On2's Customer Base Seeing Strong Growth

ThinkEquity is positive on On2 Tech (AMEX:ONT) saying their channel checks over the last six weeks instill greater confidence that On2 could outperform firm's 1Q revenue estimate, which they have revised up from $2.36M to $2.45M.

Specifically, takeaways are that On2's existing customer base is seeing better than expected growth in their respective businesses which should translate into higher levels of royalty-based revenue. Firm also believes average deal sizes continued to improve in 1Q. Increased confidence in 1Q trends leads them to believe On2 can achieve non-GAAP profitability this quarter, and as such, causes them to raise price target from $1.70 to $2.10.

Firm reiterates ONT as their top pick. ONT shares currently trade at 26.7x 2008 Non-GAAP diluted EPS estimate of $0.06, relative to its peer group at 24x-35x, and projected 3-year EPS growth of 35%. With a relatively fixed cost structure and growing level of highly profitable, recurring revenue, and most recent checks that indicate On2 should outperform firm's estimates and achieve profitability in 1Q, they have adjusted their forward P/E multiple on ONT from 28x to 35x.

Notablecalls: Expect to see some buy interest in ONT.