NeuLion Inc. (NLN T) · average on our DCF valuation at 11% discount rate and on 4x our F2014 sales estimates. C$1.05 Previous Close $0.51 $1.05 ... Case Study #1 – Newspapers

Beacon Securities Ltd.| 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H1 |416.423.1260 |www.beaconsecurities.ca

NeuLion Inc. (NLN – T)

Enabling Streaming Video

Content - Hear the Lion Roar

June 19, 2013

Doug Cooper, MBA

(416) 643-3863

[email protected]

The Internet is finally starting to have a meaningful

impact on the traditional TV industry.

The combination of technology advancements

and the proliferation of Internet-connected

devices (Smart TVs, gaming consoles, tablets, smart

phones), has enabled changing consumer

behavior. They want to watch high quality video

“content” when and where they want.

To satisfy this demand, owners of content are

looking to make it available and interactive on all

devices.

NeuLion’s strategy is to partner with content rights

holders (primarily sports today), and seamlessly

enable the conversion of live video (TV feeds) to

streaming HD video through its cloud based, end

to end solution.

Its initial focus on sports has resulted in a blue chip

client base including the NHL, NFL, NBA and UFC.

NeuLion has begun to leverage this experience

into the larger TV Everywhere market and target

traditional cableco’s and broadcasters.

NeuLion has an excellent market position in a large

dynamic industry, EBITDA break-through in Q4/FY12

and strong operating leverage (~60-70% EBITDA

flow through above $10 million quarterly revenue).

We initiate coverage with a BUY rating and a 12-

month target price of C$1.05 based on the

average on our DCF valuation at 11% discount rate

and on 4x our F2014 sales estimates.

C$1.05Prev ious Close $0.51

$1.05

106%

YE: Dec 31 FY12 FY13E FY14E

Revenue ($000s) 38,983 44,792 54,576

EBITDA ($000s) -3,298 2,271 6,003

FD EPS -0.07 0.00 0.02

FY12 FY13E FY14E

EV/Sales 2.64x 2.30x 1.89x

EV/EBITDA - 45.31x 17.14x

P/E - nmf 24.18x

Basic 166,973

FD 201,767

Market Cap (C$)

Basic 85,156

FD 102,901

EV (C$) 102,901

NeuLion was founded in 2004 and merged with JumpTV in

October 2008. The company offers a true end- to- end solution for

delivering live and on- demand content to any Internet- connected

device. NeuLion enables content owners and distributors as well

as cable operators and broadcasters to optimally address the

massive consumer demand for viewing video content on laptops,

smartphones, tablets and other connected devices. NeuLion's

sports customers include major leagues, colleges & universities,

regional networks and broadcasters. NeuLion's technology also

provides innovative solutions to general entertainment companies

and broadcasters. NeuLion is based in Plainview, NY.

$0.15-$0.5152 Week Price Range

Estimates

Valuation

Stock Data (‘000s)

12-month Target Price

Stock Performance

A ll prices in US$ unless o therwise stated

Initiating Coverage

BUY

Potential Return

Shares Outstanding

About the Company

Jul Sep Nov Jan Mar May

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mailto:[email protected]

June 19, 2013 | Page 2 Doug Cooper | 416-643-3863 | [email protected]

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Table of Contents

Investment Thesis .................................................................................................................... 3

Industry Overview ................................................................................................................... 4

Case Study #1 – Newspapers .............................................................................................. 4

The Television Industry – The Internet’s Next Victim ................................................................... 6

Case Study #2 – Netflix ....................................................................................................... 7

Enabling Streaming Video Content - Hear the Lion Roar ........................................................... 8

Revenue Model ..................................................................................................................... 11

Case Study #3 – NHL GameCenter Live ............................................................................. 12

Competitive Landscape ......................................................................................................... 13

Financial Forecast ................................................................................................................. 14

Valuation ............................................................................................................................. 17

Risks .................................................................................................................................... 17

Initiating Coverage with Buy Rating and C$1.05 Target Price .................................................. 18

Appendix A: Comparable Company ...................................................................................... 19

Appendix B: Financial Statements .......................................................................................... 20


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Investment Thesis

The Consumer Internet Revolution has caused dramatic changes in the

way many traditional businesses operate. The manner in which consumers

read the news, buy books, listen to/buy music and book travel has been

forever altered. Investors who foresaw this seismic shift in consumer

behavior, driven by technology advances, have been handsomely

rewarded. The Four Horsemen of this Consumer Internet Revolution

pertaining to news, books, music and travel (Google, Amazon, Apple and

Priceline) have seen their shares up an average of 700% over the past 5

years (before Apple’s recent slide). In our opinion, consumers are not

altering their behavior and buying patterns because the technology is

“cutting edge” but rather the opposite. Once the technology has

enabled “ease of use”, (from early adopters to early majority), consumers

have flocked to the Net given the better selections and/or cheaper prices

than traditional distribution channels (i.e. brick and mortar outlets).

We believe we are finally seeing the Internet have a similar impact on

television and the distribution of its content. Traditional means of watching

television through cable and satellite providers has been, until recently,

the preferred medium by far. That, however, is starting to change quickly.

Led by the Fifth Horseman of the Internet Consumer Revolution, Netflix (3-

year return of 700%) has dramatically impacted the way in which

consumers watch movies. With almost 30 million subscribers in the United

States alone (~25% of all US households), consumers have discovered a

distribution channel through the Internet that has more choices and is

cheaper than traditional bundled cable/satellite options. In essence,

Netflix has been the Trojan Horse through which consumers have

discovered the ease of use watching movies over the Internet and has

opened the door to them being amenable to viewing other traditional

bastions of cable/satellite TV over the Internet.

Consumer demand for alternative viewing means has forced content

providers to rethink their distribution strategies to include PCs, tablets,

smartphones and video game consoles. Making content available across

all devices would expand the viewing audience (for sports leagues)

and/or keep them (cableco’s), leading to increased (or at least stable in

the case of cableco’s) subscribers and thus revenue. To enable streaming

content, however, is complicated, especially for live sporting events.

NeuLion (the Company) has proven its end-to-end solution and has made

itself an indispensable part of the process. With an initial focus on sports,

NeuLion has partnered with all of the major North American leagues

(except MLB), who have trusted their multi-billion dollar brand and the

execution of their streaming experience to NeuLion. We believe this

speaks volumes to NeuLion’s technology and its reliability. As the sports


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franchises attract more subscribers, we believe NeuLion’s revenue will

grow significantly.

With its high profile clients, NeuLion is now pursuing cableco’s who are in

the first inning of rolling out their TV Everywhere (streaming) products. With

very positive macro trends and a very scalable operating model, we

believe NeuLion has the potential to grow its EBITDA exponentially. Trading

at a significant discount to its peers, we believe NeuLion represents an

excellent risk-return proposition. We are therefore, initiating coverage with

a Buy recommendation and a C$1.05 target price.

Industry Overview

Not since Henry Ford’s introduction of the assembly line in 1913 has an

innovation had such an impact on the way businesses operate than the

Internet. The impact of the assembly line reduced the time required to

manufacture a car and thus reduced its price by over 30% over a 4-year

period to $575. This dramatically expanded the market as the price was

now within reach of the average American consumer (note that an

assembly line worker could buy a Model T with 4 months’ pay) and forever

changed the world.

This is but one example of how technology has changed the course of

history. While we can have a spirited debate about which has had the

greatest impact (my vote is for the printing press and the light bulb), there

should be little debate over what has been the greatest innovation over

the last 25 years. It is clearly the Internet. Its widespread adoption has

completely altered the manner in which consumers live their everyday

lives, from the way they get their news, to the way they do their shopping.

This widespread consumer adoption has, in turn, forced companies to

change their distribution strategies. Just like with Henry Ford’s Model T,

new innovations have resulted in lower prices, which in turn, drive more

consumer adoption. We think we are finally starting to see the Internet’s

impact on the television world, albeit we also believe it is very early in the

game.

Before we delve into specific details of the current state of the TV business,

we think is instructive to detail the Internet’s impact on another industry.

Case Study #1 – Newspapers

When the Commercial Internet Revolution started in the 1990s, many felt

its first victim would be the newspaper industry. Why would consumers

subscribe to receive a paper when they could get more up-to-date


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information for free? However, throughout the 1990s, subscriptions

increased as did advertising revenue. Stock prices rallied, seemingly

oblivious to the Grim Reaper at their door. The reality kicked-in in 2000.

According to the Newspaper Association of America, print newspaper

advertising revenue dropped from ~$65 billion in 2000 to $20 billion in 2010,

a drop of 70%.

Shares of publically traded newspapers collapsed, as seen in the price of

the New York Times, which dropped from $50 to $6.00.

Source: BigCharts.com

The reality is not that consumers don’t want the content offered by the

New York Times, but rather that they didn’t want the physical

manifestation of that content’s delivery system. Understanding what their

customers want has forced newspapers to change their business models.

In an effort to keep readers, the NY Times obviously went on-line. But also,

in May 2011, the paper started charging for subscriptions to its online


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content. The result is that revenue stabilized and profitability improved

and its stock price rallied back to $11.00 per share.

The lesson, in our view, is twofold:

a) Purveyors of content must make that content available on the

medium their customers want to view/buy it;

b) Consumers are willing to pay for content on the Internet if it adds

value and is high quality

The Television Industry – The Internet’s

Next Victim

Will the traditional television industry, long dominated by cableco’s and

satellite providers, learn from the aforementioned newspaper example?

Already, the pieces are in place to force a change in their business

model:

a) The widespread adoption of set-top boxes and PVRs has

conditioned consumers to watch their favourite shows when they

want to. This also means they can fast forward past the

advertisements (which represent ~50% of network’s revenues);

b) The widespread adoption of alternative means of watching their

shows. For example, in 2011, ~25% of all flat panel televisions

shipped were Internet enabled. By 2015, shipment of Internet-

enabled TV shipments is expected to double to 138 million units.

This is in addition to the vast numbers of Internet connected

gaming consoles and smart phones. In essence, the home

television is becoming a giant monitor with a user friendly quasi-

browser interface as the primary function (turn on the monitor and

choose from Netflix, Apple TV, Rogers, YouTube or NFL Network, as

examples). Note that increasingly, consumers are “cutting the

cord” (to a cable subscription), or for the young demographic,

never buying it in the first place. Meanwhile, throughout the

household, family members are deploying their 2nd screen (tablets,

smart phones, laptops) as ubiquitous substitutes for the television.

The idea of the tethered television (either through a cable or

satellite connection) as the centre of a household viewing activity

will become as quaint as that image of a 1950s family gathering to

watch the latest episode of the Ed Sullivan Show;


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c) The widespread implementation by ISP (Internet Service Providers)

of 4G technology, which enables high quality streaming video. In

fact, on June 12, 2013, Cisco Systems announced that its new

router, the “CRS-X” is capable of providing speeds of 400 Gigabits

per second. Each rack is scalable up to 6.4 Terabits per second

and the entire system is capable of nearly 1 Petabit per second if

multiple racks are set up. According to Cisco, this would represent

a doubling of the speeds currently available.

The culmination of all of these factors has resulted in consumer demand

for streaming video content, where, when and on what device they want

it.

Case Study #2 – Netflix

Netflix was founded in 1997 and originally offered DVDs on a fee for

service basis and then introduced a monthly subscription service in 1999.

However, its real competitive advantage was its first mover status into the

world of on-line, streaming rentals in 2007. As of December 31, 2012, Netflix

had 33 million members in over 40 countries, watching more than 1 billion

hours of TV shows and movies per month. Since 2008, revenue has grown

by a 28% CAGR and hit $3.6 billion in 2012. While there is no doubt that

Netflix has competition from other content aggregators such as Hulu as

well as the growth of TV Everywhere, the conclusion from this case study is

simply:

a) The use of the Internet to enjoy streaming video content is fully

adopted and accepted by consumers;

b) At 3.0x EV/sales and 43x EV/EBITDA, the stock market ascribes a

premium multiple to a stock that is at the forefront of this changing

consumer viewing behavior.

The following graph highlights the growth of Netflix subscribers juxtaposed

against Comcast subscribers over the past decade. One can see that

after 2008, “cable cutters” began to have a significant impact.

Source: nScreenMedia, April 2013


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To summarize our analysis thus far:

a) There is no going back to old business practices once any

technology genie is out of the bottle;

b) The Internet is the biggest technological change to which

businesses have had to adopt over the past 25 years;

c) Businesses that try to ignore its impact, like the newspaper industry,

do so at their own peril;

d) A combination of the technology pieces and consumer

acceptance/adoption will continue to force video content

providers to change their distribution methodologies and business

models.

Against this macro backdrop, we now turn our attention to NeuLion and

its role in the evolving world of the distribution of “TV” content.

Enabling Streaming Video Content - Hear

the Lion Roar

NeuLion was founded in 2004 by Nancy Li (President and CEO) and

counts her husband Charles Wang (founder of Computer Associates and

owner of the New York Islanders hockey team) as its Chairman. The

Company went public in 2008 through a 50/50 merger with JumpTV.

NeuLion is a pure B2B technology company whose core competency is

enabling their partners to get their content to market very quickly on

multiple devices (e.g. Connected TVs, gaming consoles, tablets, smart

phones, computers). As a complete “end-to-end” service provider,

NeuLion takes care of the distribution of the content as well as its

monetization (i.e. billing, authentication), which leaves the content

provider free to concentrate on marketing and growing their subscriber

base.


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NeuLion’s Cloud-Based, End-to-End Solution

Source: NeuLion Inc.

NeuLion has historically concentrated on the sports market in which it has

amassed a very blue chip client base including:

Pro Sports: NHL, NFL, NBA, UFC, MLS, CFL, AHL, WHL and the OHL. Pro

Sports revenue has grown from $7 million in revenue in 2010 to $13.5 million

in FY12. In fact, we believe the FY12 revenue is understated as revenue

was negatively impacted by the NHL strike, which delayed the start of the

season to January 19, 2013 versus the normal October 2012 start date

(Q4/FY12). We believe the truer growth rate was apparent in Q1/FY13 as

Pro Sports revenue was up ~50% y-o-y.

College Sports: Over 175 US colleges, including recent wins such as The Ivy

League, PAC 12 and The University of Miami, use NeuLion’s College

Technology platform. While College revenue has been flat over the last 3-

years ($10.9 million in FY12 versus $10.8 million in FY10), we believe this

segment is set for growth in the coming years resulting from a change in its

sales leadership as well as the migration of College customers to the

advanced technology used for NeuLion’s Pro Sports customers. Our

confidence is buoyed by the recent wins noted above.


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In our view, this early concentration on sports is as a result of two primary

factors:

a) Charles Wang, as owner of the New York Islanders, has a relationship

with the NHL. While this certainly did not guarantee the contract

(perhaps the opposite as the NHL may have been worried about non-

arm’s length contract awards), it certainly allowed NeuLion an

audience;

b) Sports franchises realize they have a “perishable” product. Once the

game is played, it loses significant appeal and value. As such, they

are looking to increase distribution (and revenue) for their “live”

product.

TV Everywhere: NeuLion’s success within the sports world has enabled it to

expand its reach into the cable/satellite world of TV Everywhere, initially

for its sports content (i.e. providing a service for Rogers Sportsnet for

curling and Shaw’s NFL Network, delivering this content to multiple

connected devices for Rogers and Shaw subscribers, respectively). Using

its experience in enabling live streaming for sports as a Trojan Horse,

NeuLion is attempting to leverage into the cableco’s more general TV

Everywhere product offering (TV shows, movies). While its TV Everywhere

business is starting from a smaller revenue base than its Pro and College

sports clients (24% of consolidated service revenue in Q1/FY13), the

number of potential cableco/satellite companies in North America,

coupled with their large number of subscribers, makes NeuLion’s TV

Everywhere a significant growth opportunity.

Strategy

As we have alluded to in the report thus far, content providers are looking

to expand their distribution capabilities to an array of Internet-connected

devices in order to satisfy consumer demand as well as generate

incremental revenue (or stabilize revenue for cableco’s who are afraid of

cord cutters). Generally, these content providers are looking to outsource

the enabling of that streaming video to technology service providers.

NeuLion’s strategy, therefore, is to seek the owner of content rights (either

the direct owner itself or the entity to whom the direct owner has sold the

rights) and partner with them. By segment, such content owners could

include:

a) Pro Sports: While NeuLion has partnerships with all of the major sports

leagues in North America (except MLB), we believe there is still

significant room to grow. We would point to two main opportunities.

Firstly, there is an opportunity to partner with major European (or other


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non-North American) sports leagues (soccer, rugby, etc.), to expand

their fan base and stream their content to other countries. Secondly,

pursue partnerships with the domestic (i.e. USA) rights holders of such

franchises as the NFL and NBA (Note that NeuLion’s current revenue

from these leagues comes predominantly from streaming outside the

US). For example, DirecTV owns the domestic digital rights to the NFL

for streaming to Xbox and PCs. Verizon recently announced that it will

pay the NFL $1 billion over 4 years for the right to stream to

smartphones.

b) College Sports: NeuLion’s primary competitor within the US college

market is CBS College Sports Network. CBS is a media company who

aggregates the technology pieces to provide NCAA colleges and

conferences a streaming solution. Given the recent high profile wins

by NeuLion (i.e. PAC 12, Ivy League), we believe it is clear that a

premium end-to-end solution is being selected by customers as a

preferred solution. With an ~40% share of the US college market that

matters (i.e. Division I and Division II represent 60% of US colleges), we

believe NeuLion is primed to take additional market share as CBS’ old

contracts come up for RFP.

c) TV Everywhere: We believe we are very early in the process of

cable/satellite providers providing their subscribers a TV Everywhere

experience. As such, there is a long list of potential clients including

broadcast networks (i.e. CBS, ABC, NBC, etc.), cable networks (i.e.

Discovery, ESPN, Timer Warner, Turner), cableco/satellite (i.e. Rogers,

Shaw, Comcast, DirecTV and BrightHouse, with whom NeuLion just

signed a partnership etc.) and studios (i.e. Disney, Paramount, Sony,

etc.). Growth within this channel could be explosive. As a point of

reference, NeuLion has begun to work with Rogers on several TV

Everywhere projects.

Revenue Model

NeuLion’s model is based primarily on recurring revenue as the Company

shares in the revenue stream with the content provider. In the 12-month

period ended March 31, 2013, 85% of its revenue was recurring in nature.

In general, NeuLion’s revenue model is based on:

a) A set-up fee;

b) An annual “licensing” fee;


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c) A variable fee based on either a revenue share of subscriber fees or a

fee based on usage.

In essence, we believe that NeuLion has the potential to grow its revenue

significantly over our projection period through a combination of:

a) Material growth through the expansion of business with their current

customers. For example, subscriptions to NHL’s GameCenter Live

(powered by NeuLion) have grown very materially since 2008. (Of

note: we found in a straw poll that huge hockey fans were not even

aware today of the service, giving us comfort that hyper growth will

continue as the macro trends continue to reach the masses.)

b) Signing new partnership contracts, especially TV Everywhere deals.

Case Study #3 – NHL GameCenter Live

We believe the NHL is NeuLion’s largest customer at 13% of FY12 revenue

(NeuLion disclosed that one customer was 13% of revenue), or ~$5.1

million in revenue. We further know that from its filing, NeuLion had a client

that represented 10% of sales in FY08. Assuming that was also the NHL,

revenue has grown from $1.3 million in FY08 to that aforementioned $5.1

million; a CAGR of 41%. In fact, given the NHL strike that negatively

impacted Q4/FY12 revenue, we believe its contribution would have been

significantly higher. The following is an indication of how NeuLion’s

relationship with the NHL has expanded (Source: NeuLion):

Year 1: Built out the digital platform for nhl.com and 30 team sites

including video portals for each club. First implementation of NHL

GameCenter.

Year 2: Launched NHL GameCenter LIVE which focused on fan

experience and integrated features like live chat, multi-camera views,

and highlights.

Year 3: Expanded NHL digital experience to mobile devices and rolled out

over 20 new versions on handheld devices: iPhone, iPad, Android.

Year 4: Further expanded to smart TVs and connected devices: Xbox,

Apple TV, PS3, Roku. Added internal apps like Hockey Operations.

Year 5: Built out next-gen infrastructure and asset management system.

As per NHL Commissioner Gary Bettman:

“NeuLion has been indispensable to us in making sure we are state of the

art, particularly as it relates to digital applications. We’re grateful to be


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associated with NeuLion because we know they will keep us at the

forefront.” (Source: NeuLion).

While neither the NHL nor NeuLion will disclose absolute subscriber

information, the Company has indicated that as of March 2013,

subscriptions to NHL GameCenter LIVE are tracking at a very significant

increase over last season’s record number. Also interestingly, US viewership

on NBC Sports Network for game 2 of this year’s Stanley Cup finals

averaged 4 million viewers versus 1.18 million a year ago – a 235%

increase. Clearly as interest in the NHL in general and subscribership and

usage on NHL GameCenter LIVE in particular grows, NeuLion’s revenue

(as per its revenue model noted above) also grows.

Competitive Landscape

We believe that NeuLion’s competitive position is based on its high video

quality (as much as 60 frames per second and the usage of adaptive

streaming), its ability to offer interactive features (multi camera, social

media interaction) and its ability to get the product to market quickly on

a myriad of devices (computers, game consoles, smart phones – all of

which require different architecture). While our due diligence indicates

that NeuLion is certainly not alone in its ability to enable streaming video

content, it is one of the only players that can offer an end-to-end, feature-

rich solution. This has led to NeuLion’s ability to claim such high profile

clients as the aforementioned NHL, NFL, NBA and Rogers, amongst others.

These high profile clients have significant brand equity and would not do

anything to cause brand impairment. Take the NFL as an example. As

4wallmarketing (industry blog) said:

“The NFL is a branding machine. Sponsors line up to pay huge

amounts to associate themselves with the NFL. Fans pay large

sums for jerseys and other merchandise. How have they done it?

Part of the success is because the NFL puts forth its brand in a

cohesive manner. Their trademarks are well protected – most

teams own trademark registration for several variations of their

logos, helmets designs and uniform designs. Only two brands,

besides the NFL teams, are allowed to be a part of the game in

any manner — Gatorade beverages and Motorola headsets worn

by the coaches — and those rights come at a cost”

These leagues want to surround themselves with the best possible

technology to grow their respective brands. We think NeuLion’s

association with them speaks volumes as to its technology, reliability and


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customer service. Nevertheless, NeuLion does have competition within

each of its verticals:

a) Pro Sports: The other primary players in this segment are MLB.com

(Major League Baseball) and Perform Group (PER:UK). While the

former concentrates primarily for its own market segment, Perform has

focused its sports streaming solution to date primarily in Europe and

Asia on sports such as soccer and tennis.

b) College Sports: NeuLion’s primary competition in this segment is CBS

College Sports Network. As we have previously indicated, CBS is

primarily a media company who aggregates the technology pieces

to offer a solution. NeuLion has been winning market share versus CBS

recently.

c) TV Everywhere: There is still a little bit of the Wild West at work here and

it is unclear how it will ultimately play out. Many early adopters of TV

Everywhere (e.g. HBO Go) have elected thus far for an in-house

solution but largely, we think, because scalable third party outsourced

solution are only just evolving (i.e. NeuLion). NeuLion’s strategy is to use

its unique market position with its sports league customers (i.e. NFL) to

develop cable/network TV Everywhere customers (i.e. Shaw NFL Go).

NeuLion’s dominant position with major sports leagues opens the door

for the Company to work potentially with every North American MSO

(cable, satellite) to provide some or all of their TV Everywhere solution

in due course.

Financial Forecast

Income Statement

In our view, the two key take-aways from an examination of NeuLion’s

historical income statement is its revenue growth and the expansion of its

adjusted “gross” margin (as defined by us as “Service revenue” – “Cost of

service revenue”). From FY08 – FY12, revenue grew from $13.4 million to

$39 million; a 31% CAGR. Service “gross margin” has expanded from 52%

in FY08 to 67% in FY12 and 72% in Q1/FY13. At the same time, SG&A and

R&D have been flat since FY10 at ~$29 million. The combination of rising

sales, expanding gross margins and flat overhead reduced NeuLion’s

EBITDA loss from $14 million in FY09 to a $3.3 million loss in FY12 and a

trailing 6-month (Q1/FY13 + Q4/FY12) EBITDA profit of $1.6 million. Q1/FY13

saw record revenue of $11.9 million and EBITDA of ~$1 million. We note

that there is some seasonality in the business given so many of NeuLion’s

customers have their peak following during Q4 and Q1. Therefore, we are

anticipating y-o-y higher highs and lower lows with respect to quarterly


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revenue and EBITDA. To be specific, we would expect Q2/FY13 to be

lower in revenue and EBITDA than Q1/FY13 but materially better on both

metrics than Q2/FY12. From an annual perspective, we anticipate EBITDA

to turn positive in FY13 and NeuLion to expand its EBITDA margin

significantly over our projection period. As a point of reference, Perform

Group currently attains a 25% EBITDA margin.

NeuLion’s EBITDA Breakthrough in Q4/FY12

Source: NeuLion Inc.

From a forecast perspective, we model revenue growing from $39 million

in FY12 to $43 million and $54.6 million in FY13 and FY14 respectively.

Growth in FY13 is predominately from Pro Sports (up 47% y-o-y in Q1/FY13).

In FY14, our growth assumptions are more diversified amongst its segments

(30% growth in Pro Sports, 25% in TV Everywhere and 20% in College

Sports). Assuming 70% gross margin (note we have assumed zero

equipment revenue in our forecast) with relatively smaller increases in

overhead, our EBITDA margin expands from (8.5%) in FY12 to 5.1% in FY13

and 11% in FY14. Based on the Treasury Method of 202 million fully diluted

shares outstanding (@ C$0.50), our EBITDA forecasts translate to EPS of

$0.00 and $0.02. From a longer-term perspective, if revenue continues to

ramp at 20% beyond our projection period and reaches $80 million in

FY16, we believe NeuLion could hit our target EBITDA margin of 25% (as

per Perform) or $20 million in that year.


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Balance Sheet

From a balance sheet perspective, NeuLion had $15 million in cash at the

end of March with no debt. From an adjusted working capital perspective

(Cash + AR – AP), the Company ended Q1/FY13 with $6.6 million. With

minimal cap-ex required (averaging $1.5 million over the last 5 years), we

expect the Company to be free cash flow positive going forward.

Additional capital could be required to fund working capital given our

revenue growth expectations and/or to fund acquisitions. Charles Wang,

Chairman of NeuLion, has a track record of successful acquisitions while

building Computer Associates and we believe that selected acquisitions

may make sense in certain areas including gaining market share within

the TV Everywhere vertical.

Share Capital

NeuLion’s share capital structure consists of:

Basic Shares 167.0 million

Warrants 19.4 million (average strike price: $0.37)

Options 16.5 million (average strike price: $0.45)

Preferred Shares 28.1 million (1 for 1 basis)

Total FD Shares 231 million

Total Treasury Method 202 million (at $0.50)

Management and Board members own 67% of the basic shares, including

43% owned by Charles Wang and Nancy Li. Insiders also own the

preferred shares (@ $0.45 and $0.58), which we expect will be converted

in due course. Charles Wang and Vice Chairman G. Scott Paterson

bought 27% of the Company’s last $5 million financing (@ C$0.20 with a

half warrant at C$0.30). As such, we believe that management and the

Board’s interests are fully aligned with shareholders.


NeuLion Inc.

Valuation

From a valuation perspective, we have examined NeuLion using two

methods:

Peer Group: While there are several companies who participate in the

streaming industry including “content” players (i.e. Comcast, DirecTV and

Netflix) as well as “last mile” companies (i.e. Akamai and Limelight), there

are few companies that offer a cloud-based, end-to-end, “white labeled”

solution such as NeuLion. As such, finding an applicable public peer

group is difficult. Furthermore, such companies as MLB.com, that would

make an interesting comparable, are private. Consequently, we believe

that investors will look to Perform Group (PER:UK) and value NeuLion at a

discount given its smaller size and EBITDA margin at his stage of its life

cycle. With Perform trading at 5.3x FY14 revenue, we believe NeuLion

should trade at a 25% discount to that multiple. At 4x our FY14 revenue

forecast, NeuLion would trade at C$1.10.

DCF: Based on our growth assumptions beyond our forecast period and

using a 11% discount rate, we arrive at a target price of C$0.99.

Risks

Loss of Major Contract: With 13% of revenue from one client, and we

estimate close to 25% of revenue from 3 clients (NHL, NFL and NBA), a loss

of one of them would be a negative development.

Subscribership Stalls: NeuLion’s revenue is based on usage and/or sharing

of subscriber fees. If subscribers to any of NeuLion’s partners stall, it will

negatively impact its growth rate. We would note that NeuLion is

vulnerable to whether their customers promote their digital offerings

and/or price them to attract a growing subscriber base.

Fails to Grow in TV Everywhere: The opportunity within TV Everywhere is

very significant. However, it is not clear yet who will win the majority of

subscribers between such players as Netflix, Hulu or the cable/satellite

providers. In this dynamic and competitive environment, NeuLion is

competing against much larger and well financed companies.


NeuLion Inc.

Initiating Coverage with Buy Rating and

C$1.05 Target Price

We are initiating coverage of NeuLion with a Buy rating and a target price

of C$1.05. In summary, our recommendation is based on the following:

a) The Internet is the biggest technological change to which businesses

have had to adopt over the past 25 years. It is finally starting to have

an impact on the distribution of TV content.

b) The proliferation of Internet-connected devices has changed

consumers viewing patterns. No longer is the living room TV the only

viewing option.

c) As such, the technology pieces are in place such that consumers are

able to watch “content” when and where they want.

d) Owners of content are therefore increasingly look to make their

content available on multiple devices such as Smart TVs, tablets,

gaming consoles and smart phones to increase viewership/revenue

and/or retain subscribers.

e) NeuLion’s strategy is to partner with the owners of content rights and

quickly enable the transmission of streaming video through its cloud-

based end-to-end solution.

f) NeuLion’s will leverage its blue chip client base in sports to significantly

expand its presence in the large TV Everywhere market.

g) The Company’s financials have hit an inflection point as it turned

EBITDA positive in Q4/FY12 and Q1/FY13. With its strong operating

leverage, we would expect strong flow through to EBITDA (~60-70%)

above $10 million in quarterly revenue.

In essence, NeuLion is at the centre of the biggest change in the television

industry since the cableco’s attained dominance of broadcast TV in the

1980s. Its revenue growth, improving margin profile and “best in class”

technology leave investors very well positioned to benefit either from an

appreciating stock price or ultimately a potential acquisition of it. As

such, we are initiating coverage of NeuLion with a Buy recommendation

and 12-month target price of C$1.05, which represents the average of our

peer group and DCF valuation analysis.


NeuLion Inc.

Appendix A: Comparable Company

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NeuLion Inc.

Appendix B: Financial Statements

Income Statement

Year End: December 31 FY08 FY09 FY10 FY11 FY12 FY13e FY14e

(US$000s)

Revenue:

Service revenue 9,543 26,464 31,500 36,613 37,178 44,567 54,576

Equipment revenue 3,901 1,629 1,673 3,054 1,804 226 0

Total Revenue 13,443 28,094 33,174 39,666 38,983 44,792 54,576

Operating Expenses:

Cost of service 4,519 12,850 12,842 13,985 12,281 13,118 16,373

Cost of equipement 3,120 1,537 1,575 2,391 1,414 165 0

SG&A 12,372 27,599 24,741 23,965 21,914 22,438 24,559

R&D 0 0 5,048 6,201 6,673 6,799 7,641

Total operating expenses 20,012 41,986 44,207 46,543 42,281 42,521 48,573

EBITDA -6,568 -13,893 -11,033 -6,877 -3,298 2,271 6,003

Amortization 1,572 4,141 5,178 5,367 4,407 1,917 1,748

EBIT -8,141 -18,034 -16,211 -12,244 -7,706 354 4,255

Total net interest expense -130 -294 -62 -32 -1 0 0

EBT & other expenses -8,011 -17,740 -16,149 -12,212 -7,704 354 4,255

Other expenses (FX, Charges, stock based comp) 3,626 1,901 1,018 1,862 1,761 0 0

EBT -11,636 -19,641 -17,167 -14,074 -9,466 354 4,255

Tax Expense and Non Controlling Interest 0 0 353 299 613 0 0

Net income -11,636 -19,641 -17,521 -14,373 -10,079 354 4,255

Shares Outstanding 55,995 111,315 122,364 139,610 146,900 166,973 166,973

EPS (basic) -0.21 -0.18 -0.14 -0.10 -0.07 0.00 0.03

Shares Outstanding (FD) 55,995 111,315 122,364 139,610 146,900 201,767 201,767

EPS (FD) -0.21 -0.18 -0.14 -0.10 -0.07 0.00 0.02

Source: Company Reports and Beacon Securities Ltd.


NeuLion Inc.

Balance Sheet

Year End:December 31 FY08 FY09 FY10 FY11 FY12 FY13e FY14e

(US$000s)

ASSETS

Cash $27,323 12,958 $12,929 $12,347 $11,108 $8,985 $15,671

Accounts receivable 2,284 1,809 2,357 3,494 4,194 4,295 5,233

Other receivables 1,211 857 296 310 349 368 449

Inventories 348 929 947 797 417 431 538

Prepaid expenses 1,830 966 1,015 1,189 1,185 1,185 1,185

Other 324 247 1,262 734 900 900 900

Total Current Assets 33,320 17,766 18,806 18,872 18,153 16,164 23,977

Plant, property and equipment 6,475 5,754 5,119 4,294 3,447 3,333 3,227

Intangible assets 5,749 9,542 9,283 6,609 4,015 3,212 2,570

Goodwill 6,846 6,757 11,240 11,328 11,328 11,328 11,328

Other 1,347 450 259 226 162 162 162

Total Assets 53,738 40,269 44,708 41,330 37,104 34,199 41,264

Liabilities and Shareholders' Equity

Bank debt 0 0 0 0 0 0 0

Accounts payable 4,465 5,384 5,504 9,597 9,813 5,930 7,401

Accrued liabilities 7,595 5,822 5,431 5,314 4,767 5,391 6,729

Due to related parties 57 299 0 13 12 12 12

Deferred revenue 3,092 3,908 6,432 6,625 5,715 5,715 5,715

Convertible note, net of discount 0 0 0 0 321 321 321

Other 0 1,389 0 0 0 0 0

Total Current Liabilities 15,209 16,801 17,368 21,550 20,628 17,369 20,178

Long-term deferred revenue 639 469 548 1,050 1,134 1,134 1,134

Other long-term liabilities 876 728 495 432 358 358 358

Deferred tax liability 0 0 0 299 912 912 912

Total Liabilities 16,724 17,999 18,412 23,331 23,032 19,773 22,582

Redeemable preferred stock 0 0 10,129 14,865 14,895 14,895 14,895

Share capital 63,053 66,075 76,663 78,448 84,571 84,571 84,571

Retained earnings (26,040) (43,804) (60,496) (75,315) (85,393) (85,039) (80,784)

Total Shareholders' Equity 37,014 22,270 26,296 17,998 14,072 14,426 18,682

Total Liabilities and S.E. 53,738 40,269 44,708 41,330 37,104 34,199 41,263



NeuLion Inc.

Statement of Cash Flows

Year End:December 31 FY08 FY09 FY10 FY11 FY12 FY13e FY14e

($000's)

Net Income (11,637) (19,641) (17,167) (14,373) (10,079) 354 4,255

Depreciation 1,572 4,141 5,178 5,367 4,407 1,917 1,748

Other 3,892 1,969 971 2,174 2,318 0 0

Cash Flow Operations (6,172) (13,531) (11,019) (6,832) (3,353) 2,271 6,003

Changes in non-cash WC 558 1,838 2,913 3,276 (1,524) (3,394) 1,683

CFO (inc. changes in WC) (5,615) (11,692) (8,106) (3,556) (4,877) (1,123) 7,687

Capital expenditures (1,443) (1,198) (1,952) (1,876) (1,107) (1,000) (1,000)

Acquisitions 0 (1,562) 243 0 0 0 0

Other (Net) 21,738 0 0 0 0 0 0

Cash Flow Investing 20,295 (2,760) (1,709) (1,876) (1,107) (1,000) (1,000)

Principal Repayments 0 0 0 0 0 0 0

New Equity 12,034 88 9,786 4,850 4,199 0 0

New Debt 0 0 0 0 546 0 0

Other (Net) 0 0 0 0 0 0 0

Cash Flow Financing 12,034 88 9,786 4,850 4,745 0 0

Other (Net) 0 0 0 0 0 0 0

Cash Flow 26,714 (14,365) (28) (583) (1,239) (2,123) 6,687

Cash, begin period 608 27,323 12,958 12,929 12,347 11,108 8,985

Cash, end period 27,323 12,958 12,930 12,347 11,108 8,985 15,671


Beacon Securities Ltd.| 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H1 |416.423.1260 |www.beaconsecurities.ca

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BUY Total 12-month return expected to be >15%

SPECULATIVE BUYPotential total 12-month return is high (>15%), but given

elevated risk, investment could result in a material loss

HOLD Total 12-month return expected to be between 0% and 15%

SELL Total 12-month return expected to be negative

as at Mar 31, 2013 # Stocks DistributionBUY 17 73.9%Speculative BUY 1 4%HOLD 5 21.7%SELL 0 0%Restricted 0 0%Total 23 100%

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