STOCK HOUSE INTERVIEW
SHfn Interview: MGI Software Expects To Grow 75 To 80% For The Next Two Years - October 22, 1999
By Craig Sebastiano (csebastiano@stockhouse.com)
After two recent acquisitions, MGI Software plans to integrate its purchases under a
corporate name change in November and a Nasdaq listing next year.
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MGI Software [T.MGI] of Richmond Hill, Ont., is setting is sights on owning Internet imaging
relative to e-commerce and PC photography. In an interview with StockHouse, MGI's president
and CEO, Anthony DeCristofaro, expects revenue to grow between 75 and 80% in the next couple
years. "We just finished with $16 million last year," he says. "This year we're onto doing $28
million." In the first half of the year, the company made about $10 million in revenue. To meet
expectations, MGI needs to make $8 to $9 million a quarter. "We feel very comfortable with these
expectations set by the analysts. We're not allowed to disclose exactly the numbers, only that we
can say that definitely the quarter is looking very well and it's looking very strong."
Although MGI isn't turning a profit yet, the Street expect the company to be in the black in the
second half of next year - either the third or fourth quarter because of its growth rate and recent acquisitions. The company
purchased the engineering group and DVD software technology from Zoran [ZRAN]. "For us it was a great technology addition and a
great addition of world-class engineering resources right in the Silicon Valley," DeCristofaro says. "It keeps us plugged into the
latest."
Adding Live Picture's assets is also part of MGI's strategy. "By purchasing Live Picture," he explains, "we purchased some amazing
intellectual property and a very exciting server imaging solution that was starting to be used by some of the major corporations in
terms of e-commerce." It fits right in with the strategy of where the company is going relative to owning imaging on the Net. "Just as
Real Networks [RNWK] owns the audio, the audio player and the standardization of delivering audio on the Internet - with Zoom
Server and our "streaming fits" format, we have an opportunity to be the standard in delivering a rich image over a low bandwidth in
e-commerce, business to consumer."
The Zoom Server product provides an e-commerce solution for still images on the Net. MGI is currently negotiating with top US
retailers to display images of their products. One of its clients, a popular female shoe store called Nine West, allows visitors to its
Web site to zoom right in to the point where they can see the quality of the stitching and the product. The only way to sell a product
on the Internet is through an image. "We just received statistics from Nine West on this technology that they're now implementing,"
says DeCristofaro. "They've had a 30% increase in sales, 30% less calls from the products displayed with Zoom on their Internet
and 50% less returns than their catalogue sales."
Another one of MGI's products is VideoWave and the VideoWave family which includes a full video publishing or video editing
product. The company's most popular product is called PhotoSuite. The personal computer photo software for home and business
users can be used as an editing tool for digital imaging. Its products are in about 25 countries and in at least 12 to 14 different
languages. Dataquest, a leading IT market research and consulting firm, released a report summarizing sales for 1998. "MGI is the
world leader in supplying digital imaging tools, followed by Adobe [ADBE]," explains DeCristofaro. "We've continued, on the channel
basis, to lead in a reasonably significant manner and we're quite excited." The retail unit worldwide sales of its PC photography
software has grown more than 400% since 1996 and could rise further with the August release of PhotoSuite III. "We're already
seeing very, very strong signs of an exciting digital Christmas."
In September, MGI announced a strategic marketing alliance with Intel [INTC] - which holds an 8% equity stake in the company -
and Kodak [EK] called www.gatherround.com, an online photo community portal. "When we look at the activity going on in the
online photo community, that in 1999 they're estimating about 5 billion digital images were posted on the Internet," DeCristofaro
explains. "For us it's exciting because we believe this segment of the market is going again be a significant cornerstone of the
conversion of photography to digital."
With a new vision, MGI plans to undergo a corporate makeover with a new identity in November. The company also plans to list on
the Nasdaq by the end of the first quarter in 2000. The stock has done well in the past year, rising from 92 cents a year ago to the
$7 range. Along with an investment from Intel, MGI received investments from Trans Cosmos, a Japanese Information Technology
firm, and Perseus Capital, a US venture capital firm, to finance the Live Picture acquisition. "We're using and getting those
partnerships," he says, "to start adding value to MGI for the next phase of the company."
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StockHouse: What's your revenue stream like?
Anthony DeCristofaro: We just finished with $16 million last year. This year we're onto doing $28 million. We're in our Q3 and we
just finished last quarter at $5.4 million. When we look at what we've done in the first half of this year, which is about $10 million,
that means the next 2 quarters, if we meet expectations, we have to be at a run rate of almost $8 to $9 million a quarter. It's a very
significant jump up as we start being on a run rate like that. We feel very comfortable with these expectations set by the analysts.
StockHouse: What do you expect this quarter to be like?
Anthony DeCristofaro: Very strong. We're not allowed to disclose the numbers, only that we can say that definitely the quarter is
looking very well and it's looking very strong.
StockHouse: You're not making a profit right now, are you?
Anthony DeCristofaro: No, we're not. With our growth and where we're going and
with these recent two acquisitions, the marketplace is looking at the second half
of next year - probably Q3, Q4 - for us to start turning the corner.
StockHouse: Your stock has been quite a performer over the past year. How do
you explain that?
Anthony DeCristofaro: I think the performance is we're continuing to meet all
expectations. I think people - as we have now put together these investments -
understand the vision and the opportunity of where we're focusing this company
with this technology and realize how undervalued we are relative to the US plays.
It's clear that some of the support that's been happening has been more in the Canadian side. All of a sudden now, we're starting to
get some US interest and some US purchases. We finished our fiscal year at $16 million the end of January of this year.
Next year, which ends this January coming, the market's expecting $28 million - about a 75 to 80% growth rate; we expect that to
continue for a couple of years. When you look at the Internet imaging opportunity and some of the world-class players who are using
our Zoom Server technology, it could be leveraged as a very significant piece of the new economy on the Internet. On the client side,
we're already there with the franchise. Next year, our PhotoSuite product will become applet-oriented relative so we can supply all
those viewers and all those people who are viewing our Zoom images on the Net with more capabilities that will be downloaded
through the Internet - very similar to what you've seen in terms of a model with Real Audio and G2 and G2 Plus. We'll cultivate our
base and our focus on the Internet.
StockHouse: What is MGI Software?
Anthony DeCristofaro: MGI Software is in the digital imaging space. Under that, there's 3 elements that we are focusing on:
Internet e-commerce imaging, digital photography or the digitization of photos going to digital and digital video. Those are the 3
segments that we are in, with an array of products from the client side to the back end server solution for the Internet.
Our products are sold through worldwide channels with partnerships in Taiwan, China and Japan with some very major companies
sold through the channel. There's another channel called the OEM (original equipment manufacturers) or the licensing channel where
we take a product and license a typically lighter featured product and bundle it with hardware and solutions on a one for one ratio
around the world with large manufacturers such as Sony, Epson, Canon and Compaq. We're in about 25 countries and all our
products are in at least 12 to 14 languages.
StockHouse: What are some of your products?
Anthony DeCristofaro: MGI PhotoSuite is a very popular brand in terms of PC photography or an editing tool that's being used for
digital imaging. That's in the consumer SOHO (small office, home office) marketplace. It ranges in price, street price could be as low
as $49, suggested retail is $79. Our other product is VideoWave and the VideoWave family which includes a full video publishing or
video editing product.
We're selling these products on our worldwide basis. Our Zoom Server product is involved in providing an e-commerce solution for
still images on the Net and Bloomingdale's, The Gap, JC Penney use the technology to display their products to sell. Companies
like Nine West, a very popular woman's shoe store, has an amazing way to look at an image and be able to zoom right into detail to
the point where you can notice the quality of the stitching and the product. Needless to say, the only way to sell a product on the
Internet is through an image; that is really the most important experience for a sale. We just received statistics from Nine West on
this technology that they're now implementing. They've had a 30% increase in sales, 30% less calls from the products displayed
with Zoom on their Internet and 50% less returns than their catalogue sales. Certainly within the next 90 days we're already in the
midst of negotiating some very major contracts with the top retailers of the U.S. that will be standardizing on this image format to
display high quality, rich images on the Internet with a low bandwidth. In terms of bandwidth, it doesn't matter whether you have a
28.8kbps modem or whether you have cable, the minimal will be necessary for your experience.
StockHouse: Who are your competitors?
Anthony DeCristofaro: We have competitors in different segments of our major
businesses. We look at two divisions within the company, one is the imaging
division which really deals with e-commerce and imaging and the client side of PC
photography. Then of course, we have the video side. Our competitors in the
imaging space from a perspective of a standalone product would be Adobe [ADBE]
and Microsoft [MSFT]. When we talk about delivering an image across the
Internet, providing a rich experience in that photograph and almost teleporting an
individual to that image, that's the technology that we do have patented and we
purchased from the recent acquisition at Live Picture. When we look at those
competitors, again we're in a different competitive space. When you look at the
video side, we have competitors like Avid [AVID] and Ulead.
StockHouse: What kind of market share do you have?
Anthony DeCristofaro: Dataquest just came out with a report summarizing all of 1998. MGI is the world leader in supplying digital
imaging tools, followed by Adobe. We've continued, on the channel basis, to lead in a reasonably significant manner and we're quite
excited. We just launched our new version PhotoSuite called PhotoSuite III Platinum and we're already seeing very, very strong
signs of an exciting digital Christmas.
StockHouse: What about your acquisition of Live Picture?
Anthony DeCristofaro: As part of our strategy, we went out and built the client side of digital imaging, which is the PhotoSuite side
- being on the front end of and bundling with digital cameras and scanners. The back end of the business was the next strategy that
we felt was important so we would have the opportunity of owning the imaging business. By purchasing Live Picture, we purchased
amazing intellectual property and a very exciting server imaging solution that was starting to be used by some of the major
corporations in terms of e-commerce. That block fits right in with the strategy of where MGI is going relative to owning imaging on
the Net. Our strategy is quite easy to understand and quite clear. Just as Real Networks [RNWK] owns the audio, the audio player
and the standardization of delivering audio on the Internet - with Zoom Server and our "streaming fits" format, we have an opportunity
to be the standard in delivering a rich image over a low bandwidth in e-commerce, business to consumer.
StockHouse: You recently purchased assets from Zoran?
Anthony DeCristofaro: That's right. We purchased the engineering group and software technology from Zoran regarding DVD. They
had a customer base installed and they already had momentum. We have a very talented engineering team to address these
opportunities that continue to come to MGI now that we're forging these relationships with the major PC manufacturers. For us it was
a great technology addition and a great addition of world-class engineering resources right in the Silicon Valley. It keeps us plugged
into the latest.
StockHouse: Do you plan on making more acquisitions in the future?
Anthony DeCristofaro: I think this fiscal year certainly we're pretty focused on driving one clear goal and that is our investments
and the values of these investments that we've just purchased. We have now taken on these new entities and taken it into MGI,
we're going right now under a new corporate name change that should be out by some time in November. We have a new clear vision
and opportunity, which is absolutely huge relative to the Internet and imaging and how we're going to position ourselves to maximize
and own that space. We have one clear goal next year and that is to own imaging on the Internet relative to e-commerce and relative
to PC photography. Those are the two clear areas that we are focused on and we feel very strongly that we're well positioned to be
able to create such a critical mass and ubiquity that by some time next year, we'll be clearly in the opportunity of maximizing that.
StockHouse: What alliances have you forged lately?
Anthony DeCristofaro: We have some significant alliances. We now have Intel as investor, which has about 8% of the company.
We've just recently announced a strategic marketing alliance with Intel, Kodak and MGI called www.gatherround.com, an on-line
photo community portal. When we look at the activity going on in the online photo community, in 1999, about 5 billion digital images
were posted on the Internet. For us it's exciting because we believe this segment of the market is going again be a significant
cornerstone of the conversion of photography to digital. We have some very, very strong partners such as Kodak and Intel in that
particular deal. We forged some very strategic relationships with Compaq regarding the evolution of video on the business. With our
recent announcement that we did with them in June, you'll continue to see more announcements as big PC manufacturers convert
all their PCs to being video ready. We're well positioned to be able to do that.
At the same time, when the Live Picture acquisition happened, we had some US financial institutions step up and become our
partners as well because they financed the deal. Trans Cosmos, a very big Internet fund from Japan invested and did very well with
Real Networks, is well connected and almost has 40 Internet investments; and Perseus out of Washington, DC which is a very
prominent large fund that supports and invests in high-tech as well. We're starting to see some very significant demand from the US
because of our opportunity in the Internet and the imaging side of this company to go for a US listing some time in the new year.
We're using and getting those partnerships to start adding value to MGI for the next phase of the company.
StockHouse: Do you plan to list on Nasdaq or the New York Stock Exchange? When?
Anthony DeCristofaro: The plan is we'll try to be very generic because those boards don't like us mentioning them, but it's going to
be the high-tech board - probably by end of the calendar Q1 next year.
StockHouse: Regarding your name change, are you allowed to disclose that now? What will it reflect?
Anthony DeCristofaro: No, we're on the final list and until we're sure and we've gotten all the trademarks. We're quite cautious with
it. It will reflect coolness in Internet and images.
StockHouse: Do you have any other plans for the future?
Anthony DeCristofaro: I think the key focus again for us is to go out and clearly get the Internet and the e-commerce segment of
that business to be standardized on our imaging format and technology. We feel very excited because we have some of the major
retailers obviously behind that already. It's very significant when we can own that piece of the Internet - very, very significant. Real
Networks today is capped at US$6 billion for about $80 million in revenue. That's because they own obviously the audio space of the
Internet. No one today owns the imaging space of the Internet; we're by far ahead of anything that's out there.
StockHouse: Mr. DeChristofaro, thank you very much for your time.
Regards Terry McCartan |
