In this Thought Leader Interview, we talk with Chris McGurk, Chairman of the Board and CEO of Cinedigm Digital Cinema Corp. (CIDM). Chris took the helm at Cinedigm earlier this year and has been deploying new business strategies that promise to enhance the value of the company. In this interview, we talk to Chris about the new business strategies and discuss how he sees Cinedigm evolving. Some of the key takeaways from our interview with Chris include:
- Cinedigm is shifting into a new growth cycle. Under McGurk’s leadership, the company is being transformed from a successful digital technology deployment company to an entertainment services company focused on the high growth software and content distribution businesses.
- Cinedigm is capitalizing on the ongoing transition to digital cinema technology. The company has signed almost 9,000 screens with 128 exhibitors and installed nearly 7,000 screens to date, and there is widespread recognition within the exhibition community globally that the time to go digital is now. Cinedigm’s software business is experiencing increased demand as the digital conversion process reaches critical mass. The company’s recent deals with Warner Bros. and AMC highlight its strategy of helping exhibitors and distributors become more automated and efficient.
- Cinedigm is providing more alternative content for exhibitions to fill theatres during non-prime times with avid audiences and the creation of THE CINEDIGM NETWORK, which will offer on-going, programmatic content to exhibitors in a “channel” format, including independent films series, an action sports series, kids and family programming, and more. Cinedigm expects to begin announcing exhibition partners in the next 60 days.
- The biggest issue facing Cinedigm when talking with investors is the complex nature of their financials. GAAP distorts the strong growth in revenues and EBITDA being posted by Cinedigm’s non-deployment businesses. The financial picture should become clearer as the company pays down the non-recourse debt with the strong free cash flow generated by its deployment subsidiaries.
R2: Great to speak with you, Chris. We appreciate your time. You’ve taken over the reins at Cinedigm while the industry in the midst of a massive transition to digital technology. What have you seen thus far and what impact does that have on Cinedigm?
CM: Our last fiscal year, 2011, which ended this March 31st, was the best year financially and operationally for Cinedigm in our company’s history. We had our first ever quarterly and annual profitable adjusted EBITDA performance from our non-deployment businesses and that is a very important indication of our progress. We have every expectation that this trend will continue in fiscal year 2012.
From both an operational and financial standpoint, exhibitors are seeing the benefits of going digital, and we significantly accelerated our digital screen deployment program during the last year. In the first calendar quarter of this year, we signed 1,402 digital deployment agreements – by far our biggest multi-exhibitor signing quarter ever. And, in the last month alone, we signed almost 1,000 screens with Marcus Theatres and Malco Theatres –- two of largest exhibitors who until now had yet to make a decision on digital conversion. This underscores that the exhibition community fully realizes that the time to go digital is now and Cinedigm is the right partner to make it happen. All told, Cinedigm has signed almost 9,000 screens with 128 exhibitors, and has installed nearly 7,000 screens.
Our software business is also experiencing increased demand as the digital conversion process reaches critical mass. As your readers may know, Cinedigm is uniquely positioned as the leading provider of operational software to BOTH entertainment distributors and to exhibition. Two recent examples: in June, we signed a deal with Warner Bros. whereby they are licensing our Theatrical Distribution Systems to serve as their accounting and release management solution, including release planning, booking, print management, revenue accruals and more. In March, we signed an exhibitor agreement with AMC – the 2nd largest domestic theatre chain – who selected our Exhibitor Management Solution for its North American sites. Both Warner Bros. and AMC are viewed as progressive thought leaders who adopt the best and most updated software solutions for their respective businesses. These deals underscore that software and business analytics have never been more important in the entertainment business and Cinedigm is positioned solidly as the leader in this area. We remain highly focused on helping exhibitors and distributors get even smarter and more efficient.
On the international front, as part of our overall global expansion strategy, Cinedigm recently secured a multi-year contract with an India-based media exchange initiative and is engaged in numerous pilot programs throughout Europe, Latin America and Australia – all of which we expect to translate into sales as these exhibitors secure digital cinema financing.
We have intensified the focus on our alternative content business – with strong early results. In the month of July alone we’ll be distributing the groundbreaking documentary LIFE IN A DAY in conjunction with National Geographic Entertainment and YouTube, the Sarah Palin documentary THE UNDEFEATED and John Carpenter’s indie film/psychological thriller THE WARD. Our digital cinema offerings are diverse and unique, providing a great opportunity for exhibition to fill theatres during non-prime times with avid audiences.
From a broader perspective, this year saw a series of “pioneering firsts” for Cinedigm, including the first ever Live 3D wide release music performance with the Foo Fighters, the first international LIVE 3D sporting event with the FIFA WORLD CUP FINALS, and the historic 10th anniversary special release of Memento with an exclusive Q&A with Christopher Nolan. These events ran in off peak times in the theatres – often mid-week – and every program gave fans a unique viewing opportunity while providing the exhibitor community incremental revenue from box office and concessions.
R2: Your background and experience differ from many executives in “the movie theatre business.” How do you plan on leveraging your background and experience to create value at Cinedigm?
CM: Cinedigm was largely unknown outside the studio and exhibitor community when I joined in early 2011, so my appointment immediately brought attention to this company from an entirely new group, including investors, producers, talent and the media. And, as I spend more and more time communicating with these constituencies, we are getting people in the industry excited about the potential of digital cinema and how we might work together. And, clearly, the relationships I’ve forged in the entertainment business over the years are extremely useful at opening doors. Our digital distribution, digital management tools, software, technology, and content plans will strengthen the overall entertainment industry and we need to share that story far and wide with studios, producers and exhibitors. The industry is changing and we want to be a uniting force as entertainment evolves and consumer expectations continue to expand.
R2: What are some of the more important new business strategies being deployed at Cinedigm?
CM: Simply put, we can accelerate growth and create significant revenue by streamlining the company’s focus and directing our resources and efforts toward those businesses where we can truly take advantage of the growth opportunities presented by the rapidly expanding digital cinema platform. So, while we continue to rapidly accelerate our deployment program, we will also focus our energies on building our high potential software and content distribution businesses. Both are businesses where we can be the clear market leader.
R2: You have mentioned that Cinedigm wants to get deeper into alternative content. What types of opportunities do you see in this area? Are there some new approaches that you have in mind that may make it more successful now?
CM: A statistic that astounds me is that only about 5% of seats are occupied in theatres Monday through Thursday (and only about 15-20% on an annualized basis)! That means theatres are empty upwards of 80% of available times on average, and yet the domestic box office is a more than $10 billion dollar business. As you can imagine, just a small incremental increase in capacity utilization through alternative content programming has the potential to create a huge new business.
To take advantage of this, we are using our digital cinema platform and the very targeted and efficient distribution model it facilitates to secure exhibitor partners for a new initiative, THE CINEDIGM NETWORK. Focused on providing programming to exhibitors during off-peak times, this network will offer ongoing, programmatic content in a “channel” format, including independent films series, an action sports series, kids and family programming, and more. This proposition will create significant business upsides for all partners: exhibitors will clearly benefit from both increased box office and concession revenues, consumers will benefit from a unique, enhanced and communal theatre experience and the producing community will have an outlet for programs that wouldn’t normally get a theatrical release. We expect to begin announcing our exhibition partners in the next 60 days.
Needless to say, my background and experience in the film and television business give me tremendous confidence in our alternative content strategy.
R2: Tell us more about creating downstream revenue opportunities with Cinedigm’s exhibition partners. How do you envision this part of the business evolving in the months ahead?
CM: A very exciting part of THE CINEDIGM NETWORK is the financial partnership we are creating between Cinedigm, the exhibitors and the producing community. We are aligning the financial goals of exhibitors with producers and distributors in this ground-breaking partnership by including them in the downstream profits of the projects they support, including home entertainment, VOD and the like. This partnership will incentivize the exhibitors to support, market and nurture projects by sharing a piece of our profits with them. It’s a win-win-win and the reaction to this initiative has been tremendous.
R2: Cinedigm has been making investments in the software business and expects to continue to expand there. What kinds of opportunities do you see in the cloud for Cinedigm going forward?
CM: As more and more screens are transformed to digital, Cinedigm is in the unique position to be the most influential innovator in creating digital cinema software applications that capture and analyze data and create management efficiencies for exhibitors and distributors. Obviously, as the digital cinema rollout progresses, software will be needed to power 100,000 plus global screens, support studio digital distribution, as well as gather and analyze playback and booking data. As the market leader, Cinedigm is extremely well-positioned to take advantage of this growing opportunity, both by expanding our customer base across the entire world-wide digital platform, and by developing new management and analytical tools to help our customers operate their businesses more effectively. We also are in a strong position to develop precision marketing and audience analytic software tools for our studio and exhibitor customers. The growth potential of Cinedigm’s software business is enormous.
R2: We’ve seen some bearish articles in the media recently on 3D cinema, some calling it a “fad that’s had its run.” What is your view of 3D technology and the role it will play in cinema and entertainment going forward?
CM: There are some areas of entertainment where 3D is absolutely breaking new ground and creating a better entertainment experience for audiences — particularly in the area of sports, music and cultural events. This type of content is obvious and organic for 3D and will continue to thrill audiences by bringing them right into the entertainment experience.
For filmed entertainment, I have always believed – for both filmmakers and audiences – 3D provides an amazing opportunity to bring a new dimension (pun intended) to a storyline thru the visual enhancement, immersion and engagement of viewers. However, 3D is not meant for every movie; in fact, forcing 3D on certain films demeans the value of 3D as it’s seen as a ploy versus a true artistic decision. Story and character are always the most important part of any film; when used appropriately, 3D will always help take a film with good story and character development to an entirely higher level of audience engagement.
Overall, 3D is not going away and as studios and directors show more restraint on when to use or not use 3D, everyone will benefit – from exhibitors to studios to consumers.
R2: You have been at the helm of Cinedigm for over six months now and have been out on the road speaking to investors. What do you perceive to be the things not well understood or appreciated by investors about Cinedigm today?
CM: The biggest issue facing us when talking with investors is the complex picture our financials tell if you merely take a quick glance. With that quick look, our financials show strong cash flows but significant non-cash losses. But this is because GAAP requires us to consolidate the revenues, earnings, debt and depreciation from our non-recourse deployment financing subsidiary. This seriously distorts the strong growth in revenues and EBITDA being posted by our non-deployment businesses. Fortunately, this view will be significantly clarified in the next couple of years as we rapidly pay down the non-recourse debt with the strong free cash flow generated by our deployment subsidiaries.
R2: One of the main conclusions from our financial analysis of Cinedigm is that the large amount debt currently on the balance sheet associated with financing digital cinema equipment for exhibitions should be in a separate entity. What is your view of this issue?
CM: That’s a question we often get. As I referenced earlier, while our balance sheet situation should begin to take care of itself over the next few years as we quickly pay down our non-recourse debt, we will always look at smart options to further clarify and simplify our balance sheet. A key criteria is to maintain the support and confidence of our studio partners in anything we do in this area, as their trusted relationship with Cinedigm is a key competitive advantage for the Company.
R2: One last question for you today, Chris. What do you see as the major challenges for Cinedigm during the next 2-3 years?
CM: Cinedigm is at a unique crossroads in our growth cycle. We are transforming from a successful digital technology deployment company to an entertainment services company focused on the high growth software and content distribution businesses. This transition will require a great deal of management energy as we communicate this emerging business focus both with our existing constituents of exhibitors and studios, but also with an entirely new group of business partners, including talent agencies, advertising agencies, brand partners, producers and more.
Like any large transition, this will involve some degree of business complexity but the potential upside is tremendous, rewarding us in success with a higher growth, higher multiple, bigger market value company ... and we are highly confident we can achieve that success. Our strong management team has the experience and relationships to make this a positive and seamless transition. As you likely know, Adam Mizel and Gary Loffredo were the co-CEOs for nine months prior to my joining Cinedigm and both now manage the company with me, with Adam the CFO and chief strategic officer, and Gary Loffredo in charge of digital cinema and our general counsel. They’re both excellent executives, and along with the whole management team have done a great job making the digital rollout happen. They’ve got enormous credibility in both the exhibition and the studio community – giving us a great foundation to quickly build our software and alternative content businesses and create shareholder value. And our Board is very supportive and insightful, with Peter Brown, our lead independent director and former head of AMC Theatres, our partners at Sageview, and all the other Board Members bringing their tremendous experience and background to bear in all our key decisions.
R2: We appreciate you sharing your thoughts about Cinedigm with us and our readers, Chris. We wish you and your colleagues all the best in the future.
About Chris McGurk
In January 2011, Chris McGurk was named Chief Executive Officer of Cinedigm and was elected Chairman of the Company’s Board of Directors.
Mr. McGurk, 53, has had a long and successful career in the film and television industry. Mr. McGurk was the founder and CEO of Overture Films from 2006 until 2010 and was also CEO of Anchor Bay Entertainment, which distributed Overture Films’ product to the home entertainment industry. From 1999 to 2005, McGurk was Vice Chairman of the Board and Chief Operating Officer of Metro-Goldwyn-Mayer Inc., acting as the company’s lead operating executive until MGM was sold for approximately $5 billion to a consortium of investors. McGurk joined MGM from Universal Pictures, where he served in various executive capacities, including President and Chief Operating Officer, from 1996 to 1999. From 1988 to 1996, McGurk served in several senior executive roles at The Walt Disney Studios, including Studios CFO and President of The Walt Disney Motion Picture Group. McGurk currently serves as a director of BRE Properties, Inc. and has previously served on the boards of DivX Inc., DIC Entertainment, Pricegrabber.com, LLC and MGM Studios, Inc.
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