OpenTV: Great Positioning, But No Top-line Growth (OPTV)

| About: OpenTV Corp. (OPTV-OLD)

Story: The television market is undergoing some upheaval, coupled to the changes in the telecom market, and both caused by the advent of the internet. The big change that has occurred, and is continuing, is the unification of all transmissions into one basic protocol method (IP - internet protocol). Differing hardware will all implement or enable that same protocol. Built on top of that are various different functions, enabled via software. That is very different from the past, where each specific communication or transmission method was implemented via unique hardware and methods. The transition is far from complete (really just beginning), but that is where it is going. There are still many different technologies used (think Cable DOCSIS, cell phones, WiMax, Satellite TV, Telecom, etc.).

The reasons for this transition are that 1) we can, 2) system maintenance is easier and cheaper, 3) system utilization and exploitation is more thorough, 4) introduction of new products is faster and cheaper. The transition is hindered by 1) legacy systems, 2) anachronistic regulatory systems, 3) clinging to competitive moats that are drying up, 4) technological difficulties, 5) transition costs.

Given that overall background, the specific issue here is the transition of TV to IP, appropriately called IPTV. This is what Verizon is trying to roll out with its FIOS network. It is the reason that Cisco (CSCO) bought Scientific Atlanta. OpenTV (OPTV) is a software company positioned right in the middle of this transition. They make the middleware software that enables the end-user products (like TV watching via set-top boxes) to function with various hardware over an IP (or otherwise) based network. That is just a great market position to be in, provided that you have the right direction, and superior products. It's a very competitive field right now (Microsoft is providing the service for Verizon's FIOS, but there have been problems).

In terms of market success, we'll get to that in the next section, but I want to make one point on where OpenTV's story is off. They, like some of the other players, are pushing or enabling interactive advertising. That is different than targeted advertising, where different users are shown different ads or other content based on collected demographics. We think that has a bright (and inevitable) future. Interactive advertising is more like showing an ad and providing links for the viewer to click on to get more information and possibly make a purchase. That idea fundamentally misunderstands the marketplace. If there is one thing these guys need to learn, before burning more money in this 10 year cash sinkhole, it's that:

TV is passive, computing is active.

If I want to pursue something, I'll sit at my desk. If I want mindless, passive entertainment, I'll sit in the living room. Interactive TV is an advertiser's dream, but it's a pipe dream; there is no demonstrated demand, and previous attempts have been big fat flops. Give it up. OpenTV pays lip service to this being a boost for them down the road - hopefully they are not wasting too much money on it. Let's see.

Company: They just posted Q4 and FY 2005 results yesterday. They are happy to be showing their first EBITDA profitable quarter, and "positive operating cash flow for the full year." Yeah, but top line quarterly revenue declined 4% Y/Y ($23.2M/$24.1M), although for the full year it grew 12% Y/Y ($86.4M/$77.2M). This is a dynamic and changing industry, with major developments in 2005 over 2004, and yet their top line only grew 12%. That's pretty close to flat, especially for a supposedly global company with product wins in India and the UK. All their improvements in performance numbers have come from the ITDA part - Interest, Taxes, Depreciation and Amortization. Nothing operational. For operations they show a FY operating loss of $8.677M for 2005, versus $24.827M for 2004. That looks like an improvement, but really they just went from being a piece of junk to being bad. It would make sense if the losses were all attributable to R&D or some other justifiable start-up expenses, but it's not. There's just no way to see from their numbers that they have a profitable business model. Maybe if they hugely ramped up revenue and kept expenses fixed, but they sure haven't demonstrated an ability to do that.

Based on the story, their position, and the PR, we expected these guys to look good. Based on the numbers, they're a Dog.

Stock: OPTV flips around between $2 and $3, and took a bit of a pop on yesterday's press release and today's presentation, but there is just nothing there. Talk is cheap. Top line growth isn't. We'll pass. We're surprised they have not had more success, but we always let the marketplace guide our calls, since we figure their potential and actual customers will always know more relevant details about them than we can. Unfortunately, those customers are just not increasing their buying.

OPTV 1-yr chart:

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