Pantaflix — Progress across the business

The H118 numbers reflect the transitional nature of the business. Driven by strong performance in the film production business, y-o-y revenues grew by 19% to €13.85m. However, the company incurred a €6.3m charge related to the decrease in work in progress (H117: €0), which substantially underpinned a 39% reduction in gross revenues. This charge is the recognition of expenses related to the production of a film or series (eg acting, technology, producer fees), which has been completed but has yet to be released. Minimum revenue guarantees were also recognised during the period. In future, any overages or additional revenues associated with these productions will be recognised without matching expense. The anticipation of these revenues can be seen on the balance sheet, with the intangible asset line for advance payments increasing by a similar amount (€6.7m) over the period.

The cost base also underwent significant changes. First, operating expenses (primarily headcount, cost of purchased services etc) expanded by 131% to €11.2m. This increase led to an EBIT loss of €4.3m, €2.5m greater than in H117. It is important to note that opex for the existing production business and for the VoD platform both expanded over the half. Secondly, depreciation and amortisation charges reduced substantially (88%) to €1.2m as a result of performance related write-downs on capitalised production costs for film projects.

The net result was an EBITDA figure that swung from a positive €8.4m in H117 to a loss of €3.1m in H118. Interest, taxes and minority interests were collectively unchanged (vs H117), leading to net losses of €4.35m. Despite this, management highlighted that the film business remained profitable, implying the investment in the VoD platform was in excess of €4m over the period.

Despite negative operating cash flows over H217 and H118, the balance sheet has been significantly strengthened by two capital raises (raising €23m), which underpinned a move to a net cash position of €15m.

In a welcome update, Pantaflix has started to disclose KPIs for the performance of the eponymous VoD platform. At end June, the Pantaflix VoD platform had registered c 400,000 users, with a content catalogue of over 23,000 films and series. It also announced that it has generated a cumulative c 600,000 app downloads across all services (Apple iOS, Amazon Fire TV, Google Android, Samsung smart TVs etc). A marketing campaign indicated that of the 400,000 users, each accessed an average of 1.6 titles with an average value per title of €3.8. We note that at this stage it is too early to extrapolate these KPIs across all users. The company also notes that the Q218 number of users was 198% higher than the corresponding number at the end of Q1.

Pantaflix also significantly expanded its network of partnerships with global distributors. Over the period, the company announced agreements with StudioCanal and Premiere Digital, with further relationships with Warner Bros and Red Arrow Studios also announced post the period end. In increasing the size of the catalogue available to consumers, these deals have attributed to the company being able to expand its geographical reach and more generally increasing the attractiveness of the platform to consumers. The platform is now operational in 68 countries, having been launched in 23 Central and South American countries since May. Furthermore, the Spanish language was incorporated into the platform, bringing the total number of supported languages up to seven.

The film production business maintained its recent momentum in H1, with the release of feature films Hot Dog (which supplanted Star Wars: The Last Jedi in first place at the German box office) and A Jar Full of Life. The premiere of the second season of You Are Wanted, the most successful German Amazon Prime series of all time, was held in Los Angeles in May. In a new venture, the film production subsidiary Pantaleon also announced it will produce a film adaptation of Mozart’s The Magic Flute, together with two other studios. The company has also completed filming for feature film 100 Dinge in collaboration with Warner Bros, which is expected to be released in cinemas in December 2018. Finally, the company has begun the production of Resistance, its first English language film, which it also expects to be one of the largest projects it has undertaken. Emphasising the importance of this production, we understand that the project will receive €2m of external funding from FilmFernsehFonds Bayern as part of the International Co-Production.

Management has guided to FY18 revenues being significantly higher than in FY17 (€28.1m). However, this growth is expected to be coupled with additional investment in the VoD platform in terms of incremental functionality improvements, but also with regards to ramping up marketing exposure. We understand that the majority of marketing will take place via highly targeted social media campaigns.

Furthermore, with the film production business, the company has announced that shooting has begun on two additional feature films, in addition to the Amazon Prime series Beat. We note that the increased number of projects undertaken should go some way to alleviating the inherent irregularity of revenue recognition and cash inflows and outflows.

The shares have lost over 60% of their value since the end of 2017. As noted above, management has not provided any guidance beyond that broad indication given for a revenue increase over the year. We also highlight the substantial downwards revisions to consensus, which is now looking for FY18e revenues and PBT of €36.4m and losses of €100k, down from €78.9m and €15.3m when we last published in May. These figures are significantly affected by outliers (eg FY18e PBT range of €4m profit to €4.2m loss) to the extent that we consider them uninformative.

We therefore adjust consensus to exclude forecasts that have not been updated since the H1 results. The adjusted forecasts suggest FY18e consensus revenues of €27.7m and loss before tax of €4.2m (FY19e: €51.1m and €1.3m). The reported H118 figures represent exactly 50% of the adjusted FY18 consensus revenue forecasts and imply PBT breakeven over H2. Given the early stage in the VoD platform’s development cycle, coupled with the anticipated increase in marketing expenditure, we believe there may be downside to the profitability forecasts, with the unadjusted figures requiring an additional step change in performance in H2.

Indicative of the current depressed levels of profitability, Pantaflix trades at a premium based on forward-looking EV/EBIT multiple to the broad listed peer group (using the adjusted consensus figures as discussed above). Given the depressed profitability, comparison based on EV/sales maybe more revealing at present. Excluding Netflix, which is not a direct peer, the other peers are trading on 2.5x current year and 2.1x next year multiples, implying Pantaflix is at a significant discount, which could in part be explained by its relatively low profitability.

While we welcome the disclosure of KPI information, other catalysts could include additional content deals and technical integrations and improvements, or could take the form of strategic partnerships. However, in our view, increasing the number of users of the VoD platform (and increasing revenue per user) will likely be the key determinant of share price performance in the mid-term.

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