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On2 Technologies, Inc. (ONT) |
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CEOCFO Current
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This is a printer friendly page! Recent
agreements with Beijing E-world Technology and Intel Corporation are helping On2
Technologies become the premier video compression software supplier in Asia, Europe and
North America BIO: As the world's premier codec developer, On2 creates
advanced full-motion, full-screen video compression technology that has revolutionized the
industry. With their codecs, broadcast quality video (DVD) can be compressed to one
megabit (.12 megabytes) per second or less. In early 2002, On2 released the TrueMotion®
VP5 codec. VP5 was a 50% improvement on all other existing codecs, including VP4. The
TrueMotion VP6 was released in May of 2003 and provides marked improvements in quality and
performance over VP5. The VP6 added support for high-definition (HD) material and
real-time streaming at full D1 resolution. On2 also develops other products to further serve
their clients. Their Audio for Video Codec (AVC) works seamlessly with the VP video codecs
to provide a full-service content encoding solution. TrueCast 7, their RTSP-compliant
client/server suite, completes the picture, creating a family of products that make low
datarate video-on-demand a viable opportunity for the cable, set-top, and Internet
industries for the first time. For those professionals who prefer to compress their own
material, On2’s Professional Encoder product combines power and flexibility with
remarkable ease-of-use. The company licenses their technology and develops
solutions for other leading-edge digital multimedia vendors. On2 also offers in-house
video encoding, remastering, and training services. They can deliver encoded video that is
similar in quality to that produced by DVD encoding or post-production color correction
facilities. CEOCFOinterviews: Mr.
McIntyre, where was On2 Technologies, Inc., when you became its CEO and what changes did
you orchestrate? Mr. McIntyre: “I have been with On2 Technologies for about three-and-a-half years and two things have changed. For the first ten years this was a video compression software company that moved into the content business. When I got here, I did not think that was a very good idea. I thought that it was better for us to be in just one business, which was video compression because that was what we always were best at. The second thing that has changed is that we have been able to reduce our costs from about seven million dollars a quarter to about a million dollars a quarter and, because of the focus on video compression, take our revenues from seventy thousand dollars a quarter up to a million, three.” CEOCFOinterviews: What is involved in video compression, and what are you actually selling? Mr. McIntyre: “We sell software that allows people to compress video and send and receive it on things like computers, television sets, cell phones and other devices. We take video and film, which is really a bunch of still-shots that are put together at a rate faster than the human eye can detect, and using algorithms break them down into electronic bits, so that they can be sent through relatively narrow gateways on the cable modem telephone. It is reconstructed on the other end to look the same way to the human eye as it would if it were the original video or film. Over the last fourteen years, this company has specialized in that process of deconstructing and reconstructing videos over great distances and relatively small pipelines.” CEOCFOinterviews: What is it about your product that encourages people to choose you over others your competitors? Mr. McIntyre: “We have a significant technology advantage today over the other people in the business because our compression ratios are much greater than our competitors. If you were to look at video in our format of 500 kilobits, it would look much more like television or film than it would if you use our competitors.” CEOCFOinterviews: What is the revenue model? Mr. McIntyre: “The revenue model has three components to it. One is that we charge people to do engineering work that retrofits our technology to their existing equipment. Second is the software that we license to companies, like the encoders that do the compression. We license to them once and they can use it indefinitely. The third area is royalties, where you can deploy the decoder on your network, and we are paid for each effort.” CEOCFOinterviews: You recently had an agreement with a company in Beijing, can you please tell us about that? Mr. McIntyre: “Beijing E-world Technology is the company that has the exclusive franchise in China for EVDs (Enhanced Versatile Disk), which are the equivalent of DVDs in the United States. They will be paying us a royalty for each unit that they deploy in China and Hong Kong and Taiwan. They also have the non-exclusive rights to distribute those items outside the U.S. in other markets. The projections that they have given us indicate that there will be tens of millions of those sold through them, inside and outside China over the next three years.” CEOCFOinterviews: Do you have an arrangement with Intel? Mr. McIntyre: “We have an arrangement with Intel Corporation so that our decoder software can be optimized to work as efficiently as possible. Their engineers are actually with us right now working on our video compression to make sure it runs as efficiently as it possibly can.” CEOCFOinterviews: Are you at the point where people are coming to you or do you still need to get out there and let them know what you do? Mr. McIntyre: “I think that is a mixed bag; there are certain regions like Japan, where the company is well known and we do a lot of business. People know us and tend to approach us. It is more in the United States and Europe that we still have to do a lot of advertising of the company. It is not as well known because broadband is widely deployed. We probably do more selling in our own country.” CEOCFOinterviews: How do you reach potential customers? Mr. McIntyre: “We have about 70 or 75 companies worldwide that we consider important customers. We go see those customers personally, meet with their management and show them what the proposition is to make their products better base-to-base. We are not a company that has thousands of customers but instead focus our efforts on a very small number of major companies around the world.” CEOCFOinterviews: How often do you upgrade your products? Mr. McIntyre: “We have been upgrading the products about once a year for the last four years. We have a facility in Cambridge England, which is devoted exclusively to that and part of our development facilities in Albany, New York also works on that. The day we introduce a new product, we are working on the next one.” CEOCFOinterviews: How has the technology downturn impacted the company? Mr. McIntyre: “The technology downturn has been as brutal for us as it has been for other people. One of the reasons we cut costs so drastically is that the buying cycle in technology has gotten longer. We have been fortunate in that we have a product that is unique and we have been able to go out and market it to people and continue to sell it. Our basic products are the same basic products no matter where you use them. It is something that can migrate to certain platforms and different ships; it is portable. The combination of cost cutting and the improving revenue has given us great leverage at the bottom line. What we want to do in the future is keep costs where they are, even if revenue rises sharply.” CEOCFOinterviews: What do you see for the future of the company? Mr. McIntyre: “We have about 75 target customers and maybe about five or ten of those people are customers of ours today. We have a low cost base that is unlikely to rise. We then will try to get the next five to thirty customers out of that base. In Q-2, our revenues were up 61% over the same period last year. The idea is to keep the revenue growing at a rapid rate.” CEOCFOinterviews: What do you have to do to convince these next customers that they should be using your product? Mr. McIntyre: “In software there is two parts to sell you product. One is that you have objective measurements to how well the software works and the other one is cost. You obviously have to go to people and convince them that this is a better solution and it is also available at competitive cost. If people think it is not a better solution or that they are being over charged, you will lose those customers. I would look at that and say that the cycle of going into those companies and making a sale with them is not an easy cycle. You cannot just go and show them something once and expect them to buy it. We think we have a high-quality and low-cost product.” CEOCFOinterviews: Do you have long-term contracts? Mr. McIntyre: “Most of our contracts and relationships are multi-tier. If you can get your costs down and keep them there that is good news because hopefully through your investors you build an annuity on the revenue side.” CEOCFOinterviews: Why should investors be interested now, and what should they know that they may not realize when they first look at the company? Mr. McIntyre: “I think the reason people are interested now and the stock price has appreciated is that we have gone from a company that was losing a lot of money with a bad balance sheet to a company that has a very strong balance sheet and a lot of cash. What people have not seen yet is what is going on in Asia right now with video on demand, video conferencing and messaging, where there is a lot of broadband penetration, and it is spreading to North America and Europe. People do not look at that. It is like in the old days of cars when it was hard to imagine cars being built in the United States that were getting ten miles to a gallon of gas. Then people started building small cars during the oil embargo, and that became 30-40% of the market. I think people need to look at Asia, and understand that this is a movement that has already begun and that has very quickly spread to the United States and North America.” CEOCFOinterviews: In closing, how do you reach your potential investors? Mr. McIntyre: “The majority of people that buy small-cap technical companies know the company very well. We certainly make an effort to get information to them and talk to them on a regular basis. The company does trade eight or nine hundred thousand shares a day, so it is unlike many of the tech stocks on the Nasdaq where they are trading ten thousand shares a day.” disclaimers |
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