TAKING STOCK: Espying a tough road ahead

Published in the Ottawa Business Journal newspaper and website.
Aug. 4, 2008

Click here to view this article on OBJ.ca

Espial CFO Carl Smith says the recent acquisition of Kasenna Inc. should bolster excitement in the Ottawa-based company.
Espial CFO Carl Smith says the recent acquisition of Kasenna Inc. should bolster excitement in the Ottawa-based company.
Photo by DARREN BROWN for the Ottawa Business Journal

Internet TV products maker Espial began its public life with a bang, with the company’s stock price soaring by more than 12 per cent on its opening day in June 2007 on the TSX, quickly reaching a high of $9.25 about a month later.

Since then, however, Espial’s shares have dwindled to a mere 95 cents each, an 87-per-cent plunge from the company’s debut price of $7.85. Partnership agreements with significant service providers have been fairly thin, and the company was forced to cut 30 per cent of its staff at the end of 2007.

But now, the company is hoping to turn itself around with the $6.6-million acquisition of California-based competitor Kasenna Inc. But what will the market think of Espial’s prospects with this addition, which the company has said will expand its footprint to more than 100 customers worldwide, with more than 2.4 million IPTV licences in deployment?

The company’s view: “Our stock price is out of favour and doesn’t reflect the value of the company. As we continue to build out and execute our plan, and if the industry unfolds as we believe, we think the market will realize the opportunity in front of us and there will be more interest,” said Espial’s chief financial officer Carl Smith.

Mr. Smith conceded that the IPTV market has been slower to take off than expected, and that the general malaise in the stock market, especially in the tech sector, has not helped matters.

He added, “We’re a relatively small-cap stock that is very thinly traded. My experience is that when there’s not a lot of excitement in the industry itself, and specifically right now in the technology and stock market, smaller trades happen, and the price trickles down.

“Smaller trades become larger with excitement,” he said.

The Kasenna deal should help to bolster some of that enthusiasm, said Mr. Smith, since it’s a “well-recognized” name in the video-on-demand software space. The acquisition will also help consolidate a highly fragmented market and hopefully allow telecom companies – Espial’s main target customers – to focus their attention.

“There are a number of smaller companies out there because the industry’s in an early stage, so the time to make decisions (for customers) is extended, because telecom companies know they have to address a lot of companies out there,” he said. “But now, we’re well-positioned to be in the top three, and Kasenna is part of our strategy to be there … We’re now basically a market-leading IPTV software vendor.”

The analysts say: Unfortunately, industry observers seem to agree that the Kasenna buy, while a solid acquisition, isn’t a game-changing deal.

“I hate to say that the deal doesn’t mean much, but Kasenna peaked a couple of years ago,” said James Heath of Dittberner Associates. “It had been declining in terms of revenues and sales over the past two years, and the acquisition was part of the inevitable consolidation.

“It could be positive in that Espial will have a bigger installed base, but they didn’t buy someone growing in leaps and bounds.”

The main problem for both companies, Mr. Heath said, is inertia in the television services industry, an age-old issue that many say can only be solved by the passage of time.

“We’re trying to convince people to put television on networks in Europe, the Middle East and China, but remember it took us 40 to 50 years to develop the cable TV market in North America. The television nation wasn’t born overnight,” said Mr. Heath. “The market where all the revenue is already has a coaxial cable network, and where there isn’t a strong cable competitor already, there isn’t a strong propensity to watch TV.

“It takes a long time to convince people to do that.”

Jon Arnold of J Arnold and Associates agreed, noting, “Becoming established as front-runners in the independent vendor pool is a good strategy, and this is as good a time as any, but IPTV is still not mainstream technology. The telcos are looking closely at it, but there are still issues and revenues are coming slowly.

“As (companies like Espial are) starved for revenues, over time there will be attrition and they will run out of money, so they’re forced to make deals like this because they have to find other ways to survive if they think their technology is worth keeping, so they have more staying power until the market gets into more of a spending mode.”

He added that since the TSX isn’t typically known for its tech sector following, it’s not surprising that Espial’s stock hasn’t had a very good run in the year since its public debut.

And until television service providers can offer something people are actually willing to pay for that isn’t available on existing cable networks, Espial will have a bit of a hard slog ahead trying to stay in the game, as the IPTV market grows up in phases, said Mr. Heath.

“It’s a wait-and-see kind of thing,” he said.

Catalysts to watch: A breakthrough with North American cable companies wanting the flexibility an all-IP structure (instead of the telecom companies Espial is targeting); consolidation in the IPTV market; reduction in the cost of networks such as fibre-to-the-home; interest from markets such as Russia and Eastern Europe.

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