Videoflicks.com Inc VFCO.U
Shares issued 16,761,273 1999-05-03 close $1.1
Tuesday May 4 1999
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Following is SSA Fax Alert, issued after market on Monday, May 3, 1999.
SPECIAL SITUATIONS ANALYST
/ / / FAX ALERT # 9, Vol. 1999 / / /
VIDEOFLICKS.COM (CDN:VFCO.U)
FIRST MAJOR "PURE PLAY" INTERNET DEAL FOCUSING
SOLELY ON BOOMING RETAIL VIDEO/MOVIE SALES MARKET
GOES PUBLIC IN HYPERACTIVE INTERNET SECTOR
Fast-Growing Videoflicks.com is Sole Stand-Alone Public Firm Among Top Five 'Net-Based Video Retailers in N. America;
Company Starts $US7-Million Ad Program for 1999-2000;
Aiming to Boom Sales by 500% or More in the Year Ahead.
FAX HOTLINE FOR MARKET HOURS 5/4/99
Last November, Special Situations Analyst introduced its readers to an Internet-based company named Mediconsult.com. At the time, the company was trading on the US OTC Bulletin Board at $1.25 per share.
By early April, just five months later, Mediconsult.com was listed on NASDAQ and its stock had traded as high as $22/share (more recently, at about $12). Along the way, the company raised about $60-million in equity capital at $13/share through a major Wall Street firm.
We believe we have now identified the next Internet candidate for our readers. That newly selected company is Videoflicks.com.
A well-established and fast-growing e-commerce retailer of video and DVD movies via the Internet, this company is believed to be one of the top five video retailing sites in North America. But, as of now, it is the only "pure play" public market video market deal in the Internet's public company sector. This could be a "special plus" in the market for Videoflicks.com.
Founded four years ago, Videoflicks.com went public only a little more than a week ago on (as it is popularly called) "the Toronto OTC market," i.e., the CDN, or Canadian Dealing Network, under the trading symbol, VFCO.U. The company's stock is quoted in US dollars. Located just across the US border from Niagara Falls, N.Y., the CDN gets a lot of recognition among Internet followers as the initial launchpad for other Internet successes, including E-Bay and Bid.com, which recently sported market values of about $US 20-billion and $CDN1-billion, respectively.
The $US 10-billion Video Sales Market
How does the Internet channel apply to the potentials of video retailing?
The major thing to realize about the home video retailing market is that it is enormous - and also still highly fragmented and inefficient. As such, it begs for a cost-effective marketing channel to access its rapidly growing global audience.
That channel is Internet-based retailing of videos. Now just in the first stages of penetrating this vast market, a handful of Internet retailers are starting to revolutionize this plum sector with superior information and customer service, and with considerably lower overhead costs.
More than twice as large as theater box office movie ticket sales, total home video sales revenues (excluding rentals) now exceeds $10-billion annually. Video purchases are now, in fact, starting to outstrip video rentals in revenues, a trend that Paul Kagan and Associates Inc. sees as accelerating to 2005.
Powering this sales growth is the dramatic change of people's habits in watching movies at home. The annual Communications Industry Forecast (by Veronis, Suhler & Assoc.) estimated that Americans spent an average of 57 hours in 1998 watching movies at home - up nearly 400% from 15 hours per year in 1985. Likewise, they spent an estimated $92.80 per person on home video purchases and rentals - up more than 350% from $20.43 per person in 1985.
The more recent popular acceptance of DVD discs by the global movie-purchasing public broadens the video industry's product alternatives and is believed to be further expanding overall revenue growth in the sector. No deceleration of annual sales growth rates is visible as far out as anyone can see.
But look at how inefficiently this vast market is being served. Blockbuster, a division of Viacom, has a retailing website, to be sure, but is believed to control roughly 12% of the purchased-video market primarily through its "brick and mortar" franchised store chain. "Mom and pop" retailers have a few percentage points of the market. But, as one 1997 survey indicated, about 83% of all North American video purchase still tend come through catalog sales, mainly of the mail-order variety.
Internet Retailing Benefits
The video sales market is, in short, ripe for an Internet retailing revolution. Internet retailers are just starting to scratch the surface here. And they have compelling advantages. These include considerably fewer, and lower, overhead costs and far greater service/information capability.
Because they're electronically based, they can focus on developing giant cross-referenced bases of movie information covering tens of thousands of titles, where they can readily analyze site-visitor and customer buying patterns and preferences for personalized e-mail marketing. E-mail can easily be used for promotional campaigns. (One Internet retailer recently zapped out a "special offer" of the movie Titanic at $9.95, a 50% discount from retail, and pulled in 200,000 new customers.)
Finally, with credit card transactions being handled on a secure basis right at the website point of sale, simultaneous electronic bookkeeping and improved cash management provide further benefits.
About the Company
This brings us to Videoflicks.com. The company was formed in June 1995, by CEO Michael Kavanagh, as one of the very first movie retailers in cyberspace. The company was originally a division of a regional, Toronto-based chain of conventional video rental/sales stores named Video Flicks Canada, also started by Kavanagh in 1981. (Kavanagh franchised a total of 31 store units and directly operates four more.)
Dedicated to the concept of attentive customer service and a love of movies, Videoflicks.com consistently grew strictly by word of mouth, with no advertising of any kind. The company commenced trading on the Canadian Dealing Network (CDN), popularly known as "the Toronto OTC," on April 26. The deal was financed for $US 1.2-million with another $US 8.5-million due this year on warrant exercises.
Prior to starting to trade as a public firm, and before the launch of its first Internet advertising campaign, the company says it was operating at a run rate of about $US 3-million revenues for this year, at a 200% month-over-month revenue growth compared to 1998. The company's video customer market has historically known no boundaries, as the Internet is a global tool, but the majority of sales are in the U.S., and the company excels in swiftly servicing its far-flung customer base.
Now, Videoflicks.com is, for the first time, starting an intensive campaign by budgeting up to $US 7-million over the next 12 months, to dramatically increase the number of U.S. and other visitors to its site. Kavanagh estimates the company can expand revenue growth by 300% to 500% over the next 12 months, to between $US 10-million and $US 15-million. For the following one-year period, acknowledging the growth plan is conditional on a major added financing, he's boldly targeting yet another +500% revenue gain, to the $US 85-million mark.
The Website
The best way to evaluate the company, its service, and the capabilities of management is to visit its website at: videoflicks.com.
Right now, the site offers the highest number of in-print titles in the industry - nearly 65,000 North American video titles (only about 68,000 have ever been issued, but some are out-of-print) and all of the 2,800 DVD discs issued to date by the industry. Customers and visitors find an inviting and informative website graphics environment in which to browse. A 150,000-page full-color catalog is cross-indexed with information offered by category, title and talent. The site also offers plenty of guidance and prompts to facilitate searches. Also included are movie reviews by customers as well as professional film critics. Overall, the site has been called one of the two best in the industry.
The company says it maintains the highest quality of customer service in its industry, and this is more than a boast. Periodic surveys have shown that Videoflicks.com does the best job of quickly locating obscure, difficult-to-find titles. And the company says it has the most rapid order fulfillment cycle in the industry. In secure transaction processing, the company has never had a security lapse.
Management
CEO Mike Kavanagh is experienced in management of other large-scale family companies with up to 300 employees, and fields a proven supporting management cast with 27 employees in the video e-commerce sector.
The Board of Directors of Videoflicks.com, led by Kavanagh, was recently strengthened by the addition of Allen Karp. A prominent figure in the global entertainment/information industry, Karp is the CEO of Cineplex Odeon Theatres, Canada's largest theater chain, and has strong links with the Hollywood business/entertainment sector.
Outlook
In our recent survey of video retailing sites, we found a total of 16 companies not including Videoflicks.com. Among these, Amazon.com is included, as it began selling videos only last November as an added activity on its booksales site. However, it's safe to say that Amazon.com's market values at this point dominantly reflect its estimated 90% market-channel domination of Internet-based booksales, and don't show a "special situation" potential of a pure play video deal with its growth still ahead of it.
Also included is Blockbuster.com, a retailer of some significance, to be sure, but with no direct exposure of its own as a pure video play in the markets. It's only a captive subsidiary of giant Viacom.
Much the same can also be said for reel.com. This was a private company acquired about a year ago by Microsoft magnate Paul Allen's publicly traded Hollywood Entertainment Corp. for about $90-million in cash and stock. Although reel.com is said to now be growing aggressively with the benefit of an intensive revenue infusion funding a broad advertising campaign, it, too, is only a captive subsidiary with no exposure of its own to the public market.
Of the 13 remaining known video retailers, three of these actually specialize in music sales with video marketing on a relatively small scale as an add-on. The last ten video marketers mostly tend to be smaller private operators.
Punchline? Videoflicks.com considers it is already positioned as a significant player in this field. The company believes that, in terms of revenue size and growth rate, it currently ranks among the top five Internet video retailing operations in North America. This includes comparisons with Amazon.com, reel.com, Blockbuster.com, and perhaps with one of the private operators.
But here's the significant "plus" of the company. As the sole pure play, publicly traded Internet company specializing in movie sales - and with a strategy to rocket its sales rates by up to 500% over the coming year and much more thereafter - we think that Videoflicks.com is a unique special situation in terms of potential market values being directly geared to its rate of success.
As the first "stand-alone" public video retailer, management thinks the company's performance can uniquely focus the investment world's attention on the growth potentials in this sector through the prism of a single Internet company. We'd watch this one very closely.
Videoflicks.com has approximately 27 million shares outstanding on a fully-diluted basis. The Company's CDN OTC price is quoted in $USD despite the fact it's Toronto-based. The stock closed on May 3 at $US 1.05.
______________________
For immediate corporate information,
call Marlene Hyder at 905-459-5471.
Website address: videoflicks.com
A broker knowledgeable in U.S. and Canadian-based Internet stocks is Ben Johnson at First Securities NW in Portland at 800-547-4898 or 503-224-1234. A U.S. discount brokerage firm that trades directly on the Canadian Dealing Network is Green Line Investor Services USA, a division of Waterhouse Securities in New York City, at 800-862-9515 or 212-908-7600.
Note: First-time site visitors who identify themselves on the site's order form "notes" section as having read this Fax Alert issue of SSA will be accorded an introductory "thank you" benefit: They will receive a movie of their choice free when they also purchase one of equal or greater price. -- SSA
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Copyright (c)1999 -- SSA
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