Description

OpenTV (OPTV) is a provider of advanced services for television including enhanced program guides, high-definition services, video-on-demand, personal video recording, home networking, interactive and addressable advertising, and a variety of enhanced television applications. This report is more of a brief note as I was just starting to build my model and a note came across about a possible acquirer for OpenTV.

The valuation is extremely attractive. As of the close of February 26, 2009 OPTV had a market cap of 139 million with $103 million in cash with no debt ($0.75 in net cash per share or 75% or its market cap). Trailing twelve month sales from continuing operations in 2008 were $116.5 million, up 6% from 2007 and are expected to grow in 2009 as the company's guidance is for revenues in the range of $117 million to $123 million. OpenTV is solidly profitable with 2008 adjusted EBITDA of $17.6 million up from $8.0 adjusted EBITDA in 2007. Assuming margins stay consistent in 2009, the midpoint of the guidance would translate into $120 million in revenues and 2009 adjusted EBITDA of $18.13 million, up 3% from 2009. Forward EV/Sales and EV/EBITDA would be 0.30 [($139M market cap - $103M net cash) / $120M sales] and 2.0 respectively. Two times EV/EBITDA for a company that is forecasting growth in 2009 assuming no new customers!

OpenTV's main drivers for growth are its two main products, Middleware solutions (88.6% of revenues up 5.6% YOY) and Advertising Solutions (11.4%, up 8.1% YOY). The growth of these products is driven by providers of TV services as they seek to better compete with the Internet and untethered devices and delivery platforms for content. OpenTV's Middleware makes TV more interactive and allows users to watch content on demand, program their personal video recorders at home from a website anywhere in the world among other services. Advertising Solutions, mainly driven by EclipsePlus, allow more efficient ad insertion, a huge source of revenue for TV providers. Ad insertion has become a hot topic as internet companies such as Google and Yahoo! claim to be more efficient platforms for advertising. TV is fighting back as advertising dollars are being sucked out of TV ad budgets into Internet ad budgets.

We believe that the trend towards interactive TV and ad technology that is better targeted and easier to track will continue despite the current economic and financial problems as the up front investment is low relative to the client's capex budgets, the payback is quick and the return on investment is attractive. This belief seems validated by deferred revenue as it jumped to $33.2 million at the end of 2008 from 24.1 million in 2007, up 38%.

On a side note, Kudelski, SA made a cash offer for OpenTV this morning for $1.35 in cash. The offer is not subject to financing arrangements and Kudelski already owns 7.2 million shares of OpenTV. We think the acquisition has a high probability of being closed (probably at a higher price) and recommend buying the shares.

Catalyst

Continued adoption of interactive TV software and ad insertion technologies driven as a response to the challenge posed by the Internet and the untethered devices to TV as a delivery of media content.