I was lucky enough to get to know the people who run Ancestry.com in my prior career as a media analyst and banker, and they are top notch. In addition, they run a business that faces little competition, is highly profitable, has a recurring revenue model and benefits from network effects as it grows larger. After a successful but not “hot” IPO last fall the company has handily exceeded initial investor expectations in 4Q09 and 1Q10, the sign of a professionally run and conservative management team. The stock has responded but analyst estimates still appear conservative, and I think there is plenty of upside left especially after this market pullback. I have owned the shares since just after the IPO and have bought more recently. I think the shares can trade to $23 and still be an attractive longer term holding after that.
Ancestry.com: Baby Boomer Play. For those who don’t know, Ancestry.com is a robust online resource for pursuing one’s family history and genealogy. The company is the clear leader in this category which should have increasing appeal as baby boomers age and have more leisure time to record their legacy. Over the past 13 years the company has digitized and indexed family history data from a slew of sources worldwide and now claims 4 billion records. According to Nielsen, 44mn homes are baby boom homes (39% of US households) representing 77mn people. This is clearly a big market opportunity (and not limited to just baby boomers or to the U.S. either as the service is internationally available). Consumers can subscribe to different levels of Ancestry.com’s service including many free, introductory resources. As of March 31, 2010 the company had 1.2mn paid subscribers who pay an average of about $17 per month. Compete.com reports more than 6.7mn unique visitors to the Ancestry.com in March, well above the 1.7mn for OpenTable.com and more than one third of Netflix’s 19.8mn in traffic. Ancestry’s customers appear happy with the service with monthly churn of only 3.3% in the past quarter (an improvement from 3.8% in 2009).
Estimates Still Appear Prudently Conservative. My financial model suggests the company can meet or exceed its 2010 guidance of $275mn-$280mn in revenue and $90mn to $95mn in EBITDA even if new subscriber growth slows to about 10% in the second half of the year (following 48% y/y growth in 1Q10) and 2H10 churn increases from 3.3% to 3.7%. Of course 1Q10 benefitted from the airing of complementary television show Who Do You Think You Are? on NBC which was great exposure for the Ancestry.com brand and service. While subscriber growth should moderate some when the show is not on, at its upfront meeting with advertisers this past week, NBC announced the return of WDYTYA for next television season, so we have that to look forward to. Even with conservative assumptions in the second half of 2010 and for 2011 my estimates for revenues are in line or higher than analyst estimates (as posted on Yahoo! Finance) of $279mn in revenue and $0.63 in EPS for 2010 and $317mn in revenue and $0.82 in EPS. My numbers for 2010 are $279mn in revenue and $0.65 based on $90.7mn in EBITDA (I actually look at EBITDA after stock comp expense so my EBITDA estimate is $86.7mn after about $4mn in 2009 stock comp). My 2011 estimates are $319mn in revenue, $102mn in EBITDA ($108mn adding back stock comp) and $0.84 in EPS. The company enjoys strong free cash flow characteristics, so I expect free cash flow per share of $1.00 in 2010 and $1.15 in 2011. Net-net I expect the company to meet or exceed estimates going forward into 2011 which is usually a key ingredient for stock price outperformance.
Long ACOM. Especially after last week's stock market downdraft, the shares look attractively valued (and not particularly vulnerable to the crashing Euro and economic slowing, but of course not immune) at only 7.5x my 2011 EBITDA estimate and only 15x 2011 free cash flow. I have been adding to my position recently and have a one year target price of $23 which would be 10x EBITDA and 20x free cash flow and 27x EPS. Although nothing is really comparable to Ancestry.com, other online subscription companies, Netflix and OpenTable, trade at 2011 P/Es of 28x and 52x, respectively.
Saturday, May 22, 2010
Tuesday, October 6, 2009
QIK
Attending a broadcast technology conference and was introduced to a new (to me anyway) web service called QIK. Turns a cell phone into a live broadcast transmitter ... like Twitter only with a live video feed. As an analyst this would have come in handy when attending company meetings and conferences and getting live video back to the traders, clients, and anyone who tuned into my QIK channel. Regulation will kill that I imagine. QIK.com is the place to go, then download to Windows Media phone (I am using an HTC Touch phone). Digital technology is dramatically bringing down the cost of news and information video capture and transmission, just not as fast as ad revenues are declining, at least in this recession.
Friday, September 25, 2009
Three Thumbs Up!
I was a panelist at the 2nd annual 3D Entertainment Summit last week in Los Angeles. The conference audience appeared to be mostly filmed entertainment executives and personnel along with various 3D technology vendors. With the exception of the Wall Street perspective panel members, very few recognizable Wall Street types were in attendance. When it was time for Q&A following our panel, the audience responded in tranquilized silence. It appeared that the 3D film ecosystem was suffering from low morale (perhaps a sophomore slump after last year's summit) as the hoped for rollout of 3D capable screens has not met expectations. Much of this is a result of fear and greed rather than issues with consumer demand or technology. A look at the data suggests that consumers overwhelmingly prefer the 3D experience and are willing to pay more for it, despite tough economic times. 3D box office grosses have outpaced 2D showings by a 3:1 ratio, through both higher ticket prices and higher attendance per screen. Dreamworks founder and CEO, Jeffrey Katzenberg, suggested the cinema industry was being too timid in charging a 3D ticket premium of only $2 to $3 with studies showing little audience resistance at the $5 level. This is very positive for both the cinema companies and 3D-heavy studios like Dreamworks and Disney. We will drill into the financial implications in more detail below. Back to the fear and greed issue, it appears that last year's financial ice age chilled the financing model behind DCIP (Digital Cinema Implementation Partners), the semi-mysterious funding vehicle for a studio subsidized deployment of theatrical digital projection systems. In addition, it appears that wrangling between the studios and cinema companies over virtual print fees (the amount of the studio subsidy credited to the cinemas) stymied DCIP's inertia as well. According to Katzenberg, everyone around the negotiating table was guilty of wanting too much which ended up hurting the whole studio-theatre ecosystem in 2009 by limiting the box office on films such as Coraline and Monsters vs. Aliens with too few 3D capable screens. Now that the financial ice age is thawing somewhat, DCIP appears to be back in gear (maybe just "first gear", but out of "park") with all but one of the major film studios signed on (we won't name names) and bank loan syndication underway.
While still evoking snickers from those ignorant to digital 3D, a number of events ahead should not only subdue the snickers but bring 3D entertainment even further into the mainstream. These include several key 3D film releases including Sony's Cloudy with a Chance of Meatballs this week, the re-release of Pixar's Toy Story and Toy Story 2 in a week and several major 4Q releases in James Cameron's Avatar and Robert Zemeckis' A Christmas Carol, to name a few. Also with DCIP back on track, 3D system deployments should re-accelerate, providing audiences access to substantially more than the current 2,000 3D-enabled screens (only about 5% of the total in the US) available to experience the enhanced impact of 3D. No cinema owner wants to get caught short of 3D-enabled screens when Avatar is released December 18th.
I mentioned on the panel that despite consistent data supporting the impact 3D film may have on the profitability of the cinema and film industry, Wall Street appears largely oblivious to (or frustrated with) the thesis and positive financial impact. While many of the shares of "3D-sensitive" stocks have performed well this year (CKEC +172%, CNK +38%, DWA +33%, IMAX +96% and RGC +19% vs. the S&P 500 +16%) there was limted reaction in the share prices and volume when the dam broke on DCIP two weeks ago, and following the 3D Summit the shares have generally traded down with all but Carmike underperforming the S&P. Let's review the investment thesis and potential ramifications of 3D technology.
It is a proven technology (it works) and customers love it. We know this because of the 18 films shown to date in digital 3D, every one of them has opened at a box office per screen of between 2x-4x the 2D version with an average of 3.1x. Assuming a ticket price premium of $2.50 on an average ticket price of $7.18 (MPAA reported US average in 2008), average attendance per screen is 2x higher. With 3D box office 3x higher, and the studios' splits of the box office at just more than 50%, the studios stand to make considerably more money. For instance, Pixar's Up has grossed $292 million in the U.S. to date (source: Box Office Mojo), of which I estimate a whopping $200 mllion was viewed in 3D. On the opening weekend Up in 3D delivered 60% of the box office and outperformed 2D by 120% on a per screen basis. Assuming this relationship held for the duration of the film (Disney may remark on this on its fiscal 4Q conference call in October) it would imply 3D generated an incremental $95 million which represents an incremental $45 million to Disney/Pixar (after theatre splits), a terrific return on the approximate $10-15 million extra cost to produce in 3D. Dreamworks Animation (DWA) has committed to producing all of its films in 3D with three releases per year. The studio's earnings should continue to get a nice bump from the incremental 3D revenue, not to mention reduced piracy in the U.S. and overseas (3D films are hard to "handycam" as the camera would need to record the image through a special polarized lense.)
From the cinemas' perspective a 3D screen with 2x the attendance pays off in several ways. One, according to Richard Hare, Carmike's CFO, who was on the 3D Summit panel with me, a theatre owner makes an extra $1 per ticket on 3D after paying film splits and a 3D technology license fee (to companies like RealD). More importantly, with attendance up 2x the cinemas sell more high margin concessions. Typical concession and cinema advertising revenue per patron runs about $3.35 and gross margins run about 80%. This means a 3D screen showing 7 out of 15 movies per year in 3D could generate an incremental $1.80 or so per patron, 70-75% more revenue and 270-280% more cash flow. (I'll spare you the math equations but we based this on industry average screen economics.) If an additional 20% of screens ultimately become 3D-enabled (about 8,000 in the U.S. for a total of 10,000) the US box office would increase by 16% from $9.8 billion to $11.4 billion (with the studios enjoying half of that increase) and theatre profitability could increase by more than 50%. These eyepopping numbers are best viewed through a pair of 3D glasses! With cinema stocks trading around 6x EBITDA I doubt very much Wall Street has factored in this long term impact.
I recently bought Cinemark Holdings (CNK) shares which pay a $0.72 annualized dividend. The company represents one of the three largest cinema circuits in the U.S. (and Latin America too) and, in my view, represents a great way to play the 3D investment thesis.
While still evoking snickers from those ignorant to digital 3D, a number of events ahead should not only subdue the snickers but bring 3D entertainment even further into the mainstream. These include several key 3D film releases including Sony's Cloudy with a Chance of Meatballs this week, the re-release of Pixar's Toy Story and Toy Story 2 in a week and several major 4Q releases in James Cameron's Avatar and Robert Zemeckis' A Christmas Carol, to name a few. Also with DCIP back on track, 3D system deployments should re-accelerate, providing audiences access to substantially more than the current 2,000 3D-enabled screens (only about 5% of the total in the US) available to experience the enhanced impact of 3D. No cinema owner wants to get caught short of 3D-enabled screens when Avatar is released December 18th.
I mentioned on the panel that despite consistent data supporting the impact 3D film may have on the profitability of the cinema and film industry, Wall Street appears largely oblivious to (or frustrated with) the thesis and positive financial impact. While many of the shares of "3D-sensitive" stocks have performed well this year (CKEC +172%, CNK +38%, DWA +33%, IMAX +96% and RGC +19% vs. the S&P 500 +16%) there was limted reaction in the share prices and volume when the dam broke on DCIP two weeks ago, and following the 3D Summit the shares have generally traded down with all but Carmike underperforming the S&P. Let's review the investment thesis and potential ramifications of 3D technology.
It is a proven technology (it works) and customers love it. We know this because of the 18 films shown to date in digital 3D, every one of them has opened at a box office per screen of between 2x-4x the 2D version with an average of 3.1x. Assuming a ticket price premium of $2.50 on an average ticket price of $7.18 (MPAA reported US average in 2008), average attendance per screen is 2x higher. With 3D box office 3x higher, and the studios' splits of the box office at just more than 50%, the studios stand to make considerably more money. For instance, Pixar's Up has grossed $292 million in the U.S. to date (source: Box Office Mojo), of which I estimate a whopping $200 mllion was viewed in 3D. On the opening weekend Up in 3D delivered 60% of the box office and outperformed 2D by 120% on a per screen basis. Assuming this relationship held for the duration of the film (Disney may remark on this on its fiscal 4Q conference call in October) it would imply 3D generated an incremental $95 million which represents an incremental $45 million to Disney/Pixar (after theatre splits), a terrific return on the approximate $10-15 million extra cost to produce in 3D. Dreamworks Animation (DWA) has committed to producing all of its films in 3D with three releases per year. The studio's earnings should continue to get a nice bump from the incremental 3D revenue, not to mention reduced piracy in the U.S. and overseas (3D films are hard to "handycam" as the camera would need to record the image through a special polarized lense.)
From the cinemas' perspective a 3D screen with 2x the attendance pays off in several ways. One, according to Richard Hare, Carmike's CFO, who was on the 3D Summit panel with me, a theatre owner makes an extra $1 per ticket on 3D after paying film splits and a 3D technology license fee (to companies like RealD). More importantly, with attendance up 2x the cinemas sell more high margin concessions. Typical concession and cinema advertising revenue per patron runs about $3.35 and gross margins run about 80%. This means a 3D screen showing 7 out of 15 movies per year in 3D could generate an incremental $1.80 or so per patron, 70-75% more revenue and 270-280% more cash flow. (I'll spare you the math equations but we based this on industry average screen economics.) If an additional 20% of screens ultimately become 3D-enabled (about 8,000 in the U.S. for a total of 10,000) the US box office would increase by 16% from $9.8 billion to $11.4 billion (with the studios enjoying half of that increase) and theatre profitability could increase by more than 50%. These eyepopping numbers are best viewed through a pair of 3D glasses! With cinema stocks trading around 6x EBITDA I doubt very much Wall Street has factored in this long term impact.
I recently bought Cinemark Holdings (CNK) shares which pay a $0.72 annualized dividend. The company represents one of the three largest cinema circuits in the U.S. (and Latin America too) and, in my view, represents a great way to play the 3D investment thesis.
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