Small Cap Values

PNI Digital Media reported the strongest quarter in the company’s history last week, however it was a little below my expectations.  The weakening US Dollar had an impact, but even backing that out transactions came in a little light.  Here’s the overview:

• Record revenues of $7.8 million, up 8% year over year and 14% from the prior quarter.
• Record transactional revenue of $6.2 million, up 7% year over year.
• Net profit for the quarter increased 32% to $1.2 million compared to $0.9 million in the first quarter of Fiscal 2009.
• Cash expenses fell 1% to $5.0 million for the quarter.
• Non-GAAP adjusted EBITDA of $2.7 million, an increase of 28% year over year.
• Non-GAAP adjusted EBITDA margin of 35.4% vs 29.8% year over year.
• Repaid the $937,548 short-term loan outstanding.

So while all that is good, I was expecting a little better.  Transactions were only up 16% to about 61.5k per day, I had been expecting closer to 64k or 65k per day.  Organic growth has slowed, and while they still are targeting 20% growth from existing partners, I think that may be a little aggressive.

Management is trying to monetize their network, but adding new “on ramps.”  They have 3 planned for the next 12 months, those being Mobile, Business Printing, and Social Stationary.  On Mobile, they have a contract signed, but can’t disclose it (this never sits well).  Business Printing “needs to be better than the initial pilot” with Walmart Canada which did not meet expectations.  And they are still working on a strategy for social stationary.

The good news is that management is keeping a handle on expenses, so while revenue may not be as strong as I had hoped, they should still have positive EBITDA.  Analysts are expecting $9m in EBITDA for 2010 and $12m for 2011, my estimates are not that far off.  The current market value is about $55m, they’ve got net cash of between $3m and $5m after adjusting for working capital needs, leaving an EV of about $51m.  Assuming they generate about $9m in EBITDA in Calendar 2010, it’s trading at a forward EV/EBITDA of only 5.5x (and only 7.6x trailing).  At this time next year, if the stock price doesn’t change, the forward EV/EBITDA will fall to 3.5x.

Clearly the stock is cheap, and management agrees.  They announced an intent for a share repurchase agreement, stating on the conference call:

We continue to be frustrated by our share price as it relates to the fundamentals of our company.  We believe the robust platform that we have built and the additions we are adding to it merit a higher consideration than we are currently seeing.  We are demonstrating our ability to scale and to generate greater revenues and profits, but our stock price has not moved accordingly.  With PNI now working capital positive, and starting to put a decent buffer of cash in the bank, we believe one of the best investments in the market are our own shares.

I couldn’t agree more.

Disclosure: Long PNDMF.

PNI Digital Media reported Q409 Earnings today after the market close.  And like most earnings reports, it was filled with both positives and negatives.  The conference call was very short with only 2 analysts asking questions, perhaps because the press release didn’t hit the wires until after the call had started!

The main negative to me was that average orders per day came in at only 38,000, compared to the 42,000 I had been expecting.  However, counteracting this decline was an increase in transactional revenue per order, from $1.26 last year and $1.27 last quarter to $1.43.  As a result, transactional revenue was up 26.6% to $4.95m and represented 72.6% of total revenue.

Other revenues also increased nicely, as installation, membership, archive, and professional fees all came in higher than I expected.

Gross margin (after deducting network delivery costs) increased to 80.1% from 77.7% last quarter and 62.9% last year.  The company started to leverage other costs as well, as sales and marketing declined, however G&A and R&D increased more than I had expected.

The end result was a profitable quarter, with EPS of $0.02 (taking everything, including foreign currency, into account) and EBITDA of just over $2m or $0.06 per share. EBITDA margin came in at 30.4%, a record high quarterly level.

For the full year the company saw $6.1m in EBITDA on $24.8m in revenue, an 24.7% margin.  This is about $0.18 in EBITDA per share, which means the company is trading at about 10x EBITDA, while I expect EBITDA to grow at a faster rate.

For the current quarter, while the company didn’t give any guidance, they did say that on the peak day they processed 150k orders, with over 2m prints, 5m photo uploads, and 2.5m greeting cards.  As a comparison, the peak day last quarter saw 150k orders.

They did warn that that recent decline in the US Dollar could hurt future results as revenue would have been only $23m had the exchange rate been where it is today for the full year.  Expenses, however, are in Canadian dollars so margins could suffer.

Doing some quick numbers, for Q1 I expect 65k orders per day on average leading to $7m in transactional revenue.  I expect total revenue to come in just shy of $9m, expenses just over $7.65m, for $1.3m in earnings, or $0.04 per share.  EBITDA should be around $3.2m, which comes out to about $0.094 per share, so we’ll see if they manage to round that up to $0.10.  My estimates could be high with the currency issue, but this is about 50% higher than last year on a 24% increase in revenue, the beauty of operational leverage.

That’s it for now, I’ll likely have more after reviewing the results more.  This quarter seemed much “cleaner” than the last quarter, however, as there wasn’t the strange marketing expense hurting revenue growth.  We’ll see how the market responds tomorrow.

Disclosure: long pndmf.ob.

PNI Digital Media may have broken a record for using the word record in the title of a press release:

PNI Digital Media Sets Record Q3 Revenue with Record Transactions Processed

But it’s what’s not in the press release that is most interesting to me.  More on that in a bit.

As for the reported earnings, Transactions were up 79%, leading to 39% transactional revenue growth, and 29% total revenue growth.  And those are some pretty impressive stats considering, if you haven’t noticed, the economy is still pretty bad.  Same Store Sales at retailers continued to grow at about 20%, which is, oh, just a little better than pretty much any other retailer.

Continue…

Here’s the Link.

PNI, formerly called PhotoChannel Networks Inc., provides retailers such as Wal-Mart and Costco with online and in-store digital photofinishing. The analyst says PNI has developed online business printing services with Wal-Mart Canada, which allow customers to professionally print envelopes, business cards, letterheads and marketing material. “We believe the market for online business printing represents a large untapped opportunity.”

Cool company. Great peeps! Meet PNI. : todaysellen.com.

Inside PNI’s offices, a short interview with a PNI employee.

Disclosure: Long PNDMF.

reportonbusiness.com: EYE ON EQUITIES / STOCKS THAT SHOULD BE ON YOUR RADAR SCREEN.

Photochannel Networks is mentioned in today’s Globe and Mail, Canada’s National Newspaper.  It quotes Versant Partners who rate the stock a buy with a $3.60 target.

Disclosure: Long PNWIF.ob.

Photochannel released earnings after the close today.  Revenue came in just as I had expected, although the composition was weighted less toward transactional revenue than I had thought.  Expenses were a little higher as well, so EBITDA came in at only $0.02 per share vs the $0.03 I had expected.

Gross Margin was a little light at 67.3%.  The company had thought this would be at 70%, but network delivery expenses were higher than I had estimated.  73% GM is the highest I have in my model, so there might not be that much higher to go here.

Same Store Sales continued at a nice 20% pace in the quarter, despite the economic downturn.  The photo industry seemed to go into the “doldrums” (CEO Kyle Hall’s words, not mine) in February and March but has since gotten better.  This is similar to what the Photo Industry groups have said.  PNI managed the 20% same store sales as people continued to shift to more photos processed through the upload/pick up method.

So far in Q3 orders are going at 34k/day, up from 21,302 last year.  This is a greater than 50% increase already and the order rate should increase from here as we go into Memorial day and June.

The best part about the PNI story is the network.  If they can leverage this for more than just photos, the value of the company could be substantially greater.  They are expecting a press release about Business Printing through Walmart sometime in the current quarter, so that’s a step in the right direction, but I really want to know what other areas they’re looking at.  They tried music in the past, and they couldn’t figure out how to make money at that.  But anything digital that needs to go from point A to point B is possible, I’m just not sure what that could be…

Disclosure: Long pnwif.ob.

PNI Digital Media Provides Business Update and Date of Release for Second Quarter 2009 Financial Results – Yahoo! Finance.

Photochannel Networks announced they’d be reporting Q2 results on May 13th.  They also provided two pieces of news:

First, Fred Meyer and King Soopers, two grocery/department stores owned by Kroger, will be implementing a new connected Kiosk by Photochannel based on technology acquired from Works Media.  I also find it interesting that Kroger no longer provides 1 hour printing of uploaded images to their stores.  This service ended March 15th, but you can still get pictures mailed to you via Snapfish.  So is this a prelude to winning all of Kroger’s upload and pick up in store business??  Kroger has 2,841 locations as of 12/31/08, and while I don’t think too many people get their pictures processed at the grocery store, every incremental dollar helps if they were to win all Kroger’s business.

The second news item was about volumes across their network during Q2 (ending March).  Orders were up 153% and sales were up 213%, which were slightly above my estimates.  Average Daily orders came in at 31,000, which is similar to Q4 2008 (ending September).  I’m expecting about $5million in revenue with 70% gross margins, leaving $3.5m in Gross Profit.  I see $1.6m in R&D, $900k in G&A, $300k in S&M, and $1.4m in Amortization, leaving a loss of about $700k or $0.02 per share.  Backing out Amortization and Stock Based Compensation gives me $1million or $0.03 per share in positive EBITDA.

The stock has been stuck at $1.25-$1.35 for a long time.  I hope they beat my estimates and the stock breaks out of this range.

Disclosure: Long PNWIF.ob

PhotoChannel Networks Inc.: Corporate Update.

Photochannel released a corporate update a few weeks back, and it contained a few bits of information.  First, they licensed a red eye removal technology and will receive royalties from future sales.  I really don’t expect this to lead to much revenue.  Second, Transactions and Dollar Volumes over their network were up 168% and 229%, respectively,  in January and February over last year.  Finally, they closed the WorksMedia acquisition.

So what does all this mean for profitability?  Well the big wild card is Pixology revenue.  In last year’s Q2, Pixology had almost $1m in revenue.  But this is software revenue, and in trying economic times, it makes no sense for a retailer to pay to upgrade their software when the old software works just fine.  So there is no doubt that Pixology revenue will be down.  The company even wrote off the investment (Costco was a Pixology customer, so if you’re wondering why they bought Pixology at all, I think there’s your answer).

But back to a Q2 estimate, I’m assuming 250% increase in transactional revenue, $200k from WorksMedia, and $250k from Pixology.  I might be high on Pixology.  On expenses, I’m assuming 30% of revenue goes toward network delivery costs (70% GM), an ~10% decline in in other expenses (from Q1), and $1.4m in amortization.  Over 33.5m shares, this gives a net loss of $0.02 per share.

Backing out Amortization and estimated Stock Based Compensation of $300k, gives almost $1m, or $0.03 per share, in positive EBITDA.

Considering this is the company’s seasonally worst quarter, $1m in EBITDA in a quarter for a $50m company is pretty impressive.

My only concern is a 50k share insider sale from Peter Scarth.  This represents a fraction of the shares he owns, and likely is just a way to raise some cash, but I still do not know why one would sell shares at this level.  Of coruse they are restricted in when they can sell, so they can’t always wait for the best price, but I’d prefer insiders not sell any shares.  I will continue to watch insider transactions, hopefully we get some buys instead of further sells next.

Disclosure: Long PNWIF.ob.