Thursday, October 30, 2008

Funimation's Parent to Report Earnings Today

A reminder to anyone interested in the business side of the Anime industry that Navarre corp., which owns Funimation, will report 3rd quarter earnings after the closing bell today (Thursday, Oct 30th).

While Funi's profitability has been holding up well in an otherwise tough market this year, Navarre's other divisions including BCI, Encore, and the Game Distribution arm have been flagging. The recent severe drop in Navarre's (NAVR) share price below a dollar (not that everything else hasn't been dropping too of course) has had me a little bit concerned, especially since there has been virtually no insider buying this year (the last insider buy was in June) even though the shares are selling at a fire sale price right now (or are they?). Gen Fukunaga (the head of Funi) hasn't bought any stock as the price has gone down over the last year, but of course he already owns 726,000 shares (worth about $550,000 at today's stock price, close to his annual salary of $350,000) so perhaps he doesn't want to take on anymore risk in his personal holdings. Cary Deacon, his boss, only personally owns about 186,000 shares and draws a salary of $453,000.

Navarre took on a lot of debt when they purchased Funi in 2005, and with credit markets frozen I'm mainly concerned with their ability to service that debt short term. Like most mixed home entertainment distributors / producers, they use short term credit for most of their operational funding and have a fairly poor cash position. Their balance sheet as of the 2nd quarter showed them carrying only .03 cents of cash per share, about $1.2 Million in cash on $663 Million in revenue, while they carry approx $49 Million in debt against a $27 Million market cap at the current share price. That revenue figure sounds like a lot, but they have a terrible operating margin of only 2.41% and a razor thin net profit margin of only 0.74% (that's less than one percent). Those numbers imply that the company will be fine as long as they execute, but has absolutely no room for error.

Needless to say, we watch them very carefully because their business directly impacts ours. We certainly know first hand how Funi is doing in the direct Anime market, but I'm anxious to see how their overall numbers come in for the 3rd quarter, and also to see if they will offer guidance for the next 2 quarters. This particular earnings report is important because we are at somewhat of an economic crossroads in the industry, especially now that Funimation represents about 50% of the total US Anime market (and is currently the most financially sound R1 Anime studio). The numbers and guidance Navarre reports will be important in gauging where the US Anime market actually is right now beyond the 'all is well' rhetoric the studio marketing machines continue to spew out.

If you are interested, Cary Deacon (Navarre's CEO) will be hosting an earning conference call Friday (10/31) at 11AM EST, and you can listen in by calling (800) 299-0433 and entering conference passcode "67756564". You'll need to call about 10 minutes before the start time. The call will also be web cast here if you want to access it over the Internet.

Consensus estimates have them coming in at positive earnings of .02 cent per share. I personally hope they beat by a penny. :-) If they miss, it's a problem.

UPDATE: Navarre reported .04 cents per share. Before everyone jumps for joy it's useful to note that the earnings increase was all carried by Funimation, and mostly due to the additional market share Funimation picked up in the third quarter from the Geneon and ADV license acquisitions. Otherwise earnings would probably have been flat or down. They reported a very tough economic environment, and did not offer any forward guidance except that their goal over the next 2 quarters is basically not to go negative.

Looking at the schedule, most of the real honey pot licenses that Funi picked up in the Geneon and ADV deals will be exhausted by the end of the first quarter next year. Hopefully they are looking forward and working on some dynamite new licenses for stuff that hasn't previously been released, which is the only thing that will carry them through 2009 profitably. I work on the inside of this industry. Doing my best to be dispassionate and look in from the outside, and I hate to say this, but I now believe that in the current environment the bad Anime companies are being eliminated and the good Anime companies (including ours) are now getting an increasing share of a shrinking US market, so expect plenty more shakeout over the next 2-4 quarters.

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