Access Integrated Technologies AIXD S
August 08, 2007 - 4:05pm EST by
bentley883
2007 2008
Price: 9.20 EPS
Shares Out. (in M): 0 P/E
Market Cap (in M): 224 P/FCF
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT
Borrow Cost: NA

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Description

INTRODUCTION: With a 75% rebound in the share price, an unfavorable change in the economics of its digital cinema financing plan (not understood by the bulls) forcing the company to try to shift its business model to newly acquired businesses with major competitive pressures, the continued very high cash burn and the need for major dilutive capital requirements in the near future, I believe it is timely to reiterate my short recommendation on the shares. A sum of the value of the parts analysis of the company shows a fair value for the shares below $3.50, which illustrates the significant potential downside in the share price.
Note: For anyone interested in background on this company, I would refer you to my original write-up (under the stock symbol AIX) dated 10/20/05 as well as subsequent Q&A update postings dated: 1/13/06, 4/26/06, 9/28/06 and 10/12/06. Thus, the focus of this new posting will be on the current factors that I believe underscore my negative position on the fundamental outlook for the company and the shares at this time and makes this a timely call.
 
THE ECONOMICS OF THE DIGITAL DEPLOYMENT BUSINESS FOR AIXD ARE NOT ATTRACTIVE: As a starting point for understand my position on the stock, I think it’s important to understand the economics of the digital distribution business for AIXD. For those investors who have taken the time to get past the sizzle and hype, and run a spreadsheet on the economics of the digital equipment financing business (especially the AIX/Christie plan) the clear message that comes through is that this is not the outstanding investment opportunity that some make it out to be and that in the case of AIXD the ROI is not compelling. The following is my basic model for AIXD for revenues and costs on a per screen basis assuming completion of all 4,000 screens:
 

Economic Model for Deployment Business
 
 
VPF Revenues
$15,000
Delivery Revenues
$900
  Total Revenues
$15,900
 
 
Depreciation
($7,500)
Interest
($5,923)
Operating Expenses
($250)
 
 
Pretax Income
$2,227
Taxes
($891)
Net Income
$1,336

 
In modeling this business I have assumed the following:
-- VPF’s averaging $1,000 per screen.
-- the industry average of 15 movies per year.
-- delivery fee revenues of $200 from 1,200 theater locations.
-- an average system cost of $75,000 and a 10 year depreciation life.
-- interest costs on the GE credit line (70% of the system cost) as per the terms (about $4,500 per year) and a portion of the remaining 30% system cost that AIXD has funded at the very unattractive terms in their recent private placement (see below), with the remaining piece (about $17,000) as AIXD’s equity piece.
-- modest administration and operating costs (delivery, administration, etc.) of about $250 per system per year.
-- a 40% tax rate.
 
Note, my model assumes full completion, no hidden costs (i.e. potential upgrades and hardware replacements) and full revenue streams (i.e. an all goes right scenario!). Factoring in all these variables, the model shows an annual CF of $1,336 per screen and a ROI for AIXD on its equity in this business is only about 8%.
 

Per Screen ROI Analysis
 
 
System Cost
$75,000
 
 
GE Financing (70%)
$52,500
 
 
AIXD Financing (30%)
$22,500
  AIXD Private Placement ($22M)
$5,500
  AIXD Equity Component
$17,000
 
 
Net Profit
$1,336
ROI on AIXD’s Equity
7.9%

 
My discussions with some of the other companies looking at this business suggest that my calculation are consistent with their models and is the reason they have been somewhat tepid to jump into this market. Thus, I would ask: does an 8% ROI make this such an attractive business and justify all the hype from AIXD?
 
PHASE 2 HYPE LEADS TO A RALLY IN THE SHARE PRICE DESPITE LESS ATTRACTIVE ECONOMICS: I believe the recent move in the share price from the low to mid $5 levels is tied to the company’s discussion of phase 2 of its digital cinema conversion program. As has occurred in the past, the combination of management’s one sided spin on current events, the laziness of a number of sell-side analysts to do some of their own research (instead of just listening to management) and some favorable press articles has in my opinion aided the recent rally. However, there are a number of major factors and changes from phase 1 (which management has not highlighted) which in my opinion clearly reduce the economic return for AIXD.
 
Phase 2 of its digital cinema deployment plan, which will be formally announced by year end, is targeting an additional 10,000 screens in the US. While this sounds very compelling, there is one important thing that management left out of its discussion; the economics of phase 2 of their deployment plan will be significantly different and much less profitable for AIXD, than in the past. As I pointed out a number of times, what is sometimes more important than what management says is what they don’t say!
 
An important starting point in understanding the changes that are being negotiated in phase 2 is that the studios are not very happy with how phase 1 of AIXD’s plan has working out relative to their expectations. In phase 1 the major studios were willing to give a little more up to get the program started. However, they have learned a lot during the last deployment period and want to make a number of changes before reaching critical mass. For example, the studios were unhappy in paying VPF’s on many smaller/regional theaters where the return on their VPF payments are sub par. Also, in some cases the studios were being asked to pay multiple VPF’s on screens that would have shown the same 35mm film, recycled after running a week or two at a first run theater. Negotiations continue and no formal contracts have been signed yet between AIXD and any of the studios. However, the following are some of the important changes that the studios want that will significantly decrease the economics for AIXD in of phase 2 of it digital cinema deployment:
  • the studios will have total transparency (unlike investors; sorry I couldn’t resist that one!),
  • the VPF the studios pay AIXD will come down (at least commensurate with lower hardware costs),
  • the VPF could be paid on a sliding scale depending on when the movie plays relative to its release date (i.e. the full VPF on the first week, and a lower percent on following weeks),
  • the studios will not pay multiple VPF’s for “moveovers” (as discussed above) where the 35mm prints had been reused in the past,
  • the studios will take a cut on the alternate content fees AIXD receives,
  • the studios will receive an advertising usage fee from AIXD for pre-show advertising, and
  • maybe most importantly, the studios have demanded that all revenues will go towards cost recouping hardware systems costs and terminate after completion (not after 10 years!). Thus, VPF’s will end completely when the projectors are full paid for and this revenue steam for AIXD will terminate!
 
Clearly these changes will reduce the profit potential tied to any new digital cinema asset financing plan. Our understanding is that there will be a caped return not exceeding 15% on the plan. To characterize the comments from one knowledgeable source in the discussions: the studios are not allowing this to be a big equity play and it will be tough to get a healthy return on investment from pure conversion. Thus maybe we are beginning to see why the National CineMedia proactively separated these operations, labeled Digital Cinema Implementation Partners (DCIP), from its core business pre-IPO and its CEO described these operations as nothing more than an equipment financing business and “unattractive” from a business model perspective. This may also help explain why we hear that Technicolor has said it does not expect to make any significant profits from its financing plan and why it has been very slow and cautious on moving forward with its rollout plan and others looking at getting into the business have changed their mind.
 
AIXD IS SHIFTING ITS BUSINESS MODEL TO NEWLY ACQUIRED UNPROVEN & MORE COMPETITIVE BUSINESSES: The recognition of the impact of these changes does not appear to be lost on the management of AIXD (though they forgot to communicate this to investors). In my opinion this is the reason they are attempting to change the entire focus of the company once again. Noteworthy is that the revenue stream of VPF’s on new phase 2 deployments will move to zero at some point in the future. This fact was recently highlighted in a July 8th Business Week article on Technicolor (“A Celluloid Hero Goes Digital”) and the challenges it faces. Discussing VPS’s, the article states “those fees start at about $1,200 and drop over time to zero”. Thus, the company’s latest strategy is to try to build a group of business to sell products and services to these exhibitors. The recent acquisitions of Unique Screen Media (USM) and The Bigger Picture appear to be the lynchpins in management’s new strategy. To emphasize this point management has stated publicly that The Bigger Picture division will be the biggest division of the company in five years. That’s a pretty big goal for a division that management has given guidance for $5 million in revenues this year. Hitting management’s five year goal would likely require tremendous growth over that period. Or it could be recognition of the fact that VPF’s will begin to dramatically drop off at that time!
 
Given the trend for VPF’s, what investors are primarily buying is really a company in the following businesses in which management hopes to leverage from its financing deals: software management (Hollywood Software), satellite transport/delivery (Boeing), pre-show screen advertising (Unique Screen Media) and digital content delivery (The Bigger Picture). Each of these businesses lack the sizzle factor that its financing business has with investors, are already highly competitive in that they have well established players with significant market share dominance. For example USM is a very distant #3 player in the pre-show advertising market that is dominated by two giants: National CineMedia and Screen Vision. USM’s current installed base of about 3,500 screens compares with the two leaders, who each have about 14,500 screens. This is important because currently Unique is primarily a provider of local market advertising. By contrast, both of these competitors have fully running digital satellite delivery networks already in place and a base of much more viewers (especially in major metropolitan markets) which make them much more attractive to national advertisers and helps in their goal of trying to gain more advertising dollars away from other national advertising mediums. This is where the big dollars and profits are to be had and where USM’s two major competitors are already well positioned. However, before USM can compete for these dollars it will have to spend a fair amount of its own to upgrade its infrastructure and significantly grow its screen presence before it can be competitive for this business. Maybe this is one reason why we understand that both National Cinemedia and Screen Vision passed on the opportunity to acquire USM while it was on the market for sale for quite some time prior to AIXD’s acquisition. For these reasons I believe it is very inaccurate and misleading for the management of AIXD to describe its USM division on its last conference call as “a smaller version of National CineMedia”. Thus, while I suspect that AIXD will be successful in growing its base of theaters for USM’s pre-show advertising services, one diluting factor is that in phase 2 of its digital cinema financing deal the studios will receive an advertising usage fee from AIXD on the use of its digital projectors for pre-show advertising. Thus this takes away a portion of the profit potential for AIXD and may be a reason why management has suggested that the revenue and profit picture from this division should remain similar in the future.
 
The Bigger Picture is a digital alternate content distribution company. While providing some fit, there are a number of issues that I believe will create a very challenging environment for the company to be the huge growth vehicle that management has communicated to investors. Notably, similar to the competitive situation with USM, The Bigger Picture has some major well established competitors. Maybe the most significant competitor is Hollywood itself and the major distribution divisions of the large studios, many of which have been moving to grow their business in this area. Noteworthy, in one of the largest revenue sectors for alternate content, concerts and related entertainment, the major provider of content is Live Nation. This company’s relationship with many of the major artists and its ownership on many venues for these events gives it a unique advantage. In looking for distribution for its content, Live Nation decided in May of 2006 to partner not with AIXD, but National CineMedia. Given Live Nations breath and depth of content in this area, this clearly puts AIXD at a competitive disadvantage. While The Bigger Picture has plans to add additional “channels” in regard to the type of digital content it hopes to provide one notable point is that most content distribution agreements are non-exclusive in nature. Thus, the same content could be available to exhibitors from different sources and no exhibitor wants to be locked into any provider. Also when looking at the financial impact, remember the studios are attempting to take a cut on the alternate content fees AIXD receives. Finally in discussing the subject of alternate content it is important to remember one thing, to date this content has not proven the bonanza that exhibitors had hoped for in filling up their seats during off-hours. Noteworthy, AIXD’s major exhibitor partner Carmike has stated that alternate content has been somewhat disappointing and that they are in the process of seeking new content providers. Thus, the bottom line is that there is not a lot of evidence to get too excited at this point about the future prospects for The Bigger Picture as a major explosive growth story.
 
THE SHARE PRICE CURRENTY ACCORDS A HUGE VALUE PREMIUM TO AIXD’S DIGITAL DEPLOYMENT BUSINESS THAT IS UNWARRENTED: So, given the uncertainty regarding AIXD’s new businesses, what is its core digital deployment business worth? By my calculations investors are paying an egregious sum for this business. Unfortunately, trying to value AIXD’s various businesses is difficult because management has refused until now to provide any segment breakdowns and has not even provided any pro forma historic results for any of its recent acquisitions. Thus, in my analysis of what investors are paying for this business I took the company’s EV and backed out the cost of some of their past acquisitions (including: Hollywood Software, Boeing, Pavilion, PLX Systems, Ezzi.net, Unique Screen Media and The Bigger Picture). I then bumped up the value of all but the last two at a 50% premium to their acquisition cost. I did this for conservative reasons despite my belief that some offer little if any growth and questionable value to the story. In regard to the USM and The Bigger Picture acquisitions I assumed that each company is already worth 2x their recent acquisition prices given that the AIXD umbrella provides a greater revenue opportunity. I did not factor any real value for the company’s hosting business given management’s recent failure to consummate its sale and its sharply declining sales. Subtracting the sum of these acquisitions from the current EV shows a valuation of about $285 million for the remaining digital deployment business.
 

Valuation Of AIXD's Digital Deployment Business
 
 
 
 
 
 
 
Acquisition
Est. Current
 
 
 
Price
Valuation
Premium
 
Acquired Businesses*
$17,550
$26,325
50%
 
Unique Screen Media
$16,400
$32,800
100%
 
The Bigger Picture
$4,300
$8,600
100%
 
  Total
$38,250
$67,725
77%
 
 
 
 
 
 
EV
$361,400
 
 
 
Acquired Businesses
$67,725
 
 
 
Digital Deployment Business
$293,675
 
 
 
 
 
 
 
 
Note: * Includes: Boeing, Pavilion, Hollywood Software, PLX Sys. & Ezzi.net

 
Thus, using the annual CF from all 4,000 screens of about $5.34 million shows that at about $294 million this business is being valued at a multiple of 55x phase 1 cash flow. I would submit that with mediocre ROI characteristics and the average company selling at 7-8x FC, this valuation significant overvalues this business. One might point out that my analysis does not consider the potential CF’s from phase 2. While I agree that there may be some “real option” premium from phase 2, the economics associated with this plan will be even less attractive than phase 1 and there are major questions as to who the exhibitors will be that sign on to the AIXD plan given the competition from DCIP (and its 14,000 screens) and Technicolor in the US and new competitors like Arts Alliance Media in international markets. However, let’s assume that my calculations are wrong and/or AIXD can find additional revenue streams to raise its ROI up to the 15% cap that Hollywood studios are now discussing. If I value AIXD’s digital deployment business at a healthy 15x CF (or double the average market company) and account for the company’s large debt position in calculating its EV, the adjusted market capitalization shows that the stock should sell at roughly $3.50 per share. This is my estimate of fair value for the stock for investors who believe that AIXD’s management can successfully raise the returns in its digital deployment business.
 

AIXD Share Price Valuation
 
 
AIXD Equity Component
$17,000
ROI @ 15%
$2,550
ROI @ 4,000 screens
$10,200
 
 
Deployment Business @ 15x CF
$153,000
Premium value of Acq. Businesses
$67,725
Total EV
$220,725
 
 
Debt
($166,700)
Cash
$29,400
Adj. Mkt. Cap.
$83,425
 
 
Shares Out.
24,363
Share Price
$3.42

 
A PATTERN OF RECENT WEAK FINANCIAL PERFORMANCE AND EXCUSES: Noteworthy, quarterly results over the last few periods have been disappointing, with most analysts increasing their forecasted losses (and making excuses for the results). The Q4 FY07 (March) results reported 6/20 were no different. Relative to analyst expectations the Q4 loss was significantly more than expected and the guidance for the current year was short of forecasts. While sales were above expectations, the upside was due to the addition of sales from recent acquisitions and the inclusion of the previously discontinued hosting business (not stronger core business). With consensus estimates calling for a loss of $0.24, the reported number was a loss of $0.47 (including a loss of $0.10 from these previously discontinued operations). In addition, while not unexpected, debt grew notably and the company continued to burn significant amounts of cash.
 
One of the major reasons that the company continues to remain unprofitable and why the loss was greater than analysts had forecast was the huge growth in depreciation. Management makes the case (repeated by the analysts who follow the company) that investors should look at an “adjusted EBITDA” number to gauge their progress and that depreciation doesn’t matter because it is not a cash charge. Wow, this brings back memories of how valuations were justified during the internet bubble! I thought we learned a lesson from that period! Also, I’m reminded of Warren Buffet’s comments that cap-x and depreciation are the worst kind of expenses because the cash flows out immediately and are only expensed later. I would add in the case of AIXD it is unclear of the future revenue and stream of profits tied to those cash outflows. Moreover, as this company’s business model is centered on deriving a revenue stream from these assets (digital projectors), how can anyone logically make the case that investors should just forget about the financial cost of owning these assets? That would be like someone saying that in the case of Microsoft, R&D expenses should be eliminated from any profitability analysis. Finally, I would remind readers that a basic premise of financial analysis is that EBITDA is not a good benchmark for capital intensive businesses like AIXD.
 
THE CASH INCINERATOR WILL NEED TO RAISE MORE EXPENSIVE CASH TO BURN: As previously stated, during the last 24-36 months the company has burned through an enormous amount of cash, which has recently accelerated commensurate with the increase in installations. By my calculations the company burned about $39 million in cash in FY06 (March) and about $149 million in FY07. Looking out to this year, if the company completes its goal of installing 4,000 screens by October 2007 my model (assuming about 500 instillations on average per month) shows the company burning an additional $125 million this year. Management’s guidance for FY08 is for revenues of $82-90 million and adjusted EBITDA of $30-36 million, which is not based upon achieving the 4,000 screen goal, but only the commitments they have in hand. Assuming they reach the 4,000 goal and assuming a healthy increase in margins, my model shows: revenues of about $102 million, adjusted EBITDA of about $41 million, a net loss of about $17 million and a loss of $0.70 per share. Clearly if management stops new installations after phase 1 is completed in October, the cash burn would be less. However, that would likely be viewed very negatively by even the bulls, given the recent phase 2 hype.
 

With only $29.4 million in cash and remaining $53 million remaining on its $217 million GE credit facility as of March, the company will have to raise significant cash to fund its installation plans. Under the terms of the GE credit facility AIXD will have to fund 30% of the equipment cost, I estimate that AIXD will have to raise at least an additional $60 million this year, translating into huge dilution for shareholders. Note in the last 24 months the share count has risen about 2.3x and 3.2x over the last 36 months, despite the addition of a huge amount of debt (the debt/equity ratio was 184% last quarter). Management has stated that they will not be funding this future growth in the equity market and are evaluating alternatives in the debt markets. While some investors may welcome the news that the company does not intend on printing any more dilutive shares in the future, I would caution that: 1) terms in the overall credit markets have turned very unfavorable lately and 2) the recent history shows that the cost of debt for the company is far from attractive. Regarding the $217 million GE Credit loan facility, the interest rate is 400-450 basis points above LIBOR, which is also not cheap. But maybe most telling is that on top of this rate, GE Credit will only fund 70% of the cost of each installation, which leaves them with a lot of margin to resell the assets off in a worst case scenario. Moreover, the terms of the company’s last debt deal in October 2006 were even less attractive. While the press release suggested the company was raising $22 million in a private placement at an 8.5% rate, reading the fine print of the 8-K filing and considering the impact of the “kicker shares” raised the cost of the debt to a whopping 17% rate! I believe the terms that debt holders are requiring from the company is very revealing. The interesting question from this is if the story for Access IT is as strong as management projects to investors, why are very sophisticated investors demanding these aggressive terms to loan the company money?


Disclosure: The comments on this stock, and any other I discuss with VIC members on this site, represent my own opinion on the stock which are based on my own analysis and independent research from multiple sources that I believe are reliable. In keeping with the spirit of the club, I suggest others should do their own research before making any investment decisions and welcome any feedback or opinions from other VIC members. Consistent with my investment opinion, my firm has had and may continue to have a short  position in the shares of AIXD.

        

        

Catalyst

• Continued losses and significant cash burn.
• The need for dilutive financing.
• Competitive actions.
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    Description

    INTRODUCTION: With a 75% rebound in the share price, an unfavorable change in the economics of its digital cinema financing plan (not understood by the bulls) forcing the company to try to shift its business model to newly acquired businesses with major competitive pressures, the continued very high cash burn and the need for major dilutive capital requirements in the near future, I believe it is timely to reiterate my short recommendation on the shares. A sum of the value of the parts analysis of the company shows a fair value for the shares below $3.50, which illustrates the significant potential downside in the share price.
    Note: For anyone interested in background on this company, I would refer you to my original write-up (under the stock symbol AIX) dated 10/20/05 as well as subsequent Q&A update postings dated: 1/13/06, 4/26/06, 9/28/06 and 10/12/06. Thus, the focus of this new posting will be on the current factors that I believe underscore my negative position on the fundamental outlook for the company and the shares at this time and makes this a timely call.
     
    THE ECONOMICS OF THE DIGITAL DEPLOYMENT BUSINESS FOR AIXD ARE NOT ATTRACTIVE: As a starting point for understand my position on the stock, I think it’s important to understand the economics of the digital distribution business for AIXD. For those investors who have taken the time to get past the sizzle and hype, and run a spreadsheet on the economics of the digital equipment financing business (especially the AIX/Christie plan) the clear message that comes through is that this is not the outstanding investment opportunity that some make it out to be and that in the case of AIXD the ROI is not compelling. The following is my basic model for AIXD for revenues and costs on a per screen basis assuming completion of all 4,000 screens:
     

    Economic Model for Deployment Business
     
     
    VPF Revenues
    $15,000
    Delivery Revenues
    $900
      Total Revenues
    $15,900
     
     
    Depreciation
    ($7,500)
    Interest
    ($5,923)
    Operating Expenses
    ($250)
     
     
    Pretax Income
    $2,227
    Taxes
    ($891)
    Net Income
    $1,336

     
    In modeling this business I have assumed the following:
    -- VPF’s averaging $1,000 per screen.
    -- the industry average of 15 movies per year.
    -- delivery fee revenues of $200 from 1,200 theater locations.
    -- an average system cost of $75,000 and a 10 year depreciation life.
    -- interest costs on the GE credit line (70% of the system cost) as per the terms (about $4,500 per year) and a portion of the remaining 30% system cost that AIXD has funded at the very unattractive terms in their recent private placement (see below), with the remaining piece (about $17,000) as AIXD’s equity piece.
    -- modest administration and operating costs (delivery, administration, etc.) of about $250 per system per year.
    -- a 40% tax rate.
     
    Note, my model assumes full completion, no hidden costs (i.e. potential upgrades and hardware replacements) and full revenue streams (i.e. an all goes right scenario!). Factoring in all these variables, the model shows an annual CF of $1,336 per screen and a ROI for AIXD on its equity in this business is only about 8%.
     

    Per Screen ROI Analysis
     
     
    System Cost
    $75,000
     
     
    GE Financing (70%)
    $52,500
     
     
    AIXD Financing (30%)
    $22,500
      AIXD Private Placement ($22M)
    $5,500
      AIXD Equity Component
    $17,000
     
     
    Net Profit
    $1,336
    ROI on AIXD’s Equity
    7.9%

     
    My discussions with some of the other companies looking at this business suggest that my calculation are consistent with their models and is the reason they have been somewhat tepid to jump into this market. Thus, I would ask: does an 8% ROI make this such an attractive business and justify all the hype from AIXD?
     
    PHASE 2 HYPE LEADS TO A RALLY IN THE SHARE PRICE DESPITE LESS ATTRACTIVE ECONOMICS: I believe the recent move in the share price from the low to mid $5 levels is tied to the company’s discussion of phase 2 of its digital cinema conversion program. As has occurred in the past, the combination of management’s one sided spin on current events, the laziness of a number of sell-side analysts to do some of their own research (instead of just listening to management) and some favorable press articles has in my opinion aided the recent rally. However, there are a number of major factors and changes from phase 1 (which management has not highlighted) which in my opinion clearly reduce the economic return for AIXD.
     
    Phase 2 of its digital cinema deployment plan, which will be formally announced by year end, is targeting an additional 10,000 screens in the US. While this sounds very compelling, there is one important thing that management left out of its discussion; the economics of phase 2 of their deployment plan will be significantly different and much less profitable for AIXD, than in the past. As I pointed out a number of times, what is sometimes more important than what management says is what they don’t say!
     
    An important starting point in understanding the changes that are being negotiated in phase 2 is that the studios are not very happy with how phase 1 of AIXD’s plan has working out relative to their expectations. In phase 1 the major studios were willing to give a little more up to get the program started. However, they have learned a lot during the last deployment period and want to make a number of changes before reaching critical mass. For example, the studios were unhappy in paying VPF’s on many smaller/regional theaters where the return on their VPF payments are sub par. Also, in some cases the studios were being asked to pay multiple VPF’s on screens that would have shown the same 35mm film, recycled after running a week or two at a first run theater. Negotiations continue and no formal contracts have been signed yet between AIXD and any of the studios. However, the following are some of the important changes that the studios want that will significantly decrease the economics for AIXD in of phase 2 of it digital cinema deployment:
     
    Clearly these changes will reduce the profit potential tied to any new digital cinema asset financing plan. Our understanding is that there will be a caped return not exceeding 15% on the plan. To characterize the comments from one knowledgeable source in the discussions: the studios are not allowing this to be a big equity play and it will be tough to get a healthy return on investment from pure conversion. Thus maybe we are beginning to see why the National CineMedia proactively separated these operations, labeled Digital Cinema Implementation Partners (DCIP), from its core business pre-IPO and its CEO described these operations as nothing more than an equipment financing business and “unattractive” from a business model perspective. This may also help explain why we hear that Technicolor has said it does not expect to make any significant profits from its financing plan and why it has been very slow and cautious on moving forward with its rollout plan and others looking at getting into the business have changed their mind.
     
    AIXD IS SHIFTING ITS BUSINESS MODEL TO NEWLY ACQUIRED UNPROVEN & MORE COMPETITIVE BUSINESSES: The recognition of the impact of these changes does not appear to be lost on the management of AIXD (though they forgot to communicate this to investors). In my opinion this is the reason they are attempting to change the entire focus of the company once again. Noteworthy is that the revenue stream of VPF’s on new phase 2 deployments will move to zero at some point in the future. This fact was recently highlighted in a July 8th Business Week article on Technicolor (“A Celluloid Hero Goes Digital”) and the challenges it faces. Discussing VPS’s, the article states “those fees start at about $1,200 and drop over time to zero”. Thus, the company’s latest strategy is to try to build a group of business to sell products and services to these exhibitors. The recent acquisitions of Unique Screen Media (USM) and The Bigger Picture appear to be the lynchpins in management’s new strategy. To emphasize this point management has stated publicly that The Bigger Picture division will be the biggest division of the company in five years. That’s a pretty big goal for a division that management has given guidance for $5 million in revenues this year. Hitting management’s five year goal would likely require tremendous growth over that period. Or it could be recognition of the fact that VPF’s will begin to dramatically drop off at that time!
     
    Given the trend for VPF’s, what investors are primarily buying is really a company in the following businesses in which management hopes to leverage from its financing deals: software management (Hollywood Software), satellite transport/delivery (Boeing), pre-show screen advertising (Unique Screen Media) and digital content delivery (The Bigger Picture). Each of these businesses lack the sizzle factor that its financing business has with investors, are already highly competitive in that they have well established players with significant market share dominance. For example USM is a very distant #3 player in the pre-show advertising market that is dominated by two giants: National CineMedia and Screen Vision. USM’s current installed base of about 3,500 screens compares with the two leaders, who each have about 14,500 screens. This is important because currently Unique is primarily a provider of local market advertising. By contrast, both of these competitors have fully running digital satellite delivery networks already in place and a base of much more viewers (especially in major metropolitan markets) which make them much more attractive to national advertisers and helps in their goal of trying to gain more advertising dollars away from other national advertising mediums. This is where the big dollars and profits are to be had and where USM’s two major competitors are already well positioned. However, before USM can compete for these dollars it will have to spend a fair amount of its own to upgrade its infrastructure and significantly grow its screen presence before it can be competitive for this business. Maybe this is one reason why we understand that both National Cinemedia and Screen Vision passed on the opportunity to acquire USM while it was on the market for sale for quite some time prior to AIXD’s acquisition. For these reasons I believe it is very inaccurate and misleading for the management of AIXD to describe its USM division on its last conference call as “a smaller version of National CineMedia”. Thus, while I suspect that AIXD will be successful in growing its base of theaters for USM’s pre-show advertising services, one diluting factor is that in phase 2 of its digital cinema financing deal the studios will receive an advertising usage fee from AIXD on the use of its digital projectors for pre-show advertising. Thus this takes away a portion of the profit potential for AIXD and may be a reason why management has suggested that the revenue and profit picture from this division should remain similar in the future.
     
    The Bigger Picture is a digital alternate content distribution company. While providing some fit, there are a number of issues that I believe will create a very challenging environment for the company to be the huge growth vehicle that management has communicated to investors. Notably, similar to the competitive situation with USM, The Bigger Picture has some major well established competitors. Maybe the most significant competitor is Hollywood itself and the major distribution divisions of the large studios, many of which have been moving to grow their business in this area. Noteworthy, in one of the largest revenue sectors for alternate content, concerts and related entertainment, the major provider of content is Live Nation. This company’s relationship with many of the major artists and its ownership on many venues for these events gives it a unique advantage. In looking for distribution for its content, Live Nation decided in May of 2006 to partner not with AIXD, but National CineMedia. Given Live Nations breath and depth of content in this area, this clearly puts AIXD at a competitive disadvantage. While The Bigger Picture has plans to add additional “channels” in regard to the type of digital content it hopes to provide one notable point is that most content distribution agreements are non-exclusive in nature. Thus, the same content could be available to exhibitors from different sources and no exhibitor wants to be locked into any provider. Also when looking at the financial impact, remember the studios are attempting to take a cut on the alternate content fees AIXD receives. Finally in discussing the subject of alternate content it is important to remember one thing, to date this content has not proven the bonanza that exhibitors had hoped for in filling up their seats during off-hours. Noteworthy, AIXD’s major exhibitor partner Carmike has stated that alternate content has been somewhat disappointing and that they are in the process of seeking new content providers. Thus, the bottom line is that there is not a lot of evidence to get too excited at this point about the future prospects for The Bigger Picture as a major explosive growth story.
     
    THE SHARE PRICE CURRENTY ACCORDS A HUGE VALUE PREMIUM TO AIXD’S DIGITAL DEPLOYMENT BUSINESS THAT IS UNWARRENTED: So, given the uncertainty regarding AIXD’s new businesses, what is its core digital deployment business worth? By my calculations investors are paying an egregious sum for this business. Unfortunately, trying to value AIXD’s various businesses is difficult because management has refused until now to provide any segment breakdowns and has not even provided any pro forma historic results for any of its recent acquisitions. Thus, in my analysis of what investors are paying for this business I took the company’s EV and backed out the cost of some of their past acquisitions (including: Hollywood Software, Boeing, Pavilion, PLX Systems, Ezzi.net, Unique Screen Media and The Bigger Picture). I then bumped up the value of all but the last two at a 50% premium to their acquisition cost. I did this for conservative reasons despite my belief that some offer little if any growth and questionable value to the story. In regard to the USM and The Bigger Picture acquisitions I assumed that each company is already worth 2x their recent acquisition prices given that the AIXD umbrella provides a greater revenue opportunity. I did not factor any real value for the company’s hosting business given management’s recent failure to consummate its sale and its sharply declining sales. Subtracting the sum of these acquisitions from the current EV shows a valuation of about $285 million for the remaining digital deployment business.
     

    Valuation Of AIXD's Digital Deployment Business
     
     
     
     
     
     
     
    Acquisition
    Est. Current
     
     
     
    Price
    Valuation
    Premium
     
    Acquired Businesses*
    $17,550
    $26,325
    50%
     
    Unique Screen Media
    $16,400
    $32,800
    100%
     
    The Bigger Picture
    $4,300
    $8,600
    100%
     
      Total
    $38,250
    $67,725
    77%
     
     
     
     
     
     
    EV
    $361,400
     
     
     
    Acquired Businesses
    $67,725
     
     
     
    Digital Deployment Business
    $293,675
     
     
     
     
     
     
     
     
    Note: * Includes: Boeing, Pavilion, Hollywood Software, PLX Sys. & Ezzi.net

     
    Thus, using the annual CF from all 4,000 screens of about $5.34 million shows that at about $294 million this business is being valued at a multiple of 55x phase 1 cash flow. I would submit that with mediocre ROI characteristics and the average company selling at 7-8x FC, this valuation significant overvalues this business. One might point out that my analysis does not consider the potential CF’s from phase 2. While I agree that there may be some “real option” premium from phase 2, the economics associated with this plan will be even less attractive than phase 1 and there are major questions as to who the exhibitors will be that sign on to the AIXD plan given the competition from DCIP (and its 14,000 screens) and Technicolor in the US and new competitors like Arts Alliance Media in international markets. However, let’s assume that my calculations are wrong and/or AIXD can find additional revenue streams to raise its ROI up to the 15% cap that Hollywood studios are now discussing. If I value AIXD’s digital deployment business at a healthy 15x CF (or double the average market company) and account for the company’s large debt position in calculating its EV, the adjusted market capitalization shows that the stock should sell at roughly $3.50 per share. This is my estimate of fair value for the stock for investors who believe that AIXD’s management can successfully raise the returns in its digital deployment business.
     

    AIXD Share Price Valuation
     
     
    AIXD Equity Component
    $17,000
    ROI @ 15%
    $2,550
    ROI @ 4,000 screens
    $10,200
     
     
    Deployment Business @ 15x CF
    $153,000
    Premium value of Acq. Businesses
    $67,725
    Total EV
    $220,725
     
     
    Debt
    ($166,700)
    Cash
    $29,400
    Adj. Mkt. Cap.
    $83,425
     
     
    Shares Out.
    24,363
    Share Price
    $3.42

     
    A PATTERN OF RECENT WEAK FINANCIAL PERFORMANCE AND EXCUSES: Noteworthy, quarterly results over the last few periods have been disappointing, with most analysts increasing their forecasted losses (and making excuses for the results). The Q4 FY07 (March) results reported 6/20 were no different. Relative to analyst expectations the Q4 loss was significantly more than expected and the guidance for the current year was short of forecasts. While sales were above expectations, the upside was due to the addition of sales from recent acquisitions and the inclusion of the previously discontinued hosting business (not stronger core business). With consensus estimates calling for a loss of $0.24, the reported number was a loss of $0.47 (including a loss of $0.10 from these previously discontinued operations). In addition, while not unexpected, debt grew notably and the company continued to burn significant amounts of cash.
     
    One of the major reasons that the company continues to remain unprofitable and why the loss was greater than analysts had forecast was the huge growth in depreciation. Management makes the case (repeated by the analysts who follow the company) that investors should look at an “adjusted EBITDA” number to gauge their progress and that depreciation doesn’t matter because it is not a cash charge. Wow, this brings back memories of how valuations were justified during the internet bubble! I thought we learned a lesson from that period! Also, I’m reminded of Warren Buffet’s comments that cap-x and depreciation are the worst kind of expenses because the cash flows out immediately and are only expensed later. I would add in the case of AIXD it is unclear of the future revenue and stream of profits tied to those cash outflows. Moreover, as this company’s business model is centered on deriving a revenue stream from these assets (digital projectors), how can anyone logically make the case that investors should just forget about the financial cost of owning these assets? That would be like someone saying that in the case of Microsoft, R&D expenses should be eliminated from any profitability analysis. Finally, I would remind readers that a basic premise of financial analysis is that EBITDA is not a good benchmark for capital intensive businesses like AIXD.
     
    THE CASH INCINERATOR WILL NEED TO RAISE MORE EXPENSIVE CASH TO BURN: As previously stated, during the last 24-36 months the company has burned through an enormous amount of cash, which has recently accelerated commensurate with the increase in installations. By my calculations the company burned about $39 million in cash in FY06 (March) and about $149 million in FY07. Looking out to this year, if the company completes its goal of installing 4,000 screens by October 2007 my model (assuming about 500 instillations on average per month) shows the company burning an additional $125 million this year. Management’s guidance for FY08 is for revenues of $82-90 million and adjusted EBITDA of $30-36 million, which is not based upon achieving the 4,000 screen goal, but only the commitments they have in hand. Assuming they reach the 4,000 goal and assuming a healthy increase in margins, my model shows: revenues of about $102 million, adjusted EBITDA of about $41 million, a net loss of about $17 million and a loss of $0.70 per share. Clearly if management stops new installations after phase 1 is completed in October, the cash burn would be less. However, that would likely be viewed very negatively by even the bulls, given the recent phase 2 hype.
     

    With only $29.4 million in cash and remaining $53 million remaining on its $217 million GE credit facility as of March, the company will have to raise significant cash to fund its installation plans. Under the terms of the GE credit facility AIXD will have to fund 30% of the equipment cost, I estimate that AIXD will have to raise at least an additional $60 million this year, translating into huge dilution for shareholders. Note in the last 24 months the share count has risen about 2.3x and 3.2x over the last 36 months, despite the addition of a huge amount of debt (the debt/equity ratio was 184% last quarter). Management has stated that they will not be funding this future growth in the equity market and are evaluating alternatives in the debt markets. While some investors may welcome the news that the company does not intend on printing any more dilutive shares in the future, I would caution that: 1) terms in the overall credit markets have turned very unfavorable lately and 2) the recent history shows that the cost of debt for the company is far from attractive. Regarding the $217 million GE Credit loan facility, the interest rate is 400-450 basis points above LIBOR, which is also not cheap. But maybe most telling is that on top of this rate, GE Credit will only fund 70% of the cost of each installation, which leaves them with a lot of margin to resell the assets off in a worst case scenario. Moreover, the terms of the company’s last debt deal in October 2006 were even less attractive. While the press release suggested the company was raising $22 million in a private placement at an 8.5% rate, reading the fine print of the 8-K filing and considering the impact of the “kicker shares” raised the cost of the debt to a whopping 17% rate! I believe the terms that debt holders are requiring from the company is very revealing. The interesting question from this is if the story for Access IT is as strong as management projects to investors, why are very sophisticated investors demanding these aggressive terms to loan the company money?

    
    

    Disclosure: The comments on this stock, and any other I discuss with VIC members on this site, represent my own opinion on the stock which are based on my own analysis and independent research from multiple sources that I believe are reliable. In keeping with the spirit of the club, I suggest others should do their own research before making any investment decisions and welcome any feedback or opinions from other VIC members. Consistent with my investment opinion, my firm has had and may continue to have a short  position in the shares of AIXD.

    
            

    Catalyst

    • Continued losses and significant cash burn.
    • The need for dilutive financing.
    • Competitive actions.

    Messages


    SubjectQ1 Comments (Part 1)
    Entry08/14/2007 12:28 PM
    Memberbentley883
    With Q1 financial results, the 10Q and the proxy statement out I thought I would make a few comments. The following are some of my thoughts & opinions:

    •ANOTHER SHORTFALL/FUTURE FORECASTS CUT: Consistent with history, the Q1 results were somewhat disappointing. Notable, total revenues, which showed a meaningful sequential slowing, were below published estimates and the net loss of $0.28 was once again more than sell-side analysts were expecting. In response to the Q1 report card, sell-side analyst forecasts for sales were once again cut and the estimate for the full year loss was increased notably. Remember, this is for a growth company! But this is all good news in the eyes of some sell-side analysts who indicate the story is beginning to unfold! For its part management continues to focus on an “adjusted EBITDA” number, ignoring the cost associated with D&A and interest. As stated in my original write-up, this strikes me as back-to-the-future thinking in regard to valuations during the internet bubble and that EBITDA is not a good analytical benchmark for evaluating capital intensive businesses like AIXD.

    •BALANCE SHEET WEAKENS FURTHER: Regarding the company’s balance sheet, the company increased its debt burden significantly. $22M of senior debt was re-classified as short term, an additional $31M of LTD was taken down on the company’s GE credit facility and $5M of vendor financing from Christie. Note, the debt/equity ratio now stands at 236% vs. 184% last quarter and 3% last year. Interestingly the 10Q states that the GE credit facility has some compliance covenants, including a leverage and interest coverage ratio, but does not provide further details. Also, in addition to the 17% rate on the company’s senior debt (including the kicker shares), the 10Q stated that the Christie note bears interest a at 15% rate! Thus, this is another indication of the rate terms the company has to offer creditors!

    •INSTALLATIONS SLOW: Installations again slowed in the period. In Q1 the company installed 417 screens, which compares with 582 in the March quarter and 651 in the December period. While management said this slowing was a result of busy exhibitor schedules, my understanding is that one of the busy periods in the industry is during the Summer. I wonder if the slowing in installations has more to do with the rapidly declining cash and credit line of the company. Nonetheless, if the company hits its goal of reaching 4,000 systems by October, the pace of installations will have to rise. That also means the cash burn will also be going up. Burn baby burn!

    •CASH BURN CONTINUES & WILL ACCLERATE: In Q1 the company burned about $32M of cash vs. $25M last quarter despite lower digital screen installations. For the last 12 months, the company used about $151M. Going forward, by my estimates the company will require about $100M to complete its 4,000 screen roll-out by this October. However, the combination of the $29.5M of cash on hand and the $44M left on the GE credit line (remember only 70% of a system cost can be financed on the GE facility) will not be enough to fund the roll out. That means that the company will have to raise a significant amount of money in the near future just to complete the roll-out on schedule. I estimate that the company will have to raise about $35-40M to cover the cost of installing the equipment and covering operating costs.

    continued in Part 2.........

    SubjectQ1 Comments (Part2)
    Entry08/14/2007 12:29 PM
    Memberbentley883
    •FUTURE FUNDING ISSUES: Management again reiterated that it will not use stock to fund its upcoming capital needs. Despite the turmoil in the debt markets management expressed confidence that it could raise adequate capital to complete the 4,000 systems on plan and move to phase 2 of its deployment plan. The company’s CEO said that he is in discussion with multiple lenders and likes “to think of ourselves as a special situation”. The company also indicated that he “would not be surprised to see us pay a little more” than the recent senior debt (which I remind you is 17%, including the kicker shares!) and that the company has backed away from installing satellite dishes on every theater they sign on (partly to save the cash expense). It will be interesting to see in this market environment what terms the company will get from any lender to complete the roll-out on plan (remember to read the fine print in the lending document!).

    •DIVISIONAL BREAKDOWNS: While not discussed on the conference call, the company did provide some divisional breakdowns in the 10Q. While management had previously referenced in investor presentations that the company was structured around 5 divisions, the 10Q provided details on two plus an “other” segment. However, footnotes in the document gave information on additional pieces. I was disappointed that the deployment segment, containing the all important VPF revenues, was not broken out. Noteworthy, quarterly revenues for The Bigger Picture division totaled all of $368K in the period, or 2% of total revenues. Thus, this division has to post an awful lot of growth if management is correct in its comments that this division can be the largest contributor to over revenues in the future.

    •10Q TIDBITS: The following are some interesting tidbits from the 10Q: 1) I noticed in the 10Q that the former name of the Christie/AIX division has been changed to AccessIT Digital Cinema and that Christie’s President & COO Jack Kline is now no longer affiliated with the division. While this likely is tied to AIXD being forced to use other projector suppliers, it will be interesting to see if AIXD maintains it most favored nation status with Christie in the future. 2) The weighted average interest rate on the GE credit line as of 6/30 was 9.86%. This is slightly more than I had modeled and will likely rise in the future.

    •A HEALTHY RAISE FOR THE CEO: The proxy indicated that the company’s CEO received a very healthy increase in total compensation which last year totaled $1,138,400. Noteworthy, his compensation agreement was changed from a base salary of $250,000 and a percent of revenues to a base salary of $600,000, a minimum bonus of $240,000 and potential stock/option awards. Noteworthy, this amount equates to about 6% of the company’s annual SG&A expenses and about $0.05 per share.

    SubjectCFO
    Entry08/15/2007 11:23 AM
    Memberbruin821
    Very nice write up, we have also done work on this name and agree with your sentiments. An interesting tidbit is that recently the CEO said hiring a CFO was not necessary because the accounting is complex and because of his background he can handle those responsibilities rather than taking the time to get someone up to speed. Seems pretty fishy to me.

    SubjectExpensive & Dilutive Debt
    Entry09/06/2007 03:57 PM
    Memberbentley883
    Last week AIXD announced that they had completed a $55 million private placement of senior unsecured debt. The following are some of my thoughts on the news:

    • The news of the company taking on additional debt to complete phase 1 of their digital deployment plan is consistent with the expectations I communicated out in my recent 8/8/07 write up on the company and: follows a pattern of raising and burning cash, diluting shareholders, misleading investors, offering highly attractive terms and concessions to lenders and is likely not the last financing in the near future. It is important to note that by my calculations this financing will only give the company enough cash to last them a few months and complete their phase 1 deployments with additional financing/dilution likely before year end!

    • In a move that I would characterize as somewhat misleading, the headline of the 8/28/07 press release references that the private placement was done at a 10% interest rate. However, that headline does not take into account the first and second equity kicker shares that the company will have to offer the group of investors who have signed up for the deal. Accounting for the interest that will be paid in equity kicker shares raises the total implied interest rate on the debt to about 20%, which is well above the 10% referenced in the headline. Note this is the second time that the company has chosen to issue a press release on a debt offering with such a misleading headline. What is the company trying to hide? I guess they also realize that the real interest rate on the debt is not very attractive and suggests that the credit risk assigned to the company by sophisticated investors is not good.

    • A notable trend from the last couple of financings (the two recent private placements and the Christie loan) is the increased implied interest rate offered lenders in the range of 15% to above 20%. The importance here is that as the company’s cost of capital increases, its potential ROI from its digital deployment business falls commensurately. In my 8/8/07 analysis my ROI calculation was based on a lower cost of capital than these recent financings. Thus, this makes my 7.9% ROI calculation for this business much more of a stretch and requires an even greater contribution for the newly acquired businesses to compensate.

    • Another issue that I would characterize as misleading investors is that despite the CEO’s repeated comments to investors, including on its last quarterly conference call with investors, that it would not dilute investors by doing an equity financing, management did exactly that. By my calculations the two equity kickers will increase the share count by about 1.8-2.5 million. This number is consistent with the comments made by the CEO at an investor meeting in New York this week when he stated that the latest financing will increase the share count over the next 3 years by an average of about 2.2 million. Noteworthy, this represents dilution in a range of about 7.2%-10.1% off the last quarter average shares outstanding. Clearly this is not just a small amount and is another sign that illustrates how desperate management must have been to get financing done.

    • Buried in Exhibit B on the Registration Rights Agreement of the SEC filing is the following: “In connection with the sale of the Common Stock or interests therein, the Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the Common Stock in the course of hedging the positions they assume. The Selling Stockholders may also sell shares of the Common Stock short and deliver these securities to close out their short positions, or loan or pledge the Common Stock to broker-dealers that in turn may sell these securities.” My understanding is that this is a highly unusual concession made to the lenders to allow them to create basically a riskless hedged position on the kicker shares they expect to receive in the future and allow them to cover their positions with the expected shares they receive. Clearly this is a nice deal for the lenders, and again shows the attractive terms the company had to offer lenders. However, these deals are coming at the expense of existing shareholders who are bearing an even greater portion of the risk.

    • The latest debt financing moves the company’s already highly leveraged balance sheet deeper into debt and clearly creates more risk to the story and for current shareholders (unlike equity the company will have to pay back the debt with real cash!). For conservative reasons, using last quarter’s balance sheet as a reference point the company’s debt/equity ratio considering the $55 million financing now stands at about 307%. To show how debt has skyrocketed, this compares with a ratio of only 9% last year. In addition to increasing the risk for existing shareholders, I would guess this may also raise some issues with the company’s other lenders, especially GE.

    SubjectDebt Covenant Violated
    Entry09/07/2007 11:01 AM
    Memberbentley883
    The increased debt load the company has following its last offering got me thinking about its GE credit line and prompted me to dig a little bit into the matter. Thus, I read the 11/14/06 SEC filing on the GE loan agreement that is available at:

    http://www.sec.gov/Archives/edgar/data/1173204/000093244006000525/aitexh10-1_nov1406.htm

    I would call your attention to pages 47 & 48 of the 225 page document which highlight the financial covenants of the agreement. While I am not an expert in this area (and welcome any other opinions), it appears that the company has violated at least one of these financial covenants relative to its maximum consolidated leverage ratio. The document states the following:

    “Consolidated Leverage Ratio” means, with respect to any Person as of any date, the ratio of (a) Consolidated Total Debt of such Person outstanding as of such date to (b) Consolidated EBITDA for such Person for the last period of four consecutive Fiscal Quarters ending on or before such date.”

    The document states that the maximum consolidated leverage ratio for the quarter ending 6/30/07 is 17.0 to 1 and then drops significantly to 9.5 to 1 for the quarter ending 9/30/07. Now while I know that management has created its own definition of EBITDA, my math shows that the trailing four quarter EBITDA figure is about $8.3 million. On the other side of the equation, including the recent $55 million financing, the company’s total debt stands at about $263.0 million. Note that I used Q1 (June) reported figures and that the real current debt number is likely higher as the company continues to draw down funds on its GE credit line. Thus my math shows a consolidated leverage ratio of 31.7 to 1, which is well above the financial covenant spelled out in the loan agreement. Even considering a significant improvement in EBITDA in the current quarter, I would suspect that at best this ratio may decline to possibly the 14-15 to 1 range. However, as spelled out in the loan agreement, the consolidated leverage ratio covenant also significantly declines this quarter. Thus, the company would still be in violation of this debt covenant.

    Not being an expert in this area, I am not sure of the impact of this. I believe it is possible that AIXD could get a waiver from GE, but this may come at some cost (a higher interest rate?). However, I do know this is not a good sign and the explosion in debt and/or the lower EBITDA number was obviously different from what the company expected just one year ago. This in my opinion illustrates that the story is not working out as management planned and is not as good as the CEO continues to articulate to investors. In my opinion, the huge increase in leverage, which has increased the debt/equity ratio from 9% to 307% in just the last year creates enormous risk to the company from an investment perspective and supports my negative position on the stock.

    SubjectBentley
    Entry09/19/2007 01:28 PM
    Memberbruin821
    Sorry for the delay in getting back to you. My thoughts are in general very similar to yours'. Management had said they couldn't have done the deal with GE if they had violated the covenants and triggerer an event of default. Said they were offered up to $150mm in convert since the deal was so well recieved. Said if covenant issue was real they have had to have done a convert.

    Bottom line is I think it is very shaky busines model requiring enormous amounts of cash with a questionable business model. Think it is a great short at $9ish, that being said would probably cover if got much lower than these levels.

    SubjectMore Evidence Of Problems
    Entry10/23/2007 09:02 AM
    Memberbentley883
    GE LOAN AGREEMENT AMMENDED: Back on 9/7 I pointed out the likelihood that AIXD had violated its GE debt covenants. Last week in an SEC filing, the company announced that it had amended its loan agreement with GE, including loosening some of its leverage ratio covenants. The following is the web link to the document: http://www.sec.gov/Archives/edgar/data/1173204/000093244007000606/exh10-1_access1243795.htm

    My take on this is that this illustrates that the story is not working out as management planned and is not as good as the CEO continues to articulate to investors. Remember that this loan agreement was finalized less than a year ago. Clearly AIXD was not thinking that they would have to take on such a significant increase in debt. In my opinion, the huge increase in leverage, which has increased the debt/equity ratio from 9% to 307% in just the last year creates enormous risk to the company from an investment perspective and supports my negative position on the stock. Unlike raising capital by printing new shares, debt needs to be paid back (or else!). GE on the other hand is not at risk and could afford to amend the terms due to the fact that it has protected itself by funding only 70% of the full system cost and having full recourse to the assets in case of default. The same cannot be said of AIXD. Given the high interest rate that AIXD has been forced to issue this debt, this will create a significant liability to the company’s hopes of achieving profitability sometime in the future. Moreover, the high interest rate will decrease any ROI that the company hopes to make from phase 1 of its digital deployment deals.

    AIXD LIKEY TO MISS ITS 4,000 SYSTEM GOAL: On another front, with the end of October rapidly approaching it looks increasingly unlikely that AIXD will be able to meet its goal of converting 4,000 screens to digital in phase 1 of its deployment plan. Management stated that last weeks announcement of Krikorian Premiere Theatres brings the total number of screens signed to 3,743. As of 10/22/07 the company’s website states that they have completed the instillation of 3,577 screens. By definition that leaves the company short of its goal by 423 systems with about a week and two days left in the month. Even if the company were to have signed enough contracts to deploy the remaining screens (which it does not have) they would be hard pressed to complete all of them in time. Thus, missing its installation goal is another sign that the company’s strategic plan is may not be working out as planned.

    While one could argue that the reason they were not able to meet their installation goal was that they had basically run out of cash before the latest debt deal (which obviously raises other concerns), the fact of the matter is that they did not sign enough contracts to reach their 4,000 screen goal. I believe that signings are more significant than installations. Using management’s number for signings of 3,743 systems, this leaves the company 257 screens short of reaching its goal. However, the actual figure may in fact be higher. Back in December of 2005 when the company announced the Carmike agreement the press release stated that the agreement was for “up to 2,300” systems. Thereafter Carmike has stated that they intended to convert only about 2,100 screens as some of the remaining did not make sense to redo for a number of reasons. Thus, I am not sure what number AIXD is factoring into its 3,743 contract number. As such, I suspect the real number of the screens they are short is currently closer to 457. Remember most of the major exhibitors outside of the DCIP group of partners, those who are involved in a beta with a competitor or those who have already contracted with AIXD are small in size. Thus, reaching its 4,000 screen goal will likely take multiple new exhibitor signings.

    A couple of things should be troubling for investors about the inability of the company to reach their goal of signing 4,000 screens by October. Remember management has continuously touted the very strong demand they were seeing from exhibitors for their product. Thus, the facts related to the number of orders for digital conversions appear to dispute this. Also, AIXD’s phase 1 contracts with the major studios are for signings through year end. Thus, this would leave AIXD with no growth until phase 2 deals can be arranged and exhibitors signed under these more expensive terms. Moreover, given this timetable you would have suspected that a full court press would have been on to sign any remaining exhibitors sitting on the fence in order to make their October 4,000 goal. This leaves one with the question of how many, if any, exhibitors are left to sign up by year end. Moreover, given the likelihood that under phase 2 exhibitors will have to kick in to pay a portion of the cost of the system, why would any exhibitor who is serious about moving to digital cinema not sign now and wait for phase 2? The only answer I can come up with is that they are uncomfortable about signing with AIXD and are likely to deploy with one of the company’s competitors. Obviously, this is another concern that raises questions about the long term future of the company and is consistent with my negative position on the stock.

    SubjectQ2 Thoughts
    Entry11/19/2007 12:24 PM
    Memberbentley883
    I just wanted to share with interested VIC members my thoughts on AIXD’s recent Q2 results following its conference call and 10Q filing. The following are some key points:

    -- Relative to the Q2 results, it looks like revenues were slightly below what the sell-side analysts were predicting; however, the net loss was much greater than what they were forecasting. It looks like EBITDA was not too bad, but the combination of greater depreciation and especially much higher interest cost were the main reason for the shortfall.

    -- Management reiterated its guidance for revenues and EBITDA for this year, however, the CEO said that results are now expected to come in at the low end of the range. Moreover, on the prior quarters conference call management suggested that this same guidance would be lifted as they announce new signings from the Q1 ending levels. Note, while the number of screens signed did rise, the guidance was not only not raised commensurately, it was effectively cut. Also, in a repeat of the last few quarters the sell-side analysts once again increased their forecasts for the loss expected this FY and next.

    -- The company missed their highly touted goal of signing 4,000 screens by October. This is interesting in that management had continuously talked about how strong interest and demand was from exhibitors and they had previously reiterated this goal just before their most recent debt offering.

    -- Noteworthy, in reading the footnotes in the 10Q it appears that VPF revenues declined 11% sequentially (the CEO somehow must have forgot to mention that on the analyst conference call!) while the average screen count increased in the quarter by 11%. Looks like turns declined to 1.73x for the quarter (6.9x annual rate) vs. 2.32x last quarter. This appears inconsistent with the comments from the CEO that the company is still on track for a 15x turns number. Given the importance of this revenue stream to the company, this raises major questions in my mind. It is unclear why VPF’s declined sequentially. It may be due to less digital releases in the quarter or some issues relative to the studios not paying VPF's.

    -- The highly touted Bigger Picture division, which the CEO previously said will likely be the largest revenue generator for the company in the future, saw it revenues drop +50% sequentially to a modest $202k. This was also unexplained on the conference call. My guess is that Carmike's decision to use other alternate content suppliers probably had some impact here.

    -- The debt/equity ratio jumped to 312% from 64% a year ago. As bad as it sounds now relative to their current debt load, it will only get much worse beginning in August 08 when the company will have to start paying back the principal on their GE debt. The table on page 28 of the 10Q listing the company’s contractual debt obligations in 2008, 09 & 10 and shows how much their debt payments will go up in the future.

    -- There are some interesting comments in the 10Q relative to: the restrictions imposed by their lenders, the concessions that the company had to give to their lenders, the amendments to their GE loan agreement and the of extra stock they had to offer certain holders of the 1 year note to invest in the new private placement.

    -- But all is not bad. At least the CEO is collecting his MONTHLY bonus based on REVENUES in CASH!

    SubjectResponse to Roc on VPF's
    Entry12/17/2007 11:05 AM
    Memberbentley883
    Roc
    -- While the company does not come out and state it clearly, by reviewing the “Risk Factors” footnotes of the 10Q on page 34 in the customer concentration statements for both the divisions and the major customers within the divisions (and comparing then with prior 10Q’s), you can get some informative breakouts and a good read on VPF revenues and trends.

    -- My calculation shows that media services revenues per average screen declined 9.5% sequentially.

    -- The decline in VPF revenues was likely tied to the number of digital releases in the period. However, one can only wonder if some of the studios may have balked at paying full VPF’s for screens that had in the analog days had “recycled” 35mm prints that had previously run for a week or two at other theaters and repackaged and shipped (at minimal cost to the studios) to them.

    -- Relative to your comment regarding VPF revenues per screen, using a $1,000 VPF, your $3,500 number would imply turns of 3.5x for the quarter or annual rate of 14x. That figure (which is close to the 15x goal of management) in my opinion is too high at this point. Why are you using this number? As I pointed our in my Q2 review it looks like turns declined to 1.73x for the quarter (6.9x annual rate) vs. 2.32x last quarter. Thus, the company has a long way to go to hit management’s goal.

    -- How will management spin phase two? Like everything else; give investors only one side of the story and not providing any insight into some of the negative issues and challenges. I suspect management will focus on the opportunity associated with how many screens are still available for conversion to digital and the prospect of cross selling their other services (i.e. Bigger Picture and Unique Screen Media) to these customers. However, as I have stated many times previously, it’s not what management says; it’s what they don’t say that’s important! I suspect, we will hear very little about competition for these screens from DCIP and Technicolor, the changes the studios have demanded in the new phase two contracts and how the economics associated with phase two are less attractive to AIXD.

    Hope these answers are helpful
    Bentley
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