Verticals eat up UTV Operating Income , Operating Revenues grow 7%

UTV has reported operating revenues growth of 53% to Rs. 6,768 million from Rs. 4,424 million for the year reported .Net Profit after tax for the year reported growth of 30% to Rs. 1,010 million from Rs. 777 million . Max Digital Media spoke to UTV about its future plans and strategies to boost revenue growth. Excerpts :

MDM: Most of ’08-’09’s Net Profit of UTV has come from “Other Operating Income”– so where are the “Business” profits?

UTV: In ’08-’09 three of our Verticals Broadcasting , Gaming and New Media contributed an Operating Loss of approx. Rs.46 crores. Had we not invested in these activities, our Operating profit would have been higher by Rs.46 crores and this was because this is the first year for Broadcasting and New Media and True Games is a start up. In 2009-10 Broadcasting with 4 entertainment Channels will continue to be in Investment mode. So also will True Games whereas New Media and our other Gaming subsidiaries are expected to be profitable.

“Other Operating Income” in 08-09 includes foreign exchange gain enjoyed by UTV for its investment into the Hollywood Movie, The Happening at a much more favourable rate to a dollar $ to its realization now as the money starts flowing in. It also includes forex gain from sale of games in the US due to the strengthening dollar.

Media Companies, world over, that deal with income from various geographies, like UTV does, have forex gain, as its normal course of business.TV Next: This has been a very good year for UTV Motion Pictures where Movies big and small have done well and yet we have not seen that translated to the bottom line?

UTV: Some of our Movies are cash profitable in the same year and many of the others are profitable over a longer period because the ancillary rights specially Satellite TV rights has had a deferred revenue Model. Simply put, as an illustration, if earlier we used to sell Satellite TV Rights, like all have been doing for many years, outright for 5-7 years for around Rs. 10crores then now in the changed model in the first year it would be only around Rs. 5crore but the Total Revenue over a 5 year period would be higher at around Rs. 12-14 crores. The revenue in the first year to be recognized would be Rs.5 crore Vs Rs. 10 crore for outright sale as per past model and therefore the gap in Year One.

Now if you were to extrapolate that to 10-12 Movies a year which a Studio Model such as ours were to release in a year then the loss of not realizing up to say 50% of that Revenue in Year 1, since its deferred, would cumulatively come to Rs. 60-65 crore. Also this deferred model has kicked in only in ’08-’09 and so the impact is mostly felt in 08-09 itself.

Furthermore, we do admit that cost for producing Movies had risen only due to market conditions and free flow of Equity Money and that hiked cost has also put pressure on our margins. UTV has not been immune to this industry wide hike in costs but we believe we have brought this under control. However, the benefits of total cost rationalization to pre 2007 days would only be partly felt in 09-10 as many of our productions were already on the floor but will be fully realized and corrected from 10-11 onwards.

MDM: UTV’s movie “Amortization” Model makes it difficult to understand the profitability? Also is 60:10:10:10:10 the most prudent policy?

UTV: Actually the Amortization Policy is mostly P&L Neutral in a going concern and except for in the first year of a business or in a year of very high growth the write off with the write back mostly tallies.

We believe a 5 year write off Policy with 60% in year one and a cut off period of 5 years is prudent and correct. Our Hollywood counterparts link write down of costs to revenue and take a 7 to 10 year horizon. Given how the India market has matured and that the revenue has become slightly deferred but recurring we believe this is a conservative and long term model and very transparent to understand.

MDM: Your investments into Hollywood Movies is now 12 months and more and in the case of The Happening its 9 months into the investment, so when do we see cash flow? A4. Hollywood Revenue flow does have a gestation period but then it flows. Outside of the cost of production the marketing and print costs for a worldwide release is very high and is spent by the Studio distributing the film. Therefore net revenues from theatrical go mostly, if not all, to recovering those costs and contributions to cash flow on recovery of cost of production come partly from Home Video and mostly from TV Syndication worldwide. Home Video is usually about 6 months from theatrical release and TV a year thereafter. Therefore cash flow starts approximately 15-18 months hence.

Namesake revenues will start in Q1 of 09-10. On The Happening even though the theatrical release was only 9 months back on 13 June’08, since it did well theatrically worldwide we have recognized part of the revenues in Q4 of 08-09 to the tune of Rs. 306 million. We estimate that approx 40% of the cost invested in The Happening will flow in pre and of 09-10 and the balance in ensuing years. On The Happening our estimates are that on our investments of approx. $34 million, the revenue flowing back to us in its first cycle of exploitation would be between $39-42 million. Of course a lot would depend on the TV exploitation as that has just begun (for this year and may be into the next year there is a slow down on TV syndication worldwide). The State of Pennsylvania has also given a tax rebate to The Happening of a little over $10 million – our share 50% as Co-Producers and that also will also contribute to the revenue flow.

We also believe co-owing the IPR and Negative Rights in perpetuity for 3 Hollywood Movies in our Balance Sheet will be a valuable asset and a source of regular annuity income, post its first exploitation cycle.

MDM: You have invested into Gaming across 3 subsidiaries but the model is not so well understood in India since a majority of the activity is overseas. Also how big can this business truly be for UTV and what does UTV bring to the table in Gaming to take on global companies?

UTV: Firstly, UTV’s core strength and business focus is to create Content for worldwide dissemination. UTV has spotted global and local talent with like-minded vision and partnered and invested into these start ups to create Games on multiple platforms for a Global audience. The Pharma, IT, Telecom and other sectors out of India have been doing this for the last decade, and quite successfully and Media has similar opportunities and we have identified them well. In Mobile, we believe India is the fastest growing market and Games on Mobile has hardly made its presence felt. India Games (our subsidiary) which has close to 60% of the market share in India and has grown 120% in 08-09, since we invested into it is best poised for growing this market as also to create a strong Online gaming platform in India as broadband expands into homes. UTV’s strengths in building scale into its business as well as promoting it and growing the market and industry will be a strong value add to ensure that India Games enjoys at least 50% growth YOY for quite some years to come.

In Console, UTV and Ignition have aggregated and empowered some of the best global talent to create cutting edge high end Console Game Content for all the Leading Platforms- Sony & Microsoft (X Box) and Nintendo.

We would have invested approx. $ 50-60 million into 3 large and 2 smaller IPs for release to global audiences. The main markets for our IPs are North America, Japan and the European Union.

The first presentations to all platform owners and distribution/publishers like Sony, Microsoft etc. have evinced very positive response. In June 2009, at the largest console gaming conference and trade show, E3 in Los Angeles, we will unveil the First Look on all our 3 large IPs and one of the smaller ones.

Disney’s gaming team have started close involvement in the progress of the three Ignition IPs and will contribute actively as we move forward. All the 3 Big IPs will be released in 10-11 fiscal year for UTV. The plan is to seek co-Production partners as well as Distribution companies by Sept ’09 in different territories to support the release of these Games worldwide in 10-11.

UTV & Ignition have the full capability to produce and distribute these games worldwide on its own but it would select its partners carefully and prefer that approach as these are 3 high profile titles all releasing in One Year.

In Online Gaming, our investment into True Games, less than a year old, has progressed well and by Q2 of 09-10 we will be launching our own MMORPG Platform in the USA and Turkey with our own owned titles & IPs. Online Gaming has experienced high growth worldwide specially in China and Taiwan and just by studying the phenomenal success in these countries one can see its true potential. North America is the largest potential market for Online Gaming with its established broadband infrastructure and payment/collection Gateways. The US market has suffered so far due to lack of right content offering for Online and we believe that our True Games and a few other companies will grow this market exponentially.

Overall, we are very encouraged with the progress that our Gaming investments have made. Indiagames has over a 180 skilled member team in Mumbai and between Ignition and True Games we have another over 200 creative team at our facilities in London, Florida, Los Angeles and Tokyo. We believe that the Games Content vertical for UTV is a very integral part of its Content vision for global audiences. We believe that this vertical will grow to contributing $150-200 million in revenue to the UTV Group within the next 18-24 months.

For the quantum of investments we have put in, in the last 18 months we believe that post its gestation period which for any business like this is 24-30 months UTV will enjoy a more than a healthy ROCE.

MDM: In BROADCASTING you are a niche player. Most Investors and Analysts are not ascribing a value to your Broadcasting Vertical. Where does this Vertical go from here for UTV? Recently UTV consolidated by buying another 10% in Broadcasting but at half the Value at which Disney invested?

UTV: We are extremely clear about our strategy in Broadcasting. A) The GEC space is the worst segment of Broadcasting to be in. There will be no clear winners for a long time. With the result that road to profitability will be long and tough. Its such a high stakes part of Broadcasting that in the last 12 months four new players entered this fray where one made it through the clutter very well but at a huge cost and long term will need to continue spending lot more than it will earn, two fell by the wayside in less than weeks to months and one is stuck in the middle but at a high cost burn. With the new entrants the “established” players can only have a strategy to cut costs, to stay breakeven or profitable and the “new” players, those who are left have to spend more to keep up with the established players.

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