H&Q's view of GMST buying e-book companies:
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**** Hambrecht & Quist
Company: Gemstar Int'l Group Ltd.
Price: 84.38
Recommendation: Buy - Focus List
Date: 1/19/00
Gemstar Enters E-Book Business
* Last week, Gemstar acquired NuvoMedia Inc., and SoftBook Press, Inc. in stock-for-stock "pooling" transactions.
* Terms of the transactions were not disclosed, but the total number of shares issued for the two businesses represents less than 3% of GMST's fully diluted shares, which we estimate to be $300 to $400 million.
* Along with Microsoft, NuvoMedia and SoftBook Press were instrumental in developing the Open E-Book (OEB) standards for online distribution of electronic books.
* We believe that GMST will be able to leverage NuvoMedia's and SoftBook Press's intellectual property to develop a licensing model similar to those for its VCR+ and EPG businesses, and will seek to generate revenue through royalty fees, advertising and e-commerce opportunities.
* This is a dramatic departure from GMST's core VCR+ and EPG businesses, but we believe that the potential long term growth in this market could be very lucrative, significantly and materially increasing GMST's longer term sales and earnings, if GMST is able to execute.
* Pending further guidance, we are maintaining our current estimates and our BUY-Focus List recommendation.
1999 A 2000 E 2001 E
Q1 EPS $0.06 $0.08A $-
Q2 EPS 0.06 0.09A -
Q3 EPS 0.08 0.10 -
Q4 EPS 0.12 0.14 -
FY EPS 0.33 0.42 0.61
FY REVS (M) 166 211 287
CY EPS 0.35E 0.55 na
CY P/E 241 153 nm
FY Ends Mar
Current Price $84.38
52-Week Range $13-85
Market Cap (M) $20,243
Shares Out (M) 239.9
Book Value $2.13
Net Cash/Share $2.35
3-Year EPS Growth 35%
CY99 P/E-to-Growth 689%
Gemstar Enters E-Books Business
Last week, Gemstar acquired NuvoMedia Inc., and SoftBook Press, Inc. in stock-for-stock "pooling" transactions. Terms of the transactions were not disclosed, but the total number of shares issued for the two entities represents less than 3% of Gemstar's fully diluted shares, which we estimate to be $300 to $400 million. With the acquisition of the two primary independent eBook businesses, Gemstar is now well positioned to alter and shape the direction of this nascent technology and emerging market.
NuvoMedia and SoftBook Press have developed proprietary solutions that enable consumers to download and read books, magazines, newspapers and other periodicals in electronic form using a portable reader, which stores electronic content in on-board memory, while protecting the intellectual property / copyrights of the authors and publishers. Both eBook businesses have existing strategic relationships with key publishers and content providers in the markets for books, magazines and newspapers. Together with Microsoft, NuvoMedia Inc. and SoftBook Press Inc. were instrumental in authoring and developing the Open e-Book (OEB) standard for online distribution of electronic books, which defines file, transmission and markup formats for electronic books.
NuvoMedia, founded in 1997, developed the Rocket eBook reader (retail price of $199 for a basic version and $269 for a professional version), which is similar in size to a hardback book. NuvoMedia is a leading provider of trade titles for the consumer electronic book market, having established strategic relationships with more than 70 key publishers.
SoftBook Press, founded in 1996, primarily focuses on providing distributed information technology to enterprises. The company introduced its version of an eBook reader in 1998, the SoftBook Reader, which is sold to businesses for $599 to $699, and to consumers for $299, with a 2 year contract which requires consumers to purchase additional content for $19.95/month. SoftBook Press's reader, which is larger than NuvoMedia's reader, is similar in size to a magazine. Accordingly, SoftBook Press has established strategic relationships with key magazine and periodical publishers.
We believe that GMST will be able to leverage NuvoMedia's and SoftBook Press's intellectual property to develop a licensing model similar to those for its VCR+ and EPG businesses, and will seek to generate revenue through royalty fees, advertising and e-commerce opportunities. Accordingly, we believe that GMST will establish licensing relationships with key consumer electronics manufacturers to incorporate the eBook technology into their devices, to attain large volume distribution of reader technology.
While these transactions represent a dramatic departure from GMST's core VCR+ and EPG businesses, we believe that the potential long term growth in the eBook market could be very lucrative, significantly increasing GMST's longer term sales and earnings, if GMST is able to execute. We believe that the strategic developments that investors should watch out for include successfully implementing and executing a licensing business model similar to those for its VCR+ and EPG businesses, establishing key licensing relationships with leading consumer electronics manufacturers, as well as incorporating technology to enable these mobile readers to become interactive (for example, by adding wireless capabilities), which would allow the company to generate additional revenue from advertising and e-commerce opportunities.
Overall the outlook for Gemstar remains very strong pending its acquisition of TV Guide Inc. (TVGIA,$47.63,nr) and has been further enhanced by these two strategic acquisitions. Pending further guidance, we are maintaining our current estimates and our BUY-Focus List recommendation. |
