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How To Value A Podcast

If Joe Rogan of The Joe Rogan Experience, one of the top 20 podcasters, wanted to one day scale up by bringing on additional producers and podcast personalities to host multiple new shows, how much equity should he give away to investors for their investment? Or perhaps Dan Carlin wanted to turn his Hardcore History podcast into a company that published history textbooks. How much should he value his podcast if he decided to propose this business plan to venture capitalists? Basically the question is, how much is a podcast worth? How do you value a podcast and is it considered a company with a robust enough business model to value it?

While listening to the episode of Startup (the first show produced by Gimlet Media) on valuing their startup company at $10 million during their seed funding, I was curious to find out if podcasts could in fact be valued the same way as ordinary businesses. An investor might need to know the valuation of a potential podcast company. Or a podcast producer might need to know the value of their podcast if they’re looking for funding, exit, or if they want to see how their podcast stacks up against others. Or a prospective podcaster might want to know if it’s worth venturing into the world of podcasting.

In order to answer the question of how much a podcast is worth, I looked at three podcasts that provide enough financial data to work with. First, Gimlet Media, whose show, Startup, discussed some of their numbers and their valuation on their show and in the media. The other two podcasts I used are Smart Passive Income (SPI) and Entrepreneurs on Fire (EOFire) as they have consistently produced monthly income reports since the inception of their respective shows.

The Data

  • At the end of 2015, Gimlet raised $6 million at a $30 million valuation. They forecasted $7 million revenue for 2016.
  • EOFire generated an average of $3 million annual revenue in the last 3 years with an average of ~72% net profit margin. I then used the discounted cash flow method and forecasted a normalized level of revenue and profit similar to historical average levels with slow growth. I assumed a 35% corporate tax rate and a 10% discount rate*.
  • SPI generated an average of $1.4 million annual revenue in the last 3 years with an average of ~74% net profit margin. I also used the discounted cash flow method here and forecasted a normalized level of revenue and profit similar to historical average levels with slow growth. I assumed a 35% corporate tax rate and a 10% discount rate*.

*Discount rate of 10% was derived using the industry standard discount rate for Advertising, Broadcasting and Entertainment as podcasting is not an established enough industry to garner a discount rate yet. Advertising has an industry discount rate of 6.6%, Broadcasting has an industry discount rate of 6.2% and entertainment has 7.9% (Source: Damodoran). An average of 7% discount rate + a company-specific risk factor of 300 bps was added as long-term success of a profitable podcasting company is too early to tell.

The Valuation

The average implied revenue multiple that I got from the valuation was 5.0x.

What does this mean? The multiples are certainly a lot higher than revenue multiples of cash flowing companies in general. The average industry revenue multiple for Advertising is 1.7x, Broadcasting is 2.9x, and Entertainment is 2.9x (Source: Damodoran). I suppose since podcasting is a whole new vertical compared to these traditional industries, it could be comparable to startups. Looking at startup valuations then, the revenue multiples range anywhere from <1.0x to 10.0x. In particular, digital media companies are valued between 1.1x and 5.9x (Source: Fortune).

Could 5.0x become the industry standard valuation multiple for podcasting (for the time being)?

How do Podcasts Make Money?

The value of a podcast depends on the types of income streams the podcast employs and the stability of revenue generated by each income stream. Advertising/sponsorship is the income stream that most podcasts rely on, but selling products and services catered to a niche audience is where a podcast makes the big bucks.

The possibility of coming up with a new income stream is endless. Some income streams require more creativity and don’t necessarily depend on the number of downloads (assuming they have a pretty legitimate level of audience already). And then there are other income streams where once you implement, you don’t need to keep innovating and are more predictable cash flows for the. The most common income streams and their characteristics are:

Income Stream Description Avg  Revenue Predictability Depends on Download #s Creativity


Pre-roll: ~15 seconds at the beginning of the episode

Mid-roll: ~30 – 60 seconds in the middle of the episode

~$20-$40 CPM (Cost per Mille); i.e. fee per 1000 impressions (or downloads) High High Low
Affiliate Income Clickable link on the website that directs to a 3rd party’s website with products and services to purchase Wide range, e.g. $0.25 – $50 per purchase of 3rd party product using the affiliate referral link Low Mid Low
Membership Special privileges beyond free podcast listening ~$5-10/month High Low High
Products & Services Introduce new products (physical or digital) or services (webinars, online courses, in-person courses) catered to the audience Varies depending on product/service

e.g. eBook could be $10 to purchase or an in-person course could be $1000 to attend

Low Low High

Download #s isn’t Everything

The good news is that you can rake in millions of dollars if you have close to or more than a million downloads per month. The bad news is that you have to get to a point where you’re drawing in close to or more than a million downloads per month. But, I won’t leave you with a bad taste. Here’s another good news: it’s that the number of downloads isn’t everything when it comes to generating revenue.

For instance, EOFire’s Revenue/Download was $3.53/download with ~850k downloads in the beginning of 2015. Put another way, every download was worth $3.53. Comparably, Gimlet had almost ten times the download numbers in a given month but was only able to sell $1 per download. Breaking out the income streams makes it clear that EOFire’s profitable success per download is because ~60% of their revenue is generated from additional products and services.  SPI’s revenue per download is pretty healthy as well with $2.33, with ~20% of their income coming from products & services. Gimlet on the other hand isn’t leveraging their audience enough. Of course, it’s a different story because Gimlet’s network of podcast shows is more journalistic and story-telling vs SPI and EOFire, which are geared towards a niche audience of entrepreneurs. But I still think there is a lot of opportunity there for Gimlet to introduce products and services to their audience (i.e. not just to their “customers,” that is, advertisers/sponsors, selling production/editorial services).

Podcasters: How much are you generating in revenue per download? What income streams have you employed and what new income streams can you add in order to scale up?

EnviroStar Valuation Dry Cleaning Business

Company Overview

EnviroStar was founded in 1959. They started as a private distributor of laundry equipment and then went on to become a nation-wide distributor and provider of their own proprietary equipment. The Company was able to achieve success because of the founder’s innovative and entrepreneurial approach to business.

Their three business segments are very complementary to each other. They produce their own brand of products. They have a franchise business. And they’ve now added the nation’s largest distributor to their portfolio, from which they will have synergies through technician efficiency, inventory management, and exposure to clientele to market their products through the distribution business.

3 Complementary Operating Segments

  1. Steiner-Atlantic: Provides commercial & industrial laundry & dry cleaning equipment as well as providing maintenance and technical support for their products. Started in 1959 as distributor of laundry and dry cleaning equipment. While building the distribution business, Bill Steiner created and patented dry cleaning equipment that was more energy efficient and environmentally friendly.
  2. DryClean USA: License and franchise operation, with over 400 locations in the US, Carribean and Latin America. In 1977, Bill Steiner co-founded DryClean USA, which became the nation’s largest and most recognizable dry cleaning franchisor. Note that these are drop-off dry clean as opposed to do it yourself coin-operated laundromat.
  3. Western State Design: Nation’s largest distributor of commercial, industrial, and coin-operated laundry equipment and a provider of routine maintenance and technical support. Announced acquisition of Western State Design in September 2016 and completed the acquisition in October 2016.

Pricing & Customers

Steiner-Atlantic’s customers are primarily hotels, resorts, and correctional facilities that use industrial laundry and dry cleaning equipment everyday. In addition to their proprietary laundry and dry cleaning products and equipment, such as GreenJet – a dry wet cleaning machine that is energy efficient and environment friendly – their product offering has 12 brands which also include third party hot water boilers for industrial use. They believe their products attract their customers because it is a one-stop shop. Their prices for the products and machines range from $5,000 to $1,000,000.

DryClean USA’s customers are franchisees of the brand. Initial franchise fee can cost from $80k – $500k depending on location, size, and equipment. The franchise fee they collect from each location is $15k – $30k a year and the royalty fee is $5k a year. Terms of agreement are for 10 years with renewal fee of $5k. They don’t charge a fee for advertising. Other dry cleaning franchisors charge a percentage-based royalty fee around 6%. (Source: thefranchisemall) A profitable dry cleaner could be making $500k a year in sales, which translates to $30k a year in royalty fees at 6%. The fixed annual royalty fee could be their cost-leadership style. Although I can’t see what every franchise agreement looks like, there might be missed opportunity to structure the royalty fee as a fixed up to a certain amount of sales and then a fixed + percentage if they meet a certain target, provided that DryClean support advertising fees, etc.

Dry Cleaning Industry

Industry is Fragmented

The dry cleaning industry in the US is highly fragmented. The nation’s 50 largest firms only generate 10% of the revenue in the industry (Source: First Research, Dec 2016). In 2015, annual sales of the dry cleaning industry was $9 billion, brought in by more than 34,000 dry cleaners across the country (Source: IBIS, March 2016). In comparison, Walmart brought in $480 billion in revenue in 2015 alone from ~6,300 stores (Source: Statista). With the acquisition of Western State Design, they’ve now built a stronger presence in the coin-operated laundry industry. In the US, laundromat sales in the US was $5 billion, with almost 22,000 laundromats in the country (Source: IBIS, June 2016).

When the market is this fragmented, it means there is no loyalty from its customers, which makes sense since I am not going to drive 50 miles to my favorite brand of dry cleaners when I can go to the local dry cleaner’s down the street. There are advantages of a fragmented industry, which is that you are not competing against a Coca-Cola. There are also many pockets of niche that can be created to differentiate yourself.

EnviroStar’s Competitive Advantage

For EnviroStar, they’ve certainly been smart to brand their franchise business, DryClean USA. What they are missing in this business is the unique competitive advantage. Currently, their brand is known for average price, average service, average offerings. It neither caters to those who would pay extra for a reliable, high-quality job, nor the people who need it super fast and super cheap. Unless the company gobbles up other players in the industry to become the leading brand in terms of most recognized in customers’ minds, it’ll be hard to demand customer loyalty when there are dry cleaners that pop up down the street every year due to low barriers to entry.

DryClean USA’s franchise cost in upfront fees and annual franchise & royalty fees are in the middle of its peers (Source: Entrepreneur, thefranchisemall). So, the pricing they enforce or encourage their franchise stores to charge consumers depends on the profitability of the franchise stores and EnviroStar’s wiggle room to charge less royalty fees but with the strategy of putting more franchise stores across the nation.

One competitive advantage they have with their line of products that they sell directly to industrial and commercial customers, such as hotels, is that their products have been known for a long time as environmentally friendly and energy efficient. In this fragmented industry, if they continue to introduce new versions of products that are proven to be even more energy efficient and environmentally friendly, they’ll be able to position themselves to gain customer loyalty.

Surviving a Declining Industry 

Unfortunately, what is working against them is the lack of growth in the industry. The annual growth of the last 5 years was -0.2% (Source: IBIS). Further adding to the decline of the industry is that clothing manufacturers are producing less clothes that require “dry cleaning only.” And there are more and more advanced washer and dryer for the home that will give you similar results from dry cleaning (Source: Capital, Jan 2016). Fortunately (but not really), the laundromat industry had a slightly better performance with 1.2% annual growth in the last 5 years (Source: IBIS).

EnviroStar – Last Man Standing?  

  1. Organic Growth: When demand is shrinking, you have to try to capture as much of the remaining demand as possible. Especially in such a highly fragmented industry where there is a lack of customer loyalty, you are left with (1) being the cheapest, and (2) being ubiquitous. These are important transformative years, where more effort is exerted into marketing its brand to pervade every niche of the market but also to introduce cost-cutting programs in order to support low prices offered to customers. They also have the opportunity to grow internationally, either through their salesforce or M&A.
  1. Mergers & Acquisitions: When EnviroStar’s new CEO came on board in March 2015, one could say this is the 3rd chapter of EnviroStar’s story. The first was the founder, Bill Steiner, finding the foundation of the company, the second chapter was when his son, Michael Stiner, joined the company and together, they built the company to a company with a network of customers. And now with Henry Nahmad, a young and driven MBA grad, at the helm, he’s helped the Management team recognize the state of the industry, i.e. fragmented and declining, and has begun a buy and build strategy to survive it.

On that note, Western State Design was a smart move – adding a portfolio of customers to its distribution network. Was it a fair price? We’ll find out in their next financials. But with a purchase price of $28 million, we should expect to see around ~$30 million of sales added every year, with an average multiple of about 1.0x sales (Source: Fulcrum). It has certainly helped with international expansion, i.e. to the Caribbeans and Latin America. Western Design is located in Calirofnia, which plays into the strategic location to reach into their distribution network since EnviroStar is located on the opposite side of the country in Miami, Florida.

We should be seeing more transactions involving international reach in the coming years if Management’s buy and build strategy is in full force.

The market really seemed to like the acquisition, helping the stock jump 225% in 3 months since their announcement of the acquisition in September and still 2 months after the completion of the acquisition.

  1. Cut off the Tumor: This is obviously an extreme strategy, and one that should be employable in a desperate situation where the long-term vision of the industry is clearly terminal. Kimberly-Clark sold off its capital-intensive paper mills that were generating mediocre sales decades ago. At the time, the stock took a hit, but the CEO, Darwin Smith, understood that the long-term vision for its company in this industry was to be in the consumer business. So, surviving through the downturn of the stock, Kimberly-Clark pushed through in divesting the “cancerous” arm that was the paper-mill business and refocused its company’s resources into building the consumer paper-product business. Kimberly-Clarks became the #1 paper-based consumer products company (Source: Good to Great). Is there a segment that is sucking the resources of EnviroStar? Could it be better spent innovating and launching home-based washer and dryer products with all of the technology and branding lessons the company has learned over the years?


As part of their buy and build strategy, in addition to businesses they are looking to acquire, they are exploring technological advancements to make their current operations better.

Currently, apart from the “technology” of their products, EnviroStar hasn’t implemented new faster, better, and smarter way of doing business that gives them a competitive advantage via technology. For example, with the network of franchisee partners, they are more suited to head a consumer-based pick-up/drop-off drycleaner service mobile app than Flycleaners, who has to cut a margin to their partnered facilities (Source: Business Insider).

EnviroStar could also be implementing technology into their advertising and sales. Are they doing any online targeted advertising for their franchisees? Are they doing any digital advertising to young people who are looking to become entrepreneurs via franchises? Do they have an enterprise software where franchise owners can use it to manage multiple locations?

There is a lot of room for improvement in technology.


The Management Team is currently comprised of:

  • Henry Nahmad – Chairman, CEO, President

Previously served as CEO of Chemstar Corp, a provider of food safety and sanitation solutions. Before becoming CEO, he held Executive Vice President and Strategy position at Chemstar. Prior to Chemstar, he served as Director of Corporate Development at Watsco, Inc, the largest distributor of heating, air conditioning and refrigerated products.

So, he’s a corp dev guy – no wonder as soon as he came on board EnviroStar, he’s implemented the buy and build strategy. Or conversely, the previous CEO, Michael Steiner, and the board may have been looking for new management to expand the business by way of acquisitions in his efforts to leave a legacy after his exit. In any case, for the buy & build strategy, he seems to have the right experience. However, after having servied as EVP for Chemstar since 2008, he left his CEO position not long after assuming the new role, which raises some questions. Although his experience has not directly been involved in laundry and dry cleaning, it has always been in industrial products and distribution, so it is somewhat aligned. A small, albeit, important finding is that the culture at Chemstar is such that employees did not approve of the CEO – most of the reviews are for after Nahmad left Chemstar, but there are some reviews for during Nahmad’s tenure as CEO there. And even if it is for after Nahmad had left, it does question the state of the company’s culture he had left it in (Source: Glassdoor).

  • Michael Steiner – Executive Vice President and President of Steiner-Atlantic

Has been President of Steiner-Atlantic since 1988, and during his tenure, was involved in growing the business in many different facets. It’s reassuring to see that one of the company’s veterans is staying in Management after control of ownership.

  • Dennis Mack – Executive Vice President of EnviroStar; President and Founder of Western State Design
  • Tom Marks – Executive Vice President of EnviroStar and Western State Design


Their financials ending Sep 30, 2016 is a bit cheeky. They had an outstanding revolving credit facility of about $2.2 million, which they wiped clean before September 30, so they declared debt to be $0 at the reporting date. But a week later, on October 6, they refinanced the debt into a $5 million term loan and a $15 million revolving credit facility. Of the $20 million available credit, the company took out $12.6 million to help pay for the acquisition of Western State Design. As a result, what is reported on their balance sheet looks ostensibly healthy, but their leverage ratios reveal otherwise.

  • Current ratio is 2.2, which is pretty healthy even though a lot of it is tied up in accounts receivable which saw a 3-fold increase since June 30, 2016.
  • With the $12.6 million loan outstanding, debt ratio is 1.3. Above 1.0 indicates they don’t have enough assets to cover their debt. In addition, their debt to equity is 2.3. Yikes. The loan is not due until 2021, and since we don’t know Western State Design’s financials, it’s hard to tell whether this will be a problem. For now, there isn’t enough information to make that call.


  • My DCF valuation yielded $4.80/share – the price EnviroStar was trading at before the announcement of the acquisition of Western State Design. On September 7, 2016, the day before the announcement, it was trading at $4.76/share. Closing price on Friday Sep 16, 2016 was $15.45/share… Something is clearly amiss. (Discount rate was derived using a bottom-up approach)

  • Here is how the comparables look in terms of multiples:

Again, the median of its peer multiples was in line with EnviroStar’s implied trading multiples before the inflation of its stock price following the announcement of WSD acquisition announcement. However, in the last 3.5 months, the stock price became way too inflated and now it is extremely overvalued.


Value Item Grade* Comments
Competitive Advantage/

Unique Business


Positioned themselves to provide complementary products/services within their space. They target the commercial and industrial customers, which is easier to reach with their salesforce than individual customers. However, it is still a highly competitive industry.
Growth Industry


Declining industry, i.e. -0.2% annual decline in the last 5 years; highly fragmented – no customer loyalty. Competitive forces come from outside its direct competitors such as consumer-based washer and dryer products that can replace dry cleaning. Opportunity lies in international expansion and implementing its buy-and-build strategy until its captured most of the demand that it could.


EnviroStar’s had a long history of innovation, not so much reinvention. When the company started out as a distributor of laundry and dry cleaning products, the founder, Bill Steiner, saw the opportunity to fill the gap in the market with more energy-efficient and environmentally friendly products. Henceforth they started providing their own products to industrial and commercial customers. EnviroStar saw the opportunity to enter the franchise market and now boasts ~400 stores. Since then, they have been building their distribution network and franchise segment, both organically and with the acquisition of Western State Design under the new CEO, Henry Nahmad. Their innovation and reinventing strategy will be more important than ever going forward with competitive forces at play in this declining and fragmented industry.


They don’t currently have technology implemented into the way they do business. A part of their buy and build strategy does mention that technological capabilities is one area they will explore in potential investments.


The company has the right mix of old and new. Steiner, the veteran of EnviroStar who grew the company to what it is today continues to assume leadership of Steiner-Atlantic. Meanwhile, Western State Design’s founder and EVP have now joined the team to build the distribution network, which in this highly fragmented business and where sales depends on distribution, is key. Furthermore, although the new CEO, Nahmad is young and lacks experience in the CEO role, his previous roles were aligned in a similar industry and his experience in corporate development/M&A could be what EnviroStar needs to expand.
Strength of Financials


High leverage ratios, but we are not sure how Western Design is going to contribute to working capital. It is a loose grade of C for now until the next 10Q.
Valuation (Projection/Potential)


Right now, the stock is overvalued. However, that is not to say that the company does not have potential to be strong. I believe the company has a robust intrinsic valuation. It appears the stock is overvalued (but we will have to see WSD’s financials to comment further).
Overall Grade


Strong company but currently overvalued. Wait to see WSD’s contribution to the consolidated financials in the next 10Q.

5 Reasons to Invest in Microcap and Small Cap Stocks

Small company investing is a hot topic these days. Many investors are flocking to the small guys, and for good reason. Check out these 5 reasons to invest in small cap stocks and microcap stocks.

  1. Portfolio Diversification

Microcaps have a low correlation to the S&P 500, so while large cap stocks move together in response to certain economic events, microcap companies do not move along with them. And what’s more, during a down market, this correlation is observed to be lower, because the small pool of investors who own microcap stocks know the value of their microcap companies, so they don’t sell them off in reaction to negative news.

  1. Higher Returns

Historically, microcap stocks have returned an annualized 11.7% since 1926, versus large caps at 9.4%, which is a spread of 230 basis points. Over time, the compounding of the spread has a significant return.

  1. Influence from Activist Funds

Activist funds are funds that invest in stocks with the intention of actively providing their opinion about how the company should perform to the company’s Management and Board of Directors. Often, the media only gets wind about the nasty letters they send to the company and the back-and-forth angry letters between the company and the fund that ensue thereafter. This may have created a negative stigma around activist funds, but on the flip side, activist funds are made up of some of the smartest money managers with a lot of experience and exposure to many different companies, so really, it’s like free advice.

Of course, because activist funds are just like the rest of the investing public, they aren’t privy to insider information, so when they try to overstep their boundaries and direct their opinions to Management about how they should run the company, they’re doing so without being visible to the long term vision and strategy that the company has put in place. But, because of the lack of resources smaller companies have, there is value in getting input from activist funds. As a result, more activist funds are targeting microcap companies. And for the regular investors, the advantage of this is that they know that Management and the Directors of the company whose stocks they’ve invested in won’t try to manipulate the stocks artificially, because activist funds that have invested in them as well would more than put in a word or two.

  1. More Hidden Gems to Discover

Because microcap companies are not covered by many analysts, there is less buzz around them, which leads to a higher probability of discovering those that are undervalued.

  1. Less Risk of the Agency Problem

 The smaller the company, the higher percentage of shares Management owns. As “agents” of the company, Management’s goals are better aligned with the company’s goals when they hold a large stake in the company. And such is the case with microcap companies. Due to this alignment of goals, the agency problem is reduced.

With any stocks, accompanying advantages to invest in them are risks as well. Every investor should do their due diligence and only invest in companies that make sense to their risk tolerance level. Does the company have sound Management? Are their products and services unique in their industry? Do they have strong financials? Look up microcap companies covered here to see where each company stacks up against these questions, i.e. the risks and opportunities.

Neonode Valuation Creating Touch

I am impressed by the level of detail Neonode’s 10K goes into in terms of its customers, the market it operates in, and the very relevant risks to the business. One of the key criteria that Buffet looked for in his fundamental valuation of companies was whether the company’s management gave detail on the drivers for the industry and their company. So, I was excited to see that Neonode was asking and answering the right questions preemptively.

My hope was then shattered when I dove deeper into their numbers. The company is clearly trading on its future potential. But this is not a discussion of stock price, but a stripped down analysis of whether the company has substantial value. Let’s begin with who Neonode is and what they do.

Company Overview

Brief Company History

  • Formerly known as SBE, Inc, incorporated in 1997. Merged in August 2007 with Neonode . Company continued operating as Neonode with principal office in Stockholm, Sweden, and US office in San Jose, California.

Products & Solutions

Core Business: Touch Technology Licensing 

  • Optical touch solutions under the brands zForce and MultiSensing. They have a portfolio of patents, but the touch screen functionality itself is not proprietary and thus they face many competitors.
  • As of Dec 31, 2015, Neonode had 40 technology license agreements with global original equipment manufacturers (OEMs) and original design manufacturers (ODMs). This is an increase from 35 at Dec 31, 2014, which is also an increase from 33 at Dec 31, 2013.
    • 16 of those customers are shipping products they’ve made using the technology license and more to enter commercial markets .
  • Neonode’s touch technology is incorporated into products such as laptops, touch-screen monitors, printers, GPS devices, e-readers, tablets, touch panels for automobiles, household appliances, mobile phones, wearable electronics, games and toys.
  • Their technology is optical touch technology. There are various types of touch technology including capacitive and resisitive as the touch screen industry’s most common types of touch technology. According to a Medical Electronics Design article, pros for optical touch simply boils down to:
    • Optical clarity
    • Cost efficient
    • Doesn’t need glass

AirBar: Neonode’s First Hardware Product

  • In addition to licensing their technology, Neonode has launched their first consumer product called AirBar, which is a USB plug-in device that enables touch functionality directly on the screen of the non-touch PCs. It is actually a very cool product that I may think about getting – an airbar for my mac air. How it works is you place the AirBar on the bottom of your non-touch laptop/computer screen. AirBar then projects an invisible layer of optical technology onto your screen, which then allows the screen to be touch-enabled.

  • AirBar was announced in 2015 that it was in development. They begain manufacturing in 2016 and officially released in October 2016.
    • At the time of this report on Dec 9, 2016, 15.6″ AirBar is available on their website and retailing for US$69 + $10 for shipping (14″ and 13.3″ are marketed but are not yet available – prompts to sign up for email notification)
  • It uses their zForce AIR sensing platform, the very technology that is licensed to many of their customers.
  • Marketing the products to consumer electronics retailers, online stores, and resellers to the education and enterprise customers. Ingram Micro is their e-commerce, distribution and fulfillment partner. Also anticipating demand from PC OEMs to bundle AirBar with their non-touch notebooks.


  • Primary customers are OEM and ODM manufacturers
  • Automotive
    • Touch interface displays
    • In 2015, Neonode’s 10 automotive OEM customers had 20 automotive models in the market. Majority of these are in China and include SUVs (Boojun 560 and Haval H6 ) and the two top-selling sedans (Chevrolet Cruize and Buick Excelle). In 2014 Volvo also launched using their product called XC90
    • Other products include:
      • zForce AIR for keyless entry. Estimate first system to be available in 2017
      • zForce DRIVE for detection of hands on steering wheel. Entered into agreement in 2015 to explore and industrialize.
      • Also engaged with several global OEM manufacturers about developing automotive Human Machine Interface. But long development cycles of 4-5 years before any fees for licensing are collected.
    • Printers and Office Equipment
      • Interactive touch display instead of mechanical buttons
      • Entered into agreements with 5 leading global printer and office equipment companies including HP and Samsung.
        • HP started shipping consumer printers with touch technology in early 2014
        • Lexmark released 7 new printers in January 2016 with their technology
        • Samsung and 2 other customers are finishing development and will release products with their technology in 2016 and 2017
      • E-Readers and Tablets
        • Since 2011, more than 23 million units shipped with their technology
        • Amazon, Kobo, Deutsche Telekom, Barnes & Noble and Sony use Neonode’s technology
        • Sony is currently shipping a 13.3 inch writing tablet named “Digital Paper”
        • LeapFrog Enterprises and LG are shipping tablets with our technology
      • Computers and Monitors
        • have technology license agreements and are in product design phase with tier one computer and monitor OEMs that we expect will begin shipping products in 2016. We are also in the process of attaining Microsoft Windows 10 certification on top of our already received Windows 8.1 certification
      • Production facility in Sweden. Distributed and fulfilled (including online e-commerce setup) by Ingram Micro to customers globally.


A lot of heavy hitters for partnerships, but that isn’t reflected in their financials.

  • Neonode’s revenues are unreliable as their technology can be replaced by their competition’s when the technology license agreement ends with the customer. For example, they had a blip in 2013 when they lost Amazon’s e-book reader business, but they’ve been able to gain back sales from other customers.

  • In addition, their net revenue during the 9 months ended Sep 30, 2016 was lower by -10%, due to no engineering consulting service fees in 2016 as well as a decline in e-book readers. During this period, revenues came from 51% printers, 27% automotive, and 22% e-book readers, compared to 31% printers, 11% automotive, and 51% e-book readers during 9 months ended 2015. Their technology license fees are shifting away from low-margin consumer products such as e-book readers to high-scale and potentially standardized among multiple OEMs in the automotive sector as car manufacturers continue to infuse electronic gadgety type of products into cars.

  • The concern is how high their costs are. They’ve reduced the number of corporate full-time employees from 8 in 2013, 7 in 2014, now down to 6 as of 2015 year end. Hopefully they will continue to operate under a lean, or even leaner, corporate team.
  • No point in doing a discounted cash flow method for valuation since their revenues are too unpredictable forecast and they’re operating at a loss.
  • Neonode’s comparables tell us that indeed their costs are way too high. The industry median SG&A cost as a percent of revenue is 13% and R&D as a percent of revenue is 18%. Neonode’s on the other hand is 79% and 56%, respectively. Their P/S and P/BV ratios are both not meaningful to even compare because of how ridiculously high they are. So far, the valuation of the company does not look great. They have a good technology and good partners, which is essentially what the company has. But in order for them to survive, they MUST cut down their costs.


Risks & Opportunities

Key Risks

  • Revenues are highly dependent on the success of its OEM manufacturers. In other words, Neonode does not have a direct affect on the success of the end-user products or marketing and therefore sales growth.
  • Revenues are highly concentrated in a few of their customers and the total # of customers they have is to major companies. Three companies represented 60% of revenues in 2015. For example, net revenue decreased from ~$7.1m in 2012 to $3.7m because Amazon did not use their technology for their e-book reader.

  • Highly competitive space – in order for a commoditized product due to high competition to survive, have to choose between low price or high quality, and most often times, it is high quality that survives. (and continuous introduction of innovative products.
    • R&D spend is not a measure of how innovative a company is according to this Forbes articles, but it gauges the growth of the company historically as a function of how much R&D they’ve spent and if they’re spending the same levels but the company has been declining, then obviously they’re doing something wrong. Hope they’re brewing some innovative products. If their sales don’t grow by at least 20%-50% by 3 years from now, then their R&D is not being spent to good use.
    • Again, as noted above, their R&D % of revenue is more than triple that of the industry median. Even if development of new products take anywhere from 6 months to 36 months, the company is not at its infancy stage, so they should have proved their sales to support the levels of R&D spending by now.
  • Their costs are simply way too high. Not only is R&D 56% of revenue compared to 18% for industry median, their SG&A cost is 79% compared to the industry mean of 13%. They need to make their team and their sales and marketing program has to undergo a major improvement. If costs continue to be a problem, the company will continue to operate at a loss, which will force them to close more private placements as they have done a few months ago and then draw down credit facilities. And, we all know the fate of those companies…

Key Opportunities

  • Big car markets by country that they have not penetrated yet include UK and Norway, two countries where electric vehicles are the most popular. Are there regulations or patents they have to file separately in those countries that are keeping them from making sales there?
  • Highly automated production facility set up in Sweden, but could they explore a lower cost country and lower export costs
  • Virtual reality and augmented reality are expected to grow 181.3% CAGR from 2015 to 2020, in dollars that’s $5.2 billion to $162 billion (IDC report, Aug 2016). That doesn’t even include artificial intelligence which alone is expected to grow from $640 million in 2016 to $36.8 billion by 2025; that’s a 57-fold growth (Tractica report, Aug 2016). This is a growing opportunity. Aggressive sales should have started already. Hope they’re putting those huge sales and G&A costs to good use.


First of all, the Company operates in a very competitive space, as evidenced by them losing Amazon as a customer for the Kindle e-readers, which affected the business by a -48% decline year over year.

Revenues from engineering consulting fees have been about ~$800,000 a year. It’s not a bad idea to build this division out as it relates to optical technology implementation and vision consulting. It would be a more robust way to secure sales

The launch of their first consumer product, AirBar, is very timely as it coincides with Apple’s new “touch bar” on their Macbooks, so they’re riding the coat tails of Apple’s marketing as an introduction to the product. But it is still not widely known, so they need to be doing some more online marketing of their product. As they stated in their filing, they’ve never mass manufactured products before, and they’re about to find out how good they are at it.

Neonode has put themselves in a very interesting position. If they’re successful at marketing AirBar and PC users adopt this in lieu of Macbook with touchbar functionality, they can leverage their presence in the consumer market to launch new products using their optical technology, especially in the augmented reality/virtual reality space. It’s promising that they’re developing a human interface product with tier 1 automotive OEMs at the moment, but this will take 4-5 years as they said. If they’re smart, they’re probably working on an AR/VR product development as well, but this is also going to take at least a few years. So, the company can go down a few paths from this point on as I see it:

  1. Continue to supply optical touch technology to OEMs, aggressive sales efforts in existing industries including automotive, computer, printer, e-book reader, etc, but also in new areas in development including AR/VR, AI. A few other industries I’m thinking they could penetrate with touch functionality are fitness & gym equipment, health care/biotech medical devices, and smart home products to name a few.
  2. Continue to supply to OEMs but focus efforts on becoming a consumer brand, starting with AirBar. They could have a series of products ready to launch in successions.
  3. Get acquired by a computer electronics company, with some potential suitors being: Apple, Microsoft, Sony, Samsung.
  4. Get acquired by an ancillary consumer electronics hardware company such as Logitech, Razer, Facebook’s Oculus.

Regardless of their path,  I don’t see this company failing anytime soon. Even though they’re operating in a highly competitive space, they’ve positioned themselves very well in the market with OEM partnerships and there are ample opportunities for their technology to be used in various avenues.

Craft Brew

After accounting for capex and likely scenarios in each year of their production and sales, Craft Brew’s valuation doesn’t look very appealing. Craft Brew was an incumbent in the recent craft brewery trend but is now struggling as this trendy niche has now become an oversaturated mainstream market. Can Craft Brew survive the influx of competition into this niche space?

Company Overview

Craft Brew Alliance (CBA) was formed in 2008 through a merger of Redhook Brewery (from Washington) and Widmer Brothers Brewing (from Oregon). They also added to their portfolio in the same year, Hawaii’s oldest and largest brewery, Kona Brewing Company. CBA has 5 brands:

  • Kona Brewing Company
  • Widmer Brothers Brewing
  • Redhook Brewery
  • Omission Beer – #1 beer in the gluten beer segment
  • Square Mile Cider Company – #1 in hard cider in the Pacific North West
  • Resignation Brewery (through theCHIVE.com) – first ever virtual brewery through an online media platform.

The original CEO from the merger, Terry Michaelson, transitioned out of the role in 2013 but has stayed on as a senior advisor. The CEO that took his place, Andy Thomas, has been with CBA since 2011.

CBA distributes to retailers through wholesalers in the Annheuser-Busch network, and more than 90% of their sales comes from this channel.


CBA is riding the wave of the craft brew trend, but competition in this space is fierce, due to low barriers to entry and a relatively high margin drawing attraction. Many local breweries can start with a business loan from the bank. In the last decade, the craft brew market has seen a double digit growth year over year. Craft brew now makes up ~21.7% of the total US beer market (as of Sep 2016). US craft beer production grew 20% CAGR from 2010-2015:

Source: WSJ Article

Breweries Association reported that in Dec 2015, the number of breweries in the US surpassed the previous record in 1873 with 4,144 breweries, many of which came online in the recent part of the decade. But, craft brew supply has now reached the demand and will likely start to see a plateau.

The larger brands (Boston Beer, Sierra Nevada, New Belgium) have become stagnant because of an overflow of volume in the marketplace, and the growth of the market is now led by local breweries driving the growth of the market as opposed to the large brands. The 2 driving forces left in this competitive market to out-win competition are quality/innovative beers (such as introduction of nitro-infused beer) and lowering prices. (Source: Bevindustry.com Article)


The overall volume shipment of barrels has decreased in the last 2 years since 2014 because of declining popularity of Widmer and Redhook brands.


  • CBA’s Q3 10Q reported a 9month year to date production decline of -4% yoy for beer distributed through Annheuser-Busch network; total FY decline of -5%
  • Repositioning Widmer and Redhook brands in 2017 will see a decrease in shipment volume but offset by an increase of Omission and Square Mile
  • Kona’s expansion of the Hawaii brewery to come online in early 2018
  • Contract brewing has been experiencing a decline offset by international sales

Even though overall volumes have decreased, net revenue has increased because of a higher average selling price from shifting from draft to packaged goods sold. The Company unfortunately probably won’t benefit much more beyond the current draft to packaged ratio, and in fact, recent quarterly filing saw a slight shift back to draft:

Therefore, a similar level of draft to packaged goods ratio and therefore a similar level of average selling price per barrel are assumed in deriving revenue.

The only noteworthy things to mention in the above valuation are:

  • I believe that with the expansions and greater marketing efforts to rebrand their dying brands, SG&A spend will increase in 2017 over budget. Then, they could see losses and in 2018, initiate a cost-reducing strategy, which will drive the SG&A back down to slightly below normalized levels going forward.
  • Capex in FY2016 was estimated to be between $17-$19 million as reported in their recent quarterly. Capex of $20 million is expected to expand Kona brewery in 2017. Assumed conservatively for other brewery improvements to be only an additional $3 million.
  • The Company has been operating with a negative free cash flow.

Key Risks & Opportunities Summary

Widmer and Redhook brands have been around for a long time, but they never gained popularity outside of the Pacific North West (and a bit of lower West Coast). With a crazy influx of craft breweries in the last decade with local brands winning the hearts of beer fans in their communities, older brands just can’t keep up with the competition.

Kona at least brings something unique, because it comes from “overseas,” so it could maintain some traction. And, CBA was smart to introduce Omission and Square Mile – something unique to the table. Continuing to introduce innovative products will be key to survival.

It is slightly of concern that Annheuser-Busch is CBA’s exclusive distributor and that over 90% of their sales come from this partnership. But, it is not too alarming, because that’s just the nature of the business, and it is unlikely that A-B will suddenly raise their fees to ridiculous levels.

CBA’s capex levels have been pretty high and their expansion of the breweries for ~$20million a piece seems egregious. Their opportunity to fill the new increased capacity will come from increasing their international sales efforts and if they acquire or introduce a new unique brand.

Could we see CBA dismember their alliance of brands and either (1) operate as a lean company of one or two brands or (2) divest their underperforming breweries and position their more popular brands to be acquired by large brew companies like Boston Beer?

Harte Hanks


Harte Hanks

Company Overview

  • Marketing agency/consultancy that helps clients strategize a marketing program to acquire new customers and increase customer retention rate by developing better existing customer relationships. In 2014, initiated new strategy and revised operation into 2 divisions:
    1. Customer Interaction: Analyze clients’ customers’ behaviors from their data and using the insight, create innovative multi-channel marketing programs. Includes the following services:
      • Agency & Digital Services – Implement targeted marketing online for clients through search engine management, display, digital analytics, website development and design, digital strategy, social media, email, e-commerce, and interactive relationship management.
      • Database Marketing Solutions and B2B Lead Generation – Marketing database solution tools that the clients can use to identify models that provide them the most profitable customer relationships and then apply those models to win new profitable customers and retain existing customers.
      • Direct Mail – Digital printing, print on demand, advanced mail optimization, logistics and transportation optimization, tracking (including proprietary prEtrak solution), commingling, shrink wrapping, and specialized mailings. Also maintain fulfillment centers with custom kitting services, product recalls, and freight optimization allowing customers to distribute literature and other marketing materials.
      • Contact Centers – Teleservice workstations around the globe for inbound and outbound contact center services and support in many languages. Provide speech, voice and video chat, integrated voice response, analytics, social cloud monitoring, and web self-service.
    2. Trillium Software (Business sold – awaiting regulatory approval): global enterprise data quality solutions provider – industry specific (financial services, banking, retail, healthcare, manufacturing, risk professionals), global data profiling, data cleansing, enrichment, and data linking for e-business, Big Data customer relationship management, data governance, enterprise resource planning, supply chain management, data warehouse, etc. Fee from perpetual software licenses, annual maintenance and professional services.
  • Successor to a newspaper business started by Houston Harte and Bernard Hanks in Texas in early 1920s. Company went public in 1972; became private in a leveraged buyout in 1984, and listed in NYSE again in 1993.
  • Largest client comprised 6% of total revenues in 2015; largest 25 clients represented 57% of revenues in 2015.


  • Valued at $1.73/share, put on Watchlist, with a reassessment of the Company when the sale of Trillium Software is completed and debt is paid down with the cash from the sale of Trillium. Key risks followed by recommendations below outline how the Company could bounce back to profitability and growth. The Company has the potential to turn itself around into a growth stock if they overcome key challenges they are encountering that’s causing the Company to be unprofitable (see Key Risks and the Recommendations sections).
  • Company has seen better days. Its stock performed significantly lower than the Russell Micro Cap Technology Index over the last 52 weeks, currently trading at $1.52 with a peak of $3.73 in March 2016.


Source: Google Finance (Link)

  • Discounted cash flow valuation (as of 12/3/2016) of base case yields $1.83/share:


  • Long term growth rate of 5% assumed, which is between 3.9% of average projected nominal US GDP growth and 5.6% average projected nominal industry (online and traditional advertising) growth
    • Discount rate of 15% used using weighted-average cost of capital build-up from risk-free rate of 2.7% (20-year US treasury as of the valuation date), its comparable peers’ data and company-specific borrowing rate and company-specific risk
  • Using 0.3x trailing P/S multiple and 0.4x forward P/S multiple for US microcap advertising peers, relative valuation of Harte Hanks is $1.62/share:


Key Risks & Challenges

  • Sales forces and sales groups are solution-specific to sell individual products and solutions. Direct sales forces, with industry-specific knowledge and experience, emphasize cross-selling of full range of marketing services, but are assigned to each sector to specific clients in that industry. There are some verticals that are not increasing in demand – retaining the industry-specific salesforce may cost more than the revenue able to fulfill in those verticals. Time to think about getting out of the non-profitable verticals. Is there also a way to consolidate the services or verticals such that the salesforce can be used laterally across verticals?
  • Highly competitive space with rapid technological change, high turnover of client personnel who make buying decisions. Hard to retain client loyalty for this reason. Revenue depends heavily on salesforce.
  • 22 domestic offices and 6 international offices – are they all strategically located and necessary?
  • 5,529 full-time employees and 44 part-time employees, of which 2,333 are based outside of the US, primarily in the Philippines. Presumably for the contact center segment. What is the margin for the contact center? Not a business that sets HH apart from its competition – a pure margin business by numbers. Worth continuing to provide as a service to its clients?
  • Clients are heavily concentrated – is the salesforce reaching its breadth of customers?
  • Direct mail – declining business with postal rates not supportive of profitability.
  • Very highly levered, but with completion of the sale of Trillium Software business, Company plans to pay down the debt.
  • Dividends discontinued, but it’s not a risk. The fact that the company had introduced it means it could re-introduce it in the future when it’s profitable again.
  • Labor as a percentage of revenue has grown from 46% in 2011 to 53% in 2015. 2014 recorded high labor costs due to severance. Stock compensation was the same in 2015 as 2013. Outsourced costs may contribute to higher labor costs, but could be offset from divestiture of Trillium.

Key Opportunities for Upside

  • Although Trillium Software business was operating at a profitable margin, its success is highly dependent on maintenance and continued advancement of technology to keep up with competition. Talent fees for software development is a risk that could lead to bleeding cash. The successful completion of the sale of Trillium Software could allow HH to save on costs.
  • Being a historical company that’s been around, the success of its offerings depends on acquisitions of target companies that are not only synergistic but that is in the growth stage with new technology. HH is relatively active in making the calls to divest when necessary and be on the prowl of acquisitions. Hopefully in the next year, we will see HH acquire a programmatic advertising company that has an impressive list of existing clients.