Friday, April 1, 2011

SENSIO 3D - Looking Forward To Q2

Over the last few weeks I've had a number of people ask me to post an update on SENSIO (SIO.V) as we get ready to enter Q2.

Here's a summary of some of the highlights. I won't have time to touch on everything here, so please feel free to email me or post a comment below if you have any questions. (Those new to the company may also be interested in my previous post: Sensio 3D Update: Where Will The Revenue Come From?)

Relationship With VIZIO

Vizio is the largest manufacturer of LCD televisions in North America with about a 28% market share. SENSIO has a very strong relationship with VIZIO. In early 2010 SENSIO and VIZIO signed an agreement to integrate SENSIO's 3D decoder into all of VIZIO's 3D TVs.

However in mid-2010 VIZIO shifted their strategy away from active shutter 3D TVs toward passive 3D TVs (passive 3D TVs use the same affordable glasses used in most 3D movie theaters).

This shift in strategy I believe delayed the launch of many of VIZIO's 3D TVs. It was not until just very recently that VIZIO launched their new lineup of passive 3D TVs to very strong reviews. Initial indications are that the TVs are selling very well. And every TV sold has SENSIO Hi-Fi 3D technology in it.

Not only is VIZIO a leader in 3D TVs, they are also a leader in interconnected TVs. That is another area where SENSIO is expected to benefit. VIZIO's 3D TVs have the capability to connect directly to SENSIO's 3D Video On Demand service, providing potential new revenue streams for SENSIO while at the same time supplying consumers with 3D content that has up until now been lacking.
SENSIO Autodetect And S2D Switch

SENSIO Autodetect automatically detects the type of signal being sent to the TV (2D or 3D, as well as the type of 3D signal - side-by-side, top-and-bottom, Sensio Hi-Fi) without requiring the viewer to manually adjust his or her TV. Currently most 3D TVs require the user to determine what signal is being sent, and then manually choose that format via menu selections on the remote.

I own a Sony 3D TV, and while the picture is great the constant need to use the remote to switch back and forth between formats is a huge pain. It's confusing enough that nobody else in my house actually knows how to use the 3D functions on the TV.

The Autodetect solves this problem, and SENSIO owns the patent on the technology.

Apparently both Samsung and Panasonic are currently using there own versions of autodetect which may infringe on SENSIO's patent. Instead of taking an aggressive approach and threatening to sue the manufacturers, SENSIO is reportedly working with each of them (and others) to not only license the autodetect feature, but to bundle the autodetect with SENSIO's entire line of technologies (including SENSIO Hi-Fi 3D and SENSIO S2D Switch). These discussions are apparently in "very advanced" stages. I expect to hear announcements of new deals being signed this quarter.

This article in the Financial Post provides a nice overview of how SENSIO can help to simplify the whole 3D experience for consumers.

Balance Sheet And Funding Requirements

This is another area where SENSIO was very smart. Although already in a strong financial position, management at SENSIO knew that it would take time for 3D in the homes to catch on in a big way. To make sure they had sufficient working capital to sustain them over this period SENSIO went out and raised over $10 million in Dec 2009, issuing additional shares at $2.60/share.

SENIO's current burn rate is approximately $250,000/month. Even at that rate the company has more than enough liquidity to last them over 2 years before they would potentially need to go to market again. This of course ignores any increase in revenues and further positive developments at the company.

With the new line of VIZIO 3D TVs just being launched, upcoming Live3D events, recent and future licensing agreements, etc., SENSIO should have no liquidity concerns for the foreseeable future. SENSIO's solid balance sheet should be a big asset as it transitions from a concept/development company to a revenue generating company. The fact that they did the financing at $2.60/share is a huge bonus.

Live3D Events

This is an area where SENSIO's compression technology really shines. Broadcasting of live 3D events (such as FIFA, NBA, etc) must be done using the existing 2D infrastructure.

Existing spatial compression methods, such as side-by-side, send the left eye image to half of the screen and the right eye image to the other half. When the signal is received each half must then be stretched to fit the entire screen, reducing the resolution by 1/2. The result is a noticeably lower quality picture compared to the original.

What SENSIO does is compress and decode the signal, using their patented SENSIO Hi-Fi 3D technology, in a way that results in virtually zero noticeable picture loss, even when transmitted across existing 2D infrastructure.

This is why SENSIO is the leader in this area and was chosen to broadcast FIFA World Cup to 1,000 screens worldwide last year, and then chosen to broadcast numerous NBA games this year. This segment could see tremendous growth over the next couple of years, especially if the broadcasters are able to work out a revenue sharing deal with the television networks in the US.

Also In Q2...
  • SENSIO will be attending NAB 2011 in April, where they will be demonstrating their new product offerings. NAB 2010 was where they announced their deal with FIFA last year, so I will be keeping my ears open for possible new deals to be announced during this time. The event runs Apr 9 - Apr 14.
  • SENSIO has been working on a new website to better represent the company and better explain how their technologies work. I have seen the beta version of the site and must say it already looks 100 times better than their previous site. The new site is to be launched in early April.
  • Look for new licensing agreements with major 3D TV manufacturers to incorporate SENSIO Hi-Fi 3D, Autodetect and S2D Switch into their televisions.
  • Look for announcements for new Live 3D sporting events.
  • Look for updated sales forecasts for the new line of SENSIO-enabled VIZIO 3D TVs.
The Share Price

What can I say? The share price has been a big disappointment so far this year.

Fundamentally I think the stock is a steal right here. The price isn't really much higher than it was a couple years ago - before Avatar was released, before 3D TVs were being produced, before live 3D sporting events were being broadcast in cinemas worldwide, before the successful $10 million financing, before SENSIO signed its agreement with VIZIO and before SENSIO introduced new patented technologies like Autodetect and S2D Switch.

Why this company is currently trading under a dollar I have no idea. The handful of analysts that cover the stock currently have 1-year price targets that range between 2.25 and 4.20 per share. Union Securities has also suggested that SENSIO is a potential takeover target. At under a dollar I could definitely see someone like RealD or even VIZIO looking to take them over at a bargain price.

Technically, today's closing price of .86 is just 2 cents shy of the 52-week low of .84. So far this .84-.86 has provided decent support, and if this level holds it could form the basis for a very strong double bottom.

If .84-.86 breaks then we could see a move down to as low as .70-.75 in the short-term. The fundamentals don't support a move lower in my opinion, but I can't rule it out. The stock is very illiquid and a few large sell orders could easily push the price lower. The flip-side, of course, is that once we hear some positive developments the price could just as easily jump by 40-50 cents with a few large buy orders.

My year-end target for the stock is 2.60-2.70, assuming we get some positive developments in Q2. Longer term, with a market cap of under $50 million, I think SIO.V has the potential to go much higher.

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