Monday, July 16, 2012

SENSIO-TCL Deal - The Biggest Yet

The TCL Format and S2D Licensing deal announced today achieves 3 major milestones:

(1) It confirms the value of the SENSIO Hi-Fi 3D Format and further cements the value of their S2D patent.

With just Vizio (and to a lesser extent Cyberlink) licensing the 3D format over the last year, there was always the risk that Vizio would decide to stop supporting SIO if no other manufacturers jumped on board. Now that TCL is on board (and China's #2 and #3 TV manufacturers reportedly very close to signing) momentum has taken a swift turn for the better. I expect that Samsung and/or LG will sign with SENSIO prior to the official launch of 3DGO! VOD this fall for fear of being left behind.

News of either of these 3DTV leaders licensing the SENSIO 3D Format would be a game changer for SENSIO. As Ralph Garcea at NCP said after the close today, "Sensio’s 3D technology has the opportunity to become nothing less than a worldwide standard". I'll leave it to the market to speculate on how much SIO shares would rise if either LG or Samsung license the SENSIO 3D Format.

As for the S2D patent: Vizio, Cyberlink, Samsung and TCL are all now licensing the patent. Yet there are other manufacturers out there that are currently still infringing on SIO's patent. It is all but a foregone conclusion that one by one they will eventually have to pay up. The strategy, of course, is that SENSIO will sell them on the 3D Format at the same time. Now with TCL, Vizio, and Cyberlink all licensing the Format, SENSIO's job becomes that much easier.

(2) It takes the pressure off of SENSIO to go to market for additional funding in the near future.

SIO's share price plunged in June as the company announced it was calling off its previously announced financing plans. The stated reason for the cancellation was that market conditions were poor and that the company did not feel issuing stock under .40 was in the best interests of the company and its shareholders. But some investors were concerned that this meant the company would eventually have to issue stock at even lower prices if SENSIO was unable to sign additional deals or generate additional revenues over the next 12 months.

In the last reported quarter (Q3) SENSIO received about $270k in revenues from their licensing agreement with Vizio (up over 300% from Q2). That rate (assuming zero growth) implies almost $1.1 million in annual revenues from Vizio. TCL is now #5 globally, and should be able to generate 2-3 times the revenues as Vizio. That's at least $3-4 million a year from these two SIGNED licenses alone (ignoring growth, ignoring the existing Samsung S2D patent license, and ignoring the probability that SIO signs several more TV manufacturers over the coming weeks/months).

SENSIO's current burn rate is $300k per month, or about $3.6 million per year. With Vizio and TCL we should easily be more than 80% of the way toward being cash flow positive. That puts the timing for a required financing at least 18 months away (if ever). That doesn't mean SENSIO won't come to market for a few million to help speed up the development of their 3DGO store, or to fund another venture, but the TCL deal means if they do it will be on their terms.

Plus, now any major Format deal with a player like LG and/or Samsung could immediately make SIO cash flow positive. After that, everything else is gravy. Given the current momentum, SENSIO easily has the potential to generate $10-15 million a year in revenues by the end of 2013. That could mean $10 million or more in free cash flow, or $0.20 a share in cash per year. A 5-10x multiple puts SIO share valuation @ $1-2/share. I think that is very reasonable. If you want to come up with an "upside" number then consider 100 million 3DTVs are expected to be sold in 2014. If LG and Samung license the 3D Format then that's easily over 50 million 3DTVs. At just .50 per TV that's over $25 million in revenues. And that could be also end up being conservative.

(3) The deal confirms that 3DGO! will launch this fall (September)

The risk of a successful 3DGO! VOD launch has always been the lack of eyeballs (i.e., the number of SENSIO-enabled 3DTVs out there to watch the SENSIO 3D format). The TCL deal not only immediately adds millions of SENSIO enabled 3DTVs to the list, but greatly increases the odds that TCL's competitiors (Samsung, LG, etc) will sign on to the format to ensure they're not left behind.

SENSIO's 3DGO! VOD initiative has always been to push the sales of their 3D Format. As SENSIO announces more content/studio deals in the coming weeks to support their VOD service, the value of their 3D Format will continue to grow in the eyes of TV manufacturers. And while I am ignoring revenues from 3DGO! from this analysis, it also has the potential to add significantly to the bottom line in the near future.

Sunday, July 8, 2012

SENSIO 3D - Time to Break out of the Range?

Other 3D stocks like RealD (RLD) have had an incredible run since the beginning of the year, yet SENSIO Technologies (SIO.V) has been stuck in a .25-.50 range for over a year now. But recent price action suggests another test of the top of the range is coming soon. SENSIO was up as much as 40% at one point on Friday on higher than usual volume before closing up 18%.

A break of .50 would suggest a move right back to the .90-1.00 area. But to do that SENSIO will need to deliver on it's promises and prove to the market that they can execute their business plan. If they can execute, then SIO is a potential 10-bagger from here.

Back in January SENSIO announced a LOI with TCL (China's largest TV manufacturer) to license the SENSIO 3D format in all TCL 3DTVs. If SIO can finalize the deal with TCL then SIO's share price could easily double on the news.  

Senior management at SENSIO was recently in China and rumors are that the trip went very well. Apparently one of the "issues" has been that SENSIO is simultaneously negotiating with the #2 and #3 TV makers in China at the same time and need to be careful that all the terms and conditions are consistent. 

SENSIO also recently announced a patent deal with Samsung. However the patent deal is for the S2D switch (not the 3D format) so the market reaction was muted. But SENSIO now has their foot in the deal and an upcoming 3D format deal with Samsung is a real possibility. A 3D format deal with Samsung would be huge.

(Click on chart to enlarge)

Thursday, May 10, 2012

Sensio Technologies - Dissecting Q3 Earnings

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.

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 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.

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.