GMP research on Intrinsyc Software's progress
Here is a nicely detailed update research note from GMP Securities on Wellington Financial Fund II portfolio co. Intrinsyc Software (ICS:TSX):
“As October comes to an end, the month has so far shaped out as expected with Intrinsyc announcing a design win through SiRF (the previously announced unnamed silicon vendor), and most recently the commercial launch of Motorola’s first line of personal navigation devices (PNDs). In addition, the company announced a distribution agreement with SatNav Technologies, whereby SatNav will distribute the Destinator software for Symbian-based mobile phones in India.
Motorola launches first line of PNDs using Destinator
Yesterday, Intrinsyc confirmed our speculation that Motorola is the customer that signed a new software licensing agreement (SLA) last month for a new series of PNDs. Motorola announced the launch of its first line-up of PNDs (the MOTONAV TN20 and TN30 shown in Exhibit 1). The TN20 will be priced at $200 and the TN30 will be priced at $300 – prices that we believe will put them in the high-volume segment of the market, which is positive for Intrinsyc as they will earn a royalty fee on a per unit basis.
In addition, the devices will be available exclusively at RadioShack, and is expected to be heavily promoted with a TV ad campaign. We are pleased that these products have been released in time for the holiday season, in particular well-before the key American Thanksgiving weekend (the most important weekend of the year for retailers). More importantly, we believe this win has strategic value to Intrinsyc beyond just royalties.
Although Intrinsyc has had a historical relationship with Motorola from its engineering services business (e.g., software integration of Motorola Q) it did not yet have a relationship with Motorola in the mobile software side of the business until now. With the acquisition of Destinator, Intrinsyc’s mobile software segment now has a direct relationship with Motorola first through the A1600 MING device, and now, with Motorola’s new PNDs. The A1600 MING device recently started shipping in the Chinese market and is the best-selling smartphone in its price range. Motorola’s new PNDs are available now through Radio Shack in North America. If Motorola finds success with these PNDs, we believe the manufacturer may consider looking at Soleus Transit (Soleus + Destinator), which is expected to be available in Q4/08, for a future device. In our opinion, this would be a natural progression since Motorola is already seeing success with the A1600 MING. Adding to this possibility, Motorola is looking to decrease the number of OS platforms it uses for handset devices in an effort to improve operating margins. Android, Windows Mobile (for the Motorola Q), and P2K (Motorola’s own platform) are believed to be the focus platforms but given that Windows Mobile is also based on the same Windows
CE kernel on which Soleus is built, we believe that it is possible that Motorola could look to Soleus for lower-end devices to give them the flexibility to customize the look and feel of Windows-based devices (recall, Windows Mobile is not very customizable).
Intrinsyc is now collecting royalties from its first design win through SiRF
Intrinsyc announced that Shanghai RagenTek, a GSM/GPRS and smartphone solution provider,
produced a converged connected PND (essentially a PND with telephony and smartphone-like
features) dubbed “Cronos”. Cronos uses the Intrinsyc/SiRF reference platform, where Intrinsyc’s Soleus platform is integrated with SiRF’s (the previously unnamed silicon win) chipset. Recall, we have high expectations for Intrinsyc’s two silicon wins to-date as they greatly extend Intrinsyc’s market reach with the potential to yield high shipment volumes spread across numerous customers. While it is still early to tell, our sense is that Cronos will be a lower-volume opportunity, but the important point is that Intrinsyc is now generating royalty revenues for this device and we believe it is a good sign of progress. We will look for indications of success with this device, which would demonstrate the viability of both the reference platform as well as Soleus itself, which should help the company to build momentum and win
Three additional Soleus design wins
During the last business update, management reiterated their confidence in its ability to close three additional Soleus design wins by year-end (in addition to the Samsung LSI win in January 2008). We believe the company is in later stage discussions with multiple potential Soleus customers, and expect announcements to be forthcoming. It is our hope that one of these announcements will be a high-volume win as it would highlight Soleus’ capabilities and build momentum for future design wins (and royalty fees).
Commercial launch of the Quanta device
The Quanta device, which we believe is Polymer Vision’s Readius based on our separate due
diligence, experienced a minor slip in launch date (we initially expected this device to launch in
September) and it is now expected to launch sometime this month or in November for distribution initially in Europe. Again, we believe it is important for this product to launch in time for the holiday spending season, and in our view, earlier is better than later as it would provide more time to promote product awareness and drive up demand for both holiday gift-giving and for use during holiday travel.
eReaders are useful to travellers since they eliminate the need to carry a vast numbers of books or other reading materials. We believe its rollable form factor makes this device more attractive than current versions from Sony or Kindle. Based on the Readius website, content specifically formatted for Readius like free eBooks and RSS feeds will be available for free through Content World, but users will also have the option to pay for content like newspapers and eBooks by downloading through a PC or over-the-air transfer directly to Readius.
We expect lots of news flow in the near future that should act as catalysts for the stock. October has shaped out as expected with lots to look forward to. That said, we believe Intrinsyc remains a highly speculative stock, particularly in the current market environment.
The company needs to execute on signing new design wins as promised and launching the awaited new Soleus devices to demonstrate the viability and potential success of Soleus. If the company continues to see delays in ramping up meaningful Soleus volumes, the company may face balance sheet risk given that the company is still burning cash and access to capital is challenging in these markets. At this time, we leave our estimates, recommendation, and target price unchanged. We have a BUY rating and $0.85 target price on Intrinsyc, which is derived by using a sum-of-the-parts method valuing the different businesses using a target multiple of 3.0x to value Soleus, a 1.0x multiple for engineering services, and 2.0x multiple for Destinator. On a consolidated basis, this implies a target C2009 P/S multiple of 2.7x.”
(disclosure – Fund II holds warrants in ICS)