Quarterly Results: RealD (Good) and NCM (Not)

By Patrick von Sychowski | August 7, 2014 1:14 am PDT
RealD logo

We are coming to the end of the current season of quarterly financial results, with RealD and National CineMedia, Inc announcing their respective Q1 2015 and Q2 2014 results. One is good and the other one not so good.

Starting with 3D technology licensing company RealD, the figures should please investors, with a 43% EBITDA year-on-year growth and net income of over USD 5 million. The press release gives the details:

Total revenue was $55.4 million, comprised of license revenue of $36.0 million and product and other revenue of $19.4 million. For the first quarter of fiscal 2014, total revenue was $59.2 million, comprised of license revenue of $37.3 million and product and other revenue of $21.9 million.

China license revenue represented 14% of total worldwide license revenue, up from 8% in the first fiscal quarter of 2014.

GAAP net income attributable to common stockholders was $5.5 million, or $0.10 per share, compared to GAAP net loss attributable to common stockholders of $1.5 million, or $0.03 per diluted share, for the first quarter of fiscal 2014.

The key metrics are interesting in terms of showing RealD weathering a slowdown in North America, both in terms of deployment and box office, with growth in emerging markets more than compensating and in some cases overtaking US/Canada numbers.

  • Estimated box office generated on RealD-enabled screens(1) for the first quarter of fiscal 2015 was $787 million ($387 million domestic, $400 million international). In the first quarter of fiscal 2014, estimated box office generated on RealD-enabled screens was $838 million ($431 million domestic, $407 million international).
  • Ten 3D films were released in the first quarter of fiscal 2015, compared to eight 3D films in the first quarter of fiscal 2014. These figures reflect the number of 3D films released domestically during the periods.
  • International markets generated 63% of license revenue and 34% of product and other revenue in the first quarter of fiscal 2015.
  • As of June 30, 2014, RealD had deployed approximately 25,600 RealD-enabled screens, an increase of 9% from approximately 23,500 screens as of June 30, 2013, and an increase of 400 screens (50 domestic, 350 international), or 2%, from approximately 25,200 screens as of March 31, 2014.
  • As of June 30, 2014, RealD had approximately 13,450 domestic screens at approximately 3,000 domestic theater locations and approximately 12,150 international screens at approximately 3,000 international theater locations.

In the earnings call (transcript by Seeking Alpha, as always) CEO Michael V. Lewis pointed to a 20% cost reduction and significant growth in China, Russia and Latin America as keys to the company’s success in this quarter.

In the first quarter, the majority of our 400 screen installs fell within these targeted territories. With respect to China, demand for 3D content continues to increase. In fact, it is estimated that China will overtake the U.S. as the largest 3D market worldwide by the end of 2014. 6 of the top 10 films in the region were shown in 3D.

In addition, of the top 10 films, 3D comprised nearly 70% of the box office, which is up from 53% in the prior year period. Transformers: Age of Extinction, released in late June, broke prior records to become China’s highest grossing 3D film ever, surpassing Avatar, and bringing in approximately $350 million to date in total 3D box office.

Local 3D content continues to be a prevailing trend, with 15 locally produced 3D films set to be released over the course of fiscal 2015 alone.

Looking ahead, Lewis highlighted RealD’s TrueImage, new screen technologies, laser projection and consumer-focused applications, all of which he said were part of RealD’s “prudent and disciplined approach” to R&D initiatives.

This was a clear allusion to RealD’s scaling back of R&D projects and decrease of spending from USD $5.5 million USD $3.8 million, which at a 32% reduction was significantly more than the 21% decrease in sales and marketing. Investment in consumer visual technologies was also cut by half from USD 7 million to USD $3.7 million.

So RealD has pleased the markets with major belt-tightening and with an installation rate of 125 to 150 screens per quarter in China alone, a strong focus on international expansion (where films like Godzilla earn 54% box office form 3D compared to 45% for USA – though US 3D film average was lower at 35% and international ‘only’ 45%) means RealD has a returned to a stable core business and should have a good-enough year.

NCM logo

For the parent company of US cinema advertiser National CineMedia it was less of a rosy picture, as the press release spells out in stark terms.

Total revenue for the second quarter of 2014 decreased 18.6% to $99.9 million from $122.8 million for the comparable quarter last year. Excluding revenue from the Fathom Events division that was sold in December 2013, revenue decreased 14.5% from $116.9 million for the second quarter of 2013. Adjusted OIBDA decreased 21.5% to $52.0 million for the second quarter of 2014 from $66.2 million for the comparable quarter last year and Adjusted OIBDA excluding Fathom Events decreased 20.5% from $65.4 million for the second quarter of 2013. Net income for the second quarter of 2014 was $3.6 million, or $0.06 per diluted share compared to net income of $9.5 million, or $0.17 per diluted share for the second quarter of 2013. Excluding $1.7 million in pre-tax costs associated with the proposed merger with Screenvision, net income for the second quarter of 2014 would have been $4.7 million, or $0.08 per diluted share.

So it seems the only ones cheering were the lawyers and management consultants who were paid USD $1.7 million that quarter to ensure that the NCM-Screenvision merger goes through.

Instead of dwelling in the figures Chairman and CEO Kurt Hall was already looking ahead and seeing a brighter future.

“While our projected results for the first nine months are expected to be below last year, we are experiencing strong Q4 bookings and a significant increase in the number of upfront discussions for the TV upfront year beginning this October.” Mr. Hall continued, “The shifts we are making in pricing strategy continue to help broaden our client base and inventory utilization. This combined with the expected competitive benefits associated with the Screenvision merger will position us very well to reestablish revenue and Adjusted OIBDA growth in the future.”

In the earning call (transcript again by Seeking Alpha), Hall elaborated that this decline was not the “start of a long trend” either for the company or (cinema) advertising, blaming “new pricing strategies.”. But reading between the lines it seems like NCM is betting the proverbial farm on the merger with Screenvision.

In this scenario, it actually makes perfect sense having bad quarterly financial figures, because it allows NCM to point to the figures and tell federal trade regulators (i.e. the DOJ), “look, see, cinema advertising is so small and under pressure from television competition that we need to merge to survive.” Here is where things stand on the merger according to Hall:

The anti-trust review process is progressing as expected as we and Screenvision are nearly finished responding to a second request for information from the Department of Justice. We also have made significant progress on the planning to integrate our two companies and we remain confident that we will achieve the 30 million or more in annual expense synergies that we mentioned on our last call. We have also received commitments and completed the loan documentation related to the 250 million required to fund deal expenses and the cash portion of the merger. So we’re ready to close as soon as the DOJ review process is completed.

Screenvision need no further convincing, as the company and its shareholders have already voted in favour, so they are not worried about NCM’s performance this quarter but rather keeping their fingers crossed that the deal will be waved through.

Meanwhile Hall was bullish about this year’s up-fronts, the third year that the company has been selling advertising the broadcast way:

Along with the Q4 pickup in national bookings we’re seeing much more upfront activity than in the past after a very successful upfront presentation in mid-May that included added excitement surrounding the Screenvision merger announcement in the previous week. This year was our third year participating in the TV upfront process and we’re seeing much more client and agency interest than in the past including increased demand for our content partner packages. While we’re being hampered somewhat by our inability to finalize future commitments related to the combined NCM Screenvision network until we receive the DOJ clearance, we currently are pacing meaningfully ahead of last year’s upfront commitments with discussions in process with nearly 50 clients representing over 200 million of potential commitments versus 19 clients that committed approximately 112 million upfront last year including our content partners and cell phone courtesy PSA sponsors.

This upfront activity for us is encouraging given the recent soft TV upfront. This is the first year since 2009 that the TV upfront commitments have declined from the previous year and thus maybe a sign that media buyers are beginning to look for alternatives including cinema. We could also set the stage for strong scatter market over the next several quarters.

Hall concluded the call, following a long Q&A with various analysts, saying that “I wish that the numbers were a little bit stronger but I do have to tell you that I have probably never been as excited about the opportunity that we have going forward.”

It is likely that the Screenvision merger will be approved, probably even with a minimum of conditions. Whether the merged entity can implement the cost savings and achieve robust growth is tougher to predict. It is important to remember that NCM is not a ‘cinema’ company, but an advertising company. That is the reason it’s HQ is in New York and not Los Angeles. Unlike RealD it has no international exposure. But it is the company that soon almost all major US cinemas will depend on for screen advertising revenue.

Then there’s Fathom, but that’s a post for a different day.

Carmike Cinema logo

On that note, however, it is worth going back to the earnings call by Carmike a few days ago (Seeking Alpha credit for transcript) and the prominence that was given to Digiplex, which the exhibitor has just acquired and what it is hoping to get in terms of adapting the focus on event cinema/alternative content. Here is what CEO S. David Passman III had to say:

We think we are in an excellent position to take alternative programming to the next level. Certainly for Carmike, perhaps even impacting this cottage industry for other exhibitors. Led by CEO and Founder Bud Mayo, a pioneer in theatrical exhibition and digital cinema, Digiplex has clearly demonstrated that there is still a largely untapped opportunity, to incrementally improve theater utilization. Since their formation less than four years ago, they have succeeded in presenting a wide range of non-Hollywood entertainment, such as opera, ballet, concerts, and sporting events among other programming, primarily booking such things during weekday times, when most theaters have the majority of their seats unfilled.

Digiplex has averaged up to 5% of its box office receipts from alternative programming in a given quarterly period. Carmike’s circuit is more than 13 times larger than Digiplex. So you can see why improving our success with this content, understandably, intrigues us. We hope to bring Bud and his team of alternative programming experts into the Carmike family. While obviously in the early stages, we are setting goals to spread the Digiplex alternative programming model across the Carmike footprint over the next couple of years.

Passman returned to the subject later in the call during the Q&A when he acknowledged:

I am in the weeds with alternative programming at this point. But any one who knows me, knows it has been something that I have been very anxious to figure out for the last several years, and I just haven’t been smart enough to do it. Bud has, and I hate to speak for him, but he believes that you can do the same thing at scale, as long as you do it by location. Meaning, you got to go, visit the theaters, you got to look at the markets that they are in.

You got to do some research around what kind of social environment is there, for instance, are the markets into things like concerts, or are they into things like ballet and opera. And frankly, that’s a lot of blocking and tackling. So it’s a theater by theater approach. Bud has taken four years to get it up to where he has, and 22 locations. I believe, that he can visit clusters of locations, or as people can and train theater managers by groups, and we can get up to scale, I am hoping several dozen next year, that we will be at that kind of level.

For NCM and Fathom too, the next year will be critical in doing for alternative programming what it has already done for cinema advertising in the US.

Patrick von Sychowski
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