Text of Kaufman Bros., L.P. Buy Coverage to $37
NITSAN HARGIL INITIATING COVERAGE KAUFMAN BROS., L.P.
Internet Applications & Content BUY 800 Third Avenue, 25 th Floor
212-292-8143 JANUARY 25, 2000 New York, New York 10022
nhargil@kbro.com www.kbro.com
KBRO Trading Desk: 1-800-807-8723
ON2.COM, INC. (ONT/ASE) PRICE: $18 5/8 PRICE TARGET: $37
Diluted Shares (MM): 23.2 Next Report Date: Feb '00
Market Cap (MM): $417.6 52-Week Range: $40 - $7
LT Debt (MM): $0.0 Avg Daily Volume: 480,772
1998A 1999E (NEW) 1999E (OLD) 2000E (NEW) 2000E (OLD) 2001E (NEW) 2001 (OLD)
Mar (1Q) $0.00A ($0.15)E -Jun
(2Q) ($0.07)A ($0.22)E -Sep
(3Q) ($0.12)A ($0.27)E -Dec
(4Q) ($0.18)E ($0.28)E -Full
Year EPS ($0.37)E ($0.92) ($1.19)
% Change EPS NM NM NM
Price/Earnings NM NM NM
Revenue (MM) $0.1E $5.5 $16.7
% Change Revenue NA 4284% 203%
Total Cap/Revenue 3313.2x 75.6x 25.0x
EPS (Fiscal Year Ends 12/31)
We are initiating coverage of On2.com (ONT) with a BUY rating and a price target of $37.
On2.com is one of a handful of companies completely focused on the broadband market.
The company's VP3 video technology is better than any other streaming technology we have seen.
A dual strategy of an exciting Internet Web site and a business-to-business (B2B) licensing opportunity offer this company very strong
growth.
We anticipate this very early stage company will move its listing to NASDAQ offering an additional catalyst for stock performance.
A PURE BROADBAND PLAY WITH A GREAT TECHNOLOGY
We are initiating coverage of On2.com (ONT) with a 12-month price target of $37 and a BUY rating. On2.com is one of few companies
today completely focused on broadband. It has developed an exciting technology for use by individuals with broadband Internet access.
Watching an on-line video segment through On2.com gives one the highest quality video viewing experience currently available anywhere
on the Internet, and it does so at a not very demanding (for broadband) 300 kilobits per second.
We looked at On2.com's valuation based on forecast 2002 revenues of $31.7 million and a very conservative 35% discount rate over two
years (bringing it back from year-end 2002 to our 12-month price target at year-end 2000). This high discount rate reflects the very
early stage the company is in, still months away from any meaningful revenues. For 2002 we used a revenue multiple of 50 giving
us an implied price target of $37. We initiate coverage of On2.com with a price target of $37 and a BUY rating.
ON2.COM IS COMPLETELY FOCUSED ON THE BROADBAND MARKET SEGMENT
On2.com is focused on delivering interactive streaming video over the Internet to individuals in their homes over broadband connections
(i.e., cable modems, digital subscriber lines or wireless broadband). We believe that there will be tremendous growth in the deployment of
broadband connections to residential consumers in the next few years and expect 60% of households in the U.S. to have some form of
broadband connectivity by 2005.
TECHNOLOGY THAT IS SUPERIOR AND PROPRIETARY
On2.com has developed a proprietary technology for enabling the delivery of high quality content over today's broadband networks.
On2.com's proprietary codec (compression/decompression algorithm), called VP3, currently allows for the delivery of fully interactive
video at speeds from 250Kbs to 500Kbs. From our own experience with beta-versions of VP3, at only 300Kbs, the technology offers
content which at first glance could be confused with a standard TV transmission. This is important, for while current consumer
broadband technologies are theoretically capable of peak throughput of 1Mbps or faster, in practice, sustained throughput of higher than
500Kbs is extremely rare. At 250Kbs to 500Kbs, VP3 outperforms all other current codecs. As higher throughput rates become feasible,
VP3 can be scaled up to offer higher and higher quality transmissions. We eventually see On2.com delivering next generation video at a
quality surpassing today's TV signal.
B2B PRESENTS AN ATTRACTIVE SEGMENT WITH TREMENDOUS GROWTH
TV cable companies offer text channels (TV listings, community access information) that are hardly ever watched. In our opinion, the
same will apply to the Internet. Static pages will be a lot less attractive than ones containing audio and video as an integral part of the page.
Any company with a presence on the Web that wants to target broadband users may turn to On2. Today these companies may be in the
tens or hundreds, but a few years from now we forecast it will be virtually every company on the Internet. On2.com can turn your video
stream into a high quality, truly streaming clip.
On2 plans to capture this market in two ways. First, it plans to offer complete video hosting services, alleviating companies of the need to
deal with the streaming problem. It will help with everything from encoding the video stream to distributing it to end-users. The second
way will be to license the technology to those customers who want to perform these tasks in-house, but at the much higher quality offered
by VP3 technology.
A MOVE TO NASDAQ WILL BE A MAJOR CATALYST TO THE STOCK
On2.com is currently listed on the American Stock Exchange. While On2.com has not had any significant problems raising capital to date,
we believe that a high-tech company like On2.com is better suited to the NASDAQ. On2.com's visibility would be greatly enhanced by
this move, and it should make it that much easier to raise capital in the future. We anticipate that On2.com will move to a listing on the
NASDAQ in the near future.
On2.com has more than $15 million in the bank due to recent financing activities. This venture also has strong backing from Citibank
Investment Group. Combine this with the excitement surrounding streaming video and we do not anticipate that raising money should be
a problem for the firm.
On2.com's Web site should greatly
aid in the adoption of the VP3
standard and has significant
potential in its own right. We believe
that www.on2.com has the potential to
become the Broadcast.com of the
broadband age and more. Not only
could the Web site become a portal for
streaming content, but it also provides
On2.com with the opportunity to
participate in e-commerce and other
enhanced services that will be provided
along with broadband.
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