Here is a heads-up for everyone just in case you didn't know. DISK is running Las Vegas at Chatsworth-level efficiency (i.e. 48 hr turnaround) and at this point, they are apparently not limited in their business due to the processing speed.
There are two possible negatives that may or may not have been partly causing the dip in DISK prices.
1) [Likely cause.] DISK is under pressure from other distributors in non-exclusive pricing. It's no surprise that the DVD retail market is moving to razor thin margins in order to gain market share. This slashing of prices is occuring at both the e-tailing level (i.e. DVD Express, Amazon.com, kencranes.com) and distribution level (DISK, Valley Media). DISK has lost some business due to Valley Media moving to "cost plus" basis, although this revenue is low-margin.. so they are losing off the top-line but it hopefully won't impact the bottom-line as substantially.
Still, after I heard this, I feel that there may be a short-term correction if shareholders think a price war is cutting into revenue. Reel.com and DVDExpress buy from Image Entertainment at something like a 37% discount but they have to sell to consumers at a 40% discount. It's not surprising, then, that kencranes.com is not growing revenue as expected in the face of this onslaught of those other e-tailers buying customers with their shareholders money. Also, Valley Media (VMIX) has been dropping their price and, although not verified, it seems they are taking some revenue at low (5%) margins.
2) kencranes.com fulfillment requires two groups of developers to finish their pieces. On one hand, you have a group working with kencranes.com, and on the other, there is the IT team at Image Entertainment. The IT team at DISK might be a bottleneck since they are apparently already working hard changing the internal billing system to allow different billing (to compete with VMIX and others). I have some questions about DISK's IT teams capability to *timely* get their side ready for kencranes.com's integration. The goal is integration by mid-October but I'm somewhat pessimistic.
In any case, I've been trimming my position in DISK for the last week and will probably continue this practice in the short-term. My feeling is that while DISK is in a no-lose situation in the long-term given DVD growth, there are some serious questions in the short-term. If you guys go to the shareholder's meeting, I'd ask:
1) How revenue looks given the competition in distribution, e.g. Valley Media's pricing?
2) What is the best-guess (or worst-case) scenario about when kencranes.com can get fulfilled by Las Vegas? In particular, are there any problems with DISK's information technology team from timely delivery of the necessary software?
If the answers are bad and haven't been factored into the price already, I can see us testing 3 again :( The worst case long-term scenario is DISK being reduced to only making money on exclusives as other distributors shrink down to razor-thin margins on non-exclusive titles and kencranes.com losing money. When I get the time to do the full projections based on this worst-case scenario, I'll post them. I also suggest others work on such projections so we get an idea about worst-case valuation for DISK. |
