GDC Technology announced that it will soon join the short list of digital cinema companies that have reached out to the US public market for money. In the 13-year history of elevating digital cinema from concept to reality, the two industry IPOs that come to mind are that of National CineMedia (NCM), and RealD. GDC will soon be among them.
According to its Form F-1 recently filed with the US Securities and Exchange Commission, GDC is seeking to raise $75M from the sale of an unspecified number of American depository shares (ADSs). Word on the street is that this number will rise to US$100M. Readers may recall that investment groups Carlyle Group and Yunfeng Capital completed the purchase of 80% of GDC in October 2011. The company valuation at that time was around US$94M, the 80% stake taken by Carlyle and Yunfeng priced at around US$75M. Undoubtedly, the investors will seek a much higher valuation, which remains to be announced.
The filing provides a rare glimpse into the operations of a digital cinema manufacturer. GDC is perhaps unique in that its manufacturing is 100% China-based. But unlike the Asian OEM manufacturers available to other players in the industry, this Asian manufacturer builds its product in-house, giving GDC a significant edge in maximizing its margins. Its numbers speak volumes. GDC’s F-1 reports a 28%, 26%, and 23% comprehensive earnings on revenue for years 2010, 2011, and 2012, respectively. These are numbers that any manufacturer would be pleased to report.
But the gorilla in the room is that GDC does not achieve its numbers as the premium vendor in the business. Rather, its reputation is that of selling at rock bottom prices, making GDC the bane of every digital cinema server and media block manufacturer. (One prominent vendor recently said it could actually make money if it wasn’t for the fact that it had to compete with GDC.) Which says a lot about how sharp GDC is at running its business. Measured against reported cost of sales and services rendered, it has consistently delivered margins over 40%. A very impressive figure.
On the flip side, another word for a company that makes low cost products is “cheap.” GDC lives with that reputation, rightly or wrongly. GDC servers are DCI compliant, so a “cheap” product in this sense could have less bells and whistles, and possibly require higher maintenance. I’ll leave it for readers more familiar with the use case for GDC’s products to pass judgment on that one. But one should note that this is how disruptive players play.
Of course, if one wanted to most impress Wall Street with past figures, this is the year to do it. After 2013, one would think that sales will not look so impressive. However, GDC casts its market opportunity in a different light. It reports that the worldwide screen count has been growing, on average, at a 3% per annum rate for the past 3 years. As the majority of that growth is coming from the BRIC countries (Brazil, Russia, India, and China), markets where GDC has strong presence. GDC ranks as number 3 or 4 in worldwide server/IMB market share, so it does not present market share as a strength, but rather, it discusses its market presence in terms of its incremental sales, where it claims it is now number one, whatever that means. It’s entirely plausible that it could be now be benefiting from strong sales, given GDC’s propensity to sell at rock bottom prices, which makes its products quite attractive to the late adopter market. GDC assumes a few more years of late adopter market, discounting the havoc that overly expensive film prints could create. Coupling its newfound strength in sales, its anticipation of a long late adopter market, and its anticipated 3% a year growth in new construction, GDC does not predict a fall off in new sales for several years, by which time it hopes to sell into the replacement market.
GDC has the appearance of a classic market disrupter, starting out as the little guy whose cheap product was not worthy of attention, and gradually improving while keeping costs low in order to eventually undermine much stronger competition. If GDC can raise the money it seeks through its US IPO, and continue to grow its incremental sales while operating with the margins it has today, it could be around for a long time, much to the chagrin and pain of its competition.