Answering Requests, Part III

NDL11 asks, pithily,

PNDMF

In response, I offer this recent correspondence between me and Aaron Edelheit, from Aaron's blog:

1. DaveinHackensack Says:
August 14th, 2009 at 1:09 am

Aaron,

I saw your comment on the company formerly known as PhotoChannel on the VIC. Do you have an updated target in mind for when the company will start consistently posting positive EPS (not just cash EPS)? Just curious.

2. admin Says:

August 14th, 2009 at 1:48 pm

$2.50 to $3 per share in the short run. If some of their growth prospects such as getting Wal-Mart, the stock would be much higher. They will post positive eps in the December quarter.

amortization blocks it because the company made two acquisitions.

3. DaveinHackensack Says:

August 14th, 2009 at 2:33 pm

Do you envision they will be profitable consistently from the December quarter forward?

4. admin Says:

August 14th, 2009 at 2:40 pm

The march quarter may be their last negative eps quarter because of seasonality. But again, all I care about is cash flow.

Edelheit versus Buster on PNDMF

Reader N.L. draws my attention to an exchange between Aaron Edelheit ("issambres839") and "buster736" on PNI Digital Media (formerly PhotoChannel; OTCBB: PNDMF.OB) on the Value Investors Club. Below are a few excerpts from this exchange.

Edelheit/issambres839:

I continue to view this as a mispriced growth stock. I can make a credible case that if they continue to grow organically, get Wal-Mart and some of their existing initiatives start to work, in 2011, this stock could easily earn $1 per share. I'm guessing the stock would be close to $15 or higher. The risk/reward in this situation seems very attractive.

P.S. 2010 numbers could be low.

buster736:

With all due respect, In your original write up about PNI in 2007 you had the company earning 1.09 in 2009. The company is going to be lucky to show a profit this year. Now you are saying that you believe they will do $1 in 2011. The company has gotten both Sam's club and costco as you originally postulated, yet earnings have been no where close to what you estimated in the past and your estimates have been pushed out at least two years. What has differed from your model to what the company has actually done (why haven't the earnings been there?) Have transactions been lighter? have you wat to low on your costs? What gives you confidence that this model even scales and you estiamtes will be anywhere close this time?

Edelheit:

You are absolutely correct that my estimates have been wide off the mark from my original report. A couple of things happened that ruined that estimate:

1)They bought a money losing operation in Pixology that they thought they could easily turn around. That was wrong, but it helped get them Costco.

2)They underestimated what it would take to get Costco up and running.

3)CVS uptake has been very slow and most uptake of online uploading versus walking into the store has not met my expectations.

4)The economy fell off a cliff last year and their core biz which was growing organically at 50% plus is now 15-20%.

Those are the main reasons, also my estimating of earnings was a bit high. I don't think looking back I did a good job estimating how expenses would ramp.

That said, I have been saying pretty consistently that I expect $0.25 a share in cash EPS for 2009. This has not changed for some time now. Remember that this excludes amortization.

Also, when I talk about over $1 a share in eps for 2011 or in the future, I try now to be much more cautious, and use words like "could." I mention that number only in the context of winning Wal-Mart.

I encourage you to do your own research and come up with your own estimates. I have made plenty of mistakes in the past year, that's for sure, but I think that I'm trying to my best to estimate a fast growing company that has gone through some growing pains.

I think there is still a tremendous amount of opportunity and the company is now profitable, EBITDA positive and cash flow positive and is growing despite one of the worst economies in decades.

I hope that helps.

PNI Digital Media (formerly PhotoChannel)

Reader N.L. was kind enough to share his correspondence from earlier this week with Simon Cairns of PNI Digital Media (OTC BB: PNDMF.OB). According to Cairns, one of the PNI's retail partners will soon announce an iPhone application that will allow users to take photos and send them to the retailer for printing. Below is an excerpt from Cairns's e-mail to N.L.:

We’re now in a position to add an iphone app that would live on your iphone and would help consumers take photos and then send that photo to the retailer for printing (in many cases in as little as one hour). Think of it as another “on-ramp” to the retailer’s system that is run by our company. So, what you have written below is very accurate. We will do a co-announcement with one retailer shortly, but exactly when that will be is up to the retailer because they are trying to figure out when is the best day or event to announce that. It should be soon though.

N.L. also speculates that the "new thing" alluded to recently by PNI may be an application similar to the one described above, except for short videos taken with an iPhone.

N.L. also reminded me of PNI's recent ranking by Canadian Business as Canada's fifth fastest-growing company (in terms of revenue growth) over the last five years.

PhotoChannel and Facebook

Reader N.L. shared with me the following correspondence he had with PhotoChannel (OTC BB: PNWIF.OB) today.

N.L.'s e-mail to PhotoChannel:

Is it fair to say that Photochannel is no longer in the running for facebook as a company called imagekind seems to be working with them? Any other social networking sites or flickr on the radar screen?

PhotoChannel's response to N.L.:

Thank you for your interest.

While I can’t speak definitively about Imagekind and their relationship with Facebook, it is of no mounting concern for us at PNI.

It seems that they have created a fan-page on Facebook. Artists who sell their art via Imagekind, and are also users of Facebook, can become fans of the fan page, and thereby attract new fans, with the hopes of selling more art via Imagekind. This type of marketing is a common strategy of both big and small companies, including some of PNI’s key customers. Wal-Mart Canada, for example, has a photo gift presence on Facebook already which can be used as an on ramp to further sales.

As a company, we are pursuing corporate level partnerships with leading retailers and sites, including Facebook and Flickr, the two you mentioned. In terms of marketing, we also guide and support our existing partners in devising and implementing messaging and strategies that will drive sales through the PNI platform.

I hope that answers your question.

Simon Cairns

PNI Digital Media

PhotoChannel Update

Last month, PhotoChannel (OTC BB: PNWIF.OB) announced, among other news, that Robert Chisholm had resigned as CFO, and was replaced by Simon Bodymore, formerly, the Company's VP of Finance. At the time, the company announced that Mr. Chisholm had been retained as a consultant to help with the transition, and that Mr. Chisholm was also considering "other long-term opportunities with the Company". Yesterday, the company announced that Mr. Chisholm had joined the company's board of directors.

Reader N.L. asked me to speculate on this. As I mentioned to him via e-mail, I didn't have any speculation to offer, but I do have a few clarifications after speaking with David Bremner in PhotoChannel's investor relations department today. According to Mr. Bremner:

- The plan had long been for Mr. Bodymore to replace Mr. Chisholm at CFO. Initially, the idea had been to do so at the end of the company's fiscal year, last fall, but when the stock market went into (to use the technical investor relations term) the shitter, the company decided to hold off on the change until the annual meeting last month.

- The company had also long planned to add Mr. Chisholm to the board of directors. It couldn't do so last month, because Mr. Chisholm first needed to get approval from his current business partners in an unrelated venture.

- None of the seven board members announced last month has resigned; instead, the company has expanded the number of directors to eight to accommodate Mr. Chisholm.

As always, readers are free to add their own thoughts in the comments below.

Update: Reader N.L. says to expect a business update from PhotoChannel tomorrow.

PhotoChannel Turns a Profit

From the company's press release ("PhotoChannel Reports Profitable First Quarter"):

FIRST QUARTER FISCAL 2009 HIGHLIGHTS

- Net profit of $940,644 versus a loss of $1,082,600 for
the comparable period of fiscal 2008

- Record revenues of $7.2 million, up 67% year-over-year

- Transactional revenues of $5.8 million, up 91% year-over-year

- Non-GAAP adjusted EBITDA(1) of $2.8 million, compared
to an adjusted EBITDA loss of $117,483 in the first quarter
of 2008 (adjusted EBITDA defined as net profit plus amortization
and stock-based compensation expense)

- Non-GAAP adjusted EBITDA representing 39% of net-revenues
for the quarter

- Earnings per share (EPS) of $0.03 versus a loss per share
of $0.03 for the comparable period of fiscal 2008

- Non-GAAP adjusted Earnings per share (EPS)(1) of $0.08
versus $0.00 for the comparable period of fiscal 2008

- At December 31, 2008 the Company had approximately $3.1
million cash on its balance sheet

ORDER METRICS

- Over 4.9 million orders were transacted in the first quarter
of fiscal 2009

- Average daily orders of approximately 53,000 versus 15,000
for the same period of fiscal 2008, a 240% increase year-over-year

- Peak day saw over 134,000 orders placed and over 5.2 million
images pass through the PNI Platform

PhotoChannel Update

On Wednesday, PhotoChannel (OTC BB: PNWIF.OB) issued a somewhat Delphic press release ("PhotoChannel Announces the Launch of the PNI Open Access Project"). In it the company announced,

The PNI Open Access Project has been created for non-PNI customers to be able to take advantage of and utilize the power of the PNI Platform's "Routing Tier" that currently delivers millions of images and orders from PNI hosted websites to its customer's stores and production facilities.

There was nothing in the press release about revenue projections related to this project, or the reactions of PhotoChannel's current clients to it, so reader N.L. did some legwork on this and was kind enough to share what he found with us.

The first time N.L. contacted the company today, investor relations forwarded him a morning research note from Merriman Curhan Ford, which offered no specific insights into the Open Access Project (beyond some general speculation about the size of the potential market opportunity, e.g., the number of Facebook users), but did offer some general guidance on PhotoChannel. From the research note,

We expect strong December quarter results next week, where we are projecting revenue growth of 99% coupled with the company turning profitable with $0.05 in EPS, as well as a sequential more than doubling of EBITDA (going to $3.7M from $1.7M in 4Q08). In our opinion this will be the quarter that we (and everyone else) have been waiting for – the emergence of PhotoChannel into profitable territory. Not only did PhotoChannel generate same-store sales of approximately 40% in the December quarter, but the company is also now experience a solid revenue ramp with its newest retail partners, Costco USA and Sam’s Club.

·Reiterating Buy. In our opinion, PhotoChannel is poised to become a leading provider to the digital photofinishing market by offering a fully integrated solution to retailers — having already locked up most of the top photofinishing retailers in the U.S., Canada and the U.K. – with global digital print revenues estimated to eclipse $100B by 2010. We continue to believe using a 15-20x P/E multiple is conservative and achievable—yielding appreciation potential to the $4.25-5.50 range on our FY10 EPS estimate of $0.28.

Expecting a double-digit multiple on any stock in this secular bear market seems a tad too optimistic to me, but it would be encouraging to see PhotoChannel become profitable and continue growing revenues.

N.L. also checked Issambres839/Aaron Edelheit's comment on Value Investors Club, but Edelheit had no specific information either and instead offered similar speculation as the Merriman analyst. After contacting PhotoChannel directly again, N.L. got this vague response:

This is just an "opportunity" for PNI. The company will go into more detail on the Feb 25 conference call.

N.L. noted in an e-mail to me that the recent positive performance of PhotoChannel's stock has been in spite of the overall market weakness (e.g., closing up about 9% today; see the chart above).