Value Find: OpenTV Corp.
Massive insider buying, a badly beaten-down stock price, a strong balance sheet and a still solid market position make for an interesting situation at a small-cap interactive TV solutions provider.
Founded a decade ago, San Francisco, Calif.-based OpenTV Corp. (Nasdaq: OPTV) survived the tech crash and today is one of the world’s largest providers of solutions for the delivery of digital and interactive television. OpenTV’s middleware solutions have been deployed by more than 40 network operators in over 96 million digital set-top boxes and digital TVs. Clients include EchoStar Communications (Nasdaq: DISH), BSkyB, Sky Italia and FOXTEL. OpenTV believes that it holds 60% market share worldwide in the middleware market.
While these are all impressive sounding numbers, OpenTV’s survival skills and large installed customer base hasn’t historically resulted in steady profits. As of this writing, OpenTV trades for a paltry $1.25 a share, near the bottom of a 52-week range of $0.93 to $2.85. Once a Wall Street darling, OpenTV attracts little analyst coverage these days. The stock suffered from a string of missed expectations and lowered guidance in 2007. The $175 million market capitalization firm’s competitors are a potent group, which includes heavyweights Microsoft Corporation (Nasdaq: MSFT), Scientific-Atlanta, a unit of Cisco Systems, Inc. (Nasdaq: CSCO), and NDS Group plc (Nasdaq: NNDS), which is controlled by News Corp. (NYSE: NWS).
Given the stagnant stock price, its unprofitable ways and a scary group of competitors, it might be easy to write-off OpenTV on first glance. However, every dog has its day and, under closer review, this looks like a dog that may still have some bark in it. For starters, OpenTV ended its most recent quarter with more than $71 million in cash (over $0.50 share) and no debt on its balance sheet. Revenue inched up to $71.8 million from $70.1 million for the first nine months of 2007, while earnings before interest, taxes, depreciation and amortization (EBITDA) flipped to a negative $3.8 million from a positive $3.9 million in the year-ago period. Given OpenTV’s sturdy balance sheet and modest cash burn, it isn’t going out of business anytime soon.
In addition, OpenTV’s largest shareholder, Swiss technology-focused holding company Kudelski Group SA, has been a very heavy open market buyer of the stock in recent months. Kudelski has purchased nearly $16 million worth of OpenTV shares around the low $1 level. Kudelski gained control of OpenTV in October of 2006 when it purchased for $132 million, or $3.60 a share, a 75% voting interest and 27% economic interest in the company from Liberty Media Corp. (Nasdaq: LCAPA). To date, Kudelski’s investment in OpenTV has obviously proven to be a big loser, with the stock down almost 70% since this transaction. That said, the continued insider buying by Kudelski raises the possibility that it could make a bid to buy-up the rest of OpenTV.
OpenTV expects to report 2008 revenue of $105 to $115 million with improvements in net income and operating cash flow from 2007 levels. At a current enterprise value of $86 million, this small-cap tech play with 50%-plus gross margins is being valued at less than 1 times expected revenue. At the end of August, OpenTV appointed a new acting CEO whom has focused on settling longstanding litigation, cutting costs, selling non-core operations, and reinvigorating growth in OpenTV’s core middleware and advertising solutions businesses. So far, these efforts have yet to visibly bear fruit in OpenTV’s quarterly results. That said, with the stock now hovering at such a low valuation and with meager investor expectations, it likely won’t take much good news to give the stock a lift. OpenTV’s fourth-quarter and full-year results are expected in mid-March.
On the upside, a $1.50 to $2.00 stock price later this year seems possible. On the downside, OpenTV may have a strong balance sheet and pile of intellectual property on its side, but it also has revenue concentration risk. OpenTV’s top three customers in the third quarter accounted for 45% of total revenue. Further, OpenTV competitors like Microsoft, NDS and Scientific-Atlanta have much greater resources. Finally, the fact that Kudelski has voting control of OpenTV can be both good and bad. On the one hand, Kudelski could bid to buy OpenTV at a premium to its current price. On the other hand, Kudelski’s voting power makes it difficult for other OpenTV shareholders to try and rattle the cage at the company. It is up to Kudelski to unlock value.
Add it all up and I think OpenTV (OPTV) is an interesting speculative “value find” for high-risk, high-reward investors. Please notice that I use the word speculative. This looks like a “swing big” potentially “miss big” situation. I would consider adding the stock around the $1 level.
About the Author
Contributing author Matt Ragas is an investment writer and analyst with ten years of experience analyzing small and microcap stocks, with a particular emphasis on value and turnaround situations.
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