Full-year results for FY2012, ended March, demonstrated accelerating revenue growth (+31%), improved profitability, and a “restacking” of the business to align with profitable growth opportunities in software and content.

[To see this report in PDF format (with diagrams and IV table) please use this link CIDM_FY2012_Results_Update (PDF).]

CINEDIGM (CIDM — $1.40), FY 2012 RESULTS UPDATE, JUNE 26, 2012

Kris Tuttle, kris@soundviewresearch.com, +1–617-934‑1877

Fiscal Q4 was a little weaker than planned due to a few software deals slipping out of the quarter and the completion of a major acquisition (New Video) that will now serve as the foundation of the content business.

Forward guidance for the current fiscal year came in a little below where most people were thinking due to expected flattish deployment revenues and planned investments in new content to support long term revenue growth. We’ve recast our IV model and a preliminary version is included in this update.

Overall, investors saw the report as a “mixed bag” made up of strong operating results for the fiscal year with greater planned investments in the coming year to drive long-term revenue and profitability. We see it a bit differently because we expect that announcement of additional content acquisitions will drive the stock before subsequent revenue and earnings. Overall management has executed well, continues to own ~40% of the equity and is making the right long-term moves that support our current $5.62 IV estimate. Additional details are below.

EXTENDED COMMENTARY 

Software and non-deployment revenues basically doubled for FY 2012 but were flattish due to three customer acceptance delays; these are scheduled for completion in the next two quarters.

For the rest of the fiscal year we expect further development of the business in terms of new installations, business pipeline and the launching of new releases with additional functionality. Cinedigm has also hired a head of soft-ware sales and marketing to handle the growing pipeline and more fully capitalize on the global market opportunity.

Based on the market demand, product pipeline, competitive positioning and management focus we expect the software growth rate to be sustainable for the next two fiscal years. By then we also expect a meaningful portion of the software revenues to be cloud-based and using the SaaS delivery and business model. Overall, we expect the growth and profitability of the software group to be the star in the medium-term while the content business ramps up.

Turning to content business, the acquisition of New Video (NV) has already led to a number of notable content acquisitions targeted to avid audiences in theaters and subsequently downstream to mobile devices, televisions and laptops through online content providers (iTunes, Netflix, Amazon.com, etc.)

For the first time the company mapped out some details of their New Video content strategy. The company is in-vesting in new content during the F2013 fiscal year, which means acquisition and related costs will impact the P&L before revenues begin to kick in. Cinedigm FY 2012 Results Update June 26, 2012 2

In essence, the company will be taking a data and business model driven approach to licensing and distributing content that represents a de-risking of the digital content market. Management likes to describe this as the “Mon-eyball approach” to the content industry. For those not familiar with the book and movie by the same name, it shuns gut feelings, big names, ego and other adverse selection criteria in favor of an analytical, results-focused ap-proach that is geared to optimizing returns.

That doesn’t mean that the content doesn’t have to be good. The New Video acquisition puts the company at the nexus between a plethora of independent content providers and the massive global but fragmented audience of consumers.1

1 For more background on the acquisition see: Cinedigm’s Acquisition into Content and Distribution, April 23, 2012. http://blog.research2zero.com/2012/04/cinedigms-acquisition-into-content-and-distribution/

As an investor, this means that Cinedigm provides “last dollar in, first dollar out” capital. They also receive a 25% distribution fee and up to 20% of back-end profits after all fees and expenses. However, these fa-vorable investment terms won’t show up in revenues and profits until after newly-licensed content gets into the release schedule.

The graph here illustrates the dynamics starting in the quarter before release. Up-front marketing costs must be expensed as incurred in ad-vance of revenue. As the film goes through release and then down-stream monetization the expenses are recovered and period losses turn into period profits, which eventually result in a cumulative gain that benefits some from long-tail demand.

Each release will vary considerably in terms of details but the overall shape of the business will be the same: pre-release marketing and other expenses incurred and reported, followed by revenues. After a year results will be steady enough to offset upfront investments so the P&L will become more balanced.

VALUATION 

The balance sheet and reporting structure of Cinedigm make it hard for some investors to understand valuation, but the business has been simplified and today it is much easier to understand. We deconstruct EBITDA for all the companies we follow anyway. Most management teams find the notion of “adjusted EBITDA” appealing but it must be parsed and reclassified for use in any sensible intrinsic valuation (IV) model.

In the case of Cinedigm we include all (core and non-recourse debt) interest expenses but exclude depreciation. On the side of the balance sheet we include only core debt as part of the total capitalization of the company. Ap-plying this to the IV model using a10x earnings multiple we arrive at our IV of $5.62. We’d also note that the “period share price” that measures purely current numbers comes to $3.00, also well above the current share price of $1.40.

Just for fun we ran a version of the IV model with the non-recourse debt included in the total. It drops the IV substantially but it still comes out to $3.65 per share using a 10x multiple. Cinedigm FY 2012 Results Update June 26, 2012 3

CONCLUSION 

Cinedigm has come a long, long way in just over a year and has entered a new phase of growth. Because they are blazing a new trail in terms of theatrical content in a digital world it’s going to take a little time for investors to embrace the business, but we expect that as more top flight content comes to the big screen from Cinedigm with all the little screens following right behind, people will begin to take notice.

We will be covering the newly digital world of cinema more completely in our next basic report on the company.

Meanwhile, the upside in the shares provides a strong incentive to put some patient money to work in this name.

[Warning label — I am not a lawyer and have no specific information about this case. In fact I’m really not qualified to write about it. But that seems to stop nobody these days. I also don’t have any positions in any of the stocks mentioned here.]

The awaited results of the Vringo “Markman” hearing rippled through the market in the last day or so as Vringo stock ($VRNG) started to rise again. Since this is such a high stakes soap opera I decided to take a little time to go through the courts “Memorandum Opinion and Order” which was filed with the SEC by the company. It’s already said that the result was a win for Vringo with a score of 4–2 but I wanted to know more.

First of all some bad news for followers of this saga — the 23 page document is concerned with the meanings of terms and the construction of claims. That means that it’s a long and nuanced discussion of what specific terms like “a scanning system” actually mean down to minutia is scanning through information or merely scanning across a network. My summary and analysis follows but if you really want to get the full effect you should read the full document.

So what’s with deal with “terms?” As you’ll see in the analysis the legal definition of what terms mean can play a pivotal role in determining whether or not there is actually infringement. For example let’s say I patented step-by-step instructions with a specific order to whiten teeth. If someone used these instructions but in a different order I would have a hard time asserting infringement since my patent covers a specific order. It’s not black and white but you get the idea.

The Arguments

There were four undisputed terms included “informon” (a unit of information), “user” (thank goodness!), “relevance to the query” (how well the information satisfies) and “query” (request for search results.)

There were six disputed terms:

Please login (registration is free) to see the rest.

Further Reading:

If you haven’t seen it the original match to the flame came on March 31st with this post by James Altucher on TechCrunch: Why Google Might Be Going to $0

There are more links to this so please share in comments if you have them and they will be added.

We know the insides and outs of email marketing and even online social networking for business but have always failed to grasp Constant Contact (CTCT — $16).

Even after meeting with the company management we only came away with “we do what we do very simply with lots of hand holding for one and two person companies without any technology skills.” This was enough to describe the company but hardly an exciting investment.

By way of context we first talked about the stock as a short back in October of 2007 at $24 and published a fuller note on the company with a $14 IV estimate in February of 2008. Most of what we put forward in that research report remains true but acquisitions, especially the recent purchase of SinglePlatform, have blurred the picture more. We’ve uploaded the report and here is the link (PDF): Constant Contact CTCT Update February 2008

Constant Contact has tried to move into more areas like event management and social networking to provide additional offerings to their existing base of users. They’ve made some acquisitions to accomplish this but have not made any traction at all outside of their existing base of users. These acquisitions may not have moved the needle much (like NutShellMail) but they were fairly harmless.

Spending $100M for an also-ran in the online restaurant menu and promotion space is not good. (It’s true they are working to generalize their product but it’s mostly shown in the marketing and not the market. The number of employees is rather small and only about $5M has been invested in the company. That’s one hell of a premium. If CTCT had acquired this company for $15-20M I think we’d all give management the benefit of the doubt and at least give them credit for being a disciplined buyer. But that’s not the case here.

We also note that there are larger and more successful private companies (like www.yext.com) in this space.

Not everyone out there follows our Twitter stream so may have missed a quote we took from an online forum on email marketing where experts expressed the fact that “you probably won’t go wrong in choosing any leading platform from Mailchimp to Aweber as long as you don’t end up with Constant Contact.”

Their message is still that they are not trying to impress anyone who is technically savvy but in this world of “consumer driven IT” that strategy is not working. Consumers and their generally available technologies just keep getting better.

And alongside it all CTCT keeps looking clunkier.

[No investment position.]

Today we published an update on StrikeForce Technologies outlining what has been consistent progress over the last several months during a time when security breaches remain routine despite elevated spending levels on improved technologies and services.

In summary the company has improved their direct sales while developing a network of channel partners, distributors and resellers that are helping to grow sales of which is recurring (70%+).

We acknowledge that the company needs to restructure the balance sheet and build a stable long-term shareholder base. In the meantime though management continues to build value in the company that we expect will be recognized over time, possibly by strategic partners if not investors.

Please refer to the report for more: StrikeForce Update June 5, 2012

Amazon ($AMZN) is a controversial stock these days to be sure. We see 3 to 6 notes a day from short sellers about how this company is wildly overvalued / about to crash. The funniest one though is the recent flurry on the back of Target saying they would no longer sell the Amazon Kindle.

Does anyone else think this is similar to publishers saying they won’t sell books on Amazon and music labels saying they won’t do business with Apple? You may not like it but stopping it is not an option.

As a family man I like Target ($TGT). Considering the way kids go through clothes you have to love the folks at Target for letting you get new wardrobes for your kids at remarkable prices. It’s also great for plastic containers, household supplies and stuff like that. My first reaction to the story that they were going to stop selling the Amazon Kindle was “what they sell electronics?”

Target has tried to be more relevant online but never succeeded. They sell the kind of stuff you go to the store for. Amazon and Target should actually be good partners. Target management should really think about that. You aren’t really competitors. Amazon doesn’t have stores remember?

Target may think that selling the Kindle is aiding and abetting the competition. The short-sellers on Amazon suggest that “Best Buy will be next!” Maybe they will. Both companies give you another reason not to visit their store. Which by the way we can tell you is 100% linked to success. If you have physical assets and fixed costs like Best Buy the whole point is getting more bodies into the store and increasing the propensity to buy just a little tiny bit. That’s all there is to it. Getting philosophical gets you into bankruptcy court. Just ask Circuit City.

The time to stop Amazon was at least 10 years ago. Too late now. On the retail side there is such a big fundamental difference which Target can never even hope to address: selection, availability and price. If I need a garbage can I’m going to Target. I know they have a few and one will be find. But if I want a DVI to VGA cable? What about a pair of 12″ scissors? Clay Shirky’s new book? Flax seed flour? In some cases yes or maybe but they might also be out of stock. So you just pay for prime and buy everything at Amazon. Prices are good and everything arrives at your doorstep in 48 hour or tomorrow if it’s worth $4 to you.

There are concerns of course. What about margins? What’s the right multiple for this? Etc. But arguing that somehow Amazon is going to be dealt a “blow” by Target or Best Buy reflects a basic misunderstanding of the market, consumer experience and the business.

This is the first of a three part look at Amazon that will shift into their cloud services and then into eBooks. The SoundView TechFund (which we advise) is long Amazon stock as a core position.

The biggest reason  to own Amazon in the end may be Jeff Bezos. Steve Jobs is gone. Steve Ballmer is clueless and based on what we see at Target, they don’t get it either.

We met with Atrinsic $ATRN in 2011 after they attracted attention by acquiring music property Kazaa late in 2010. Back then the shares were trading in the $3-range versus the current $0.08.

At the time company was working on adding to the senior management team and board at the same time they were hoping to secure agreements with music content providers (the “labels”) to grow the service.

Picking through all the filings it kind of looks like the company got what it wished for. The only problem is that the content costs are high so that the Kazaa subscription revenue generates losses instead of profits.

Our old friend Michael Robertson (of MP3.com fame) mentioned this problem in no uncertain terms when we published a note on Pandora $P.

It appears that Atrinsic is running out of cash and lacks enough runway to get their music subscription business in the air. They have recently sold a few none-core mobile and online properties but that only raised a little over $600K.

The company seems to be painted into a box. The current CEO, Nathan Fong, needs to work with the board and map out some kind of strategy. Since content costs are unavoidable it makes it hard to fathom what they might do.

We think the endgame for some of these distribution companies is acquisition by the content owners since the businesses would be instantly profitable if you didn’t have to pay the content fees. In that case $ATRN would be worth much more than the current share price.

Problem is you don’t have any power to bargain with. You’re sitting at the power table with nothing and everyone can see your cards.

Any ideas?

As we enter the heart of 1Q earnings season we like to look at how expectations are currently set for the year.

Based on a group of 219 mostly US-listed companies with over $1B of annual revenues the expected technology revenue growth this year is currently 5.9%. [The aggregated figures are $2.27T growing to $2.41T YoY.]

This figure is consistent with 2.2% expected GDP growth (the rule of thumb is about 3x GDP for technology spending.) It also lines up with expected growth in capital spending this year of 5.6%.

It comes as no surprise that Apple $AAPL is the big projected winner — growing 30% and generating nearly $38B in additional revenue. It’s fairly stunning to what extent the growth in the mobile has *not* been a tide lifting all boats. For Research in Motion $RIMM and Nokia $NOK they are not only losing share but actually shrinking. Using a 2x growth rate for mobile versus traditional IT spend it suggests that about $14B of incremental revenue for Apple this year is coming out of the hides of those two previous market leaders.

The other big revenue bump is coming from a recovery at the disk driver makers, Western Digital $WDC and Seagate $STX. They are projected to grow at a blistering 70% this year and add nearly $15B to the collective top line of the technology business.

Most surveys we have seen and discussions we’ve had point to a general tone of business that is “slightly less growth than last year where there was some catch-up spending but still fairly strong.”

As we have noted elsewhere spending on specific areas like information security, cloud/virtualization and mobile continue to remain above average after a strong 2011. As we go through earnings season we will “peel the onion” further in terms of annual growth expectations by sector, combine it more with valuation and also run a similar analysis on the “mittelstand” of the technology industry.

There feels like there is a disconnect between all the activity and disruption in the information security sector and Symantec which has been quietly sitting on the sidelines. $SYMC shares have been trending steadily down for the last seven years.

But information security and storage have been red hot the last year or two. Even the IPO market is welcoming for InfoSec companies. Imperva ($IMPV) was a huge success and AVG $AVG did okay. Now we have ProofPoint, Palo Alto Networks and Splunk on the way.

It’d be one thing if SYMC was innovating and coming out with new products to take advantage of the growth in mobile device security, network security management, and authentication — but they haven’t.

Please login to view the full post.

For reasons we can’t begin to grasp Quepasa held a conference call and presentation for analysts and investors today to “unveil” their rebranding strategy.

We admit that we are new to the story but from a distance the old story at least made some sense. Spanish speaking people are a big segment of the world and it’s not unreasonable to think about having a social network and content company focused on it. (Yandex $YNDX is a good example of a regional company that has done well and we like.)

But Quepasa decided to merge with MyYearbook and consolidate into something new they are calling MeetMe. The ticker of the company will be changed to $MEET. To be sure meeting sites like Badoo are popular and based on most accounts extremely profitable. But nobody is kidding themselves about what these sites are all about.

Unfortunately for Quepasa the “redesign” and integration creates a giant spam/hookup site that few investors will want anything to do with. The consolidation of the two looks more like FriendFinder $FNN then the companies they are comparing themselves to (LinkedIn $LNKD, Facebook and Twitter.)

Strangely the company fails to mention Meetup which is one of the few online sites that is in fact dedicated to helping people connect, albeit around common interests, regions or events. There are some gaps in the online services that would help promote more discovery but this will be emerging in multiple forms from established companies and third parties who will build that functionality alongside the large properties.

The real tragedy though is that the company burned a rare opportunity to actually connect with long-term investors and prove their mettle in terms of strategic thinking, operating expertise and hard and fast goals about product development, revenue growth, operating margins and returns on invested capital.

Their story went along the lines of “we have acquired this big property and put them together into something that makes some sense and are big in terms of registered users and page views.” Investors have seen versions of that story before and know it doesn’t work. Demand Media $DMD is another spammy content company that proved that volume does not equate to sustainable growth and earnings in an increasingly filtered net.

At this point we don’t have enough to suggest we should build an IV model on the company to see how the current market capitalization stacks up to what they might be worth. It’s possible that there is a brilliant strategy lurking around somewhere in the mix but it’s not at all evident from the information we have reviewed. As far as we can tell MyYearbook looks like a disaster and the dilution of what might have been an interesting niche story should be a disappointment to QPSA investors.

All in all another surprising example of a company that appears not to be getting any good advice on what investors expect or perhaps is not listening to it. Given the resources at their disposal they need to go back to the drawing board with good erasers and sharper pencils.

Further reading & references:

Company presentation on the rebranding

Demand Media: Cashing in on Crapification

LinkedIn company snapshot from a year ago.

Disclosures:

This information is prepared to illuminate but could be materially inaccurate in places, omit important information or be flat out wrong. It is not intended for investment purposes. Research 2.0, their affiliates and/or partners may have positions in any of the stock mentioned at any time. As of this writing the author has no position in QPSA and has no knowledge of any affiliate having a position. YNDX is owned in the IPO Candy Folio over which the author has authority and LNKD is owned in the SoundView TechFund which the author advises. Nobody has any obligation to update this information going forward.

We’ve known and followed some of the goings on at Vringo since late 2009 when we get interested in their video ringtones business as a potential avenue for automatically generated 3D pictures. The idea may have been far out but we liked what they were doing with more dynamic and richer content delivery in the mobile space.

In 2011 they added some Facebook sizzle to their solid carrier-based story and we wrote up a short overview, Connected Consumer: Vringo, published on Seeking Alpha.

Yesterday the shares jumped 100% on an article posted by the prolific James Altucher. James is a smart, witty and widely followed writer who also happens to be an investor. We’re not going to repeat it all here so it’s worth going back there and reading the whole thing.

Judging by the stock action throughout the day it would seem that his analysis is not easily dismissed. It has also stirred up swirls of controversy not just in terms of the company itself but the evils and virtues of click bait, US Patent law, research and writing with “conflicts” of interest.

Instead of getting into the more philosophical points let’s look at what this is all about from the standpoint of a Vringo (VRNG) investor or potential investor:

On March 12 Vringo agreed to merge with Innovate/Protect (IPC) company that holds eight long-standing search patents originally granted to Lycos. In exchange Vringo is giving a large portion of the surviving entity to the owners of IPC. As noted in the March 30 10-K filing the owners of IPC will own 67.55% of the new company on a fully diluted basis.

IPC already has been working the legal ropes against some large potential infringers and it’s not just Google; AOL, IAC, Gannet and Target are all named. The core of the patent case is about techniques that improve the relevance of returned search results and related advertisements.

Even though all the recent attention is focused on the potential of the IPC lawsuits the video ringtone and “Facetone” business is an important asset and one that we will come back to in the context of the IPC patents. Revenues are very limited but the availability via carriers and on mobile devices could be important depending on the strategy of the combined company.

As a purely practical matter the patent business has become one that looks more like risk management than real innovation, debate and the rule of law. There are a number of public companies now in this space and they are not all “patent trolls.” One of them, RPX $RPXC — $16.47, $807M cap, provides this service to dozens of large companies. Software patents are the most notorious to adjudicate.

If we are playing a risk management game then the conventional wisdom is that your most likely outcome is a settlement that consists of a 1% to 4% royalty. Altucher’s article goes further than it should in terms of talking about “willful” violations and treble damages. Even as a public company, some money in the bank and a very strong case I wouldn’t want to draw the attention of the entire Google legal team in a fight to the death.

Turning to the numbers we’re going to use a 1% royalty rate because it’s low enough to imagine that Google might agree to it versus a lengthy court process. The vast majority of Google’s revenue is from this form of advertising and the rest is a rounding error. Google has posted about $150B in revenues so far and is estimated to do $46B this year. It’s easy to do the math here — that’s a $1.5B settlement for past use and a $460M royalty payment this year. No doubt Google has the best understanding of their real risk in this case and has a strong negotiating team.

If this case were not against Google these numbers would be hard to believe but Google has $37B on their balance sheet and is expected to generate $19B of EBITDA this year and $23B in EBITDA in 2013. So for Google the sums being discussed cause little discomfort. At the same time that means it’s going to be hard to scare them. For example if this went the distance and Vringo won and provided willful infringement with a 4% royalty the figures would be $18B for historical violations and $2B a year in royalty payments. Those numbers are huge but they would not in fact break Google. I wouldn’t want to play “chicken” with them.

At this point it’s worth reminding everyone that outcomes in these venues are not the domain of technology or financial analysts. Even lawyers get surprised. Delays are common and as investors flock to $VRNG stock expecting quick results might leave just as quickly if results are delayed.

In terms of the stock there are quite a few new shares and outstanding warrants to factor in. Some new preferred has been issued which is equivalent to about 21M shares of common. Plus about 16M warrants struck at $1.76. There are a few additional shares and warrants (250K and 850K respectively) used to absorb the old warrants of IPC. Earlier the company raised $3.6M through an exercise of outstanding warrants and granted an additional 2.5M in the process.

We’re going to use a back-of-the-envelope to estimate share count since it is a moving target. Google lists 10M shares out, S&P Capital IQ lists 14M and our quick math suggests about $57M fully diluted shares for a market cap of $170M at $3/share.

Could there be a Plan B?

What if Google disappeared and the entire lawsuit couldn’t proceed? That brings us back to the core business that existed prior to the merger with IPC. It is after all a mobile business with social context. And we know that dynamic rich content and increased relevance are big growth areas. Vringo does have some interesting opportunities to develop their business in and around these markets.

For instance we just wrote something about a private company called Kovio that will bring item level intelligence to all mobile devices with NFC. This is going to open up myriad opportunities and Vringo could use their combination of assets to great effect there. It might not be a patent story per se but the patent portfolio could assist with the adoption of Vringo mobile/social platform products for advertisers.

Conclusion

This stock is attracting attention and it won’t all be good. Some promotional types are getting involved and it’s certainly not an institutional quality name at this point. However we liked the old business and think it still has potential. The IP facet is exciting but is hard to estimate in terms of size and timing. In the old days we called these names “cloak and dagger stocks” for a reason. They often moved wildly without reason and left plenty of people hoping for quick and easy gains with empty pockets. Do your work and manage your risk.

[Disclosure: We proposed advisory services to Vringo but no agreement was reached. Research 2.0, their employees and affiliates may have positions in any of the securities mentioned. We make no claims as to the accuracy of this information and it should not be relied upon. We also are under no obligation to update or otherwise maintain this information to ensure that it remains current.]