Description

Chyron is in a unique position to grab a share of the market for graphics for internet video broadcasting, a market forecast to grow rapidly.   While the success of their entry into this new market is speculative, the currently depressed stock price makes for an investment with attractive upside/downside scenarios.  Management appears to believe, as multiple officers and directors have been consistently adding to their collective 41.4% ownership of the company.

Chyron is the leading maker of graphics technology equipment and software for television news broadcasts.  The company has been around since the 1970's when they made the first character generators for television broadcasting.  In modern years, their products provide the graphics for television news broadcasts such as weather forecast graphics, over the shoulder graphics, maps, pie charts, stock charts, etc. U.S. Clients include ABC; CBS; NBC; ESPN; CNN; Fox News; Fox Sports; Gannett; C-SPAN; Discovery; Weather Channel; Home Shopping Network; Comcast; DirecTV; Shop atHome; Court TV; NBA; Turner Entertainment; Portland Trail Blazers; Waterman Broadcasting Cartoon Network.  They have numerous overseas broadcast clients as well.

The company emerged from bankruptcy in the early 1990's and was purchased on May 26, 1995 (70% of the company for $32 million) by MWW group, an investment group including the current CEO, Michael Wellesley-Wesley.  This group added Pro-Bel Limited, a maker of Video Signal switching equipment, on January 24, 1996.  The Pro-Bel acquisition was initially successful but ultimately a disaster as the equipment Pro-Bel made became obsolete.  Pro-Bel was sold in 2003 and Michael Wellesley-Wesley became CEO on Feb 21, 2003.  The stock swam around on the OTCBB until getting an AMEX listing on Oct 3, 2007 and switching to the Nasdaq on Oct 3, 2008.  Chyron's graphics business was consistent and at least moderately successful even while the Pro-Bel problems weighed on the companies financials.  Since the disposition of Pro-Bel and the takeover of the CEO position by Wellesley-Wesley in 2003, Chyron has performed reasonably well.  Historical Financials look like this.

Year          Revenue         Intl Revenue        Operating Profit       Gross Margin       R&D

2003          $19.4M

2004          $23.2M               $4.9M                 $0.1M                        58%                 $3.4M

2005          $25.1M               $5.3M                 $0.83M                      62%                 $2.9M

2006          $26.2M               $5.5M                 $1.30M                      67%                 $4.0M

2007          $32.3M               $8.5M                 $2.62M                      68%                 $5.0M

2008          $34.3M               $8.3M                 $1.24M                     70%                  $6.3M

2009*        $24.6M              $5.9M                 ($4.8M)                     68%                   $7.4M

*2009 numbers obtained by multiplying 9 months results by 4/3      

The revival of the company has been driven in part by the conversion to digital television, which drove news broadcast stations to upgrade their equipment.  The company continues to benefit from the transition of news broadcasts to high definition in the US as well as conversions to digital and high definition broadcasts overseas.   

Strong sales and earnings in 2007 and early 2008 made it a favorite of momentum growth investors (including Oberweis Asset Management) who chased the stock price to as high as $6.50.  The 15% downturn in television advertising in 2009 has dropped Chyron's sales by 28% as broadcast stations delay upgrading to high definition and reduce capital expenditures.   Earnings in 2008 and 2009 have also suffered from a steep ramp up of R&D spending to 29% of sales in the most recent quarter.  Chyron has gone from a growth stock to a money-loser and the momentum investors have sunk the share price to deep value levels as they have gotten out.

The special situation opportunity is related to the recent ramp up of R&D spending.  In January 2008, Chyron acquired a small start-up company called Axis for $3.04 million.  Immediately after the purchase, Chyron ramped up R&D spending to integrate Axis with their existing products, link Axis with other data service providers, and continue to develop Axis.  R&D spending continues at a rate of nearly $2.0 million a quarter (29% of sales) almost exclusively spent on Axis.   Axis renders graphics for broadcast without using specialized equipment operated by graphics artists as traditionally done.  Axis uses the software as a service business model.  Graphics are created using a web browser connected to the Axis server.  When the graphic design is complete, a graphic file is created and e-mailed to the broadcast station where it is put on air by Chyron or competitors equipment.

 Axis is so easy to use that no specialized training is required to make professional looking graphics.  CBS affiliate KLAS in Las Vegas is a recent adopter and had this to say

"We now have traditional graphics people using Axis right alongside newscast producers and directors," said KLAS Creative Director Lee Minard in a statement. "The simplicity of use for creating over-the-shoulder and full screen graphics has allowed us to easily and cost-effectively create graphic content for our programs without sacrificing quality. Our primary usage is for news, although it does support some of our weather requirements as well."

Gannet, one of the largest television broadcast groups in the country, was the first adopter of Axis in the Summer of 2008.  Broadcast Engineering had this to say

"Gannett Broadcasting president David Lougee called Chyron's new AXIS graphics platform a "game changer" as he announced its adoption across 23 Gannett news stations in the summer of 2008.

An online content creation system for broadcasters, AXIS uses existing on-air graphics packages to enable anyone in a newsroom to build broadcast-quality news graphics directly from a desktop without special hardware or software required.

This implementation of the AXIS system has transformed the way Gannett TV stations create, manage, share and broadcast news graphics across their 23 news stations, while freeing graphic artists to focus on more creative aspects of design and branding.

The AXIS server-based model enables virtually anyone in a newsroom to create powerful graphics for everyday use as well as breaking news - on the fly - at a higher quality, faster rate and lower cost than traditional routes. It is superior to traditional graphics content creation workflow models because it removes from the shoulders of highly skilled graphics artists and designers the repetitive aspects of everyday graphics creation, freeing them to concentrate on more creative aspects of design and branding.

Gannett uses AXIS for daily breaking news graphics, maps and charts while still relying on its newly formed Gannett Graphics Group (G3) for more complex and customized work. G3 assists local Gannett stations by providing a variety of design options to enhance the real-time data provided by the AXIS creation process. The result is an exponentially increased output - and better graphics - especially for smaller stations and fringe newscasts that now have access to a talent pool beyond their previous budget or personnel.

Because AXIS is Web-based, if there's a late-breaking news item, a high-quality map that is specific to the city, the story and the situation can be created online, at home, on a laptop or straight from a live shoot by anyone.

The use of image databases inside the AXIS system is central to the accelerated time between creating a graphic and bringing it to air. AXIS facilitates the sharing of graphics content over the entire Gannett Group with access to virtually unlimited data sources such as AP GraphicsBank, together with the group's own archives of proprietary images. AXIS was designed with the objective that graphic content should be created intuitively and dynamically but with consistent design and brand quality.

Chyron's AXIS platform facilitates this process in that a graphic need only be created once to be simultaneously publishable to multiple formats, displays and devices, which has obvious return on investment advantages when compared with other traditional methods of graphics content creation."

The Gannet article noted that Axis was "freeing graphic artists to focus on more creative aspects of design and branding".  In fact, television broadcast groups that have adopted Axis have laid off some of their specialized graphics artists.  Axis is a means to significantly cut costs at a time when cost-cutting is needed in the broadcast industry.

To date, Axis has five (Gannet, Fox, Sinclair, Scripps, Post Newsweek) of the top 20 news broadcast groups as clients.  They expect to sign more stations in 2010.  Revenue from Axis in Q3 2009 was less than 5% of revenue (roughly 0.3M).  Axis is clearly a big drag on earnings currently with $7.5 million in R&D spending annually and just $1.2 million in revenue. 

Investment Thesis: 

• 1. Axis could turn into a very valuable web property with many small clients. The number of television news broadcasters in the world is limited. However, web broadcasting promises to increase the number of content creators needing professional looking graphics immensely. Yahoo Tech Ticker, for example, uses Axis to create stock charts. Newspapers are going online and many will likely begin offering some form of video news and/or professional online graphics. Internet video viewing is up 50% year over year according to Nielsen. Adams Media Research projects advertiser spending on internet video streams to approach $1.7 billion by 2011. Much more professional looking video is going to be produced by many more entities in the near future. Many of the new web broadcasters will be low-budget operations that will find Axis's software as a service model requiring no capital spend very attractive.
• 2. Axis may be difficult for competitors to duplicate. First, Chyron has already invested $15 million or so in Axis even though they were already world class in graphics technology. There is significant cost and expertise required to duplicate the Axis site. Chyron can make this investment now because they have a current client base of news broadcasters to spread the cost around. Web video broadcasting is in its infancy so a competitor cannot yet offer a competing service without eating losses for some time. Further, in order to render all the graphics clients want, Axis has agreements with numerous data service providers such as the Associated Press, Reuters, MapPoint, TeleAtlas, and Custom Weather. They have partnered with a number of other companies to integrate their web-based software into Axis as well. Partners include ForScene (post-production web-based image editing), Atex (content management system), Asseto (digital media format conversion), and TxtStation (Global Mobile Marketing). The Axis website through these partners will offer a comprehensive web-based graphics and internet video solution. Duplicating these partnerships may be difficult for a startup who has no current client base. Chyron will have competitors but their first move advantage may help them capture a share of a big market.
• 3. Axis provides Chyron access to new and larger markets. While the news broadcast graphics market is only about $200 million a year, Chyron's management believes they will eventually compete in the video editing and video post-production markets. Additionally, Axis can be used to produce professional website graphics.
• 4. If Axis doesn't work out, the remaining Chyron business is viable. Excluding the $7.6 million in Axis R&D expenditures and about $0.9 million in Axis revenue, Chyron would have posted an operating profit in 2009 with their traditional equipment business; this operating profit in a severely depressed market for their equipment. Gross margins run 68% so increased revenue in 2010 will drop to the bottom line. High definition news broadcasts are still the minority in the U.S. and there is plenty of remaining opportunity overseas as well. The company has just $0.9 million in debt and $3.9 million in cash. Axis is being valued by the market as having negative value because of its losses. The 41% ownership by officers and directors provides some security that they are and will manage the company appropriately in shareholder interest rather than attempt to expand endlessly.

In summary, Chyron's current broadcast clients are providing it a unique opportunity to enter the small but rapidly growing internet video broadcast graphics business using a software as a service business model.  The success of this effort is speculative but if it works out could result in a valuable web property providing a service with rapidly increasing demand.  There are barriers to entry for potential competitors.  The downside on the investment is limited by the existence of a viable high margin core business that isn't going away.  High and increasing insider ownership is an additional plus.

Catalyst

Rapid Growth of Axis Revenue