Super info on MPEG
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Thursday, Feb 3rd, 2000 ALERT INVESTOR By Peter Kertes
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Special Buy Alert - InnovaCom (MPEG)
It's not often that one comes across well-known technology and one realizes
that it belongs in large part to a company that's completely unknown. In
the case of MPEG compression technology, you are also talking about a
microcap from Silicon Valley that is just coming out of the development
phase and is getting on the investment map in a big way. With a similar
investment approach, we had huge gains with Spatializer (SPAZ) and their
DVD technology and with USA Video Interactive (USVO) and their
video-on-demand technology. Three is a charm...
We don't take these Special Buy Alerts lightly. The last one we sent out
was in September, on Starbase (SBAS). The stock was trading at 2 3/8 at the
time, now it's around $14. Again, in this same convergence/signal
compresion/streaming media/DVD space, we had two huge winners lately. USVO,
written up below 1 a month ago is now trading at 5 and SPAZ, written up
several times last year around 30c, is now trading at 2 1/4. So, the area
is hot and so are our convergence picks...
BUY RECOMMENDATION
There is nothing hotter on the suddenly streaming media-crazy web than
compression technology - and MPEG technology is the platinum standard.
Silicon Valley-based InnovaCom Inc. (MPEG,11/16,BB), the home of the MPEG-2
compression technology for collaborative applications, has created products
that will enable the broad migration from analog to digital video in
multiple professional markets. The company designs, manufactures and
delivers specialized video compression systems for industrial and
professional video content creators (through its DVD PreMastering Systems)
and transmission infrastructure providers. InnovaCom?s primary target
markets include DVD, training, video collaboration, distance learning,
telemedicine, surveillance and video-on-demand. Their customers are The
Fortune 1000, government, R&D, educational institutions and multimedia
developers. MPEG creates software and designs both boards and systems for
complete hardware/software video encoding and authoring solutions and
features four new TransPEG Distance Learning Terminals (TDLT) for ATM
(Asynchronous Transfer Mode) networks, featuring transmission and control
of multi-channel, high-quality video for distance learning and
teleconferencing networks.. The company's DVDimpact has been selected as a
finalist for AV Video & Multimedia Producer's 2000 Platinum Award in the
DVD Products category. Still, I bet you've never tried to punch up the
symbol MPEG or ever heard of this company ... (In this report, you'll see
MPEG used both for the technology and for the stock's symbol - nothing we
can do about it, except be glad for InnovaCom).
The market for video compression and transmission is expanding at an
unprecedented rate. According to several research reports (including Frost
& Sullivan), the size of the video compression market has grown 10-fold in
5 years, to approximately $2 billion in 1999. Continued double-digit growth
is a given in the years ahead. As the distance learning and video
conferencing industries continue to grow strong, InnovaCom is a pacesetter
and a prime beneficiary.
MPEG targets three primary markets:
1) Corporate teleconferencing and collaboration. A prime example of
this is the important contract award from the Inchon Airport in Korea, the
largest airport in the world. There are a number of Korean suppliers of
MPEG-2 technology, yet InnovaCom got a key part of the project. There can
be no better endorsement.
2) The distance learning area, with applications at both the
pre-college and college level, world-wide. It bears pointing out that VoIP
is not yet visible in this environment, due to its bandwidth limitations,
so we are more likely to be dealing with broadband networks or intranets.
Picture a professor at Florida State addressing 20 honor students at 20
different high schools throughout Florida on a fully interactive ("duplex")
basis and able to make a full multi-media presentation from his desktop,
without assistance. Brave New World... teacher empowerment and no teaching
assistants.
3) Distance legal applications are a burgeoning market that is widely
discussed in the media. The legal profession is looking for better
communication both within firms and in trial situations, the storage and
presentation of trial materials is improving through new technologies and
the court system is finding more and more uses for streaming media to save
time and costs.
Notably, InnovaCom is not targeting the traditional MPEG market, namely the
broadcast industry. You gotta know what you can do well and what you cannot
do well... Let TCI and Hollywood buy the high-end stuff, and let corporate
America buy InnovaCom's stuff.
MPEG is able to broadcast its compressed signal point-to-point,
point-to-multipoint and multipoint-to-multipoint. Also, DVDimpact,
InnovaCom's flagship authoring/publishing system is targeted directly at
multimedia studios and Fortune 1000 clients because of its high price
performance value. DVDimpact is an all-in-one Windows NT solution
incorporating InnovaCom's MPEG real-time compression technology, integrated
with a full suite of publishing tools, as required by today's DVD authors
for premastering. At a price point of $29,000 or so, MPEG's DVD system
offers 85% of a broadcast-quality system at a fraction of the cost. Based
on new
generation MPEG encoding and networking technologies, MPEG's feature-rich
TDLT, which is also available now, establishes a new price-performance
benchmark in video teleconferencing.
All the company's products are built to broadcast specs, meaning to much
more rugged standards than PC's, and are upgradeable and retrofittable,
unlike any of its competitors' products.
The company, whose stock traded over $9 in late 1996 was a struggling,
unfocused R&D shop. They had 84 different projects going - and zero
customers
- when the current CEO, Frank Alioto (with a Westinghouse background) was
brought in 18 months ago. Now MPEG is a focused, lean and mean and
customer-responsive operation poised to generate significant revenues.
There are almost 20 engineers on the payroll plus about 7-8 people in the
front office, and all the final assembly and testing is done in-house
(fabrication is sub-contracted). MPEG just filed an important patent for
double encoding of MPEG video signals, and the company has a rich research
pipeline and a number of additional patent filings on the way.
MPEG TECHNOLOGY (This will only hurt a bit...)
MPEG stands for Motion Picture Experts Group, and the basic algorithms were
developed by a group of research scientists as the first compression
protocol for broadcast signal. MPEG-1 was optimized for CD ROM or
applications at about 1.5 Mbit/sec. and video was strictly non-interlaced
(i.e. progressive). The international cooperation had gone so well for
MPEG-1 that the committee began to address applications at broadcast TV
sample rates using the CCIR recommendation (720 samples/line by 480 lines
per frame by 30 frames per second or about 15.2 million samples/sec.) as
the reference. Unfortunately, today's TV scanning pattern is interlaced.
This introduces a duality in block coding: do local redundancy areas
(blocks) exist exclusively in a field or a frame? The answer of course is
that some blocks are one or the other at different times, depending on
motion activity. The additional years of experimentation and implementation
between MPEG-1 and MPEG-2 improved the method of block-based transform
coding.
The MPEG-2 concept is similar to MPEG-1, but includes extensions to cover a
wider range of applications. The primary application targeted during the
MPEG-2 definition process was the all-digital transmission of broadcast TV
quality video at coded bit-rates between 4 and 9 Mbit/sec. However, as
InnovaCom has proven, the MPEG-2 syntax has been found to be effective for
other applications such as those at higher bit rates and sample rates (like
HDTV). The most significant enhancement over MPEG-1 is the addition of
syntax for efficient coding of interlaced video (e.g. 16x8 block size
motion compensation, Dual Prime etc).
Several other more subtle enhancements (e.g. 10-bit DCT DC precision,
non-linear quantization, VLC tables, improved mismatch control) are
included in MPEG-2, which have a noticeable improvement on coding
efficiency, even for progressive video. Other key features of MPEG-2 are
the scalable extensions which permit the division of a continuous video
signal into two or more coded bit streams representing the video at
different resolutions, picture quality (i.e. SNR), or picture rates.
Why do films do so well with MPEG? Several reasons:
1.. The frame rate is 24 Hz (instead of 30 Hz) which is a savings of some
20%.
2.. the film source video is inherently progressive. Hence no fussy
interlaced spectral frequencies.
3.. the pre-digital source was severely oversampled (compare 352x240 SIF
to 35 millimeter film at, say, 3000x2000 samples). This can result in a
very high quality signal, whereas most video cameras do not oversample,
especially in the vertical direction.
4.. Finally, the spatial and temporal modulation transfer function (MTF)
characteristics of film (motion blur) are more amenable to the transform
and quantization methods of MPEG.
There will be a quiz on this tomorrow....
COMPETITION
The group of credible suppliers of either MPEG-2 applications or DVD
authoring systems is very small. Among them, two Israeli companies stand
out: Optibase (OBAS) is a more specialized player, selling at a healthy
multiple to sales and with a stock that is up five-fold since Thaksgiving,
and ECI Telecom (ECIL), a much more diversified electronics company and a
stock that hasn't done much for a while. Among the US competitors, FVCX
(FVCX) is a somewhat troubled company that needs to address a few internal
issues, and Optivision, slightly larger than MPEG, is private.
LATEST DEVELOPMENTS
Korea's Inchon International Airport bought the company's TransPEG 500TM
video transmission system -- running over ATM. InnovaCom's system was
chosen by airport officials to enable the expansion of the airport's
General Public Communications System (GPCS) and will be installed in the
main passenger terminal. TransPEG provides the state-of-the-art facility
with advanced video communications via the Satellite Communication System
(SATCOM) to TransPEG and is then fed, in MPEG-2 format, to the ATM network
from the Airport Information Communication Center (AICC) to the CATV
head-ends located in the passenger terminal buildings. Inchon International
Airport's main passenger terminal building, scheduled for completion in
June 2000, will be the world's largest airport passenger terminal -- 60
times larger than a U.S. football field. The new airport will contain two
passenger terminal buildings and four concourses.
End users of MPEG's applications may selectively deliver video
presentations to several schools within one district via the desktop;
saving time, money and aggravation -- and in the short-term can pay back
the initial investment many times. For example, in the case of a TV station
in a sparsely populated California county, TransPEG has extended KGOV's
reach through live video transmission of Kern County Board of Supervisors
Meetings to citizens in remote areas. Kern is the 3rd largest County in CA
and spans 8,000 sq.miles. Due to its expansive size, active participation
in legislative procedures has been very limited, because doing so could
entail traveling more than 200 miles roundtrip to attend a county meeting.
FINANCIALS
MPEG has about 25M shares O/S, and the float is just a tad over 1/2 of
that. A large block is held by the Encore Capital VC fund out of Reston,
VA, who is a long-term shareholder and a source of short-term funding for
MPEG. The company is just coming out of the development phase and has put a
number of ghosts to bed, but it is well-funded and poised to show explosive
growth. We expect the current year's revenues to be in the $15-16M area,
with EPS of 7-8c. The company will be cash flow positive by the 3rd quarter
(possibly sooner) and the earnings will be sheltered by its tax loss
carryforwards. In 2001, revenues should easily double to the $30M range
and, with "normalized" net margins of 17-18%, we can expect EPS of 23-25c.
Though it's early days in 2000, the stock is still barely selling at one
times it's current year's revenues. No fair!
Revenues for the three months ended Sept. 1999 were about $75,000, double
those for 1998. Revenues for the first 9 months of 1999 were more like
$172,000, and the 4th quarter will show the first substantial devlieries.
The revenue in both periods in 1999 reflects the completion of some
TransPeg transmission products and the first shipments of these products.
MPEG is debt-free, except for a convertible debenture in the amount of
$9.5M payable to Encore Capital. The instrument is not likely to be
converted any time soon, since both parties feel that the stock's current
price and the resulting dilution would make it unattractive. Let sleeping
dogs lie....
TECHNICAL ANALYSIS
The stock of MPEG has been showing accumulation for the past few days,
after the last pullback, with steadily increasing volume. Yesterday's close
was at the day's high on the biggest volume of the last 2 years (two
tell-tale signs) and the stock opened with a small gap today, but closed
it. Now, a break past the recent high of 7/8 is a matter of days. Beyond
that, with the stock now moving into strong hands (including our readers),
the minimum expectation is a move to the supply area at 1 5/8. We're on
track today to beat yesterday's volume of 2.5M shares. The short-term
stochastics just hit 100, the highest possible momentum reading, but the
MACD is yet to match the +0.23 reading that was hit when the stock was at 2
3/4 in late 1998. Everything is in gear for a powerful move, and we
recommend purchase up to $1.50. As you know, we don't use price targets.
Watch it and enjoy the ride.
This newsletter has received no compensation whatsoever from InnovaCom.
Peter Kertes & Pat Comer
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Disclaimer: The writer of The Alert Investor (A.I.) is not currently a
Registered Investment Advisor. It is the intent of A.I. to identify and
research companies that it believes might prove profitable investments.
However. A.I. is not liable for any investment decisions by its readers and |
