Now it’s through the ‘Valley of Death’ this tech company is on the up

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Transitioning a tech business to the cloud is known as the ‘Valley of Death’ for good reason. Your up-front costs soar and the payoff in profit can be years away. Little-known cinema-focused tech company Vista Group International (VGL) has been through a tumultuous few years as it made this transition. Many of its shareholders deserted it and its stock price more than halved from March 2025 to March 2026.

However, the transition is now well progressed and VGL is seeing the benefits. It has been winning contracts and the stock has been rising off its March lows. In this podcast Lucas Goode and Max Canfield from our Small Cap Team discuss:

• Why they bought VGL and the customer research that convinced them of its merits
• How cinema has changed since Covid and why the Australian box office is up ~22% this year
• What has driven the recent roller coaster ride in Vista’s share price
• Why Lucas and Max believe VGL is in a strong position for future growth
• Why Australian small caps are at their biggest discount to large caps since the GFC and what might close the share price gap

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Lightly edited transcript – Recorded on 4 June 2026

Carl: Hello and welcome to Navigating the Noise, a podcast by Natixis Investment Managers where we bring you insights from our global collective of experts to help you make better investment decisions. I’m Carl McMinn and today I’m joined by Lucas Goode and Max Canfield from IML’s small and mid-cap team to discuss a stock they bought recently, Vista Group International, ASX ticker VGL.

Lucas, Max, welcome back. Max, first time on the podcast. Great to have you here.

Lucas and Max: Thanks, Carl.

Carl: Okay guys, Vista Group is a stock I imagine a lot of our listeners don’t know. Can you give us a bit of an overview of the business and what initially attracted you to the stock?

Max: Yeah, so at a high level, Carl, Vista sells products and solutions to cinemas. The group’s core product under the Vista Cloud offering is an ERP (Enterprise Resource Planning software) for cinemas. So all things from film scheduling, seating capacity management, cancellations and refunds. And obviously, that’s got to sync across both digital and physical, so you don’t have double bookings.

It also handles things like food and beverage, so menu management, inventory tracking. So it’s really the lifeline of the cinemas, if you like. It’s the operating system of the cinemas. The group was actually formed in 1996 through a JV between Village Force Cinemas, which is now owned by Event Cinemas and a part of EVT. and Madison Systems. The team at Madison were ultimately the original Vista team. They were led by Vista’s co-founder, Murray Holdaway, and then ultimately through a management buyout in 2010, Madison, if you like, gained control of Vista. And then four years later, Vista listed on the NZ Stock Exchange in 2014.

Lucas: There’s a lot of attractive things about Vista as an investment proposition. I mean, number one, it’s a clear market leader. They’ve got about 50% market share in terms of number of cinema venues globally. So streets ahead of the competition.

It’s a real niche ERP player. So you got deep integration within their vertical, very complicated software stack for someone to replicate, but equally because it’s in a niche, it’s unlikely that you’re going to see a larger player try and enter because the profit pool is just not big enough for that to be worth it for them.

And finally as well, you’ve got this really attractive transition in the business model that they’re going through at the moment that we’ve seen on the ASX. Listeners might be aware of Technology One, a local government software provider. In many ways, this is similar to Tech One in the sense that, Tech One is an ERP provider into local government and education. These guys are an ERP provider into cinema. But just as Tech One has done very successfully over the last five years, these guys are moving from on-prem to cloud. And what that means is a big uplift in recurring revenue. It does mean a short term impact to the P&L and earnings level, but long term the size of the prize and the size of the pie expands materially and that’s what’s really attracted us to the stock.

Carl: Thanks, Lucas. Thanks, Max. When I think about film and cinemas, I think about a decline. I’ve got two young children. I haven’t been to the cinema in like 4 years, obviously entertainment systems at home are getting much better, people are a bit more comfortable sitting at home watching their streaming services like Netflix. How does VGL deal with that?

Max: Yeah, it’s probably interesting to really understand what’s transpired and what’s happened over the past six years.

So if you think around when COVID came through, if you like, and even Vista’s business model at that point in time there was predominantly perpetual license fees, large one-off payments when a circuit signed or expanded, and then a smaller proportion of maintenance and support fees.

Now, as you can imagine, when COVID rolled around, this caused a little bit of an issue for Vista. There wasn’t too many cinemas signing up. So what the film studios had to do then, consequentially, was basically deliver that film, almost on demand. And so a lot of them changed their models. Pre-COVID, so in 2019, you had what’s called the ‘theatrical window’, which is effectively how long that film would be shown for before going to a streaming platform like a Netflix. And that was typically 75 to 90 days. Obviously, through COVID, that went to zero. And so there’s been an adjustment phase since then. And over time, what you’ve seen is the industry sort of settled around, 2022, 23, if you like, around 30 days. It’s actually started to shift up higher and higher.

We saw recently, I think it was Universal, which was actually the first studio to change their model back in COVID. They’ve actually gone now and they’ve said 45 days is the absolute minimum. And then in 2027, that’s going to shift up to above 50 days, which would support box office revenues. And I think we’re seeing that in the numbers today.

Lucas: Yeah, I mean, Carl, you might not be going to the movies anymore, but plenty of other people are. I’m just looking at some numbers from Barrenjoey here and the Australian box office is up 22% calendar year to date. It’s almost back at pre-COVID levels.

And look, I think the reality is if the content’s there, people will go to the cinema because it’s a nice day out. It’s pretty cheap entertainment for the family. And it’s really become tentpole programming. So Avengers film, Star Wars, Dune, Mad Max, people go to the cinemas to see that. Like, when the next Bond film comes out, people go to the cinemas to see that because it’s not the same seeing it in your home.

Those rom-coms and comedies that we used to see in cinema screens 20 years ago, they probably do go straight to streaming now. But the real issue for the industry, and it’s a good question because the health of the customer is obviously integral to the future outlook for a service provider like Vista and we want to see their customers doing well. It was that there wasn’t enough content coming out.

So you had COVID made it really hard to make films, then you had the producers, the actors strike, then I think there was the screenwriters strike. And that really clogged up the system. And now that you’re seeing a return to normality in terms of the amount of content coming out, admissions are bouncing back. So I don’t think cinemas are as dead as you implied in your question, Carl. And maybe you should keep an open mind and take the family to see, whatever, maybe go see the Mandalorian and Grogu, that’s out at the moment.

Carl: I will say, if it’s a massive launch, a couple of new ones come to mind, Odyssey, the new Dune, like they’re all massive ones, right? You’ve got to see them in the cinema.

Lucas: Yeah, exactly. Yeah. But if you come down to Sydney, we’ll go see Dune 3 on the IMAX.

Carl: But I’d love that. All right, well, let’s dig a little bit deeper into the business. What type of work did you do to get comfortable before you bought it? It can be tricky to value a business like this.

Max: Yeah so I think, there’s been a lot of volatility around the stock. And to be honest, a lot of that is linked back to the terminal value* of Vista, software providers as a whole, if you like at the moment. And so when you are faced with that prospect of a declining terminal value, what you’ve ultimately got to get comfortable with is what is going to be the new alternative solution that customers are going to use. And so for us, that was trying to understand whether it’s in-housing, so they’re selling to large customers, we’re seeing that a little bit, even with the likes of, large cap names like WiseTech and DSV at the moment. So in-housing can be a real threat if your customers are large or especially larger than you.

And then if it’s not that, is it the threat of a smaller new competitor? coming to the table. And so we were really lucky. We were able to actually get in touch with one of Vista’s larger customers and one of the largest cinema operators in Europe, being Pathé. When we spoke to Pathé, and then actually, funnily enough, we also spoke to a pretty large domestic operator as well and a significant customer of Vista’s. Both of them, their messages were extremely consistent and it really consisted around, three key items.

• The first one being the product offering is extremely complex and far more complex than what we appreciated initially. And again, this is we’re talking to the customers. This is not like a pitch coming from the company itself. So we got a lot of comfort from that.
• Second is competition is extremely limited. And existing competitors predominantly just operate in one geography. So Vista is really the only global offering. And so, you might have different tax regimes that you’d need to comply to if you’re operating across multiple jurisdictions.
• And then the final one would be even if you were to move, it would take… two years or so to re-platform. So we just talked about how fast moving the whole space is. In a time like today, can you really afford to be sitting there for two years, not being able to alter your UI or UX if you like?

Lucas: Yeah, I think as Max touched upon, those customer discussions were pretty key. I mean, I think in the words of one customer, the closest competitor is 10 years behind Vista. And also, this business had built all their offerings, and their tech stack had been built on top of Vista’s. So their, their website, all the stuff that they saw was their secret sauce was actually built on top of Vista. So moving away was going to be close to impossible.

So it really is a very sticky offering. And I think you’ve even seen that with one of their biggest, or one of the things that hurt the share price over the past year was losing Cinemex, a Mexican exhibitor. Well, last week there was an announcement Cinemex have now come back and they’re going to take the more expensive cloud offering: because they weren’t able to actually migrate off Vista’s tech stack. So I think that speaks to the strength of the offering and just how sticky these ERP, these vertically ERP solutions can be.

Carl: Yeah, it definitely goes against that, the narrative in the market at the moment.

Lucas: And I think you asked about valuation as well, Carl. I mean, the easiest way to think about it conceptually is that they’ve got targets out there for 75 million bucks of free cash flow in 2030. The market has been skeptical about their ability to get there, but I think after the announcements, the contract wins over the past couple of weeks, they’re probably actually ahead of schedule in terms of that cloud transition. That’s $75 million of free cash flow. You compare that to a $500 million EV (enterprise value), I mean, clearly one of those numbers is wrong.

If they do $75 million of free cash flow in 2030, I mean, what model would you pay for a growing SAS business that’s generating good free cash? You’d pay at least 20 times probably for that business. That suggests that the share price could even triple by 2030. So, that on the valuation is extremely compelling.

Carl: Just on that, you touched on a little bit there, the share price down roughly 40% over the last year, but then sort of last month it’s popped up another 20%. Lots of volatility. What’s driven the short-term stuff?

Max: Yeah, I guess more recently, it’s probably been, it’s really been two things. If you think about it, the whole transition from on-prem to cloud, it’s referred to as the ‘Valley of Death’, and it’s referred to that for a reason. It’s extremely intensive operationally and financially. So you’re effectively front-loading all your costs up front, in order to perform the transition on behalf of your clients.

And then over the top of that, we’ve got this whole thematic in the background, and in SaaS, it’s been called SaaSpocalypse. So you’ve really had these two things in the background that are going on that are sort of weighed in on this stuff. And as I said, previously, is that, at a very high level, without digging into it and doing the work, you hear ticketing software and you immediately think, well, surely this must be, replicable by AI.

The reality is when you go and you speak to their customers who are also very technically adept and they really, put it into context that it’s not as easy as what you think.

And then I guess the positive movements recently Lucas sort of touched on, but it’s really been their three.

Lucas: Yeah, well, three massive contract announcements. So Cineworld, second largest exhibitor in the UK. Cinépolis, which is the largest Mexican exhibitor and actually one of the largest in the world, they’ve got 500 movie theatres, not 500 screens, 500 theatres. I think that’s out of a total global pool of like 10,000 or something. So it’s pretty meaty, and winning back Cinemex.

I think the other thing to touch on as well, that you’re always interested in a stock Carl that’s sold off for reasons that have got nothing to do necessarily with the operations of the company. And you’ve had a lot of register change at Vista over the past couple of years. You had a failed PE takeover, the PE fund then sold out. You also, Max touched upon the ‘Valley of Death’ where you’re trying to weigh up near-term profitability against long-term growth in that move to the cloud. And the move to SaaS, it increases your total addressable market, or your long-term revenue, but at the expense of hitting your short-term earnings because it costs money to transition your customers. It costs money to develop the cloud solution, and you lose that 100% upfront margin from the perpetual licenses that you used to sell.

And I think there were maybe disagreements among some of the larger shareholders on what strategy they wanted Vista to pursue, whether they wanted near-term cash generation or long-term growth. Now, obviously, the shareholders that want a long-term growth run out, we think that’s absolutely the right strategy for the business, but it did mean that you had some pretty material shareholders that sold out as a result of that. And we were the beneficiary because we picked up stock really at an absurdly cheap price.

Carl: Right. Like on that note, Lucas, moving on to the sort of more the market broadly. You’ve said recently Aussie small industrial companies are at the biggest discount to the top 200 since the global financial crisis. Not even COVID, the GFC.

Lucas: And unfortunately, Carl, it’s even truer today than it was a couple of weeks ago when I spoke to you. I think actually the discount is now slightly more than it was at the peak of the GFC.

Carl: What do you think closes it?

Lucas: Look, I’m not trying to get out of answering the question, because I’m going to have a stab at it. But I mean, first and foremost, it’s just its main reversion. I mean, the rubber band can only stretch so far, because obviously what followed that period of massive underperformance into the GFC is, guess what, a period of massive outperformance coming out of it.

So you never quite know exactly what the catalyst is. But you can flip the question around and say, well, why have Aussie small caps underperformed so badly? And it’s not even a small cap, large cap thing, right? The Russell 2000 in America is up 15% for the year. Small industrials are down 16(%) in Australia.

And that’s been driven by three things.

1. So yeah, yeah, the war in Iran. Obviously not helping risk assets. Though that doesn’t seem to have hurt US tech.
2. And then you had rising interest rates as well in Australia. Small caps do underperform when interest rates are going up.
3. And then you also have the SaaSpocalypse that Max talked about earlier, or the AI disruption threat.

I think it’s rising interest rates that explain a lot of that discrepancy. It sucks liquidity out of the smaller end of the market. We saw it in 2022 as well when rates were going up. But I also think, the market’s often fighting the previous battle. Interest rates went up 12 times in 2022. Inflation was at 7%.

I’m not loving paying more on my mortgage each month, but we haven’t seen 12 increases. We’ve seen three, and I don’t even know if we’re going to see another one.

So what changes it? Is those things being reversed. I think the SaaSpocalypse is being followed by now a bit of a SaaSurrection, at least overseas. The war in Iran, I mean, Trump’s been trying to get out of it for the last month. So that will wind up at some point, you would hope, fingers crossed, touch wood. And then with interest rates, again, the economy clearly is slowing in Australia. And in some respects, that’s a good thing because it does mean that the RBA probably now doesn’t have the urgency to hike. And that should feed through at some point into small cap outperformance.

Also, eventually things just become too cheap. And we’re seeing this with, we’ve had two of our stocks that have been under real pressure, oOh!Media and Ready Tech, both got bids in the last couple of months, because private capital and industry players are willing to take a longer term view and go, I’m not going to value these companies on the next six months’ earnings. And, the market is very short-term focused, but we always think the long-term fundamentals are what matter, and that’s what drives our investments.

Carl: Sounds compelling. Thanks. Well, on that note, thanks Lucas and Max. Great to hear about one of the new stocks that you’ve been buying, VGL. To everyone else there listening, please tune in again to hear more from the IML team as well as our global collective of experts. Thanks very much.

* The ‘terminal value’ of a stock, in financial valuation models, represents the present value of all of a company’s future cash flows beyond the explicit forecast period (e.g., the next 5 or 10 years). It assumes the company will continue to exist and generate cash flows indefinitely, but at a slower, perpetual growth rate.

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