Chyron Corp.: Smallcap TV Graphics Company Ready for Prime Time

After difficult times in the late 90s and the beginning of this decade, Chyron (CGS) made several management changes. The new management team initiated their extremely successful turnaround strategy that has resulted in current strong financial performance. Beginning in 2004, the company regained profitability. In each year subsequent the company has at least doubled net income. In 2006, all debt was eliminated.

Recent financial performance has been extraordinary. Third quarter 2007 revenues were up year over year by 36%. Corresponding net income showed a 450% increase for the same period.

In alliance with the completion of the turnaround strategy, the board of directors authorized a reverse split to gain access on a broader exchange – the AMEX. Previous to the split, the company had over $45 million shares outstanding; a remnant from the days it was a much larger entity in the late 90s. After the transformation that began in early 2003, the company essentially was operating similar to a start-up, with the advantage of 35+ years experience in graphics. The reduction in the number of shares was more in line with the size of the company. The stock has appreciated 20% in the two months after the split.

Peter Lynch is credited with coining the phrase “10 bagger”. This author will attempt to argue that CGS will have accomplished this within 3 years.

In conjunction with the graphics segment that is currently poised for 30 to 40% revenue gains in 2008, the company has utilized this core technology and expertise to develop products to expand into ancillary markets. The first is digital signage. The market in which Chyron competes is anticipated to be $400 to $500 million annually. Chyron has developed the ChyTV line and a network for customers, ChyTV.net. Similar to the graphics one sees on ESPN, NBC, CNBC, and CNN (all Chyron customers), individual establishments will be able to customize any screen in their place of business. Currently, Buffalo Wild Wings is in the process of installing ChyTV and ChyTV.net into its network of 450 restaurants. Other installations include the San Francisco Giants baseball stadium, Miami Dolphins football stadium, and the New York Islanders hockey arena.

ChyTV also has significant applications in schools, universities, and government. The ChyAlert system can immediately post to every screen at a facility any information in the event of a crisis, bad weather, or criminal event.

Other initiatives include WAPSTR, a system of integrating user content flawlessly and immediately into newscasts. Anyone with a camera phone can send and image directly to a local TV station by phone, and within seconds the station can have the image on air as breaking news.

Channel Box integrates the images on the bottom of the screen during broadcasts. Examples are the ABC logo, what show is next, etc.

Chyron has developed strategic partnerships to assist in the marketing and distribution of the new initiatives. Another exciting possibility is the partnership with Madison Road Entertainment, a leader in product integration in media applications.

The main impetus for Chyron’s growth for the remainder of 2007, 2008 and 2009 will be the switch to HD and digital broadcasts worldwide. The demand for broadcasters, cable, and individual productions to provide the most current HD products with all graphic abilities will enable Chyron to grow revenues in excess of 30% annually just on the graphics segment. Add the ability of digital signage and the other products, and Chyron could obtain year over year revenue growth surpassing 50% beginning in 2008.

Because their business has migrated to a more software centric and recurring revenue model, the economies, combined with gross margins of 70%, will result in net income growth well in excess of that of the revenue. In addition, the company has nearly $50 million in tax loss carry forwards to apply against earnings, which adds to bottom line profitability and results in increased cash generation.

The stock is current trading at $5.50 with a P/E of 26 based on trailing twelve month earnings. This author agues the stock is greatly undervalues based on future growth in earnings prospects. Being that the company has no analyst coverage, one must derive key statistical ratios and data oneself. Utilizing a conservation growth rate of 30%, the PEG ratio is less than 1. My current projection of the forward P/E is under 7.

The recently released study by IBM stated advertising will change more in the next 5 years more than it has changed in the last 50 years. Traditional methods (print, radio and TV commercials) lack the ability to locate and target specific customers to the level Chyron is positioned, through all of its products and established position in media markets, to extraordinarily benefit from the dynamic shift in advertising delivery not only in the United States, but worldwide. Because of the relative small size of the company (market cap of $86M), and its integration into media channels and essentially all channels of electronic delivery of advertising, it would be negligent not to recognize the potential of the model as an acquisition as all large internet, media, and entertainment and technology organizations battle to gain competitive advantage in advertising delivery.

Disclosure: Author is long CGS