show new films slated
for a targeted theatrical release and enjoy some small percentage
of the downstream revenues generated. The number for an individual
film will be small but the numbers accumulate both over time and
the number of releases. It's also important to note that these
revenues would expand margins as they come with little to no
Two of the giant theater chains, AMC and Regal, set up their own
film distribution company called Open Road Films in 2011. Their
move provides a pointer to where the independent theaters will go
using a company like Cinedigm as a partner. Structurally, this is
the solution that makes the most sense and while it will take some
time, the theater owners will be drawn to it.
Initially the driver is more content to support their existing
model but in time they will come to the additional step of
participating in downstream revenues. Cinedigm can pull this off
because of their existing relationships with these exhibitors
their steady and diverse mix of high quality films scheduled for
release. This gives the theaters the quality and diversity they
Cinedigm is blazing some new territory here but getting
exhibitors to be part of the network and give them a play in the
downstream revenue is a step in bringing more disruptive innovation
to a somewhat moribund industry. Hard as it sounds it might be
easier than trying to find people who will sit in a theater during
The Small Film/High Return Secret
There's a fundamental truth in the film industry that most
creative types and studios prefer to ignore rather than embrace -
small budget films generate the highest returns on investment with
lower risk than big budget movies.
The industry is obsessed with big films costing $200M to $300M
to make because it's more about ego, power and prestige than
profit. Although they offer the chance of making high absolute
), they come with the same outsized risk (
). Even when they aresuccessful, the percentage returns are limited
to some degree by the sheer size of the investment needed.
Any film, large or small, can end up losing money. But the
smaller films are the ones that have the best chance of making very
high percentage returns. The biggest successes have outlandish
returns of 100 times the original budget. These are rare events and
can't be predicted, let alone expected. In the aggregate one way to
make money in films is to keep budgets small.
The point isn't that all small films have a good chance to make
money. Many fail to even make it through production and many of
those never earn back their production costs.
(click to enlarge)
We put quotes around "profit" since there are many additional
costs for promotion and distribution that can be substantial,
especially if a big marketing push is justified. It's a tricky
decision since it adds to losses initially in the hopes that it
will drive enough incremental audience to help profits.
The Cinedigm target films fall into the $100K to $1M range where
returns are very attractive on average and occasionally offer a
"home run" that can generate a multiple of the capital invested. As
the business grows the revenues and profits add up. Since the
number of films distributed will also go up over time the
likelihood of hitting a home run in any fiscal year will also
As long as Cinedigm sticks to their knitting and runs the
business effectively it will generate a virtuous circle of economic
benefits for the company and shareholders.
Cinedigm recently reported results for the December quarter,
which is its fiscal Q3. Generally speaking, investors would
classify the quarter as "inline with expectations" with the company
remaining on track to meet the full year guidance they have
articulated. All the information is readily available via the
detailed press release and the conference call transcript. There
are a few notable points as the quarter relates to our long-term
Revenue from software and content is growing much faster than
total revenue. Non-deployment revenues of $9.6 million were up 53%
YoY versus 17% growth for total revenues.
Cinedigm released two solid but not spectacular films during the
In Our Nature
) and these films are doing as planned and entering digital
channels in the current quarter.
The next two releases are scheduled for this quarter and look
like they will add to the momentum based on initial reviews.
Critical acclaim and an Oscar nomination for
The Invisible War
, combined with a major library, has made Cinedigm the "go-to guys"
for documentary films.
Management again articulated a clear vision of the changes
underway in filmed entertainment and their strategy to create and
capture value there.
When we look at results we don't use EBITDA as our metric
(although management does.) For Q3 we take revenues of $23M less
direct costs, including interest expense of $6.7M, to reach our
proxy for operating income of $6.9M which is just under 30% of
Business Models & Valuation
For a relatively small company Cinedigm has a few business
The way we see it, there are three types of revenue:
where Cinedigm gets some combination of installation fees, service
fees and software fees per screen or as a percentage of total
which is sold to enterprises with an upfront license fee +
maintenance and theaters on a per screen basis. Over time the
business may evolve to have a greater SaaS component.
where Cinedigm gets distribution fees of 20-30% plus residual
ownership, which can be exploited for some "long tail" revenue
We have substantially reworked our intrinsic valuation model to
account for the new business mix and restatements of past periods
to reflect the currently operating parts of the business (note
It's worth noting that we model the company our own way in order
to use our intrinsic valuation (IV) model. Cinedigm management
talks about EBITDA as its core metric, which is what investors will
. EBITDA has never been the cornerstone of how we evaluate and
value companies. Interest payments and taxes are, after all, real
costs so in our models they are always included. Conversely we do
"look through" non-cash expenditures and account for stock based
compensation in the shares outstanding rather than the P&L. The
result is basically in line with other methods as long as the
business is creating real economic value.
Our Cinedigm IV model is included here so that investors can
understand the assumptions and methods that lead to the $7.34 IV
estimate. As the size of the software and content businesses grow
we will understand the longer-term growth and margin dynamics of
these businesses better.
The one element of the model where we have been obviously,
perhaps overly, conservative is in the multiple. With an average
top-line growth rate of 17% driven by margin-expanding businesses
like software, a 10x P/E multiple is very low. As we see it this is
the easiest way to settle arguments about whether SG&A will
trend to 20% or 25% of sales over time. Nobody has clarity on that
yet so our low multiple gives us plenty of room for parts of the
model to adjust and still support our IV estimate.
There's an expanded table of comparable but different public
companies included as an appendix to this report along with some
thoughts about how they fit into our thinking. Looking at the
valuations and different businesses it's difficult for anyone not
to see that Cinedigm looks relatively undervalued on traditional
metrics like TEV/revenue and TEV/income.
Cinedigm has been undervalued for some time now but the
combination of multiple factors is setting up catalysts for 2013
The software and content businesses are growing much faster than
the overall company. Revenues from their cinema servicing business
are reducing debt and the balance sheet is improving to the point
where the debt will become investment grade.
As this report went to "press" we couldn't help notice that the
don of entertainment investing, Kirk Kirkorian, is preparing to
return to the movie business (note #3). His timing has been
impeccable in the past and now he sees the opportunity that
technology and industry change is bringing as being irresistible,
even at 94.
We expect to see shares of Cinedigm move up towards our IV
estimate during 2013 and 2014. It will take time but when it occurs
the small market capitalization may result in sharp moves.
(click to enlarge)
Appendix - Extended List of Comparable Companies
The Cinedigm mix of businesses makes it hard to point to a
"direct comparable" company and use it as a valuation yardstick. As
the company grows its software and content business it will span
more related companies.
Theaters - Although their business model is different from
Cinedigm, these companies are clearly in the same industry. We've
included Cinemark (CNK), Carmike (CKEC), IMAX (IMAX) and Regal
Theater Supply Chain - These companies supply products and
services into theaters. At the bottom of the food chain (and with
the lowest valuation) we have Ballantyne Strong. As we move up we
get to Technicolor, Barco, RealD (RLD) and Dolby Labs (DLB). The
bigger firms have meaningful business outside of theaters and
Content and Distribution - We've included some content owners
like Lions Gate (LGF) and MSG (MSG) along with distributors like
Bona Film Group (BONA) in China. Although we acknowledge that
Netflix has been a horse of a different color their recent foray
into acquiring content gets them on the radar screen.
Advertising & Data - Rentrak (RENT) is a long-standing
provider of film industry data that is working on expanding and
improving their capabilities and analysis. National CineMedia is a
leader of in-theater on-screen advertising.
Operational Support Software - Now we're getting a little
technical but the software business of Cinedigm is very much like
that built upon operational software from companies like Amdocs,
CSG and Synchronoss. These companies are focused on communication
services but as a software business model they provide useful
Online Infrastructure - The last category is the "sexiest" and
provides the online software and services to support business
processes. The back-end business of Cinedigm could evolve far in
this direction over time. At the consumer level the example of
OpenTable (OPEN) is instructive. What some investors don't realize
is that the restaurant industry relies on the OpenTable back-end
software to manage the customer portion of their business.
(click to enlarge)
2 Historical numbers and restatements sourced from
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
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