Interactive Television Market: The Myers group, a leading media and
interactive consulting firm, forecasts that the Interactive Television
industry (subscription, advertising and e-commerce) will grow from $700
million in 1999 to $28 billion in 2006. Forreseter Research projects the
indsutry opportunity to be $19.7 billion by 2004. Some additional projections
follow:
Forecasted Growth in Potential Revenue Sources for Interactive Television
1999 2007E
---------------------------
Digital Cable Subscribers 5.1 mil 47.6 mil
Broadcasting Ad Revenues $43 bil $67 bil
Cable Ad Revenues $10 bil $24 bil
Web based Advertising Revenues $3 bil $22 bil
e-commerce Revenues $15 bil $185 bil
------------------------------------------------------------------------
Source: Paul Kagan and Forrester Research
As highlighted by the recent merger announcement of AOL and Time Warner,
consumers will soon shift from the PC to the television as a dominant
platform for interactive delivery of content. We believe that the convergence
of the Internet with television is driving consumers to utilize those
technologies that enable them to interact with and have control over
individualized programming preferences. With 100 million television
households and 32 million "on-line" households in the US (projected to go to
58 million by 2002), the potential ramp-up for interactive services offered
through a TV platform is enormous. Although it is difficult to pick the
winners from the losers at what appears to be the very early stages of the
game, we believe those companies with patent protection, strong partners and
strategic and financial backers will rise to the top. A first mover advantage
will also be beneficial.
Investment Opinion: ACTV is well positioned to capitalize on the
opportunities of interactive television. Given its lack of operating history
and the company's commercial roll-out schedule for additional services later
this year, it may not be clear what will drive the stock in the near term. We
believe ACTV shares will be more sensitive to strategic milestone
announcements versus news around tracking quarterly financial performance. We
emphasize that the early stage nature of the company's businesses and the
forward looking financial model that has been built around projections can
vary significantly from actual events. We believe the following events could
impact the stock:
Positives
- Meeting or beating product roll out milestones
- Additional equity investments from new and existing partners
- Accelerated market roll outs from increased investment
- Indications of subscriber acceptance, advertiser interest, and distribution
agreements
- Additional development of new business opportunities
- Industry-wide events that impact interactive TV, like AOL/TWX merger
We also point out that the company is just beginning to roll out its business
plan and will continue to have operating losses as the company ramps up its
customer base and rolls out its products. If the stock were to underperform,
it may be tied to the following:
Risks
- Missed milestones (such as delayed roll outs, slower subscriber acceptance)
- Dependence on Cable operators, DBS providers and broadcasters
- Outside industry delays (delay in advanced digital set top box roll-out)
- Difficulties related to setting industry standards
- Competition
- Time periods with lack of news
Valuation: Our valuation is based on 2 separate DCF approaches that lead us
to the same target of $43 fair value per share. We estimate growth in
proportionate EBITDA from $(22) million in 2000 to $280 million in 2005.
Based on a sum of the parts DCF on each of ACTV's four business segments, we
break out each of the four defined business units and apply a relative
multiple against that unit's projected terminal EBITDA, which is dependent on
that unit's growth rate in the terminal year (22x for ACTV Ent, 16x for Hyper
TV, 16x for Digital ADCO, and 18x for IATV Events). We then attribute ACTV's
ownership interest in each unit to calculate the proportionate enterprise
value to ACTV. The second approach uses proportionate EBITDA and a blended,
weighted multiple (18.0x) from the prior valuation to arrive at an enterprise
value. On both valuations, we use an 18% discount rate and give credit for
proceeds from options, the recent secondary offering, and net debt. As far as
a revenue multiple for valuation purposes, 2000 may be too early since a
number of businesses will not be rolled out until later in the year.
For a company in an emerging technological space, valuation can be a
difficult proposition. Given the early stage of ACTV as well as the peer
group, there are no meaningful multiples that make sense for valuation
purposes. We attempt to use traditional valuation metrics to arrive at a
price target, however we recognize the difficulty of accuracy regarding
forecasts for a company that has yet to roll out three out of four current
operating businesses. We believe the long-term prospects for the interactive
television business are excellent and that major players with strong patents
and solid partners will be able to realize this opportunity.
Partners: Liberty Digital (Liberty Media) is ACTV's largest shareholder, with
5.5 million shares and warrants for an additional 7.5 million shares, which
would increase Liberty's ownership stake to 24%. In addition to capital,
Liberty Media provides ACTV with strategic relationships with cable and
programming providers, which will be a differentiating factor for creating
business combinations going forward. Motorola owns approx. 1.025 million
shares, with warrants for 0.625 mm shares, for an approximately 3% stake.
Capitalization: After paying off $6 million in debt from the net proceeds of
the recent equity offering, ACTV will have approximately $116 million in cash
to fund operations, expand business internationally, and accelerate the roll-
out of business infrastructure.
Financials: Given the successful rollout of planned business, we expect the
company to report revenues of $6 million and EBITDA of ($24) million for
2000. Our consolidated income statement uses GAAP accounting, and fully
consolidates the revenues and expenses associated with Digital ADCO, ACTV
Ent, and HyperTV, which are all majority owned by ACTV.
ACTV Consolidated Income Statement
---------------------------------------------------
($ in millions) 1998 1999E 2000E
--------------------------------------------------
Revenues 1.4 2.0 6.2
% growth -15% 44% 208%
EBITDA (10.7) (19.6) (24.2)
% growth NM NM NM
EPS ($0.98) ($0.62) ($0.47)
--------------------------------------------------
Source: Company reports and Lehman Brothers estimates.
------------------------------------------
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