IATV: Upgrading ACTV - ACTV & Liberty Livewire Form "Convergence" Programming
C.A. Recouso 212 272-6541 crecouso@bear.com 4/13/00
Daniel Parker 212 272-9441 dparker@bear.com
Raymond L. Katz212 272-6857rkatz@bear.com
Subject: Change in Recommendations
Industry: Internet/New Media
BEAR, STEARNS & CO. INC.
EQUITY RESEARCH
ACTV* (IATV 20.69) - Buy
Upgrading ACTV - ACTV & Liberty Livewire Form "Convergence" Programming
Agreement
______________________________________________________________________________
Data
Shares Out 57.7mm Market Cap (MM) $1,194
______________________________________________________________________________
Key Points
*** We are upgrading ACTV from Attractive to Buy on what we interpret to be an
increasingly strong partnership with Liberty Media, its 16% equity
shareholder. We reiterate our $45/Share target price.
*** Yesterday, ACTV and Liberty Livewire, a Liberty Media post-production
unit, announced a joint marketing agreement in which ACTV patented
technology will serve as the standard for all of Livewire's TV-internet
convergence post-production services.
*** We believe this agreement testifies to the strength and commercial
viability of ACTV's patent portfolio for "convergence" programming.
*** We believe the Liberty Livewire - ACTV agreement lessens ACTV's patent
infringement risk and increases the likelihood of ACTV becoming a
technology licensing gateway for TV-internet convergence programming.
________________________________________
Earnings Estimates P/E
Year Year
2000 ($0.26) NM
2001 $0.02 1034x
2002 $0.50 41x
________________________________________
________________________________________
EBITDA EV/
Year EBITDA
2000 ($18.8mm) NM
2001 ($3.8mm) NM
2002 $28.9 41x
________________________________________
Summary & Recommendation:
We are upgrading ACTV, Inc. (IATV), an early entrant in the interactive digital
media sector, from Attractive to Buy on what we interpret to be an increasingly
strong partnership with Liberty Media, its 16% equity shareholder. As a result
of the strengthening Liberty Media - ACTV association, we believe the risk of
patent infringement on ACTV intellectual property will diminish; also, we
anticipate Liberty Media's influence will help position ACTV as a leading
"convergence" programming technology gateway. We reiterate our $45/share, DCF-
based "fair value" price target, implying 115% potential upside. (Our
valuation analysis is e-mailable upon request).
Late last night, ACTV and Liberty Livewire LLC, a Liberty Media-controlled
broadcasting post-production company, announced an agreement in which Liberty
Livewire will employ HyperTV (an ACTV subsidiary) patents for its post-
production work requiring the convergence of television and Internet content.
We think this could represent a major advancement in ACTV's efforts to be
recognized as a pioneer and standard-bearer of software-based TV-web
"convergence" applications.
Some Background. . .
ACTV owns 20 software-based technology patents; we believe the agreement with
Liberty Livewire implicitly gives testimony to the strength and commercial
viability of ACTV's patent portfolio. Liberty Livewire consists of three
assets, Todd-A/O, Four Media and Soundelux, which Liberty Media has either
purchased controlling stakes in or acquired outright within the last 10 months.
Todd-A/O is one of the primary providers of sound, video and ancillary post-
production services to the television and motion pictures industries.
Soundelux and Four Media are a leading providers of location-based
entertainment technology and audio post-production services.
We believe Liberty Livewire's three assets, now housed under one corporate
roof, quite likely represent the dominant post-production facility for the
broadcasting and motion picture industries. For instance, we understand that
the Livewire assets currently contract in some way, shape or form, 75% of all
commercial TV advertisements and a significant portion of the major networks'
episodic television programming. (Accordingly, we estimate Livewire will
generate something in the neighborhood of $500-$600 million of revenue and
$100-$125 million of operating income this fiscal year). Livewire's reach is
truly global in scale, with primary facilities in Los Angeles, New York and
London. More pertinently for ACTV shareholders, proprietary ACTV patent-based
technologies will now serve as Livewire's "convergence" (TV-Internet content)
post-production standard. Considering Liberty Livewire's post-production
dominance, this agreement should result in wide-scale promotion of HyperTV
technologies as the de-facto standard for TV-Internet convergence programming.
Additionally, this agreement likely will move the creative process of
"convergence" programming closer to the inception of content creation,
accelerating its adoption by broadcasters and advertisement agencies.
ACTV Migrates Toward Precisely Where We Hoped It Would. . .Core Competencies
We are particularly pleased with the Liberty Livewire - ACTV agreement because
it likely allows ACTV to concentrate on it's core competencies: licensing
convergence technologies, data management, encoding/enhancing advertising and
broadcast content and developing e-commerce advertising applications, while
capital-intensive, "heavy lifting" services such as hosting, server-management
and large-scale, post-production content insertion are handled by Liberty
Livewire. In fact, the central virtue of the Liberty Livewire - ACTV agreement
may be that it exposes ACTV "convergence" patents to large audience programming
(read: licensing revenues), i.e., it gives ACTV the "scale" it would otherwise
find difficult to reach. To that end, we understand AT&T is providing Liberty
Livewire with Internet hosting and networking services and Sun Microsystems
will provide hardware solutions.
For ACTV's HyperTV subsidiary, this agreement should improve cash flows. We
currently forecast HyperTV will generate approximately $125 million of revenue
and $50-$60 million of EBITDA (40%-45% margin) by 2005. But the Livewire -
ACTV agreement may push HyperTV revenue closer to the $200 million level with a
$110-$120 million of EBITDA (55%-%60 margin) by 2005. Granted, an additional
$60 million of EBITDA would only amount to an incremental $1.00/fully diluted
share, nothing to become overly excited about, but we believe one of the
important issues to focus on is the likelihood that the Liberty Livewire - ACTV
agreement strengthens the prospect of material ACTV consolidated cash flows
($160 million in 2005) that we have already forecast.
The Upshot: Lessening Patent Risk, Better Industry Positioning
To reiterate, we interpret the Liberty Livewire - ACTV agreement as
confirmation of the strength and validity of ACTV's patent portfolio for the
synchronized delivery of video programming with related Web content.
Initially, our concern regarding possible ACTV patent infringements was one of
the primary constraints keeping us from a Buy rating on ACTV. We think the
implicit backing and muscle of Liberty Media entailed in this agreement reduces
this risk. Additionally, Liberty Media's operational breadth and influence
should help position ACTV as a "convergence" programming gateway. |
