MicroCap.com (Est: 1998) Canadian MicroCap Equity Research Published by Danny Deadlock April 28, 2016 Frankly Inc. (TLK.V 69 cents) www.franklyinc.com This report is based upon my visit with Frankly s CEO and Chief Engineer at the NAB (North American Broadcasters) convention, plus a review of their recent webcast to discuss 2015 financials and 2016 outlook. This past week there has been a lot of new information to digest but it has became very clear that the convergence of streaming media, Smart TV s, broadcasting and the Internet, has created a VERY complex world that will be dominated by the smartest minds in technology and software engineering. The complexity of what Frankly is accomplishing cannot be under-stated. The flow of information within their industry and the ability to manage it all is quite amazing. They have a team of 50+ software engineers (plus overseas outsourcing) but I am surprised they accomplish what they do without multiples of this. It reflects upon a company that is (overall) extremely well run. TLK should be worth a lot more than what the market is giving them credit for. I believe the share price will either grow through 2016 to reflect their true value OR if it stays this low, they may become a takeover target of Lakana (owned by Nexstar Broadcasting - NXST $51) who may want control of this entire industry. From what I can tell, Frankly has superior technology to Lakana and over this next year, it should be proven even stronger. Frankly is taking proven business models and technology from Silicon Valley and applying it to the Media / Broadcasting industry. Frankly s core business is now deeply rooted and the stock s valuation reflects approx. one times annual revenue for 2016 ($22 Million U.S. - assuming minimal growth). Fair value should be closer to two times revenue BUT also missing entirely from the current valuation, is the significant potential of their new Native
Device APPs technology and the monetization of user data that Frankly will be tracking as a result of those apps. There are several reasons this company could be worth significantly more but first I have touched on the importance of their apps. Sixty percent of all Internet is mobile and over half of U.S. homes own a Smart TV. The broadcasting industry has (surprisingly) lagged behind these developments and Frankly has the technology to make them relevant / competitive again. The Frankly media network from 200 television stations is currently creating 1 Billion monthly impressions from 80 million monthly unique visitors. With the launch of their new software in April 2016, the potential to capitalize on this network has grown immensely - primarily through shared advertising opportunities. Of particular importance, each TV station will continue to push / promote (at their expense) their unique Station Apps (created using Frankly technology and templates). This has many advantages for the station AND the viewer. For Frankly, it gives them access to enormous amounts of consumer information that can be leveraged in many ways. As the number of media outlets grows, and as the stations continue to push utilization of their mobile apps, this network of 80 million consumers, could grow significantly - and carry with it, very significant value for Frankly shareholders.
These are the main components of Frankly s technology 1) CMS A management control panel that easily automates multiple processes and allows Multi-Platform Internet publishing (including social networks), flexible templates & modules, real time rich media storytelling, and provides actionable insight and informed decision making. 2) APPS Allows companies to control the style and content of their mobile, web and TV apps from a single intuitive interface. Media companies can distribute their content across all the major mobile devices, streaming media devices, and smart TVs including easy (on the fly) app customization. App development and maintenance can be expensive, time consuming and cumbersome. Frankly has dramatically simplified the process while still making it very powerful.
http://thesouthernweekend.com/ Frankly recently finished an app for The Southern Weekend (demo shown above) - an Internet and television property that is part of Raycom Media (63 local television stations in every Southern State). The app will be heavily promoted to viewers / consumers and the back-end data generated will all flow through Frankly. This is one example where their new app technology will be leveraged to track valuable consumer data and then, monetized.
3) Video a huge part of the industry. Companies can capture (from multiple sources) and manage enormous amounts of high quality data, distribute, and monetize it.
4) Managed Advertising Services Companies will be able to monetize their traffic with the highest yields in the business (Frankly will participate in ad revenue sharing). 5) BIG Data Mgmt / Analytics and Optimization Frankly provides cost effective management of the huge amounts of data generated by broadcasting companies (using cloud computing). They are using a proven and highly successful model developed by Amazon and applying it to the broadcast industry - a Cloud-based turnkey platform designed for smart and easy transformation of all types of data into innovative services. The Broadcasting industry is deeply rooted in Legacy Computing (software or hardware that has been superseded but is difficult to replace because of its wide use). Frankly s head of engineering, explained it to me like this Broadcasting for the most part, is an inelastic industry. Frankly is using the Silicon Valley model that focuses on flexible and affordable software and they will provide the industry with Elasticity (scale data usage and storage to what is needed as it is needed). And use very affordable cloud based computing to accomplish this (without incurring large capital costs). As I walked around the NAB convention, it became glaringly evident that the broadcasting industry generates incredible amounts of data video in particular. Cost effectively managing this enormous flow of data is a huge undertaking (and priority) for the industry. This is Frankly s area of expertise and they are tailoring technology to what their clients want. Over-the-Top- Technology or Content (OTT) In a report mid April I discussed the relevance of OTT to Frankly but I need to touch on it again as it is very important to the valuation growth of TLK.
OTT (Over-the-Top-technology or Content) uses the Internet and includes popular services like YouTube, Netflix, Amazon, and Hulu. Consumers access OTT content through computers, gaming consoles, streaming media devices like AppleTV, smart phones, tablets, and Smart TVs. The rise of these hugely popular services has resulted in Cable Companies losing customers to a new kind of customer called "Cord Cutters. Most cord cutters are younger and have opted out of traditional cable service. This has become a major problem for traditional television that depends upon advertising revenue. Local Television stations present a large opportunity for Frankly as they fight to become relevant again. Local TV was a big deal until digital came along and people started creating their own content. Frankly will help local TV rescue themselves from disaggregation losing touch with the consumer who spends a lot of time on the Internet (young people in particular). People still watch at least four hours of TV per day similar since 2010. TV is still the dominant way people get their Local news (82%). National news is at 73% and newspapers are 66%. In small and mid-size cities, 70% of the people depend upon local TV (about 200 million Americans) for weather, traffic, breaking news, and First Alerts. TV still gets 41% of Ad spending and it exceeds most popular online sources these numbers have been changing but TV is still the number one ad spend. Frankly is forecasting that CONTENT will become more important than PLATFORM (using YouTube for example to watch a video). This change will remain for the next five to ten years (it has been platform for the past ten new websites have evolved, Apple TV has launched, etc.). This drive/demand for CONTENT is clearly evident through Netflix who have been developing their own Original Programming. Another example: Verizon buying AOL marrying the content pipe to the Telco. Content and Platform need to be synergistic Frankly will help Local TV accomplish three OTT specific goals: o Know their audience (use data and build a relationship with the consumer) - More data means more money. TV gave up too much to Telco s, cable companies (data from billing, etc.) o Broader Content Offerings including local content that they are uniquely positioned to report on. They need that to stay relevant. Syndicating content around the world and enhancing with other content. o Multi-Platform Growth Hacking taking experiments and using science to grow your audience. Facebook does thousands of experiments per day. People love to be on TV it has very strong appeal that they are NOT capitalizing on. >> Tying all your platforms together with a unique strategy. Frankly is a One-Stop-Shop for Local TV stations to publish their content digitally & globally. Unlike anyone else in the industry, they will develop a huge content syndication pool across many platforms. Frankly will Enhance content with other diverse external content so that TV stations within the overall network (and the 80 million end users) will have access to an enormous amount of relevant shared content. They want the users to stay their longer (within the network) so everyone makes more money. The Content owner will generate and focus on producing content while Frankly takes care of the rest they will manage it, distribute it, and monetize it (through advertising). Local TV is their focus but the system will work great for ANY content owner production studios, Bloggers, YouTubers, etc.
Hollywood Studios have expressed an interest in getting their content into other places (other than just Netflix, Hulu, Apple TV, etc. the Frankly network of 80 million active users is a huge and lucrative market for them. It allows the studios to go direct to the consumer and also to work directly or indirectly with local television stations across the country. COMPETITION Frankly and Lakana have an estimated 60% to 70% of the American television market (the rest is a fragmented suite of small players with far inferior technology). Lakana is owned by publicly traded Nexstar (NXST:NASD). Nexstar recently announced the takeover of Media General for $4.6 billion plus the assumption of $2.3 billion in debt. The combined company will be known as Nexstar Media Group, and will own 171 stations, serving an estimated 39% of U.S. households. In any given market there will now be a Nexstar Media Group television station which means that if you are a competitor, it is most likely you will NOT do business with Lakana. (In a perfect world, could Nexstar decide Lakana is not core to their business and they would sell it to Frankly?)
Frankly differentiates (dominates) based on their technology platform: 1) They are the ONLY player that integrates ALL of the different platforms (native mobile apps, internet of things, streaming players, etc.) The Content Mgmt System allows them to manage all platforms 2) They are the ONLY company with a robust monetization / advertising team and technology. 3) Their data tracking ability through the APPs gives them a very big competitive advantage. The broadcast industry has been burdened with legacy systems so they have not adapted to Internet growth as quick as they should have. As a result, they have not evolved to target young millennials or the high usage of mobile devices (smart phones and tablets). This has created a large market for Frankly. Highlights from the Recent Financials and Webcast Frankly has now fully (and very successfully) integrated the U.S. $45M acquisition from August 2015 They are on a solid financial trajectory to achieve positive earnings over this next year. Q1/16 will now be their financial base-line (benchmark) going forward. They will continue to focus on revenue growth and cost rationalization. Their platform is software based so it allows them to scale up revenue without large overhead. For shareholders they hope to provide steady news-flow through the remainder of 2016. There will be a focus on monetizing media network visitors sourcing local and national advertising Many new companies have approached them in Q1 and at NAB They will continue to develop new technologies specific to media They have a very robust sales pipeline and scalable technology There are 700 news producing stations in the U.S. and they have 200 of them. They will up-sell to existing customers with new products (low hanging fruit) and pick up new stations from the remaining 500 (excluding those who are part of Nexstar). Local media companies want to better connect with their local audience and provide more targeted content. Because they have good working capital and are close to break-even, there should be no reason for an equity financing (dilution) unless something very material justified it. The end of 2016 and beyond they will look at expansion of their verticals (to newspaper publishing for example) and eventually International media. CONCLUSION I find the entire software industry associated with the Internet incredibly invasive. We have little personal privacy anymore. However, that is the nature of the beast and what it has involved to. As much as I don t agree with it, the companies capable of collecting and tracking enormous amounts of consumer data (and monetizing it) are the companies that have become incredibly valuable. The list is long but includes Facebook, Google, Twitter, Etc. What is Frankly really worth? I am not sure. I know based upon previous valuations of Canadian microcap techs that they should be valued closer to 2 times annual revenue (because they are approaching break even and have strong growth potential). That would value them closer to $1.25 to $1.50 per share.
However, two things have to be taken into consideration: 1) Their new app strategy and the enormous amount of data they will be collecting could hold very significant future value. Already they have access to 80 million consumers. What will happen in coming years as the number of television clients grows, they expand to newspapers and radio stations, and/or they go International? 2) This remains a Canadian tech story and many microcap Canadian investors would rather be buying junior mining stocks right now (the majority of which are now over-valued). That sector has suffered for almost five years so their time is due and the sector has seen a big rally in Q1/16. This has fueled herd mentality and shifted capital from other sectors (including techs) into junior mining. Inevitably this may result in a hard landing for many resource investors. If Frankly can list on a larger American exchange and/or attract U.S. investors, their valuation could change dramatically as those new investors may recognize the future value of the company s growth plans, and in particular, the future value of that enormous flow of consumer data. Frankly s use of data is revolutionary for the media / broadcast industry and they are at the leading edge of innovation. Their recent NAB partnership should only make that stronger. After seeing how complex their technology is and how much digital data the media industry generates, I now fully understand why NAB chose them to be part of an alliance that includes some of the biggest tech names in the world. I left the NAB convention feeling confident that Frankly has the leading software platform that broadcast groups can utilize to better engage and monetize their customers. They appear to be the Salesforce.com of the media industry. It is important to know that this business is not just about the revenue generated from selling software and services to media / broadcasting stations. It is the consumer DATA being generated behind the scenes that could hold very large future value. Local television stations will encourage their viewers to download and utilize the station s APP(s) it will make the station both competitive and relevant. The station does all their own marketing / promotion to put the app in the hands of the viewer while also building brand loyalty. Using Frankly s technology, the station can focus on content, while Frankly manages and monetizes the massive flow of data and shares in the advertising revenue. The Frankly network currently provides access to 80 million consumers. Over the next few years we could see this audience grow significantly and when it does, Frankly revenue and the value of that data network will go up.
It should only be a matter of time before a larger audience of investors recognizes this and they will be forced to pay significantly higher prices as TLK has a strong share structure and loyal shareholder base. http://www.linkedin.com/in/dannydeadlock www.microcap.com www.twitter.com/microcap_com www.facebook.com/microcap