OpenTV will report 3Q06 results Monday after the close. Our 3Q06 estimates are: revenue of $26.0 million, adjusted EBITDA of $800,000 and an EPS loss of $0.01. This compares to consensus estimates of $25 million, $1.3 million and a loss of $0.01, respectively, and $19.5 million, $3.1 million, and a loss of $0.03 a year ago. Further points:
• We are looking for a sequential jump in revenue. Our 3Q06 revenue estimate of $26 million is ahead of consensus. We think OpenTV will make it, but a minor miss would not be material, least of all because our estimate includes $1 million from Betting Corp., which is likely too high. However, after factoring this in, OpenTV must also show a material improvement from the $24 million in revenue it has reported for three quarters in a row as this would show new deals are coming online.
• Expenses are likely to be in line with prior quarters. Our adjusted EBITDA estimate of $800,000 is lower than consensus expectations. Again, we do not think a small variance would be all that material. The take away is that OpenTV is sitting in front of accelerated revenue growth with a breakeven cost structure. Therefore, the sequential gains in revenue that will begin to this quarter will be leveraged into positive earnings trends.
• OpenTV is not likely to say anything new about Comcast. We will be listening carefully to what OpenTV does say about this much speculated potential business, but we think a final deal is still a way off. We do not expect any other new customer announcements either. The rumors, mostly stale, include a European telco IPTV deal, NTL/Telewest and a Latin America MSO. We think OpenTV will point to UPC and/or Essel as responsible for the sequential jump in revenues.
• Acquisition of controlling interest to be under scrutiny. Some investors are feeling burnt because they were looking for a full takeout and the shift in controlling interest to Kudelski virtually insures this will not be the case. We think there is a strong fundamental case to be made for OpenTV, which a closer relationship with Kudelski only enhances. However, investors are likely wary that the private, and closely held, Kudelski will recognize their interests.
• Now is a good time to become involved with this stock. We think the macro-case for OpenTV is very compelling. Shares of OPTV have languished, but seem to have critical support at current levels. We believe that after three quarters of flat top-line growth, OpenTV will report its first sequential gain in 3Q06. The number of the middleware deals OpenTV has announced sets the stage for continued sequential revenue gains.
• Our price target on BUY rated OPTV is $5. Our price target of $5 is based on a DCF analysis that employs a terminal multiple of 25.0x 2009E FCF of $34 million and a discount rate of 14.0%. Our model for FCF reflects only announced middleware wins and a small contribution from interactive applications.
• Investment in OPTV should be considered speculative. OpenTV is not yet profitable and valuation is subject to a number of forward looking factors, which are subject to change based on dynamics which cannot be completely foreseen at this time.