Photochannel PNWIF W
April 14, 2008 - 3:04pm EST by
issambres839
2008 2009
Price: 3.55 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 142 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

How many companies trade at 8 times cash flow but are growing sales organically at 60%? With two major new customers, Sam’s Club and Costco U.S., and existing clients growing at 60%, Photochannel’s sales, cash flow and earnings are about to explode. I expect by the end of this month, when Costco gets “turned on” as a customer, Photochannel will be on an annual run rate of cash flow of $0.25 per share. With 80% plus gross margins, 40% EBITDA margins expected in 2009 and at least $0.45 a share in cash flow, Photochannel will be rolling in cash. Yet it only trades at 8 times my estimate for 2009 cash flow.
Private label online photo processing
 
Photochannel manages the front and back end of a retailer’s photo processing website(s). They are basically a private label version of Shutterfly (NASDAQ: SFLY). Using the example of CVS (NYSE: CVS), a consumer will go to CVS.com and choose “photo,” then “Get started.” Photochannel takes over from there and handles all of the uploading and storage of pictures, then electronically delivers those pictures in the right format to that customer’s CVS location and in one hour those digital pictures are ready to be picked up by the customer. It is important to make the specific distinction of what Photochannel does. They do not own the photo development/printing equipment in the retailer such as CVS. They only help process, store and digitally send the photos as consumers upload the photos to the retailer’s website. They also handle email lists and email marketing functions for their customers for a fee.
 
Their customer list is pretty impressive for a Canadian microcap company:
 
1) Wal-mart Canada
2) Costco Canada
3) CVS (U.S.)
4) Black’s (Canada)
5) Costco (U.S.)
6) Sam’s Club (U.S.)
7) Tesco (U.K.)
8) ASDA (Wal-Mart UK)
9) Shoppers Drug Mart (Canada)
10) Loblaw (Canada)
Other retailers include Kmart (US), Eckerd’s (US), etc.
 
Photochannel provides the same web/photoprocessing service for all of these clients.
 
 
 
 
 
Customers uploading pictures online is small but growing fast
 
Photochannel gets paid a transaction fee every time a customer orders a print(s) and/or gifting product(s) online from one of its client retailers. If a person walks into a store and prints it off of a kiosk or deals with a person from the desk, then Photochannel doesn’t get paid. And this is a very important point, because right now only around 12% of digital prints are uploaded from a computer and printed at a retailer. This means that 88% of digital printing customers are walking into a store and working with a kiosk or a person behind the counter when they could have just uploaded them online and saved themselves the hassle. Why is that?
 
Well, one reason is that uploading online is relatively new. A mere 18 months ago, CVS, one of the five or six largest photo processing retailers in the US didn’t even have an online component to their photo processing.
 
Even though the amount of prints uploaded online is only 12% now, this is almost 40% higher than it was in 2006, as growth is soaring for online printing to retail according to the Photo Marketing Association (www.pmai.org). Photochannel is currently experiencing a 60-70% growth rate of its customer base in transaction revenue. This growth rate is higher than the retail industry, because its customer base such as CVS are larger retailers who are more successful at marketing to customers than the retail industry as a whole.
 
As retailers ramp up their marketing and technology and start actively educating consumers, the percentage should continue to soar. Sometime in the next 3-5 years over 50% of customers printing at retail will have uploaded their pictures online, from currently around 12%. The question is when and how fast will this happen.
 
Acquisition of Pixology should lead to an integrated online/kiosk product
 
Last fall, Photochannel acquired a poorly run kiosk software company called Pixology. Pixology is based in England and had some key customer accounts including Tesco and ASDA (Wal-Mart UK) as well as Costco (US). Pixology also had an interesting kiosk software technology that Photochannel desired.
 
Photochannel has worked the past six months at getting Pixology to breakeven and is now working on integrating Pixology’s kiosk software to work with Photochannel’s online solution.
 
Through Pixology, Photochannel will now be involved in a retailer’s kiosk. Photochannel has developed a new integrated product and by this summer, retailers will be able to offer customers the ability to upload and save pictures online from the retail kiosk. This new product will also allow customers to grab photos already saved online and print them out from the retail store. For the first time, it will allow retailers to offer gifting items like photobooks, greeting cards, coffee mugs, etc. – all in real time live over the internet instead of working manually with counter personnel to mail an order to the retailer’s gifting manucaturer.
 
I think that retailers will love this solution and the success of this software integrated solution could provide substantial upside to my numbers. (I currently include nothing in my estimates from this product.)
 
New customer wins of Costco and Sam’s Club
 
Photochannel won the Costco US contract in November of 2007 and won Sam’s Club in February of 2008. Both of these contracts were won from Snapfish, a division of Hewlett Packard, and Photochannel’s main competitor.
 
The enormity of these wins will soon be evident to the bottom line, making an immediate impact in the June quarter. I estimate that Sam’s Club (which is already up and running) is already Photochannel’s second largest customer on a run rate. And that once Costco comes online (by the end of April), Costco should be at least twice the size of Photochannel’s largest customer, Wal-Mart Canada.
 
Wal-Mart should come up for bid by year’s end or early next year
 
Snapfish, Photochannel’s primary competitor, is living a double life, and that double life is upsetting its customers. Snapfish is trying to have a branded website in which they print for the customer and mail it to the person’s home in addition to being a private label technology provider to retailers. This must have become a point of contention, when in December Snapfish’s branded website cut picture prices to $0.09 a print, well below what its own customers of Wal-Mart and Walgreens were charging. How much do you think Wal-Mart likes it when its suppliers compete with them?
 
Six months ago, Snapfish had Wal-Mart US, Walgreens, Sam’s Club and Costco as clients. Clearly Snapfish is losing customers to Photochannel, as they now just have Wal-Mart and Walgreens.
 
More importantly, with the exception of Wal-Mart US, Photochannel now has every Wal-Mart entity offering online photo solutions under contract including Wal-Mart Canada (which just happily renewed its contract), ASDA (Wal-Mart UK), Wal-Marts in Puerto Rico and Argentina as well as Sam’s Club in Canada and the US (which is owned Wal-Mart).
 
I believe that the Wal-Mart US contract expires in late 2009 (the site launched in September of 2006) and a RFP (request for proposal) will come up by year end or early next year. I think that Photochannel has an excellent shot at winning this contract.
 
Wal-Mart US is the largest photo processor by far and this win could easily bring in $0.50 or more a share in earnings to Photochannel in 2010 and beyond.
 
Costs and capex will flatline as revenue soars, as fixed cost investments are done
 
I believe that Photochannel has had to spend a lot of money to add capacity through technology and data centers to handle the growth in existing and new customers and has recently spent a lot of money to restructure Pixology after its acquisition. This has caused expenses and capex to soar in the recent short term. But this is all over going forward.
 
Consider that capex may be as much as $5 million this year, due to a new data center and other growth capex requirements, but that ongoing capex should only be $1 to $1.5 million a year. This shows how much of a cash cow business Photochannel will be going forward.
 
Further, the company has taken on more people than they need going forward to design and launch Sam’s Club US and Costco US in a timely manner. So I believe head count should actually go down this year as sales ramp. Depending on new opportunities, headcount could actually fall from 93-95 people to 88-90.
 
The point of talking about capex and expenses flat lining and falling is to explain how past expenses seen in previous quarters will not be rising with sales and to understand how much cash flow Photochannel will be generating.
 
Operating model is fantastic
 
Photochannel doesn’t have much in the way of selling or marketing expense, because it doesn’t market directly to the consumer. The retailers do the marketing and promotion. Further, once Photochannel makes its investment in technology, it can scale the amount of data it processes quite easily and only has to make minimal capex investments going forward. It is primarily for these two reasons that Photochannel makes a fantastic investment.
 
Once volume gets going in May, gross margins will reach close to 80% and eventually, gross margins could get as high as 90%. I expect an EBITDA margin next year of 40% (this is before stock compensation expense).
 
Revenue for the June quarter is poised to explode due to Costco and Sam’s Club
 
The key to the attractiveness of investing in Photochannel now is the near term catalyst of a revenue explosion.
 
The addition of Costco US and Sam’s Club US should cause transactional revenue to more than double in their first full quarters of operation, from $2.3 million to $5 million. I calculated this number based upon transaction revenue from both Sam’s Club and Costco to be at least $2 million a quarter in transaction revenue. Add that to my estimate of the March quarter’s revenue (estimated) of $3.5 million and you should get to around $6 million. (This assumes both of these new contracts having had a full quarter of operation.)
 
Very importantly expenses should be flat at around $2.5 million excluding amortization and stock compensation expense, so the entire amount of new revenue will flow to the bottom line. I am expecting EBITDA should be around $2.0 million for the first full quarter of these new customers being live or $0.05 per share on a fully diluted share count of 40 million shares (including all warrants and options).
 
There is a good chance that revenue for the fiscal 4th quarter (ending September) could be close to or even exceed all of fiscal 2007’s revenue. Costco and Sam’s Club are simply that big.
 
Equally exciting is that Sam’s Club had been operating on a five year old system and with Photochannel’s up to date system, Sam’s Club expects to show above average growth (possibly triple digit growth) from past volume as customers learn about the new system.
 
Seasonally the strongest quarter is the December quarter (fiscal 1st quarter), and the company should earn around $8.0 million in revenue and at least $0.09 a share in EBITDA.
 
The run rate of revenue by the beginning of the September ending 4th quarter should be $28 million at a 75% gross margin and $11 million of expenses. That gives me an annual cash flow per share of about $0.25 per share.
 
In 2009, with a full year of Costco and Sam’s Club, gross margin should increase to 80% and the EBITDA margin should be 40% and the company should do about $0.45 per share in cash flow.
 
And this is important; none of these figures include any new customer wins. Any new customer wins would be upside on these numbers.
 
I expect that by the time Photochannel reports the June quarter in August, that the company will probably hold their first earnings conference call.
 
Comps
 
The main competitor and comparable public company is Shutterfly (NASDAQ: SFLY). Shutterfly trades at 33 times 2008 earnings estimates that have been falling. The advantage that Photochannel has is that it doesn’t have to market to customers, nor does it have to have the expensive machines to print. Shutterfly has to spend tons of money on marketing. This compares poorly to retailers that already have a connection to consumers who are already shopping at the stores. It is my opinion that once Photochannel starts to perform and show substantial cash flows and earnings, investors who are infatuated with Shutterfly will flock to Photochannel.
 
The other comparison is Snapfish, which was bought by Hewlett Packard in 2005 for $180 million. Consider that Photochannel is taking all of Snapfish’s customers and that the market is so much bigger than it was in 2005, and Photochannel’s market cap (fully diluted with 40 million shares) of under $150 million looks paltry in comparison.
 
Both comparisons make Photochannel look very inexpensive.
 
This is my second report
 
I decided to write a second report (first one was January 2007) because Photochannel is a much better investment now than it was in 2007 and its risk profile is so much lower than when I first recommended it. Photochannel did not have Costco or Sam’s Club as customers and had not acquired Pixology when I first wrote it up. And yet, investors today are paying little more than they did in early 2007.
 
Further, I have taken a lot more care to make sure that my cash flow and earnings figures are spot on. It’s very easy to get carried away when you see how much photo processing retailers do and how little of it is done online. If the migration online accelerates, Photochannel will make a lot more money than I have estimated here.
 
Summary
 
Photochannel is finally on the cusp of a substantial increase in revenue on an expense base that will stay flat. This will result in a waterfall of cash flow and earnings. The stock sells for a substantial discount to its growth rate and its comparables. I believe this discount is due to its trading on the bulletin board and in Canada. Also, only one analyst covers Photochannel, and I believe this is bound to change.
 
Once Photochannel is on the NASDAQ (stock needs to be over $4) and a few more analysts cover the company, its earnings reports should drive the company to at least $7 to $8 per share. I believe that with new customer wins the stock could easily trade into double digits by next year.

Catalyst

-Costco comes online
-announcement of June and September quarters
-future guidance for 2009
-NASDAQ listing
-WalMart win
-Other customer wins
-Revenue and cash flow surge
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    Description

    How many companies trade at 8 times cash flow but are growing sales organically at 60%? With two major new customers, Sam’s Club and Costco U.S., and existing clients growing at 60%, Photochannel’s sales, cash flow and earnings are about to explode. I expect by the end of this month, when Costco gets “turned on” as a customer, Photochannel will be on an annual run rate of cash flow of $0.25 per share. With 80% plus gross margins, 40% EBITDA margins expected in 2009 and at least $0.45 a share in cash flow, Photochannel will be rolling in cash. Yet it only trades at 8 times my estimate for 2009 cash flow.
    Private label online photo processing
     
    Photochannel manages the front and back end of a retailer’s photo processing website(s). They are basically a private label version of Shutterfly (NASDAQ: SFLY). Using the example of CVS (NYSE: CVS), a consumer will go to CVS.com and choose “photo,” then “Get started.” Photochannel takes over from there and handles all of the uploading and storage of pictures, then electronically delivers those pictures in the right format to that customer’s CVS location and in one hour those digital pictures are ready to be picked up by the customer. It is important to make the specific distinction of what Photochannel does. They do not own the photo development/printing equipment in the retailer such as CVS. They only help process, store and digitally send the photos as consumers upload the photos to the retailer’s website. They also handle email lists and email marketing functions for their customers for a fee.
     
    Their customer list is pretty impressive for a Canadian microcap company:
     
    1) Wal-mart Canada
    2) Costco Canada
    3) CVS (U.S.)
    4) Black’s (Canada)
    5) Costco (U.S.)
    6) Sam’s Club (U.S.)
    7) Tesco (U.K.)
    8) ASDA (Wal-Mart UK)
    9) Shoppers Drug Mart (Canada)
    10) Loblaw (Canada)
    Other retailers include Kmart (US), Eckerd’s (US), etc.
     
    Photochannel provides the same web/photoprocessing service for all of these clients.
     
     
     
     
     
    Customers uploading pictures online is small but growing fast
     
    Photochannel gets paid a transaction fee every time a customer orders a print(s) and/or gifting product(s) online from one of its client retailers. If a person walks into a store and prints it off of a kiosk or deals with a person from the desk, then Photochannel doesn’t get paid. And this is a very important point, because right now only around 12% of digital prints are uploaded from a computer and printed at a retailer. This means that 88% of digital printing customers are walking into a store and working with a kiosk or a person behind the counter when they could have just uploaded them online and saved themselves the hassle. Why is that?
     
    Well, one reason is that uploading online is relatively new. A mere 18 months ago, CVS, one of the five or six largest photo processing retailers in the US didn’t even have an online component to their photo processing.
     
    Even though the amount of prints uploaded online is only 12% now, this is almost 40% higher than it was in 2006, as growth is soaring for online printing to retail according to the Photo Marketing Association (www.pmai.org). Photochannel is currently experiencing a 60-70% growth rate of its customer base in transaction revenue. This growth rate is higher than the retail industry, because its customer base such as CVS are larger retailers who are more successful at marketing to customers than the retail industry as a whole.
     
    As retailers ramp up their marketing and technology and start actively educating consumers, the percentage should continue to soar. Sometime in the next 3-5 years over 50% of customers printing at retail will have uploaded their pictures online, from currently around 12%. The question is when and how fast will this happen.
     
    Acquisition of Pixology should lead to an integrated online/kiosk product
     
    Last fall, Photochannel acquired a poorly run kiosk software company called Pixology. Pixology is based in England and had some key customer accounts including Tesco and ASDA (Wal-Mart UK) as well as Costco (US). Pixology also had an interesting kiosk software technology that Photochannel desired.
     
    Photochannel has worked the past six months at getting Pixology to breakeven and is now working on integrating Pixology’s kiosk software to work with Photochannel’s online solution.
     
    Through Pixology, Photochannel will now be involved in a retailer’s kiosk. Photochannel has developed a new integrated product and by this summer, retailers will be able to offer customers the ability to upload and save pictures online from the retail kiosk. This new product will also allow customers to grab photos already saved online and print them out from the retail store. For the first time, it will allow retailers to offer gifting items like photobooks, greeting cards, coffee mugs, etc. – all in real time live over the internet instead of working manually with counter personnel to mail an order to the retailer’s gifting manucaturer.
     
    I think that retailers will love this solution and the success of this software integrated solution could provide substantial upside to my numbers. (I currently include nothing in my estimates from this product.)
     
    New customer wins of Costco and Sam’s Club
     
    Photochannel won the Costco US contract in November of 2007 and won Sam’s Club in February of 2008. Both of these contracts were won from Snapfish, a division of Hewlett Packard, and Photochannel’s main competitor.
     
    The enormity of these wins will soon be evident to the bottom line, making an immediate impact in the June quarter. I estimate that Sam’s Club (which is already up and running) is already Photochannel’s second largest customer on a run rate. And that once Costco comes online (by the end of April), Costco should be at least twice the size of Photochannel’s largest customer, Wal-Mart Canada.
     
    Wal-Mart should come up for bid by year’s end or early next year
     
    Snapfish, Photochannel’s primary competitor, is living a double life, and that double life is upsetting its customers. Snapfish is trying to have a branded website in which they print for the customer and mail it to the person’s home in addition to being a private label technology provider to retailers. This must have become a point of contention, when in December Snapfish’s branded website cut picture prices to $0.09 a print, well below what its own customers of Wal-Mart and Walgreens were charging. How much do you think Wal-Mart likes it when its suppliers compete with them?
     
    Six months ago, Snapfish had Wal-Mart US, Walgreens, Sam’s Club and Costco as clients. Clearly Snapfish is losing customers to Photochannel, as they now just have Wal-Mart and Walgreens.
     
    More importantly, with the exception of Wal-Mart US, Photochannel now has every Wal-Mart entity offering online photo solutions under contract including Wal-Mart Canada (which just happily renewed its contract), ASDA (Wal-Mart UK), Wal-Marts in Puerto Rico and Argentina as well as Sam’s Club in Canada and the US (which is owned Wal-Mart).
     
    I believe that the Wal-Mart US contract expires in late 2009 (the site launched in September of 2006) and a RFP (request for proposal) will come up by year end or early next year. I think that Photochannel has an excellent shot at winning this contract.
     
    Wal-Mart US is the largest photo processor by far and this win could easily bring in $0.50 or more a share in earnings to Photochannel in 2010 and beyond.
     
    Costs and capex will flatline as revenue soars, as fixed cost investments are done
     
    I believe that Photochannel has had to spend a lot of money to add capacity through technology and data centers to handle the growth in existing and new customers and has recently spent a lot of money to restructure Pixology after its acquisition. This has caused expenses and capex to soar in the recent short term. But this is all over going forward.
     
    Consider that capex may be as much as $5 million this year, due to a new data center and other growth capex requirements, but that ongoing capex should only be $1 to $1.5 million a year. This shows how much of a cash cow business Photochannel will be going forward.
     
    Further, the company has taken on more people than they need going forward to design and launch Sam’s Club US and Costco US in a timely manner. So I believe head count should actually go down this year as sales ramp. Depending on new opportunities, headcount could actually fall from 93-95 people to 88-90.
     
    The point of talking about capex and expenses flat lining and falling is to explain how past expenses seen in previous quarters will not be rising with sales and to understand how much cash flow Photochannel will be generating.
     
    Operating model is fantastic
     
    Photochannel doesn’t have much in the way of selling or marketing expense, because it doesn’t market directly to the consumer. The retailers do the marketing and promotion. Further, once Photochannel makes its investment in technology, it can scale the amount of data it processes quite easily and only has to make minimal capex investments going forward. It is primarily for these two reasons that Photochannel makes a fantastic investment.
     
    Once volume gets going in May, gross margins will reach close to 80% and eventually, gross margins could get as high as 90%. I expect an EBITDA margin next year of 40% (this is before stock compensation expense).
     
    Revenue for the June quarter is poised to explode due to Costco and Sam’s Club
     
    The key to the attractiveness of investing in Photochannel now is the near term catalyst of a revenue explosion.
     
    The addition of Costco US and Sam’s Club US should cause transactional revenue to more than double in their first full quarters of operation, from $2.3 million to $5 million. I calculated this number based upon transaction revenue from both Sam’s Club and Costco to be at least $2 million a quarter in transaction revenue. Add that to my estimate of the March quarter’s revenue (estimated) of $3.5 million and you should get to around $6 million. (This assumes both of these new contracts having had a full quarter of operation.)
     
    Very importantly expenses should be flat at around $2.5 million excluding amortization and stock compensation expense, so the entire amount of new revenue will flow to the bottom line. I am expecting EBITDA should be around $2.0 million for the first full quarter of these new customers being live or $0.05 per share on a fully diluted share count of 40 million shares (including all warrants and options).
     
    There is a good chance that revenue for the fiscal 4th quarter (ending September) could be close to or even exceed all of fiscal 2007’s revenue. Costco and Sam’s Club are simply that big.
     
    Equally exciting is that Sam’s Club had been operating on a five year old system and with Photochannel’s up to date system, Sam’s Club expects to show above average growth (possibly triple digit growth) from past volume as customers learn about the new system.
     
    Seasonally the strongest quarter is the December quarter (fiscal 1st quarter), and the company should earn around $8.0 million in revenue and at least $0.09 a share in EBITDA.
     
    The run rate of revenue by the beginning of the September ending 4th quarter should be $28 million at a 75% gross margin and $11 million of expenses. That gives me an annual cash flow per share of about $0.25 per share.
     
    In 2009, with a full year of Costco and Sam’s Club, gross margin should increase to 80% and the EBITDA margin should be 40% and the company should do about $0.45 per share in cash flow.
     
    And this is important; none of these figures include any new customer wins. Any new customer wins would be upside on these numbers.
     
    I expect that by the time Photochannel reports the June quarter in August, that the company will probably hold their first earnings conference call.
     
    Comps
     
    The main competitor and comparable public company is Shutterfly (NASDAQ: SFLY). Shutterfly trades at 33 times 2008 earnings estimates that have been falling. The advantage that Photochannel has is that it doesn’t have to market to customers, nor does it have to have the expensive machines to print. Shutterfly has to spend tons of money on marketing. This compares poorly to retailers that already have a connection to consumers who are already shopping at the stores. It is my opinion that once Photochannel starts to perform and show substantial cash flows and earnings, investors who are infatuated with Shutterfly will flock to Photochannel.
     
    The other comparison is Snapfish, which was bought by Hewlett Packard in 2005 for $180 million. Consider that Photochannel is taking all of Snapfish’s customers and that the market is so much bigger than it was in 2005, and Photochannel’s market cap (fully diluted with 40 million shares) of under $150 million looks paltry in comparison.
     
    Both comparisons make Photochannel look very inexpensive.
     
    This is my second report
     
    I decided to write a second report (first one was January 2007) because Photochannel is a much better investment now than it was in 2007 and its risk profile is so much lower than when I first recommended it. Photochannel did not have Costco or Sam’s Club as customers and had not acquired Pixology when I first wrote it up. And yet, investors today are paying little more than they did in early 2007.
     
    Further, I have taken a lot more care to make sure that my cash flow and earnings figures are spot on. It’s very easy to get carried away when you see how much photo processing retailers do and how little of it is done online. If the migration online accelerates, Photochannel will make a lot more money than I have estimated here.
     
    Summary
     
    Photochannel is finally on the cusp of a substantial increase in revenue on an expense base that will stay flat. This will result in a waterfall of cash flow and earnings. The stock sells for a substantial discount to its growth rate and its comparables. I believe this discount is due to its trading on the bulletin board and in Canada. Also, only one analyst covers Photochannel, and I believe this is bound to change.
     
    Once Photochannel is on the NASDAQ (stock needs to be over $4) and a few more analysts cover the company, its earnings reports should drive the company to at least $7 to $8 per share. I believe that with new customer wins the stock could easily trade into double digits by next year.

    Catalyst

    -Costco comes online
    -announcement of June and September quarters
    -future guidance for 2009
    -NASDAQ listing
    -WalMart win
    -Other customer wins
    -Revenue and cash flow surge

    Messages


    SubjectCompetition
    Entry04/15/2008 01:47 PM
    Memberdanconia755
    Thank you for a very interesting report. I was wondering what your thoughts may be regarding competition from Snapfish and the entry of American Greetings into the space? Thank you.

    SubjectRE: Competition
    Entry04/15/2008 06:53 PM
    Memberissambres839
    I think Snapfish is either incompetent or they have decided to get out of the private label part of photo processing. Their actions and thought process is just plain bizarre to me.

    As to American Greetings getting into the space, I'm not sure what you are talking about.

    SubjectRE: European Competition
    Entry04/23/2008 11:14 AM
    Memberissambres839
    Thanks. I will check them out. I met with a entrepreneur who has started a Photochannel type business in Brazil. The more perspectives the better.

    Subjectcostco contract now official
    Entry04/29/2008 05:50 AM
    Membervanbr707
    VANCOUVER, BRITISH COLUMBIA--(MARKET WIRE)--Apr 29, 2008 -- PhotoChannel Networks Inc. (CDNX:PN.V - News)(OTC BB:PNWIF.OB - News) ("PhotoChannel" or "PNI"), a leading innovator in online digital media solutions for retailers today, has signed a three year definitive agreement with Costco USA ("Costco") to provide and operate the Costco online photo service, which will be connected to all 391 Costco locations in the US. The service will launch imminently and will allow Costco Members to easily upload and place orders for prints, greeting cards, calendars and other photo gift items on the Costco photo website with options to pick up their prints within an hour and/or have their order shipped to their home. PhotoChannel also provides online photo services to Costco in Canada.

    SubjectRE: costco contract now offici
    Entry04/29/2008 12:34 PM
    Memberissambres839
    Its taken awhile but it will be worth the wait, once this Photochannel starts pumping out the cash flow.

    SubjectKmart Australia business win
    Entry04/30/2008 05:30 AM
    Membervanbr707
    PhotoChannel to provide and operate Online Photo Systems in Australia


    VANCOUVER, BRITISH COLUMBIA--(MARKET WIRE)--Apr 30, 2008 -- PhotoChannel Networks Inc. (CDNX:PN.V - News)(OTC BB:PNWIF.OB - News) ("PhotoChannel" or "PNI") the leading innovator in online digital media solutions for retailers announces it has signed an agreement with Kodak Australia ("Kodak"), a division of Eastman Kodak, to provide and operate online photo systems for Kodak and Kodak's customers in Australia.
    ADVERTISEMENT


    PhotoChannel will deploy a customized version of its PNI Digital Media Platform to enable Kodak's retail customers' online photo businesses. The service will include uploading, storing and sharing of images as well as ordering products including prints, calendars, photobooks, greeting cards and other photo gifts. Kmart Australia is the first customer to go live with the service, which is scheduled to launch shortly.

    "Working with Kodak will allow us to move much faster within the Australian market," says Peter Fitzgerald, Chairman and CEO of PhotoChannel. "Placing orders for prints and other creative photo merchandise is one of the fastest growing aspects of the digital imaging market in Australia. With PhotoChannel's expertise in delivering online photo systems for large retailers, having the opportunity to deliver systems for Kodak customers such as Kmart Australia is fantastic for the Company. We are pleased to be Kodak's partner in Australia and are looking forward to growing our strong relationship."

    SubjectRE: Kmart Australia business w
    Entry04/30/2008 01:17 PM
    Memberissambres839
    What's so interesting about this is that every time Kodak needs an online solution they partner with Photochannel. There are many other places around the world where Kodak does business as well.

    This is a really good sign.

    SubjectFinally
    Entry05/27/2008 11:23 AM
    Memberissambres839
    http://www.costco.com/PhotoCenter/PhotoCenter.aspx?cat=2781&cm_re=1_en-_-Top_Right_Nav2-_-Top_photo&lang=en-US The costco switch to photochannel is finally about to happen.

    SubjectPNWIF signs deal in China
    Entry05/28/2008 09:49 AM
    Membervanbr707

    PhotoChannel Signs Agreement with Kodak China
    Wednesday May 28, 9:12 am ET


    PhotoChannel to Provide and Operate Imaging Network for Kodak in China


    VANCOUVER, BRITISH COLUMBIA--(MARKET WIRE)--May 28, 2008 -- PhotoChannel Networks Inc. (CDNX:PN.V - News)(OTC BB:PNWIF.OB - News) ("PhotoChannel" or "PNI") the leading innovator in online digital media solutions for retailers announces it has signed an agreement with Kodak (China) Investment Company Limited to provide and operate Kodak's imaging network in China.
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    PhotoChannel's network and software expertise will enable Kodak Express stores in China to transmit digital versions of personalized photo products created in the store, such as PhotoBooks, to a Kodak production facility. The products, created on Kodak Software, are delivered by the PNI software solution through direct connection with the Kodak Software in the store for transaction, credit clearance and transport of the digital copy to the Kodak production facility whereby the physical product is created and shipped back to the store. There will be 800 Kodak Express stores connected to the platform in 2008.

    "With this agreement PhotoChannel is now truly the worldwide leader in delivering image processing transactions," says Peter Fitzgerald, Chairman and CEO of PhotoChannel. "We are now operational in five continents with dominant positions in all. The versatility of our platform is showcased here as Kodak's software solution is the front end of this system and PNI is delivering the back end transaction clearing and image transport capabilities, all under our enterprise class monitoring, tracking and financial reporting systems. We are very pleased to partner with Kodak in offering this new and unique solution for the Chinese marketplace."

    "PhotoChannel's software has complemented our solution and helped us deliver a unique, state-of-the-art solution with the capabilities we need to capitalize on an emerging and immense opportunity in China," says Kodak Retail Printing Director - Asia Pacific, Terence Chiu. "The PNI platform will allow the Kodak Express stores in China to sell new revenue generating products by providing the operational and transactional workflow for our business. We look forward to realizing this significant opportunity with our partner PhotoChannel."


    SubjectRE: PNWIF signs deal in China
    Entry05/28/2008 12:59 PM
    Memberissambres839
    I think this contract is a very big deal and as details filter out the stock will go much, much higher. Consider that while the contract mentions it is for 800 stores, that is the initial up and running amount, and that the full roll-out will be 4000 stores. Second, I believe that Photochannel will not be operating any equipment and is simply licensing their technology. This means that all of this revenue comes without expenses meaning it all flows to the bottom line. As I get more details I will try to pass them on, but this is a huge win and is not in anyone's numbers for this year or next.

    SubjectUpdate
    Entry07/15/2008 04:39 PM
    Memberissambres839
    I just wanted to post a note that nothing has changed fundamentally with this stock. I'm looking forward to earnings being released in August and the company having its first conference call ever. I also think they will give guidance for the first time as well. I think this is a ridiculous price and clearly represents someone who is being forced to sell their stock. I think the company will earn $0.30 to $0.40 next year (without Wal-mart, which they may win) and its a steal here.

    SubjectUpdate
    Entry08/26/2008 11:17 PM
    Memberissambres839
    As expected, PNWIF put up some crazy growth numbers and had higher expenses as they integrated Costco and Sam's club. The key takeaways include: 1)They averaged over 21,000 transactions a day in the second quarter more than Shutterfly. And once Costco was on, they were averaging over 30,000 on the last day of June and as of yesterday they are now over 40,000 a day. Can you say growth? 2)They are finally cash flow positive. 3)There are 25,000 locations in Asia that Kodak has identified for Photochannel that they can use Photochannel's help. This includes Kodak India, Kodak Australia, Kodak Japan, Kodak Taiwan and Kodak China. I don't think that I have really describe the upside of this or the value of Photochannel's technology if Kodak is relying on them so much. 4)While expenses were higher than I expected in the quarter it was not surprising considering the bumpiness and tardiness of the Costco launch. I actually expect expenses to slowly moderate over the coming quarters. 5)With 30% organic growth, and 247% growth with only two weeks of Costco, look out for how much the company will grow in its September and December quarters considering the seasonal benefit coming. 6)With Asia, a new CEO, and a small acquisition that should lead to new business, the future is just very, very bright for PNWIF. The end of this year and next should be a sit back and watch the company's performance really take off.

    SubjectShutterfly vs. Photochannel
    Entry08/27/2008 01:40 PM
    Memberissambres839
    Why is Shutterfly more valuable than Photochannel? Consider the following: 1)Photochannel is now processing twice the volume of Shutterfly 2)Photochnanel has a better economic moat via switching costs for retailers 3)Photochannel is growing three times as fast as SFLY 4)They both should earn about the same mount on a cash basis in 2009. 5)Photochannel has a massive Asian expansion that Shutterfly doesn't possess.

    SubjectRE: Shutterfly vs. Photochanne
    Entry08/27/2008 04:00 PM
    Memberruby831
    Issambres -
    I am new to this story and have a few questions:

    1. Who owns the machines in these retailers and why have they not attempted to create a one-stop shop for the retailers? What are the barriers from them to develop software that can send the photos from home to their machines?

    2. What was the delay in getting Costco off the ground?

    3. With the ramped up capex, and lack of real cash generation, will this company need to raise cash (even assuming they continue to generate more and more)?

    4. Is the company still on target for $.45/share of FCF in 2009?

    5. Is there any reason, other then growth, that Photochannel should generate about the same amount of cash as Shutterfly yet have double the volume?

    Thanks!

    Subjectmargins
    Entry08/27/2008 04:24 PM
    Memberagape1095
    Thanks for a great write-up.

    What are your thoughts about margins going forward? Do you think the large retailers will ask for tougher terms when current contract expires? It seems to me that the customers (Walmart, CVS etc) has more power than PN.

    SubjectRE: margins
    Entry08/27/2008 04:58 PM
    Memberissambres839
    As of right now, they have had no pushback on margins, while that may change past 2010, with the stock price where it is at we are being compensated for that risk. Further, I would argue that Photochannel is the one who is gaining the economic moat. Adding 2 million images a day, storing that and processing all of that information, plus adding more and more services to the retailers make them more entrenched and makes the switching costs that much higher. Consider that it took over 6 months to switch Costco and they are only growing, switching in the future will only be harder especially now that Photochannel has Pixology and is integrating the kiosk software with the online software with the gifting merchants as well.

    SubjectRE: RE: Shutterfly vs. Photoch
    Entry08/27/2008 05:53 PM
    Memberissambres839
    I think run-rate margins once this really gets going next year is 80% GM and 40% EBITDA margins. I expect them to hit these targets at the end of next year to the beginning of 2010. I'm looking at $32 million in revenue for 2009, $0.25 per share in EBITDA now. And for 2010 I'm looking at $42 million and $0.42 per share in EBITDA. Mind you this includes no new customer wins, new royalty deals, or any new business just what they have announced already and organic growth of 30%. I think their technology, especially the back end is state of the art and the best in the industry. That would be hard to duplicate. But if you were willing to hire 100 plus people and then throw $25 to $30 million at it, you could come up with a similar product. But considering that the reatiler contracts come up every three years and how entrenched PNWIF is now, why would they switch? And how would you prove to the retailers that your system would work and could handle serious volume? Remember PNWIF is adding 2 million images a day. Further it took nine months of work to switch over Costco, it will only be harder in the future considering they are still growing. And further, now that Costco is integrating in kiosk software to the gifters and other service providers it will be very, very hard to switch.

    SubjectRE: RE: Shutterfly vs. Photoch
    Entry08/27/2008 06:02 PM
    Memberissambres839
    Consider that there are only so many big box retailers and it if you wanted to start a business this is not one you would choose. There are maybe 8 to 10 large customers that drive most of the revenue from printing through retail. So, why would you develop a product and a service in which the contracts are long, customers few and switching costs very high? The barriers to entry and competitive moat are only rising here.

    SubjectRE: Kodak
    Entry08/27/2008 10:18 PM
    Memberissambres839
    This is a wonderful question. When you think about Photochannel going into 25,000 Kodak Asia locations and receiving a royalty on every transaction, it won't take Kodak long to see the checks they are cutting PNWIF. I think it is one of those things that happens once PNWIF starts putting up earnings and starts taking off. That's when top brass at Kodak will pay attention. As far as I can tell Kodak is like most large companies, dysfunctional and slow moving.

    SubjectKodak
    Entry08/28/2008 12:59 PM
    Memberbuster736
    wouldn't PNWIF have trouble with their customers if they sold themselves to kodak? One of the reasons Snapfish lost Costco was, as a division of HPQ, they (snapfish) were competing with their customers. PNWIF is clear that much of their appeal to customers is that they are Switzerland and aid, not compete with, the COST's and Sam's clubs of the world. How does this reconcile with the fact that PNWIF would be a good acquisition fit with Kodak?

    SubjectRE: Kodak
    Entry08/28/2008 04:25 PM
    Memberissambres839
    I think for this to happen, Kodak would have to either agree to not cut prices below its customers or link their site with retailers, or some combo of those two. I think it could be done. The big thing for Snapfish is the cutting of prices to 9 cents below all its customers.

    Subjectupdate?
    Entry09/11/2008 11:36 AM
    Memberbuster736
    issambres, do you have any feel for why the stock has acted as baddly as it has over the lst few weeks? Were the earnings call significantly worse than people expected? I saw the MERR cut numbers? What are you current expectations for next year? Any insights you have into the recent stock action would be appreciated. Thanks!

    SubjectRE: update?
    Entry09/11/2008 11:52 AM
    Memberissambres839
    There is absolutely no change to fundamentals. This is simply forced selling by funds blowing up. I'm personally trying to take advantage.

    SubjectRE: update?
    Entry09/11/2008 12:00 PM
    Memberissambres839
    My estimates are that the company earns $0.25 per share in cash eps (excluding amortization) in 2009. The company is cash flow positive now and is poised to have have revenue of $6 million in revenue in the September quarter and $8 million in the December quarter.

    SubjectRE: RE: Cash
    Entry09/11/2008 02:17 PM
    Memberissambres839
    I am very confident. They had $2 million in cash at the end of the quarter, and said they were cash flow positive the minute they turned on Costco. Also, seasonally business gets stronger in the September and December quarters. I expect them by December to have generated another $2-3 million in cash. Its just not an issue. Capex is really, really low. All of the losses came from getting Costco up and running, building data centers, hiring extra software consultants and from lingering losses from Pixology. That is mostly in the past. Also note that of their income expenses, that over $1 million are non-cash amortization expense.

    SubjectRE: issambres
    Entry09/16/2008 04:09 PM
    Memberissambres839
    They actually just presented at the Merriman conference and had a lot of positive things to say including: 1)They have launched Kodak China and Kmart Australia 2)They are working on a Facebook photo application 3)They haven't seen any slowdown in orders 4)There is an opportunity to get Kodak India, which has 14,000 locations Clearly there is a large seller out there and it is pressuring the stock, but in my opinion this has nothing to do with fundamentals.

    SubjectRE: issambres
    Entry09/16/2008 04:21 PM
    Memberissambres839
    BTW, who is MERR?

    SubjectRE: RE: issambres
    Entry09/16/2008 04:24 PM
    Memberbuster736
    MERR is merriman's stock symbol . .

    SubjectRE: RE: RE: issambres
    Entry09/16/2008 05:01 PM
    Memberissambres839
    Oh, I thought it was MERRI. I talked to them and the seller is coming from Morgan Stanley. No idea who it is, but it doesn't have anything to do with fundamentals.

    SubjectRE: RE: RE: RE: issambres
    Entry09/16/2008 05:36 PM
    Memberbuster736
    i hope you are right, but how could be ever really know

    SubjectRE: RE: RE: RE: RE: issambres
    Entry09/16/2008 08:47 PM
    Memberissambres839
    Well, there is always that remote chance that management is completely lying to us, which would be surprising to say the least. They just gave a very bullish presentation. That said, there are many small caps and many Canadian small caps that are getting decimated. Photochannel is not alone. Consider this. I estimate that on an EBITDA basis, PNWIF will earn $0.10 per share in the December quarter alone.

    SubjectCAD fall is huge positive
    Entry10/22/2008 06:34 PM
    Memberissambres839
    Investors may not be appreciating the tremendous benefit Photochannel (bulletin board: PNWIF) will get from the falling Canadian Dollar (CAD). PNWIF gets paid predominantly in US dollars (USD) and pays all of their expenses in CAD. In the past three weeks the CAD has fallen more than 20%. Now I'm sure at some point it will recover somewhat but it is a huge benefit to some of my companies, most notably Photochannel. Remember that PNWIF manages the front and back end of a photo processors web site and gets paid about $0.02 for every picture printed. Most of PNWIF's customers are US based. I estimate 75% of their revenue right now is US based. Only a small amount in CAD and the rest is British pound from Pixology. Photochannel reports in CAD revenue. The impact is substantial when you look at the numbers if the current exchange rates hold. I estimate that Photochannel should earn $8 million in revenue in calendar q4 (ending December 31). Now, if that revenue estimate holds in terms of transactions and business, revenue should actually be $9.2 million, or an extra $1.2 million (20% more USD revenue of $6 million (75% of total revenue). This extra $1.2 million is all margin, cash. I estimated that they were going earn $3.5 million in EBITDA in q4, now I estimate it could be $4.7 million. That is $0.14 a share in cash flow in one quarter for a company trading at $1.40! Now let's look at it next year, my revenue estimate of $28 million in revenue would have to jump to $32.2 million. My EBITDA estimate of $8 to $10 million ($0.24 to $0.30 per share) would have to jump to $13 to $15 million (0.39 per share to $0.45 per share). That means at its current quotation, PNWIF trades at possibly 3 times next year's cash flow growing at 100% year over year. Astounding. Another company I own Destiny Media Technologies (bulletin board: DSNY) will have the same benefit, but even more so, as all of their revenue are USD, and all expenses CAD. I think once investors start realizing how much of a benefit some of these companies will receive from the recent currency move, these companies will start to move higher.

    SubjectPositive update
    Entry10/29/2008 02:57 PM
    Memberissambres839
    PNWIF issued a press release updating operations saying a couple of positive things for their September quarter: -Total orders handled during the quarter of 3,091,203, a 184-per-cent increase over fourth quarter 2007 and a 59% increase over third quarter 2008; and - Average orders per day of 33,600, compared with 11,797 during the same quarter of fiscal 2007. September is their year end so results will come out in December, so the company wanted to update everyone that growth has not slowed.

    SubjectMerriman Call today
    Entry10/29/2008 03:01 PM
    Memberissambres839
    Merriman hosted a conference call with PNWIF management today that was very positive. Here are the highlights: 1)Growth is not slowing at all, in fact their retailer customers are saying they don't expect any slowdown. In fact, organic growth excluding Costco and other new customers is 20% plus. 2)The company is cash flow positive and generating cash 3)They expect gifting revenue to go from 17% of revenue to 50% in a couple of years. 4)They sounded quite optimistic for future growth in Asia next year. Kodak China is rolling out as expected.

    SubjectRE: Positive update
    Entry10/29/2008 03:15 PM
    Memberbuster736
    can you comment on the average orders per day. In your update from august you said orders were running at 40,000 per day. Now we see that average orders for the quarter were about 33,000 per day. Though I realize one was average and one was at a point in time, it seems as if the 40,000 per day might have been too high? any idea what the current run rate is?

    SubjectRE: RE: Positive update
    Entry10/29/2008 05:49 PM
    Memberissambres839
    Good question. I was citing one day in August numbers which is one of the best months for PNWIF due to summer vacations and picture taking. September with back to school and work is actually quite a slow month. So when you average July/August/September together you get the lower number. They stepped up from 21,000 orders a day in q3, now they are at 33,600. That is really nice sequential growth. Now we are in their strongest revenue quarter due to gifting revenues. When they give the update in December, I expect PNWIF to give guidance and I expect it to be strong.

    SubjectNow doing business printing
    Entry11/14/2008 05:26 PM
    Memberissambres839
    Very quietly, PNWIF is getting into business printing. Check out the following link for Walmart Canada: http://www.walmartphotocentre.ca/album/business_landing.aspx PNWIF gets a percentage of everything uploaded through the site. This is a huge market, that all of their customers could tap including Costco and Sam's Club especially due to the small business nature of their customers. This is very positive. But shhh, don't tell the stock price, it's too busy going down.

    SubjectRE: PNWIF
    Entry12/03/2008 02:37 AM
    Memberissambres839
    No, I don't believe there is a chance they go under. What has happened in the last two weeks, is that two blocks of 600K (2% of the shares out) shares hit the market, just as the market was imploding. Investors heard that front ran it by selling even more. Result, stock plunging with no buyers. I expect really positive news when they announce in mid-December. They should give guidance for December. I expect them to generate $2-$4 million in cash in the December quarter alone. They should end the year with at least $4 million in cash and no debt.

    SubjectCostco cuts prices, very +
    Entry12/03/2008 02:43 AM
    Memberissambres839
    Costco just cut their prices across the board for prints, cards, and photo gifting products, such as photo books. This is a big positive for Photochannel as their fee is fixed regardless of what Costco cuts it to. It also shows that Costco is quite secure in PNWIF that they can handle a major surge in orders. This is also part of a renewed marketing push by Costco to market to customers, especially gifting products. This is a big positive for PNWIF, as volumes should jump for their largest customer.

    SubjectRE: Costco cuts prices, very +
    Entry12/03/2008 06:46 AM
    Memberreg015
    Just to play devil's advocate, could it also signal that Costco is trying to maintain levels of photo sales that would otherwise dwindle due to reduced spending? Also, what is the length of the current Costco contract, and do you have any thoughts on attempts Costco might make to retrade the deal or renegotiate fees paid to Photochannel (whether fixed or otherwise) in the future?

    SubjectRE: RE: Costco cuts prices, ve
    Entry12/03/2008 11:53 AM
    Memberissambres839
    Not is not the sense I get from Photochannel. Wal-mart is already at prints of $0.09 per print. Costco is just finally making a big promotional push now that the new system is fully up and ready for serious growth. I believe the Costco contract is a 2 year contract with a one year automatic extension. I think the risk of Costco renegotiating lower pricing exists but is low, due to the lack of alternatives for them to go to. The only real company that competes with PNWIF is Snapfish and they are a competitor. Further, PNWIF is getting more and more integrated and important to Costco so the switching costs are high. I think this is something to consider 3 years out but not right now and not at 3 times cash eps for next year.

    Subject4 million people
    Entry12/03/2008 03:47 PM
    Memberissambres839
    FYI, 4 million people got the email I got last night regarding the new promotion. That shows just how much potential there could be as Costco puts its might behind pushing photo gifting and photo print products.

    SubjectRE: Q4
    Entry12/19/2008 05:33 PM
    Memberissambres839
    I share your frustration. I've talked with the company and I'm sure they are hearing it from multiple angles. I can tell you that their numbers are very, very good in my opinion and I think that in December the growth accelerated from November. I expect them to announce a really good December quarter $0.10 to $0.12 per share in EBITDA for the quarter. This stock could easily double with some good reported numbers in January.

    Subjectupdate
    Entry01/19/2009 10:03 PM
    Memberissambres839

    Thought I would update everyone, that PNWIF reported good results that still mask what is going on, but that th numbers in February will finally show what I have been waiting a year from them to show. Ridiculous sales growth combined with positive cash flow and tremndous cash flow at that.

    The company reported triple digit gains in revenue and that in the September quarter they generated $1 million in EBITDA.

    I expect that for the December quarter they will announce at least $8 million in revenue and over $3 million in EBITDA. To put that in perspective consider that the company reported $17 million for all last fiscal year.

    This company continues to grow like a weed and the proof will finally be evident and plain to see when they report their numbers at the end of February.

     

    I'm looking for $0.25 in cash EPS (excluding non-cash amortization), making the stock trade at 5 times earnings. Cheap. cheap.


    SubjectRE: update
    Entry01/19/2009 10:05 PM
    Memberissambres839

    make that $0.25 in cash EPS for the year, from the last post. not for the quarter.


    SubjectFacebook?
    Entry02/19/2009 12:49 PM
    Memberissambres839

    Last night, PNWIF put out a cryptic press release, called the PNI open project. Basically what they are doing is opening up their network of retailer customers to 3rd party websites. I think that the real opportunity is social networking sites such as Facebook. Thsi would allow Facebook customers the easy option of printing any picture on Facebook at their local retailer such as CVS or Costco.

    The implications of this are huge. Consider that if 5% of Facebook/myspace customers printed 1 picture a year, PNWIF's revenues would almost double from current levels.

    Earnings are next week and I expect them to be excellent.


    SubjectRE: Facebook?
    Entry02/20/2009 12:33 PM
    Memberbuster736

    Perhaps it is nit picking, but your calculation about 5% of facebook users printing one PHOTO.  .that is not correct.  If you said 5% of facebook users did one TRANSACTION, then total transactions may double, but but printing one picture wouldn't double PNWIF Revenue.

    Facebook has 175 million members.  5% of that is 8.75mm transactions.  Spread that over 365 days gets us 23,973 tranasactions per day.  That number is in the ball park of PNWIF's current daily transaction.  However, i would say that it is unlikely that facebook users would print as many photos per transation as somebody that is currently going to a site with the soul purpose of printing pictures.

    it is clearly not right that one picture per 5% of face book users doubles revenue.  One transaction (which currently on average is certainly largely that one picture) per 5% of users might double daily TRANSACTIONS, but I think it is a stretch to say it would double revenue.

    I agree that this is "greenfield" potential, but I don't think we should get ahead of ourselves and say that this can double revenue.


    SubjectRE: RE: Facebook?
    Entry02/21/2009 10:09 PM
    Memberissambres839

    You are right, I meant one transaction.

    That said, I think that gifting may be a big thing one day from all of the photos on social networks like Facebook.

    also, beyond just Facebook and the big boys in social networking is hundreds of mom and pop websites from amatuer photographers or niche sites like family sharing sites. PNWIF could be building an enormous moat if they start bringing tons of customers and transactions to retailer customers.

    This is the key quote: "The PNI Open Access Project was created in response to an overwhelming demand we were receiving from third parties who wanted the ability to offer their users a retailer based output solution for their images," says Kyle Hall, CEO of PNI.

    I expect to hear more on their call this week.

     


    SubjectRE: Printing of photos
    Entry02/22/2009 07:07 PM
    Memberissambres839

    My own view is that while printing demand may slow or start falling, I think we are just starting to see photo-gifting products such as photobooks, mugs with pictures, t-shirts, calendars, etc. I think this is what is going to drive demand in the future.

    At a minimum, Photochannel will continue to grow as more people upload pictures online instead of walking into the stores. Remember that only 12% of retailer customers upload online. as the transition continues PNWIF will keep growing.


    Subjectupdate
    Entry02/27/2009 03:27 PM
    Memberissambres839

    Photochannel announced 67% sales growth and their first real profitable quarter, earnings $0.08 a share on a cash basis. Their transaction revenue grew 91% in one of the worst economic periods in a long time. On their conference call they said that through February organic growth was still 25% year over year, and that we will be cash flow positive from here on out even in one of their seasonally weakest periods. They also posted a fantastic 39% EBITDA margin in the quarter.

    There are a number of catalysts on the horizon including:

    1)A potential contract/agreement with Facebook or other social networking sites

    2)Wal-Mart U.S. contract

    3)Kodak India contract

    4)Kodak China ramping up

    5)Business printing contracts

    I continue to expect the company to earn at least $0.25 a share in cash eps, excluding amortization, and assumes no new contract wins or new business. The stock trades for 5.8 times this number despite continuing to grow, have minimal capex requirements and a 40% EBITDA margin business.

    I continue to pound the table that this is a screaming buy and if not for terrible stock market action would be much, much higher.

     

    Oh yeah, and the COO has started buying stock in the open market.


    Subjectupdate
    Entry06/05/2009 02:01 PM
    Memberissambres839

    Photochannel just continues to chug along as the investment world ignores it.

    "To date the average daily order volume for fiscal Q3 is 36,507, compared to 15,626 for the same period of fiscal 2008. Overall retail sales processed through the PNI Digital Media Platform for retail partners show an increase of over 200% for the quarter compared to the comparable period in fiscal 2008.

    Organic growth of retail partners on the PNI Digital Media Platform continues to be very strong, up an aggregate 20% year over year. The Company's 3rd quarter financial results are expected to be announced in early August 2009."

    The company is soon to launch its business printing service for Wal-Mart Canada:

    http://www.walmartphotocentre.ca/businessProfile/default.aspx

    Check out Vistaprint (VPRT) for how large this market is. I think that this stock continues to have tremendous upside for a very cheap valuation.


    SubjectRE: update
    Entry06/10/2009 04:37 PM
    Memberdoggy835

    Issambres, thanks for staying with this one. I've been digging a little and have some questions mostly relating to non-cash expenses. I approve of small, fast growers using options as a cash-efficient way to attract and incent employees, but the expense is quite real and not to be ignored. Do you have an estimate for normalized option expense? I think the GAAP number is too large because it reflects grants made in prior years at higher prices, but if they average 1m options per year (3% annual dilution) it seems like an annual expense of 0.5-1.0m is in the ballpark. Thoughts?

    Amortization looks to be split almost 50/50 between PP&E (called depreciation in the US) and intangibles from acquisitions. They amortize intangibles in 3 years and PP&E almost as fast, which may be a bit conservative, but there are actual cash expenses behind this stuff. I'm trying to estimate 'maintenance capex' and 'maintenance intangible spending' if you will. As a first cut I'd put this at roughly 50% of their reported 6m annual amortization, for a cash expense of 3m/year. Any thoughts on this?

    How do you model the (sometimes large) "Foreign exchange gain (loss)" going forward? Just net it out to zero over time?

    If I take Merriman FY2009 estimate of 26m revenue/6.7m ebitda and subtract my 3.5-4.0m estimate of annual stock option/maintenance capex/intangible replacement cost I get about 3m owner earnings vs. a diluted market cap of 50m. A 17x ratio is not cheap in today's market, especially with almost zero tangible assets to cushion the downside, so the real story is 2010 growth. Merriman puts FY2010 at 34m revs and 12.8m ebitda, which translates to almost 9m owner earnings and a much more intresting 5.5-ish multiple. So how confident are you in the FY2010 numbers? Thanks in advance.


    SubjectRE: RE: update
    Entry06/11/2009 12:39 PM
    Memberissambres839

    You make a good point on the options. I think your expense estimate is about right.

    Management has communicated to me before that maintenance capex is about $2 million to $3 million.

    With the way the currency markets are moving, I don't even try to model foriegn currency exchange. They have business in CAD, GBP, Euros and Dollars, with around 50-55% dollars. Its just too much of a moving target.

    I think the Owner Earnings or P/E for this year doesn't show the entire picture. The company is going to be growing revenue at something like 70% this year. And their P/E will only be 17? Shutterfly isn't growing and somehow gets a 40-50 p/e and that is excluding amortization and stock compensation expense.

    Further, all new revenue coming in almost all flows to the bottom line at 70-80% gross margins. They finally have the support structure in place and people and equipment. That is why how they grow from here and why 2010 will be the waterfall year. They are still growing 15-20% organically and as that falls to the bottom line, earnings and cash flow explodes. And they are still growing despite one of the worst economies in decades.

    This of course is not to mention the potential of getting Wal-Mart, or the growth of business printing, or further expansion into Asia, or their new kiosk software business.

    I continue to view this as a mispriced growth stock. I can make a credible case that if they continue to grow organically, get Wal-Mart and some of their existing initiatives start to work, in 2011, this stock could easily earn $1 per share. I'm guessing the stock would be close to $15 or higher. The risk/reward in this situation seems very attractive.

    P.S. 2010 numbers could be low.


    SubjectYour Estimates
    Entry06/15/2009 02:03 PM
    Memberbuster736

    Issambres,

    With all due respect, In your original write up about PNI in 2007 you had the company earning 1.09 in 2009.  The company is going to be lucky to show a profit this year.  Now you are saying that you believe they will do $1 in 2011.  The company has gotten both Sam's club and costco as you originally postulated, yet earnings have been no where close to what you estimated in the past and your estimates have been pushed out at least two years.  What has differed from your model to what the company has actually done (why haven't the earnings been there?)  Have transactions been lighter? have you wat to low on your costs?  What gives you confidence that this model even scales and you estiamtes will be anywhere close this time?


    SubjectRE: Your Estimates
    Entry06/15/2009 07:04 PM
    Memberissambres839

    You are absolutely correct that my estimates have been wide off the mark from my original report. A couple of things happened that ruined that estimate:

    1)They bought a money losing operation in Pixology that they thought they could easily turn around. That was wrong, but it helped get them Costco.

    2)They underestimated what it would take to get Costco up and running.

    3)CVS uptake has been very slow and most uptake of online uploading versus walking into the store has not met my expectations.

    4)The economy fell off a cliff last year and their core biz which was growing organically at 50% plus is now 15-20%.

    Those are the main reasons, also my estimating of earnings was a bit high. I don't think looking back I did a good job estimating how expenses would ramp.

    That said, I have been saying pretty consistently that I expect $0.25 a share in cash EPS for 2009. This has not changed for some time now. Remember that this excludes amortization.

    Also, when I talk about over $1 a share in eps for 2011 or in the future, I try now to be much more cautious, and use words like "could." I mention that number only in the context of winning Wal-Mart.

    I encourage you to do your own research and come up with your own estimates. I have made plenty of mistakes in the past year, that's for sure, but I think that I'm trying to my best to estimate a fast growing company that has gone through some growing pains.

    I think there is still a tremendous amount of opportunity and the company is now profitable, EBITDA positive and cash flow positive and is growing despite one of the worst economies in decades.

    I hope that helps.


    SubjectEBITDA Doubling Sequentially Thru Yr End
    Entry08/12/2009 07:25 PM
    Memberissambres839

    PNI Digital Media (PNDMF) as photochannel is now called, doubled EBITDA sequentially on a big drop in expenses, as the cash flow finally starts to hit. The next two quarter should see EBITDA double in each quarter SEQUENTIALLY.

    They did $0.5 million in the March quarter, June was $1.1 million. The September quarter should be $2.2 or more and the December quarter should be $4.5 to $5 million. That would bring them to my estimate of $0.25 in cash eps for the calendar year of 2009. They are trading at 5 times my cash eps growing at 20% orgincally with several growth projects on hand.

    They are poised to spend only half a million on capex, yet generate at least $6.7 to $7.2 million in EBITDA in the last two quarters.

    Consider that they will be producing $0.18 a share in free cash flow in the last two quarters of this calendar year, yet the stock trades at $1.30 per share.

    And if they accounted for revenue the way SFLY did, PNDMF would have more revenue then SFLY, yet SFLY has a $400 million market and PNDMF has a $45 million market cap. PNI is stupidly cheap.


    Subject4q
    Entry10/23/2009 12:48 PM
    Memberscott265

    Issambres...can you talk more about your 4q estimate for ebitda? I see they put out a press release in September that implies Average Daily orders similar to the 3rd quarter.  If that is the case, why is EBITDA increasing so significantly in your mind? I would think it would be relatively similar to the third quarter but maybe I am missing something on cost saves or seasonality in September.

     

    Thanks

     

     


    SubjectRE: 4q
    Entry10/25/2009 03:01 AM
    Memberissambres839

    Their fiscal q4 ends September and they were on a run rate of 38,000 orders. Their fiscal q3 ended June 30 had 32,000 orders. Please don't confuse the calendar q4 with fiscal q4. The December quarter is their fiscal q1 and should see an enormous inrease due to holiday buying and photo gifting.


    Subjectstill confused
    Entry10/26/2009 04:22 PM
    Memberscott265

    I do see what you are saying about a big jump in calendar 4q (fiscal 1q) but still confused by your statement that the September quarter will see a doubling in EBTIDA from from the June quarter.  You said it was 1.1mm in June going to 2.2mm or more in September and I just can't get there.  

    From the 8/12 press release referencing the June quarter they said :

    Operational Highlights

    • 3.4 million orders transacted during the quarter, compared to 1.9 million in the third quarter of fiscal 2008, representing an increase of 79% year over year.
    • Average daily order volume handled during the quarter of approximately 38,000 orders

    In the press release for September quarter updates they said

     

    Fourth quarter to date, retail sales transacted over the PNI Digital Media Platform on behalf of PNI's retail partners exceeds 20% growth compared to the same period for Fiscal Year 2008. With 2.6 million orders being transacted so far this quarter, the average daily order volume over the PNI Digital Media Platform is in excess of 38,000 per day, marking the current quarter as the busiest non-holiday quarter in the company's history. 

     

    Where do you get your 32,000 avergae daily order volume from?  


    SubjectRE: still confused
    Entry10/26/2009 08:28 PM
    Memberissambres839

    My mistake, I entered it in wrong from 32,000. I rechecked and the 38,000 is the correct number for q3 transactions.

    That is not the reason EBITDA will be much better though. There were some one time items in the last quarter that depressed EBITDA that will not be in the latest quarter so EBITDA should be much higher.

    Sorry for the confusion.


    SubjectPNI Overall Strategy
    Entry11/20/2009 07:58 PM
    Memberdoggy835

    Perhaps you can help me with some things I'm puzzling over. I understand people taking their camera into CVS and printing out pictures at a kiosk. I understand people connecting their camera to their PC and e-mailing pictures to friends or posting them on Facebook or ordering 4x6s or photobooks from Shutterfly. But I don't really get people connecting to their PC to upload pictures to CVS then driving to CVS to pick them up.What's the point? If you have to go to the store anyway why mess around with the PC and internet? Somebody must do it sometime because PNI shows revenue, but it seemsmore like special case situations than a normal mode of operation.

    Also, I understand why CVS wants photo customers to come into the store and why CVS doesn't want to partner with a company who encourages people to avoid the store. But doesn't this lock PNI into these special case "hybrid" situations in which a customer needs some feature that's only available online but also needs 1 hour turnaround and can't wait for overnight mail delivery?

    Also, the stores want to own the end-user relationship. PNI lets them. But if Facebook eventually dominates the photo market, as seems likely, where does that leave PNI? Facebook will make print buttons available and print vendors can compete on cost, quality, conveniece and speed. PNI can write "Facebook device drivers" for the various in-store print options, but again this seems like a niche. I don't mean to say PNI is worthless, these markets are big enough that even niche players can make decent money, but I have trouble seeing these glorious scenarios in which PNI dominates digital photography and becomes some kind of toll taker.

    Thanks in advance for your thoughts.


    SubjectRE: Use of Cash
    Entry11/23/2009 09:31 PM
    Memberissambres839

    Sorry, I just saw this comment. I think management will first build up the balance sheet and then there might be one or two small acquisitions they want to do. But once they get this cranking I think they would be open to paying dividends.


    SubjectRE: PNI Overall Strategy
    Entry11/23/2009 09:38 PM
    Memberissambres839

    Its not just ordering pictures and picking them up in the store. You can also get them delivered to the home. Costco.com has free shipping. Its important to the retailers to not lose the connection to the consumer and not lose a profitable sale. If the customer is going to go to Shutterfly, why not print out through CVS.com or costco.com? The in store option is only really important if you want the pictures in one hour, which some people do.

    The gifting options are really something that you want to do online and this is what is really driving PNI's growth.

    I'm not sure Facebook is going to dominate the photo market. Photos for them is a big problem. It is their number 1 cost and it is soaring as Facebook is basically a photo sharing site. And facebook has not been able to figure out how to monetize photos.

    Retailers are always going to have a market share in photo printing and their sites will always drive usage. PNI's strategy going forward is to drive volume, as all volume past this point is basically pure cash flow. That is why business printing will become very important and wedding and social stationary as well. Any and all volume will drive cash flows.

    Also, you leave out how mobile could really drive PNI's business. 

    I don't think PNI is going to dominate digital photography. I think it is going to be a very profitable niche with a great business model that will start benefiting shareholders going forward.


    SubjectRE: Congrats on nailing the 4th quarter
    Entry12/14/2009 09:08 PM
    Memberissambres839

    I think the one headwind the company will face in doubling EBITDA sequentially is the currency effect which might hamper that forecast by a little, but not too much. The evidence is finally flowing through the company's income statement and balance sheet. Costs are steady and revenue and earnings are growing.

    Next year will be very exciting because beyond the 15% a year growth of the photo business, the company will be launching business printing and wedding and social stationary (read: wedding). Both of these markets are substantially larger than the current photo business and there is no large infrastructure to build out. Business printing is a $25 billion and social stationary is $10 billion, versus $8 billion for photo.

    Can you imagine if Costco or Sam's Club launched a business printing site with PNI and marketed it to their customer base? I'm guessing that this volume of orders could be very large and easily dwarf the opportunity of getting Wal-Mart. (I have no idea what will happen with Wal-Mart)

    The catalysts that I see for next year and especially the first 3 to 6 months of the year is:

    1)Continued strong earnings reports. We shouldn't have to wait as long as we did for the September quarter and we should see q1 in February.

    2)We should see announcements of business printing retailers.

    3)Wedding and social stationary launch

    4)Mobile news. I think the company is going to aggressively try to get into mobile photos and facilitate processing them. Consider that the number 1 camera on Flickr is the Iphone.

    This time next year should see the company swimming in cash flow. In cash EPS for 2009, the company should end up doing close to $0.25 per share in cash eps, but the currency effect might knock a few pennies off. At this valuation it hardly matters. I'm hoping the company can do north of $0.40 per share next year in cash earnings, but that is highly dependent on business printing and currency effect headwinds. A more conservative forecast with little growth and no new customers is around $0.32-0.33 per share in cash eps. The stock trades for 5.5 times that number.


    SubjectWal-Mart
    Entry12/14/2009 11:01 PM
    Membergoogie974

    Seems like Wal-Mart would have reason not to award Wal-Mart USA to PNI.  Having two suppliers (Snapfish and PNI) gives them some bargaining power with each.  I have a large position in this stock and believe it will do well without Wal-Mart USA.  Thank you Issambres for this idea and your continued commentary.


    SubjectDaily transactions
    Entry12/15/2009 06:31 AM
    Memberzzz007

    Issambres,

    Nice work thus far.  Any concerns on your end with average daily transactions Q to Q roughly flat at 38k?  I realize management pointed out that 3Q had some one-off promotional events that boosted daily transactions beyond a normalized sustainable rate, but it wasn't clear to me exactly what the impact of these events was.

    Thanks,

    zzz


    SubjectRE: Daily transactions
    Entry12/15/2009 10:53 AM
    Memberissambres839

    I'm not concerned by it and believe that once you see q1 reported in february you will see a resumption of growth. Also, a very important mention on the call is that the dollar amount per transaction is going up as people buy more photobooks and other photo gifts that aren't prints.


    SubjectShare buyback and solid results
    Entry02/11/2010 06:44 PM
    Memberissambres839

    PNI delivered another quarter of solid cash flow generation and announced a share buyback.

    The company's balance sheet is also radically changed in the last six months as they produce a lot of cash for a small company. They are now net working positive and have $6.5 million in cash and no debt. The company will continue to see 10-15% or so growth in organic revenue (though slightly lower than the 20% bar), but they have major catalysts coming up.

    They announced a share buyback, which could have an outsized effect on the stock considering how cheap it is. For $2.75 million, they could buyback 5% of the company. They should generate $7 million plus in FCF this year.

    Business printing, social stationary and mobile is coming later this year and the fantastic thing is that all of that revenue will flow to the bottom line.

    I encourage investors to check out the expense control this company has exhibited.

    Taking out the currency impact, the company generated $0.10 a share in cash eps in the quarter.

    Why this trades at 6-7 times cash eps for this year is beyond me at least the company is no able to take advantage of the situation now. Compare the valuation and growth to SFLY. Its almost a retarded comparison. Why SFLY doesn't buy them I have no idea.


    SubjectRE: RE: Share buyback and solid results
    Entry02/12/2010 01:39 PM
    Memberissambres839

    $600K impact would ahve brought EBITDA to $3.3 million and then I think there business slowed down a bit in the quarter. That said, the stock is so cheap, expectations don't really matter.

    The buyback will make a big difference once they get it going.

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