Business Context and Reporting Period
Company: National CineMedia, Inc. (NCM)
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: NCM operates the largest digital in-theatre network in North America, distributing advertising and Fathom Events (live and pre-recorded entertainment/business programming). The company is a holding company that manages its consolidated operating subsidiary, NCM LLC. NCM LLC holds exclusive rights to sell advertising in the theatres of its three founding members (AMC, Cinemark, and Regal), which represent approximately 86% of the network's screens and 88% of attendance. The network covers 16,803 screens across 47 states and the District of Columbia.
Key Financial Metrics
| Metric | 2009 (in millions) | 2008 (in millions) |
|---|---|---|
| Total Revenue | $380.7 | $369.5 |
| Operating Income | $168.2 | $173.2 |
| Net Income (Attributable to NCM, Inc.) | $26.1 | $1.0 |
| Adjusted OIBDA | $189.3 | $189.5 |
| Adjusted OIBDA Margin | 49.7% | 51.3% |
| Cash and Cash Equivalents | $91.1 | $69.2 |
| Total Debt (Borrowings) | $799.0 | $799.0 |
| Capital Expenditures | $8.6 | $16.7 |
Revenue Composition: Advertising accounted for 88% of total revenue ($335.1 million), while Fathom Events accounted for 12% ($45.5 million).
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 3.0% to $380.7 million. This was driven by a 17.0% increase in Fathom Events revenue, partially offset by a slight decrease in local advertising revenue due to economic conditions.
- Net Income Surge: Net income attributable to NCM, Inc. rose significantly from $1.0 million in 2008 to $26.1 million in 2009. This improvement was primarily due to a $7.0 million non-cash credit related to interest rate hedge fair value changes (compared to a $14.2 million charge in 2008) and the absence of an $11.5 million non-operating impairment charge recorded in 2008.
- Operating Expenses: Total operating expenses increased 8.3% to $212.5 million, driven by higher costs associated with increased Fathom Events and national advertising revenues.
- Network Expansion: The network added approximately 18.1 million new attendees on a pro-forma basis through new affiliate agreements (e.g., Galaxy Theatres, Storyteller Theatres) and the integration of AMC Loews screens.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- CPM Strategy: Management expects national CPMs to increase over time as cinema advertising proves more effective than traditional media. In 2009, national CPMs were approximately 2.2 times the average U.S. primetime TV CPM.
- Capital Expenditures: Expected to be between $8.0 million and $10.0 million in 2010, primarily for software upgrades and network equipment for new affiliates.
- Dividends: The company declared a quarterly dividend of $0.16 per share in January 2010, payable April 1, 2010.
- AMC/Kerasotes Acquisition: Following AMC's acquisition of Kerasotes, the theatres will move from a network affiliate agreement to the Exhibitor Services Agreement (ESA) structure. Management expects this to reduce affiliate expenses and increase Adjusted OIBDA margins.
Risks and Contingencies:
- Debt and Liquidity: NCM LLC has a $725 million term loan and an $80 million revolving credit facility. A portion of the revolver ($14 million) is held by Lehman Commercial Paper Inc. (LCPI), which failed to fund its undrawn commitment. The company is working to restructure this portion.
- Economic Sensitivity: The company faces risks from the global economic crisis, including reduced advertising spending and potential customer financial difficulties.
- Founding Member Dependence: The business relies heavily on the Exhibitor Services Agreements (ESAs) with AMC, Cinemark, and Regal. Termination or non-renewal of these agreements would have a material adverse effect.
- Interest Rate Risk: The company has hedged $550 million of its term loan. A 100 basis point fluctuation in market rates would impact interest expense by approximately $2.5 million annually.
Key Facts for Investor Verification
- Debt Covenant Compliance: Verify continued compliance with the senior secured credit facility covenants, specifically the consolidated net senior secured leverage ratio (4.0x at year-end) and the requirement to hedge 50% of the term loan.
- Lehman/LCPI Resolution: Monitor the status of the $14 million revolver borrowing from LCPI and the $6 million unfunded commitment, as repayment could permanently reduce the revolving credit facility.
- Tax Receivable Agreement: Confirm the impact of the tax receivable agreement, which requires NCM to pay 90% of tax savings to founding members. Estimated payments for 2009 taxable year are $15.6 million.
- Non-GAAP Reconciliation: Review the reconciliation of Adjusted OIBDA to GAAP Operating Income, noting the exclusion of depreciation, amortization, and share-based compensation.
- Seasonality: Acknowledge that Q1 is typically the weakest quarter for revenue and operating income due to advertising cycles and theatre attendance patterns.