Sector Watch: DVR plays
A recent study by The Carmel Group predicts a dramatic surge in the installed base of digital video recorders (DVRs) and a five-fold increase in related revenues from hardware, software and service fees to $5.5 billion over the next few years.
DVRs are becoming increasingly popular with consumers since they offer a way to effectively sort through the rising volume of broadcast, cable and broadband video and fast forward through commercials. The Carmel Group study predicts that roughly one-third of all 108 million U.S. households with televisions will have DVRs by year-end 2008. DVRs are joining cell phones, flat screen TVs and digital music players among the list of “must have” consumer electronics. The Carmel study also predicts that by 2010 there will be as many as 1.5 million users of portable digital video recorders.
Satellite television broadcasters are helping to drive increased DVR market share. They offer DVRs as a competitive tool for differentiating their services. As a result, the percentage of satellite television subscribers using DVRs is forecast to increase to roughly 50% by 2010, from 28% currently. Cable service providers are also aggressively marketing DVR technology. As a result, the percentage of DVR users among cable-television households is forecast to rise to about 50% by 2010, from approximately 10% today.
Two small caps that will benefit from these trends are Tivo Inc. (Nasdaq: TIVO) and Spanish Broadcasting System, Inc. (Nasdaq: SBSA).
Tivo
Tivo Inc. has a leading market share in digital video recorders. The company offers subscription-based television services enabling consumers to record, watch and control television and receive videos, pictures and movies from cable, broadcast and broadband sources. In addition, Tivo provides a platform for interactive television advertising and audience research measurement. The company markets its services through satellite television providers, consumer electronics retailers and the Web. It is also pursuing distribution agreements with cable television operators such as Comcast Corporation (Nasdaq: CMCSA) and Cox Communications Inc. and DSI providers such as EarthLink, Inc. (Nasdaq: ELNK) and BellSouth.
At year-end 2006 Tivo had approximately 4.4 million subscribers. During the quarter ended April 2007, Tivo’s net income increased to $835,000, or $0.01 per share, from a net loss of $10.7 million, or $0.13 per share, in last year’s first quarter. The company also announced the rollout of its services on Comcast, an agreement with Amazon.com and an alliance with Australia’s leading broadcaster to distribute Tivo in Australia and New Zealand. Consensus analyst estimates forecast 65% growth for Tivo next year and longer-term growth averaging 25% annually.
My $10 price target is 80% above the recent share price. On Monday Tivo closed at $5.52. The 52-week low is $5.05, established on January 3; the high for the past year was achieved on August 31 at $8.37.
Spanish Broadcasting System
Advertisers recognize DVRs are a new marketing tool offering the ability to customize messages for specific audiences. DVR interactive features allow advertisers to identify and target ethnic groups of interest to them such as Hispanic and Asian viewers.
Hispanic viewers are an especially attractive audience to advertisers because they tend to be younger than the rest of the country. Census Bureau statistics indicate that Hispanics are already the largest minority in the United States, with about 43 million residents representing 14% of the population, and the fastest-growing demographic group.
Increased advertising to Hispanic audiences is benefiting Spanish language broadcasters, who are anticipating a surge in advertising next year as politicians court a key constituency for the 2008 elections. Preliminary data based on fall 2007 advertising commitments suggest that advertising on Spanish language stations will be up 7% this year, versus flat spending for English language stations. Ad spending on Spanish language media was approximately $5.6 billion last year – only about 3% of total ad spending. The growth opportunities for Spanish language broadcasting are immense; if advertising becomes proportional to the Hispanic population, then ad spending on Spanish language stations would increase by more than $15 billion annually.
Spanish Broadcasting System, Inc. is poised to benefit from increased ad spending in the Hispanic market. This company is the nation’s largest publicly traded Hispanic-controlled media and entertainment company. It operates radio and television stations in this country’s largest Hispanic markets and has the #1 rated Spanish language station in America - WSKQ-FM in New York City. SBSA also owns four of the top seven U.S. Spanish language stations. Its stations in New York, Los Angeles, Chicago and San Francisco rank as favorites with 18 to 34-year-olds, a coveted demographic for advertisers.
During the quarter ended March 2007, SBSA’s operating income grew 25% year-over-year to $6.0 million, from $4.8 million. Net losses of $1.4 million, or $0.02 per share, were below analyst estimates of $0.05 per share. The company reported net income of $51 million, or $0.71 per share in last year’s March quarter because of an asset sale. Consensus analyst estimates target 200% growth for the company in 2008 and growth averaging 75% annually over the next five years.
Monday’s closing price of $3.36 is near the 52-week low of $3.27, established May 1; the 52-week high, $5.20, was set October 16. My target for Spanish Broadcasting System is $6.00.
