AccessIT: The Big Digital Picture

http://seekingalpha.com/article/39779-accessit-the-big-digital-picture

posted on: July 02, 2007 about stocks: AIXD

It would seem as though digital entertainment pervades our lives these days, from DVDs to digital satellite and cable television. But one medium still relies on old-fashioned silver halide film: the movies shown in your local theater.

Access Integrated Technology Inc. (AIXD), launched in March of 2000, is trying to change that. AccessIT is the leader in installing digital equipment into theaters. Now it’s moving into distributing digital films to its equipment in the theaters. It acquired a private company, Big Picture, for about $4 million last quarter. Big Picture produces alternative digital entertainment, such as animated films and sports and concert events, enabling theaters to provide alternative programming to targeted audiences during slow times that normally attract very small audiences.

While most major research firms have so far ignored the space, several analysts covering the company believe the potential is huge. “I’m a believer in digital cinema,” says Jeff Van Rhee with Craig-Callum Capital. “There is absolutely an audience out there for alternative content.”

But AccessIT’s future could be bigger than an iMax double feature. It has distribution contracts with News Corp.’s 20th Century Fox (NWS), Viacom, Inc.’s (VIA) Paramount Pictures and General Electric Company’s (GE) Universal Studios. The studios currently help fund the theaters’ transition to digital, paying a fee every time a digital film is shown. So far AccessIT distributes mostly small films, but its executives have made it clear that transmitting feature films is on the digital horizon, predicting film distribution will be its largest revenue producer in five to seven years.

AccessIT has installed systems for 2,600 theater screens and is on track to reach its promised 4,000 screens by the end of next year. Currently, most of the films are delivered on DVDs, but AccessIT is also installing satellite dishes on the theaters, allowing it to beam films directly to them. The company promises to reach at least another 4,000 screens by 2011, but Mark Harding with Maxim Group believes it could hit an additional 10,000 screens by then. Its few competitors have installed equipment for just a few hundred screens. “AccessIT has a solid head start on its competition,” says Harding.

One big potential competitor is National CineMedia Inc. (NCMI), a joint venture between three of the largest theater chains in the business, AMC Entertainment, Inc., Cinemark USA, Inc. and Regal Entertainment Group (RGC). National CineMedia distributes mostly low end digital equipment, and most of its content is advertising for the screen and lobby kiosks. But it also has bigger plans. It is upgrading its equipment to devices capable of showing feature films, and has so far upgraded its machines for about 100 of the 12,000 screens it serves. With National CineMedia’s major theater backing, AccessIT’s ability to infiltrate new theaters could start to look as limited as the distribution of a foreign-language film.

AccessIt has also had trouble turning a profit. In its fourth quarter ended in March, revenues were $17.3 million, more than triple its revenues the same quarter last year, but its net loss nearly quadrupled to $11.3 million, or $0.47 per share. Analysts had expected a net loss of $0.24 per share. After a big run in 2005 and 2006, when it reached about $15 per share, the stock hit $5.23, its current 52-week low, at the beginning of April 2007.

National CineMedia, by contrast, went public at $21 just last February. It reported revenues of $56 million for its March quarter, double those of a year ago, and a net loss of $3.2 million, about a third its loss from last year. Its stock reached a peak of $29.80 in early June and now trades at about $28. NCMI’s market cap is $1.17 billion, nearly 21 times quarterly revenues, while AccessIt’s is $185 million, about 11 times revenues.

Still, AccessIT’s Q4 loss was due primarily to non-cash expenses, such as depreciation from the equipment it owns and installs in theaters, amortization of intangible assets and disposition of assets. Much of that was due to discontinuing its Data Centers line of business, co-location sites to house computer and telecommunications equipment for corporations.

Without the write offs, AccessIT is profitable. EBITDA earnings for the quarter were $3.4 million (National CineMedia’s EBITDA earnings were $24 million). Investors noticed: since it released its earnings on June 20, AccessIt’s stock has increased from about $7 to $8. Profits should improve from increased distribution of alternative entertainment. Craig-Hallum’s Van Rhee estimates that if it averages just 15 showings on 4,000 screens per year, as the company expects, it can generate $60 million in cash annually, compared with $400,000 last quarter.

For those betting that distribution of films, rather than equipment, is the big picture for digital cinema, AcessIT could have the advantage. By pitting its major studio partners against NationalCinema’s major theater partners, AccessIt could eventually prove to be the real blockbuster.

Disclosure: Access Integrated Technology Inc. is in the portfolio of Rising Star Stocks, an independent investment advisory published by Business Financial Publishing, the owner of SmallCapInvestor.com