RealD reported strong fiscal third-quarter results; revenue and profitability came in ahead of expectations. Total revenue of $55.4 million was above the consensus estimate of $50.4 million and adjusted EBITDA of $21.3 million were well above the consensus estimate of $15.2 million.
Licensing revenue of $35.6 million was above the consensus estimate of $34.2 million, and product revenue of $19.8 million was above consensus of around $16.2 million. Licensing upside was primarily driven by strong 3-D trends in China. Adjusted EBITDA were $21.3 million in the quarter, above the consensus estimate of $15.2 million due to licensing revenue outperformance and an incremental $3 million of gross margin from product revenue.
China, a growth market for RealD, performed well during the quarter with licensing revenue up 140% year-over-year, driven by demand for locally produced 3-D content.
Management announced TrueImage, a visual enhancement product outside RealD’s traditional 3-D business. The company did not provide any rollout timetables or commercialization details.
At about $8.70, shares trade at a fiscal 2014 EV/EBITDA multiple of 8.3 times with a free cash flow yield of around 5%. In the near term, we believe the key drivers of stock performance in calendar 2014 will be 1) the 3-D movie slate, 2) sustaining 3-D rates, 3) RealD’s 2014 TrueImage product announcement(s), and 4) sustained free cash flow generation. We believe that shares are likely to outperform the market on a relative basis, although we believe the real opportunity for outsized performance will be driven by consumer electronics commercialization. Unfortunately, management did not provide many rollout details of the new product.