Shares Outstanding: 44 million
Revenue for Quarter Ending 01/31/07: $6.9 million (EBITDA $1 million)
Revenue for Year Ending 01/31/07: $17.8 million
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Micro-cap Monday: Betting on Better Bandwidth
Monday, May 14, 2007
By Danny Deadlock
Important Notice: We speculate on microcap stocks, we do not invest. Speculating on microcaps (penny stocks) is nothing more than educated gambling and you must always be aware that it is extremely high risk. The returns can be tremendous, but never speculate with more than you can afford to lose as they are often subject to extreme volatility. We are not investment advisors but are here to provide insight into various aspects of the market and research into microcap stocks we feel offer strong growth potential over a 12 to 18 month period.
Satellite technology leader seems undervalued
International Datacasting (TSX: T.IDC; 38 cents)
Shares Outstanding: 44 million
Revenue for Quarter Ending 01/31/07: $6.9 million (EBITDA $1 million)
Revenue for Year Ending 01/31/07: $17.8 million
Good working capital, Minimal debt
Valuation potential
This is a small, fully-listed TSX tech company that has been in business since 1984, has a clean balance sheet, is showing strong revenue growth, and is profitable, which should be worth one to two times annual sales. The past year-end showed revenue of $17.8 million but Q4 was very strong at $6.9 million. If International Datacasting (TSX: T.IDC, BullBoards) can even sustain $25 million annually during the next 12 to 18 months, this puts a value of 57 cents a share at one times annual sales. At two times, it's closer to $1.10. Even splitting the difference provides a nice valuation objective. All this, however, depends upon its ability to continue growing the business. If it does even better, this is where micro-caps can really pay off. Regardless, you need to read the next section as it's one of our primary risks and the reason we're cautious in this current price range short term. Fortunately, the mid and high 30-cent range is providing excellent liquidity.
The warning
We have tried numerous times to contact the CEO of this company and emailed three separate people asking for someone to contact me to discuss the firm. No one has had the courtesy of even an email. This attitude likely explains why the company has been stuck in the 20-cent range for the past two years. If it wasn't experiencing such strong revenue growth, profitability, and strong industry potential, we wouldn't waste our time. However, if its revenue growth trend continues, there could be real potential here - so long as a person can ignore its lack of "investor relations common sense."
Some micro-caps appear clueless when it comes to attracting new investment or supporting existing shareholders. They believe the market will magically recognize their "business expertise" over time and knock down their door to purchase stock. Rarely does this happen unless the stock is dramatically under the radar, fundamentally undervalued, and has strong growth potential. If you catch these cheap enough and tuck them away, in time, some type of catalyst will move the valuation dramatically higher - usually this involves a news release that catches media attention or financials that the market suddenly recognizes. If this doesn't occur, it can mean tying up dead money.
We believe the stock is currently undervalued (even in light of this) and has strong growth potential, so we're overlooking this investor relations shortcoming for the time being. Just remember it's an important risk factor. Volume for the past two years has been very low but following release of financials last month, it has picked up significantly.
About IDC and importance of DVB-S2
IDC is in a niche industry providing products, services, and systems for distributing multimedia content across broadband satellite. Markets for its technology include the emerging IPTV, HDTV & digital cinema, streaming media, interactive distance learning, radio broadcasting networks, syndicated TV content distribution, digital signage, financial news and weather distribution, and emergency response.
The company has been a satellite technology leader and innovator for years and is recently one of the first to market with a new technology called DVB-S2. This has resulted in a 30% improvement in bandwidth carried across a satellite signal. Digital cinema, for example, can deliver in one to 1.5 hours, compared with four or five previously. The speed improvement translates into huge cost savings, efficiencies, and signal quality. This also dramatically expands the applications for IPTV and HDTV. The new S2 technology being pushed as the global industry standard could result in significant growth for IDC going forward - one of the specific reasons for speculating at this stage.
IDC was recently awarded a new research and development project financed by the European Space Agency (ESA) to develop next-generation, ultrahigh- performance DVB-S2 technology.
They are also encountering demand from long-time customers upgrading their networks to take advantage of the cost savings and high-performance of DVB-S2, including a major UK-based agency for its global financial news service. IDC was selected to provide its next generation of DVB-S/S2 satellite router/receivers for the expansion of a secure financial information network in Europe.
SES Americom, one of the largest satellite operators in the world, is using IDC's DVB-S2 receivers exclusively for its new IPTV service IP Prime. IP Prime enables telcos to offer "triple play" to its customers by adding television to its normal service offering of telephony and Internet connectivity - and satellite delivery is reliable, secure and has the lowest possible operating cost for this application. Access IT, another leader in the industry, is rolling out digital cinema service across the U.S. using IDC's DVB-S2 receivers. AccessIT expects to achieve an installed base of several thousand digital cinema systems by year end and, overall, the industry expects to see 7000 digital cinemas worldwide within the year.
Satellite has finally come of age with digital cinema, we're seeing pent up demand for HDTV, and IPTV (Internet Protocol Television) is likely the next technology we should see emerging. It has been talked about for years, but the technology and cost efficiencies just haven't been there. The new DVB-S2 could start to change that.
Internet TV, or Internet Protocol TV, would integrate television with high-speed Internet and telephone services, somewhat similar to the "bundle" services now offered by cable companies. The big difference would be that IPTV would mesh those services with each other, so viewers could watch television on their desktop computer or cellular phone, or have caller identification on their television. It would also give televisions Internet-like capabilities.
IPTV's biggest markets are in East Asia, especially in Hong Kong, Japan and South Korea. Small companies have driven the early development of IPTV in the United States, but now the big telecommunications firms are seriously looking at it. Satellite in massive regions like India and China could be particularly lucrative.
Market opportunities and growth potential
There is significant growing demand for Broadband Satellite and government sponsored education projects in regions such as Mexico, Thailand, Columbia, Brazil, Russia, Turkey, Malaysia, and Argentina.
Australia, for example, was an important satellite broadband market in the last year. While smaller in scope, the Australian Broadband Connect access subsidy program was an excellent example of a government initiative to bring broadband services to rural areas at a price on par with services in urban parts of the country. IDC has demonstrated on a global scale its ability to serve rural and geographically isolated regions.
There is a lot of opportunity here for growth and the technology (in particular with DVB-S2) could really start to come of age.
Enterprise Networks - this includes large organizations with multiple remote locates, government agencies and other organizations requiring their own private broadband wireless IP network, typically for security or access reasons.
Distance Learning - schools, universities, corporations, government agencies and other organizations that wish to provide education and training via a broadband wireless network. IDC clients already include the Mexican government's K-12 program, the Virtual University of ITESM across Latin America and universities in China.
Internet Infrastructure - this includes Internet Service Providers (ISPs), Application Service Providers (ASPs) and distributors of broadband content via wireless networks to business and residential users.
Multimedia Content Distribution - includes broadcasters, government agencies and other organizations that wish to provide broadband multimedia content (video, audio and-or data).
Further due diligence
There is little point repeating and re-typing information that is already well summarized on their Web sites. These not only explain what they do, but who their large clients are and what the market potential is like. The International Datacasting site explains the satellite side of the business, while Profline explains why that division is one of the leading audio and data distribution providers across Europe.
www.intldata.ca /www.profline.com
Disclosure: Danny Deadlock owns 25,000 shares of International Datacasting (TSX: T.IDC)
