- Covenant waivers expire next quarter.
- The company is taking action now to broaden its revenue post COVID-19.
- Upcoming results should tell us if cash burn is accelerating or improving.
When National CineMedia, Inc. (NASDAQ:NCMI) last reported earnings back in November the company disclosed that it had enough liquidity to reach early 2022. This disclosure followed after the company's successful negotiation with its lenders of leverage covenant waivers through July 1, 2021.
Since then, rather than hoarding its cash and waiting for the cinema business to recover, management has been busy executing on a series of operational goals and new agreements. These actions are intended to buttress NCM's core business and to advance its strategy of creating a diversity of revenue streams outside of traditional cinema theater advertising.
If NCM succeeds in integrating these complementary advertising businesses, not only will they lessen the revenue shortfall as theaters reopen over time, but will be a boost to revenue once cinema advertising resumes in full, whatever that becomes after the pandemic subsides.
When results for Q420 and FY20 (ended 12/31/20) are released after the market closes on March 8th, investors will be able to assess the company's liquidity position, rate of cash burn, and progress toward extending debt covenant waivers. These have all been critical to NCM since the onset of the pandemic and subsequent slashing of revenue.
Until then, the outlook for NCM remains unchanged and an assessment of recent transactions will provide some more data to be added to NCM's investment thesis which, when Covid-19 struck in the spring of 2020, was morphing from a pure income stock to a faster grower capable of delivering share price gains.
The several transactions and agreements which NCM has entered into since the Q320 (ended 9/30/20) earnings results were announced can be divided into cinema related and diversification oriented.
The cinema related activities include an upgrade to NCM's cinema advertising management system and the signing of a cinema advertising affiliate agreement with a regional theater chain.
The upgraded cinema advertising management system called 'Advertising Accord' was the result of a two year joint development effort with Unique X to tailor it to the U.S. market. Specific terms of the deal were not disclosed.
The new, fully digital system, which can produce up to 30 million playlists per week, will manage all inventory for NCM's Noovie pre-show and movie theatre lobby products across NCM's network. This encompasses over 20,600 screens in over 1,600 theaters in 190 Designated Market Areas and all of the top 50 DMA's.
NCM's clients will now be able to buy cinema advertising in broadcast weeks, similar to other premium video. The company expects this feature to make NCM directly competitive with the major digital ad platforms.
CEO Tom Lesinski said:
This new streamlined end-to-end process will result in significant operational efficiencies for NCM, while giving our advertising partners the ability to buy our cinema inventory the same way as they are used to buying other premium video and digital options."
Earlier this month, NCM reached a cinema advertising affiliate agreement with Harkins Theaters, the fifth largest theater operator in the U.S. NCM will provide its Noovie pre-show program with exclusive entertainment content, in-theater gaming, and advertising by local, regional, and national brands.
The inclusion of Harkins' locations adds 33 theaters and 500 screens in Arizona, California, Colorado, and Oklahoma to NCM's network.
CEO Lesinski commented:
Brands rely on NCM for ratings in the biggest markets, and we especially see Harkins bolstering our coverage in California, Colorado, and particularly in Phoenix, the number #11 DMA."
The strategy of diversification away from in-theater advertising was formalized in the past few months with the creation of NCM'sDigital Out-of-Home (DOOH) group. This business, which was initiated with the hiring of Steve Sapp as Senior Vice President of DOOH sales, was started, "to further unite brands with the power of movies by extending movie-centric entertainment content, trivia, and advertising beyond theaters to a variety of complementary venues."
In the ensuing months the DOOH group has partnered with three non-cinema ventures to broaden NCM's reach.
The company has partnered with Ziosk to sell Ziosk's media advertising inventory and NCM's Noovie content on Ziosk's restaurant based entertainment & media network.
Essentially, NCM will pair its advertising and entertainment content with Ziosk's tablets which restaurant patrons use to view specials, order food and drink, enroll in loyalty and e-club programs, view entertainment, complete surveys, and make contact-less payment at the table.
The arrangement creates a theater-like environment which has a 'captive audience' element for presenting advertising to engaged customers. Ziosk's 'dwell time' for customers at its client restaurants like Olive Garden, Yard House, Outback, Red Robin, and Cheddar's Scratch Kitchen is 50 to 55 minutes, which is a big window for advertisers to get their brand message to their audience.
Another partnership in which NCM has entered to expand its revenue potential beyond the theater experience is with location-based digital video network Captivate.
Similar to the Ziosk model, NCM will sell Captivate's media inventory and NCM's Noovie content using Captivate's technology and locales, namely elevator and large format displays in office and residential buildings.
Again the 'captive audience' element is at work with nearby local businesses now able to directly target consumers in the high traffic office and premier residential buildings where they work and live.
Finally, NCM has joined with Coinstar to sell digital advertising on Coinstar's adPlanet network in 4,000 grocery stores in 35 of the top 50 DMA's nationwide. NCM's DOOH group will sell adPlanet media with its Noovie content on a national, regional, local, and programmatic level via Coinstar kiosks.
Although this agreement does not leverage a 'captive audience' model, it does open another non-cinema avenue for reaching NCM's movie audiences. Steve Saap noted:
Movie audiences have come to know and love NCM's Noovie entertainment and trivia content at their local movie theater, so we're excited to bring it to Coinstar's adPlanet network to continue to engage with them when they are out shopping in their local community."
The creation of the DOOH group, and hiring of Mr. Sapp to lead it, followed by these three partnerships, along with the new advertising management system and affiliate advertising agreement, have all taken place since December 10th. The team at NCM is engaging in what now appears to be very productive activity as it awaits the return of cinema.
Next Earnings Call
Aside from the updates on progress toward waiver extensions and critical liquidity and cash burn rate metrics, an assessment of NCM's most recent actions should be front and center on the next call.
NCM reported liquidity of $145M at 9/30/20, including $137.5M in cash and $7.5M in receivables. At the time of the Q320 call in October, the reported cash burn rate was $11M per month which the company indicated would continue through Q420. We should then expect to see liquidity of about $112M at 12/30/20 unless there was a change in the cash burn rate.
On the Q320 call the company disclosed that its quarterly cash burn will reach breakeven at revenue of about $50M, or 45% of 2019 levels. Total revenue in 2019 was $444.8M or $111.2M per quarter. Revenue in Q220 and Q320 were $4M and $6M, respectively, which indicates the degree to which revenue must begin being generated to get NCM out of the cash burn cycle that it is now facing.
Note that the upgraded cinema advertising management system launched in February should improve the cash burn rate both on the expense side and the revenue side. The company stated on the Q320 call in October:
In fact, the implementation of this new system is expected to reduce our operating overhead by approximately $8 million per year from our historical run rate of a couple of years ago and $1.2 million per year from our current run rate today...In addition to the cost savings, we are also expecting revenue benefits as the buying and scheduling process becomes more integrated and seamless."
These benefits will not yet be reflected in the Q420 results, but it is likely that future expectations for the new system will be discussed by management on the Q420 earnings call.
Also highly anticipated for the upcoming earnings call will be further clarification of the company's efforts to negotiate an extension of its covenant waivers beyond July 1, 2021.
In April of 2020, the company, as the parent of its operating entity National CineMedia, LLC ('NCML'), reached an agreement with its lenders to amend NCML's Credit Agreement. This agreement waives, until July 1, 2021, any non-compliance with the Consolidated Net Senior Secured Leverage Ratio (the ratio of Senior Secured Debt less cash and equivalents to adjusted EBITDA) and Consolidated Total Leverage Ratio (the ratio of Total Debt less cash and equivalents to adjusted EBITDA). Note that in both ratios the cash and equivalents cannot exceed $100M.
As part of this amended agreement, NCML must maintain minimum liquidity of $55M cash and availability under the Revolving credit facility. The subsidiary company is also barred from distributing any available cash to either its founding members (the cinema operators) or to NCM unless certain conditions are met.
First, trailing 12-month Consolidated EBITDA (as defined in the Credit Agreement) must equal or exceed $277.0 million. Also, outstanding loans under the Revolving Credit Facility must be equal to or less than $39.0 million. After the waiver period expires at the end of July, the company can make distributions if the Consolidated Net Senior Secured Leverage Ratio is equal to or less than 5:1 and no event of default has occurred.
In its Q320 10-Q filing, the company expressed 'going concern' doubts in the absence of the negotiated waivers, saying:
Considering current liquidity sources, the Company would not be able to repay the Company's total outstanding debt balance. These conditions and events raise substantial doubt about the Company's ability to continue as a going concern. In light of this, the Company is actively pursuing with its administrative agent and expects to obtain an amendment to its Senior Secured Credit Facility to extend a waiver of its financial covenants through at least one year following the date (9/24/20) that these financial statements are issued."
As we are now into the last month of the quarter before the quarter when the waivers expire, time is becoming of the essence as the company has met the conditions of maintaining the waivers but is not in compliance with the covenants.
An extension of the waivers beyond July 1 must be obtained as the pace of theater re-openings is unlikely to accelerate enough to allow NCM to generate the adjusted EBITDA required to comply with the two leverage ratios.
While we do not have Q420 and FY20 results or any financial data surrounding the above described transactions, we can look at consensus EPS and revenue trends to get a sense of what the upcoming results may hold.
EPS for Q420 were estimated at ($0.05) before Q320 results were announced. The consensus estimate was lowered significantly to ($0.16) then again to ($0.17) where it stands currently.
Following a similar pattern, consensus revenue for Q420 was $60.58M before Q3 results were announced. Subsequently they were significantly reduced to $20.42M, and then to $15.72M, and now they are at $14.55M.
Estimates for next year, FY21 (ended 12/31/21) have also been taken down since Q320 results were announced. Before the November call to discuss Q320 results the consensus EPS for FY21 was ($0.03). Now the consensus is ($0.04). This reduction after the Q320 call was much less severe than the reduction in Q420 consensus EPS, likely reflecting the possibility of more widespread vaccination during 2021.
FY21 consensus revenue was also reduced to a much lesser degree than Q420 after the Q320 earnings call. Specifically, the consensus got reduced from $283.32M before the Q3 results to $271.98M after, and then to the current consensus of $263.68M, again possibly reflecting greater confidence in wider vaccinations.
NCM shares offer a great opportunity for significant capital appreciation if the company successfully negotiates through the COVID-19 crisis and the cinema industry resumes reasonably close to its former state. This seems marginally more likely with the introduction of vaccines.
Still, the shares are only suitable for very aggressive investors willing to risk near total capital losses (less the big dividend yield) for the chance to capture the upside of NCM's pre-Covid growth plan and recent revenue base expansion.
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