IATV: From SHSB A Good Story Getting Better; Livewire Deal Analysis Part 1
--SUMMARY:--ACTV, Inc.--Interactive Entertainment
* In a major strategic positive, ACTV announced a marketing pact with
Liberty Media's Livewire to accelerate the roll out of HyperTV. * By
leveraging Livewire's deep relationships with TV programmers, the deal
should boost the penetration of HyperTV, while simultaneously adding scale
to its business model. * In addition, the pact will shift hosting and
content creation services to Livewire, allowing ACTV to focus on higher
margin advertising, e-commerce, software licensing, and data mgmt.
revenues. * By outsourcing the capital intensive hosting business to
Livewire, ACTV's returns should also improve. * As a result, we are raising
our FY01 EPS est. to $(0.22) from $(0.32) and our EBITDA est. to $(15) mil.
from $(20) mil. * The stock has been weak owing to sell off in Nasdaq. *
With improving fundamentals, we reiterate our 1S rating on ACTV.
--EARNINGS PER SHARE--------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 12/99 EPS $(0.23)A $(0.14)A $(0.08)A $(0.17)A $(0.61)A
Previous 12/00 EPS $(0.15)E $(0.13)E $(0.11)E $(0.10)E $(0.49)E
Current 12/00 EPS $(0.15)E $(0.13)E $(0.11)E $(0.10)E $(0.49)E
Previous 12/01 EPS $N/A $N/A $N/A $N/A $(0.32)E
Current 12/01 EPS $N/A $N/A $N/A $N/A $(0.22)E
Previous 12/02 EPS $N/A $N/A $N/A $N/A $N/A
Current 12/02 EPS $N/A $N/A $N/A $N/A $N/A
Footnotes:
--FUNDAMENTALS--------------------------------------------------------------
Current Rank........:1S Prior:No Change Price (04/11/00)....:$22.75
P/E Ratio 12/00.....:N/Ax Target Price..:$50.00 Prior:No Change
P/E Ratio 12/01.....:N/Ax Proj.5yr EPS Grth...:0.0%
Return on Eqty 99...:N/A% Book Value/Shr(00)..:2.65
LT Debt-to-Capital(a)N/A% Dividend............:$N/A
Revenue (00)........:7.40mil Yield...............:N/A%
Shares Outstanding..:48.5mil Convertible.........:No
Mkt. Capitalization.:1103.4mil Hedge Clause(s).....:#
Comments............:(a) Data as of the most recently reported quarter.
Comments............:
--OPINION-------------------------------------------------------------------
OVERVIEW
ACTV, Inc., a leading digital media company, announced a major strategic
partnership with Liberty Livewire, which we view as an important positive
strategic step for ACTV. In order to comprehend the benefits of this
transaction, it is first important to understand Liberty Livewire.
Liberty Livewire, a unit owned by legendary media investor Dr. John
Malone's Liberty Media (ticker LMGA), is the largest post production
house in Hollywood. Assembled through the acquisitions of Todd-AO, Four
Media Co., and Soundelux (among other purchases), Liberty Livewire is a
leading provider of post-production services such as sound editing and
mixing, film editing, film transfers, special effects, and DVD
authoring. Liberty Livewire boasts a stable of 3,000 creative employees,
about $425 million in revenues, EBITDA of roughly $75 million, and is
involved in 75% of all commercial television spots.
Under the terms of the deal, ACTV and Liberty Livewire will form a joint
marketing venture, "HyperTV with Livewire," to promote the deployment of
ACTV's HyperTV product. To review, HyperTV is at the center of the
convergence of the TV and Internet and is a patented process that
enhances traditional television programming with related and synchronized
multimedia content delivered via the Internet. Pursuant to the joint
marketing arrangement, Liberty Livewire will leverage its deep Hollywood
relationships with the notion to accelerate penetration of HyperTV. In
addition, Liberty Livewire's 3,000 creative employees spanning offices
from L.A. to Singapore provides ACTV with a powerful global staff to
create HyperTV content and important scale as new HyperTV contracts are
won. Furthermore, Liberty Livewire, through AT&T, will assume
responsibilities for hosting, allowing ACTV to exit this lower margin and
capital intensive business. As part of the deal, ACTV will also receive
an equity kicker in the form of 2.5 million Liberty Livewire warrants
(which will vest in equal tranches over the next five years). Overall we
view the terms of the deal as very positive for ACTV.
KEY INVESTMENT POINTS
1. Building a Superior Business Model/Exiting Non-Core Businesses
The deal with Liberty Livewire signals a positive change in the HyperTV
business model. With Liberty Livewire assuming hosting responsibilities,
ACTV will no longer have to build a network of POPs to support HyperTV.
While ACTV will sacrifice the associated hosting revenues (which will now
flow to Liberty Livewire), capital spending will be minimized for ACTV,
while also eliminating a relatively lower margin revenue stream.
Similarly, by essentially outsourcing the bulk of content creation duties
to Liberty Livewire, ACTV's HyperTV business model will be further
concentrated in the higher margin areas of online advertising,
e-commerce, software licensing, and data management. It is important to
note that this strategic shift is entirely consistent with our vision of
how the HyperTV business model should evolve. The decision was never a
question of "if," but rather "when." In the initial stages of deploying
HyperTV, ACTV was required to offer hosting services in order to provide
TV networks with a complete turnkey solution. Now, with the technology
and service proven to TV programmers, these non-core businesses can and
is being outsourced.
2. Adding Significant Scale
Another positive feature of the transaction is added scalability to the
HyperTV business model. As ACTV succeeds in securing new HyperTV deals,
the ability to program interactive content for an increased customer base
is imperative. By partnering with Liberty Livewire and its pool of
creative employees, ACTV achieves this goal and avoids the time consuming
(and costly) task of having to develop talent and resources in-house. In
addition, we believe that by utilizing AT&T/Liberty Livewire to develop
the network for POP hosting will allow this roll-out to be accelerated.
We anticipate that a network of POPs capable of supporting 1 million
simultaneous users (an important need should HyperTV be utilized for
major event programming) will be completed by the fourth quarter of
2000.
3. Accelerating HyperTV penetration
In our view, from a revenue standpoint, the deal is a win-win scenario
for ACTV and Liberty Livewire. For Liberty Livewire, this transaction
allows the company to offer an increasingly important interactive service
to its Hollywood client base, while simultaneously solidifying its
position as a leader in the post-production business. By partnering with
Liberty Livewire, the HyperTV product receives increased credibility and
visibility among TV programmers, which should boost HyperTV penetration.
Furthermore, Liberty Livewire's relationships with Hollywood and its
ability to package HyperTV with its other services should also ensure
deeper market penetration for HyperTV.
4. Cementing Ties to Liberty
In our opinion, this new partnership with Liberty Livewire further builds
upon ACTV's ties with Liberty Media. Liberty remains a key equity
sponsor for ACTV, owning about 24% of ACTV (including options). We
believe that pooling the strengths of its Liberty Livewire assets with
ACTV is a strong reinforcement of Liberty's commitment to ACTV and should
reaffirm confidence in ACTV's growth prospects. Although the benefits of
such a link is admittedly difficult to quantify, in the end, Liberty is
at the epicenter of the media/communications and interactive television
universe. With one of the most highly regarded media executives (Dr.
John Malone) at its helm and strategic relationships with nearly every
notable media/communications player, we believe the ongoing relationship
between the two companies will yield other value enhancing events.
LIBERTY LIVEWIRE DEAL PROMPTS RAISED ESTIMATES.
Based on the premise that the partnership will boost HyperTV penetration,
improve margins, and provide important scalability, we are raising our
(Voluntary Disclosure: Position- Long; ST Rating- Strong Buy; LT Rating- Strong Buy)
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