Well, I liked the title. C-Cube customers...................
digitaltelevision.com
The Business of Digital Television: July 1999
Where Video Company Investors Are Finding Value
By Douglas I. Sheer
Investors have benefited from an unprecedented bull market, the Dow has reached new heights, Internet stocks have soared to unreal prices, so what should they think about shares in the video hardware companies?
To plumb this question, we sought out experts in the field: two top executives from publicly traded video hardware companies and two investment bank analysts who track the sector.
According to Mark Sanders, president of Pinnacle Systems Inc. most stock valuation of firms in the video business is not gauged on traditional earnings outlooks. "If you take the financial analysts view of the business, there are three things going on in the video field," said Sanders. "There's the traditional companies supplying hardware, like Chyron, Quantel, or Sony, then there's the desktop market, which is a completely new market--the nonlinear market where Avid sold about 6 to 7,000 units last year, and Pinnacle sold 20,000 units to professionals in the last quarter," Sanders continued.
"But," he added, "they are going to wedding videographers and pro-sumers." So the analysts are saying, 'Who's going to be the new leader; the new Microsoft or Intel? Who seems to be building a real business?'"
Strategic alliances have been important to Pinnacle and others, according to Sanders because "one company can't do it all.
"Coopetition," said Sanders, referring to a phrase in active use last year, "makes sense [because] today, most of our competitors are partners in some way or another."
Some companies who have depended on the high end of the market can risk saturating their potential shares and be forced to go down market to build new customer bases. When that happens, Sanders stated, "You need to re-make yourself and sometimes you actually have to sacrifice some things in order to go down-market. Ultimately, its the number of seats that counts."
Analysts tracking Pinnacle, according to Sanders, project that the firm may exceed total revenues of $200 million by year-end, which would be almost double that of 1998.
According to Avid Technology's Senior Vice President and CFO, William L. Flaherty, the company's 1998 revenues totaled $482.4 million, and that a drop in Avid's stock price (just after the April 22 first quarter earnings release) was primarily a result of the shortfall in revenues and earnings versus the company's expectations that had been pre-announced on March 29. Flaherty attributed the numbers to the firm's inability to fill and ship orders during the first quarter of 1999. Despite overall good financial news, poor results for Avid's Broadcast News product line worldwide, as well as in the post-production market in the States, factored into poorer than anticipated results.
Gene Munster, an analyst at Piper-Jaffrey in Minneapolis who calls his turf the "digital infrastructure space" has spent four years tracking the video hardware companies. In speaking of Avid, he said that the firm's ups and downs were seen caught a lot of people's attention.
"The reality was that investors were becoming traders now, and very few people buy a stock anymore based on holding it for a long time," said Munster. "The key driver is the growing demand for content. What affects the near-term most is earning visibility and upcoming product cycles."
As to how bad PR might affect stock prices, Munster said that Avid's handling of rumors which led to users concerns about a potential abandonment of the Mac platform, (which Bill Miller, Avid CEO, firmly denied at NAB) illustrated that no major impact would be felt in stock valuation as a result.
According to Flaherty there are "over 25,000 Mac based [Avid] editing systems and we remain committed to the owners of those systems."
Munster did mention, though, that Media 100, another firm in the same group that he tracks, was reaping benefits--and showing a new found vibrancy--as a result of the perception--however unfounded it may be--that Mac users might need another source of Mac platform editing and graphics tools.
As to top end saturation, Munster said that Avid and Pinnacle (as well as some of the others) had discovered how to build "value-added software and hardware" so that they could remain somewhat immune to "price-point crashing," by being able to adapt to a variety of platforms of other firms.
Doug Van Dorsten is an analyst at the San Francisco investment bank of Thomas Weisel Partners (and was formerly with Hambrecht & Quist where he actively tracked many of the same category firms). Speaking in broad terms about the entire class of video hardware and software companies, Van Dorsten said, "Imputing from stock price performance, as a group, they haven't done very well," adding that some have seen steep price declines.
"But, there have been a couple of notable exceptions," added Van Dorsten (see Figures 1-3).
As to the potential for an economic or at least video industry recession and the impact it might have on the video manufacturing firms, Van Dorsten said, "The share prices and share price valuations of the companies in this industry are modest [at least by comparison to the wild price range of Internet stocks], and most of them have pretty good balance sheets."
This gives them "somewhat muted negative factors." Van Dorsten also feels that traditional equipment manufacturing companies that create desktop products have a reasonably good shot at taking advantage of the rise of streaming video over the Internet, thereby re-invigorating themselves.
Douglas I. Sheer is a market researcher and business development consultant to broadcast equipment manufacturers worldwide. He can be reached at dougsheer@aol.com.
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