SENSIO Now A Takeover Candidate

Tweet

SENSIO (SIO.V) has become a legitimate takeover candidate following global deal with LG this week.

SIGNIFICANCE OF THIS WEEK'S DEAL WITH LG

On July 8, 2014 SENSIO announced that it inked a deal with LG to put their 3DGO! streaming app on LG CINEMA 3DTVs in over a dozen countries worldwide.

SENSIO signs an agreement with LG for the international deployment of 3DGO! on CINEMA 3D Smart TVs

This marks the third manufacturer (following Vizio and Panasonic (PC)) to sign onto the 3DGO! platform - but the first to expand beyond the United States. In the United States alone the LG deal should more than double SENSIO's potential market when it launches in October giving SENSIO access to around 40% of all 3DTVs in the US. When the global roll out begins in December SENSIO's customer base will continue to grow as more and more countries are added.

More importantly, the global roll out of 3DGO! will give SENSIO something nobody else has: A global user base of active 3D consumers. Until glasses-free 3DTVs become mainstream (likely still years away) 3D in the home will continue to be a niche market. But niche markets can be extremely valuable if they can efficiently be tapped into. SENSIO's 3DGO! provides that medium. Potential suitors would include names like Netflix (NFLX), Amazon (AMZN) and RealD (RLD), among others.

Existing deals with top named studios like Disney, Paramount, IMAX, and others give SENSIO instant credibility and recognition. In fact LG plans to use characters from these studios to help promote sales of their 3DTVs via SENSIO's 3DGO! in retail stores when they launch later this year.

PATENTS

SENSIO's existing patents also provide further support to SIO's valuation. SENSIO currently has 15 issued patents and 21 pending. Key among those patents include:

Hi-Fi Format - Ability to compress and transmit Bluray quality 3D streams across existing 2D cable, satellite and internet infrastructure.

S2D Switch - Ability to convert any 3D video into 2D video.

AutoDetect - Ability to automatically detect any 3D format (SENSIO Hi-Fi, side-by-side, top/bottom, etc) and automatically convert the stream to a 3D video without the need to navigate 3D menus on the 3DTV.

Global Maxfin estimates that SIO's patents alone are worth $0.13-.40/share.

VALUATION

As of Friday shares of SIO were trading at $0.30/share. This week Global Maxfin increased their price target from $0.50 to $0.75 based on the LG deal and maintain a 'Strong Buy' recommendation on the stock. Following the LG deal this week SENSIO also announced a S2D patent deal with Sony (SNE) which further supports this valuation.

SENSIO SIGNS LG FOR 3DGO! TRIPLE PLAY

SENSIO® S2D Switch Patents Licensed to Sony by WiLAN

Going forward expectations are for more CE manufactures like Samsung and others to license the 3DGO! app from SENSIO. As these deals are announced SIO's valuation potential will only continue to rise as they continue to capture more and more share of the global 3D market.

And with virtually every 3DTV manufacturer currently utilizing technology covered by SENSIO's S2D Switch patent we should expect a number of new S2D deals to be announced in the coming weeks/months through SENSIO's patent agreement with WiLAN (WILN).

1-YEAR CHART

Sensio Technologies - Dissecting Q3 Earnings

Tweet

Revenues totaled $679,913 for Q3. Clearly the vast majority of these revenues were split between Samsung patent deal and continuing royalties from Vizio. But what is the split?

The notes to the financial statements say that “one client represented 59.3% of sales” for the quarter. I am going to assume that client is Samsung, meaning RECOGNIZED revenues from the patent deal were $403,188 for the quarter (more to say on this later). That leaves $268,952 of Consumer revenues for the quarter. Ignoring tiny revenues SIO probably made from Cyberlink, etc, that means Vizio revenues were close to $268,952 for the quarter.

Samsung - $403,188 (vs. ZERO in Q2)
Vizio - $268,952 (vs. $61,226 in Q2)

That Vizio revenue of $268,952 is actually quite impressive. We knew there would be a pick up from Black Friday sales in the quarter, but we saw an almost 450% increase Q/Q. The CEO said in the last CC that Vizio sales for the current quarter were looking “interesting”. I am going to be very interested to see if they can build on this momentum going forward. I have said for a while now that Vizio should be able to contribute $1 million or more in annual revenues in the near future. Torday’s report shows that this is clearly attainable and that the Vizio format deal is FINALLY starting to pay off. It also highlights the importance of getting the TCL deal finalized, as I believe TCL can potentially be 2-3 times the size of the Vizio deal in the short-term. That would mean annual revenues of $3-4 million from TCL and Vizio alone. A major deal with LG or Samsung would obviously be even bigger, but I am skeptical about SIO signing another new format deal (exclusing possibly TCL) until 3DGO is launched this fall.

Unfortunately revenues from other business lines were close to zero for the quarter. Live3D revenues actually were zero for the quarter. While disappointing, clearly not a surprise since there were no Live3D events held during the quarter. But given past performance this is an area where just 1-2 events during a quarter can easily generate $250,000-$500,000 or more. So there is definitely potential going forward, particularly with the Sequence deal and other events like UFC, etc.

CASH
As of Feb 29, 2012 SENSIO had cash in the bank of $2,346,538. That is a decrease of $1.24 million vs. Q2. However the company’s receivables increased by $1.2 million to $1,639,615. So net cash and receivables were actually stable quarter-over-quarter. And during the most recent CC the CEO confirmed that the bulk of those receivables had already been collected since quarter end.

The company’s payables stayed fairly flat at around $550,000. If I had to guess I’d say just under $1.0 million of the new receivable is from Samsung and $200,000 or so is from Vizio.

The company's burn rate is currently $300,000/month. With cash & receivables of $3.6 million, it looks to me like SENSIO has about a year of liquidity at its current pace (ignoring existing/future deals like TCL, etc). If they sign TCL and get a Live3D event or two then we’re looking at well over a year before SENSIO would need to raise cash (assuming no new major deals). That being said, looking to raise a small amount of cash over the next couple months would appear to be the prudent thing to do.

DEFERRED INCOME
Deferred income represents money received (or billed) by the company in advance for future periods. Deferred income is not recognized as revenue during the quarter. For Q3 SENSIO had $577,000 in deferred income. Again, this is certainly related to the Samsung patent deal.

SAMSUNG DEAL
From everything noted above, it appears as if SENSIO received immediate payment of almost $1.0 million from Samsung for the S2D patent. Since the deal was signed on the last day of the quarter the $1.0 million showed up as a receivable on the balance sheet for the quarter.
This $1.0 million Samsung estimate is consistent with my analysis above:

Samsung revenue (59.3% of Sales):      $403,188
Deferred Income:                                 $577,000
Total                                                   $980,188

Of the $1 million, $403k is related to past sales and $577 is related to future sales. The big question is how far into the future does this payment relate to? Is the $577k pre-payment for the rest of the year? For the next 2 years? For the next 5 years?

We know that Samsung has been infringing on SIO’s patent for about the last 2 years. So it seems reasonable to assume the $403,188 of recognized income covers the past 2 years of Samsung 3DTV sales. Maybe $300k for last year and $100k for the previous year. If that’s the case then the $577k in deferred income might just be for the rest of 2012. If correct, then the Samsung deal could still be worth a few $million more and we may continue to see additional income and cash flow in future years from the deal – but I am just guessing on this last point.

So over all I see a couple of things to be positive about here in the financials. Clearly much better than last quarter. And the reduction in operating expenses vs. prior quarters is also a step in the right direction. SENSIO said a while back that expenses should stop rising and level out and we are seeing that now. Routhier said a patent deal was coming, and we finally got the Samsung deal in in February. He commented during the last CC that Vizio sales were looking good for the current quarter and we now see that they jumped by almost 450%.

So while it's frustrating to hear of delays in things like 3DGO, and while we'd all like things to be progressing faster, I think in retrospect we can see that most things that SENSIO told us to expect are beginning to become reality. So while the upcoming PP while result in a little dilution to the shares, if Vizio royalties continue to increase, if the TCL deal gets finalized, if 3DGO is launched successfully in the fall with the support of major Hollywood studios, along with the "at least 3 major TV manufacturers", then I think patience will be rewarded here.

USD/CAD - Poised For A Significant Move

Tweet

Fundamentally things are starting to look a little shaky for the Canadian dollar. Recent economic numbers have come in under expectations. Just last week New Motor Vehicle Sales came in at -1.0% (vs. +2.1% exp), CPI -0.6% (vs. -0.1% exp) and Wholesale Sales were -0.4% (vs. +1.0% exp).

On January 18 the Bank of Canada's Mark Carney said that the economic situation in Europe is going to cost Canada $10 billion in lost economic output. As well, there continues to be concerns over Canadians' high debt levels and inflated housing prices. Not surprisingly the Bank of Canada seems intent on keeping interest rates where they are for the indefinite future.

After a brief break below 1.0100 last week, USD/CAD bounced back into wedge formation it has been in for the last 5-months. The fact it bounced back while US equity markets were rallying and the USD was weakening against the Euro points to the underlying weakness in the Canadian dollar (USD/CAD higher = Canadian dollar weaker).

In the weekly chart below, you can see a clear bottom bottom at .9425/50, following by a wedge consolidation pattern folllowing USD/CAD's break above 0.9900 back in August/September.

Typically these consolidation patterns resolve themselves in the same direction as the recent trend, which would be higher. If that happens we could easily see a re-test of the 1.0800 and possibly even higher.

I like using pullbacks to get long USD/CAD for an eventual break back above 1.0300. I am currently long from 1.01375 with an eventual target of 1.0800. However a clear break below the support line would quickly target .9900/1.000. If it breaks lower I'll likely reverse my view and go with the break.