Lookie here: We actually have a brokerage following WAVO now...
WAVO: Riding the Data Broadcast Wave
11:59am EST 30-Jan-98 Friedman, Billings, Ramsey &Co (Robert Martin 703-312-96
Friedman, Billings, Ramsey & Co.
1001 Nineteenth Street North
Arlington, VA 22209
Coverage Initiated
WavePhore - WAVO ($8 3/4) Speculative BUY
Rob Martin (703) 312-9631 rmartin@fbr.com
Dan MacKeigan (703) 312-9666 dmackeigan@fbr.com
January 30, 1998
52-Week Range: $13 - $5 5/8
Shares Outstanding (MM): 17.3
Float (MM): 10.0
Avg Daily Volume: 241,753
Market Capitalization (MM): $151.5
Enterprise Value (MM): $142.6
Institutional Holdings: 12.2%
Insider Holdings: 26.0%
3 - 5 year CAGR: 50%+
As of 12/31/97
Cash (MM): $11.6
Shareholders' Equity (MM): $45.6
Long-Term Debt (MM): $2.6
Book Value Per Share: $2.63
Revenue Year - Year
FY (Dec ) (MM) Growth
1996(A) $19.0 n/m
1997(E) $22.6 18.8%
1998(E) $32.8 45.3%
1999(E) $63.8 94.4%
2000(E) $100.2 57.0%
FY: Dec
Quarterly EPS 97(A) 98(E) 99(E) 00(E)
Q1 ($0.23) ($0.32) ($0.15) -
Q2 ($0.62) ($0.31) ($0.05) -
Q3 ($0.21) ($0.24) $0.07 -
Q4 ($0.24) ($0.18) $0.21 -
Full Year EPS ($1.30) ($1.04) $0.09 $1.59 *
P/E n/m n/m 101.1 X 5.5 X
* FY00 EPS fully taxed (not including NOLs) would be $0.95 per share
Riding the Data Broadcasting Wave
* We are initiating coverage of WavePhore, a leading Internet data broadcasting
systems and services provider with a Speculative BUY rating for long-term,
risk-tolerant, small-cap investors.
* Serving three distinct data broadcasting markets: 1) WavePhore Networks -
supplying Information Providers (Reuters, S&P, etc.) with wireless data delivery
services, 2) WavePhore Newscast - providing corporate workers universal access
to a variety of content sources in one easy-to-use package, and 3) WaveTop - to
provide individuals an advertising-supported, free, content delivery platform
not constrained by Internet speed limitations.
* Newscast emerging as a significant factor in information aggregation and
delivery services. Businesses served grew from 133 by the end of 2Q97 to 167 by
the end of 4Q97, with forecasted growth to 243 by year-end 1998.
* WaveTop, available by mid-1998, adds significant upside potential. WaveTop
could become the America Online (AOL $95 15/16 - BUY) of consumer data
broadcasting, providing an alternate method of content delivery. We estimate
100,000 subscribers by year-end 1998 and 500,000 by year-end 1999. We see
WaveTop contributing $1.6 million revenue in 1998 and $20.1 million in 1999.
* Significant potential growth fueled by Newscast and WaveTop. We project total
revenue growing from $22.6 million in 1997 to $32.8 million in 1998 and $63.8
million in 1999, with profitability expected in 3Q99. Networks anchors expected
revenues with $22.4 million in 1998 and $24.8 million in 1999. We see
Newscast and WaveTop generating significant growth, aggregating $3 million in
1997, $10.4 million in 1998 and $39 million in 1999.
* Recommendation: We are initiating coverage with a Speculative BUY rating and
a 12-18 month price target of $15, based on a combination of our 5-year
discounted cash flow analysis and an independent valuation of each business
unit.
Recommendation and Valuation
We are initiating coverage of this data broadcast technology leader as a
Speculative BUY for long-term, risk tolerant investors with a 12-18 month price
target of $15 per share. We have used two valuation techniques in reaching our
price target, however we realize each of these methods hinge on a couple of key
events: 1) WaveTop rolls out on time in early 2Q98, reaching a level of modest
success by year-end 1998 with 100,000 subscribers and 2) Windows 98 rolls out
by at least year-end 1998. Assuming these two events occur, our estimate that
WaveTop begins to accrue a significant subscriber base into 1999 becomes
attainable.
Valuation method #1 - DCF: If WaveTop works as outlined above, the first of our
valuation methods applies. Assuming a 5 year overall growth rate of 50%, a
discount rate of 20%, and terminal value multiple of 15 times EBITDA yields an
$18 per share price target.
Valuation method #2 - Break down of business units: According to our forecasts,
Networks is expected to contribute just over $3 million pre-tax as a
stand-alone entity in 1998. Assuming our growth rate of 15%, we apply a 15X
multiple to the fully taxed $1.9 million net income contribution to achieve a
$29 million stand-alone Networks valuation. We have valued Newscast at a
discounted year 2000 (first year of Newscast full profitability) earnings
multiple. Assuming a $5.5 million pre-tax Newscast contribution in 2000,
applying a 30% growth multiple to a fully taxed net income contribution of $3.3
million, discounted back 20%, yields a $69 million value. WaveTop is estimated
to contribute stand-alone pre-tax in 1999 of $10.8 million (as most of the
expense has already been incurred over the past year). Valuing this component
at a significantly discounted multiple (realizing the risks) of 1/5 its 3-5 year
growth rate (100%), or 20X a fully taxed net income contribution of $6.5
million, yields a $130 million valuation. Combined, these independent
valuations add up to $228 million or $13 a share.
We have taken a combination of these two valuation metrics to arrive at our
12-18 month price target of $15 per share.
Conclusion
The company's progression path, thus far, demonstrates management's ability to
quickly identify opportunities, while keeping risk to a minimum (respective to
start-up operations) by limiting the company's exposure to any single
initiative. Management continues to emphasize its intent to remain on the
lookout for opportunities within both the data broadcasting and news delivery
industries and is not averse to making additional acquisitions.
WavePhore represents a unique opportunity to invest in an emerging consumer
technology (WaveTop) while offsetting the risk generally associated with such
ventures by also investing in WavePhore's base business (Networks) and an
additional emerging business (Newscast). We are therefore initiating coverage
with a Speculative BUY rating for risk tolerant, small cap investors with a
12-18 month price target of $15, based a combination of our 5 year discounted
cash flow analysis and an independent valuation of each business unit.
Investment Thesis
WavePhore, a data broadcasting company, comprised of three separate business
divisions, offers investors an interesting technology play through
diversification and potentially significant market opportunities. WavePhore is
currently segmented into three business units, each serving separate markets:
1. WavePhore Networks, offering data broadcasting services and equipment to
customers including Reuters, S&P Comstock and Thompson Financial;
2. WavePhore Newscast, offering news aggregation and delivery of over 4,500
sources to more than 167 business customers; and
3. WavePhore WaveTop, expected to be launched in mid-1998, offering consumers a
free advertising-supported broadcast content service.
WavePhore has created what could be considered a "content aggregation and
delivery" holding company, diversifying its risk across three separate markets.
While such a structure has created some confusion, we have concluded that each
of WavePhore's business units represents a unique opportunity independent of one
another's success.
WavePhore Newscast is emerging as a significant player in the information
aggregation and delivery services market. Growing from 133 business customers
at the end of 2Q97 to over 167 customers at the end of 4Q97, Newscast has
vaulted into the major leagues. WavePhore's acquisition of Paracel Online in
June 1997 added technology, customers and management, providing significant bulk
to WavePhore's existing internal Intranet service. Newscast is quickly
emerging as an attractive option within corporations seeking news delivery and
information. We believe this business unit will quickly scale to size, adding
nearly 100 new business customers in 1998.
WavePhore WaveTop, expected to be available in mid-1998, adds exciting upside
potential to the equation. WaveTop is an advertising-supported, free content
broadcast application similar to AOL, WebTV and other content aggregators
offering packaged content in one easy-to-use interface. The big difference
between WaveTop and these other applications is the nature of distribution and
user cost (WaveTop is a free-to-the-consumer service) - WaveTop is broadcast,
dependent not on the Internet, but on airwaves. WaveTop is taking advantage of
the Internet's current congestion by offering an alternate distribution path,
allowing users to receive a constant stream of downloadable data to be viewed at
the user's discretion.
WavePhore Networks provides market leadership, a solid customer base and
consistent cash flow to the company's overall structure. We consider Networks
the backstop of the WavePhore story, contributing a solid base of revenue,
providing a number of blue-chip content companies with broadcast services and
equipment. Networks offers assistance to both Newscast, by referring content
sources, and WaveTop, by lending its experience in data broadcasting.
Very significant overall growth potential is fueled by both Newscast and
WaveTop, with projected total revenue growing from $22.6 million in 1997 to
$32.8 million in 1998 and $63.8 million in 1999, with profitability expected in
3Q99. While Networks anchors WavePhore's revenue stream, expected to contribute
$22.4 million in 1998 and $24.8 million in 1999, Newscast and WaveTop are
expected to generate more dynamic growth, with Newscast rising from revenue of
$8.8 million in 1998 to $18.9 million in 1999, and WaveTop rising from revenue
of $1.6 million in 1998 to $20.1 million in 1999. We realize that these
estimates are largely dependent on the success of WaveTop and we have modeled
our subscriber expectations at 500,000 by year-end 1999.
Risks
The number one risk in this story is the level of success, or lack thereof,
associated with WaveTop. If WaveTop fails to gain broad market acceptance,
expected profitability will push beyond 1999. Management must carefully monitor
WaveTop, doing its best to ensure that both the proper content and distribution
alliances are in place. Without these ongoing efforts, the entire company
would suffer.
Newscast faces significant competition in the news aggregation and delivery
market, regularly running up against industry leaders with considerably more
resources than the company. Newscast must continue to offer an increasing
number of news sources and services to capture additional customers.
Technological obsolescence and changing business models remain factors in all
three businesses - Networks faces an increasing number of wireless
telecommunications solutions offering content providers speedier alternatives;
Newscast faces competition from Internet news providers offering ad-supported
content at a fraction of the cost; WaveTop faces competition from WebTV
(although a $300 box and a subscription are required); cable modem services
including @Home, WorldGate, and others; and on a broader level, online service
providers including America Online. As new services are introduced, WavePhore
must continue to sign more content, further enhancing the user experience.
Management must continue its efforts to support all aspects of the organization
without losing focus at any individual business unit. We believe WavePhore's
current corporate structure, allowing units to operate independently with
constant support at the holding company level, is key to the company's future.
As the company evaluates and potentially folds in acquisitions, further support
will be needed.
In addition, small market capitalization and lack of profitability combine to
make WavePhore a speculative purchase only suitable for risk tolerant investors.
Catalysts in the Coming Months
* WaveTop is scheduled for consumer launch at the beginning of the second
quarter
* Microsoft Windows 98 is expected to ship in 3Q98, WaveTop will be installed on
the desktop of the operating system (OS) when the "broadcast option" is
selected
* Newscast's sales effort kicked into gear at the beginning of 1998 with the
hiring of 6 additional sales people, from a base of 7, expected to increase by
about 3 per quarter through 1998
* Networks recently announced WavePhore Internet News Delivery Service (WINDS),
a new Internet transmission option, working in conjunction with Networks current
satellite-based network
These factors combined with WavePhore's strong management and flexible structure
create a compelling opportunity for investors seeking a diversified direct
broadcasting play with the potential to set a new standard for content delivery
over the coming year.
Friedman, Billings, Ramsey & Company, Inc. is a market maker in WavePhore.
Additional information on the securities mentioned in this report is available
upon request. This report is based on data obtained from sources we believe to
be reliable, but is not guaranteed as to accuracy and does not purport to be
complete. Because of individual client objectives, this report should not be
construed as advice designed to meet the particular investment needs of any
investor. Any opinions expressed herein are subject to change. This report is
not to be construed as an offer or the solicitation of an offer to buy or sell
the securities herein mentioned. From time to time, this firm and/or its
directors, officers, employees or members of their immediate families may have a
long or short position in the securities mentioned in this report. These
securities may be sold to or purchased from customers or otherwise by this firm
or its directors, officers, employees or members of their immediate families, as
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