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Technology Stocks : e.Digital Corporation(EDIG) - Embedded Digital Technology -- Ignore unavailable to you. Want to Upgrade?

To: ROBERT who wrote (11747)	3/26/2000 6:14:00 PM
From: JimC1997	Read Replies (3) \| Respond to of 18366

Speaking of market caps for technology-dominating companies, here is a reasonably good foreshadow of what e.Digital has the potential to become in a year or two: biz.yahoo.com Gemstar is best known for the VCR Plus+ video recorder programming system. It has sales of about $200 million (almost entirely from licensing) and generates income of about $100 million. It has only 211 employees. Its market cap is currently $19.1 billion. If EDIG had a market cap of $19.1 billion the share price would be $153/share. Is this a reasonable comparison? In the very near future I expect that e.Digital will attract equity analyst coverage from several institutional research firms. The analysts writing such reports will focus on revenue potential and will issue buy recommendations if and only if they can justify substantial growth by e.Digital in the near future. Could e.Digital generate $200 million in revenues in the near-term? I am a CFA myself (Chartered Financial Analyst - the professional designation that senior institutional analysts attempt to obtain) and I have constructed a typical business model that a sell-side equity analyst might present in an initial write-up on the company. Below are some of the revenue sources open to the company and my own rough estimates of near-term (1 to 2 year) revenues and gross profit opportunities: Lanier: e.Digital is manufacturing the portable unit used in the Lanier Cquence medical transcription system. The initial contract is $3 million, but Lanier has indicated that the potential is much, much larger. e.Digital could become the supplier to a full conversion of Lanier's analog dictation systems to a digital system. Lanier does over $500 million in revenues in the analog systems. Assuming that e.Digital obtains 10% of that volume, their Lanier-derived revenue would be $50 million Margins on this business are 30%. Music Players: There are three ways for e.Digital to participate in the music player business. First, by arranging manufacturing for a consumer brand that does not have its own production facilities. For example, if Nike decided to market music players they would need e.Digital to arrange for manufacturing. Margins here would be about 25%. I estimate the revenue opportunity as at least $50 million (wholesale, based upon 500,000 units at $100 each). Second, by licensing their reference design and MicroOS to other electronics manufacturers, such as Panasonic. The fee per unit would be "up to $10", so assume $8 as an average. The volume here would be very large, perhaps 5 million players and the margin would be essentially 100%. Finally, by licensing only the MicroOS file management system to manufacturers who wanted to use their own design. The license fee would be about $2 per unit and the volume might be another 10 million players, again with 100% margins. Intel Devices: e.Digital has been working with Intel on the design of some advanced voice-activated devices which Intel intends to license for manufacture by others. This is hard to judge, so let's assume a $10 licensing fee on 1,000,000 units, all at 100% margins. Other MicroOS Licenses: There is a wide range of non-music player devices (such as digital cameras, personal digital assistants (Palm Pilots, etc.), IBM's MicroDrive and 3rd generation cell phones) that could benefit from the use of MicoOS to manage flash memory files. The numbers here are very, very large. 25 million would be on the low-end of likely applications. Here the revenue would occur by embedding the MicroOS in DSPs (digital signal processors) or directly into flash memory chips (possibly in Intel's recent deal with Ericsson). The license fee might be small, perhaps $1 per unit, but the volume would be huge and the margin would be 100%. Future Applications: There are many other possibilities, (e.g. through IBM's Voice/Times Alliance, the realm of video files and other consumer home and automotive audio products), but it is hard to speculate on the size of those markets, so I'll take a conservative approach and assume $5 million near-term revenue from those applications. Putting all of these guesstimates together: Revenues/Gross Profit Lanier $50 million/$15 million MusicMfg $50 million/$12 million MusicDesign $40 million/$40 million MusicOS $20 million/$20 million IntelDesign $10 million/$10 million Other OS $25 million/$25 million Future $5 million/$5 million Total revenues would be $200 million and the gross profit would be $127 million. Current operating expenses are running at about $3 million per year. Assume that this goes up five times with the higher sales level, then SG&A would be $15 million. There are no significant loans, so interest expense is essentially zero. Thus, with these (hopefully conservative) near-term assumptions, the sales per share would be $1.60. The pre-tax profit would be $112 million and the after-tax profit would be about $70 million or about $0.56/share. At a price to sales ratio of 50 (fairly common these days for rapidly growing companies with proprietary technology) this could support a stock price of at least $80, perhaps as much as $160 if the price/sales ratio is 100. (Gemstar has a price/sales ratio of 100, likely due to their very high profit margins.) Given that stocks tend to run about 33% beyond their "steady-state" value as the market first learns about their potential (and, of course, leading to a subsequent retracement of some of that run-up), this opens the door to a peak stock price of well over $100 (perhaps past $200) if the projections above are deemed reasonable by the market in its collective wisdom. Among the unknowns facing EDIG investors is how the stock market would respond to the possible acceptance and ratification (e.g. through an equity investment) by industry-leading firms such as Intel that e.Digital had established a position as the primary file management system for flash memory devices. I should add that the number of such devices might quickly grow to the hundreds of millions in units with direct flow-through to e.Digital's bottom line. This could make even the extraordinary market value projections given above appear conservative in retrospect. JimC