Hooray for Hollywood Media

This was originally sent to subscribers of TheStreet.com Stocks Under $10 on March 28 at 9:30 a.m. EST. For more information on this newsletter, click here.

We are initiating a 1,000-share position in Hollywood Media(HOLL Quote). The company operates online ticketing services -- such as Hollywood.com and Broadway.com -- as well as a cable TV division that enables cable companies to offer audiences interactive entertainment and information. Although Hollywood Media is not yet profitable, it is benefiting from an increase in overall Internet commerce and the growing penetration of high-speed data services among consumers. The stock was recently trading at $4.54.

Hollywood Media's recent fourth-quarter earnings results, while falling short of the expectations of the handful of analysts covering the stock, showed strong top-line growth and the potential for future positive earnings and cash flow. For the quarter, the company posted revenue of $28.5 million and lost 4 cents a share. This marked solid, 21% top-line growth from year-ago levels. Earnings per share (EPS) improved 4 cents, though profitability is still a few quarters away, in our estimation.

The best way to look at the revenue and earnings trends of a company like Hollywood, which operates in five business lines, is to break down each division and examine areas of growth that could lead to higher profits in the future. Hollywood's largest operating division, Broadway Ticketing, accounts for 82% of the company's fourth-quarter revenue. The division delivered 17.4% top-line growth vs. the year-ago period and grew a strong 39% sequentially.

In addition, Hollywood's deferred revenue of ticket sales -- revenue that has been received but not yet recorded under the accrual method of accounting, which requires services to be delivered before a company can recognize revenue -- grew a massive 53.5% from the fourth quarter of 2004. This is a good predictor of future revenue, since the company will recognize this deferred revenue balance on its income statement during the coming year.