Yahoo Finance
Filing
Sept 20, 2022
July 31, 2022 Data (Year end: Oct. 31)
Price: $4.07. Shares: 28.8m, Cap: $117m.
1. Business
(1) History
(1) History
The company was founded in 2004 by Mirko Wicha. Through time it developed a low-latency video-encoding and transmission technology called SRT(Secure Reliable Transport) protocol. It is suitable for real-time video transmission like video monitoring, streaming, video broadcasting, etc. In 2017, it open-sourced the SRT protocol and created the SRT Alliance which is joined by Microsoft, Avid, Harmonic, etc. Now it has over 500 members.
The company's main products are video-encoding-related hardware. By 2017, its revenue has grew to over $50m with around $2m in profit. It maintained around 15% organic growth from 2017 to 2020 with over $80 in revenue and $6m in profit in 2020.
In Aug. 2013, the company temped to IPO through a reverse merger but the deal did not go through. In Dec. 2020, it got listed directly on TSX and raised around $30m at $6.00/share.
After the IPO, the company acquired 2 more companies. In Q3 2021, it acquired CineMassive, a video wall provider. Later was named Haivision MCS. In Q2 2022, it acquired AVIWEST, a mobile streaming product company. While its revenue has increased to around $120m on an annual basis, its employee number also raised to over 400 from 250 at the time of IPO. Since Q4 2021, it encounters problems with low growth and higher cost. In Q3 2022(July 31, 2022), it became EBITDA negative.
(2) Product & Business
SRT protocol: The SRT protocol is a direct competitor of RTMP which is used by Youtube and Facebook. The main advantage of SRT is its low latency while also achieving relatively high video quality. However, it's not suitable for two-way conversation or content delivery to the end-user. Also, it's relatively inconvenient to set up. SRT protocol has become more popular lately but is still not yet widely adopted.
50% of revenue is hardware related while the other 50% is software and services. However, only 30% of its revenue is considered to be recurring. Typically Q1 is the weakest quarter which accounts for 20% of annual revenue while Q4 is its strongest quarter which accounts for 30% of annual revenue.
It has 3 different customers, the government, the media company, and the enterprise. Each seems to account for around 1/3 of its revenue. The CineMassive acquisition has contributed to its government and enterprise market while AVIWEST's customers are mainly media companies.
I think its major strength is in the media and government sectors. As they most likely care more about the latency and quality of their real-time video streaming.
(3) Industry
The streaming hardware industry seems highly competitive. In some applications, the encoder and decoder hardware are more like commodities. When searching for "SRT encoder" on Amazon, there are mostly unknown hardware brands made by Chinese manufacturers.
The SRT protocol is not supported by Youtube, Facebook, and Twitch. Currently, all three of them are using the RTMP protocol(Real-Time Messaging Protocol). When comparing RTMP to SRT, it is pretty obvious that SRT is better. However, there are also other newly created protocols to consider.
Real-time video communication: Those are dominated by Zoom, etc. To achieve real-time video conferencing, the latency must be <200ms. While it is still very hard for SRT to achieve that, it might be possible in the future. Thus Haivision might be able to enter the real-time conferencing market. On the other side, there is no barrier for Zoom to enter the video streaming as well.
(1) Management
CEO Mirko Wicha: He was a salesperson and had over 20+ working experiences at different tech companies before creating the company.
(2) Ownership and Compensation
Mirko Micha: 3.6m shares. 12.4%
Thomas Hecht: 3.3m shares. 11.3%. Major shareholder. Used to be a director of the company.
All insiders hold shares: 31%.
3. Financial data
Notes: Debt and cash
As July 31, 2022, it has $9m in cash and $18m in debt.
Notes: Share data
1. In 2020, before the IPO, it had around 245k shares outstanding. They became 20.8m shares after it did a 1 for 85 splits during the IPO process. The original price for each class of shares was from $0.79(class A) to $2.24(Class D). It issued 5.75m shares during IPO. After the IPO, it had around 26.5m shares outstanding.
2. In 2019, the company bought back 30k(2.5m after split) shares for $7.7m in total( around $3/share after split). At the time of IPO, the stated share capital is around $21m. However, the company's presentations have mentioned that invested capital is only $8.25m pre-IPO. Even with removing the $7.7m from the $21m, the numbers do not match.
4. Valuation and comments
(1) Currently the company is traded under 1 time of its annualized revenue which is very cheap. However, it is very scary that its profitability is disappearing very fast post the IPO and the latest two acquisitions. I think this is a short-term issue if its revenue continues to grow or it can simply cut back its spending.
(1) Currently the company is traded under 1 time of its annualized revenue which is very cheap. However, it is very scary that its profitability is disappearing very fast post the IPO and the latest two acquisitions. I think this is a short-term issue if its revenue continues to grow or it can simply cut back its spending.
(2) Its R&D spending as a percentage of its revenue has raised from 20% to over 25% lately which is very impressive.
(3) If any of the major streaming platforms adopted the SRT protocol, it would be a major boost for the company.
5. Risk
(1) Currently the company is experiencing a glitch in its profitability. It might take quite a while for it to become profitable again, or might not even be able to achieve that.
(1) Currently the company is experiencing a glitch in its profitability. It might take quite a while for it to become profitable again, or might not even be able to achieve that.
(2) The hardware might become more commoditized as the SRT is open-sourced. It might have trouble keeping its high margin in the future. It must keep spending heavily on R&D to keep its leading position.
(3) As the Internet speed is getting faster, its technology might become less useful, thus it might never gain major adoption by the industry.
(4) Its organic growth rate is just around 15% lately which is not that high. As the pandemic ends, there might be some pressure on revenue as well as some customers might cut back on spending.
6. Conclusion
Overall, The company seems to be managed well. It is a leading innovator in a niche technology area. Although it is quite risky at this moment, it is worth investing some in it as the potential return could be very high too. The price is very acceptable on a price-to-sales basis.
7. Links
https://www.youtube.com/watch?v=bZcPqJxwk5c
