Wednesday, April 30, 2014

April Manufacturing ISM & NFP ...

Thursday, 5/1, will be a busy day regarding some potentially market-moving macro indicators.  The ISM manufacturing along with jobless claims are scheduled to be released.  Of course, what Yellen says to the Independent Community Bankers of America, likely will be watched more closely, further displaying the fact that the economy, equity markets, and politicians' well-being remain completely dependent on the almighty Fed.  Economists expect initial jobless claims of 320K and manufacturing ISM of 54.3.  As usual, we have our own estimate for ISM.  Based on the regional surveys released during the last few weeks, we think manufacturing ISM will come in at 55.4. 

April net change in NFP

Looking a bit further ahead, the BLS employment report will be released this Friday, 5/2.  We estimate NFP increased by approx. 250K, higher than the 215K consensus.  While this may appear to be 'uberly optimistic', we remain confident in our model.  We note that although last month's official net change was 192K, below our 225K estimate, adding the 37K net revision of the prior two months (Jan. and Feb.) actually made our 'guesstimate' pretty accurate.  Again, we are looking for NFP change of 250K for April.  Of course, after the S&P 500 climbed again today (up 5.62 or 0.30%), even after the miserable initial Q1 GDP of 0.1% (of course impacted by that ever-present 'weather') and the Fed indicating further tapering, we believe the positive surprise may be priced in or hoped for.  We note S&P 500 is not too far from its all-time high of 1897.

TWTR, AMC, IACI: Q1 earnings results ...


Twitter (TWTR) reported Q1 numbers yesterday after the close.  It beat both on the top and bottom-line, but the MAU figures were disappointing.  In addition, although its Q2 guidance was in-line with consensus, estimates for FY '14 ended up at the high-end of TWTR's full-year guidance.  The stock is down approx. 10% today and down 49% since its all-time high of $74.73 the day after Christmas.  Currently, TWTR's $22bil market cap remains far above our $15bil valuation of the Company.  

A mere 19% and 27% MAU growth, in the US and international markets, respectively, were not very impressive.  However, for the time-being, advertisers have jumped on the mobile platform and paid higher rates, as TWTR generated $3.47 and $0.61 ad revenues per 1000 timeline views in the US and international markets.  But in time advertisers will be looking for consistent growth in audience and audience interaction with content, two important factors driving higher ROI of ads.  While we do not think that growth in TWTR MAUs has peaked, we must say that it may decelerate a bit earlier than originally expected, similar to Facebook (FB).  If that's the case, then ad price growth may also decelerate.  No matter how low TWTR's ad load is currently, lack of growth in demand will result in an unwanted and very low capacity utilization, which is not positive.   

We upped our FY '14 revenue estimate by around $30MM to $1.22bil and now expect adj. EBITDA of $186.1MM.  Again, we are valuing TWTR at approx. $15bil, which based on a 5-year DCF.  The stock is currently trading at over 110x, 102x, and 41x FY' 14, FY '15, and FY '16 EBITDA, respectively.  TWTR's revenue multiple for those same years are: 17, 15, and 12.  We continue to think the stock is overvalued.  By the way, some additional selling due to expiration of the lock-up does pose more risk for the stock.  We were a bit surprised that management tried to discount that risk on the earnings call.  


AMC Entertainment (AMC) reported mixed Q1 results yesterday as it beat on the top-line but missed on EPS.  As expected, growth in concession revenues was stronger than admission revenues, as the Company (and others in the space) continues to invest in enhancing movie goers' experience.  We note that attendance remained strong in the quarter.  We did not make any adjustments to our FY '14 estimates, nor to our $26/sh valuation of AMC, which is based on a 5-year DCF and its share of NCMI.  Based on where AMC is currently trading, our valuation represents only 17% upside.  We remain 'neutral' on the stock.  


IACI reported Q1 results this morning with in-line revenues and higher than expected EPS.  As we mentioned after Google (GOOG) reported its numbers, search & applications revenues for companies such as IACI and Blucora (BCOR) have slowed down and will slow down further.  IACI search & application revenues came in flat Y/Y.  Its Match Group revenues were up 9% Y/Y.  We hope the Company either begins to monetize Match Group's assets (such as Tinder) more quickly or acquires additional ones, which is what IACI is known for.  Media and eCommerce segment revenues were down 12% mainly due to the Company's sale of Newsweek.  We did not make any changes to our FY '14 estimates which include total revenues of $3.4bil and EBITDA of $705.5MM; although the EBITDA number may be at risk given the lower margins we saw in Q1.  We continue to value IACI at $60/sh, representing 7.5x FY '14 EBITDA.  Given that the stock is trading slightly above our valuation, we still view it as a 'neutral' stock.  We note that while the potential of Match Group's IPO and/or spin-off represents upside, it may be discounted due to the mere single-digit Y/Y top-line growth in that segment during Q1.

Monday, April 28, 2014

NFLX: Netflix Agrees to Pay Verizon for Faster Network Access (Bloomberg)

It appears that NFLX is expecting what everyone is expecting from the FCC: ISPs can charge a premium for its content to be delivered without any slowdowns.  According to Bloomberg, the latest ISP to charge NFLX is Verizon (VZ) ...

NFLX: More competition and higher costs; tough times possibly ahead

Netflix (NFLX) is facing a few 'issues' these days that have come to the forefront and pushed the Company's stock down 32% from its YTD high of $458 in less than 2 months.  We've touched on some of these for a long time.  For example, the fact that NFLX is merely a distributor and its subscription-based-only business model is not a good fit with its efforts to also co-produce original content.  We've talked about the bad pricing strategy that NFLX began implementing early on - starting at a low price.  Recently some new issues are banging on NFLX's door.  They include NFLX's streaming causing a 'traffic jam' for ISPs and increased competition from solid companies, with Microsoft (MSFT) being the latest one.

Regarding the 'traffic jam', given that NFLX is an OTT and it has 35.7MM subscribers, and that many of them go on the 'binge content consumption', it is basically slowing down the Internet for all on-line users, even the non-NFLX Internet users.  In order to maintain at least average performance, ISPs have to increase bandwidth, creating additional costs.  

One way to offset such costs is to increase rates for all Internet subscribers, even the non-NFLX users.  Given the already high prices, we do not think this would be welcomed by consumers.

Another way is to have NFLX and other OTTs pay a premium to make sure content is delivered to households at the right speed and without any interruption.  This appears to be a more logical approach.  We view it similar to toll-roads set up on US highways.  Given many different costs associated with expanding all highways for which all citizens will have to pay via higher taxes, toll-roads (via public and mostly private funding) are set-up for drivers that are willing to pay extra to avoid traffic, or more accurately, to hit less traffic.  Costs of constructing and maintaining a few toll roads are less than costs of expanding all highways, in dollar terms and in terms of environmental costs.  At the same time, those costs are covered mostly via private funding and the tolls paid by those willing to pay.  Tolls increase or decrease based on traffic level.

ISPs such as Comcast (CMCSA) are using this approach.  And the FCC may officially ok such method (with huge oversight and likely caps on how much can be charged) later in May.  We note that wireless companies have been doing this for a long time.  Unlike the CMCSA/NFLX deal, wireless companies are forcing consumers to pay more for more data that they consume online; in other word, tiered pricing.  By the way, NFLX will likely implement tiered pricing to its subscribers.

Whether such premiums are charged for the first mile or the last mile of content delivery, is irrelevant in our opinion.  We do not view this as the end of net neutrality, as some so-called 'pro consumers' have said recently.  In fact, this approach actually makes sure that all Internet users get good performance no matter what content or data they are requesting.

And we must say that NFLX initially approached CMCSA with the proposal that NFLX be treated differently just so NFLX content would get delivered to households or mobile platforms without any hiccups.  Of course, as expected, NFLX did not want to pay a premium for such 'special treatment'.

If FCC finally puts all of this in writing, other ISPs will demand NFLX to pay a premium for content delivery, which will not be very good news for the Company.  We note that NFLX is already barking at another ISP, AT&T (T).

Now let's turn to competition.  As it was widely reported over the weekend, MSFT has taken another step to compete with NFLX and other OTTs.

Unlike Amazon (AMZN), MSFT got its foot in the door a long time ago.  According to the Company, it has around 48MM Xbox Live subscribers.  So the hardware is already in millions of homes and MSFT will be working on providing more than just games; it will try to provide original programming.  This does discount the risk associated with MSFT's Xbox - it is a much more expensive hardware than AMZN's Fire TV.  Then again, Sony has been moving down this path too.  MSFT's Xbox Entertainment Studios certainly won't have big-hit original programming over night, but over time, we could see MSFT's Xbox being the gateway to the one-stop-shop for all types of content, or at least we think that has been MSFT’s strategy.  That 48MM figure can attract many content providers.  Of course, Xbox Entertainment Studios has been working on original programming for a while now.  We note that Xbox users already have access to NFLX via the Xbox.

Overall, competition has intensified for NFLX.  As we mentioned before, its only option is to pay more for premium content and pass that cost down to its subscribers.  And this is a tough task given that NFLX initially priced its service very low.  Unfortunately for NFLX, more competition is good news for the content creators as all players will place higher bids for rights to quality content.  NFLX may not be able to throw money at content as easily as AMZN, MSFT, and some of its other competitors; while at the same time its subscribers may begin frowning at the higher price.

Saturday, April 26, 2014

RGC: Q1 numbers beat expectations ...

On Thursday afternoon, 4/24, Regal Entertainment Group (RGC) announced Q1 results which beat expectations on the top and bottom-line.  We think the Company is on track to meet or beat our FY '14 revenue and EBITDA estimates of $3.14bil and $538MM, respectively.  

While RGC's Q1 $8.88 average ticket price was below our $9.23 estimate for the year, we think it will increase throughout the remainder of FY '14 and will be driven by growth in attendance and more box office hits to be rolled out during the summer and Christmas Holidays.  According to management, more children's and matinee tickets, along with lower priced tickets at the acquired Hollywood screens, put some downward pressure on prices. 

RGC's guidance for theatres and screens by the end of FY '14 was below our estimates, but again, higher attendance and likely higher prices will help generate revenues above our expectations for FY '14.   

Q1 concession revenue per attendee was $3.64 and on its way to hit our $3.69 estimate for the year, which represents a 3.4% increase from FY '13.  More menu options for attendees helped drive the 5%+ Y/Y growth.  

The Company is planning to continue its theatre enhancement strategy which includes installing reclining seats and rolling out the IMAX and RPX screens. 

It appears that RGC's and other theatre operators' strategy of differentiating film viewing in theatres from the in-home experience by providing more options on their menus and creating those IMAX and RPX premium experiences, is working.  Of course, the most important attendance and revenue driver - quality and/or popular content - appears to be ever-present.  We still value RGC at approx. $26/sh based on our 5-year DCF model and RGC's 20% stake in NCMI.  It closed at $18.95 on Friday.  We discussed RGC and some other movie theatre companies here: .

Thursday, April 24, 2014

AMZN, NFLX: Amazon/HBO deal is a big deal!

As we basically stated on 4/2, Amazon's Fire TV service may not be good news for Netflix (NFLX).  Well, NFLX got the first taste of that on Wednesday (4/23), as AMZN announced a huge deal (huge, in our opinion) with Time Warner's (TWX) HBO.  Maybe NFLX management saw this coming as it spoke too kindly of one of its 'partners', AMZN, while it announced plans to increase subscription prices during its Q1 conference call, or 'interview'.  

Although the agreement with HBO includes only HBO's old shows, AMZN still gets that initial and first ever "online-only" access to HBO's very valuable content library.  In addition, this is an exclusive and multi-year deal.  AMZN has now taken the first step to compete very effectively with NFLX.  

We note that according to the Company's press release, AMZN will get the older episodes of more recent shows about 3 years after they are shown on HBO.  And Games of Thrones, the latest HBO hit, is not included in the deal.  

With all of this, the deal may not sound very significant, but we think it is, as it will increase Fire TV subscribers which will likely attract more content creators to sign additional deals, possibly exclusive ones, with AMZN.  This will also force NFLX to pay more for content and/or spend more on co-producing original content.  This deal also eliminates the pursuit of 'long tail' content as an option for NFLX.  As we discussed after NFLX's Q1 release, this is why NFLX plans to increase its prices; it is being forced to do so.  And higher prices are not usually welcomed by consumers over the long-term.   

We are assuming AMZN is paying a hefty price for this deal.  As we said earlier this month, we think AMZN is willing to throw money at 'premium' content; it is capable of doing so.  

Lastly, we are assuming that cable companies and telcos are now glad they added Internet service to their offerings and became ISPs a while back, as the more content is being streamed by OTTs, the more bandwidth is necessary, and the more likely it is that OTTs will pay a premium to maintain or increase, as NFLX management says, "member satisfaction" (e.g., the NFLX/Comcast agreement).

FB: Another impressive quarter, but ad revenue growth may slow down a bit ...

Facebook (FB) once again beat expectations.  The Company's Q1 top and bottom-line came in well ahead of our estimates and the Street's.  The stock was trading up 3% in AH, and will likely have a good day on Thursday.

It appears that us adjusting our estimates and the valuation of FB higher is becoming the 'norm'.  We note that with all the good news, management stated Y/Y ad revenue growth will not be as high going forward.  It believes that Q2 Y/Y growth will be lower than what we saw in Q1, and the rest of the year will be "meaningfully lower".  It appears that mobile ARPU, driven by mobile ad pricing, will not be spiking as high as we have seen the last 3 quarters.  We have been expecting this, but unfortunately were expecting it to occur a bit earlier.  However, combined with the slowdown in MAU growth, not only in the 'mature' North American market, but also in Europe and Asia, maybe our 'mere' 40% and 37% Y/Y growth assumptions for FY '14 ad and total revenues are not too pessimistic.  

We're now valuing FB at $33.23/sh, much higher than the $28.39 we gave it after Q4 '14, and remains significantly below where the stock closed at on Wednesday and where most analysts value it at.  We note that at the last closing price, $61.36, FB is trading at 27x and 14x FY '14 adj. EBITDA and revenues, respectively.  It is trading at 13x the Street's total revenue estimate for FY '14.  Our DCF valuation represents a 14 forward EV/EBITDA.  We remain positive regarding FB's services, as we mentioned in our initial post on the Company; however, we continue to think the stock is overvalued.

Wednesday, April 23, 2014

GCI: Good Q1 results; on track to meet our FY '14 expectations

Gannett (GCI) reported pretty strong Q1 results, and it appears the Company is on track to meet or beat our full-year top and bottom-line expectations.  We think management also displayed confidence, supported by the good numbers, by buying back approx. 1.3MM shares at an average price of $29.23/sh.

Total revenues of $1.4bil came in slightly below the $1.41bil Street estimate, while non-GAAP EPS of $0.47 beat the consensus by a penny.   

  • Driven by Winter Olympics and political ads, GCI's broadcast segment revenues were up 20% Y/Y on a pro forma basis, which includes Belo revenues in Q1 '13.  Retransmission revenues, which may be at risk a few years down the road depending on the Aereo case decision, grew 66% on a pro forma basis.  Core broadcast revenues grew 6% Y/Y.  
  • Olympic ad revenues of $41MM came in much higher than our $28.8MM estimate.  In addition, with $80MM in political ad revenues only in Q1, we expect political ad spending to increase significantly as we get closer to mid-term elections.  We have modeled in $196.8MM political ad revenues for the year, which we think GCI can meet.
  • Broadcast operating margin of 40.4% was below last year's 43.7% as integration post Belo acquisition continues.  We continue to expect this figure to increase to around 49% for the year, given further integration and significantly higher political ad revenues going forward.  
  • Publishing advertising and circulation revenues declined 4.8% and 1.4%, respectively.  This was not a surprise, although it could have been better as management said the bad weather impacted those revenues by approx. $7MM.  Management also indicated that the sale of for which GCI received $155MM, will have a "small impact" on publishing revenues.  Other publishing revenues remained pretty much flat, down only 0.1%.  Publishing operating margin of 5.1% declined 180bps from last year.  Although not indicated in the earnings press release, we think some of the decline was due to facility consolidation and asset impairment charges.  Those details will be included in the Company's 10-Q filing.
  • Digital revenues (mainly were up 2.8% Y/Y with operating margin of 13.3% compared to last year's 13.5%.  Given the seasonality of this segment, along with publishing and broadcasting (due to ad revenues), we look for digital segment margin to be higher for the full-year.  

Again, in our opinion, GCI is on track to meet or beat our estimates for FY '14.  We continue to value the Company at approx. $40/sh.  

We were pleased that one of the analysts on the call asked about the Aereo case; and we agreed with management's response that the main issue is whether or not Aereo is violating copyright laws.  In our opinion it is.  After reviewing the transcript of the arguments made before the Supreme Court on Tuesday, we still (as we mentioned on Monday) think Supreme Court's decision (likely in Jun. '14) will allow Aereo to continue operating but will also give broadcasters an opportunity to charge Aereo for distributing the content for which they pay.  While the justices appeared to agree with broadcasters regarding copyright infringement, they were also worried that a decision completely against Aereo may put Aereo out of business.  The entire transcript is available on the Supreme Court website:

Tuesday, April 22, 2014

NFLX: Good Q1 results; planning to increase prices

Netflix (NFLX) reported better-than-expected Q1 '14 results on Monday.  Margin improvement was apparent in domestic and international streaming businesses (with international coming in at a loss), in addition to the DVD business.  DVD margin still remains nearly twice the domestic streaming margin.  All of this was good news as the stock was up nearly 7% AH. 

However, NFLX also announced its plan to raise monthly subscription prices by $1 - $2, but did not say exactly when it will do so.  We discussed that this will have to be considered by the Company in our post regarding Amazon's Fire TV announcement.

NFLX is raising its prices because the better content it needs to purchase and/or 'co-produce' is becoming more expensive.  We think the Company has realized it cannot pass all of the higher costs to the Internet service providers (NFLX also complained about that), therefore it is kindly giving some of it to the consumers by raising prices and potentially adding to its tiered pricing.  NFLX is doing this gradually.  In addition, initially only new subscribers will have to pay more.  But we think the ones 'grandfathered in' will also pay more later down the road, and that price increase will be masked effectively as the Company will likely present it as tiered pricing.  

The short-term impact of the pricing announcement will drive many to subscribe before prices increase, which may push Q2 subs higher than analysts expect.  However, in the long-run, we believe higher prices will increase NFLX subscriber churn (for which NFLX no longer provides numbers; and management no longer uses the word "churn", instead it indirectly refers to it by using the term "member satisfaction") and will force the Company to spend more on marketing and continue to pay higher prices for better content.  We note that the contribution margin expansion seen in Q1 '14 was mainly due to lower cost of revenues, which may be surprising, but not to us.  As usual, NFLX management is trying to manage Wall Street expectations.  Simply put, costs of revenues (mostly content costs) did not decline, management just "managed level of content growth".  And now that it needs to grow content, it has to raise prices.  We think NFLX fears it will face increasing marginal costs, possibly slowing down the margin expansion we have seen lately, unless it increases prices.  Sell-side analysts' expectations are managed very well.

NFLX also took a shot at AT&T for its slow ISP performance.  Unfortunately, NFLX also set a precedent earlier this year as it signed a deal with Comcast (CMCSA): it is willing to pay ISPs more for better performance.  We are assuming that AT&T doesn't mind Hasting's 'outburst'.  

We believe Hastings' main strategy is to throw the ISPs at each other and to hopefully drive consumers to bark a bit louder.  This was apparent as he also made negative comments about the potential CMCSA and Time Warner Cable (TWC) merger.  Now, Hastings is hoping he can just sit back and watch T, CMCSA, and other service providers wage a more aggressive pricing war against each other, so that if prices decline, it may partially offset impact of NFLX's price increase on subscribers.  While all of this is fun to watch, we do not agree with Hastings' argument: a CMCSA/TWC merger will make CMCSA "the only option for truly high-speed broadband".  T, Verizon (VZ), and many other ISPs can serve the same markets.  And as CMCSA also said: "Internet interconnection has nothing to do with net neutrality; it’s all about Netflix wanting to unfairly shift its costs from its customers to all Internet customers, regardless of whether they subscribe to Netflix or not."  We proudly say that we have basically said the same thing before.  The entire CMCSA response to NFLX's opposition to the merger is on CMCSA's website:

Assuming EBITDA margin expands rapidly to 10%+ this year (from around 6% in 2013), approx. 15% in 2015, and 17% in 2016, which will be very impressive, based on Monday's closing price, NFLX is trading at 36x, 22x, and 16x 2014, 2015, and 2016 EBITDAs, respectively. 

Monday, April 21, 2014

GCI, IACI: Supreme Court to hear the Aereo case ...

Well, the time has come to make arguments to the Supreme Court regarding whether Aereo is illegal (violating Copyright Act of 1976), and if so, should it pay broadcasters retransmission fees that they receive from cable and satellite companies; or not.  The Supreme Court will hear both sides on Tuesday, 4/22; and will likely make a decision at the end of Q2.  

We believe the Supreme Court will allow Aereo to continue operating but will also give broadcasters an opportunity to charge Aereo for distributing the content for which they pay.

If the ruling, likely in late Jun. '14, is completely against Aereo, then, as Barry Diller, chairman of IACI and an early backer of Aereo, said on Bloomberg TV, "If we lose, we're finished."

If the ruling gives Aereo the right to 'intercept' the content, violate copyright laws, and give the content to its subscribers for only $8/month without a penny of that going to broadcasters, then the cable and satellite players will use the ruling to reduce or eliminate the retransmission fees they pay those broadcasters; certainly a risk for companies such as GCI.  In our opinion, if the ruling is completely in favor of Aereo, then everyone may have to begin scripting their lengthy goodbye message to the entire concept of content copyright.   

While Aereo had two favorable rulings in 2013 (one in federal appeals court in New York and the other in the US District Court in Massachusetts), in Feb. '14, the US District Court in Utah ruled that Aereo is violating copyright laws, which made us happy as we finally saw some logic and sanity at work!

Thursday, April 17, 2014

BCOR, IACI: Google's TACs not very encouraging for BCOR and IACI ...

Google (GOOG) reported its Q1 results, which provides some color regarding how Blucora's (BCOR) and IAC/InterActive's (IACI) search segments may have performed in Q1.  In our opinion, the traffic acquisition costs (TAC) of GOOG indicate continuing deceleration in BCOR and IACI search segment revenues.    


GOOG's Q1 TAC, related to its AdSense, grew only 4.8% Y/Y, compared with 11.8% in Q1 '13.  Such deceleration in GOOG TAC (positive for GOOG as its ad revenues still grew 16.5%, but not for its partners) has been evident also in annual numbers as TAC grew 5.7% and 20.5% in FY '13 and FY '12, respectively.  Historically, we estimate that AdSense has been responsible for 80%+ of BCOR's search revenues.  Combined with the fact that the latest arrangement between GOOG and BCOR do not include ads on mobile platforms, this is not every good news for BCOR's search segment.  We have touched on this risk faced by BCOR before. 

We expect only high single-digit search segment revenue growth for BCOR in FY '14.  We think the Company can accelerate growth in its owned and operated (O&O) search revenues, likely in the teens.  However, O&O revenues represent only 20% - 25% of total search revenues.  We expect total search revenues to grow approx. 10% this year compared to 24% in FY '13.  

BCOR stock has declined 36% since it hit its 52-week high of $30.12 on 11/15/13.  We continue to value it at approx. $22.50, based on sum-of-parts: FY '14 EBITDA multiples of 6, 8, and 7.5 for its search, TaxAct, and e-commerce segments plus net cash of approx. $31MM.  The Company is trying to further diversify its business as it will likely bid on the specialty retailer Brookstone.  We note that according to various reports Spencer Spirit Holdings is also bidding on Brookstone.  Given BCOR's need to find other sources of revenues, it may have to offer too-high of a premium to Spencer's bid, which is approx. $146MM.  Regarding this name, we remain on the sideline.  As a reminder, we recommended BCOR on 1/29/13 at $15.13 and 'downgraded' on 11/5/13 at $24.24. 


The same 'TAC logic' we believe is applicable to IACI when it comes to its search & applications segment.  Although, IACI's acquisition of ValueClick's O&O websites in Dec. '13 may make those figures look a bit better.  We expect approx. 11% growth in search & applications revenues for FY '14.  What has held IACI stock in the high $60s is anticipation of an IPO of the Match Group (online dating) business.  It appears the market considers Match Group's Tinder (which we discussed early on in Nov. ’13) attractive, although the question of monetization still needs to be answered.  By the way, Zoosk, another online dating service provider, filed its S-1 today, 4/16/14.  We will review it in the near future and likely provide our valuation of the company.  Of course, a successful Zoosk IPO could shoot IACI stock much higher.  But we still have a 12-month valuation of $60 for IACI, based on 7.5x FY '14 EBITDA.  We recommended IACI on 1/29/13 at $40.65 and 'downgraded' it on 11/4/13 when it closed at $55.68.

Tuesday, April 8, 2014

AVID: Avid at the NAB; more on valuation ...

We thought to touch on AVID given that we attended the Company’s ACA and went to its booths at the NAB.   
Overall, we heard positive feedback and input from its current clients.  In addition, based on the number of people at its booths, it appeared there is a great deal of interest in the Company’s Avid Everywhere strategy.  We did speak with an engineer that is not using AVID products.  We asked why and that person said AVID’s support services were disappointing.  We think the Company is trying to improve that side of the business, especially now that it is using the subscription, or SaaS, model for its products.  This model is heavily dependent on providing exceptional support and maintenance services as they are part of the ‘rent’ that its clients pay.
In terms of valuation, as mentioned before, we value it at $11.18, which includes $9.23 based on our DCF model, plus NOL carryforward estimate of $1.95.   Based on our estimates, AVID is trading at 7.8x FY ’14 EBITDA, comparable to AAPL’s 7.5, but significantly below ADBE’s 26.1.  We certainly don’t think AVID deserves an EV/EBITDA multiple anywhere close to what ADBE is trading at.  However, given the margin expansion and return to breakeven or profitability expected in FY ’15, AVID is trading at only 5.6x FY ’15 EBITDA, while AAPL is at 7.1 and ADBE at 16.4.  Although we do not have the consensus EBITDA estimate for Harmonic (HLIT), we note it is trading at 22.4x TTM EBITDA, while AVID is at 8.7x during a restructuring and new strategy implementation phase; based on our estimates as the Company has not filed its annual reports since end of FY ’11.
In addition, we note that the $220MM that Belden (BDC) paid for Grass Valley (a private company and a competitor of AVID) represented a P/S of approx. 0.71, based on our assumption of Grass Valley generating $310MM in revenues during FY ’14.  Applying that multiple to our FY ’14 revenue estimates for AVID, results in a $10.54/sh valuation of AVID, an attractive 61% upside.
In summary, assuming a successful operational turnaround (which is likely based on AVID’s customer base and well-respected brand in its space), the completion of its SEC filings (likely by mid-2014), and the Company trading on NASDAQ again, we think the stock remains attractive. 

AAPL, AMZN, AVID, BDC, HLIT, NFLX: “Consumers, 4K, and Next Generation Home Entertainment” session at the NAB conference

We also attended the “Consumers, 4K, and Next Generation Home Entertainment” session at the NAB conference.  Participants in this session included: Jimmy Schaeffler (The Carmel Group), Darcy Antonellis (Vubiquity), Brian Markwalter (CEA), Vince Pizzica (Technicolor), Vince Roberts (Disney/ABC TV Group), and John Taylor (LG Electronics).  Below are some of the main points and our takeaways.  

  • Many consumers still don’t know that 4K is the same as ultra-HD TV 
  • More effective marketing of 4K hardware is needed on the retail side 
  • Increasing use of 2nd (or 3rd, or 4th, …) screens, especially by young consumers
  • More simultaneous use of different screens.  AMBlog: this could mean that ads could become ‘commoditized’ as volume over many screens might be pursued more aggressively than expensive ads.  This could also mean that traditional TV spots (not necessarily all linear based) will continue to have the highest ROI, therefore prices.
  • Linear TV is growing at around 5%, but bringing in approx. $16bil in ad revenues; while online TV is growing at 25%+ but bringing in only $5bil in ad revenues.  AMBlog: this shows just how important minimization of subscriber churn rate for most OTT’s is, as mentioned during the Frost & Sullivan session. 
  • 3D TV is not ‘dead’, but all participants have realized that unlike HD, 3D is more of a new ‘feature’ rather than a ‘next generation’ product.  AMBlog: not enough 3D content to make the 3D feature a purchase driver for consumers 
  • Content providers such as Disney/ABC are looking for an answer to “what is the value proposition of 4K?” before they create 4K content more aggressively.  They have enhanced their infrastructure allowing them to create 4K content when that question is answered.  AMBlog: in other words, they, along with other content providers, are waiting for more consumers to purchase 4K TVs (hardware).  They are waiting for the 4K eyeballs to increase.  Once it hits around 40mil households (HHs), then they will create more 4K content.  We believe this will not happen until TV makers such as LG, Sony, Samsung, etc. lower their prices.  TV hardware certainly has a very high PED, as we have seen with HD TVs (Plasma, LED, etc.). 
  • Disney/ABC not planning to launch ‘4K networks’ anytime soon.  They have created some 4K programs for NFLX, but that’s about it. 
  • More support is needed on the network side for 4K to become successful.  As Vince Roberts of Disney said, “pipe to home must be fixed”.   AMBlog: we agree, and we touched on this in our post on AMZN’s Fire TV and NFLX. 
  • Success of HDTV will drive success of ultra-HD (or 4K). 
  • Hardware vendors, such as LG, think (or hope) adaptation of 4K will take place a lot sooner.  CEA estimates 500K 4K TVs will be sold this year, LG thinks it might get to 1mil.  AMBlog: obviously, we assume that the near 1mil figure is a bit biased. 
  • Panelists agreed that software (content creation and enhancement) and hardware (devices or screens) are both important.  AMBlog: we think they were trying to show respect for each other.  Content, created via software, remains king.  As long as there is not much 4K content, not many 4K TVs will be sold.  And as long as 4K TV prices remain high, not many consumers will upgrade their big-screen HD TVs.  And as long as consumers do not upgrade, most eyeballs remain on HD TVs, which is why content providers will remain on the sideline when it comes to 4K content.  We hope this makes sense!  Basically, the pressure is on the hardware providers to lower prices, which means lowering margins, as usual. 
  • Vince Roberts was very content on cloud and collaboration of workflow, which is good news for software providers such as AVID, Grass Valley (BDC), HLIT, AAPL, etc. 
  • AMBlog: our main takeaway from this session was – ultra-HD TVs remain too expensive for consumers, not enough eyeballs for content providers yet to create more 4K content, and cable operators and other Internet service/network providers must be included in this discussion.  More bandwidth is necessary and the question is: who will pay for it?  If the cost is passed down to the consumers, it will take longer for more consumers to purchase 4K TVs.  In addition, limited bandwidth, or the cost of more which will be needed, impacts video ad revenues on which the content creators/providers are dependent.  Video ad revenues will have to be limited in order to control cost of the bandwidth and deliver the 4K content without any issues to the consumer.  The non-ad or limited-ad OTT service providers don’t care much as their revenues are based on subscription payments.  However, we think as ad revenues may be impacted, content providers will charge OTT companies much more for the content, which may be bad news for NFLX.

AVID, FB, GCI, TWTR: Media-tech industry analysis discussion at 2014 NAB ...

We also attended the media-tech industry analysis and business strategy sessions at the NAB conference.  Participants in this session included: Joshua Stinehour (Silverwood Partners), Joe Zaller (Devoncroft Partners), Sam Blackman (Elemental Technologies), Louis Hernandez, Jr. (AVID), Joop Janssen (EVS), and Michelle Munson (Aspera of IBM).  Below are some of the main points and our takeaways.  
  • Technology is essential to media.  AMBlog: of course, we agree!  And this has been true for a long, long time.
  • Most media companies are stable, growing at a modest rate, and remain profitable. 
  • Tech vendors are working even more closely with media companies.  Expect more consolidation: content creators (the bigger ones) and distributors; and among tech vendors. 
  • The phrase “there is a bubble in technology” is correct but applicable to social media companies such as FB and TWTR.  AMBlog: we’ve been saying this for a while.  We continue to believe those companies and some of their peers are overvalued, even after their recent ‘downturn’ - FB is down 21% since March 10, and TWTR is down 36% since Feb. 4. 
  • Media technology companies are not the ‘bubble’ type.  AMBlog: agreed. 
  • Revenue drivers for tech vendors include: transition to cloud, access to and analysis of content consumption data, HD transition, 4K (or ultra-HD) transition, etc.  AMBlog: agreed. 
  • Number one purchase driver (media companies buying technology) is efficiency.  AMBlog: more evidence that collaboration of workflow and accommodating service/support are becoming more and more important.  And this makes the SaaS model more applicable for software providers in this space, including AVID.  We note that although AVID is now offering its software via a subscription model, it also continues to provide it via perpetual licensing.  Some clients may want to continue to categorize software spending as capex and some may feel comfortable viewing it as a part of their opex.
  • Most ad revenue is still coming in from traditional broadcasting.  AMBlog: one of the reasons GCI remains attractive; in addition to higher recurring and high-margin retransmission revenues which all broadcast companies are now receiving.

AMZN, AVID, NFLX: Sessions at Avid's ACA and the 2014 NAB Conference ...

We attended a few information and discussion sessions at AVID’s ACA and at the NAB (National Association of Broadcasters) 2014 conference the last couple of days.  Below are some of the main points made in one of them, and our takeaways.

This session was held during AVID’s ACA by Mukul Krishna, Sr. Global Director of Frost & Sullivan, covering digital media practice.

  • The old lines between content, networks for delivery, and content consumption devices are now blurred. 
  • Current siloed systems must be integrated in one workflow; collaborative workflows have become a necessity.  AMBlog: this is where tech vendors’ business strategies (such as AVID’s, its peers’, and competitors’) that include technologies combining all the components of the workflow,  make sense.
  • With more companies, small and large ones, coming out with newer tools and apps, the market is fragmented, which means we should expect consolidation within the next 5 – 7 years.
  • Content must be made available on multiple screens, but need to be monetized on all of those screens. 
  • Monetization means more ads.  Attractive ad ROI is necessary for more ads; and the ROI can be maximized via more eyeballs and targeted advertising.  Those ads become more effective if they are based on targeted content, or on-demand content.  AMBlog: this is why analytics of content consumption and overall consumer behavior have become more and more valuable, which explains why more tech vendors are focusing on enhancing or developing data analytic applications in addition to gathering the data.
  • Unfortunately, it is becoming more difficult to project which consumer devices will attract the most eyeballs.  That is why content must be made available everywhere.
  • Frost & Sullivan expects nearly 27% CAGR screen-device by the end of 2017 (from 2012).  With so many different screens and service providers (cable, satellite, OTT, etc.), all participants have the objective to keep their viewers.  Simply put: minimizing subscriber churn, especially for OTT, has become even more important.  AMBlog: this goes along with what we said when discussing AMZN’s Fire TV and NFLX. 
  • In addition to asset monetization via ads and minimization of subscriber churn, efficiency, which helps in cost-control, is a priority.  AMBlog: this again brings us back to a collaborative workflow for all participants.

Wednesday, April 2, 2014

AMC, CKEC, CNK, NFLX, RGC: Amazon introduces Fire TV ...

Amazon (AMZN) introduced its new product, Amazon Fire TV, which we view as potentially negative for Netflix (NFLX).  Fire TV provides access to other streaming content providers such as NFLX and Hulu, in addition to its own content library and video games.  Fire TV comes with hardware that acts like a set-top-box (STB) but is much smaller and cheaper, a one-time payment of $99.00.  No monthly subscription is needed.  It has some features which it hopes will attract consumers.  They include voice search (basically telling your TV or Fire TV what you would like to watch), parental control, and access to personal photos and videos if they are stored on Amazon's cloud.  

Let's focus on Fire TV going head-to-head against NFLX, even though it provides access to NFLX's service.  Both NFLX and AMZN likely have many of the same titles, so Fire TV could push NFLX to be even more aggressive in co-producing original content in order to differentiate itself from Fire TV and justify the monthly subscription model.  NFLX already charges very low for streaming, and knowing the negative reaction it will get from the Street, we don't think it can lower its price further.  We think NFLX will have basically two options: 1) spend more on bringing in original content; and/or 2) be willing to pay much more for exclusive OTT distribution rights to popular content.  None of these will help its margins.  This could force NFLX to once again rely more on 'long-tail' content, which was the Company's strategy about 10 years ago.  However, things are a bit different these days as although there is more 'indie' and 'long-tail' content available, there are also many more OTT distributors.  By the way, AMZN also has some original programming.  Simply put, although users of Amazon Fire TV will have access to NFLX, Fire TV may eventually hurt NFLX.  As everyone knows, AMZN will throw money at this product/service, hoping it will squeeze competitors' margins.

Fire TV could also impact cable and satellite service providers' video-on-demand (VOD) services negatively, as it is also pretty much a VOD, except delivered via streaming onto the TV.  In the long-run, cable companies (especially the ones that do not yet have their own content) will likely approach AMZN with an attractive streaming deal as they provide Internet access to millions of homes.  That is when we think AMZN will begin to slowly do away with its $99 hardware, unless features such as voice search become just too widely accepted by users.

Ad revenues and their potential ROI is what we think will differentiate AMZN's offering.  AMZN is the master in the retail space.  It sells everything to anyone anywhere.  We think the one-click shopping idea that many cable operators were trying to make go mainstream in the early 2000's by investing millions into those 'interactive TV' (ITV) set-top boxes and software/applications (remember OpenTV?) might actually become mainstream over time; but this time thanks to AMZN.  We actually tweeted about this last week.  

AMZN will not only have access to households' viewing habits but also their shopping tendencies.  It can use this information and work with advertisers to enable the one-click shopping, possibly increasing ad ROIs, and convincing advertisers to pay more, or convincing product suppliers to charge less.  

In terms of how Fire TV may affect movie theatres, we do not think it will have much of an effect.  This home entertainment space that AMZN is tapping into is already crowded, and as we explained in our movie-theatre post, theatre companies already have taken steps to offset declining attendance.  In addition, they still have the theatre release window advantage.  While studios and distributors may narrow the theatre release window a bit further, we don't think they will go too far in fear of cannibalizing box-office receipts.