Take a look at the receivables for FY23. They have significantly increased, resulting in a negative operating cash flow. During the conference call, management confirmed that there is one customer who places substantial orders with the company, but the payment from that customer is overdue. Although the company has a long-standing relationship with this customer, and they continue to place orders, the delayed payment poses challenges to the company’s working capital cycle and operating cash flow. Additionally, despite the funds raised from the IPO, the company’s borrowing has also increased (although in absolute terms it’s not very high). I am not fond of this situation as it indicates a weak financial management approach. I would prefer if the company starts collecting payments from this customer on time.
Market cap to sales ratio is around 8 now. High Working capital days and high debtor days. Has doubled in last 3 months
For your kind information if you read the investor presentation they have clearly mentioned that company has received the payment in full.
Their competitor Prime focus has piled up so much debt and their interest coverage ratio is pretty low - why are they struggling if the industry is so lucrative, just because they are doing commodity work? Or should we look at dneg financials separately to Prime?
Hi All,
I spoke to two friends working in two of the bigger VFX/Animation Studios in the country. The first one works in MPC (a part of the Technicolor Group that also owns The Mill). MPC concentrates on international movies and shows, while The Mill concentrates on advertising work. The other is an Artist in Prime Focus.
The salient points that came out from these conversations are as follows.
Is AI an Industry Killer?
No. It is not. ‘You guys are talking about AI for the last six months. We have been using it for a few years now.’ They see AI as a collaborative tool that aids creativity. Not something that will replace them.
How will AI affect the Industry?
Base level jobs like ageing/deageing or rotoscopy can now be completely done by AI. That means that a lot of small VFX firms that specialised in these kinds of manual jobs will be in trouble. But bigger jobs that require human creativity (World Building and World Creation) still needs Human Input and will continue to do so regardless of the improvements in the AI Softwares. Yes. These jobs will progressively be completed faster with fewer people. This will make for quicker turn around times and smaller teams per job.
AI is a boon for the industry considering the sheer volume of Domestic and International Content that is being produced and paucity of trained VFX work force to execute those jobs.
Will AI make certain section of the Work Force Obsolete?
That is a real fear. That is why almost all VFX Firms are training their workforce to effectively use the latest versions of AI Softwares. The same will soon be a part of the curriculum of almost Animation/VFX schools in the country.
One gave an example that I found really interesting.
When Film Cameras were replaced by Digital Cameras and the entire eco-system around the filming process transformed with migration from film stock to memory cards, the people who lost their jobs were the ancillary members in the camera crew who were supposed to take care of the stock, process the stock etc. The Camera Man and Light Man were there in 1920s. They are still here in 2023.
My Take: From these conversations I got the feeling that the industry is going through a transformation. VFX firms up the value chain will make a killing due to smaller work force requirements and greater work volume. VFX firms lower down the value chain will perish (if they fail to adapt).
I am not sure if Phantom is really that big a player in the game. I have my doubts if it can survive the churn.
Hope this helps.
Not Invested.
As a counter point, I think that the market will also increase exponentially, considering OTT platforms spending a lot on regional content.
Usually, the producers and content makers strike a deal with OTT platforms, who invest in the show, but the content makers are free to choose their VFX partners.
This will lead to an advantage of smaller players, over larger ones.
True. I completely agree. As someone who is employed as a writer in the industry, I have seen an exponential demand for ideas, scripts and the delivery timelines have been crunched by 70% across platforms.
Just a couple of points to add.
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When the Platform is Netflix or Amazon, one has to be on the preferred Vendor list to be used by the production house for their jobs. Phantom is on both the lists.
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The real money is in high value international jobs. I have a feeling those will either stay in LA/London or go to the bigger houses in India (Mill, PF, Red Chillies). While Phantom is trying to build it’s international presence, it will be a tough battle for the relatively small and unknown firm.
I guess the only way to find this out is to be invested and ride the wave and hope for better quarterly results, better order book and better margins. Any miss on these will prove your point but if phantom manages to fire all the engines I think we have a multibagger in our hands.
No recommendation !
Biased, Invested Heavily !
Hope so RocketMan. And hope your investments bear fruit. After all you are betting on Phantom, ‘the ghost who walks. The man who cannot die!’
@RocketMan My friend can you please tell me which presentation are you referring to. I can see the last presentation as on Feb 2023. I do not have any new presentation after that. Can you please share. Also I am talking based on the company’s concall recording which is on its website which I believe is based on H1FY23 results. Further to this its full year Balance sheet of FY23 and Cash flow statement of FY23 shows high receivables. Your clarification will help.
Check the interview!
Thanks for sharing the video. Agreed that receivable have been collected. But at any given point in time it exposes the cash conversion cycle to get stretched, since the payment from customer is on milestone basis. It can lead to rise in short term working capital loans. If you are aware same problem had happened to Prime Focus. Their receivables used to be high. And in such a situation if by any chance there is a dispute with the client on quality of work or timely completion of work then there is a risk of company having to write off these recievables.
Just wanted to highlight that. So its a high risk high reward bet. Thanks.
Agree on 2nd point.
However, I am also betting on the voracious consumption of Indian audience. This will lead to good quality shows that invest in VFX (VFX is used not only for graphics and spectacles, but also mundane things like changing backgrounds, corrections, etc)
As technology absorption increases, we might see a lot of growth in smaller companies too.
Disc : Thinking of investing into this company moderately.
Can you tell me your source of information that Phantom is on preferred vendor list for Netflix and Amazon?
Hi Kumarvvr,
This piece of information came out during my conversations with a couple of friends from the industry working in PF and The Mill. Incidentally, both are also in the list.
As far as your other hypothesis about the well being of mid sized vfx firms is concerned, I think we can only make educated guesses about the future. What actually transpires, only time will tell.
There is also another point I would like to make at this juncture. VFX payments are tied to stages of delivery. In the Pre OTT times, VFX firms were working with dubious small scale productions houses in Mumbai who were not reliable pay masters. Sometimes VFX payments (infact writer, DoP, Director and even actor payments) were delayed or renegotiated mid project. It was a chaotic time. But these days, in the professionally run OTT universe, work and payments are like clock work. You deliver the stages of the job, you work on three rounds of feedback, you get paid. Moreover, the final payment is pre delivery. That means the show/movies doesn’t get released on the slated date if the VFX team doesn’t get paid. That means huge losses for the platform. So, if the VFX team is good and what they do, 99% of the time they will get paid on time and full amount.
You can check the above interview, Mr bejoy himself said that ! Also there was a concall after Q-3 results same thing is said there too.
My investment thesis in PhantomFX and my views on some of the Concerns raised above
Market
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Fastest growing market across India and around the World (>40% CAGR) and PhantomFX comfortably growing above this level
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Huge market size, with India tapping only a small portion of the Industry…this gives scope for more players and also acts as a cushion in case of decreased work from AI
Management
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Founder himself is a VFX Supervisor with around 20yrs of experience
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Young founder around 40-45yrs of age with good experience…has many years left to steer the ship
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No negative remarks…taking care of core contributors with around 80 people getting ESOPS… number might go up in coming years
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Low attrition rate of around 8.5% …I feel this number will go up as most of hirings are done in last 6-9 months
Corporate Governance
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Though SME, it is sharing results on Quarterly basis instead of Half year
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Improvements need to be done in terms of organizing Quarterly conference calls, Sharing Investor’s presentations on Quarterly basis and periodic business updates
Strategies which I liked
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Good mix of Indian and Foreign Revenues (40:60%)
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Good relationship with Directors, Production Houses across languages, regions …Also has good relationship with its larger peers like DNEG sharing work among themselves
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Focus on both Movies and OTT share (44:50% ) …While Movies gives them opportunity to work on latest technologies and better visibility, OTT gives them consistent work / revenues through out the year
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Setting up offices / studios in US, UK, Canada, Dubai …being close to client location will be able to provide better service and grab more projects
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Exclusive partnership with OTT players
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Tie up with more Production houses …Auditing from Paramount is in progress
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Adopting latest technology - Seems company is aware of the challenges and is looking out for right vendors…Check out this video from AMD, wherein PhantomFX team is talking about using their hardware and getting better results
- Process oriented - I was sceptical when they promised high growth numbers during IPO …I was thinking whether they will be able to hire this many people or not…will they be able to utilise them and transalate these hiring into higher topline and bottomline… In my view, In last six months, overall they had delivered as promised in terms of hiring, Revenue and missed slightly on margins…unless they have a good process and tools in place, it would have been difficult to achieve and sustain this kind of scalability
Concerns
Will AI take over VFX artists work?
- With AI’s ability to write code, I guess this fear is there even in Software Services Industry too …AI will quicken the work done or make it easy to do a task (like cleaning ropes, change backgrounds etc;) …But, as long as there is a Human behind to operate this AI software, I feel these Services industries will continue to thrive … Though it is too early, also there could be possibility of more work and higher Revenues…For example, multiple AI s/w might be required to finish a shot …the choice and the parameters / way to use them would depend on the person well versed with these software … and Services industry brings in this expertise with latest and best AI tools available in the market and also bring in people well versed with these tools, thus charging higher than previous rates… Finally the most important thing is that Services Industry brings in Processes connecting multiple people and software to deliver a project…
Change is something which is constant across our life journey…any individual or company not adopting to change will not survive
Can PhantomFX adopt to AI or not?
- Phantom is not in the business of VFX / AI software products creation (like Adobe, Autodesk etc;) …It is just an end user of these products and will be adopting them for sure on need basis…When it comes to decision to upgrade to these newer AI versions or adopting newer AI products, most likely it will be easy for PhantomFX compared to its larger peers…And In terms of funding, larger peers with good balance sheet will have an upper hand and also will be able to negotiate better prices …I feel PhantomFX need to be watchful in these developments and be careful in picking their AI vendors and shouldn’t burn their fingers choosing snake oil sellers …to conclude every VFX company will eventually be using multiple AI software…mostly these companies will be already using them with each adopting a different percentage of overall work
High Receivables
- Note that, with increase in Revenues on a QoQ basis this number will keep going up …Also there will be some delays in payments which will eventually get paid…The good thing is that, as per management there were no defaults as of date
I am invested, having seen IT Services growth since 90’s didn’t wanted to miss this bus …my view as of now is to Hold as long as the company is delivering anywhere around it’s promised high growth figures of 75-80% with 33-35% margins… Having said that, we need to keep a close watch on these concerns and see if any of these are going to play out big in coming quarters
Wonderfully articulated !
Next 2-3 years will be very interesting for this business !
Just read through the thread and here are my thoughts on the receivables concern. I work in M&A division of a US MNC and have worked on media deals. This receivable practice is pretty common and sort of an industry standard. Even the big studios work in that manner and this is a similar ques we asked the management. The answer that we got was that the movies that have a budget for high end VFX will not run away with studios money because there are clauses and until the final product is delivered, a good portion of payments are already disbursed.
See an ex. from Indian context, when Adipurush’s first teaser was released, they got a lot of criticism for bad VFX, so instead of just winging it, they went back to make corrections, such movies are made on a very high budget and messing with VFX studio’s payments will do them no good
Yes, they might have to take debt to finance working capital, but that is the nature of this industry, so take an investing call accordingly
This is an interesting read about the state of the industry per se.