The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
This biweekly newsletter lists key events in the movie rental and exhibition industries for the period between March 11 and March 24, including notable rental releases, box office figures, and recent company-specific news.
Movie Rental Industry
Key Redbox (NASDAQ:CSTR) releases this year (with domestic box office total in millions from www.boxofficemojo.com):
o 3/12: Skyfall ($304), Rise of the Guardians ($103), Man with the Iron Fists ($16), Cirque du Soleil: Worlds Away ($13).
o 3/19: Argo ($135), Zero Dark Thirty ($95), Anna Karenina ($13).
Key Redbox releases last year (with domestic box office total in millions from www.boxofficemojo.com):
o 3/13: Adventures of Tintin ($78), Three Musketeers ($20), Young Adult ($16), My Week with Marilyn ($15).
o 3/20: Girl with the Dragon Tattoo ($103), Muppets ($89), Tower Heist ($78), Happy Feet Two ($64)…
Over the next two weeks, there is one notable rental release compared to two last year (notable releases are those that grossed over $50 million in domestic box office). Despite fewer notable releases this year, DVD rentals for the upcoming twoweek period should narrowly outperform the same period last year as this year’s releases grossed slightly higher at the box office.
It appears that Redbox Instant by Verizon (NYSE:VZ) has launched to the public. Redbox Instant by Verizon was offered last week on Xbox Live to its Gold members (an estimated 10 million addressable market in the U.S.), and we expect the service to be rolled out widely in the coming weeks. It is unclear whether the service will gain much traction, as the streaming portion of the offering is limited to movies, with only films from EPIX and a handful of studios, although we think that the DVD side of the offering is a reasonable value.
New Ventures have negatively impacted 2012 profitability and free cash flow; we believe investors would prefer continued viability of the company’s Redbox and Coinstar businesses before embarking on a chase for untested and potentially expensive growth opportunities. In total, management believes that revenue can grow from over $2 billion in 2012 to over $4 billion in 2017, representing 25% of the total automated retail sweet spot of ≈ $16 billion. Less than half of the revenue growth is expected to be from Coinstar’s core businesses, and the remainder from New Ventures, including Redbox Instant by Verizon…
Netflix (NASDAQ:NFLX) announced a number of new content deals in recent months, but has begun to drop other content from its streaming catalog. The higher costs of newer deals should depress margins and force Netflix to shrink its content library; as quantity is sacrificed in favor of quality, we expect domestic subscriber growth to slow or stall completely in the next few years.
We expect slowing growth to be evident later in 2013, with fewer net domestic subscribers added year-over-year. We think that Netflix saw a modest boost from House of Cards, but think that churn may increase in Q2 as most have finished the program. Over the long term, we expect profitability to remain challenged as content providers seek ever increasing royalties. Netflix’s newest capital raise of $500 million of senior notes suggests to us that the cost of its streaming agreements is outpacing its cash flow growth…
Q1:13 is tracking down 13.3% quarter-to-date. Q1:13 is up against a strong +24% comp. January ended down 0.6%, led by lateDecember Oscar-nominated releases. February ended down 24.6% due to a quiet release slate and a difficult comparison. March is trending down 15.1% quarter-to-date and is up against a difficult comparison from last year’s release of The Hunger Games. Weexpect the quarter to end down 15%. Looking forward, we expect a strong summer release slate to offset a weak first quarter.
We estimate that international box office is tracking up 8% in Q1 quarter-to-date. According to our estimates, Cinemark’s (NYSE:CNK) international circuit is tracking up 8% in U.S. dollars quarter-to-date, while in local currency the circuit is tracking up low double digits, by our estimates. We expect foreign currency translation headwinds in Q1 similar to Q4:12, impacting the international growth rate during the quarter. Additionally, we note that Cinemark is slated to sell its entire Mexican theater base, and, while a sale date has not yet been announced, our model accounts for this sale as of Q2:13…
Carmike (NASDAQ:CKEC), Cinemark, and Regal have been very active in the M&A market, which we expect to continue throughout 2013. Carmike completed two acquisitions in Q4, the first for 16 theaters including 251 screens from Rave Reviews Cinemas, for an estimated ≈ 5x EBITDA, and the second for two theaters with 16 screens from Phoenix Big Cinemas. Cinemark will acquire 32 theaters with 483 screens from Rave Reviews Cinemas for an estimated ≈ 5.8x EBITDA, and has agreed to sell its Mexican circuit of 31 theaters including 290 screens for an estimated ≈ 7.5x EBITDA.
Regal (NYSE:RGC) completed an acquisition of 25 theaters with 301 screens from Great Escape Theaters for an estimated ≈ 5.5x cash flow in Q4, and announced plans to purchase 43 theaters including 513 screens for ≈ 5.9x cash flow. We expect further domestic and international acquisitions to augment accelerated organic growth throughout 2013 for the exhibitors.
Michael Pachter is an analyst at Wedbush Securities.