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). 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.
Even more intriguing was the 144% year-over-year top-line growth of the company's Internet advertising sales division. The ad sales division operates on only two of the company's sites -- Hollywood.com and Broadway.com online ticketing portals. While still accounting for just 6.5% of the company's total revenue, the division is benefiting from growth in the number of global Internet users. The company also has a 26% equity interest in MovieTickets.com, which announced a distribution deal with Yahoo! ( YHOO) in mid-March. Yahoo! is the most-visited Web portal in the world, and this distribution agreement should increase the exposure of MovieTickets.com. The company does not have the required 50% or greater stake to consolidate revenue from its holding in MovieTickets.com, so under the equity method of accounting Hollywood records those gains and losses on its income statement as equity in earnings of investments. To date, MovieTickets.com has not generated any income for Hollywood. However, there is talk among investors and analysts that MovieTickets.com could eventually merge with its only competitor, popular ticketing Web site Fandango. Such a deal would provide the combined company with access to the entire global footprint of digital distribution of movie tickets and likely increase its leverage in negotiating with theater operators and other advertisers. We believe such a deal would have a favorable impact on the share price of Hollywood Media. The company's data business, which licenses entertainment content and movie listing times to wireless data and cable providers, grew revenue to $2.7 million in the fourth quarter, a 17.1% gain from year-ago levels. However, much of this growth came from Hollywood's July 2005, $4.74 million acquisition of Studio Solutions, which tracks the evaluation and production of movie scripts and movies. Even so, a slowdown in the top-line growth rate of this division would have a minimal impact on overall top-line growth, as the data business represents a mere 10% of total revenue at present.
Finally, the company's Hollywood.com television business, which offers its free-VOD (video-on-demand) cable network to more than 15 million U.S. cable subscribers, is still less than 2% of total revenue. But management believes the segment could eventually reach 20 million subscribers in 2006. The company also said in its earnings press release that it expects to increase advertising sales on its free-VOD offerings in 2006, which we believe will carry high margins given the margins of other online advertisers, such as Google ( GOOG) and Yahoo!, and help the company achieve profitability by 2007. While none of these businesses has been profitable over the past 12 months, the company has the potential to scale its Web operations into meaningful advertising revenue in 2006, and its equity stake in MovieTickets.com should begin to benefit from the wider distribution potential offered by Yahoo! Also, Hollywood Media could benefit from improved box office sales this year. Although 2005 was a negative year of total domestic box office sales relative to 2004, back-to-back negative years have occurred only three times since the 1970s. In addition, Hollywood Media is a classic Stealth Stock, an equity that has yet to be discovered by Wall Street analysts and institutional investors in our rating system. Currently, just three analysts actively cover the stock, and it gets no attention from bigger investment firms such as Goldman Sachs and Lehman Brothers. Also, only a few large institutional names hold sizable stakes in Hollywood Media. But if the company continues to execute and deliver double-digit percentage top-line growth as we expect, and its VOD ad sales generate higher margins leading to positive cash-flow generation in 2006, we believe the herd will move into this stock and bid shares higher.