Where to grow from here: Cineplex reports record media revenues and looks to expand

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Logo courtesy of Cineplex Inc.

In its most recent financial statement released Sept.30, entertainment conglomerate Cineplex Inc. reports a record quarter with $44.8 million in media revenue and $376 million in total revenue.

The company anticipates that 2016 will make its best fiscal year to date, projecting over one billion dollars in total revenue.

As Cineplex expands, the question of growth remains. How will the company maintain its revenues moving forward?
Cineplex Inc. is one of the biggest entertainment companies in Canada. With 164 theatres across the country and approximately 77 million customers annually, the motion picture company is dominant in the market.

Through a series of mergers and acquisitions, Cineplex established its prominence over the last decade. Former Canadian entertainment enterprises such as Famous Players, Cinemark, Empire Theatres, and others were subsumed into Cineplex. As of Sept.30, the company reports control over 77.5 per cent of the industry’s market share.

However, in the era of Netflix and online entertainment streaming, the nature of the market has changed. Competition has driven Cineplex to diversify in the shifting media environment.

Exhibition forms the largest source of revenue for the company. Typically, box office sales provide half of the annual revenue. But further and further, the company is expanding its revenues beyond box office and concession sales.

Media revenue has diversified the company’s financial base. In a document accompanying the latest financial report, Cineplex Investors suggests this is achieved through its “wholly-owned advertising business covering everything from onscreen advertising to magazines, online advertising, naming rights and our digital media business, Cineplex Digital Media.”

Simply, media revenue is generated by offering ad space to clients and companies on the wide variety of Cineplex’s platforms. Please click here to review potential ad space.

The effects of diversification have been quick. As indicated, Cineplex’s media revenue was $44.8 million in the latest term, a 30.7 per cent increase from the same period last year.

(To review and compare the recent 2016 financial statement in DocumentCloud, please click on the annotated image below).

As noted above, media revenue is generated from two distinct areas within Cineplex: Cineplex Media and Cineplex Digital Media. In the Q-3's accompanying factsheet, media is defined as "Cineplex’s wholly-owned advertising business covering everything from onscreen advertising to magazines, online advertising, naming rights and our digital media business, Cineplex Digital Media."

Source: Cineplex Q3 2016 Report

Over the last six years, media revenues have steadily increased in the third quarter. In 2011, Cineplex reported a 5.6 per cent decrease in media revenue due to reduced spending in automotive manufacturing. Since then, media revenue has increased gradually from $22.1 million to $44.8 million – a 102.0 per cent increase.

(To review and compare the 2011 financial statement in DocumentCloud, please click on the annotated image below).

The third quarter in 2011 saw a decrease in the media revenue. As noted above, the revenue was impacted by both domestic and international economic conditions and events. This is noteworthy as media revenue does not have its own, specified risk assessment in the 2011 MD&A. In later reports and management discussions, the economic concern here is noted. For example, the "media risk" identified in the Cineplex 2014-2016 third quarter reports identifies the following: "Media revenue has been shown to be particularly sensitive to economic conditions and any changes in the economy may either adversely influence this revenue stream in times of a downturn or positively influence this revenue stream should economic conditions improve."

Source: Cineplex Q3 2016 Report

Michael McIntyre, an Associate Professor of Finance at Carleton University, notes the increase and confirms the trend. He says that advertising in the theatre is a newer, immature model which dates back only five or ten years. The expansion of the “leisure dollar” beyond box office sales warrants further analysis, he suggests.

As media revenues increased, the recent financial statements include a Media Risk analysis in the Management’s Discussion and Analysis (MD&A). In the assessment, media revenue is stated as being “particularly sensitive to economic conditions” and that any economic changes could impact this revenue source – as noted in the Cineplex Q3 2016 Report.

Additionally, the MD&A states that Cineplex may not be able to replace the revenues created by major media customers if they were lost.

In reviewing the risks, McIntyre says that the company may be viewing the media revenue as a discretionary expense in the MD&A, whereas the revenue and risk could be more substantial:

Michael McIntyre is an Associate Professor of Finance at Carleton University. Photo courtesy of the Sprott School of Business.

“It is discretionary in the sense that you can just turn it [advertising] off like a tap. Whether they really can from a business exigency point of view, is debatable.” McIntyre says.

“In a downturn, you’re fighting harder for your customers. So to me it’s quite debatable whether that really is as discretionary as they are eluding to.”

Cineplex is looking to expand further in the North American market, as confirmed by CEO Ellis Jacob in fall press releases.

With its large market share in Canada, McIntyre says that Cineplex may have run out of room to grow domestically. He says it could impact share price and capital in turn if growth “flat lines” and shareholders decide to invest elsewhere. The ways to counter are diversification or expansion, options Cineplex continues to explore.

Cineplex’s media strengths are identified as a strategic corporate priority. Moving forward, the media revenues should be expected only to grow.

The 2016 Cineplex annual report will be released on February 15th, 2017.

Cineplex-Investors did not respond to requests for comment by the deadline.

Photo courtesy of Cineplex Inc.

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