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New Frontier Media: Average 10 year free cash flow yield of 150% at the current price

January 28, 2012 | About:
There is one media stock which went through the roller coaster in its stock price, whereas its revenue moved exactly nowhere in the 10 year period, delivering the wide fluctuations in its operating income as well as the net income. That stock symbol is NOOF, the New Frontier Media Inc. Over the years, the stock was as low as $0.75 per share, then it shot up to more than $10 within one year, and currently, the stock is hovering around $1 per share.

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NOOF was incorporated in 1998, providing transactional television services and a distributor of general motion picture entertainment. The company’s key customers are large cable and satellite operators, premium movie channel providers and major Hollywood studios. It has three principal businesses: Transactional TV, Film Production and Direct-to-Consumer. On the Transactional TV, it distributes adult contents to cable and satellite operators who then redistribute to retail consumers via video-on-demand and pay-per-view. For this segment, the revenue source comes from contractual percentage of the retail price paid by consumers to purchase the content. Second segment, Film production, is to distribute mainstream to erotic films to large cable and satellite operators, premium movie channel providers, etc. And third, the Direct-to-Consumer revenue source is coming from membership fees for adult content to consumer website.

For the three segments, the first was the most profitable segment whereas the last has been incurring losses and expected to incur more losses in the near future. Nevertheless, the transactional TV segment has been in the decline for the last 03 years, due to the cut back of consumer expenses and consumers moved to free website for the content. The film Production segment experienced the challenging market conditions since 2009, and NOOF had to write off the goodwill for this segment. The business got high level of customer concentration, with 46% of its total revenue coming from Comcast Corporation (CMCSA), DirectTV (DTV), DISH Network (DISH), and Time Warner Cable (TWC) in fiscal year 2011.

The last 03 years NOOF experienced the decrease significantly in both operating income and net income, making the company gain just little bit of profit in 2009 and get deeper and deeper loss in 2010, 2011. This result is caused by several factors, declining sales combined higher cost of sales, higher general and administrative costs, and the goodwill impairment as well as asset impairments other than goodwill occurred in those periods. However, the cash generation ability is quite consistent over time, backed up by depreciation & amortization and because the impairment did not cause the cash outflow. Here is the snapshot of its operating performance and its cash flow generation.

USD million 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Revenue 52 37 43 46 47 63 56 53 50 49
Net Income -1 -12 11 11 11 12 9 -5 -2 -1
Operating Cash Flow 6 0 14 15 12 19 8 9 5 8
Free Cash Flow 3 -1 13 14 11 17 6 5 4 3


For the financial health, the company is nearly debt-free, along with significant level of cash on hands, around $15 million as of September 2011 reporting. So with the current market capitalization of $20 million, the enterprise value of NOOF stays at around $5 million. Basically, if we buy the company at $5 million, we could own the debt-free media company generating consistent positive operating cash flow, at average 10 year rate of $10 million, and average free cash flow of $7.5 million.

Disclosure: Long NOOF

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 2.7/5 (18 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 2 years ago


The proliferation of online porn sites has been killing almost all the for-profit XXX content providers. This is true of NOOF as a lesser player in that field. They have lower cash flow and book value than in 2006 , are not currently profitable and haven't been since 2008.

Cash assets were $17.2 million at fiscal year-end 2009, and declined to $15 million as of Sep. 30, 2011. Each of the six quarters since Q4 of FY 2010 has been a negative year-over-year comparison.

The share price now is close to the $1.05 absolute low in the March 2009 panic bottom. It seems to me there's a good reason investors have been staying away from a cash-burning business that has poor future prospects.

johnheiderscheit
Johnheiderscheit - 2 years ago
The market views the cash as not excess (because management just lets it sit there) and thus the EV is $20ml, so the FCF yield (forward) is around 10x, probably about right.
adamcz
Adamcz - 2 years ago
I'm on the fence about even asking this question, because this board is no place for a discussion about tastes in porn. However... does NOOF have any kind of differentiated product? Do they have a contract with a popular star, or a brand name series? I'm wondering if they have some kind of moat.

I love the tiny equity value, but revenue has been declining consistently since 2009. May be because the product is completely commoditized.
batbeer2
Batbeer2 premium member - 2 years ago
@ Adamcz

Some random thoughts:

  • AFAIK, porn is porn.

  • Getting paid for the product is another matter. At some point, "they" will be asking for your credit card. There may be some value in being a "trusted" supplier. Whether NOOF has that, I don't know.

  • It may be hard to find someone willing to admit the industry is in his/her circle of competence. I won't ;-)
  • Dr. Paul Price
    Dr. Paul Price premium member - 2 years ago
    I remember a quote from one of our most famous Gurus...

    98% of all men watch porn. The other 2% have no arms.


    The problem for NOOF is that other providers are giving it away free (collecting ad revenues only).

    It's the same reason you don't see many hookers on college campuses. When others are giving it away free it's hard to charge for the same service.
    DaveinHackensack
    DaveinHackensack - 2 years ago
    Funny. NOOF is a value trap that pops up in a post like this a couple of times per year.

    I remember a quote from one of our most famous Gurus...

    98% of all men watch porn. The other 2% have no arms.

    The problem for NOOF is that other providers are giving it away free (collecting ad revenues only).

    It's the same reason you don't see many hookers on college campuses. When others are giving it away free it's hard to charge for the same service.


    Please leave your comment:


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