National CineMedia ($NCMI) Update: Navigating the Post-Pandemic Cinematic Landscape
An In-Depth Look at the Challenges, Opportunities, and Future Outlook of America's Largest Cinema Advertising Network
Situation Overview:
Established in 2006, National CineMedia, Inc. (“NCMI”) is the largest cinema advertising network in the US. The company operates through its subsidiary, National CineMedia, LLC (“NCM”), which specializes in offering advertising services alongside managing third-party cinema circuits through network affiliate agreements. Based in Colorado, NCMI holds a 70% market share with access to 18,403 screens across 1,439 theaters around the US.
Chapter 11 Bankruptcy:
For those unfamiliar, NCM (the operating subsidiary) filed for Chapter 11 bankruptcy protection on April 11, 2023, largely due to the COVID-19 pandemic which negatively impacted the business, resulting in an estimated $850 million to over $1 billion in lost revenue. Despite efforts to increase liquidity, NCM’s existing capital structure became unsustainable, leading to the decision to file for bankruptcy. You can read more about the leadup to the bankruptcy in the first day motions here and find my original write-up below.
NCM quietly emerged from bankruptcy in 2023, after successfully restructuring its balance sheet and eliminating ~$1.2 billion of debt and ~$90 million of annual fixed charges. The company also eliminated certain non-profitable exhibitor contracts and restructured/eliminated office leases, which resulted in a combined $8.3 million in annual cost savings. Further, the restructuring simplified the ownership structure through which NCM Inc. now owns 100% of NCM LLC and continues to serve as its manager.
Since nearly a year has passed since my original post, I figured it was worthy of an update and a more comprehensive re-underwrite, especially since the company just posted their earnings results last week and saw its stock rip over 30%. Despite the more recent rally, the stock saw most of its price action in the last week and is only up ~25% over the last year. Nevertheless, the equity is still arguably cheap, particularly since the situation has largely been de-risked in many ways.
Post-Emergence:
Post-emergence, NCMI has been focused on capitalizing on the ongoing recovery in theatrical attendance, growing its advertising revenue, and exploring new opportunities within the broader digital out-of-home ecosystem. The company’s improved financial profile and liquidity have allowed it to invest in strategic initiatives aimed at enhancing its network capabilities, diversifying its advertising client base, and driving long-term growth.
On March 18, 2024, NCMI reported its 4Q’23 and FY’23 earnings results that exceeded both management guidance and consensus estimates. This better-than-expected performance was fueled by a robust cinema advertising market and higher pricing, offset by film slate changes due to the Hollywood strikes which resulted in attendance declines. That being said, the company reported a record high in revenue per attendee and a 43% increase in active national advertisers.
Looking ahead, NCMI guided 1Q’24 revenue to be between $34.5-$35.5 million, which is roughly flat compared to the prior year. The company expects Adj. OIBDA to be in the range of -$7.5 million to -$6.5 million in the seasonally-weak 1Q’24 compared to -$10.9 million in 1Q’23. The company did NOT provide guidance for the full year.
In a separate announcement, NCMI’s Board of Directors authorized a new $100 million share repurchase program, set to run through April 1, 2027. The company will use operating cash flow for opportunistic buybacks at market prices. The announcement of a $100 million share buyback, representing a whopping ~25% of the company’s market cap, combined with better-than-expected earnings, led to the stock surging by nearly 30% in the days after the announcement.
Remaining Legal Overhang:
Post-emergence, NCMI has faced some legal challenges with AMC and Cinemark appealing the confirmation of NCM’s plan and the approval of its settlement agreement with Regal Cinemas. This follows a multi-year extension announced in June 2023 of its exhibitor service agreement with Regal Cinemas (~30% of NCM’s total attendance).
AMC and Cinemark argue that NCM’s new advertising contract with Regal triggered “most favored nation” rights in their existing agreements with NCM. However, NCM contends that the requested relief cannot be granted without “dismantling” the now-effectuated plan. NCM has moved to dismiss the appeal as equitably moot, contending that granting the requested relief would unravel the substantially consummated plan and undermine the reliance interests of numerous stakeholders.
In summary, NCMI has successfully emerged from bankruptcy and is now focusing on stabilizing its business and financial performance. While the company faces ongoing challenges related to theater attendance and legal disputes with key partners, management remains optimistic about NCMI’s long-term prospects and has initiated a share repurchase program to demonstrate its confidence in the company’s future.
Disclosure: The information provided is for informational purposes only and should not be considered as investment advice. Any investment decisions made based on the information provided are at your own risk. It is essential to conduct your own research and consult a qualified financial advisor before making any investment decisions. Investing involves risks, and past performance is not indicative of future results. By using this information, you acknowledge that you are responsible for your own decisions and release me from any liability. Seek professional advice tailored to your financial situation and objectives.