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New Frontier Media Inc (NASDAQ:NOOF) reported fiscal second quarter earnings last week [see call transcript], showing continued pressure on the business segments as the company discloses additional (although much lower) impairment charges.

Quarterly Results

NOOF’s second quarter revenues were relatively flat, falling to $11.2m compared to $11.4m in the prior year quarter. Overall, international revenues were up 41% during the first six months of the year while the domestic market fell 6%.

The Transactional TV business continues to generate a vast majority of overall profits, driven largely by increased sales in the Video-on-demand (VOD) segment.

However, this revenue growth comes with additional costs as the company must make upfront investments to reach these new markets. Gross margins within this segment have fallen to 63% compared to 69% in the same quarter last year.

NOOF reported an operating loss of $286k, driven primarily by higher costs across most of the business segments and a non-cash impairment charge of $0.6m in the film production segment.

Financial Position

While the business continues to face challenges going forward, the balance sheet and financial position of the company remain strong. The company has $14.8m in cash on the balance sheet – after backing out liabilities, NOOF’s net cash balance is $5.7m or almost $0.30 per share.

The company’s current ratio sits at a healthy 3.61.

Despite the business struggles, the company continues to generate cash, with an adjusted free cash flow of $3.37m so far in 2010. This cash-flow number is affected by a significant increase in cap-ex expenses as the company is in the process of upgrading its storage systems. In addition, cash was paid out at the beginning of the year for producer arrangements that should be recouped before the end of the fiscal year.

New Lease Agreement

In October, the company announced the signing of a new lease agreement to consolidate its operations into a 50k square-foot facility. Historically, business operations were split between two smaller locations.

The new lease is offering very attractive leasing terms including substantial leasehold improvement allowances, and should allow for increased efficiencies in NOOF’s operations going forward.

According to NOOF’s CEO, Michael Weiner,

We obviously will have some costs associated with moving, but we estimate combining the facilities and what we have to look forward to, we will save a substantial amount of money over the next several years by having everything in one facility, and plus the ability to grow.

So it was a very, very favorable deal…And as I say the amount of money we got from the landlord was substantial and made the deal very economically viable.

Conclusions

Consider these valuation statistics:

  • Using a TTM EPS number of $0.23, the cash-adjusted P/E is only 6.9.
  • EV/EBIT is only 5.03.
  • P/Book Value is 0.7.

By most traditional valuation metrics, the company continues to remain historically cheap, even after the recent run-up in the stock price.

This conclusion is backed by management actions, as several company insiders bought back over 33k shares in August when the stock traded between $1.35-$1.50, near its 52-wk low.

A new institutional investor, Longkloof Limited, an investment holding company based out of the Virgin Islands, disclosed a new 11.5% stake as well.

While the business is certainly facing short-term pressures, the stock remains too cheap to ignore.

Disclosure: Long NOOF

Source: New Frontier Media Remains Too Cheap to Ignore