chmcnfunds
11 years ago
Negative article from SA (novice writer):
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RealD Still Has Farther To Fall - Get Out Now (And Short The Shares)
Oct 2 2013, 11:30 | about: RLD BOOKMARK / READ LATER
Editor's notes: Follow The Data takes the other side of the RLD trade, arguing that growth will remain prohibitively expensive and that the company's model has too many vulnerabilities. 30-50% downside.
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RealD (Ticker: RLD) shares currently trade around $7 per share, down 50% in just 3 months time. Simply stated -- the company has problems -- and there is still more downside to come. Absent new management or a takeover -- both of which are highly unlikely -- I believe the fair market value for RealD shares is 30% - 50% below the current market price.
In my view, RealD is challenged by five very large problems:
Problem 1: New unit installations since FY2011 have negative profitability (and worse ROI given ~$9,000 cost)- but management continues to press forward with new installations and associated operating expenses (S&M + G&A). Said another way - revenue is flat to declining, and operating expenses keep rising
Problem 2: Management is drastically over-investing in R&D (~$20mm/yr) for a highly uncertain/speculative opportunity (no-glasses 3D on Consumer Electronic devices)
Problem 3: A completely new "jump ball" will occur in 5-10 years - threatening all of RealD's core business revenue. It's uncertain if RLD wins the theaters, and "winning" will require substantial R&D, plus selling costs
Problem 4: Consistent revenue declines are more likely than growth -- theatrical 3D has arguably "peaked," potentially in decline
Problem 5: Management has no control over their revenues - creates volatility & unpredictability
Valuation: Currently $340mm Market Cap - Potential for As Much As 50% Downside (i.e. $3.50 share price). Revenue is more likely to fall than grow, but management continues to invest operating expense dollars in both R&D and non-profitable new installments-eroding shareholder value. This results in a business with a GAAP operating income loss with unlikely reversals; EBITDA is only positive due to Depreciation add-backs (I exclude stock-comp add backs).
"Bull-case" scenarios - believed unlikely - provide only ~10% upside from current price (i.e. $370mm value)
"Bear-case scenario" is that management continues to spend on negative ROI projects, pressuring RLD's valuation and destroying investor confidence - eventually pushing valuation towards $165mm market cap
Best guess is 30%+ downside potential in NTM
More Details
1. New unit installations post-FY11 have negative profitability (and worse ROI)- but management continues to press forward. As detailed in the chart below, the average profit per installed 3D unit has declined from $5200 in FY11 to an estimated ~$2,000 in FY14E. The reality is that management is over-paying for installed unit growth. The operating expense investments necessary to secure these new installments have negative profitability profiles; they destroy value instead of creating it! Sure, new installments in high-growth emerging markets like China, Brazil, and Russia theoretically make sense, but the investments necessary in new offices, hiring new sales teams, sales team commissions, wining and dining potential clients, etc. - those costs exceed the revenue. It's in the data!
(click to enlarge) (click link below for tables/charts)
2. Management is drastically over-investing in R&D for a highly speculative and uncertain opportunity
Management has publicly announced that it invested ~$20 million last year in R&D for no-glasses 3D for Consumer Electronic devices, and plans to continue to invest at least $20m per year moving forward. This is a foolish waste of capital for a number of reasons:
The end market demand is questionable at best:
Device manufacturers are highly hesitant to include new licensing deals for technology into their bill-of-materials. RealD's last partnership with Samsung failed for this reason…
Demand for 3D video on consumer electronics devices hasn't proven itself. 3DTV is the ideal format for 3D video - and demand has been tepid for years
Supply of 3D video is low. Only professional-grade 3D video is typically watched, which means movies. TV shows never materialized, and live-broadcast has failed (ESPN 3D is shuttering its operations due to lack of demand)
The patents RealD has are only valuable if RealD's method of displayed 3D images is adopted by the market. There are more than 10 different technical ways to make 3D video… if your solution isn't adopted, the patents are worthless
Even if RealD does manage to get a customer win or two, it's a long road to making it a worthwhile investment:
$40mm is already spent (or in process) - add in additional R&D and sales & marketing support, and the "bet" management is making is around $75 million
Per-unit royalties for technology like RealD is developing is between $0.25 and $1.00 per unit (reference as a comp Dolby (DLB) and DTS (DTSI) premium audio licensing rates)
To break even, RealD would need to get 75 million to 300 million units with its technology embedded sold the market. That's a HUGE amount of required units for a technology the world continues to show tepid demand for.
3. RealD's core theatrical licensing business is completely "up in the air" in 5-10 years due to new technology.
In 5-10 years, no-glasses 3D for theatrical screens will be technically viable. This will require completely new technology to implement, and RealD's existing installed units will be obsolete. There is no guarantee that RealD will "win" in this new technology cycle, and there will be more competitors to deal with (Dolby, Master Image, Xpand + Project manufacturers like Sony and Christie). Furthermore, RealD has yet to invest as much R&D as it needs to in order to even develop the technology for this…
4. Revenue declines are more likely than growth; 3D movie product has been flat for 3 years, and 3D viewership rates are declining in developed markets.
Simply stated, 3D has had its day, and it's carved out a slice of the market, but there is minimal growth. Demand in developed markets has been in slow decline for the last two to three years, and growth from emerging markets isn't overly powerful (plus it's more costly to pursue, as detailed above). When your revenue is flat or declining, and you don't adjust your spending on operating items (or worse, you continue to increase it like RealD is doing) - it's a very bad thing!
5. RealD has no control over its revenue - which creates volatility and uncertainty
RealD receives a percentage of the box office receipts from 3D movies. They basically "take what they get," and they have minimal control over persuading Hollywood to make more 3D movies or encouraging a higher percentage of users to pay a premium to watch a movie in 3D versus 2D. This "boxed in a corner" setup makes RealD's revenue stream highly volatile, and serves to compress valuation-multiples (investors pay-up for consistency and predictability - which RealD has none of).
Risks to Short Thesis:
Risk 1) RealD may be able to convince a second-tier or third-tier Consumer Electronics manufacturer to try out its no-glasses 3D tech - creating headline risk.
Second- or third-tier consumer electronics manufacturers tend to be more open to "gambles" because they need to find ways to capture market share. Some of these manufacturers may be willing to "gamble" on installing RealD's no-glasses 3D in a tablet or smartphone and "see what happens." This would create headline risk to the upside in the short term (just as the Samsung news did a few years ago), even if the core economics don't make sense (reference point 2 above).
Risk 2) Estimated Value of RealD if the business model was shifted to "bleed for cash flows" is about 5% to 10% higher than the current market value.
As detailed below, I estimated that a "bleed for cash flows" valuation on RealD shares would be around $370 million, or around 10% higher than today's price. Given that return would take perhaps 5+ years to generate, I don't see a private takeout as highly likely at current values. But - it could help reduce the downward pressure on the shares as a "floor value."
(click to enlarge)
Risk 3) Management change or publicly-announced strategy shift.
Institutional investors are largely unhappy with the business strategy RealD is pursuing. Given that, if management was replaced, or if management were to publicly announce plans to significantly rationalize their operating spend-it would likely be viewed favorably by the street.
Valuation Scenarios & Rationale
1) Bull-case Scenario: 5% to 10% GAIN (estimated probability: 10%)
If management shifted their strategy, or if a private equity firm took the company out, it could cause a brief uptick in price. Given management's ownership of the firm, and their "head in the sand" commitment to their existing model - I don't see this as likely
2) Medium-Case Scenario: ~40% downside to ~$180mm Enterprise Value (estimated probability: 60%)
Management spends ~$20mm through FY15, continues with new installs in emerging markets but tries to control S&M and G&A spend a bit better (5% y/y growth)
Valuation: $175mm ( ~$35mm EBITDA @ 6x multiple)
3) Bear-Case Scenario: 50%-plus downside to ~$135mm Enterprise Value (estimated probability: 30%)
Management spends ~$20mm through FY15, continues with new installs in emerging markets and fails to try to trim OpX costs
Valuation: $165mm ( ~$27.5mm EBITDA @ 6x multiple)
Rebuttal to the Recently Published RLD Bull Case. A few thoughts regarding the recently published bull case for RealD:
Bull Argument 1) GAAP earnings are being "artificially" depressed & Valuation. To state the obvious, depreciation is a bizarre cost because sometimes it makes sense, other times it can cloud realities. The logical test for an investor is to decide whether or not the time frame an asset is being depreciated over makes sense relative to the terminal value. In RealD's case, a depreciation horizon of 8 years (with no terminal value) makes perfect sense, because (per point #3 above), the technology will be obsolete in 5-10 years.
As for valuation, the scenarios I detailed above are not impacted, because these scenarios utilize a DCF analysis ("bleed for cash flows") or an EBITDA multiple, which adds back Depreciation. Said another way - my analysis indicates that the fair value of RealD shares is well below the current market value regardless of depreciation cost issues.
I agree that RealD shares have value - my math just indicates that the value is below the current market price.
Bull Argument 2) Growth Drivers. Growth doesn't come free. It requires both substantial capital costs and operating expenses. I certainly concede that some of the new emerging market wins RealD has gotten are going to be OK deals (maybe even a few will be good deals) - but on average, management is spending far too much to grow, and it's eroding shareholder value instead of creating it.
To add value, a company needs to make business investments that provide an ROI greater than their cost of capital (let's say RLD has a cost of capital of around 7%). For RLD, the equation for calculating this on an annual basis is: [(revenue per unit) - (annual expense per unit)] / (unit manufacturing cost).
Since 2011, the incremental units RealD installed have generated revenue per unit below the expense per unit - meaning the numerator in the equation above (i.e. profits) is negative. Said another way, the returns from RealD's "growth" isn't just falling short of 7% cost of capital hurdle… it's generating negative returns.
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http://seekingalpha.com/article/1725312-reald-still-has-farther-to-fall-get-out-now-and-short-the-shares?source=email_rt_article_readmore
RLD
CincyMike
14 years ago
RealD Sets Date to Report Second Quarter Fiscal 2011 Financial Results
Monday 10/25/2010 12:23 AM ET - Close-up Media
Related Companies
Symbol Last %Chg
RLD 18.53 0.98%
As of 10:04 AM ET 10/25/10
RealD Inc., a global licensor of 3D technologies, will announce financial results for the second quarter of fiscal 2011 on Tuesday, November 2, after the market close.
The Company will hold a conference call to discuss the results the same day. Participating in the call will be Michael V. Lewis, the Company's Chief Executive Officer, and Drew Skarupa, the Company's Chief Financial Officer.
The conference call is scheduled to begin at 1:30 p.m. Pacific (4:30 p.m. Eastern) on November 2. The earnings call will be broadcast live over the Internet, hosted at the Investor Relations section of the Company's website at www.reald.com, and will be archived online upon completion of the conference call.
RealD is a global licensor of 3D technologies. RealD's intellectual property portfolio is used in applications that enable a 3D viewing experience in the theater, the home and elsewhere.
More information:
www.reald.com
((Comments on this story may be sent to newsdesk@closeupmedia.com))
CincyMike
14 years ago
Polaroid and RealD team up for premium 3D eyewear, mutual back-patting
Polaroid's iconic instant camera may have retreated into the annals of yuppie history, but the company's original business remains: sunglasses, whose light-spinning lens technology is indeed directly responsible for the Polaroid name and whose new RealD-certified Polaroid Premium 3D variant is the latest attempt to make the brand relevant again. Yes, only seven decades after introducing polarized theater to the world the firm's at it once more, with a line of designer 3D glasses endowed with upstart RealD's enthusiastic recommendation. The glasses should appear at theaters near you soon, though we think it's safe to say that you won't see them distributed in little plastic baggies at the counter -- there's no word on price, but Polaroid's probably calling them "premium" for a reason. PR after the break.
Show full PR text
Polaroid Eyewear and RealD Sign Global License Agreement for Polaroid® Premium 3D Eyewear
ORMOND BEACH, Fla., ZURICH and LOS ANGELES, Aug. 18 /PRNewswire/ -- Polaroid Eyewear, a division of Stylemark AG, and RealD Inc. (NYSE: RLD), a leading provider of 3D technology for cinema, consumer electronics and professional applications, announced today that they have signed a global license agreement to use the RealD brand in conjunction with the launch of a new generation of curved 3D glasses - Polaroid Premium 3D Eyewear.
Under the terms of the agreement, Polaroid Eyewear will distribute its RealD certified Polaroid Premium 3D Eyewear line to movie theaters and cinemas, eye care professionals and other retail channels through its global network of subsidiaries and distributors. Polaroid Premium 3D Eyewear will be compatible with all RealD 3D enabled movie theatres around the world.
"RealD is excited to partner with a brand like Polaroid that has a heritage in polarizing lens technology," said Joseph Peixoto, President of Worldwide Cinema at RealD. "Polaroid Premium 3D Eyewear promises a range of custom frames with precisely curved lenses so moviegoers can fully experience RealD 3D with an uncompromising field of vision and a pair of glasses to match their personal style."
Polaroid Eyewear's launch collection features a range of appealing designs to satisfy demand from all types of movie-goers. And prescription lens wearers are not forgotten, with a range of premium 3D cover styles that fit comfortably over any optical frame. There is even a junior style for the younger audience to enjoy. The collection has been developed under the umbrella of a full 3D vision marketing concept, supporting an easy-to-handle sales system in movie theatre and cinema lobbies, and professional optical and retail channels and will be available soon. All styles feature Polaroid Eyewear's unique 3D formed lenses, differentiating the product from standard 3D cinema glasses provided at theatres and similar products currently available on the market. The product is also fully UV-protective so that a consumer can choose to wear the product outdoors without risk of UV damage.
"We are a brand that is all about technical innovation, style and great value for the money" said Andy Suszko, President of Polaroid Eyewear. "This endorsement from RealD recognizes the high quality of our 3D lenses, made possible only by our unique, patented ThermoFusion™ Technology, the same technology used to make our linear polarized lenses for the highly successful sunglass collections we sell worldwide. We are delighted to be associated with RealD and look forward to working closely with them and their other technology partners as 3D pushes into the consumer electronics mainstream."
nole92
14 years ago
RealD Inc. priced shares of its initial public offering at $16 each, the company said Friday, above the expected range of $13 to $15.
That indicates high demand for the company's shares.
The Beverly Hills, Calif., company, which makes projectors and glasses for watching 3-D movies, raised $200 million in its IPO. Stockholders offered 52 percent of the shares in the offering, so RealD won't get about half the proceeds from the IPO.
RealD expects to benefit from the growing appetite for watching movies in 3-D. AMC Entertainment Inc., Cinemark Holdings Inc. and Regal Entertainment Group license RealD's technology, which it says is used on nearly 6,000 of the nation's 7,500 3-D movie theater screens.
The shares are exepected to trade Friday on the New York Stock Exchange under the symbol "RLD".
MONEYMADE
14 years ago
RealD Announces Stereo3D Calculator App for iPhone, iTouch and iPad
Mobile 3D Production Tool Calculates Parallax and Optimal Stereo 3D Rig Settings for Camera, Lens and Rig Configurations
LOS ANGELES, April 26 /PRNewswire/ -- RealD Inc., a leading 3D technology provider for cinema, home and professional applications, in association with FrameForge Previz Studio, a cutting-edge pre-visualization solution for professional filmmakers, announced today the availability of the RealD Professional Stereo3D Calculator app for iPhone, iTouch and iPad, a pre-production and on-set tool for filmmakers shooting in stereoscopic 3D. Designed for both seasoned stereographers and newcomers to stereo 3D production, this app saves time and budget by calculating parallax and separation to plan stereo 3D depth, helping a filmmaker determine an optimal camera rig, its settings and lens configuration. The RealD Professional Stereo3D Calculator is now available for download from iTunes for $299.99.
"Shooting in 3D is an art form, one that can be challenging not only for novices but experienced professionals as well given the calculations needed to create an effective and comfortable 3D visual," said Joshua Greer, President of RealD. "This Calculator takes away the guesswork involved in shooting in 3D, helping ensure the best configured rigs are in place for each shot and maximizing on-set efficiency."
The RealD Professional Stereo3D Calculator is an interactive tool for planning 3D film and video capture. Designed to work with any camera and stereo rig combinations, users can select the display size upon which the content will be shown, the camera, its lens or lenses, and customize the rig and camera capabilities and parameters. The Calculator factors together these settings and reports how subjects will look in 3D to assist in determining an optimal rig set-up for the desired 3D effects.
"Like our FrameForge Previz Studio software package, the goal is to deliver a tool that helps filmmakers shoot better stereo 3D by handling the complicated 3D calculations for them. With this app, a filmmaker can remain focused on creating powerful and compelling 3D instead of getting lost in the angles, geometry and optics behind it," added Ken Schafer, President and Lead Program Architect at Innoventive Software (FrameForge Previz Studio).
RealD Professional Stereo3D Calculator features include:
•Parallax - know the depth of a shot by seeing the actual positive and negative parallax values at any distance with the subject in focus
•Separation - learn how various objects in each shot will affect the on-screen image quality based on separation and distance from the cameras (includes "Maximum Positive On-Screen Offset")
•Lens - determine the appropriate lens or zoom to achieve the desired 3D effect
•Shooting style - choose "Converged" or "Parallel" style to customize shots and plan post-production workflow
•Camera Setup - set camera model, lens type and interaxial range; test real shots with interactive shot settings and quickly rearrange the setup real-time
•Stereo Solver™ Mode gives the exact settings needed to accomplish any shot while ensuring far objects' parallax never goes over defined maximum on-screen offset
•S3D Calculator Mode functions as a pure 3D reference calculator with interactive value tables
About RealD Inc.
RealD Inc. is a leading global licensor of stereoscopic (three-dimensional), or 3D, technologies. RealD's extensive intellectual property portfolio enables a premium 3D viewing experience in the theater, the home and elsewhere. RealD licenses its RealD Cinema Systems to motion picture exhibitors that show 3D motion pictures and alternative 3D content. RealD also provides its RealD Format, active and passive eyewear, and display and gaming technologies to consumer electronics manufacturers and content producers and distributors to enable the delivery and viewing of 3D content on high definition televisions, laptops and other displays. RealD's cutting-edge 3D technologies have been used for applications such as piloting the Mars Rover, heads-up displays for military jets and robotic medical procedures. For more information about RealD, please visit its website at www.reald.com
About FrameForge Previz Studio
FrameForge Previz Studio is the industry leader in optically accurate desktop previsualization for the film and television industries. Created by San Diego-based Innoventive Software, LLC, the award-winning FrameForge Previz Studio software is available for both Mac and Windows, and has powered the productions of thousands of filmmakers worldwide, from Academy Award winning directors and ASC Cinematographers to the next breakout indie filmmaker. FrameForge's Stereo Edition leverages the optical power and accuracy of its predecessors while offering unparalleled ease and power for stereo 3D production needs. It has been quickly adopted by some of the world's top stereographers in addition to being selected by the Sony 3D Technology Center for their Stereographic Previsualization. www.frameforge3d.com
Media Contact:
Rick Heineman (RealD)
(310) 339-9347
rheineman@reald.com
Stuart Voytilla (FrameForge)
(858) 270-7204
vpmarketing@frameforge3d.com
MONEYMADE
14 years ago
3-D technology firm RealD has starring role at movie theaters
RealD founders Michael Lewis, left, and Joshua Greer worked to improve the quality of 3-D images.
The Beverly Hills company has become a huge player, with deals to install systems
in cinemas including those of AMC and Regal.
By Richard Verrier
March 26, 2009
As Hollywood rushes headlong into 3-D filmmaking, few companies have as much to gain --
or lose -- as RealD of Beverly Hills.
The privately owned technology company with 75 employees has emerged from obscurity to
become the leading provider of 3-D systems for movie theaters, outflanking established
players such as Dolby Laboratories Inc. RealD's products -- which include an adapter that
attaches to the lenses of digital projectors and lightweight glasses -- account for 90% of the
U.S. market.
Underscoring its dominance, RealD just signed an agreement with theater chain AMC
Entertainment Inc. to install its 3-D technology for as many as 1,500 screens. Terms
weren't disclosed. The deal, which will be formally announced today, follows similar
agreements with theater operators Cinemark USA Inc. and Regal Entertainment Group.
"We've been impressed with the system," said Frank Rash, AMC's senior vice president of
strategic development and marketing. "People are very comfortable with the experience."
The contracts come as theater operators seek to lure people away from the big screen highdefinition
TV at home and back into theater seats.
Hollywood studios, concerned about younger audiences who increasingly are turning their
attention to video games, the Internet and text messaging rather than going to movies at
the mall multiplex, also are banking on the new format.
Over the next three years, about 40 films are scheduled to appear in 3-D, including James
Cameron's long-awaited sci-fi adventure "Avatar," which Fox will release in December. Walt
Disney Studios has 17 3-D movies in the pipeline. And DreamWorks Animation SKG is
releasing all of its new features in 3-D, starting with Friday's opening of "Monsters vs.
Aliens," whose performance will be closely watched as a bellwether for the new format.
The studios have been encouraged by the 3-D versions of movies such as "Coraline" and
"My Bloody Valentine." And if the upcoming releases live up to the hype, that could be a
boon to RealD, which makes money by licensing its system to theaters, which typically pay
an upfront fee of $5,000 to $10,000 and a royalty of about 50 cents per ticket.
Nonetheless, the company's $100-million investment in 3-D technology is a gamble. The
credit crunch has slowed the conversion of theaters to digital projection systems, which are
required for 3-D screenings. Currently, only about 2,000 of 40,000 screens in North America
are 3-D ready.
And although domestic box-office attendance is up about 6% this year despite a severe
recession, some analysts question whether penny-pinching moviegoers will be willing to
shell out the extra $3 to $5 per ticket to watch a movie in 3-D.
"Is the value proposition sufficient that consumers are going to feel like it's warranted?" said
Michael Pachter, a media analyst at Wedbush Morgan Securities. "My guess is no."
For years, theater owners and studios squared off over which would pay for the switch to
digital projectors, which cost about $70,000 per screen.
That dispute was resolved last fall, when a consortium of exhibitors and studios agreed on a
plan to finance the conversion of nearly 20,000 theater screens and enlisted JPMorgan
Chase & Co. to help with the financing. Then the credit markets froze, making it hard to
bankroll the conversions.
"It's clearly slowed the rollout," said Regal Chief Executive Mike Campbell, whose company
has RealD's systems on only 240 of 6,800 screens. "We would love to have more 3-D
screens on the market, but it's beyond our control."
Campbell sees the financing problem as temporary, as does DreamWorks Chief Executive
Jeffrey Katzenberg, a zealous advocate of 3-D.
Katzenberg has had to temper his expectations. He initially predicted that "Monsters vs.
Aliens," which cost about $175 million to produce, would open on 5,000 3-D screens.
Instead, the film will open on less than half that number.
The slower pace of the 3-D rollout hasn't stalled RealD's business, Chief Executive Michael
Lewis said.
RealD won't disclose its finances, but Lewis said revenue nearly doubled in 2008 and that
the company was on track this year to post an operating profit. "The best creative minds
are using this as a new type of filmmaking," Lewis said. "This is a fundamental shift."
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