Cinedigm: A Micro Cap Play on Digital Cinema

Apr.14.11 | About: Cinedigm Corp. (CIDM)

The conversion of cinemas from analog to digital and 3D continued throughout the economic crisis and has accelerated recently based on the conversations we have had with a number of suppliers in the industry. The most direct play on this trend has been RealD (NYSE:RLD) which came public in July of last year. RealD deserves a lot of credit for seeing the market opportunity, betting the company on 3D and executing well. They have been able to capitalize under the very nose of companies like Dolby that either didn’t believe in the market or could not execute. [Refer to our July 2010 report on RealD for more details.]

There are a lot of players in the digital entertainment space vying for different parts of the market. The biggest companies [Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX)] are focused mostly on individual devices and the home. Most of the public companies associated with the cinema space [RealD, IMAX (NYSE:IMAX), Dolby (NYSE:DLB)] now have market capitalizations above $1B. So finding smaller scale investments within the digital/3D cinema opportunity has been a challenge.

We discovered Cinedigm (NASDAQ:CIDM) about a year and half a go when we were completing our large overview report, "3D Computing from Digital Cinema to GPUs" and were intrigued with their positioning. The company soon entered a CEO transition period during which we watched carefully to see who would emerge to take over the solid platform that the company had and prepare to exploit the major shift to digital cinema. While we were waiting we did post a short overview, "Is it time for Cinedigm?"

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The short answer is yes and the longer answer is covered in our recent initiation of coverage report. The cinema industry in the U.S. is investing billions of dollars over several years to convert to digital technology. There is a major opportunity around servicing this large and growing asset base with software, services, and content that only a handful of companies are in a position to address. Cinedigm, though small at just over $80m in revenues sits right at the center of this space.

Basically the drivers are in place for rapid adoption of digital technologies, the market is large, and there are a limited number of players with the right technology, services and capabilities to exploit it.

These bullets summarize our view:

  • Theaters are shifting to digital technologies and going online to provide the next version of big screen entertainment. The move from film is similar to the shift away from printed infor-mation formats in news, books and magazines and has equally broad implications.
  • The transformation of the big screen is part of our ongoing coverage of what we refer to as "RealVR." The line between the real and the virtual is blurring quickly thanks to new technologies and how they are used. The cinema offers a venue for highly immersive experiences for a large audience.
  • The shift to digital provides theater owners with improved margins, greater flexibility and more compelling content types like enhanced picture quality and 3D. For most theater owners there is now a "convert or die" attitude with respect to digital and 3D.
  • Cinedigm provides services, software, and technology to theaters making the transition to digi-tal cinema. Cinedigm is benefiting from an increasing demand for solutions to support the digital operations of theaters.
  • Cinedigm just completed a leadership transition and Chris McGurk has taken over as CEO. Previously, McGurk was COO of MGM and Universal Pictures, President of the Walt Disney Motion picture group and, most recently, CEO of Overture Films. McGurk has the background, contacts and ability to lead Cinedigm into the next phase of growth and navigate the company in its pursuit of a market opportunity that totals $1B in the US and $3B globally.
  • Cinedigm acts as a service provider for the assets going into digital cinema, which includes financing for the initial purchase of the equipment. This adds a substantial debt to the balance sheet and obscures the attractive underlying service businesses from investors. We’ve put together an Intrinsic Valuation model that "looks through" the financing, which should really be in a separate entity.

With recurring revenues and some "built-in" EBITDA growth, the shares have support with substantial upside if they can execute their plans in the next few years. Our current IV factors in the corporate debt and total interest expense and suggests a stock price of $6.28 versus the current $1.77.

Disclosure: Cinedigm is a corporate research client of Research 2.0. Research 2.0 employees may own shares of CIDM. More information about our disclosures and practices are available on our website.