The $1b Kiwi blockbuster you've never heard of

If it was a movie, you could call Vista Group International a sleeper hit.

Its unfashionable line of business and its founders' low-key Kiwi demeanour mean it has largely flown under the radar, even as its market capitalisation hits $1 billion.

It's a favourite with institutional investors but no household name, and most of those who have heard of it often don't appreciate its global success.

Co-founder Murray Holdaway says that when only about 1 per cent of your turnover is in New Zealand, "there's not a lot of point in shouting from the rooftops".

And to an outsider, Vista might look like a terrible idea for a company: making software for managing movie theatres, selling tickets and wrangling loyalty programmes at a time when Netflix is taking over.

In fact, the Auckland-based business has boomed. Healthy profits and dividends have driven a five-fold increase in its market cap since it listed on the NZX in 2014.

Vista now employs more than 840 people - with more than half its staff in New Zealand - and its fast-growing "Movio" foray into data-driven marketing and analytics has landed some big-name customers, including Amazon Studios, Disney and Fox.

What's the secret of its success? There are three.

Streaming killed the cinema star?

First, rumours of the death of cinema in the Streaming Age have been wildly exaggerated.
In fact, according to global figures compiled by the Motion Picture Association of America (MPAA), it's looking pretty chipper.

Box office receipts actually rose 15 per cent between 2014 and 2018 in the US (the most established market) and 12 per cent worldwide (see chart), say MPAA figures.

Growth has been lumpy, however, with some years flat. For Vista, that's arguably the sweet spot. The industry is healthy enough to invest in new technology, but not so gangbusters healthy that it doesn't need software like Vista's to sharpen its operations.

The MPAA figures also show the total number of screens worldwide has risen every year since 2012, with 1200 to 1500 added annually.

And the generation who grew up with YouTube still goes to the cinema. Last year, in the US, 92 per cent of those aged 12 to 24 saw at least one movie, according to the trade group's stats, vs 71 per cent for those aged 25+. Teens were the most frequent moviegoers.

And crucially, a survey of 2500 Americans by Ernst & Young, released in December last year, indicates that the Netflix boom is at the expense of traditional TV, not cinemas. According to EY's research, keen streamers are also the most avid moviegoers.

Global scale, no worldwide competition

The second for Vista's success: it has no direct competition, at least on the global level. There are other companies in the same market, but all are regionally-based.

Group chief executive Kimbal Riley says with New Zealand cinema chains being controlled from Australia, Vista was immediately forced to do business on both sides of the Tasman.

And because even the Aussie market was relatively tiny in the great scheme of things, the company also had to spread its wings around the globe.

Today it holds substantial market share on every continent, with 97 per cent of the market (by screens) in Australasia, 48 per cent in the giant US market, 29 per cent in Europe and 22 per cent in Asia. All up, Vista has a 40 per cent worldwide share.

"We have competitors in the US, and competitors in Europe, but neither has been able to cross the ocean,' Riley says.

He says New Zealand businesspeople often underestimate the value of being from a small country.

"We have to be and we are adaptable. It's in our nature. It helped us to think globally from the beginning."

The tightly controlled Chinese market has been the hardest graft. Vista broke into the country via a joint venture with Beijing Weying Technology or "WePiao", whose backers include Tencent, the conglomerate that owns China's dominant social media platform, WeChat.

Riley says the Chinese market has been hard work, but Vista is now the only foreign company with the right to sell ticketing software (there are eight licences; the Vista China joint venture holds two of them - albeit with the challenge that they have to be renewed every year).

Vista now has 80 staff in China, its most significant outpost outside of Los Angeles, where it has around 130.

Riley says China will shortly pass the US as the world's largest cinema market.

It's not all smiles in China. Craigs Investment Partners' Stephen Ridgewell - who is bullish on Vista overall - sees Chinese regulation as a risk, and notes that Vista China made an ebitda loss of $4 million last year. However, it is expected to break even this year as more customers - signed last year but not active in time for the financial result - come onboard.

Big Hollywood studios onboard with Movio

The third secret to Vista's success is its Movio data-driven marketing product, which is not new but really fired last year, to contribute a meaningful amount to Vista's bottom line for the first time.

"One of the interesting characteristics [of the movie industry] is that while the cinema knows who you are, the studio does not, because the cinemas never share that information."

Filling that breach has proven lucrative.

The core Vista Entertainment Solutions (including Vista Cinema) lifted sales 22 per cent to $82.4m and earnings before interest, tax, depreciation and amortisation (ebitda) by 29 per cent to $25.6m for the year to December 2018.

But the real growth option is the Movio business, where sales were up 47 per cent to $22.8m and earnings rose 74 per cent to $6.2m.

Cinemas have long had email lists, and data attached to loyalty programmes, but haven't been good at mining it. Riley says many in the industry have been "slow learners" when it comes to digital marketing.

Vista Group's Movio Cinema product can chew through a theatre chain's customer database and predict what movies people are open to seeing next, based on their past viewing patterns. They can then be targeted with tailored email or other digital marketing (if they've opted in, with the lure of goodies).

Riley says Movio Cinema's only competition is horizontal. That is, general customer relationship management (CRM) systems like Salesforce. But his pitch is that Movio Cinema has built-in smarts specific to the industry that his company has developed by keeping tabs on punters at the 7000 or so cinemas where its core product is installed. Its algorithms can predict their habits, and who might be open to, say, a nudge to see the next Star Wars movie.

Then there's Movio Media - designed for studios (or distributors), to deal with their historic problem of being in the dark about who sits in a darkened cinema and watches their movies.

"If they don't know which people go to see what movie and why, it's like punching into the dark. That's why they make so many sequels," Riley says.

Movio Media provides anonymised demographic data about who actually pays to see a movie, plus options to target digital marketing to them (via Movio, without studios getting to learn your name or other details).

The product got a major boost late last year when the largest Hollywood Studio - Walt Disney Pictures - signed a multi-year deal to use Movio Media.

"It's definitely the one that, for us, is the Holy Grail," Movio head Will Palmer told the Herald at the time.

Other big Hollywood studios such as Warner Bros, Universal and Sony, are already Movio clients, as is Amazon's moneybags new Amazon Studios unit.

Fisher Funds analyst Matt Peek calls Movio Vista's "jewel in the crown" and sees the product being used more intensively as the industry moves away from its traditional focus on "above the line" marketing.

And while Movio Cinema has so far been available only in the US, indications are that it's working for theatre chains.

In April, Movio released a survey vetted by Harvard statistics professor Donald Rubin, that found cinema exhibitors using Movio Cinema saw a collective US$227m incremental rise in box office receipts in 2018 - plus an additional US$97m from concessions (popcorn, soft drink and the like).

The analysis showed that moviegoers receiving direct communication via Movio Cinema increased their visitation by 0.89 visits per moviegoer. Or, in English, they went to the movies one more time a year.

As moviegoers attend with family and friends, this resulted in 1.96 extra admissions, leading to an increase of US$16.61 in box office revenue, per moviegoer, the analysis said.

The average cinema exhibitor using Movio Cinema has 730,000 moviegoers in their database, equating to a total annual box office revenue rise of US$12.1m for each exhibitor.

Helping Village out of the Stone Age

Today, Vista's software is running in about 7500 multiplexes around the world. As well, at the end of 2018, its small-cinema software offering, Veezi, was running at more than 900 sites in 36 countries.

At the time of the 2014 float, Vista Cinema was in about 3000 multiplexes and Veezi, whose development began in 2012, was in just 50 locations.

But Holdaway and his three partners had no idea what they were creating in 1995 at what was then their software development company, Madison. One of those partners, Brian Cadzow, still sits on Vista's board with Holdaway, who handed the group CEO role to Riley in May last year.

Vista is more like Topsy who "just growed". There was no "grand plan or great idea," Holdaway says.

Australia-based Village Roadshow had been waiting and waiting for an endlessly delayed new software system when somebody who had worked for the New Zealand arm's previous incarnation, Kerridge Odeon, and knew of Madison from that era, suggested it might be a better alternative.

The first system built by what would become Vista went live in the now-defunct Highland Park Cinema in the Auckland suburb of Pakuranga, on Christmas Eve 1995.

"I guess you get lucky every now and then," Holdaway says, because Village's brief coincided with the advent of Windows 95 drag-and-drop software. Village had also wanted a single system to deal with both the box office and its food and beverage offerings.

Before that, cinema ticketing systems had run on DOS systems (kids, ask your grandparents). And because Village was then operating in about 20 countries, it was natural for the software provider to follow its customer into Fiji and Argentina.

Holdaway says Argentina was a particularly difficult country to work in and had forced his people to develop software flexible enough to work in an international environment.

Coming attractions

Fast-forward to 2019 and Vista has a number of early-stage products that Riley says will also drive future growth. One is Powster, a platform for creating movie marketing campaigns. Another is Numero, for tracking box office.

Then there's movieXchange, for studios to distribute marketing materials. Riley says for many, "going digital" has meant replacing posters sent out in tubes with trailers and artwork mailed out on a USB key.

He says many exhibitors get impatient, and scrape a movie synopsis off the IMBD website, then grab a trailer off YouTube for DIY content - in the process often duffing up a studio's carefully-crafted sequence of teasers and regionally-tailored content.

The recently launched movieXchange - which Riley says is already making money - is designed as a one-stop portal for distributing digital posters, all the materials needed for a website or mobile app, and trailers, all timed to be released for the right region at the right time in a marketing cycle.

Other initiatives include Stardust, a social media app that lets people share their reactions to movies - helping their friends decide which film to see next - and Vista's purchase of listings and review site Flicks for an undisclosed sum in 2016.

Great - but a billion dollars worth of great?

In a February 27 research note, Stephen Ridgewell and fellow Craigs analyst Samuel White praised what they called Vista's "blockbuster guidance" for 2019. In February, Vista forecast revenue would rise 20 per cent this year.

Vista "is continuing to deliver the rare trifecta of strong revenue growth, operating leverage and strong and improving cash generation as it continues to cement its dominance of the global cinema software market," the pair said.

Ridgewell and White see operating earnings doubling to $55m by 2021 and net profit tripling to $30m as revenue ($131m last year) reaches $232m.

And in a note issued at the same time, Forsyth Barr's Matthew Henry and Matt Dunn saw very similar growth ahead, thanks to growth in Vista's core business and rapid growth in Movio Media, following "large customer wins" at Fox and Disney.

Yet Henry and Dunn (who did not issue a rating for the stock) saw long-term earnings growth as already being factored into Vista's share price - then $4.50.

And while Ridgewell and White rated Vista a "Buy", its shares have since powered past their 12-month target price of $4.90 (earlier this week they hit $6.10 for a market cap of $1.01 billion - making for some pretty eye-watering multiples on its trailing 12-month revenue and profit).

With "high and growing barriers to entry" and its investment in millions of lines of software code forming a "moat" around its market position, Fisher Funds' Peek sees Vista building a near-monopoly.

"With weaker competitors falling by the wayside, it's conceivable that this could be a classic 'winner-takes-all' specialist software market," he says.

"Vista's still a key holding in our funds even at $6+. We think the investment case still has a lot of longevity."

And of course, Vista is not the first technology company to have a heady valuation.

Back in 2012, when Xero was losing money on $38m revenue, this reporter wrote an article headlined "Is Xero worth a cool billion?"

The accounting software company's market cap earlier this week was A$8.7b.

Vista's future is an unknown country, but unlike a lot of unicorns, it has growing profits and strong market position on its side.

With reporting by BusinessDesk