Sea of change enroute to your living room
Stockhouse Ticker Trax is equity specific research (Canadian listed and market cap < $300 million) published every Monday to paid subscribers. Our free Friday column may feature companies previously featured to paid subscribers (with a minimum one month delay) or discuss topics of interest to the general investment community and relevant to overall portfolio management.
Powering the TV Everywhere Generation
Espial (TSX: T.ESP, Stock Forum; 98 cents)
Espial was originally featured to paid Ticker Trax subscribers Sept 17th at 52 cents but with only 14 million shares outstanding, the future value growth remains significant.
Recently I attended CES (Consumer Electronics Show) in Las Vegas. With over 3000 exhibitors and 150,000 attendees (it is not open to the public), this has to be one of the most hectic trade shows you could imagine.
A high profile theme at CES this year was the SmartTV. In fact, within 2 to 3 years I doubt you will see a TV sold that isn't a Smart TV - which in its simplest form is a television capable of connecting to the Internet - and navigates much like a Smart Phone. You could tell Apple has been an incredible influence on the entire tech world (which is really nothing we didn't already know).
What was fascinating is that some companies are developing the technology to navigate your TV with hand gestures. In the same way you would sweep through your smart phone, you may eventually navigate your television the same way while sitting on your couch using sweeps in the air. The Microsoft Xbox Kinect uses something similar for playing games but the technology appears at least a year or two away for navigating a TV Browser - for now manufacturers use a remote control device.
The look and feel of your smart phone (thanks to Apple innovation) is what all televisions will become. Here is a very good example:
It is the navigation (browser) brain that Espial brings to the table (along with the ability to use your smart phone or tablet to navigate your SmartTV and interact with the Internet). Their revenue (approx. $14 million in 2012 with a small profit) comes from: 1) licensing the software to large television manufacturers; 2) boxes connected to the television and provided by large (tier 1 or 2) cable or telecommunication companies.
I had a good meeting with the CEO and CFO of Espial in Las Vegas and the outlook for 2013 and 2014 sounds very promising. One question weighing on my brain was how they would compete with Apple as I heard Apple TV would launch something new in 2013. I thought this would pose a huge threat to Espial but the response from Espial's CFO was a pleasant surprise:
Today "Apple TV" is a small box that is attached to your TV like any other device (set top box, blu-ray player, and game console). It can be used with any TV that has a HDMI port. The companies at CES that were using Apple TV must have been content providers or manufactures of devices other than TVs. Each TV manufacturer is developing/shipping their own SmartTV that has the software imbedded in the TV required to make it smart and have the functionality of the Apple box. The TV manufactures want to be independent of Apple for two primary reasons (1) they want the revenue share from content providers like Netflix and (2) Apple is widely expected to become a TV manufacturer and sell its own SmartTV.
You should think of the current Apple TV as a separate device that enables existing TVs to access OTT content, music and photos. It is a cool device, but not integrated into the TV. Roku is a competitive box to Apple, as is BoxeeTV. TV manufactures such as Sharp, Sony, Samsung, Toshiba, LG (all TVs) do not see these devices (including the Apple TV box as competition for sales of their TVs. You need a TV for the device to work.
What TV manufactures do see as competition is each other (and Apple when they come out with an actual TV). Customers' expectation of TVs are changing quickly - they do not want to buy a separate device that needs to plug into the back of TV, have a separate remote, take up additional space (esp for wall mounted TVs). They want and integrated device, i.e. a SmartTV that can do all this off the shelf. That is a differentiator and that is why all manufacturers are bringing out Smart TVs. In addition, for the TV manufacturers it provides a second revenue stream that does not exist today. Currently they sell the TV and that is their margin. A SmartTV enables them to revenue share with content providers and aggregators like Netflix. In a low margin business like TV manufacturing, this is gold.
We expect Apple to emerge in the market with a smart TV of their own and launch a high end TV set at a premium price. This will likely change the leader board of TV manufacturers over time. Today the likes of Samsung, LG, Sharp, Sony, Panasonic, Toshiba, etc. occupy the top 6-7 spots. Will Apple be able to break into the top five, quite likely but even if Apple is to occupy 10%-20% of the market, it will still leave 80%-90% of the market that will be addressable by Espial. In a way we actually look forward to Apple launching a TV. Certainly the threat of this has helped us since it made the existing TV manufactures focus on SmartTV much more than they otherwise may have. Actual launch will likely increase the focus and spend even more.
In addition, for the Pay TV or Service Provider market (cable and telephone companies), Apple TV is another competitive threat and as such they must react to and invest in ensuring they have a TV platform that will allow them to compete effectively against Apple TV to maintain their customers. For us this is positive, since it keeps the Pay TV market spending robust and we provide solutions to this market for them to improve and launch new services.
During a Q4/12 conference call, their marketing manager pointed out that globally there are 600 million paying television subscribers (cable, satellite, etc.) and providers need to offer competitive services if they plan on retaining them.
He also noted that over 1 billion televisions may be replaced with Smart TV's over the next 5 years and so far Espial has one of the leading technology browsers for this market - this was evidenced by the major manufacturers they signed during the quarter.
YouTube video of the award winning ANT Galio
Large list of Industry Partners (similar in size to Espial)
On January 11, it was announced that Espial received ANT shareholder approval and in a couple weeks the UK court should sign off on the acquisition. This was an opportunistic and strategic acquisition for Espial as it gives them important technology that compliments their own, expands their client base across Europe, and they pick up approx. 40 software engineers - along with tech talent recruiting from Cambridge University where ANT is based.
Espial has been following ANT for years and mid-2012 their CEO quit after conflicts with the board. This was followed by the resignation of their CFO who wanted to work in the agriculture industry. As a small publicly traded company, having both senior managers leave created heavy pressure on their share price. As it hit a low, Espial started negotiating and was able to acquire them for approx. $8 million but that included approx. $5 million in cash.
Espial who have done an amazing job managing their share structure over the past decade, had no interest in issuing stock for the acquisition so they were able to pay cash and prevent any shareholder dilution.
After discussing this acquisition with them last week, it was obvious Espial will have a tremendous talent pool. In addition to what they can recruit from Cambridge, they will use the UK office for sales and software development (currently approx. 25 software engineers) and this will be combined with another 60 very talented software developers working in Ottawa. Espial re-invests heavily in Research & Development so with almost 100 specialists focused on building code, a lot of great new ideas should emerge from this company.
There is good reason to follow this story in 2013. With a current valuation of only $14 million, the company is trading at only one times annual revenue. If the SmartTV market takes off (along with IPTV) over the next 12 to 18 months, we could see someone much larger take an interest in acquiring Espial – and with only 14 million shares out, they will be in no hurry to give this company away.
Because their software is available in more than 10 languages and they deal only with large television manufacturers and Tier 1 and Tier 2 cable and telecom companies, it would be a much larger international corporations that could have an interest in them - companies like Motorola, Huawei (China system integrator), Accenture, or Erikson.
All of the above and yet the company has managed to maintain one of the best share structures of any public company on the TSX.
They have a very good .pdf presentation on their website:
Further inquiries can be directed to Espial’s CFO – Carl Smith
email@example.com / 1-613-230-4770
Disclosure: Danny Deadlock owns 20,000 shares of Espial (TSX: T.ESP).
In addition to this weekend column and the bottom fishing research sent to paid Ticker Trax subscribers on Monday, I also provide free MicroCap alerts throughout the week. These are based upon News or Abnormal Price/Volume Activity on the several hundred stocks we track from our own research, brokerage analysts, or third-party newsletter writers.