NAVR PArt I
DELPHI FINANCIAL CORPORATION
INVESTMENT BANKERS
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BUY RECOMMENDATION
Navarre Corporation Paul Laufer
NAVR -- 5.125 (NASDAQ) July 15, 1998
FYE (3/98) FYE (3/99) E FYE (3/00) E
Revenue (millions) 196.6 281 359.5
Earnings per share (fully diluted) ($0.14) $0.26 $0.43
52 week Range $2-$12 3/4
Shares Outstanding (fully diluted) 15,120,000 Fiscal year ends: March
Price/Share 5 1/8 Revenue/Share (FY99) E $18.59
Book Value (fully diluted) 1.54 Market Capitalization $77.6 million
Price/Book (fully diluted) 3.33X Market Capitalization/Sales 0.28
Navarre Corporation is a leading distributor of music, software and, through its subsidiary NetRadio Network, the world's largest on-demand Webcaster of originally programmed audio content and an emerging entity in electronic commerce. Navarre has maintained its position as a leading distributor over the last two years despite a difficult operating environment that has forced many retailers and distributors to consolidate or leave the business. The company recently completed a $20 million convertible preferred equity offering that will provide it with the working capital needed to aggressively expand its distribution business. We are estimating revenue growth of nearly 43% in the March 1999 fiscal year, from $196.6 million to $281.0 million, with EPS improving from $(0.14) to $0.26 on a fully-diluted basis. Additionally, Navarre has indicated that it intends to utilize external sources to fund expansion of NetRadio's operations. We believe there is a strong possibility that Navarre will take NetRadio public and retain a sizable ownership position. Currently trading around $5, or towards the low end of its 52 week trading range of $2 to $12 _, we believe Navarre shares do not reflect either the significantly improved outlook for its core music and software distribution business, or any underlying value for NetRadio. Key factors for the improved outlook for Navarre shares include:
Navarre is well-positioned to expand upon its leading position in the distributed personal computer software market. Navarre has the largest share of the distributed portion of four personal computer software categories (education, interactive games, personal productivity and reference). Much of the proceeds from the recent preferred equity offering will be utilized as working capital needed to expand its market share in these categories by adding new software publishers and expanding existing relationships with key retailers and on-line retailers, effectively replacing other supply sources these retailers have been utilizing.
Navarre has recently added a number of new independent music artists. Navarre is the largest distributor of independent record labels and artists, and has recently added several significant new artists to its base of independent music business, including Kenny Rogers, Nate Dogg and an expanded relationship with American Gramaphone (Mannheim Steamroller) which should lead to significant increases in the company's independent music sales over the next year. Independent record labels distributed exclusively by Navarre account for nearly 30% of Christmas music sales.
NetRadio recently launched several electronic commerce initiatives. NetRadio was the first Internet-only radio network and has since become the world's largest on-demand Webcaster of originally programmed audio content, with 160 channels of music and infotainment. NetRadio's "content-enabled commerce" strategy focuses on utilizing compelling content to create a large audience that listens to NetRadio frequently, then using this large, loyal audience as a marketing platform to pursue a wide range of commerce and revenue generating opportunities. NetRadio is generating 20 million page views per month, and almost 3 million audio visits per month, with an average audio visit lasting almost 30 minutes. These traffic statistics have been generated with virtually no marketing budget. NetRadio recently introduced its initial two electronic commerce initiatives, CDPoint (http://www.cdpoint.com), which offers over 250,000 CD titles and SoftwarePoint (http://www.softwarepoint.com), which offers 6,500 software titles. Navarre will provide much of the product fulfillment required by these initiatives. NetRadio plans to add additional revenue sources in the near future.
A Navarre/NetRadio strategic alliance creates a complete integration of customer, product and supply chain. A Navarre/NetRadio strategic alliance should be very synergistic, enabling NetRadio to utilize Navarre's infrastructure to leverage its sales, distribution and promotional capabilities. Additionally, the alliance may provide Navarre with the marketing and distribution platform to facilitate new proprietary music opportunities in the future.
Navarre may take NetRadio public. Navarre is evaluating various external financing options for NetRadio, as it intends to finance NetRadio's operations independent of Navarre's operations. We believe that Navarre will take NetRadio public, and retain a significant ownership stake in NetRadio to maintain and facilitate a strategic alliance between the two entities. Given the synergy of a Navarre/NetRadio strategic alliance, we believe Wall Street will view the relationship between the two companies very favorably. Furthermore, we also believe that a sizable retained interest in a publicly-traded NetRadio should add meaningful value to Navarre shares and serve as a catalyst to move them significantly higher.
We believe that a reasonable three -to-six month price target for Navarre shares is $8 to $10. Our price target assumes consideration for both the earnings of Navarre's core distribution business and for a retained minority stake in NetRadio. On an earnings basis, our price target is $6 to $7, or 20 times FY 99 EPS of $0.30 from Navarre's distribution business (the $0.30 excludes $(0.05) impact from consolidating NetRadio's operating results in the first and second quarter). Our price target also factors an additional $2 to $3 of consideration for the company's retained ownership stake in NetRadio.
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