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Message 10593392
To: ENOTS (10203 )
From: Peter Mak Wednesday, Jul 21 1999 9:57AM ET
Reply # of 10210
CCUR in WSJ Southeast edition
interactive.wsj.com
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Heard In The Southeast:
Concurrent Computer Could Be
A Smart Play in Video on Demand
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By Carrick Mollenkamp
Staff Reporter of The Wall Street Journal
Hit that play button.
Two institutional investors and one analyst say there is one largely undiscovered way to play the video-on-demand market, the fledgling industry that allows couch potatoes to watch movies without making a trip to Blockbuster.
Investor confidence in the market already has fueled the stock of Atlanta-based Scientific-Atlanta. The company makes a little gray box and computer system that delivers movies to consumers' televisions via cable-company wires -- replacing any existing cable box.
Last week, Scientific-Atlanta shares touched $41.25, a 52-week high and 81% higher than the first of the year. The shares closed yesterday at $38, giving it a multiple of 53 times First Call's 1999 consensus earnings estimate of 72 cents a share. Some analysts see the stock moving higher, but fans of the industry argue there may be room for more upside with another vendor.
Enter Concurrent Computer, a Fort Lauderdale maker of computer servers that digitally store the movies that Scientific-Atlanta's system shoots to a cable-system's coaxial and fiber wires.
If a viewer wants to see "Saving Private Ryan" from home, he or she uses a remote to call up a screen on the TV and orders the movie using Scientific-Atlanta's gray box. The command is zapped to a central system along the cable system. At the central system, the Scientific-Atlanta computer system, using a Sun Microsystems platform, orders the Oscar-winning flick from the Concurrent server and sends it back via the cable wires to the TV.
Unlike with more widely available pay-per-view systems, viewers can order the movies whenever they want, and can stop, start, pause and fast forward the movie using VCR-like controls.
Concurrent's stock closed yesterday at $6.328, giving it a price earnings ratio of about 200 times 1999 earnings estimates of three cents a share. On the surface, that looks high.
But fans of the stock say now that Concurrent is eyeing a sale of a separate computer division, the company's bottom line is expected to improve. Their math: Backing out the expenses of the division increases earnings per share to 16 cents, lowering the earnings multiple to the 30 range. As revenue grows at the young video-on-demand unit, that P/E should fall into the midteens.
"Hidden in that {P/E} is the investment that they've been making in video on demand," says analyst Brian Harvey. "People aren't able to see that."
Mr. Harvey, who works in the Boston office of New York-based Gilford Securities, sees the stock doubling by year end to the $10 to $12 range as cable systems such as New York-based Time Warner ramp up their video-on-demand systems.
Time Warner plans to have tests of video-on-demand systems in one or two sites by year-end, says a spokesman. "They want to make sure that they've got a bulletproof system," Mr. Harvey says.
But Mr. Harvey and others are sure of one thing: Investors willing to dig into the framework of the video-on-demand system may find that Concurrent, with an agreement to provide its servers to Time Warner, is the next stock to take off.
"People are looking at the next level {of vendors} who are going to be the guts of the system," Mr. Harvey says. Concurrent's stock could go "a lot higher."
Rick Koe, a money manager at San Francisco-based Astoria Capital Partners, says, "We think the fun is just beginning. Wall Street will finally pay up" for the stock. Mr. Koe owns 4.5 million shares, a 9.4% stake, having accumulated the stock over the past three years.
So why is Concurrent's stock so low?
"Wall Street hasn't been able to pay attention to them," Mr. Koe says. "The stock for a long time was under $5. It was hard to justify doing anything with Concurrent. I think that's changing."
Says Mr. Harvey: "The people who take the quick glance at it don't get the story. A lot of people don't pursue it further."
What will make Concurrent's story clearer, he says, is if the company sheds its other division, a maker of real-time computer equipment, which serves as the brains for systems that needed immediate information delivery, such as aircraft simulators and weather forecasting systems. "Once we have a pure play" on video on demand, Mr. Harvey says, "I don't think it will be overlooked anymore."
That split may happen soon.
The Concurrent that exists today is the result of a 1996 merger between Harris Computer, then based in Fort Lauderdale, and Concurrent, then based in Oceanport, N.J. At the time, both made real-time computer systems.
In late 1995, Harris Chief Executive Courtney Siegel launched a hostile bid for Concurrent, which initially turned down Harris's bid. The process lasted a year, and at times, turned ugly. At one point during the contentious negotiations, Mr. Siegel brought along referee flags so the investment bankers running the deal could flag either side for unnecessary roughness.
In 1996, Harris finally agreed to a stock swap valued at $30 million, and the combined company retained the Concurrent name with Mr. Siegel as chief executive.
Having completed the merger, Mr. Siegel began to push Concurrent toward developing the video-on-demand computer servers. He says the technology for the real-time systems is the same as is required in video-on-demand products. Both require "lots of data," he says. "It was something we're used to."
For a time, the real-time unit provided the revenue needed for research and development of the video-on-demand unit. But now, Mr. Siegel feels that with the video-on-demand market ready to bloom, he can do without the real-time division, where sales are flat. So he has two investment banks looking for a buyer.
In the fiscal year ended June 1998, Concurrent reported net income of $5 million, or 11 cents a diluted share, compared with $3.8 million, or eight cents a share, a year earlier. Revenue in fiscal 1998 fell 24% to $82.2 million from $108.4 million. Most of that revenue -- 95% -- came from the flagging real-time division. Video-on-demand sales accounted for about 5%. But the company expects that revenue to grow as much as tenfold in 2000.
Mr. Siegel says he plans to use the revenue from the sale of the real-time division to pay for development of the video-on-demand business. "I believe we are going to have explosive growth," says Mr. Siegel during a recent morning interview as he puffs on a cigar.
Investors such as Mr. Koe are placing their bets largely on Mr. Siegel's management. "I give him credit for having the vision of video on demand and sticking to his guns when everybody was pooh-poohing the Orlando trials," Mr. Koe says.
The Orlando trials were a bellwether in the video-on-demand market. In 1994, Time Warner and Scientific-Atlanta teamed up on a system that proved too costly -- about $10,000 per stream of data, an industry benchmark for the software and hardware costs of delivering a system.
But technological advances brought the costs down to about $400 per stream. For consumers, movies are expected to cost the same as a video-store rental when the systems are rolled out.
Concurrent and Boston-based SeaChange International currently dominate the server market. Depending on the cable system, the cable provider or the video-on-demand system provider such as Scientific-Atlanta chooses which server maker to use.
Seeking a strong partner to gain entry with the cable systems, Concurrent last year agreed to exchange two million warrants exercisable at $5 a share with Scientific-Atlanta for Scientific-Atlanta's relationships with cable providers as well as its technology.
"It makes our platform more attractive, and we sell more" systems, says Steve Necessary, Scientific-Atlanta's vice president of marketing. Concurrent is "clearly one of the ones at the front of the pack."
Mr. Siegel also is moving his company into Scientific-Atlanta's backyard in suburban Atlanta, a move being made to take advantage of Atlanta's technology labor pool.
To be sure, the video-on-demand market is in its infancy, and consumers have yet to signal whether they are going to want the product. A risk is that the "customer says, 'I don't want to be able to do this,'" says Tom Barton, a hedge-fund manager at Dallas-based White Rock Capital, which owns 4.7 million Concurrent shares, or a 9.8% stake.
This spring, Scientific-Atlanta's shares stalled at the $27 range when it became unclear whether Time Warner would need a strong supply of Scientific-Atlanta's systems. But stepped-up orders did come later in the spring and more confident investors pushed Scientific-Atlanta's stock to the $41 level.
"The video-on-demand market is a very compelling story," Mr. Barton says. |
