Viva Skin-e-max! A look at New Frontier Media, Inc.
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The C Band revenue represented only $3M of the total $46M fiscal 2006 revenue, and the company expects to be out of this business by the end of 2007. The very fact that people still call in to NOOF with credit cards for 3 month subscriptions on C Band systems to adult channels highlights the power and sustainability of adult content delivered over satellite systems. Keep in mind that for a majority of rural DBS subscribers, reliable broadband access is unlikely for many years. Regardless of the evolution of adult content online, the best access to some good ol' fashioned naughtiness in rural America will remain via satellite.

NOOF inked a 2 year distribution deal with Directv early this year, albeit with a revenue guarantee agreement, but continues to derive a quarter of its total revenue from Echostar (DISH). This puts total satellite revenue at 35-40% of total revenue, at what has proven to be an impressive margin for all players involved. Are we naive enough to think that Directv and DISH are making anything short of 80%+ margins on this content? If so, you need to call your father and get "the talk" all over again. Net income for the past three fiscal years has hovered around $11M on relatively stagnant sales of $42M-$46M. In August, the company revised revenue guidance to the $60M ballpark, with earnings in the same $11M sweet spot. Shares responded in kind:

For all my lecherous male former teenagers out there, remember when you were 16 and a night of passionate making out ended with - nothing? If you remember what happened the next day, you understand the current plight of the NOOF equity holder. You worked so hard to get into the back seat with the two major satellite operators, and they are probably making sure you only get what they think you deserve. Who are they to decide!?! You're the captain of the adult film football team! You love the increasingly attractive free cash flow, but do you need a distributor of adult movies to awkwardly fumble around with that capital in an array of treasury products? When it gets down to it, you better make it happen while the gettin' is good. DISH can reach that door handle so easily that you try to block the way with your letterman's jacket. The pressure can be unbearable...

Hey, it could be worse, the CFO used to be a treasury analyst for Clayton Homes, the manufactured home company that had the chops to become a Berkshire Hathaway acquisition. So what is a company to do when growth is difficult to enact without potentially disastrous acquisitions and investors beginning to notice a precarious pile of cash overflowing into the back shed where the old man keeps his stack of Playboys? Special dividend time! Sweet, beautiful... release. (A moment of silence for what could have been a true New Frontier in financial journalism abruptly cut short by the Standards and Practices department here at the Stockmasters).

So where does this leave us, the potential investor? Management has been cashing in of late, and by giving up half of future free cash flow to dividends have all but admitted that they are spent. Perhaps this is good. We'd hate for there to be capital around next year for the company to actively pursue the wireless "investments" alluded to in its latest 10-K:

These wireless products include a wireless enabled web site (“WAP site”), photo and video content, and ring "moans"

What we are left with is a bet on how much the PPV and VOD market for adult content grows in the near term, as well as how nice the cable systems play ball with respect to sharing agreements. A recently announced (and expensive) agreement with upstart studio Digital Playground suggests that competing with Playboy is all about big names and variety, and I can't help but side with NOOF on this one. The Playboy name is irrelevant in the XX and XXX market, as well as frightfully mismanaged of late in the more cerebral space. I am willing to bet that the cash keeps piling up, and hope that it is employed to secure a better competitive moat in the Pay TV segment rather than throwing it down the drain online. There are enough execs around at NOOF that remember 2002 and the high-water mark of consumers actually paying for expensive subscriptions to view adult content online. My guess is that Bruce in Idaho keeps calling and that this stock continues delivering significant value to management. Fortunately, we can tag along with the gang from Boulder on this one for a few quarters before finally leaving the back seat of dad's Buick at $12 to see what the under appreciated, low self-esteem, goth chicks are doing this Friday night. They have better music anyway...

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Article written by: Henley Frey
Article posted on: December 18th, 2006

Disclaimer: The author is long at that the time this article was posted, but did not own any shares of NOOF, TWX, DISH, or DTV. Booya! Or as we like to say at the Stockmasters..1-2-shabbadoo!