RealNetworks, Inc, Neutral, $3.55 We see a tough year ahead for RealNetworks as macroeconomic conditions, particularly weak advertising environment and unfavorable foreign currency excha
Trang 1Table 161: PCLN Annual Balance Sheet
$ in millions
FY-07 FY-08E FY-09E FY-10E
Prepaid expenses and other current assets 33.1 45.2 47.9 38.9
Series B Mandatorily Redeemable Preferred Stock 0.0 0.0 0.0 0.0
Common stock, $0.008 par value per share, 0.3 0.4 0.4 0.4
Treasury stock, 2,496,326 shares and 2,496,326 (489.1) (493.4) (493.4) (493.4) Additional paid-in capital 2,124.0 2,123.3 2,349.7 2,640.5
Accumulated other comprehensive income 50.3 3.8 3.8 3.8
Source: Company reports and J.P Morgan estimates
Trang 2Table 162: PCLN Annual Cash Flow Statement
$ in millions
Compensation expense arising from restricted stock awards 16.3 34.1 17.0 20.0
Prepaid expenses and other current assets (9.2) (2.7) (2.7) 9.0
Accounts payable and accrued expenses 9.8 63.5 20.0 57.0
Additions to property and equipment (15.9) (17.1) (20.0) (24.0)
Purchase of short-term investments and shares held by minority interest (173.9) (403.9) - -
(Funding)Return of restricted cash and bank certificate of deposit 1.1 (1.5) - -
Equity investment and other acquisitions (90.6) (0.7) - -
Proceeds from issuance of convertible senior notes - (102.4) 0.0 0.0
Proceeds from exercise of stock options/warrants 19.82 5.2 3.1 0.0
Proceeds from sale of minority interest in subsidiary - 0.0 0.0 0.0
Excess tax benefit from stock based comp 3.60 6.5 0.0 0.0
Effect of exchange rate changes on cash 7.821 (13.1) 0.0 0.0
Cash at the Beginning of period 423.6 385.4 386.5 593.1
Source: Company reports and J.P Morgan estimates
Trang 3RealNetworks, Inc, Neutral, ($3.55)
We see a tough year ahead for RealNetworks as macroeconomic conditions, particularly weak advertising environment and unfavorable foreign currency exchange rate fluctuations, take a toll on revenue streams We expect the competitive landscape for online music distribution to remain under Apple’s control and think the Rhapsody subscriber acquisition effort will face headwinds We maintain our Neutral rating on the stock
• We expect the macroeconomic environment to affect ’09 results We think soft demand for online advertising worldwide will limit room for growth in the Games segment Based on current industry trends, we expect performance-based advertising revenue that RealNetworks generates in Europe to be also affected, along with CPM-based inventory, due to weakening consumer response We are modeling 2.5% Games revenue growth in ’09 with flattish subscription revenue and a slight rise in syndication revenue offset by Y/Y decrease in advertising
• We think Rhapsody America’s subscriber acquisition will be negatively impacted
by the launch of MySpace Music A potential negative impact on subscriber base implies longer path to operating profitability for Rhapsody Management believes Rhapsody can be profitable if a sufficient scale is achieved We, however, remain cautious on the longer-term outlook for pure play subscription music offerings:
(1) we continue to believe hardware as opposed to software is where positive margins are; (2) the necessary scale will be even harder to achieve now with a new competitor added to already dominant iTunes As such, we expect the number of music subscribers to decline to 1.862M at year end ’09, down 1% from our forecast for ’08
• The company management believes that current scarcity of funding and lower valuations may create attractive acquisition opportunities We think $2.86 per share in cash & equivalents on the balance sheet (as of Q3 ’08) currently provides downside support to the stock price as operating income remains negative As such we think a transaction resulting in less cash per share without an
improvement in operating profitability will be viewed negatively by investors
• 2009 drivers In our view, the following factors will drive shares in 2009: (1) the
degree of resilience of the revenue streams in a recessionary environment; and (2) M&A activity, specifically the cash costs of potential acquisitions and the impact
on earnings and cash balances
Our current and newly introduced 2010 estimates are in the table below:
Table 163: RealNetworks Financial Snapshot
$ in millions, except per share data
J.P Morgan
Revenue 154.6 606.8 594.9 609.4 6.9% (1.9)% 2.4%
EBITDA (11.7) (6.2) 4.0 4.7 (130.1)% (164.1)% 19.5%
Trang 4Our Estimates and Outlook for 2009
We expect revenue and diluted GAAP EPS of $595M and 2c, respectively While our revenue forecast didn’t change materially, the change in our EPS projection is due to a revised tax rate
Our Estimates and Outlook for 2010
We are introducing F’10 revenue and EPS estimates of $609M and 2c
We Maintain Our Neutral Rating
We rate RNWK Neutral, as we believe cyclical and competitive challenges in key markets will limit room for growth in mid term, resulting in underperformance compared to the peer group At the same time we see current cash balance of $2.86 per share providing downside risk protection from the current stock price levels
Risks to Our Rating Risks to the upside:
• Advertising on MTV and affiliated networks following the creation of RNWK/MTV JV may result in higher music subscriber growth than we currently estimate We believe the relative simplicity of competing customer propositions (iTunes), not lack of consumer awareness, has limited growth rates
• Penetration of broadband-enabled mobile handsets can grow faster than we expect, creating a larger opportunity for carrier application service (CAS) revenue
• RealNetworks’ newer PC games can prove more popular than the ones released previously, potentially leading to the creation of incremental advertising inventory and revenue upside Our model currently assumes that games ad revenue growth will primarily come from increased sell-through rates
Risks to the downside:
• We believe RealNetworks will pursue acquisitions in the near and mid-term Such acquisitions could be dilutive to RNWK shareholders
• We see advertising revenue generated through advertising embedded in casual
PC games as one of the potential revenue growth drivers Advertising revenues are usually strongly correlated with the economy and may be below our model given the economic downturn
• The Technology Products and Solution segment customer base is relatively concentrated, making its revenue streams vulnerable to increased pricing pressure from wireless carriers
• Concentrated ownership by Robert Glaser, chairman and CEO, creates risk of potential conflict of interest with minority shareholders
Trang 5Table 164: RNWK Annual Income Statement
$ in millions
INCOME STATEMENT
2007 2008E 2009E 2010E
Costs & Expenses:
Antitrust Litigation benefit, net (60.7) 0.0 0.0 0.0
Adjusted EBITDA (Company definition) $58.0 $58.4 $70.5 $72.0
Equity in net loss of investments (0.4) (0.4) 0.0 0.0
Minority interest in Rhapsody America 19.8 40.1 41.1 41.1
Gain on initial formation of Rhapsody America 3.9 0.0 0.0 0.0
Gain on Sale of interest in Rhapsody 12.5 23.7 25.5 26.3
GAAP EPS
Adjusted EPS
PF EPS
Weighted average common shares:
Source: Company reports and J.P Morgan estimates
Trang 6Table 165: RNWK Quarterly Income Statement
$ in millions
1Q'07 2Q'07 3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08E 1Q'09E 2Q'09E 3Q'09E 4Q'09E
Total operating expenses 29.8 92.1 103.8 121.1 103.7 109.7 116.8 128.5 110.1 114.4 114.6 113.6 Total cost & expenses 75.7 141.3 160.5 182.8 159.1 165.3 178.9 185.5 165.9 169.5 170.0 162.4
Operating Income $53.7 ($5.2) ($15.4) ($25.9) ($11.5) ($12.7) ($27.0) ($30.9) ($18.0) ($16.3) ($20.0) ($18.6)
Adjusted EBITDA (Company definition) $11.9 $12.7 $17.6 $15.7 $20.1 $17.8 $11.6 $8.9 $16.3 $17.9 $17.2 $19.1
Equity in net loss of investments (0.1) 0.0 (0.3) (0.1) (0.1) (0.2) 0.0 0.0 0.0 0.0 0.0
Gain on sale of equity investments 0.0 0.1 0.0 (0.0) 0.0 0.2 0.0 0.0 0.0 0.0 0.0 0.0
Other income, net 9.4 8.7 21.7 28.6 17.976 15.1 23.2 23.1 17.526 17.4 21.1 21.4
Income (Loss) before income taxes $63.2 $3.5 $6.4 $2.7 $6.4 $2.4 ($3.772) ($7.7) ($0.5) $1.1 $1.0 $2.9
Net Income (Loss) $40.0 $1.3 $4.3 $2.7 $2.4 ($1.305) ($4.500) ($3.7) ($0.5) $0.6 $0.6 $1.7
PF EPS
Source: J.P Morgan estimates and company reports
Trang 7Table 166: RNWK Annual Balance Sheet
$ in millions
ASSETS
Current Assets:
Cash and cash equivalents $476.7 $317.2 $361.1 $407.5
Trade accounts receivable, net of allowances for doubtful accounts and sales
Deferred tax assets, net, current portion 0.0 0.0 0.0 0.0
Prepaid expenses and other current assets 26.5 44.4 38.8 44.0
Equipment, software, and leasehold improvements:
Total equipment, software, and leasehold improvements, at cost 140.3 169.9 203.5 238.1
Less accumulated depreciation and amortization 83.8 104.0 124.9 146.4
Net equipment, software, and leasehold improvements 56.5 65.9 78.6 91.7
Notes receivable from related parties 0.0 0.0 0.0 0.0
Deferred tax assets, net, non-current portion 40.9 35.6 35.6 35.6
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Deferred revenue, current portion 39.6 43.1 40.1 43.3
Convertible Debt, Current Portion 100.0 0.0 0.0
Accrued loss on excess office facilities, current portion 3.4 4.3 4.3 4.3
Deferred revenue, non-current portion 2.7 1.1 1.1 1.1
Accrued loss on excess office facilities, non-current portion 7.3 3.9 3.9 3.9
Deferred tax liabilities, net, non-current portion 22.1 15.2 15.2 15.2
Shareholders' equity:
Preferred stock, $0.001 par value, no shares issued and outstanding 0.0 0.0 0.0 0.0
Undesignated series: authorized 59,800 shares 0.0 0.0 0.0 0.0
Common stock, $0.001 par value authorized 1,000,000 shares; issued and
outstanding 154,108 shares in 2007 and 163,278 shares in 2006 0.2 0.2 0.2 0.2
Accumulated other comprehensive income 16.1 16.1 16.1 16.1
Trang 8Table 167: RNWK Annual Cash Flow Statement
$ in millions
Cash flows from operating activities
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Loss on disposal of equipment, software, and leasehold improvements 0.3 0.2 0.0 0.0
Gain on sale of equity investments (0.1) (0.2) 0.0 0.0
Gain on sale of interest in Rhapsody America (16.4) (23.7) (25.5) (26.3)
Minority interest in Rhapsody America (19.8) (40.1) (41.1) (41.1)
Excess tax benefit from stock option exercises (0.6) (0.1) 0.0 0.0
Accrued loss on excess office facilities (3.8) (3.5) (3.8) (3.8)
Increase of net deferred tax asset valuation allowance 0.0 0.0 0.0 0.0
Net change in certain operating assets and liabilities, net of acquisitions 1.2 (29.8) 0.0 0.0
Cash flows from investing activities:
Purchases of equipment, software, and leasehold improvements ($26.7) ($32.6) ($33.6) ($34.6)
Purchases of short-term investments (133.4) (207.1) (222.8) (222.8)
Proceeds from sales and maturities of short-term investments 207.2 185.8 222.8 222.8
Purchases of other intangible assets (2.8) (1.8) 0.0 0.0
Proceeds from sale of equity investments 1.6 1.2 0.0 0.0
Decrease in restricted cash equivalents 1.8 0.8 0.0 0.0
Purchases of cost based investments (1.7) (4.5) 0.0 0.0
Cash used in acquisitions, net of cash acquired (45.6) (10.2) 0.0 0.0
Cash flows from financing activities
Net proceeds from sale of common stock under employee stock purchase plan and
Net proceeds from sale of interest in Rhapsody America 48.7 49.6 $50.0 51.5
Excess tax benefit from stock options exercises 0.6 0.1 0.0 0.0
Effect of exchange rate changes on cash and cash equivalents $0.9 (7.5) 0.0 0.0
Cash and cash equivalents, beginning of period $525.2 476.7 317.2 $361.1
Source: Company reports and J.P Morgan estimates
Trang 9Shutterfly, Inc., Overweight ($6.75)
We believe macroeconomic weakness will continue to negatively impact consumer spending in 2009 and, as such, are forecasting revenue growth of 7.6% in F'09 compared to our F'08 estimate of 11.7% growth However, despite economic pressure, we believe Shutterfly will remain profitable in 2009 due to improved efforts to reduce costs Shutterfly trades at 2.6x our F’09 EBITDA estimate of
$49.3M, versus peers at 6.5x, hence our Overweight rating We are introducing a $12 December 2009 price target
• We think customer growth and order volume will decelerate in 2009 We
expect F’09 customer growth of 11.5% and order volume growth of 4.1% Y/Y, compared to our respective F’08 growth forecasts of 12.9% and 6.0% Although
we believe the weak consumer sentiment will continue to put pressure on top-line growth, we do not feel Shutterfly is at risk for losing market share
• We expect reduced costs will help Shutterfly gain leverage We think the upcoming Phoenix facility set to open in 2Q'09 will help Shutterfly reduce its
operating expenses as a percentage of revenue Additionally, we believe the company will continue to benefit from its new shipping relationship with UPS
As such, we are modeling a gross margin of 54.7% in F'09, vs our 53.0% F'08 estimate, and a F’09 EBITDA margin of 22.0%, up ~610 bps Y/Y
• We think outsourcing initiatives and manufacturing efficiencies will improve FCF We believe planned outsourcing initiatives as well as reduced storage and
hardware costs in 2009 will drive to lower CapEx as a percentage of revenue As such, we expect Shutterfly to improve FCF next year and are modeling F'09 FCF
of $18.4M, compared with our $15.6M estimate in F'08
• 2009 drivers In our view, the following factors will drive SFLY shares in 2009:
(1) continued mix shift trend from print to non-print products, (2) reduced expenses resulting from the upcoming Phoenix facility, and (3) planned outsourcing and manufacturing initiatives
• Maintaining 4Q’08 estimates We are maintaining our 4Q’08 revenue,
EBITDA, and GAAP EPS estimates of $102.8M, $33.3M, and $0.41, respectively
Our current and newly introduced 2010 estimates are in the table below:
Table 168: Shutterfly Financial Snapshot
$ in millions, except per share data
J.P Morgan
Consensus
Trang 10Key Financial Metrics and Forecasts
The following table summarizes our Y/Y growth assumptions by business segment through 2009 A detailed description of our forecast is in the following two sections
Table 169: Shutterfly Operating Metrics
2007A 2008E 2009E 2010E
Average orders per customer 1.93 1.82 1.70 1.73
As % of total revenues
Personalized Products Revenue 56% 59% 62% 63%
Source: Company reports and J.P Morgan estimates
Our Estimates and Outlook for 2009
We are modeling F’09 revenue, EBITDA, and GAAP EPS of $224.4M, $49.3M, and
$0.15, vs our F'08 estimates of $208.5M, $33.2M, and $0.03, respectively We are modeling F’09 Y/Y growth in customers, orders, and AOV of 11.5%, 4.1%, and 3.4%, respectively
We think macroeconomic weakness will continue to negatively impact consumer spending in 2009, causing Y/Y revenue growth to decelerate However, we are encouraged by Shutterfly’s initiatives to reduce costs and are thus forecasting a gross margin of 54.7% in F'09, compared with our F'08 estimate of 53.0% In addition, we think manufacturing efficiencies will reduce CapEx as a percentage of revenue in
2009 and are modeling FCF of $18.4M in F’09, vs our $15.6M estimate in F'08
Our Estimates and Outlook for 2010
We are introducing F’10 revenue, EBITDA, and GAAP EPS estimates of $266.1M,
$62.0M, and $0.31, representing growth rates of 18.6%, 25.8%, and 102.3%, respectively We are modeling F’10 growth in customers, orders, and AOV of 16.4%, 13.7%, and 4.3%, respectively
We are basing our estimates with the assumption that the U.S macro economy will begin to recover in 2010, thus improving consumer sentiment As such, we think customer and order volume growth as well as a continued mix shift from Print to Personalized Products and Services will drive revenue growth in 2010
We Are Introducing a Price Target of $12
In introducing price targets for our coverage, we have derived multiples based on 5-year forward EBIT CAGRs We believe the historical record does not provide a meaningful guide to valuation as (a) the majority of the companies in our coverage did not have a track record as public companies through the previous recession and