Gruntal Report (part 2)
09:00am EST 21-Dec-00 Gruntal & Co (Catherine Skelly 212-820-3610) IATV
IATV: ACTV Files Lawsuit Against The Walt Disney Company (Part 2)
Highlights of Recent Management Meeting
Review of the Benefits of SpotOn Technology
Earlier this year, ACTV, Inc., joined with OpenTV Corporation and
Motorola, Inc., to form Digital ADCO, Inc., with both ACTV, Inc.,
and Motorola, Inc., licensing six patents each for the venture.
OpenTV Corporation is contributing its prominent technology
platform, strong international presence, and installed base of
more than 11.0 million set-top boxes worldwide. Digital ADCO,
Inc.'s core product is SpotOn, a targeted advertising service for
interactive television. SpotOn enables advertisers to deliver
commercials to digital cable television viewers based on their
interest, their geographic locations, and their languages. With
SpotOn, a targeted message is sent to each addressable digital
set-top box and viewers choose the spot that is of most interest
to them. Furthermore, advertisers have tagging capability for
each box, so they can target messages at the local level. At the
same time, SpotOn functionality enables Digital ADCO, Inc., to
report directly back to advertisers to let them know exactly when
the spot aired, who viewed it and for how long, thus eliminating
some of the problems associated with the shotgun approach to
advertising. The research associated with compiling and analyzing
demographic information and viewer responses is generally done in-
house by third party aggregators hired by Digital ADCO, Inc.
Digital ADCO, Inc.'s Business Model
Digital ADCO, Inc., is entirely funded by investments of $5.0
million from Motorola, Inc., and $10.0 million from OpenTV
Corporation. Digital ADCO, Inc., generates revenue from the sale
of set-top licenses to cable and satellite operators. We project
licensing fees of $3.10 per year in 2001 for each set-top box
equipped with SpotOn functionality. Additionally, we expect
Digital ADCO, Inc., to derive revenue from a number of services
including striping, the process of digitally encoding television
commercials with targeted messages. The company also plans to
generate a proportionately smaller amount of revenue related to t-
commerce transactions that the SpotOn product facilitates.
Integration Updates
The company's integration of SpotOn with the multiple hardware
and software platforms that currently exist in today's market
appears to be on track. The company is working closely with
Motorola, Inc.'s Broadband Communications Sector unit to ensure
that its SpotOn software is compatible with both its current and
next-generation set-top boxes and is conducting similar firmware
integration with Scientific-Atlanta, Inc.'s digital set-top
boxes. Microsoft Corporation recently announced its intention to
integrate SpotOn with the Microsoft TV platform and SeaChange
International, Inc., announced similar plans to integrate SpotOn
interactive advertising technology into its digital ad insertion
system. Integration with these and other interactive software
applications also appear to be running on schedule.
Investment Highlights
ACTV, Inc., ended its most recent quarter with cash and cash
equivalents of $134.7 million, or $2.65 per share. We believe
that this is significantly more that the company needs to fund
operations until it becomes cash flow positive, which we project
in 2002. This distinguishes ACTV, Inc., from other early-stage
technology companies that must raise additional capital at
unattractive valuations. ACTV, Inc., has partnerships, deployment
agreements and/or integration deals with major blue-chip
technology firms including Microsoft Corporation, Motorola, Inc.,
and AT&T Corporation. These relationships, in our opinion, carry
significant value, as deployment relationships are crucial
revenue drivers but difficult to obtain. Further contributing to
the intrinsic value of the firm is its extensive patent
portfolio, which covers products that are ready to deploy today
and can begin to generate revenues for its partners immediately.
In light of the recent share price decline and multiple
contraction among technology stocks, we are reducing our
intermediate- and long-term target prices to $15 and $20 from $28
and $35. At $20, AVTV, Inc., shares would be trading at 19.0
times our 2005 EPS estimate of $1.05. This represents a 50%
premium to the multiple of the S&P 500 on 2005 EPS, which we
believe is justified given ACTV, Inc.'s rapid projected earnings
growth rate. |
