NEW YORK, April 30, 2002 (PRIMEZONE) -- The following is being issued by World Financial Capital Markets:
Investment Update - Strong Buy Rating; 12-Month Target of $10
Overview
MediaBay (Nasdaq:MBAY), headquartered in Cedar Knolls, New Jersey, is a proprietor of spoken audio and nostalgia products, including audiobooks and old-time radio shows. The firm conducts client attraction and retention through various mediums such as direct response, retail, broadcast and Internet-based programs. The company, steered by real estate extraordinaire Norton Herrick, has continued to enjoy success in the interactive media marketplace.
The firm has embarked on a rather aggressive acquisition strategy to bolster its dominant foothold in the audio book marketplace. Formerly known as the Audio Book Club, MediaBay features an extensive content library that features over 60K radio shows and 3,500 videos. Those products, according to company filings, are sold to its customer base of nearly three million. World Financial Capital Markets feels that the company, through acquisitions from Columbia House and Doubleday, has been able to integrate a solid presence in the online marketplace.
The company has been in the public eye since it completed an October 1997 initial public offering. MediaBay, which commenced a $30 million secondary offering in February 2000, has been misunderstood in the analytical community because of its ties to the Internet. During the Internet hey-day any company featuring an online presence was automatically deemed an Internet concern.
Properly Valued
Thus, analysts applied the wrong metrics for valuing the true assets of MediaBay. Our analysis is hinged upon the company's June 2000 plan aimed at generating cash flow and profits. To date, that strategic initiative has been accomplished. Consecutive quarters of positive cash flow have been achieved and based on our analysis the company will be profitable for 2002.
Reality has set in and the real valuations of MediaBay are now starting to come to fruition. For example, the company is operating in a market that has already experienced stellar growth. Data provided by the Audio Publishers Association pegs that the current state of the audio book market hit $2.5 billion in 2000, up from nearly $250 million in 1989. That represented a compound annual growth rate of 30%. With 33% of online users listening to spoken audio on their personal computers, substantial growth in the audio book market definitely exists.
To properly establish a value for the firm's hard assets, MediaBay management implored several independent appraisal services to draw that conclusion. In Nov. 2001, the intellectual property rights associated with the firm's radio and video programs in its Radio Spirits content library were valued at roughly $41 million. The next appraisal came earlier this year when the membership and customer lists of the Audio Book Club and Radio Spirits operating subsidiaries were appraised at $24 million by the same firm utilized in the first valuation.
Operating Subsidiaries
To properly reach all of its audience groups, MediaBay has broken itself up into operating entities that include the
(a) Audio Book Club
(b) Corporate
(c) MediaBay's interactive operations -- Radio Spirits, which also
encompasses the firm's Radio Classics unit
Audio Book Club
The Audio Book Club, which has continued to be the flagship piece of MediaBay, is the largest audiobook membership club with nearly 2.2 million customers. This entity attracts clientele from various methodologies. To bolster its position in the market, MediaBay snapped up competing entities from Columbia House, a joint venture between AOL Time Warner and Sony Entertainment and Doubleday, a wholly owned subsidiary of Bertelsmann AG. Those acquisitions have made the Audio Book Club the strongest entity in this marketplace. To properly illustrate how growth of this club has taken off one should look at how membership has dramatically risen from 64,000 members in December 1995.
Radio Spirits
This particular piece of MediaBay is comprised of old-time radio and classic video programs that are targeted to over 600,000 catalog purchasers through direct mailing, to over 7,000 retailers that includes Target, Sam's Club, Costco, Barnes & Noble, Amazon.com and Cracker Barrel Old Country Stores and through the Internet at www.radiospirits.com. Radio Spirits was formed in December 1998 through a series of three business acquisitions.
(a) Acquired assets of Radio Spirits which specialized in selling
syndicated classic radio programs and its affiliate, Buffalo
Productions, which duplicated pre-recorded compact discs.
(b) Acquired assets of Metacom which were related to marketing and
producing of old-time radio and;
(c) Acquired assets of Premier Electronic Laboratories which were
related to marketing and producing of old-time radio and classic
video programs.
Some of the division's programming includes recordings from Jack Benny, Frank Sinatra and H.G. Wells and through co-branding agreements, MediaBay also has the ability to repackage classic shows from the likes of Walter Cronkite and the Smithsonian Collection.
MediaBay.com
MediaBay.com supports the company's Internet activities including Audiobookclub.com, RadioSpirits.com and MediaBayDownloads.com. The company's downloadable audio Web site, www.mediabaydownloads.com, is the firm's content-oriented compilation of its extensive array of premium audio content available in secured downloadable formats. One may purchase products by joining the subscription service where a low monthly fee allows a customer to download up to 20 hours of spoken audio content. Several reports indicate that over 450,000 spoken audio streams are delivered monthly through MediaBay sites.
Radio Classics
This piece of the company just achieved a major milestone with penetration into the satellite marketplace. By entering into this area, the target audience for Radio Classics has vastly increased. While starting with Sirius Satellite Radio, World Financial Capital Markets anticipates other deals with DirecTV and Dish Network may be forged.
Still, the Sirius Satellite Radio will bring the operation of Radio Classics into another platform. For example, Radio Classics is broadcast around the clock and showcases famous old-time radio episodes from the Golden Age of Radio. Programming includes episodes from "The Shadow" and "The Jack Benny Show." Radio Classics will also supply Sirius Satellite with selected old-time radio content featuring Fibber McGee & Molly. Financial terms of the deal were not announced, but it seems that MediaBay will generate advertising revenue and an increased target reach from this transaction.
Potential Growth
Based upon our analysis, MediaBay boasts dominant positions in the traditional retail and catalog distribution marketplaces. From its founding, MediaBay has grown its business through a "roll-up" strategy that has included several core acquisitions to bolster its position as a dominant purveyor in the interactive media market.
Our analysis (and financial projections to be reviewed later in this report) is hinged on the explosive growth for MediaBay in leveraging its emerging business model. While our investment strategy focuses on a long-term holding pattern for shares of MediaBay's Nasdaq listed stock, we feel that solid growth expected for the digital download market will be factored into the firm's stock price over the short-term.
Financial prosperity at MediaBay continues to generate attention amongst the investment community. During the fourth quarter of 2001, MediaBay reported net income of $3.3 million and reported its second consecutive quarter of positive cash flow. Although, the firm managed to report a loss for 2001, albeit a much smaller one than in 2000, the future looks quite bright for MediaBay. Losses were reported because of integration costs associated with several acquisitions that the firm completed.
Ownership & Management
Core to the success of a burgeoning operation is the executive team charged with the development of the brand. With MediaBay, holders are privileged to have Norton Herrick at the helm as Chairman of the Board. Mr. Herrick is a seasoned market professional having piloted his own private investment firm focused on the real estate marketplace. His firm has completed over 1,000 transactions eclipsing $2 billion.
Mr. Herrick, along with sons Michael and Howard, who hold respective positions with MediaBay as Chief Executive Officer and Executive Vice President, collectively own the majority of the company's outstanding common stock. Compensating for additional shares of the company purchased on the open market recently, Mr. Herrick and his sons own 4.5 million shares of MediaBay. In addition, the Herrick clan also maintains other investments in MediaBay such as a $2.5 million preferred stock holding and a $6.3 million convertible debt clip.
Michael Herrick, who serves as the firm's Chief Executive Officer, brings over ten years management experience in comparable industries to the company and has overseen day-to-day operations since the firm commenced operations. Mr. Herrick is also a former board member of the Audio Publisher's Association.
Future growth of the company also hinges on the success of Hakim Lindsborg, MediaBay's newly minted President. Mr. Lindsborg comes to MediaBay from International Masters Publishers Group, a direct marketer operating in 19 countries. During his tenure at IMP, he doubled revenue for the firm's U.S. subsidiary to $330 million and played an integral role in growing profits in the U.S. to $33 million during his three-years as President of the U.S. subsidiary.
Finally, financial results for the first quarter ended Mar. 31 will be released within the next three weeks. While management hasn't publicly released guidance for the recently completed three months, there's a strong feeling amongst the analytical community that MediaBay will report positive EBITDA and operating results substantially better than the operating results for the comparable period in 2001. We anticipate profitability for the current year.
Financial Projections for 2002 and 2003
2001 (A) 2002 (E) 2003 (E)
Net Revs $41.81 $45.24 $52.02
Op Income ($19.82) $3.12 $6.07
Net Income ($4.85) $1.02 $4.07
Diluted EPS ($0.35) $0.07 $0.18
Adjusted EBITDA $2.55 $4.02 $6.47
(In millions, except per share) -- Estimates provided by World
Financial
This report was prepared by Jeffrey Hirschkorn, Senior Research Analyst for World Financial Capital Markets, a New York-based investment boutique specializing in the underwriting of public and privately-held securities. World Financial Capital Markets is a chartered member of the NASD and SIPC.