VFX Giant Moves into Feature Film Production, Banks on Grant-Fueled Expansion in Florida

Visual-effects giant Digital Domain (DD) is looking to raise up to $115 million in an IPO this summer. The company plans to use the money to help fund an ambitious expansion in scope of Digital Domain's operations, including an aggressive move into production and marketing of feature films and an educational partnership with Florida State University (FSU).
Last year, DD announced the purchase of 3D-conversion technologist In-Three, rankling some feathers in Los Angeles by moving that company’s operations to Florida, where DD is taking advantage of grants from the state of Florida and the cities of West Palm Beach and Port St. Lucie to build a 500-person, 130,000-square-foot animated feature-film studio and launch the Digital Domain Institute (DDI) with FSU.

A prospectus filed with the Securities and Exchange Commission yesterday offers glimpses at the challenges facing DD as it struggles to change its profile for the 21st century. As successful as it has been at pushing the art and craft of visual effects forward, the company has never been a profit center – the company had a net loss of $45.2 million on revenues of $106.1 million last year, including $42.4 million in non-cash charges. Figures disclosed this week also showed In-Three running at a deficit, with operating losses in 2009 of $5.5 million on revenues of $2.8 million, and operating losses in 2010 of $4.9 million on revenues of $876,000. (Interest and other expenses increased In-Three’s net losses further, to $7.0 million in 2010.)

The purchase of In-Three didn’t cost DD much up front – just $1.9 million in stock and another $0.9 in cash, but the deal includes a provision for continuing royalty payments that could bring its value to as much as $22 million over five years.

Like many other VFX facilities vying for work with a bare handful of major Hollywood studios, DD remains overly reliant on the fortunes of others – in 2010, it said, contracts with just three customers accounted for 88 percent of the company’s revenue. DD’s hope is that a move into production – it is already co-producing a film version of Orson Scott Card’s landmark sci-fi novel Ender’s Game with Oddlot Entertainment – will give it more control over its own destiny.

DD cited heated competition as the main risk to its future business model, noting that technology advances are lowering the cost of entry to the CG-animation market, which could open the floodgates to smaller, nimbler producers. And it cited South Korea, China, and India as the chief sources of international competition, based on their access to low-cost, high-skills labor.

The incentives Digital Domain has found in Florida may be the envy of Southern California companies. In June 2009, DD received $20 million in cash grants from Florida. In December 2009 and January 2010, the company received another $10 million in cash, $10 million in real estate, and $40 million in low-interest financing from the city of Port St. Lucie, FL for the building of its new animated feature studio. Most recently, last November, the Community Redevelopment Agency of the city of West Palm Beach, FL, granted DD $10 million in cash, $10 million in land and $15 million in low-interest financing earmarked for DDI.

Digital Domain had previously filed for an IPO back in December 2007, when it hoped to raise $100 million, but that offering never took place. Upcoming titles featuring work by DD include Real Steel (DreamWorks), Transformers: Dark of the Moon (Paramount), X-Men: First Class (Fox), and the currently shooting 47 Ronin (Universal).

For more information: www.digitaldomain.com.