Why NCMI’s terrible quarter allows you to buy the stock cheap

NCMI reported Q1 earnings after bell yesterday and the numbers look bad. I’m going to tell you why I’m not concerned with the print even if the market decides it is. If the stock takes a tumble today on an earnings “miss”, I plan to buy in size.

First, let me tell you what NCMI reported that the market may not like and then I’ll explain why these facts aren’t relevant to the long-term thesis. For those who want to follow along, here’s the press release and earnings presentation and the call transcript. This slide on revenue about sums it up:

The company did have estimates from the street (it’s funny analysts can estimate when theaters during Q1 were mostly shut down and there wasn’t a single blockbuster released (Kong, Mortal Kombat and Demon Slayer were all April films)). NCMI missed them (-$0.25 loss on EPS v. -$0.18 expectations, miss on revenue of $5.4mm versus expectations of ~$8.6). In short, this was another quarter of hibernation mode and the market may hate it.

When this company wakes up though, look out. And if you believe management, this waking up period should be the back half of 2021:

So with that said, I will leave you with a few qualitative thoughts regarding our business performance for the remainder of 2021. Given everything we know today, I would expect our revenue to begin to meaningfully increase in the month of June. As network attendance levels are not expected to begin to pick up until Memorial Day weekend, when the first of several tentpole¬†films is scheduled to open…

As Tom mentioned, given the significant decline in TV ratings, we are very optimistic about our success in attracting meaningful levels of upfront commitments. Given this national booking outlook, and a continual ramping up of our regional and local businesses, it is our expectation that by the end of Q3 2021, we will be at a monthly run rate of more than 50% of 2019 revenue levels required to achieve cash flow breakeven after debt service on an accrual basis.
And by the end of the year, we expect to be turning back towards 2019 revenue levels, assuming that the agriculture schedule remains firm COVID-19 cases further decline allowing government restrictions that continue to decrease and an upfront that is consistent with our expectations. With every passing week, we should have a better understanding of theater attendance trends, and our success in the scatter market in the upcoming TV upfront and we will provide an update to this general Q3 and Q4 business guidance during our second quarter earnings call.

NCMI Q1 2021 earnings call

Let me restate that in my words – given no surprises, they expect to be back at 2019 revenue levels by year end. NCMI only needs to be at 50% of 2019 revenues to be cash flow break even.

When I first wrote about this company, I was calculating how long they could stay solvent. Now I’m counting down when they’re producing cash.

Management also offered some guidance on cash flow I think the market might miss. The company said CF break-even on an accrual basis – they take 90 days to collect cash from customers, so we may not see the cash hit the cash flow statement till 2022. What this means is that this company isn’t going to look like 2019 on the financials until next year. This is a key fact to keep in mind when judging the company’s performance going forward.

In short, I’m going to judge NCMI when there have been a few blockbusters out with theaters open and we have had a few quarters for customers to pay them. Even in the last month (early April to early May), the percentage of theaters open in NCMI’s advertising network has gone from 60 to 77%. Why would I consider selling the stock until I have the data on how the company can perform in a normal environment? CEO Tom Lesinki even notes that customers already feel like the normal environment is coming back:

Eric Wold

A couple of questions. Just one, when we noted that some of the advertisers are kind of on the sidelines waiting for audiences to return kind of quote on a national scale, can you maybe define that a little bit more in terms of what they’re looking for in terms of the markets open, maybe average capacity, what was kind of guiding their decisions there?

Tom Lesinski

Yes, I don’t think actually they are any longer looking for any more data. What they know now with almost 80% of our network open and with three movies that have opened well, I think it’s just a matter not so much of the restrictions or the audio levels, it’s really just getting another couple of movies under our belt. But we’re already seeing a lot of activity post just in the last week or two with more and more theaters opening.

So, candidly, it’s just a matter of time and I think a relatively short period of time based on the amount of meetings, RFPs and discussions that we’re having. I don’t think there’s anything fundamentally wrong with the attendance levels right now. We just need to stitch together a couple of more movies which is going to happen right here towards Memorial Day in the next few weeks. And then we should be off and running, looking really towards, June, being, and July being important months, for the growth in the revenue side.

NCMI 2021 Q1 earnings call

Again, judging the company on this quarter feels crazy to me, and I couldn’t find anything in the call transcript that makes me think the road ahead for the company does not confirm my long term thesis.

Some final nuggets I’ll leave you with:

– NCMI continues to stay focused on building digital offerings to supplement the movie cinema advertising business. They reported a new partnership with a SaaS company (Vobile) and a theater chain that gives them 120mm more ad impressions and movie ticket data to sell, respectively. They say in the call the data partnership is a licensing agreement, so the partner gets a cut of whatever they sell
– DOOH (Digital Out of Home) management says is generating a lot of interest – NCMI now offers ads in Coinstar, 7/11, ATMs, Ziosk (those tablets you see at restaurants) and other out of home locations. It’s too early to judge the success of DOOH, but I will tell you on LinkedIn NCMI is offering jobs for this division and management seems bullish on it

Overall, I think the back half of this year and early 2022 will be the time to judge whether management is living up to its word. If the market judges NCMI now via a drawdown, I’m a buyer. The company to me has done an admirable job during COVID by raising the necessary liquidity to stay alive and maintaining a nice divided (4%+ yield), as well as focusing on some new business lines.