OPTV (TWP): BSkyB: A Model Case for ITV Deployment
(Thanks goes to wp on the Raging site for uncovering this one.)
November 8, 2000 Thomas Weisel Partners LLC
Rich Media OpenTV1- BUY
NASDAQ: OPTV $27.06 BSkyB: A Model Case for ITV Deployment
Doug van Dorsten, CFA 415.364.2574 dvandorsten@tweisel.com
Jason Noah Ader, CFA 617.488.4621 jader@tweisel.com
Media and Entertainment
Gordon Hodge 415.364.2575 ghodge@tweisel.com
Executive Summary
*The BSkyB case study. Launched in October 1999, "Open" (not to be confused
with OpenTV) is BSkyB's branded interactive television service that delivers
online shopping, banking, weather, email, enhanced sports broadcasting and
other applications over BSkyB's digital satellite television service in the
UK. Open creates customized interactive television applications using
authoring tools from OpenTV and operates the service on OpenTV's middleware
software, which is installed on BSkyB's digital set-top boxes.
Reiterate BUY rating on OPTV shares. We believe the BSkyB deployment
exemplifies the power of OpenTV's software platform and application tools, and
as the rollout of ITV kicks into higher gear, we believe there is the
potential for multiple expansion in OPTV shares and upward earnings revisions.
(Executive Summary continued below)
Key Data: 1999* 2000* 2001*
Price: $27.06 EPS
52-Week Range: $246-$20 Q1 ($0.03) A ($0.05) A ($0.06) E
Market Cap.(mn): $2,260 Q2 ($0.05) A ($0.07) A ($0.02) E
Shares Out.(mn): 83.5 Q3 ($0.11) A ($0.06) A ($0.01) E
Avg Daily Vol.: 408,290 Q4 ($0.10) A ($0.04) E $0.02 E
Fiscal Year End: Dec. Year ($0.32) A ($0.22) E ($0.06) E
P/E NM NM NM
Debt/Total Capital: 0% Revenues (mn)
Price/ TTM Sales 86.6x Q1 $6.0 A $10.9 A $24.8 E
Net Cash/ Share $4.65 Q2 $6.2 A $11.3 A $29.2 E
Book Value/ Share: $5.38 Q3 $5.5 A $18.7 A $31.8 E
Price/ Book Value 5.0x Q4 $8.4 A $22.7 E $35.7 E
Secular Growth Rate: 55% Year $26.1 A $63.6 E $121.5 E
Target Price $40 Cap/ Sales 86.6x 35.5x 18.6x
Potential Appreciation 48%
*EPS excludes amortization, stock based comp and Gen'l Instr R&D charges
Company Description: OpenTV is a leading worldwide provider of software that
enables digital interactive television. OpenTV has a competitive suite of
software solutions, the largest installed base of set-top box software, and an
early lead in what we believe will be a rapidly expanding market for software,
and a potentially enormous market for interactive applications and t-commerce.
(Executive Summary continued from above)
*Popularity of Open a key differentiator for BSkyB. The popularity of Open
has grown dramatically since the end of 1999, as registered email accounts
have grown from 350,000 to 1,000,000 by September 2000, placing it in the top
five email services in the UK. In the September quarter, BSkyB also saw a 70
basis point decrease in subscriber churn from the prior quarter to 9.8%,
which we attribute to the increased customer loyalty that is characteristic
of Open's service. Today, 3.8 million viewers have access to Open's
interactive lineup, roughly 80% of BSkyB's total subscriber base.
Impressive usage data thus far. Open's service has received a strong reception
from the BSkyB subscriber base. As of May 2000, greater than 10% of Open
homes have purchased a product with the service and 35% of these people are
making repeat purchases. Overall, 3.3 million subscribers used Open's service
in April 2000, spending about 20 minutes each session. More up-to-date data is
expected to be released on BSkyB's next quarterly conference call.
Success of Open puts pressure on cable operators. We believe the success of
Open and other satellite services (such as Echostar in the US) will serve as
an impetus for cable operators in the United States (and elsewhere) to
integrate ITV into their networks in an effort to remain competitive and drive
new sources of revenue.
Summary & Recommendation
We reiterate our BUY recommendation on the shares of OpenTV. The company
continues to achieve strong traction in the deployment of interactive
television (ITV) software in digital set-top boxes, and currently boasts more
than 10 million set-top boxes, about half of total deployments worldwide. We
believe deployments of ITV by cable, terrestrial and satellite network
operators will accelerate over the four to six quarters, and that OpenTV will
be one of the prime beneficiaries of this increase. Investors continue to
look for deployment of OpenTV by a US-based cable network operator, and we
believe the company is well positioned to achieve this, especially after
revealing current participation in a live pilot project with a major US cable
MSO (which we speculate is AT&T) on the General Instrument DCT-2000 set-top
box. We believe there will be success in this pilot, leading to a broader
deployment. In our opinion, this traction in the US cable market, combined
with the recent Motorola investment in OpenTV, supports our thesis that
OpenTV's middleware is particularly well-suited to run on mid-range set-top
boxes, such as the DCT-2000, that are being widely deployed today by cable
MSOs. Moreover, the addition of Spyglass' browser technology to the OpenTV
middleware platform positions the company to supply HTML-compatible technology
for the next generation of set-top boxes. Based on these factors, we believe
the current share valuation does not adequately comprehend the strong progress
the company is making in gaining share in a rapidly emerging market, and that
the shares should be bought at current levels.
Open: BSkyB's Interactive TV Offering
A model case for ITV deployment. Launched in October 1999, "Open" (not to be
confused with OpenTV) is an interactive television service that delivers
online shopping, banking, weather, email, enhanced sports broadcasting and
other applications in a secure environment over the BSkyB digital television
service in the United Kingdom. BSkyB is offering the service to its 4.95
million direct to home (DTH) satellite subscribers; roughly 80% of these now
have access to the Open service. Open creates customized interactive
television applications using authoring tools from OpenTV and operates the
service on OpenTV's middleware software, which is installed on BSkyB's digital
set-top boxes.
The service is free except for the cost of goods purchased, shipping charges
and local phone charges (a phone line enables interactivity between the user's
digital set-top box and Open's commerce service). The user accesses the
service by simply turning on the television and scrolling through a menu of
options with the remote. Once in the system, users can read and write email,
perform online banking, make travel arrangements, play interactive games, and
search for desired TV shows with an advanced program guide (Figures 1-3). One
of the most exciting and popular applications has been enhanced sports
broadcasts of live soccer matches, where subscribers can view sports statistics,
switch camera angles and watch highlights during the match. As a further
example of the system's capabilities, the company has launched an interactive
advertising campaign for Unilever, which allows viewers to request coupons and
product information with their remote control. Open also plans on integrating
other features, such as interactive sports betting - an initiative that shows
the potential for integrating popular real-world activities inside the
interactive television environment. During the first 11 months of service, Open
Interactive has signed up commerce partners, such as Domino's Pizza, Marks &
Spencer, HSBC Bank, Blue Square (online betting service), Woolworth's, Toyzone,
Gameplay and First Call (theater box office). The breadth of these partners
points to the platform's appeal to merchants across the consumer spectrum.
Impressive usage data thus far. Open's service has received a strong
reception from the BSkyB subscriber base. As of May 2000, greater than 10% of
Open homes have purchased a product with the service and 35% of these people
are making repeat purchases. Overall, 3.3 million subscribers used Open's
service in April 2000, spending about 20 minutes each session. More up-to-date
data is expected to be released on BSkyB's next quarterly conference call.
Popularity of Open a key differentiator for BSkyB. The popularity of Open has
grown dramatically since the end of 1999, as registered email accounts have
grown from 350,000 to 1,000,000 by September 2000, placing it in the top five
email services in the UK. In the September quarter, BSkyB saw a 70 basis point
decrease in subscriber churn from the prior quarter to 9.8%, which we
attribute to the increased customer loyalty that is characteristic of Open's
service.
During the fall, Open started several new programs that focus on exploiting
the potential of t-commerce and enhanced advertising on the BSkyB network.
The first was the launch of a Panasonic advertising campaign for its new line
of household vacuums. The enhanced ad allow viewers to request additional
product information with a click of the remote control, as well as to purchase
the item directly from a participating Open retailer. The other initiative,
Open Extra, a virtual TV mall, is aimed at capturing a share of the holiday
shopping blitz in the United Kingdom. The service acts as a clearinghouse for
over 35 retailers, enabling customers to purchase a variety of products and
services for home delivery. We believe these types of applications and
services will enable operators, like BSkyB, to increase overall subscriber
revenues and vastly improve customer loyalty, as services like Open offer
greater value to the customer than the typical cable or satellite offering.
OpenTV's middleware is central to the deployment of Open's services by
providing the core software engine and the tools for application authoring.
Success of Open puts pressure on cable operators. In the broadband race,
satellite operators have typically been younger, more aggressive companies
with newer technology and a penchant for pushing the envelope. Open is an
exemplary case study of the feasibility and initial user acceptance of ITV in
a satellite environment. We believe the success of Open and other satellite
services (such as Echostar in the US) will serve as an impetus for cable
operators in the United States (and elsewhere) to integrate ITV into their
networks in an effort to remain competitive and drive new sources of revenue.
Valuation
We believe OpenTV deserves to trade at a premium to its peer group as the
company has garnered dominant market share for deployed set-top boxes and has
demonstrated consistent top and bottom line execution. Currently, OPTV is
trading at a multiple of 16.5x enterprise value to CY01 sales, a sizeable
discount to the closet competitor Liberate, which trades at roughly 34.2x
projected 2001 sales. As the rollout of ITV kicks into higher gear, we further
believe there is the potential for multiple expansion in OPTV shares and
upward earnings revisions. |
