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-- Access Pharmaceuticals
-- ACTV
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SMALLCAPS ONLINE LLC
1285 Avenue of the Americas, 35th Floor
New York, New York 10019
Tel: 212.554.4158 ? Fax: 212.554.4058
www.SmallCapsOnline.com
INVESTMENT RESEARCH
February 23, 2000
RECOMMENDATION: BUY
ACTV, Inc. (NASDAQ: IATV)
Leader in Digital Television Space; Poised for Significant Growth in 2000; Trading at Significant Discount to Peer Group; Updated Financial Model and Raising 6 to 12 Month Price Target to $52 to $55 a Share ; Reiterating BUY Recommendation
Market Data:
Exchange Symbol..............IATV (NASDAQ)
Price of Common Stock (2/23/00).....$25.94
30-Day Average Trading Volume....1,090,000
Shares Outstanding............46.5 million
52-Week High/Low..............$51.75/$5.50
ACTV Corporate Information:
Address.......1270 Avenue of the Americas
.......................New York, NY 10020
Telephone....................212-217-1600
Chairman & CEO.........William C. Samuels
V.P. Finance................Ted O'Donnell
Summary Investment Considerations
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Over the past 90 days, ACTV has announced a number of significant corporate events ? launch of HyperTV in the entertainment industry with Viacom and Time Warner, strengthening of its technology base with significant new patents and claims, the formation of Digital ADCO with Motorola (General Instrument), and completion a $138 million equity financing ? all of which we believe solidify ACTV?s position as a leading software company in the digital television space. While ACTV continues to achieve milestones, and deliver its proprietary technologies to national audiences, the Company continues to trade at a significant discount to its peers in the digital medial arena that do not share as rich a patent portfolio as ACTV?s. Liberate (Nasdaq: LBRT) and OpenTV (Nasdaq: OPTV) have market capitalizations of approximately $9.3 billion and $5.8 billion, respectively, compared with ACTV?s current market cap of roughly $1.3 billion. We continue to believe that this "valuation discount" is unwarranted, and presents a BUYing opportunity for investors. We believe ACTV will continue to have significant corporate announcements during the next six months that should stimulate upward momentum in the stock. We are reiterating our BUY recommendation on ACTV and raising our 6 to 12 month price target to $52 to $55 a share.
Recent Corporate Events ? Building the Leader in Digital TV/Convergence Programming
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HyperTV Launch: ACTV has successfully launched its HyperTV platform in the entertainment industry with media giants Viacom and Time Warner during the second half of FY99. HyperTV Networks (a wholly-owned subsidiary of ACTV) and TBS brought "CyberBond" to a national audience of viewers who watched TBS?s "15 Days of 007" in November. Viewers were able to download the free plug-in and enjoy an interactive experience while watching the Bond movie line-up. HyperTv was also available during TNT?s Bob Marley All Star Tribute, enhancing fans interest by providing facts, song lyrics and trivia on the popular artist. On December 31st 1999, HyperTV Networks and The Box Music Company (an MTV Networks company) launched Box Fusion, which combines the interactive Television/web experience of HyperTV with The Box?s 24 hour, 7 day a week music lineup. On January 1, 2000, the interactive Austin Powers: The Spy Who Shagged Me was launched on pay-per-view and continues to run through the end of February. The most recent launch was that of Showtime?s Stargate series, which premiered on February 11th, and will air weekly for the next several months.
We believe that these numerous HyperTV launches, which occurred relatively quickly after the announcements of the deals, evidences the power and potential of ACTV?s HyperTV technology. We believe that ACTV is successfully executing its HyperTV strategy by building a nationwide audience and delivering multiple convergence events. We feel that the scope of ACTV?s HyperTV partnerships, specifically with Showtime and MTV (both Viacom Companies), TBS, TNT and New Line Cinema (a division of Time Warner) validate the potential for HyperTV as audiences continue to embrace the TV/Web convergence that ACTV has been delivering during the past 3 months. With these multiple launches and with the continuing HyperTV events, ACTV is establishing itself as the leading provider of convergence programming.
Strengthening Its Patent Portfolio: ACTV has been strengthening its already deep patent portfolio through the acquisition of new patents and through the approval of new patents. Recently the Company announced that the U.S. Patent and Trademark Office has approved its 20 new and expanded claims for its HyperTV software, further strengthening its rich patent portfolio. The newest patent granted covers chat functionality in a TV/Web convergence environment, a key element to the convergence experience. In November 1999, ACTV acquired patented "bookmarking" technology through its acquisition of the assets of CatchTV. The technology gives ability to save addresses of Web pages (URLs) that are related to TV programming and will allow viewers to visit the URLs before, during and after the TV program airs. This technology benefits the viewers, program providers and the advertisers greatly, while maintaining an enjoyable and profitable convergence experience. We believe ACTV has one of the richest convergence patent portfolios in the digital media arena and will continue to build its strong intellectual strong hold.
Digital ADCO: One of the most exciting...with General Instrument, to enable the delivery of individualized and targeted television advertising. General Instrument and ACTV each licensed patents to ADCO and GI made the initial capital contribution, expanding on its established relationship with ACTV. ADCO will allow for a revolutionary new form of television advertising, where viewers can choose commercials showing the products that most interest them, or be automatically delivered the most appropriate commercial given their demographic or psychographic profiles. In other words, while watching the same TV program, viewers in different households may see entirely different ads during the same commercial break. A young college grad might be delivered an ad for an economy car, while a family with children sees a Minivan ad, and a single man with no children receives a sports car commercial.
We are confident that advertisers and television distributors will respond positively to the ADCO system, which will create much greater efficiency for TV advertising. While other companies are attempting to develop targeted advertising products for television, we believe that only Digital ADCO has the technology and business model to deliver what could prove to be the most compelling and profitable application of digital television.
Raised Significant Working Capital: Following a nearly 2-month process, ACTV completed a $138 million follow-on public offering, generating significant financial resources for the Company. On February 4th, ACTV priced its offering at $30 a share and sold 4.6 million shares, including the 600,000 over-allotment option. The offering, underwritten by four bulge-bracket investment banks, CS First Boston, Bear Stearns, Lehman Brothers and Salomon Smith Barney, gives the Company cash to repay a $6 million long-term debt and cash for its continuing operations for the next several years. Additionally, it will bring the research support of four major investment houses, and additional capabilities with respect to market making. We feel that ACTV will utilize the money to continue building its HyperTV, Individualized Television and Digital ADCO. Additionally, ACTV has announced that it has hired Austin-based advertising firm GSD&M to develop a branding campaign for ACTV. We feel that this is an important step for the Company at this stage in its development and is indicative of its current efforts to grow its HyperTV audience and expand consumer awareness of Individualized Television technology.
Financial Information and Valuation Discussion
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Based upon our discussions with management, and a review of the market opportunities for ACTV?s technologies, we have generated a new six-year forecast and an earnings model. We believe our revenue forecast and margin assumptions are sufficiently conservative and consistent with independent analyses of each unique target market opportunity. We have forecasted the revenues and the expenses of the three core businesses on which the Company is currently focusing: national and regional Individualized Television, HyperTV and Digital ADCO.
Valuation: From our model, we generated valuation analyses using a discounted cash flow method, a terminal P/E multiple method and a terminal EBITDA multiple method. We believe we have been sufficiently (if not excessively) punitive in our discount rates, and are comfortable with the range of multiples being used. Because of the recent financing, we feel that ACTV has reduced a lot of the financial risks associated with small-cap stocks and therefore we have used lower discount rates in the current model. Regardless of the valuation methodology, we continue to believe that ACTV is significantly undervalued at current levels given the strength of the Company and its position as a leader in digital television and convergence businesses. Unlike other companies in this space, ACTV has proven its success building a deep patent portfolio, creating multiple corporate alliances and deals, and executing its technologies for three core businesses. We feel that ACTV will continue to have significant announcements over the next several months, further strengthening its current position. We are reiterating our BUY rating with a 6 to 12 month price target of $52 to $55 a share and recommend purchase of stock for those investors tolerant of the risks associated with small-cap stocks.
Risk Considerations
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This section of the document is provided to remind potential investors to undertake a prudent level of due diligence prior to making an investment in the securities of ACTV, Inc. For a complete description of risks and uncertainties to ACTV?s business, see the "Risk Factors" section in ACTV?s SEC filings, which can be accessed directly from the SEC Edgar filings at www.SEC.gov on the Internet. Other potential risks include:
Market risk: Investors should consider technical risks common to many small-cap stock investments, including liquidity levels, small float, risk of dilution, dependence upon key personnel, dependence upon single products or technologies, and the strength of competitors that may be larger, better capitalized and hold dominant market positions.
Business risk: ACTV has limited experience in emerging business of interactive television programming and Internet educational software and support. Many of its products and services are in the early stage of commercialization. There can be no assurance that ACTV?s business or the markets in which it competes will materialize or achieve the desired levels of revenues or profitability as expected.
Competitive risk: The entertainment and software industries are extremely competitive, and many perceive the barriers to entry to be low. Added competition could lead to price competition and lower margins.
For Additional Information
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Contact SmallCaps Online LLC ? 212-554-4158
Sources for Additional Information
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The following are website addresses offering related information, and links to other sources of information.
www.ACTV.com ACTV?s corporate website
www.hypertv.com ACTV?s HyperTV website
www.SmallCapsOnline.com SmallCaps Online?s site for company information and research
www.FCC.gov Federal Communications Commission homepage (information on digital TV)
www.NAB.org National Association of Broadcasters homepage
www.GI.com General Instrument Corporation?s homepage
www.pbs.org Public Broadcasting System digital television information
www.SEC.gov U.S. Securities and Exchange Commission, with links to EDGAR filings
www.showtimeonline.com Showtime?s Home Page
www.viacom.com Viacom?s corporate website
www.ppv.com Viewer?s Choice website
www.newline.com New Line Cinema?s website
The information in this report has been obtained from sources that we believe to be reliable, but we do not guarantee its accuracy or completeness. All the statements are the opinion of SmallCaps Online LLC which are based upon information gathered from public filings, and/or information provided by the company which is featured. Neither the information nor any opinion expressed constitutes a solicitation by SmallCaps Online LLC for the purchase or sale of any securities. SmallCaps Online LLC or its affiliates has performed investment banking, consulting or other services for and may solicit investment banking, consulting or other business from, any company mentioned in this report. SmallCaps Online LLC, any of its affiliates or persons associated with SmallCaps Online LLC may at any time be long or short any of the securities referred to herein and may make purchases or sales thereof while this report is in circulation or posted on the SmallCaps Online LLC website at www.SmallCapsOnline.com. Accordingly, SmallCaps Online LLC has a potential conflict of interest in preparing this report. This material or any portion thereof, may not be reproduced without prior permission from SmallCaps Online LLC. SmallCaps Online LLC is not responsible for the contents of this document that is intended for electronic transmission and could be thus subjected to tampering or alteration. Copyright ¸ 2000 by SmallCaps Online LLC. All rights reserved.
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