Transgaming TNG
January 04, 2010 - 8:49pm EST by
2010 2011
Price: 0.87 EPS $0.00 $0.00
Shares Out. (in M): 57 P/E 0.0x 0.0x
Market Cap (in $M): 50 P/FCF 0.0x 0.0x
Net Debt (in $M): -12 EBIT 0 0
TEV ($): 38 TEV/EBIT 0.0x 0.0x

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A new Intel partnership is positioning tiny Transgaming into the investment limelight. Intel has chosen Transgaming to be the exclusive video game provider for their new Intel CE Media chipset that will allow TVs to become truly interactive.  This will enable Transgaming to become the equivalent to the “Apple App Store” for these new Intel powered devices, giving Transgaming an incredible opportunity. The potential is that in five years, Transgaming could be generating $150 million of recurring revenue with very high margins. This $50 million market cap company could easily go up 10 to 20 times from its current valuation. With little coverage, very little, if any institutional ownership, and no exposure, Transgaming is truly an undiscovered gem.


Video Game “porting”


Traditionally, video games have been made for PCs or consoles (Nintendo or Playstations). The Apple Macintosh market for video games has historically been a small, niche market. Video game companies only make their big title games available for the Macintosh, and the games’ release dates are approximately nine months or so late. This is because video game companies need to have separate programming teams to program the game in Mac OS. The cost to accommodate this programming is $500k to $1.5 million, and involves considerable extra game development time.


Enter Transgaming (TNG). TNG developed a technology called Cider, which easily wraps around a video game programmed for the PC, and in a few weeks, with some tweaking; the game will work on the Mac. This has cut development costs and time to market substantially. Now video game companies can simultaneously launch games on PC and the Mac. This is an extraordinary deal for video game companies. TNG has signed development contracts with Electronic Arts, Activision, Ubisoft and many others to work on their specific games.


Mac Gaming


In 2006, Apple decided to start making their Macs with Intel chips, which dramatically increased the power, compatibility and graphic processing power. This, combined with the advent of the Ipod and the Iphone, created a surge in Mac sales. No longer a niche market to be ignored, video game companies are now eyeing this market, and they need TNG’s help.


Apple has shipped more than 30 million Intel-based Macs since 2006 and expected to have 40 million in the marketplace by end of 2009.  Mac sales are growing at over a 30% clip. As Apple manufactures and sell more Macs, the more people switch to Macs, there will be more demand for games on the Mac, and more demand for TNG’s Cider technology. TNG is a back-door play on the success of Apple and Mac sales.


Some of successful games that TNG has worked on in the past 18 months are Spore, Command & Conquer, Sims3, Kung Fu Panda and Shaun White Snowboarding. All were successful Mac game launches.



Financial Model and How TNG gets Paid


TNG typically gets paid a small upfront fee for working on every game plus 5% to 10% of sales of every game sold for the Mac. Since Electronic Arts was the flagship firm to start using TNG, I believe TNG receives a set fee, and doesn’t share in a percentage of sales, as they do with other firms. The more games TNG works on and the more sales these games generate, the better TNG’s performance. I expect TNG will work on 25 games in 2010, with a strong possibility of working on 40 in 2011. Consider that to date TNG has only worked on 45 games since inception, and you can see that TNG should see tremendous growth in the next two years from porting games just due to the increase in the number of games it works on.


MMO Gaming Opportunity


In the last two years, Massive Multiplayer Online games (MMOs) such as World of Warcraft have taken the online world by storm. Huge sums of money are generated from these MMOs. The giant in the field is World of Warcraft. Consider that World of Warcraft has 11.5 million subscribers paying $15 a month. That comes to over $2 billion a year in sales.


TNG has signed up with two MMOs that are rapidly growing, Eve Online and City of Heroes. TNG, using their Cider technology, has enabled these games to be able to play on a Mac, and is receiving a small upfront fee plus a percentage of every Mac user’s monthly fee. My estimate is that TNG receives more than $1 a month from every Mac MMO subscriber. Both games are growing rapidly and there is a wonderful opportunity to sign up additional MMO games. This could grow into a spectacular recurring revenue stream for TNG.


TNG has also developed a digital distribution arm called Gametreeonline. In all agreements going forward, TNG is getting exclusive digital distribution for any games it works on for the Mac. This means that if you do not want to buy the game in a store, but prefer to download it online, and you own a Mac, you must buy it and download it from Gametreeonline typically gets around a 30% distribution fee of the retail price. Gametreeonline was launched in June of 2008 and currently has over 30,000 registered users, with very little marketing.


The company plans on dramatically beefing up marketing and investment in the site this year including adding social networking features and adding to the titles offered.


Linuix and Cedega


TNG actually got their start with a predecessor technology to Cider called Cedega, which allowed PC games to be able to be played in the Linux operating system. Linux users pay a subscription fee to be able to use Cedega. In the past 18 months, TNG has been focusing on Cider and the Mac and not Cedega and Linux. This has led to a slight decline in Cedega sales.


The company plans to beef up its focus going forward because TNG’s experience with Linux has set up the opportunity of a lifetime for the company., the Intel Game Changer


On September 24th, Intel and TNG announced a porting and development agreement that included Intel investing $500,000 in TNG (While $500,000 does not seem a lot, I believe it is the beginning investment for Intel not the final amount). Intel on the same day launched its new Intel CE Media processor (Pentium processor combined with a powerful graphics chip). The Intel CE Media chipset aims to revolutionize the television by making it fully interactive by providing interactive information and entertainment without any additional hardware beyond your cable or satellite set-top box and your TV.


Imagine watching a football game with a video feed of a friend in another town. You have the ability of talking and video conferencing while watching the game together.  Imagine watching CNBC, hearing a stock recommendation, pressing a button and getting all of the stock’s information instantaneously.  Basically, Intel’s new chipset will make a TV more like our computers. The new chipset will also offer gaming. This is where Transgaming comes into play.


The new chipset is a Linux based chipset. How does one get games programmed for the PC and consoles to work in Linux? You need TNG.


TNG and its service is the exclusive game provider for any Intel enabled set-top box or TV. TNG’s software sits inside the chipset so there is no getting around it.


It was fascinating to watch the video from the Intel Developer’s Forum with the Senior Vice President in charge of the Digital Home at Intel talk to the press and then introduce the CEO of Adobe Systems (NASDAQ: ADBE), an $18 billion company, and then follow that up with introducing and sharing the stage with the CEO of Transgaming, Vikas Gupta, a $50 million market cap company.


Intel will officially launch this product at the Consumer Electronic Show (CES) in Las Vegas on January 7th with Transgaming in the Intel booth showcasing the product.


Apple App store comparison and the Incredible Economic Moat


TNG will essentially be the distributor and will get at least 30% of whatever goes through its service. The model is the Apple “App Store.” TNG will test and approve games and then offer it over its service in concert with cable and satellite operators.


This is a major game changer for Transgaming. In the past, it has been small company dealing with much larger game companies on their schedules and economic parameters. This new Intel initiative aims to be substantial. If game companies want to participate with this service, they need to get TNG’s approval.


This enables TNG to market package deals for developing games for, to receive a percentage of the back-end sales. This allows TNG to receive 50% or more of a game’s retail price.


If Intel’s CE Media Processor is successful, TNG will become extremely valuable asset. How big could the opportunity be?


Huge Market opportunity


Currently in Europe, cable and satellite operators sell $1.5 billion a year worth of games, but these are primarily basic games such as chess, checkers, mahjong and poker. There isn’t any 3D processing power that the new Intel chipset offers. Imagine how much bigger the market could be if state of the art gaming was available?


Suppose we look at it in another dimension. Let’s make the assumption that in five years  Intel sells 50 million CE Media chipsets worldwide. Of those 50 million, we shall assume that 10% represent sold played games, or to 5 million homes. For estimate purposes, we will calculate these gaming homes buy $100 worth of games a year, or less than $10 a month. That is $500 million of revenue flowing through, of which TNG will receive a stream of 30% or $150 million per year, clearly a high margin of revenue. Currently, TNG’s market cap is only $50 million (57 million shares outstanding).


VC comparison


Presently, TNG has a working prototype of the service and expects to fully launch this product in q3 of 2010. It was demonstrated for the press in September, but until it is fully functional for millions of people, it will need a larger investment for development. This is not vaporware or a dream project, but something that is functioning currently, and will ramp to a full launch in q3 of next year. Initial tests will begin in q1.


Consider a “pre-revenue” (no revenue) company called OnLive, which is going to launch a gaming service next year. OnLive just raised venture capital that gives it a valuation of $500 to $750 million. This is a very exciting industry and investors see big dollars in gaming.


OnLive games will be hosted on their servers. Gamers will have to endure latency issues and the gaming speed will ebb and flow, based upon the Internet connection. This is inferior to, which will download to your set-top box or tv, and without the ebb and flow.


Few investors, analysts, or media know about TNG, that its valuation is only $50 million and its market cap has only increased $30 million since the Intel investment and announcement (and that includes a recent $9 million capital raise).


Recent Financial Results and a $9 million Capital Raise


TNG grew revenue over 100% to $3.4 million for the fiscal year 2009, ending May 31st. In their first quarter of fiscal 2010, the company grew revenue another 60% year over year. TNG lost about a half a million dollars in net income q1, but on a cash flow basis was breakeven. I expect that their core business of porting games will be profitable this fiscal year. However, the service will require an investment of $5 to $10 million to get up and running to service millions of potential customers. 




In late December, TNG closed a private placement of about CAD$9 million priced at CAD$0.70 per share. So, the company is flush with cash and should be up and running by the third quarter of this year. TNG has previously built its entire company and technology with a total of $5.5 million of invested capital. Now imagine what they can do with $10 million.


I believe that Intel and possibly another strategic investor will invest an additional $2 to $3 million, and ratchet up their ownership of the company. It is my opinion that TNG has no need for further investment from the capital markets.




This is a small Canadian based company lacking profits. There are a myriad of things that can possibly go wrong with this investment, including execution risk, capital dilution risk, illiquidity of the stock, and the management expertise of successfully launching this new service. There could be new and better capitalized competitors. Also Intel’s new chipset could be a failure.


The wonderful thing about TNG is that their core business of porting games to the Mac should keep doubling every year for the next couple of years and will be profitable this year. Should the new service be a failure, TNG is not a zero and can arguably still make a decent return for an investor. This is an important point to consider while weighing the risks.




Transgaming is an unknown, under-followed Canadian microcap that has the opportunity to generate hundreds of millions of dollars in revenue due to its new exclusive service with Intel. At a $50 million market cap, I do not believe the market is pricing the security correctly. I expect an avalanche of positive press, which will result in its appearance on investor’s radar screens. I feel that this will make the stock soar.  



-CES publicity

-contracts with cable and satellite providers

-agreements with game companies

-further follow-on investment by Intel

-launch of new MMO games

-launch of

-doubling of core business

-investor relations, which the company has never done before now

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