Hi Sheldon,
Thanks for renewing my interest in this one. I picked up a copy of Golden's research report. Here's a copy for all who are interested. Is there anyone with strong technical abilities here who could comment on their technology?
GOLDEN CAPITAL SECURITIES LTD.
RESEARCH REPORT
Image Power (IPZ-VSE)
Recommendation : Speculative Buy
3- Month Range: $0.20-$0.40
Current Price: $0.25
Year-end Target: n/a
Shares Outstanding: 15.9 million
Full Diluted: 19.5 million
Working capital: $210,000
Image Power is high-tech company specializing in the development of data compression software. The Company has three primary product lines: Power Viewer software, an integrated image viewer and compression system, Power Accelerator computer cards which provide fast image compression for high volume, corporate applications, and Power Gateway transmission services for Internet and wireless data network applications. Revenues from Power Viewer sales are expected to commence in the third quarter of 1997. Due to the multi-billion dollar market for the fax machine to wireless data communications networks-and the Company's quiet entrance into the VSE, this stock has significant upside potential.
Based in Vancouver, Image Power is an up-and-coming market player in the data compression industry. Combining technology developed in-house with technology licensed from the University of British Columbia (UBC) and Compression Labs (NQ-CLIX), the Company has developed a technology which has the capacity to compress files to sizes significantly smaller than current formats allow. The Company's products are being targeted at wireless data networks, corporate intranets, desktop applications and Internet transmissions. In the wireless and Internet markets in particular, efficient compression technology translates directly into reduced costs, since wireless data networks typically charge based on the amount of data transferred and Internet Service Providers usually apply surcharges for usage beyond a specified time limit. In the corporate and desktop markets, the benefits to the consumer take the form of less time wasted retrieving electronic documents. In all markets, the Company's products reduce direct and indirect storage costs.
The Company's colour compression technology is based on research licensed from UBC dealing with "wavelets"-- complex algorithms which can approximate mathematical functions. Graphical images can be regarded as a sequence of mathematical equations . Wavelet analysis approximates these equations with smaller functions which can be mapped back into the original function using wavelet coefficients in a linear combination. In simple terms, rather than storing the original image as an equation. Wavelet compression stores an image "code" comprised of the smaller wavelet functions and the corresponding coefficients. For colour images, wavelets can achieve compression levels of up to 200:1, while current techniques achieve levels of only 40:1.The time required for wavelet compression is comparable to that required for JPEG compression.
While wavelets work well for graphical images, they are not as efficient when it comes to text compression. In this In this regard, they face the same limitation as existing compression algorithms such as JPEG, which are not particularly efficient for sharp contrasts such as those found in text documents. Image Power's compression technology strives to overcome this limitation by separating the text and image sections within a scanned document, such that can be compressed using one algorithm and images another.
A significant risk in the high-tech sector - and software in particular - is that without alliances, new products often have difficulty penetrating the market. Part of this is attributed to the high cost of developing and marketing a new product, and part is attributed to the reluctance on the part of consumers to take chances on unknown companies with technologies which are not always compatible with existing systems. For these reasons, Image Power has sought out a number of strategic alliances. On the technological front, the Company is closely affiliated with researchers at the University of British Columbia and the BC Advanced Systems Institute. In addition, the company's participation in the International Standards Organization ensures that Image Power is up to date on international trends in the compression business. On the financing front, the Company has received contributions from Motorola Canada limited and Industry Canada to develop its Power Gateway and Power viewer products.
Compression Technology
The idea behind data compression is quite simple: the more data which can be compressed into a single file, the easier it is to store and/or transmit. Images take up a lot more disk space than plain text, since they require a much higher resolution to be legible. Transmitting images by modem is also problematic, as telecommunications technology has not kept pace with the growing need for high-speed data communications, and even the fastest modems can take an inordinate amount of time to send or receive high resolution graphics. This is one of the primary factors which has limited growth in the video conferencing industry. As more and more applications involving document imaging are employed, the greater will be the demand for effective compression techniques.
There is a fundamental trade-off in document imaging: image quality vs file size. File size and compression speed can be reduced only at the expense of image quality - a Trade-off which is not always practical. Most imaging systems do not always use colour, and are either bi-tonal (black or white) or greyscale (black to white). The typical resolution is 200 dots per inch (dpi), which compresses an image by a scale of 20:1. In order to capture fine print, it is often necessary to increase resolution, although the corresponding increase in file size is greater than one-to-one - increasing resolution from 200 dpi to 300 dpi, for instance, increases the file size by 125%; increasing resolution to 800 dpi increases the file size by about 1400%.
For many applications, bi-tonal imaging is inadequate, since it omits a wide range of shades in between black and white (such as light handwriting, shading, or grey print as found on the back of many standard carbon forms). This is where greyscale comes in handy, although as with increasing resolution, greyscale increases file size. Bi-tonal images have just two shades of grey (namely black and white), while greyscale images have at least 256. Because of the dramatically higher image data, greyscale images tend to entail larger file sizes than is usually desired. Since both higher resolution bi-tonal and greyscale techniques are not data efficient, there is an obvious need for data compression technology that can both improve quality and reduce file size.
International Standards
Perhaps the biggest hurdle in developing new compression technologies is standardization. Because compressed data transmissions require both sender and receiver both sender and receiver to have compatible systems, there are various groups which meet under the International Standards Organization (ISO) to generate standards for digital video and audio compression. The two most common formats today are known as CCITT/ITU Group IV and JPEG.
Group IV is one step up from the group III standard found in almost all fax machines, and was intended to improve fax compression capabilities. Although it was never widely adopted for its original purpose (it encountered problems when transmitting over noisy phone lines), it proved quite popular for storing scanned documents.
Most compression types are named after the sub-committees of the ISO. JPEG stands for Joint Photographics Experts Group, and is the most common compression type for colour and greyscale images. Because it was designed for photographs which have continuous tones, it is not well suited for text-based documents which have sharp contrasts between black and white. For this same reason, it is not ideal for documents which combine images with text. MPEG and MHEG, named after the Moving Pictures and Moving Hypertext Expert Groups, respectively, are compression types designed for video compression. JBIG (Joint Bi-level Image Group) is a relatively new compression algorithm developed for fax transmission. JBIG reduces file size by 20-60% compared to the current Group IV format
Sub-committees of the ISO are meeting to discuss the adoption of two new variations on JPEG and JBIG - JPEG-2000 and JBIG-2 - which should become the next generation of colour and bi- tonal compression standards, respectively. A final proposal for JPEG-2000 is due by the end of the year, while a working draft proposal for JBIG-2 should be completed by November. The key participants are Kodak, Ricoh, HewlettPackard, Alcatel for JPEG-2000, and At&T, Xerox, and IBM 2000 sub-committee (one of the Company's principle consultants sits on the Recommendation Committe), and is also contributing to JBIG-2 activities. The Company would stand to gain substantially from JBIG-2 if it were to become a widely accepted standard, as it has an exclusive patent (acquired from Compression Labs) on the bi-tonal compression technology underlying JBIG-2.
Products and Strategy
Image Power has three primary products in its portfolio: PowerViewer, PowerAccelerator and PowerGateway. PowerViewer, an image compression utility for Windows 95 and Windows NT systems, is the Company's lead product. The software reads images directly from scanners and digital cameras, identifies the text and picture elements, and compresses each element using the most efficient compression technology applicable. In addition, the software offers a text enhancement feature and an editor to generate hypertext (".html") documents for the World Wide Web. An alpha release (a test version for internal distribution) is expected within the coming weeks, and a beta release (for external distribution) is expected by July.
PowerAccelerator and PowerGateway are development-stage products also targeted at the image compression market. PowerAccelerator is a line of computer cards which increases the speed of image compression. This product is designed for high volume document management in the corporate sector. The retail price of this product is expected to be between $2000 and $4000, and a prototype is expected to be available by December 1997. PowerGateway is a line of gateway products designed to enhance digital image transmission services for the Internet and wireless data communications networks. This product enables wireless data communications networks. This product enables wireless network subscribers to receive documents faxed from a regular fax machine - something which has until now been impractical due to the cumbersome size of a typical compressed fax document - and vice versa. A finished product is expected by December 1997.
The Company's business strategy is to align itself with scanner manufacturers in order to market PowerViewer. Such bundling arrangements typically entail a royalty of $0.75 to $ 2 per unit sold. Software products are also intended to be distributed over the Internet and as standalone retail products. Image Power's technology portfolio comprises wavelet algorithms, JBIG-2 algorithms and software development kits - all of which are intended to be licensed to hardware producers (scanners, faxes, modems, copiers and other data management systems) in exchange for a royalty on sales The Company has already formed an alliance with Motorola (which provides the DataTAC system) to develop its gateway products, although to date no formal licensing agreement has been signed.
The potential markets for Image Power's products are all quite substantial, and growing at a rapid pace. Document imaging alone is a $6 billion industry, while compression products constitute another $550 million. CD-ROM publishing and Internet imaging together have a market of about $1 billion. Colour faxes, while not commercially available at the present time, may also prove to be a promising market niche for Image Power's technology when units reach the market in the next year or two.
In addition to its hardware and software product, a large proportion of the Company's earnings potential comes from the licensing of its technology. Image Power currently has three technologies that it intends to license to outside interests: its JBIG-2 compressor, its wavelet compressor and its segmentation technology. These technologies would likely be licensed to manufacturers of fax machines (both bi-tonal and colour), digital cameras, scanners, printers and data storages devices. Although no formal licensing agreements have been signed, the Company is already in discussions with a number of interested parties.
As Image Power's technology has in large part been licensed from third parities ( including UC and Compression Labs), the bulk of the development costs have already been incurred. It is expected that development costs in 1997 will amount to approximately $370,000.
Company Comparison
There are numerous companies in the field of data compression. Because the field is so wide, and includes everything from compression software to print drivers to video conferencing products, companies directly comparable to Image Power are hard to come by. We have, however, complied a list of ten companies whose primary products are based on data compression technology.
Aware Inc designs software, chipsets and modems which increase the speed of data communications over telephone and cable lines, in addition to image compression products. Excalibur Technologies and Open Text develop electronic information management software. Stac develops systems management software for data storage and communications. Warp 10 Technologies develops information management software and hardware for the graphics and entertainment industries. Finally, Xionices Document Technologies designs systems technology for office devices such as printers, copiers and scanners. This list is by no means exhaustive, as companies such as Compression Labs, PC DOCS, VTEL, and Telco Systems are also major participants in the compression industry. These companies were excluded from the comparison, however, because they already have sizeable revenues from existing products and licensing agreements. In addition to these companies, compression technology is also being developed and adopted by large hardware producers such as AT&T, Hewlett-Packard, IBM, Kodak, Mitsubishi, Ricoh and Xerox.
Although the above companies are not 100% comparable in every case, they provide some insight into valuations within the data compression industry. The first observation which can be made is the lack of correlation between earnings and market capitalization: firms with small losses (i.e. Warp 10) are valued lower then firms with high losses (i.e.) Open Text). Revenues per share are similarly uncorrelated with market capitalization, as firms with low revenues per share (i.e. Aware) are valued higher than firms with revenues per share more then ten times higher (Xionics). Clearly, companies in this market segment are being valued more on the basis of their technology and future earnings (which are both highly subjective) than current performance (which is mostly objective). Perhaps the most meaningful comparable is Wrap 10 Technologies, as it is a relatively unknown Canadian company which has just recently released an information management program and a high-speed electronic file transfer package. With less than $2 million in sales and a net loss of over $3 million in the six months ending January 31, the Company is valued with a market cap of US$27 million - almost 10 times that of Image Power, which is expected to start generating revenues by the third quarter of this year.
Risk Factors
The primary risk factor associated with Image Power is the fact that it has yet to generate any sales revenues. Although PowerViewer is expected to generate sales before the end of this year, there is no way of anticipating how warmly this product will be received by the market place until it actually gets there.
Image Power has a limited operating history, having been formed less than one Year ago with the July 1996 purchase of its image compression technology from Kalman Technologies. This short operating history combined with an even shorter trading history - although the shall company has been trading for more than a decade, Image Power has been trading for less than four months - provides investors with little insight into the Company's long-term management style. There are specific risks arising from the Company's status as a venture company, such as limited access to financing, illiquid demand on the stock market, and low profile among industry analysts and brokers.
The Company currently has a capital deficiency, with insufficient working capital to fund its anticipated development expenses beyond the next two quarters. Without a cash infusion either through new financing and/or through the exercise of warrants, the Company's development targets could be adversely effected.
The high-tech sector - both hardware and software - is characterized by intense competition and rapid technological change. While the Company's products appear to be at the forefront of the compression business today, there is no guarantee that they will remain at the forefront in the future when faxed with competing products and/or changing technology.
As a small start-up operation, the Company draws heavily on the expertise of a small number of key personnel. The unexpected departure of any of the directors or researchers could materially impact the Company's ability to complete its projects as planned.
Because the Company is not currently selling any products, it has only a modest marketing effort. This may hinder its ability to successfully penetrate the retail market once its products reach commercialization stage.
One final risk factor can be summed up in one word: Microsoft. Recent history has demonstrated (notably in the Internet browser domain) that when competitors introduce a new product which performs well in the market, Microsoft has the money and brain power to create a competing product of its own within a very short time. Should Microsoft decide to venture into image compression software, it would at best erode and at worst eliminate PowerViewer's market position. From a business standpoint, Microsoft is in a better position than Image Power to market a compression product: with a dominant share in both operating systems and office software, it would be quite simple to bundle its own version of PowerViewer with either its next Windows or its next MS Office release.
Outlook
Image Power is a company highly focused on a promising niche within the high-tech sector. The need for compression technology has been obvious for some time. On the Internet, even the fastest modems can et bogged down when trying to access web sites with high graphics content, and this problem will only escalate as Internet traffic continues to congest phone lines.
Because of the rapid pace of technological change in the high-tech sector and the large number of unknown future factors, we are unable to reasonably value the Company on the basis of future cashflows. We can, however, look at other companies within this market niche to get an idea of how the market values similar technologies. At present, the Company is valued at less than US $3 million to more than US $230 million, and given Image Power's compression technology relative to these competitor, the stock appears to be significantly undervalued. It is our opinion that the downside risk of this is limited (and relates primarily to the Company's capital deficiency rather than its technology) and that the stock price should appreciate considerably once the Company's PowerViewer product reaches the market and/or the Company starts to receive Broader coverage within the financial and high-tech communities. A licensing agreement for any of all of its three technology) and that the stock price should appreciate considerably once the Company's PowerViewer product reaches the market and/or the Company starts to receive broader coverage within the financial and high-tech communities. A licensing agreement for any or all of its three technology products should also boost the stock significantly.
We are recommending this stock as a SPECULATIVE BUY for high-risk accounts.
May 16, 1997
Julian Marlowe
(604) 844-3036
The information contained herein has been drawn from sources which we believe to be reliable; however, it's accuracy or completeness is not guaranteed. This report is not to be construed as an offer or solicitation to buy or sell any of the securities herein named. The inventories of Golden Capital Securities Ltd., its officers, directors or shareholders may from time to time include the securities named in this report. E. & O.E. |
