Tuesday, August 26, 2008

PhotoChannel Reports

PhotoChannel (OTCBB: PNWIF.OB), is one of three Aaron Edelheit picks I own, as I've mentioned in previous posts. Here is a link to PhotoChannel's press release via MarketWire: "PhotoChannel Reports Record Q3 Revenues for Fiscal Q3, 2008". And below is Aaron Edelheit's take on the quarter, via the Value Investors Club.

As expected, PNWIF put up some crazy growth numbers and had higher expenses as they integrated Costco and Sam`s club.

The key takeaways include:

1)They averaged over 21,000 transactions a day in the second quarter more than Shutterfly. And once Costco was on, they were averaging over 30,000 on the last day of June and as of yesterday they are now over 40,000 a day. Can you say growth?

2)They are finally cash flow positive.

3)There are 25,000 locations in Asia that Kodak has identified for Photochannel that they can use Photochannel`s help. This includes Kodak India, Kodak Australia, Kodak Japan, Kodak Taiwan and Kodak China. I don`t think that I have really describe the upside of this or the value of Photochannel`s technology if Kodak is relying on them so much.

4)While expenses were higher than I expected in the quarter it was not surprising considering the bumpiness and tardiness of the Costco launch. I actually expect expenses to slowly moderate over the coming quarters.

5)With 30% organic growth, and 247% growth with only two weeks of Costco, look out for how much the company will grow in its September and December quarters considering the seasonal benefit coming.

6)With Asia, a new CEO, and a small acquisition that should lead to new business, the future is just very, very bright for PNWIF.

The end of this year and next should be [good ones;] sit back and watch the company`s performance really take off.


ravinsu said...

Its a nice quarter, but as I have mentioned before, they need to get a handle on their operating margins.

The transactional volume Aaron is talking about was expected as it was evident from the huge spike in traffic as measured by Quantcast, but its nice to see the comparisons with Shutterfly. Shutterfly, by the way is not even a formidable competitor for Photochannel as their business model is totally different from Photo's - heavily commodity, marketing, advertising and distribution driven.

While I haven't read the Q report, its time to slowly increase my initial stake in this name. Looking forward to the Q call to hear the voice of management.

DaveinHackensack said...

Good points, Ravinsu.

I'm curious why Edelheit was quick to comment on PhotoChannel's quarter, but had nothing to say about Destiny Media's quarter.

bfrank said...

Looking at the comments to Edelheit's original (2007) VIC recommendation of PNWIF he recived a lot of criticism and clearly took it quite personally. I think as result of that earlier criticism he will be much quicker to comment on the PNWIF thread than the DSNY.

One of the criticisms from the original recommendation was that he was too promotional and relied too much on management's estimates/guidance. He admitted this was a problem and has toned it down since then but I am still being cautious when reading his comments. However, I am a shareholder and a believer in PNWIF.

Thanks for the great blog.

Anonymous said...

FWIW, I've done well with quite a few of his VIC picks but Destiny and Photochannel do not make sense. They are not value stocks. They are great stock picks if you have insight into the future but they have ZERO margin of safety and lame balance sheets. In fact, if you gave me their financials and told me to pick a price I'd come no where near their current share price. That being said, I like his conviction and promotional attitude. He's got SPIRIT!

DaveinHackensack said...


Thanks a lot. Regarding the point about relying on info from management, DanielW and I discussed this on his blog last week, but one of the challenges of investing in small stocks is that the company's management is often one of the only sources of info on the company. Another, related issue I discussed with Albert in one of the comment threads here is that Edelheit appears to get really enthusiastic about the companies he invests in (which is natural, of course), and that might lead him to underestimate how long it will take for his investment thesis to develop.


I usually prefer companies with strong balance sheets as well (you'll find examples among several of the small stocks I've mentioned here, e.g., KSW, USEG, etc.). Regarding whether DSNY and PNWIF are value stocks, that's really contingent on their future earnings. If Edelheit is right, and they are selling at single-digit multiples to next year's earnings, then in that sense, they are value stocks. That's an unknown, but it works the other way too. One opposite example off the top of my head was Motorola.

I bought MOT as part of the Magic Formula in the Spring of '07. At the time (if memory serves) it had a low trailing P/E multiple, strong, cash-rich balance sheet, etc. A year later, the earnings had collapsed, as sales of the Razr dropped off and the company failed to find a replacement. To use an unsubtle metaphor, when I bought MOT, it looked like a value stock in the rear view mirror. What Edelheit has tried to do with PNWIF and DSNY is find value stocks by looking through the windshield.

Anonymous said...

If that's the context, then that is exactly what every investor, whether they be a value or a growth investor, is trying to do. Growth investors are looking for some sort of discount (i.e. value) on what they perceive to be future earnings. Value investors are looking for the here & now because predicting the future, especially in fast moving tech businesses, is too hard for them.

In HEM's case, when he found it, it was trading at close to or below breakup value. It had cash, a business that was in the process of being sold, and valuable tax carryforwards. The growth story panned out nicely but the downside was securely guarded by real assets. Destiny and Photochannel don't have assets... they're floating in a realm of perceived future earnings. Now, if you are good at figuring out future businesses, which Aaron does seem pretty good at, then who cares about the balance sheet because there really are a heck of a lot of stocks that appear to be far detached from their balance sheet.

One positive thing I can add from personal experience about that destiny company & their moat... I worked in that business for 20 years and tools that made it into the mix tended to stay in the mix for a LONG time. I'm not sure how software tech will follow that pattern because that's relatively new but some studio/broadcast tools that were designed in the 50's and 60's are often still the "standard" tool. So, that's a heckuva moat IF it carries over.

DaveinHackensack said...

"If that's the context, then that is exactly what every investor, whether they be a value or a growth investor, is trying to do."

Not exactly, because there are growth investors who will buy a stock even if they think it will trade at, say, 20x or 30x earnings next year, as long as it will have an even higher growth rate. With DSNY and PNWIF, Edelheit seems to have aimed for companies trading at single digit multiples to their next year's earnings.

Regarding assets, the companies' respective intellectual properties are assets, although I've wondered if one risk factor in the case of a money-losing, cash-poor company with compelling technology is that potential clients might hold off buying the company's product or service, in the hopes that they might be able to buy the technology itself at fire sale prices if the company is heading toward bankruptcy. I think that's a bigger risk with a company I unfortunately still own from the MF list, NPLA, than with DSNY, but time will tell. The risk for the client company, of course, is that another deep-pocketed investor or client company could buy the intellectual property first, and then they might end up paying more for the service.

ndl11 said...

Anybody have a take on them adding a new director? CEO mentioned "commited to increasing shareholder value". He is retiring also. Maybe I'm reading to much into this but my guess is the new director is from Kodak. I know its a stretch to make that assumption but.....

ndl11 said...

P.S. Do you think it wise that they let someone from Kodak on the Board? Does this propose a problem with PNWIF's customers?

Albert said...

I can't believe you're still holding on to NPLA ;-)

One problem I have with AE's comments on the VIC is how he tends to focus on one particular phrase or comment that may (or may not) have real implications. Take his 25000 locations in Asia comment for instance. What are the chances that PNWIF will be able to capitalize on all of them. Just as importantly, how long would it take? 2 years? 5 years? More? Looking at the comment, or focusing on it in isolation is sort of misleading, and I've noticed that AE does that sometimes to his (and someone who listens to him) detriment.

DaveinHackensack said...


Edelheit and others have speculated that Kodak might acquire PhotoChannel at some point. I don't know if that sort of calculation has any impact on decisions about directors.

Albert said...

Is StockDocx99 on GuruFocus colorblind? Every other post he writes about PNWIF almost induces me into having a seizure. Does he think that RED and GREEN and other colors make the words more or less true?

DaveinHackensack said...

Stockdoxc learned how to change the fonts and colors on GuruFocus recently, and he seems to enjoy exercising his new talent. His interest in PhotoChannel arises from his obsession with the fellow who first mentioned it on GuruFocus, DanielW.

ndl11 said...

Any thoughts on the recent decline in stock price