The following piece was done pre-IPO for
RLD priced strongly at $16 and traded in a $19-$21 range first day.
While I liked this deal mid-teens, I am not a buyer at all
plans on offering 12.4 million shares (assuming over-allotments) at
a range of $13-$15. Insiders will be selling 6.4 million shares in
the deal. JP Morgan (
) and Piper Jaffray (
) are leading the deal, William Blain, Weisel (TWPG), and BMO
co-managing. Post-IPO, RLD will have 52.5 million shares
outstanding for a market cap of $735 million on a pricing of $14.
Note that sharecount includes warrants/options given to movie
theater chains as incentives to sell-in RLD's 3-D technology. These
options are included as an expense item to fair value on the
earnings statement. However as they will eventually be converted to
shares it is best to remove the expense item and include those in
the sharecount instead.
IPO proceeds will be used to repay debt and for general corporate
CEO and Chairman of the Board Michael v. Lewis will own 14% of RLD
post-IPO. President Joshua Greer will also own 14% of RLD post-IPO.
We are a leading global licensor of stereoscopic
(three-dimensional), or 3D, technologies. Our extensive
intellectual property portfolio enables a premium 3D viewing
experience in the theater, the home and elsewhere.
This is an 'Avatar' IPO essentially. Avatar was such a huge 3-D
success, film companies all over the world are now planning on
filming and/or converting their big releases into 3-D...and RLD is
far and away the worldwide leader in movie theater 3-D technology.'
'The Last Airbender' was shot in 2-D with no plans on a 3-D
release. Post-Avatar, 'The Last Airbender' was converted into 3-D
and grossed $70 million total over the July 4th holiday weekend.
Only a percentage of that take was from the 3-D screens, still the
trend post-Avatar is to now release a 3-D version of a 'big
release' movie. The next 'Spiderman' installment for example is now
expected to be in 3-D.
Note that there is a big difference from filming 3-D (as Avatar was
filmed) and filming in 2-D and converting in post-production.
Either way though, the end result is shown in theaters on RLD's 3-D
Our 2nd 'story stock' IPO of the summer here, this one has better
financials than [[TSLA]] at least; although it would be quite
difficult to have worse financials than TSLA!
RLD licenses their 'RealD Cinema Systems' to theater chains. In
addition, RLD sells their 3-D formant, eyewear and display/gaming
technologies to consumer electronics manufacturers and contend
providers for 3D viewing in high-def TV's, laptops and
In addition RLD's 3D technology has been used in applications such
as piloting the Mars Rover, military jet displays and medical
***Growth has been ridiculously good over the past few years,
reaching critical mass in the 12 months ending 3/31/10. As of
3/31/10, RLD's 3-D technology had 5,321 screens, up from 2,108 on
3/31/09. That is a year over year screen growth of 152%. With the
sector trends noted above and this sort of year over year growth
and clean balance sheet, this is a recommend in range right here.
RLD is not just winning the movie 3-D technology battle, they have
won the war.
Main competitor is IMAX (
). IMAX grew to 438 screens in 3/31/10 from 371 in 3/31/09. By all
indications, the IMAX experience is more impressive than RLD. RLD
has won on installation cost however as retrofitting existing
theater's for RLD 3-D is far less expensive than an IMAX
installation. RLD has won on cost.
***Note that growth continues. As of 6/30/10, RLD's systems were on
5,966 screens a sequential quarterly rate growth of 12%. RLD
screens are in 51 countries with 64% being in the US.
- From 2005 through 2009, 27 3D motion pictures were released. In
2010 alone, 23 3D motion pictures will be released with 33 more
expected in 2011.
Competitors include Dolby (
), Imax Masterimage and Xpand. As noted above, RLD has won the
movie theater 3D war but the results remains to be seen in consumer
$1 per share net cash post-IPO.
Fiscal year ends 3/31. FY '10 ended 3/31/10.
Product revenues (eyewear) accounted for approximately 55% of
revenues, licensing per movie revenues 45%.
Gross margins are negatively impacted by the 3D eyewear. Currently
RLD sees a negative net margin on eyewear. in Fy '10 RLD began an
eyewear recycling program they hope will lower their costs and push
eyewear into positive margin territory. Currently this is an issue
however and longer term profitability will in part be determined by
RLD's ability to gain some margin traction on their eyewear.
Licensing margins are strong as the costs there are minimal. This
part of the revenue stream (55% in FY '10) is similar to the Dolby
business model. The technology is already there so the cost to RLD
***Note that GAAP earnings for FY '10 and FY '11 have been/and will
be skewed by theater stock options. A few years back RLD offered,
nearly free, 3.6 million stock options total to AMC, Cinemark (
) and Regal (
) as incentive to grow the installed RLD 3D screen base. Those
options fluctuate with the implied price of RLD's stock worth.
These options will be exercised once screen targets are achieved,
so they belong in the sharecount and not on the earnings statement.
Because the implied value of RLD's worth grew so much in FY '10,
these options accounted for a GAAP drag of $39 million on net
revenues. This was not a real cost and gets folded out and those
options get put into the sharecount instead.
The above could be a potential drag on the stock price as those
theater chain stock options make it appear as if RLD is much less
successful on the bottom line than they really are. To date, all
the mainstream press articles on RLD note the losses without noting
they come from these external stock options.
Two issues, one real and one a GAAP accounting rule. The real issue
is RLD's need to improve margins on their eyewear. The licensing
model is raking in the cash on top/bottom line, the eyewear is
currently killing margins.
FY '10 (ended 3/31/10) - $189 million in revenues, a massive
increase from $45 million in FY '09. Drivers here include 1) an
increase in RLD 3D screens, 2) more 3D film releases and 3) the
massive success of Avatar. Gross margins were 26%. Again the
negative margins on the 3D eyewear are hurting overall gross
margins. Operating expenses have grown far slower than overall
revenues, a good sign. Operating expense margin was 23%, putting
operating margins at a slim 3%. Plugging in taxes puts net margins
at 2%. Earnings per share of $0.07.
FY '11(ending 3/31/11) - Very difficult to forecast. By the end of
the fiscal year, RLD 3D screens should grow by 50%. Factor in the
increased slate of 3D releases and it should be another solid
revenue growth year. The question mark however is 'The Avatar
Factor'. Avatar accounted for a huge chunk of FY '10 licensing
revenues, plus eyewear revenues per attendee. It is doubtful there
will be another Avatar like performer in FY '11. Toy Story/Shrek
were the drivers in the June quarter, each becoming a big hit.
Harry Potter should drive revenues in the December quarter.
I would estimate FY '11 revenues in the $260 million range,
approximately a 36% increase from FY '10. As usual, I'd rather be a
bit conservative here. FY '10 gross margins were impacted by
eyewear recycling start-up costs. Folding those out and including
some success in that program in FY '11 should push gross margins to
30%. Operating expense ratio should dip to the 20% area, putting
operating margins at 10%. Plugging in taxes puts net margins at 6
1/2%. Earnings per share of $0.32. On a pricing of $14, RLD would
trade 44 X's FY '11 earnings.
Again, as noted above, GAAP earnings will be negatively impacted by
theater chain stock options. I folded those out and placed those
options in the sharecount.
- Trends here are about as strong as they come. RLD's 3D technology
is the standard and by 2011 they should be in over 10,000 screens.
In addition, the major film companies are planning approximately 30
3D releases annually the next couple of years. At a pace of over 1
per every two weeks, it should keep those screens lit. The question
mark here is whether RLD can convert this swift growth into bottom
line growth/profits. Thus far that has not really happened due to
negative eyewear margins, and the risk here is that it never will.
Growth and the trends are so strong here though that this is an
easy recommend in range.
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