Interactive entertainment firm's stock gets rattled.

Iwerks' shares plunge since glowing IPO in October

Iwerks Entertainment Inc. was one of the Cinderella stocks of 1993. But lately the Burbank-based producer of movie-based specialty theaters has been trading at less than one-third of the $37 a share it hit the day after it debuted on the NASDAQ last October.

Except for a brief run-up last winter, Iwerks' stock has been on a fairly steady price decline during its short life as a publicly traded company. It closed last Tuesday at $11.88 per share.

"At the time that the company was priced, it was probably the most propitious time to do offerings in the area of multimedia and interactive entertainment," said Linda Killian, who analyzed the stock last year for Greenwich, Conn.-based Renaissance Capital Corp., an independent research service that specializes in initial public offerings.

"There weren't many other investment-grade vehicles for the multimedia industry," she noted. "And people like to invest in something they see as a new trend."

Since the stock's inception, Killian noted, there has been a change in the overall market psychology as well as "news" of a slowdown in sales to the "attractions" market.

In the fiscal year ended June 30, 1993, "attractions" like world expositions, museums, visitor centers and special events accounted for all but $1.1 million of Iwerks' $32.2 million in sales revenues. The $1.1 million came from its Cinetropolis venues, which combine Iwerks' motion simulation, giant/360 degree screen, 3-D theater systems with themed restaurants and specialty shops for urban areas and casinos.

Senior analyst Seth Feinstein, who follows the stock for the Los Angeles investment bank Crowell, Weedon & Co., agreed that 1994's first quarter was a tough one for the market in general. But he doesn't consider the slowdown in the attractions side of Iwerks' business -- specifically its sales to world expositions -- to be "news."

In fact, the expected slowdown was something that Iwerks officials had specifically pointed out in the firm's IPO prospectus:

"In fiscal 1992 and 1993 approximately 50 percent, and 40 percent of the revenues, respectively, were derived from sales of attractions to world expositions. There are no major world expositions scheduled to open in fiscal 1994 or 1995. Consequently, this market segment is not expected to contribute to the company's revenues during these two fiscal years."

As Feinstein saw it, the market should not have been surprised two weeks ago (May 2) when Iwerks reported an $891,918 loss on revenues of $10 million for the fiscal third quarter ended March 31. A year earlier, the company had reported earnings of $2.3 million on revenues of $11.2 million.

In fact, he was impressed with the firm's nine-month results, which showed a 31 percent increase in revenues to $25.6 million from $19.6 million a year earlier. Despite this, Iwerks' lost $2.8 million vs. a $2.3 million profit the year before.

Feinstein noted that Iwerks has tried to compensate for the changing market by shifting its sales force from the attractions side of the business to the Cinetropolis side.

He said he was impressed by Iwerks' ability to switch gears, build market share through the pending acquisition of competitor Omni Films International Inc. of Sarasota, Fla., and expand its Cinetropolis operations into Japan in March.

Otherwise, Feinstein said he hadn't seen any material changes in the company over the last six months -- "certainly not on the negative side."

But Keith Benjamin, an analyst with San Francisco-based investment bank Robertson Stephens & Co., which took Iwerks public, said he is cutting his earnings estimates for the company's fiscal fourth quarter from 10 cents a share to two cents. He said he changed his outlook because he was not sure how quickly Iwerks would be able to make up for sales lost from its core attractions business.

Despite these qualms, Benjamin still continued to rate the stock a strong buy. "They still have very impressive growth prospects in their business," he said.

Although he noted the long-term growth potential of operations like Cinetropolis, he admitted that he was not clear about this division's near term prospects. In fact, he said, if more Cinetropolis sites are not announced soon, "there could be more EPS (earnings per share) risk."

Iwerks Chief Financial Officer Deborah Miao said her company's biggest challenge is to find better ways of tapping into key markets.

"We are increasing our sales staff, which will allow us to address certain target markets more fully," she said.

Top priority is being given to reaching the European and Asian theme park markets and the domestic casino market. To that end, she said, Iwerks plans to add four to five new people over the next six months and assimilate Omni's strong sales force once its acquisition is concluded at the end of May.

Miao also noted Iwerks is looking for appropriate sites for its Cinetropolis ventures in the U.S. and Europe, and is working the Far East with Tokyo-based Itochu Corp. (formerly C. Itoh Corp.), one of the largest trading companies in the world.