The signing of the term sheet (assume there is an ongoing contractual negotiations before any formal acquisition) does present some questions / perhaps opportunities as well? I had additional thoughts (speculation) to add
a. The 20%-25% increase in revenues was confusing - I interpreted this as 20-25% on Rs 90-95 crs - so that would imply ¬Rs 20 crs (USD 2.4 mn) - as per the Q3 FY24 call the Rs 135 cr FY25 target included inorganic as well. The exact numbers / valuation multiple are not really critical - the main point is that Phantom is 4-5x larger than Tippett - so at least from a size perspective it is the much larger company buying the smaller one
b. Coming to reputation - without a doubt Tippett has a strong historical track record (winning an Oscar can’t be a bad thing!!). Speculation 1: However, I do see that their 2023 references are far fewer and not as impressive compared to previous years (official announcement https://youtu.be/YtKrGzzLeUg at 2:13) .
c. Speculation 2: Selling a 30 year old business for $4.375 mn would seem to imply something is not working. Combining the 2023 revenue size and track record (and the Hollywood strike?), perhaps Tippett is struggling (with any professional services company, employee cost is 50-60% of revenues and the hollywood strike was 5 months). Based on some scuttlebut, working for VFX companies in developed countries does not seem to be a desirable job (highly demanding clients - Marvel leads the pack, very long working hours -high pressure to turnaround, limited compensation upside - overtime is something being introduced). Could also explain the migration of work to India and the subsequent staff challenges here Phantom Digital Effects Limited - #236 by vikas_sinha
d. Speculation 3: Having a US reputed organisation (with the original brand) could be a way to ensure direct contracting of international work. Some additional scuttlebutt I had done on the VFX industry highlighted that one of the key challenges for more international work to be directly contracted by Indian VFX studios was confidentiality concerns. Since the VFX / Post production work needs to be done on the final rushes, there is a major concern to transfer the files to a new partner offsite in India (piracy and leakage concerns for multi-millions dollar movies is a big worry). This is where Teppitt could fit in (In addition to the point made by Gary Mundelll CEO Teppitt - that jointly they will be able to convince studios that India can do creative work as well - in addition to technical)
It would be very interesting to get management’s thoughts on this / perhaps there will be more details if and when the contract is finalised. Several questions still unanswered
The term sheet is a bit low on details - e.g. revenues over the last 3 years is not provided
Is there an option to buy out the remaining 20% and at what price?
Magnitude of earn out for the management to have them stay on - and for what period (would this give enough of a runway for a new management team to build trust?)
How will the 20% ownership affect the profitability of the business - assuming all US / Canada work is contracted through the Tippett entity, how does the transfer pricing work or is there a ‘20% tax’ on all revenues. E.g. they talk of hiring 250-300 employees across all geographies - India, Canada and US.
What is the payment schedule and how will they fund this. Total acquisition cost for 80% is Rs 31 cr. I think they had about Rs 4.8 cr at Q2 FY24. There was still about Rs 13 cr Ayalaan outstanding + cash generated in Q3 and Q4. Seems like they might need some debt assuming this is an all cash deal or they might dilute further if there is stock (hopefully not given the current share price trajectory!!)?
In balance, it seems to me that this is a reasonable step to the North America geographic expansion (and depending on the final contract details - may even be an excellent one). Perhaps they will share more on the actual rationale (rather than me relying on my speculation) in the year end call.
Disc: Invested and continuing to build position size - so likely to be biased. Not financial advice and not a registered SEBI advisor
The Visual Effects-Game-Animation Society (VEGAS) has elected a new team with Bejoy Arputharaj as the President.
Apart from Bejoy, noted other people are Balakrishnan R (BasilicFly Founder and CEO) and Rajan E (PhantomFX Vice President) who are elected as Executive members
PhantomFX is an end to end creative studio…they work right from concept art to making 2D models and then to 3D models… adding texture, animation to the objects, creatures they create
To do these kind of projects you need to be involved right from story stage with inputs to Director, Producer and other technical crew…that is even before pre production and not many Indian VFX companies does this kind of work
These are some of the examples of the work they did for Ayalaan movie
When it comes to Hollywood projects though PhantomFX has done many projects before, I guess their scope of work like any Indian VFX services company is confined only to the post production VFX work
The partnership with Tippett Studio will give them scope to do these kind of work for Hollywood studios …on the other hand Tippett can work for Jurassic Park kind of movies coming out of India
PS: Tippett in its LinkedIn post mentioned that, as part of PhantomFX partnership they will start hiring big across locations…this indicates that they have already started working together as partners and not waiting for acquisition to be completed
Plausible that Indian firms flush with IPO/QIP funds are taking advantage of a liquidity crisis US/EU VFX studios are facing coupled with the issues related to writers strike etc, making them vulnerable acquisition targets
“Visual Effects services undertaken in India for Foreign Productions can claim upto 30% of the Qualifying Expenses (75% of Contract Value) plus an additional bonus of 5% for Significant Indian Content subject to a maximum of INR 300 Million.”
Has anyone analyzed the benefit from these govt rebates and whether Phantom would be eligible for it. Doing just a back of the envelope calculations for FY24, Phantom Mgm’t has guided for a 140 Cr. Sales and assuming they are guiding for a mix of 55-60% from international, that would lead to around 70-80 Cr International revenue they might have 35-40 Cr costs relating to international projects, which may be eligible for rebate under this scheme. Even if we assume instead of max 30 Cr. available they are able to get a 20 Cr. kind of cash rebate of this amount, their Pat from international mix may go up to 40-45 Cr. Add to it domestic mix PAT of say 20-25% margin of 15-17.5 Cr, they might easily end up with a PAT of 55 - 62.5 and PAT Margin of around 40%. What am I missing here.
Maybe all of the VFX companies are being classified in the same boat.
Phantom has declared strong results last quarter. Has shared couple of positive updates in the form of project wins, Awards recognition.
However, seems Market hasn’t taken cognisance of it.
In the recent past (eg Sept qtr), the result (aka progress) was inconsistent.
And the company hasn’t shown good Cashflows so far
(although that also to some extent has been due to 1 time project financing of Ayalaan movie & others)
One VFX company messes up with the results (basic_mistake_lic) and rectifies it few days later after damage is done. This one uses template from different company.
Hope their VFX work is not all about copy/paste (errors)
Decent results if we look at YoY. With this it will now be available at a PE of around 22, why is the pessimism, is it because of the AI threat? Or has the impact of job cuts at DNEG has spooked the investors? Even Basillic Fly is available around 20 PE, seems like the market is not willing to give any premium to this whole sector.
I think receivables are the main problem with these companies. They get the job done with big production houses but not get paid for many months as they are dependent on these production houses for vfx work. These production houses work on many projects simultaneously hence they provide work regularly to these companies but delay payment of previous work done. That’s why these companies are venturing into producing movies. Recently digikore also moved into production with jio. Phantom also have its own production house. One more point when the biggest vfx company of the world Dneg balance sheet is not good I don’t think so these companies will post good result. Sora is also a threat for them
Was just going through their recent concall.
At one point during the concall they were guiding for 25% rev. growth.
When probed they stated they are conservatively guiding for 25%.
Later while answering to another question from, they said they will achieve around 50% rev growth for FY-25 vs FY24.
Management didnt seem confident of answering straight forward questions
My take -
1)growth will be difficult in first 2 quarters. Some growth is expected from q3 onwards.
They are estimating to match h1 fy24 with orderbook of tippet.
2) recievables are a real pain.increasing qoq. This is even after recieving a major portion of Ayalan.
3) they mentioned billing for q4 around 35cr. However revenue for q4 was around 22cr. Couldnt undertand why revenue are lower than billing.
Definately going through a difficult and uncertain times.
Yes receivables have skyrocketed.
But that’s been industry specific .
I was checking for basillic too, their receivables have also gone up.
So that problem isn’t a company specific, rather it’s whole VFX market facing headwinds.
But hopefully long term story remains intact.
Very curious though , what kind of real growth with come in during first 2 quarters of FY25, since management hasn’t given any sure guidance about that
• Anticipate a substantial revenue growth of 20% to 25% (conservatively) in the fiscal year '24 to '25. Margins could be same or higher as what declared in this Q (46%)
• Exploring opportunities to diversify our revenue streams through licensing, intellectual property rights, original content creation and other innovative business models.
• We already have 5 to 6 million worth of orders for the first half.
• Rev split: 40% international and 60% domestic. This year planning this to be opposite as int’l business has more profit margins.
• Market wasn’t great last year
• We are expecting a very huge surge in project flow from July onwards.
Hollywood Strike:
• Phantom is not just dependent on the North American film market. They have a global client base. Looking at European markets as well.
Receivables:
• Collection days are 60-90 days. Max business has come from Feb to march so receivables look high.
• Have received almost 20%-25% of the existing receivables for March '24.
• So, this is not something like an old outstanding, which is to be recovered or a number of days or more than that.
• Allowing a bit more of credit period due to other competitors doing it. Don’t deliver the final output until the total amount it recouped. Payment also happens milestone wise.
• Now, we are back on track and we are putting the same credit timeline in our current contract. So, we are not expecting that delays in the projects going forward.
• For Ayalaan, acquired most of the money. In 30-40 days, will receive the rest.
• Have movie rights in China as well as satellite.
Equity dilution:
• Do not have any plans to dilute the equity further.
Future Plans:
• We are already working with a lot of gaming companies, developing assets and creatives.
• Only thing missing is the technical side of it. The coding and other parts. We are looking at a couple of companies where we will partially acquire takes from them.
• We are looking at the gaming arena in a very serious note
• We have a very detailed plan and execution strategy for the next 3-4 years
• We are not just going to depend only on VFX, but also on the other verticals as well. So, that is going to increase the profit margins, increase the turnovers.
• We have also figured out new regions that are giving a lot of benefit to Phantom
AI Impact:
• When you say AI is going to do all the VFX work, that itself is a myth
• We have developed a lot of software and tools. And we are doing research on AI for the last 3-4 years
• We have started implementing a lot of AI tools in our pipeline already.
• AI is going to increase the studio’s productivity. For example, when we develop concept sketches, we used to take 15-20 days before. Now, we are doing it in 2-3 days
