Here is a report from Canaccord Capital out today about MGI.
Hope this help to reverse some of the doubts.
* MGI Software Corp. (MGA : TSE : $3.00 : Issued 23.8M)
MGI reported continued strong revenue growth for Q3/f98, ended Oct.
31, 1997. Sales for the quarter were $3.6M, up 181% from $1.3M a year
earlier. Sequentially, revenue was up 16% from $3.1M reported in
Q2/f98.
As expected, MGI reported a loss for the quarter as it continues to
invest in product development and aggressive sales and marketing
programs. Net loss for the quarter was $1.4M ($0.07/share), compared
to a loss of $1.4M ($0.08/share) a year ago and a loss of $1.6M
0.08/share) in the previous quarter.
MGI's balance sheet was greatly strengthened during the quarter by two
significant events. First, MGI completed a special warrants issue for
gross proceeds of $14.9M. Second, Intel made an equity investment in
the Company, purchasing approximately 1.0M shares for $2.8M and a
warrant for the right to purchase an additional 1.0M shares at $3.95,
expiring September 29, 2000. This agreement also included joint
product development and marketing agreements, the details of which
have yet to be released.
Of particular note in the quarter's results is the acceleration of R&D
spending. $1.4M was invested in product development, up from $1.1M in
the previous quarter and approaching the $1.7M spent in all of f97.
This level of spending reflects: (a) investment in the next
generation of the PhotoSuite product line; (b) continued evolution of
VideoWave, and (c) the infusion of capital from Intel and the special
warrants issue.
This R&D investment is critical given the rapidly evolving,
competitive nature of MGI's core markets. The need is underscored by
the rating of MGI's dominant product, PhotoSuite, in recent magazine
reviews. In a recent review of photo-editing software, PC Magazine
ranked MGI behind its competitors, and gave the Editor's Choice award
to Microsoft's Picture It! The January/98 edition of PC World also
reviews these tools, and rates MGI "mid-field", but behind both
Microsoft and Adobe.
It is important to note, however, that these reviews are judging the
current PhotoSuite product, which is essentially an evolution of the
initial product introduced approximately two years ago. MGI is
approaching completion of PhotoSuite II, its next generation
photo-editing product. PhotoSuite II is expected to enter beta
testing in early January, and thus was not available to industry
magazines for their reviews. General availability for the new product
is expected for late Q1/1998.
We recently visited MGI Software for demonstrations of the new
software. PhotoSuite II is visually very different than its
predecessor, which had the familiar, Windows-style user interface.
PhotoSuite II has been rebuilt based on a new architecture, and
features an easy-to-use, Web browser-based user interface. The
product offers many new features, in particular, most of those
mentioned as lacking in the recent press reviews. Highlights of the
new product can be found in MGI's press release of Nov. 17.
MGI's video-editing product, VideoWave, continues to receive
favourable reviews in the industry press. VideoWave was introduced
earlier this year, and has a more current look and feel than the older
photo product. In the January/98 issue of PC Magazine, MGI VideoWave
is awarded the product of the year in the Personal Video Editing
category.
As the PhotoSuite product line currently represents the dominant part
of MGI's revenue (we estimate 75-80%), successful delivery and
acceptance of the new product is critical. Q4/f98 will be a challenge
for MGI as it faces stiff competition with an aging product in the all
important Christmas season.
However, considering MGI's strong distribution capabilities, video
products, Intel relationship, and perhaps most importantly initial
impressions of PhotoSuite II, we remain optimistic about MGI's ability
to continue to deliver very strong growth. We expect a positive
reception in Q1/1998 as the industry press is introduced to the new
product, and look to MGI to implement aggressive marketing campaigns
both retail and OEM) to sustain market share.
At present, MGI shares are trading at less than 3.0X f99 (essentially
calendar 1998) sales. Given MGI's growth record and upcoming
products, we maintain our BUY recommendation at current price levels.
We will closely monitor product developments from MGI and its
competitors in coming months.
MGI management has scheduled a conference call for Tuesday morning to
provide additional details on the quarter's results and the outlook
moving forward. We will provide any updates from the call in
tomorrow's Daily Letter, including any adjustments to our financial
model.
Steve Arthur (416) 869-7920
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