Description

D-Box manufactures haptic seats (vibration and motion) for the theatrical, sim racing, and simulator/training markets. The company has been a long-time laggard, with the stock going nowhere over 20 years despite revenue increasing 10x from F’2010 to F’2024. D-Box is undermanaged, never really generating much profit even though high-margin recurring theatrical revenue should exceed $9 million this fiscal year with total revenue of $40 million last year. The company has a clean balance sheet with a slight net cash position, about $8 million of net working capital after debt and an enterprise value of $21 million. Governance at the company was questionable historically with low Board and management ownership (CEO owns less than 1% or $180k vs. average annual compensation of $550k over past three years). Activist Dan Marks was recently appointed to the Board, he owns just under 10%. Dan published some views on the company last August: https://www.newswire.ca/news-releases/stonehouse-capital-urges-board-of-d-box-technologies-inc-to-pursue-sale-of-company-894710794.html. 

The risk/reward on D-Box stock is attractive. The company benefits from the recurring theatrical revenue stream which could likely be operated at gross margins above 80% and should grow with the post-Hollywood strike box office recovery. Management has outlined a 10% EBITDA margin as the floor going forward which, at last year’s revenue implies $4 million of EBITDA. I suspect with tighter cost control, EBITDA could exceed $5 million, putting the stock at around 4x EBITDA or at least a mid-teens FCF yield (the company has $16 million of unrecognized deferred tax assets).

D-Box seats are installed in 933 theaters globally with the company targeting 1,000 over the next 12-18 months. Cinemark is the largest customer with 200+ screen installations in North America and another 100+ in Latin America. Cineplex in Canada is also a large customer and D-Box has over 100 theater installations in Germany. D-Box sells the seat upfront to the theater for around US$4k plus US$20k of projection room hardware per theater. Typically D-Box tickets are priced at an $8 premium and the incremental revenue is split between the studio, D-Box and the theater (sounds like the studio likely gets the biggest share). Payback for the theaters on the seats is estimated at 3 years and comes from the ticket premium + greater usage of the D-Box seats vs. a typical seat (average seat sold 250 times/year, D-Box sold 400-450). D-Box has relationships with the major studios and will receive upcoming films in advance to encode frame-by-frame and will usually do a screening for the film’s director to ensure satisfaction with the motion encoding.

D-Box is important enough to Cinemark that numerous executives, including the CEO, were willing to sit for this video: https://www.linkedin.com/posts/d-box-technologies_dboxtech-haptic-movie-activity-7221168466731380736-osDr.

D-Box has contemplated offering a financing structure to lower the upfront capital commitment of exhibitors and thus improve paybacks in exchange for a higher share of the ticket royalty. This might unlock opportunities for additional growth, but could also significantly increase the capital intensity of the business. Upfront seat sales to the theatrical market were about one-quarter of D-Box revenue last year ($10-$11 million).

Encoding is the only cost associated with the recurring theatrical revenue line and so the $9 million+ of recurring revenue to be generated this fiscal year could likely produce at least $7 million of gross profit. D-Box has a library of 3,000 films that have been encoded and previously offered a $10k in-home seat (discontinued a few months ago due to low demand at that price point).

Outside theatrical, the company produces seats for racing simulators and for the simulator and training market (about $10 million of revenue in F’24 each). Racing simulators carry attractive margins though there is no recurring revenue piece while the training market is apparently less profitable. Consolidated gross margins are ~50% and I would assume theatrical equipment is sold upfront at low margin.

Despite growing revenues, the company has not been overly profitable with cash flow bouncing around break-even and low single digit millions of EBITDA generation. Given the amount of recurring revenue and the presence of an activist on the Board, I would expect profitability should improve.

The company concluded a strategic review in 2023 with no outcome, though it appears the process may not have been well run. It is possible D-Box could attract interest from a strategic or financial buyer now that the Board has been refreshed.

Catalyst

Board refresh driving improved profitability, strategy, and investor communication.

Theatrical recovery.