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Frankly (TLK.V 66 cents)
www.franklyinc.com
April 14, 2016
www.MicroCap.com
I have referenced
Espial (ESP.T $1.96) a
couple times in my
past TLK reports but
this is becoming
eerily similar to our
original ESP
speculation – a
speculation that
made a LOT of
money.
Espial (chart below) I
introduced in the
summer of 2012 at 45
cents. January 2013 I
visited them at CES in
Las Vegas and was convinced even more that there was a real opportunity under our nose. However for the next
two quarters the stock languished as there was little to no interest in them.
Espial’s focus was on-demand software for the SmartTV – and they had a heavy reliance on broad acceptance of
the IPTV industry. For the most part, they developed software that helped make the TV more intelligent and used a
browser similar to what Apple TV used – but it was build for cable companies to help them compete.
It look until Q4/13 before Espial started getting some institutional interest – and then the stock started rising
dramatically. As the tech sector heated up, they raised $23 million in April 2015 and another $35 million at $4.
Within three years the stock produced a gain close to 1000%. Little had changed revenue-wise but bigger
investors started taking an interest and were willing to finance their growth.
Espial Similarities to Frankly (as an early stage investment)
I am flying down to Vegas on Monday and Wednesday will meet with them at NAB (North American Broadcasters
Convention – 100,000 attendees) to review their new software & services. Similar to what I did with Espial in
Q1/13, that hands-on insight is very important… and for those of you who are superstitious, it might bring us the
same type of good luck :)
1) Like Espial back in 2012/13, we (MicroCap subscribers) are one of the few following TLK yet they have a strong
share structure, the market cap is less than one times annual revenue (about $20M U.S.), and they have strong
growth potential that is being ignored by large / institutional investors.
2) Frankly is focused on software / service for the media industry (primarily local TV stations) but this network gives
them access to 80 million active monthly users. An extremely high number that is also being ignored / overlooked
by larger investors.
_____________________________________________
A couple quick Definitions (courtesy of Wikipedia) will be helpful before we continue:
OTT (Over-the-Top-technology or Content) and IPTV use the Internet but IPTV operates in a closed system - a
dedicated, managed network controlled by the local cable, satellite, telephone, or fiber company. In both the old
and new IPTV systems, subscribers have set-top boxes or other equipment that talks directly over company-owned
or dedicated leased lines with central-office servers. Packets of data never travel over the public Internet, so the
television provider can guarantee enough local bandwidth for each customer's needs.
IPTV is a cheap, standardized way to provide two-way communication and also address different data to different
customers. This supports DVR-like features and video on demand.
OTT is often lower quality but also low (or no) cost. OTT includes popular video on demand services like Sky Go,
YouTube, Netflix, Amazon, Hulu, myTV, Now TV, Emagine and BBC iPlayer. Consumers can access OTT content
through Internet-connected devices such as computers, gaming consoles like the PS4 and Xbox One, set-top boxes
like Roku, smart phones, tablets, and Smart TVs.
Netflix alone has 43 million members and 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.
In broadcasting, over-the-top content (OTT Content) refers to delivery of audio, video and other media over the
Internet without the involvement of a multiple-system operator in the control or distribution of the content. The
Internet provider may be aware of the contents but is not responsible for, nor able to control, the viewing abilities,
copyrights, and/or other redistribution of the content.
Similarly, Over-the-top messaging (OTT Messaging) refers to the concept of third parties providing instant
messaging services as an alternative to text messaging. This is where Facebook Messenger is dominating (after
acquiring WhatsApp in 2014 for $16 Billion).
_____________________________________________
On Wednesday (April 13th) TLK released news that made me realize how strangely similar this investment is to our
earlier days with Espial. Espial was leading the charge with a TV browser dependent upon IPTV. But as IPTV has
failed to hit the exponential growth everyone thought it would, they have been forced to modify their business
model as their revenue falls flat – I suspect this was only realized after they raised $58 million in 2015. Now Espial
is focused on Apps for SmartTVs but is still dependent upon IPTV.
The news Wednesday from Frankly made me realize I was grossly under-estimating the potential of OTT and
how all of this will integrate into one giant service that leverages the power of those 80 million users – and the
enormous power that network should have as it grows.
In addition, this is no longer just a focus on television stations. This has a growth trajectory that will include the
hugely popular streaming media devices that will include Apple TV, Amazon Fire TV, Roku, and Chromecast.
_____________________________________________
A week ago the CEO of Frankly did a 25 minute presentation: OTT Trends and the Future of Local Television
https://www.youtube.com/watch?v=s3XetugSAUo
I summarized the most important points – or at least those that are relevant to us as investors:
Frankly currently works with approx. 200 TV stations across the United States. In total the U.S. market has
an estimated 1,400 local commercial television stations and another 400 educational stations.
Local Television stations present a huge opportunity in the media industry BUT everyone forgets that.
Local TV was a big deal until digital came along and people started creating their own content. National
networks are now going direct to consumer and bypassing the local networks.
Local TV – how do they rescue themselves from “disaggregation” – losing touch with the consumer who
spends a lot of time on the Internet (young people in particular). How do they stay “relevant” ?
People still watch at least four hours of TV per day – similar since 2010 - so it is likely here to stay.
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
Local TV survival will be dependent upon three things:
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.
Frankly has a massive content management system / network for television stations.
They can manage video, text, photos, social media, weather and traffic integration. >> Edit, click, publish
ONE STOP, ONE DASHBOARD… to any endpoints including Apple TV, Xbox, etc. etc.
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.
_____________________________________________
Here are excerpts from Wednesday’s Press Release.
“The Apple TV app for multimedia consumption will give viewers the choice of watching video in a traditional lean-
back experience or a more interactive experience in which they can choose video clips, shows, and news segments.
Like the mobile apps, the TV app offers a search function, a special Weather section for an instant snapshot of the
week's weather details, and browsable categories including breaking stories, tech, business news, politics, and
more. Broadcasters will be able to add, remove, curate, and manage the features and content for all their app
experiences from the Frankly CMS backend.”
The Apple TV showcase is the first in a series of upcoming Frankly-developed OTT apps which will include
Amazon Fire TV, Roku, and Chromecast.
"To keep up with the movement toward OTT video delivery and mobile media consumption, broadcasters need
top-tier infrastructure to support content delivery to mobile and TV devices. At Frankly, we see a future where
broadcasters have a suite of beautiful, intuitive apps with a consistent user experience, powered by technology that
lets them analyze user behavior and monetize more traffic than ever before—and it's important that reaching a
new device platform doesn't fragment their existing workflows," said Harrison Shih, Chief Product Officer of Frankly.
"We are building sophisticated native apps and a platform that integrates app management into one powerful
content management and delivery tool."
_____________________________________________
CONCLUSION
As Frankly builds CRITICAL MASS (whatever that number may be) the overall network has the potential to
become very valuable and influential.
I discussed this in my February report on TLK but it needs to be emphasized when looking at this as a mid to long
term investment.
At 70 cents CDN, Frankly trades near 1 time annual revenue with a market cap near $28 million CDN. The 80
million users within their network are (for the most part) being valued at 35 cents each. Twitter ($11 Billion
market cap) with 320 million “monthly active users” believes they will generate almost $9 per active user in digital
ad revenue.
Should Frankly become successful in becoming THE dominant force in managing CONTENT, not only will that
network of 80 million users grow dramatically, but so will their overall software-as-a-service revenue AND the
managed Ad revenue across their network.
No longer would their end-users be valued by the market at a mere 35 cents, but it could grow to become
exponentially higher. This isn’t going to happen overnight, but when it does, we could see the share price change
dramatically (as we did with Espial over one to two years).
Right now the audience for TLK is dominated by smaller retail investors – primarily because of the TSX Venture
listing. Most funds cannot buy a company with such a small market capitalization. This situation is even worse in
the United States where larger investors are restricted from buying small stocks AND from buying on the TSXV.
Should the growth potential I explained above be recognized by larger institutional investors, and should they be
allowed to buy such a small company on the TSXV, we would see the market cap (and share price) change
dramatically.
Ultimately I would prefer to see them work with a well recognized investment banking firm from the United States
that could raise them capital (obviously at higher prices) and then list on NASDAQ. This would create the liquidity
they need and it would open up the company to a broad base of institutional investors.
It only takes a core group of large investors to be positioned early enough, to make a remarkable difference. And
those smaller investors willing to take that risk early, are typically the ones who achieve the exponential gains on
their investment – but that requires patience and a stomach for volatility.
Corporate Presentation:
http://franklyinc.com/wp-content/uploads/2016/03/CorporateOverviewMarch2016.pdf
_____________________________________________________________
Danny Deadlock, MicroCap.com
April 14, 2016