Accounting vs. Reality
On your question of earn ings impact, recognition of revenues etc... and stock price movement. I think it's important to seperate the two elements.
entertainment is a bit like construction or engineering. You work on a project over a number of months or years and you it's not valuable until it's completed and delivered. You can either estimate the delivery time and what percentage of the project you are "complete" or you can book all the revenue and earnings when it is finished, delivered and finally sold (percentage completion vs. final delivery). MFE uses the more conservative FASB 53 which only recognizes revenues in the accounting statements when the "...finished product hsa been delivered to and accepted by the licensee." Anything received in advance is deferred revenue, offset by capitalized production costs. They attempt to match the expenses with the total future revenues. I don't know their policy, but I think they assume fairly small revenues other than those they already know from the sale of the shows, or in the case of Beast Wars, the sponsors. I suppose as additional revenue sources are developed (international licensing, games, merchandising, etc...) they can put some expenses against those to. I would guess they are being pretty conservative in applying these rules.
So, Jimbo, you're correct. We won't see the actual revenues and income for MDK until 1998. However, neither will the expenses hit the income statement either. They will be matched. Also, we don't know have these contracts are worked out. One could try to get a chunk of the fee/episode considered a "production fee" --something like a consulting-type fee that is earned each month --or maybe a "computer/software" usage fee or something like that. In that way, you can recognize some of the revenue/income. I don't know exactly what they do, but I think they're pretty conservative and don't do much in that way. It would also mean that the JV partners would have to stump up some money up-front and along the way with no guarantee MDK would sell or be completed. I would think they will not spend a lot on MDK until they have some sponsorship to take that risk and the probability of MFE not producting a dozen episodes of something is low given their track record.
But the key to the share price IMO is that these represent very predictable, profitable growth and further enhancement to the "intrinsic" value of MFE. They will be able to spread the cost base of 200 people, the CGI equip, the Production facilities etc.. over a much larger revenue base, build up their royalties and residuals and so on....
The share price should reflect future developments. Who cares when the accounting world lets you recognize income. Each show, movie, game, IMAX deal just builds it up more. It hasn't hurt Pixar to recognize income for Toy Story in one year even though it took them 4 years.
MFE, I believe, will have smoother earnings and can hopefully dovetail a movie in ever 2-3 years. That's all it would take. Who knows?
Anyway, I wouldn't worry that the accounting earnings hit in 98. The stock will move as they continue to develop projects. We just need an analyst or two to discover what these guys are doing in Vancouver. |
