CIDM: FY 2019 Q2 Beats Expectations With its Strong Cinema Business

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By Lisa Thompson

NASDAQ:CIDM

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Revenues for the quarter ending September 30, 2018 came in significantly above expectations at $13.7 million versus $16.3 million a year ago, declining 16%. $7.5 million came from the legacy projector business and $6.3 million from content distribution and streaming. The legacy business continued to decline from $10.0 million in Q2 2018 to $7.5 million in Q2 2019 (down 25%) as studios continue to fulfill their payment obligations, but did not fall off as quickly as expected. In fact business was so strong, revenues in that business were almost double what was projected. While Phase 2 has limits on its revenues as the projectors are paid off, Phase 1 can charge new studios if they show films. 

The content business was flat with last year at $6.3 million. This group however, is comprised of physical distribution (i.e. DVDs), streaming distribution and the company’s OTT channels. Physical distribution generated $4.0 million in sales and was very slightly down from last year. This is actually an excellent result as the DVD market is declining rapidly and many companies are leaving this business. Cinedigm (NASDAQ:CIDM) as the largest independent physical distributor has been able to capture market share as the industry consolidates. The rest of the content business was also virtually flat with last year at $2.3 million, however the company revealed that its OTT channels within that category grew 23% while the digital distribution of content portion declined. Cinedigm refuses to break out the dollar amount of these two parts for competitive reasons. On a sequential basis non-physical distribution was up only 4%. While the company has signed a lot of new distribution deals for its OTT channels, they are just beginning to roll out and we expect revenues to start to accelerate considerably in future quarters. For example, this past quarter the company had particular success with is launch on the XUMO service which distributes live channels and video-on-demand through LG, Vizio and Panasonic smart TVs. CONtv launched in October and the DOVE CHANNEL and DOCURAMA are expected to be added in November. Each channel will also allow content to be viewed on demand. The agreement expanded Cinedigm’s footprint by over 30 million households across the country through XUMO via nine smart TV integrations, mobile and web. 

View Exhibit I

Gross margin was down one percentage point year over year and flat sequentially at 74%. Gross margin dollars declined to $10.1 million versus $12.2 million as digital cinema business revenues fell. Total operating expenses declined $1.2 million and the operating loss was $897,000 versus breakeven a year ago. Expenses were down primarily due to the $1.6 million reduction on depreciation and amortization of property and equipment. This line item will continue to go down going forward. 

Interest expense declined $1.4 million because of financial restructuring and paying off debt. During the September quarter, total debt increased by $3.2 million as the company moves into the Christmas season and takes on inventory of DVDs to ship into retailers. Non-recourse debt, attributable to the digital cinema business declined $1.6 million and the remaining debt increased $4.7 million.

For the quarter, the company had a net loss to common stockholders $3.6 million versus a loss of $7.5 million in the year ago quarter. 

The EPS loss in Q2 2018 was $0.09 per share versus a loss of $0.60 per share a year ago. Shares outstanding increased to 37.7 million from 12.7 million a year ago. As of November 9, 2018, the shares outstanding were down to 35.1 million.

Subsequent News

Cinedigm continues to add distribution for its OTT channels. Since the September quarter ended it added a number of outlets each of which should add between $5,000 and $100,000 a month to revenues. In chronological order of announcements they are described as follows.

In October Cinedigm announced DISH’s new Subscription On Demand added Cinedigm’s DOVE CHANNEL and DOCURAMA channels to its programming. Both DOVE CHANNEL and DOCURAMA are now available as à la carte options for $4.99 per month each to DISH customers with a qualifying base programming package and internet-connected Hopper DVR, Hopper Duo, Joey, or Wally.

Cinedigm also partnered with Tubi, the leading free movie and TV streaming service, to launch six of the Cinedigm’s channels on the Tubi Channels streaming service. Today Tubi is expected to add CONtv and Docurama to its platform, and will add DOVE CHANNEL, WHAM, HALLYPOP and COMBAT GO in the future.  

On Oct. 23, 2018 the company announced it is working with Youku to distribute 30 original Chinese feature films in North America on all platforms including digital, physical DVDs and Blu-rays, and across all OTT platforms, with a primary focus on major streaming platforms and niche outlets. The films will also be included in the company’s new China-focused OTT channel Bambu, which Cinedigm is launching early in calendar year 2019. The films have never been seen before in the US or Canada and represent a wide range of Chinese film styles including current urban thrillers, relationship driven films, sci-fi fantasy, horror, and costume fantasy. 

On Nov. 09, 2018 Cinedigm announced that COMBAT GO and WHAM were launched as new linear offerings on The Roku Channel, an ad-supported streaming channel that requires no subscriptions or fees. Both channels also feature a VOD component. COMBAT GO and WHAM join fellow Cinedigm networks DOVE CHANNEL, CONtv, and DOCURAMA, which launched as channels in the Roku Channel Store in September of 2018. The Roku Channel is a top five channel on the platform in active account reach. Customers can access content via Roku® devices, including Roku TV™, as well as via the Web.

On November 14th, Cinedigm announced its DOVE and CONtv channels are now available through Samsung smart TVs, the manufacturer with the largest installed base of smart TVs. It expects other channels to follow.

Financing 

On October 9, 2018, Cinedigm issued a subordinated convertible note to MingTai Investment to borrow $5 million. The note has a term of one year from issuance, with two one-year extensions available at the option of the company, and bears interest at 8% per annum. The proceeds of the note are being used to repay $5 million of the subordinated notes dated October 21, 2013.

Cinedigm is can be valued looking at it two main businesses and valuing them separately. If we assume the projector business has no value at all, the company’s worth is entirely based on its distribution and content business. Using a metric of enterprise value to sales and its industry averages and Cinedigm’s calendar year sales, we believe that business is worth $135 million or $3.19 per share. We are basing this on an estimate of $30 million in sales in calendar year 2018 and peer averages of 4.3 to 4.6 times EV to sales.

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