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NuTech Digital (OTC BB: NTDL); Growth is Fait Accompli in 2004

This past Wednesday morning NuTech Digital announced CEO Lee Kasper would host a conference call open to the public. He will present "an in depth discussion of our activities". The call will begin this Tuesday, April 13th, at 1:15 Pacific Time, 15 minutes after the market closes. There will be a question and answer session after the call, and individuals may call in. Details below.

I've only published three editions on this company to date. The first led to a breathtaking move in the stock ($.75 to $1.50) in one trading day. The stock has since given back about 2/3's of that gain, and now appears to be storing energy for its next attempt to move up. I have never suggested accumulating this stock at much more than $1, so unless you sold on that first trading day, this one has not proven out one way or the other yet. 

Members who were able to properly sample NuTech's proprietary DRM technology were very impressed, and the opportunity turned many interested parties into shareholders. I received a lot of positive feedback.

In advance of Lee Kasper's conference call on Tuesday, I thought it appropriate to provide a fuller explanation of the company's business model. In the first editions I focused a lot of attention on the DRM technology, which is a little misleading. The company expansion plans for 2004 don't include any revenues from the DRM product. It represents a wild card. If the right licensing deal comes along, this technology could send the stock flying up the charts. In the interim, rapid growth is a fait accompli once you understand how the company generated $3.75 million in revenues and turned a $990K loss (2002) into at $300K gain (2003). 
 

Titles = Predictable Revenues= Positive Cash Flow

In 2003 NuTech Digital generated $3.75 million in revenues, and made a net profit of $300,000. Revenues were down a little from 2002, but the company turned a $900,000 loss in 2002 into a $300,000 profit in 2003. This was achieved through a combination of cost cutting and focusing on higher margin sales.

The company's achieved 100% of its sales in 2003 from the distribution of DVDs. The company pays up front fees to licenses DVD's it believes it can resell. Demand for DVDs is skyrocketing. Consider the following information:

• It is estimated there are now DVD players in 59 million homes, or 55% of homes.
• Morgan Stanley expects that the average DVD home in the U.S. will buy 13 to 14 units per year at an average price of $19. This equates to a $14 billion to $15.6 billion market opportunity for DVD sales in the U.S. alone. 
• Total purchases of DVDs in 2002 were 548 million and are expected to grow to 1,072 million by year-end 2004 and to 1,483 million by 2008. 
• The DVD market in the U.S. was at $11.6 billion in 2002 and is expected to grow to $21.3 billion by year-end 2004 and to $28.6 billion by 2008.

NuTech completed at $2.2 million financing in the first quarter of 2004, which provided the company with much needed expansion capital. Since the first of the year, the company has acquired many new titles, and currently has 117 it can distribute.

It is said the best predictor of future performance is past performance. If this holds true in the case of NuTech, investors can anticipate $10.8 million in revenues over the course of 2004, which equates to a growth rate of 180%. The company has already announced revenue increases of 30% in both January and February. This was prior to licensing many more titles.

Historically, gross profit margins have run about 35%. Therefore, if the company matches 2003 performance, it will generate $3.8 million in gross profits, and be very cash flow positive.

There are probably about 24 million shares I&O. Therefore, this profitable company is trading at about 2x this year's revenues, leaving plenty of room for improvement to the upside.
 

DVD Concert Series

NuTech's new DVD concert series moves the company from content reseller to content owner and creator. Content creators are generally awarded much higher market values. 

NuTech intends to record and produce a series of Hi-Definition, surround sound, live concert DVDs. Personally, I am a huge fan of this new genre, and own about 20 if them.

The business model is as follows. The company engages with a performer to record and produce a DVD from a live concert. As a gesture of good faith, NuTech pays a royalty advance. The concert is then recorded and produced.  Once sales commence, the performer receives a royalty on every DVD sold, generally in the range of 20%.

NuTech now owns the exclusive right to distribute the DVD for seven years. NuTech is no longer a content reseller. The company becomes a content creator, and content is king in the media business. If they latch on to one hot concert, the fortunes of the company could change overnight.

To date, NuTech has engaged with one artist, and is in production of a concert performed by Hip Hop artist ODB (Ol' Dirty Bastard), formally of Wu-Tang Clan. The DVD should be released in May or June. 

I expect the company to sign more and much higher profile artists. The right name represents an opportunity for a dramatic surge in the stock.

The concert series could represent an opportunity to generate revenues from the DRM Technology. It could also be licensed to a movie studio for the purpose of viewing movies online using superior technology.
 

Conclusion

Here's a long term chart of NuTech. It shows the big surge in January, and it also shows a stock that has been in an uptrend since last September.

The company has already nearly tripled its number of titles this year alone. In addition, they anticipate generating significant revenues from the DVD concert series. A very high profile name could bring a lot of recognition to the company and its stock.

It seems only a matter of time before this stock begins to behave better. Certainly, the impending conference call demonstrates management's commitment to get the word to the investment community. 

In my first edition on the company I projected a potential $2 stock price over the next 90 days. Since the stock was unable to hold higher levels, I don't believe we will see $2 that quickly, but I still believe it is in the cards. I also predicted the company would have a profitable fourth quarter in 2003, and it did not. Subsequently, I learned December orders could not be filled due to lack of capital. That problem was corrected in early 2004 with the completion of a $2.2 million financing.

I don't expect the company to report profits in the 1st quarter. I anticipate the company will have a bunch of non-cash expenses related to the financing. However, I do expect the company to report significant top line growth, be very cash flow positive from operations. 

The digital entertainment revolution is upon, and NuTech is setting up to participate.

Listen to the conference call and decide for yourself. Here is the information to participate:
 

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