Espial (T.ESP) may be ideal target as Comcast (CMCSA) looks to acquire

Espial Group Inc. (TSX: T.ESP, Stock Forum) provides software solutions through HTML and RDK5 that help telecommunication operators, such as Comcast Corp. (NASDAQ: CMCSA, Stock Forum), compete against the rise of online streaming competitors like Netflix Inc. (NASDAQ: NFLX, Stock Forum). The company’s software solutions help operators offer interactive services like video-on-demand and time-shift on their top boxes to remain competitive in a next-gen environment.

Contract Wins Indicating Growth Will Continue

During the 4th quarter conference call, management alluded to prior ‘consulting contracts’ which turned out to be a due diligence process from a then potential and now current client. This third major cable operator win provides Espial with over 1.5M European households connected to the company’s software. Along with the prior deal signed in January, Espial should continue the high top-line growth rate.

2014 revenues grew 59%, driven primarily by the increase in “Professional Services” segment. This revenue is generated from integration work being performed on the company’s IPTV solution. The increase in 2014 was primarily attributed to a North American cable company that purchased Espial’s IPTV solution as part of their next-generation TV offering.

With another two major operators on board, both of whom will integrate Espial’s software, this revenue source will continue. Additionally, the company reported full year profitability for 2014, a trend that should only continue moving forward. Espial’s revenue growth will trickle down to profits due to the company’s software focused offering, which sports margins in the high 70% range.

Segmented Market on Verge of Consolidation

Large telecom companies are looking for strong competitive advantages to assist in regaining the lost market share to large streaming giants like Netflix. These traditional providers have the necessary funds to acquire innovation through smaller scaled operations that have developed next generation technology.

Comcast, one such company, has just recently committed $4 billion for a new investment spinoff and another $40 million has been pledged by Comcast’s CFO Michael Angelakis. The new investment company would invest in growth-oriented businesses and focus on larger deals. Comcast has an existing venture capital arm, Comcast Ventures, which typically spends as much as $15 million on early-stage companies.

RDK Management, a joint venture between Comcast and Time Warner, was formed to develop standardized software for IP video set-top boxes. The objective of the two media giants was to create a common framework for powering next gen set-top boxes that are able to compete with other online video streaming services eating away at their market share.

Espial Positioned as Potential Takeout Target

Espial is a “Gold Sponsor” and one of many licensees of RDK Management looking to establish a common link between incompatible top-box hardware. Espial’s software helps telecom providers with their next-generation TV offering to compete with new web-based streaming services. Additionally, the company is in a high growth business (YoY top line growth 59%) and operates globally (below).

Espial’s size of ~$100M is within the ranges of Comcast’s new acquisition focused venture. The company is small enough to generate the ‘startup’ growth, but also making enough cash flows to be self sustaining. By the time Comcast’s investment initiative commences (early 2016), Espial should have another year under its belt to prove their technology and further grow the business.

With companies like Hulu and Netflix significantly disrupting the cable business, Espial is in a prime position to provide an innovative service to assist larger cable companies in maintaining their market share. Espial’s global presence, growth and next-gen solution make company a perfect fit for Comcast’s new investment arm.

Espial's price is up nearly 120% in 2015 (now currently trading at just under 4$) and accurately reflects its current value. Despite being fairly valued currently if management continues winning more major contracts and maintains consistent revenue growth financial models predict it’s price sitting comfortably at 7$ In the next 12 months. With this continued growth and innovative technology Espial should garner attention from large player's looking to consolidate the field.