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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.
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.
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.
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.
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.]
- Cobb, Cinedigm make digital pact (variety.com)
- The aroma of fall deal pricings is in the air! (ipocandy.com)
- N.J. small-town movie houses struggle to stay afloat (nj.com)
- Phish 3D Movie to Be Released Nationwide on April 30th; Tickets on Sale Beginning April 14th (eon.businesswire.com)
- Telluride Film Festival Announces 2010 Line-up (slashfilm.com)
- Gucci 3-D Glasses – Because Nerds are Rich (luxist.com)
- Industry Leaders Forecast Dramatic 3D Expansion at Third Annual 3D Entertainment SummitTM (eon.businesswire.com)
Being pretty focused on mobile Internet, I’ve spent a good deal of time with Qualcomm and ARM Holdings but didn’t see the MIPS Technologies train leaving the station. And based on our IV analysis, it looks like we are too late. Still, the situation at MIPS is now one that we will have to watch and add to our coverage of the mobile Internet ecosystem. The positioning of the company may encourage momentum investors to pile into this one and push it further past our own IV estimates. The company reported a good quarter last night and is indicated up another 10% this morning even after the strong run that it has had.
So what is the positioning?
MIPS has been around since the mid-1980’s when there was major debate around Complex Instruction Set Computing (CISC), with the Intel x86 architecture being the primary example, and Reduced Instruction Set Computing, which had a number of players, including ARM, which some might say eclipsed MIPS in terms of overall success.
Overall, one would have to say that the x86 approach has won out in desktop and server computing. Apple was one of the last mainstream users of RISC architecture based on the PowerPC instruction set from IBM. However, the market for processors outside of desktops, laptops and servers is massive and growing rapidly. Processors are embedded in communication gear, TVs and set-top boxes, automobiles, medical devices, appliances, etc. And there are now myriad companies making embedded processors for all of these markets.
The key is that all these chip makers need to decide on a standard instruction set so that their chips can be easily programmed and integrated into designs. The market has boiled down to four: x86, PowerPC, ARM and MIPS. Both ARM and MIPS can be viewed as “pure play” companies in the embedded market. Both follow a licensing model whereby chip makers license the designs so that they can make devices that support the architecture and instruction sets that end-market customers require.
The rise of the smartphone has raised the stakes and the interest level in this market. Up until recently, MIPS has been a fairly quiet and ignored player compared to ARM. However, the company hired a new CEO from Cavium, a networking chip supplier that has become a very hot stock (sporting a $1.3B market cap and a 12x price/sales multiple as I write this.) Cavium is a MIPS licensee so the CEO has gone in with both eyes open and a vision for the company.
Thanks to an improvement in the underlying business and some stated goals to become a major player in the smartphone market MIPS is being looked at differently.
Maybe we missed it, maybe we didn’t…
The first stop for me in looking at MIPS was to crank out a quick Intrinsic Value which came to $11.70. Thanks to the strong report last night the stock should run past that figure today. But I’ve upped it on our watch list within the mobile Internet segment of our ecosystem.
Looked at another way, though, it might be tempting as either a takeover target or a pairs trade (short ARM, long MIPS) here. For example, ARM has a market cap of just over $8B and is trading at about 16x sales. On a relative basis at least it makes MIPS look cheap with a $440M EV and a 5.6x TEV/sales ratio. So a pairs trade here makes sense. And for any player wanting to get into this market an acquisition of MIPS is pretty manageable and well under $1B at this point versus the possible $10B needed for ARM. MIPS looks less risky with more upside for an a buyer on that basis.
[Disclosure: none at the time of this writing]
- Chinese Chip Closes In on Intel, AMD (technologyreview.com)
- MIPS touts its quad-core IP as an Atom-beater (linuxfordevices.com)
- One chance for Research in Motion and Nokia: Embrace Android (research2zero.com)
When KKR “went public” recently to raise another huge buyout fund a little bell went off in our head.
We have noted the multi-year shift away from public markets that started with hedge funds and then these massive increases in private equity activity around the world. It has been a situation that simply reflects the reality of the marketplace and the power large cash buyers have to dictate terms away from public markets.
Then KKR went to the public markets with enough success that there appears to be a line forming for the other major players to do the same thing.
This completion of the circle combined with announcements about upcoming $25B technology company buyouts and $100B funds just seems surreal.
Are the markets that broken?