Summary
- TransGaming is an undiscovered micro-cap technology company that has significant investment potential.
- The company serves three unique markets that have been growing and have numerous growth drivers in place for further advancement.
- TNSGF is establishing itself as a player in these markets – with deals ranging from OEMs such as Samsung and providers such as Dish Network.
(Editor’s note: Investors should note the liquidity risks involved in TNSGF. TransGaming’s Canadian listing TNG.V offers better liquidity.)
Opening and Company Background
Headquartered in Toronto Canada, TransGaming (TNG.V, OTCPK:TNSGF) is an under-the-radar technology company focusing on three unique areas in the technology realm. The company is segmented into two divisions. The graphics and portability group includes Cider, that allows for the quick conversion of games from one platform to another. This division also includes SwiftShader, a 3D renderer that is licensed and currently utilized by industry giants such as Google and Adobe. The digital media group focuses on cloud based casual gaming on Smart TV’s through set top boxes and Smart TVs. This unique service is provided through TNSGF’s GameTree TV platform.
“We act as the bridge for major PC developers, such as EA, to enable their games on multiple platforms.” – Vikas Gupta, CEO
TransGaming is not new to the area of program conversion. In 2004, TNSGF released Cedega which allows gamers to run popular PC games to Linux. TNSGF later moved on to the unmet market of allowing PC games to be played on Mac computers. In 2006, TNSGF released a program known as Cider to developers to enable the deployment of PC games on Mac computers. In 2009, TNSGF released an innovative software known as SwiftShader – a 3D rendering software that enhances the quality and processing of 3D images up to 100x compared to traditional renders. SwiftShader is currently used in Google Maps and Adobe’s Flash Player and the company is continually looking to monetize its patent portfolio.
Last on the list, and arguably the least technical is TNSGF’s GameTree TV platform. This platform is the first of its kind and allows for cloud-based gaming to any TV that is connected to the internet, such as Smart TV’s. The monetization model for GameTree is both subscription and ad-based. The company released a series of deals in 2013 and 2014 with partners such as Samsung, Toshiba, Panasonic, Roku, DISH Network and others key players.
TransGaming has been on an overall uptrend over the past year. Although shares are down since the company’s near double early in January on the back of a major deal announcement with Samsung. A breather after such a huge move is expected as shares have come down since the announcement. Moving forward, I believe the overall investment picture for TransGaming is sharper than ever as management continues to execute to fuel growth for the company.
The Value Is In The Company’s Unique Capabilities
1) Cider
With the rise of Mac computers and other operating systems, the ability to play games across many operating systems is restricted due to many games which are only accessible on one platform. Cider converts any game from one platform to another without the alteration of any lines of code. This process can take from just a few days to a few weeks and saves time compared to developers augmenting a game for cross-compatibility. Cider is already being utilized today allowing several popular PC titles such as Max Payne and Assassin’s Creed to be available on the Mac Store. Cider is a game changer as past applications focus solely on rewriting code whereas Cider translates the application between environments.
Companies such as EA, 2K, Rockstar, DIsney Interactive and Sony Online Entertainment have used Cider to allow their games to be accessible on a Mac. The consumer and the developers gain from the quick turnaround time of a few days versus months with traditional co-platform releases. Consumers get their game on Mac the same day or soon after PC gamers and developers can profit from it before the game falls out of favor by the time it would traditionally be released.
2) SwiftShader
SwiftShader is TransGaming’s software GPU toolkit that, the company states, is the world’s fastest and most flexible general purpose pure software 3D rendering technology. Interestingly, the company states that SwiftShader is 100x faster than traditional software renders and can achieve performance that matches or surpasses integrated graphics hardware on certain configurations. SwiftShader is available across multiple platforms and can support 32-bit and 64-bit architectures. SwiftShader’s current licensees include Adobe and Google.
SwiftShader is unique in that it can support multi-core 3D rendering where a graphics processing unit is unavailable or cannot be used. This deems it as a niche software solution in an area historically dominated by hardware options.
3) GameTree TV
The next wave in television technology is Smart TV, or TV’s that are connected to the internet. These televisions are already available through manufacturers such as Samsung, LG, Sony and Panasonic. On these connected TV’s one item, much like Netflix on a laptop, one item will reign king – content.
The explosive growth in the Smart TV market is underway and with it these TV’s can access TransGaming’s GameTree TV platform.
GameTree has many notable partners such as DISH N.A. and DirecTV N.A., and the platform has an existing footprint of over 60 million Smart TVs worldwide.
The reach for GameTree TV is global. In North America the platform is accessible through DISH and various Smart TVs. Through FREE it can be accessed in Europe and is available through Air Tel and Reliance in Asia. TNSGF also stated that GameTree TV expanded into the hospitality market through Select-TV delivering content to hotels in the Asia-Pacific and Middle East regions. Through their service partners, TNSGF has 100+ million connected homes deeming it the largest connected TV distribution footprint in the world.
In addition to the content providers previously discussed, TNSGF has partnered with several key equipment manufacturers. This January the company signed a deal with Samsung, the world’s largest Smart TV manufacturer, to include GameTree TV on Samsung’s app store accessible through its Smart TVs. This is supplementary to deals with Toshiba and recent deals with Philips and Panasonic. Having an application such as GameTree TV accessible through their equipment increases the value proposition to the consumer, sales for manufacturers and reach for TNSGF.
The gaming content provided to consumers are the brands they already know and play such as National Geographic Channel, TETRIS and TNSGF’s own World Poker Tour. This experience is provided without any additional hardware.
GameTree TV also provides for multi-screen accessibility allowing players to use tablets and Smartphones in addition to their televisions. TNSGF has a website dedicated to PC games that are accessible for download and usage on a Mac. The company decided in 2013 to wind down that website and transition to the App Store as the most effective way to reach consumers.
Review Of 2013′s Earnings:
Most noteworthy in TNSGF’s earnings in 2013 was a $1M technology license that the company announced several months prior. This was recognized in the 1Q of 2014. Also in the quarter, TNSGF was able to resolve pending items surrounding $2.8M in liabilities with Oberon Media. In the end, TNSGF was awarded a $1.7M benefit to their balance sheet. The company also renegotiated their outstanding debt with BEST funds lowering the interest rate for the first three years to 10%.
In 2013, both of the company’s business units saw growth. In the GPG sector, licensing revenue growth from SwiftShader and patent monetization lead the increase. The company’s second unit also added to revenue growth, which saw a $1.2M Y/Y increase. On GPG, the company executed several licensing agreements and Cider allowed for this year’s top games to be available on Mac.
Within DMG, the company re-launched GameTree TV on DISH Network. The new plan includes subscription models of $6 per theme pack and $11 for the super saver. The company also stated that they signed several new agreements with TV OEMs over -the-top device makers and that the company is in active negotiations with MSO distribution partners.
On an operating basis, the company has been executing a cost cutting program that decreased operating expenses to -$7M in fiscal 2013. Two items that helped the company’s position was the payment of $1.1M to Oberon in July, and the refinancing with BEST funds.
Overall, the company’s 2013 revenue was up 60% to $9.8M and 4Q 2013 revenue of $4.4M was up 82% Y/Y. Within the year on April 23, 2013 the company announced a licensing deal with Google on SwiftShader. Moreover, the company completed a major restructuring including significant cost reductions to stabilize the company, especially after a high expense FY 2012.
1Q and 2Q 2014 Financials Demonstrates Powerful Momentum:
The 1Q of 2014 demonstrates management’s drive to increase revenue while keeping costs at a minimum. In the 1Q of 2014 TNSGF reported record revenue of $1.8M and almost an operating breakeven with a Q1 adjusted EBITDA loss of only $34,000. This $1.8M in revenue denotes a 15% Y/Y increase and a 77% increase over the same quarter two years ago. The company received the $1M licensing fee it previously announced as well. This was due to the successful proof of concept and the adaptation of the company’s core technology to specific target devices. The company stated that the customer is a fortune 500 Cloud-based software company and that the two parties will continue to do business in the future.
“While we can’t disclose the name of this particular customer, they are a Fortune-500 Cloud-based software company and we believe that there will be many other technology licensing opportunities with them in the near future.” – Vikas Gupta, CEO. Source
With regard to operations, TNSGF launched the highly-anticipated AAA Rockstar title Max Payne 3 in Apple’s Mac App Store, Steam for Mac and other distribution channels. The company also completed work on Disney’s Planes title in late Q1 and it was released soon after. The company expects revenue to materialize in Q2 and Q3 as these titles have a long tail for revenue.
Vikas Gupta outlines that the company’s conversion technology has high margins in his telephone conference. He also speaks about the resurgence of the GTA Trilogy for Mac will be realized in the second quarter of 2014:
“We’ve seen strength in a number of the massively multiplayer online games that we have in market today. And specifically, the Mac usage for both EVE Online and Guild Wars 2, as a couple of examples has been trending very positively, with high margin revenue being derived from such titles.
Finally, I will remind everyone that TransGaming’s release of Grand Theft Auto Trilogy on the market couple of years ago. With the incredible success of Grand Theft Auto V, we have seen a resurgent to sales in the Mac version of the GTA trilogy, which will be realized again in Q2 revenues.” – Vikas Gupta, CEO, Source (bolded for emphasis).
There are a number of other catalysts moving forward which were described by the company’s CEO in their 1Q conference call including Apple’s release of its next version OS Mavericks for free. This may ignite the market in the coming quarters. The deployment of GameTree TV on Philips was a success. Philips showcased GameTree TV in September, 2013 at IFA in Berlin which is the world’s leading tradeshow for consumer electronics and home appliances.
Although TNSGF’s other GameTree TV set ups are subscription-based, this set up with Philips marks the first and only free-to-play advertising launch of a gaming service on connected TVs in the world. Philips started a deployment of GameTree TV on its 2013 TVs on a country-by-country basis in September, 2013. The company has stated that this is a huge opportunity as Philips alone represents and addressable market in the millions.
Following the success with Samsung, TNSGF stated that they have turned their attention to bringing GameTree TV to other providers. These include Panasonic televisions, Roku and Opera which enable them to reach Sony TV’s TiVo and many other devices. Also the company stated that they have closed other major TV OEMs that will be announced in the coming months.
Outside of growing its reach GameTree TV’s average revenue per user is up Y/Y to $2.89 from $1.56 for subscription services through Dish Network and FREE. GameTree TV is available on an ad-based and a subscription model. The graph below demonstrates the platform’s success with subscribers through FREE in Europe.
(Source: 2013 Annual Report)
On a 2Q basis, the company broke even and provided an operating profit of $247,000. Revenue was also up 9% over the previous quarter at 2.1M. Vikas Gupta commented that the company continued advancing their plan of licensing agreements and growing their distribution channels for GameTree TV.
Catalysts Driving Financial Performance:
As gaming continues to permeate the Smart TV realm I believe TransGaming’s GameTree TV has enormous opportunity to grow its revenues on both a subscription and advertising basis. With regard to these markets, Parks and Associates is forecasting 20% CAGR for Smart TV’s from 2012-2018 and a research report by TechNavio sees a CAGR of 21.06% from 2013-2018 for Smart TVs. The global Smart TV market is expected to reach $117 billion by 2016 per IMS Research. As an aside, Newzoo expects the gaming industry market to reach $86.1 billion by 2016.
GameTree TV offers casual games, such as trivia games and poker. These games are no less addicting than normal games as over 200M people worldwide play casual games through the internet. Keep in mind how addicting casual games such as Words With Friends or FarmVille have been. TNSGF is able to deliver casual gaming through GameTree TV right on your Smart TV – a huge opportunity and mega market for the company. The acquisition of Oberon Media’s TV games division for $7M in 2012 bolstered the platform with the addition of Oberon’s distribution agreements and over 100 casual games such as Deal or No Deal.
TNSGF has subscription deals with numerous companies such as Philips and Samsung to place GameTree TV on both of these companies’ Smart TV platforms. The growth of Smart TV’s globally coupled with TNSGF’s current and potential future subscription deals can drive TNSGF to reach the 100M person potential market. The opportunity is apparent, as the Smart TV market is expected to be valued at $265M by 2016.
TNSGF’s successful adaptation of PC games to Mac continues to move forward. The company conducts business with several gaming giants such as Rockstar and Disney and continues to do so. TNSGF is expecting revenue from “Max Payne 3″ to substantiate in the coming quarters. The resurgence in GTA Trilogy sales on the back of the release of GTA 5 (which had over $800M in sales in the first day of its release) adds to the success. Due to the substantial advantages of using TNSGF’s Cider platform, such as a huge cut down in the time to convert, the ability to be deployed at any point in the development process and having no code lost in the process – will continue to deem TNSGF as the first choice for developers. I expect TNSGF to profit from cross-app conversion from Android to iPhone and vice versa in the future as well. It would be within the realm of the company’s technology to allow PS4 games on Xbox One and vice versa in the coming quarters.
Google has licensed SwiftShader for use for all of Google’s products that use OpenGL ES 2.0 graphics application programing interface or “AP”I. SwiftShader is a 3D rendering solution and I expect more companies to utilize in the future to the gain of TNSGF. SwiftShader takes up no space as it is software, uses less energy and produces no heat, so that it can be a disruptive technology to industry giants offering 3D hardware solutions such as Nvidia (NVDA).
On an operational side management is driving to be extremely diligent on expenses. In their full year 2014 CC, Dennis Ensing, CFO of TNSGF, stated that the company is focusing on cost containment. Mr. Ensing stated that operating expenses will decrease significantly in fiscal 2013 to roughly $7M in gross cash burn that management promised a year ago. Management has been meeting their promises as Mr. Ensing stated that total operating expenses were lower than two years ago in fiscal 2011. Moving into 2014, Mr. Ensing stated that management plans to hold the line on expenses while maintaining operational efficiency. I put stock in his projections as management has delivered on their promises in the past.
“Going in to 2014, we planned to hold this line on expenses and believe that we can maintain operational efficiency as well as customer delivery for existing customers with modest increases in expenses only to support launches under new distribution agreements and related customer service as necessary.” -Dennis Ensing, CFO (Source)
Forward Looking Estimates:
TransGaming was on the verge of breaking even on an EBITDA basis, only having a negative EBITDA of $34,000 in Q1 2014. For the 2Q of 2014, the company reported earnings – breaking even with EBITDA earnings of $247,000.
(click to enlarge)
Source: Transgaming
TNSGF the potential to breakeven on a net income and operating basis in the 4Q of 2014. Assuming modest 34% Y/Y growth for the company’s strongest quarter, 4Q, we arrive at revenue of $10.87M for 2014. Assuming modest 25% Y/Y revenue growth brings us to just over $13.5M in revenue for 2015. Assuming cost cuts continue to improve, TNSGF’s attractive GM should expand up towards 75% while operating expenses should expand 5% Y/Y. Using a fully-diluted share count of 112M brings us to $0.019 in earnings for 2015. With a conservative 20x P/E ratio, this brings us to a PPS of $0.38, or over 100% upside potential from current levels. If the company continues to execute, shareholders can be rewarded further into the future.
*Past Financials can be found on SEDAR.
These estimates include a fully diluted share count at 120M. Accounting for this is 83,261,548 shares outstanding, 27,062,822 outstanding warrants, 8,838,000 outstanding employee stock options and the recent options of 3,582,500.
Vikas Gupta commented that the company’s strongest quarter is their last quarter. Coupled with his comment and the continued execution of the company across its business units are the backbone of the highest growth rate for 4Q 2014′s revenue. The fact that the company’s historic strong 4Q can also be seen in the company’s annual report that includes a quarterly revenue growth chart.
The high amount of revenue projected for the fourth quarter is in line with the company’s historical results. For example. the company reported 4Q revenue of $4.4M whereas the 3Q was roughly $2M.
Insider Ownership:
Together Vikas Gupta CEO and Gavriel State own over 10% of the company. Mr. State is TNSGF’s Chief Technology Officer in addition to being a director. Having insider ownership is a positive sign as it aligns management’s actions with those of the rest shareholders as well.
Risks:
TNSGF Is A Micro-cap Company
Transgaming is a micro-cap pink sheet traded security so there is risk in share price volatility and liquidity. I believe these risks are marginalized as the company continues to execute and deliver to shareholders.
Uptake Moving Forward
Other risks include uptake of the company’s products and services such as its GameTree TV platform on a mainstream basis. I believe this is delivered through the several major deals that the company has had with Philips and Samsung. Cider is continuing to be used as a great asset by game developers as can be seen through the continued adoption of it through titles such as “Max Payne 3″ and Disney’s “Planes”. Swiftshader has also been successfully adopted and licensed to industry giants, such as Google (GOOG) and Adobe (ADBE).
Options Could Be Dilutive
TNSGF’s options do have the potential to dilute shareholders. An example of this can be seen through the 3.6M options recentlyapproved. As with TNSGF’s past and new options, some of the risks is marginalized due to some of the strike prices being near the current share price. Such as on January 24, 2013, 2,403,500 options were granted with a strike price of $0.145 (CA $0.16) – in line with the current share price. Also on September 21, 2012, options to purchase 1,643,500 shares of stock were repriced to the exercise price of $0.19 (CA $0.21), above the current share price.
3Q Earnigns Were Soft – Mediated By Restructring
Transgaming’s recent 3Q earnings came in lower on a Y/Y basis with a revenue of $1.5M and an adjusted EBITDA earnings of $0.1M. The quarter is an outlier for the company, although I attribute the weaker quarter to the company’s major restructuring that has been underway that will help the company become more profitable moving forward. I expect the restructuring to conclude and not affect the 4Q of 2014. Along with the company’s earnings report, CEO Vikas Gupta commented on how the company is no longer restructuring and can focus on growth and execution.
“We’ve delivered consistent growth over the last many quarters and have demonstrated cash flow neutrality or profitability. Now, it’s time for us to accelerate our growth, scale the company, and be poised to take advantage of new technology and business model trends within our industry. We are very excited about the restructuring of the Graphics & Portability Group, being led by a new Vice President who is a highly accomplished games industry veteran, and are confident that our strategic changes will yield incredible market traction and results in the quarters to come. TransGaming has also closed many new channel partner agreements for GameTree TV and we are now cultivating a growing addressable market into active users. Although still a young and nascent market, we are ahead of everyone else in this marathon and are aggressively working on monetizing users.
“We are no longer managing the company to survive in difficult economic times. We’ve done this and we’ve demonstrated our ability to weather the storm. It’s now time to focus on growth. Our changes, our decisions, our outlook are now about building and scaling TransGaming.” (Source)
Even though the 3Q was a weak quarter, Transgaming offeredmany key items that will help the company moving forward. One is the restructuring of their Graphics and Portability Group for greater profitability with the addition of Fredrik Liljegren as a VP of the division. Mr. Liljegren has decades of experience in the technology and gaming industries. Due to this restructuring, TNSGF is now a full spectrum publisher for titles on the Mac platform. Gaming companies with popular PC games can now partner with Transgaming to manage the complete games publishing model that includes both distribution and marketing. TNSGF has already worked successfully with Disney, EA, NCSoft and Take-Two in this area.
In the quarter, the company announced a partnership with Toshiba Europe GmbH to bring GameTree TV to Toshiba’s Smart TVs on a global basis. Also announced was a partnership with Samsung along the same lines to expand GameTree TV to Samsung’s Smart TV’s globally. TNSGF also partnered with Sharp to bring GameTree TV to Sharp’s SmartCentral 3.0 Smart TV platform. The company alls announced the release of Star Trek Online for Mac, available due to the company’s Cider technology.
While having several news worthy items, the weak 3Q was due mainly to a significant restructuring to help the company improve profitability moving forward. On the bullish stance, the restructuring and deals in the 3Q can help bolster the 4Q even further to make up for the weak 3Q quarter.
Conclusion:
TransGaming is a niche and emerging player in the realm of technology that is revealing itself as a potential powerhouse investment. Each of the company’s divisions have seen increased growth and have significant growth drivers for the future as well.
With the risks noted, it is my opinion that Transgaming has the ability to reward shareholders as management continues to execute and investors become aware of the opportunity that has since gone overlooked.