mid term

Mid Term Review

March 2001

I am looking at the current situation with all three of the major equity holdings in the acorn and pensions portfolios. This has come about due to my concern that I am no longer concentrating on quality businesses.

The review will concentrate on the business fundamentals of each of the holdings, issues like share price behaviour and my failure to react to certain events will not be covered.

Imagination Technologies

Chorion

First Property Online

Imagination Technologies

Recent Events

IMG suffered a major setback when it was announced by Sega that they would be ending production of the Dreamcast console earlier than anticipated. This decision by such a key source of royalty revenue will cost the business about 20% of projected turnover for 2001. The release of the Kyro chip, manufactured by STMicroelectronics, has not been the success both companies were hoping for, although greeted by the industry as an excellent product, there just has not been the orders.

Current and Future Trading

The three divisions that make up IMG; PowerVR Technologies, Ensigma Technologies and VideoLogic Systems have all been very active in developing new products with the major events being:

Ensigma Technologies announced that it is now shipping the first worldwide compliant AMR (Adaptive Multi-Rate) vocoder software codec for DSPG's Oak and Teaklite processor. The Ensigma worldwide vocoder has been licensed and successfully integrated by a number of chipset and handset producers. Ensigma's multi codec is particularly significant because it is the first that can be incorporated in devices for use worldwide, providing high-quality speech encoding for digital mobile phone applications across all the major standards.

PowerVR Technologies announced that STMicroelectronics and Liberate are developing next generation set-top-box technology featuring PowerVR technology. This technology, which provides a standardised platform for cutting edge set-top-box applications, debuts today. STM is the market leader in chipsets for Digital TV with over 50% market share. Liberate develops and markets software products that form a universal platform for information appliances. Hardware OEMs, cable operators and ISPs use its software to leverage the power of the Internet. 

STMicroelectronics has unveiled its next generation KYRO II 3D Graphics Accelerator. Powered by PowerVR™ Tile Based Rendering (TBR) technology, KYRO II demonstrates clear performance leadership when compared with other products in its class on popular games and industry benchmarks. KYRO II is ST's second generation 3D Graphics and Video Accelerator derived from the partnership between ST and Imagination Technologies designed to combine Imagination's acclaimed PowerVR technology with ST's world-class digital video know-how, process technology expertise and manufacturing capability.

STMicroelectronics and Hercules announced that the two companies are working together to bring leading-edge PC graphics solutions to the market. The relationship brings together two companies with strong and complementary track records in the graphics market: Hercules has long been one of the most respected names in PC Graphics cards and ST is one of the world's leading manufacturers of complex silicon chips for PC peripherals. Cementing the relationship, both companies announced innovative new products: ST's KYRO II PC Graphics controller and Hercules' 3D PROPHET 4500 PC Graphics card, the world's first top-performance graphics board that is within every gamer's reach.

IMG and ARM have signed a long term joint development agreement for the integration of PowerVR® graphics cores alongside ARM® microprocessor cores. Initially the integrated cores will be marketed into the mobile phone, personal digital appliance, digital set top box, tethered Internet appliance and portable gaming markets. The partnership will significantly increase the graphic capabilities of appliances in these markets and is receiving widespread industry support.

Pace Micro Technology and Sega Corporation announced that they have agreed to jointly develop a set-top box home gateway with built-in Dreamcast architecture. The product utilises PowerVR Series2 graphics technology, developed by PowerVR Technologies.

VideoLogic Systems announced that it is supplying both PowerVR graphics and controller boards for the Electraride motion-based simulators produced by Jesler Enterprises Inc. The VideoLogic Neon 250 graphics board is a high performance combined 2D and 3D graphics solution ideal for arcade applications. The VideoLogic R-Cade Master is the only fully integrated, intelligent solution available for all arcade-interfacing needs. Electraride is a single seat, two-degrees of freedom, all-electric motion simulator, designed as a versatile, networkable platform to enhance the realism of the latest PC based games. Electraride has been selling on the market for seven months with outstanding results. More games for the system and further enhancements are planned, enabling the networking of up to four units. The first game released is Ultimate Race Pro, developed by Kalisto Entertainment in France.

Conclusion

The bottom line is that the company is putting together a succession of building block deals that will eventually remove the reliance on just a few large customers and help make IMG's technology part of the industry's standard. Having said that, it will still have to be proved that these new advances will become real profit generating situations. Also the competition in the form of Nvidia is rumoured to have products that are easier for developers to use which could prove to be crucial. The company has a sound balance sheet, no borrowings and a management team that has not panicked but has gone about removing risks to the future of the business. I intend to continue being a part owner. 

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Chorion

Recent Events

Chorion has two divisions; Bar Nightclubs and Intellectual Property. The company has just announced their latest set of results which have the following highlights:

Bar Nightclubs - Profits (before goodwill amortisation and UITF24*) up 37% to £7.1m (1999 £5.2m) - Turnover up 63% to £26.0m (1999 £15.9m) - Number of trading units doubled to 12 - Achieved market leadership position in London's West End with 10 trading units and total capacity of 7,300 - New Tiger Tiger developments in Birmingham and Manchester traded ahead of expectations - Tiger Tiger brand roll out programme accelerating with 3 currently under construction and a strong development pipeline building.

Intellectual Property - Profits up 13% to £4.7m (1999 £4.2m) - Turnover up 15% to £10.2m (1999 £8.9m) - Gross profits up 20% to £9.0m (1999 £7.5m) - Strong growth at Agatha Christie led by a 44% increase in TV and video income. - Significant progress on Agatha Christie TV adaptations - Two new Poirot TV movies 'Murder in Mesopotamia' and 'Evil Under the Sun' completed for ITV - CBS network in USA licensed for TV movie remake of 'Murder on the Orient Express' - BBC contracted to produce pilot episodes of TV adaptations of Christie detective characters 'Tommy and Tuppence' - Revised arrangement with BBC Worldwide give Chorion full control over TV production and financing and a more dedicated development of the Noddy brand - New 100 x 10 minute CGI animation series 'Make Way for Noddy' spearheading the second stage international development plan for Noddy - Significant initiatives to exploit other brands and characters in Blyton portfolio - 'Enchanted Lands'audio books project with Kate Winslet - Pre-production development of' Famous Five' TV series - New 'Secret Seven', 'Just George' and 'Mystery Series' publishing deals concluded.

Conclusion

The results were as expected with both divisions trading well with the Bar Nightclubs storming ahead. The roll-out programme continues apace, the Tiger-Tiger brand looks like it has gained its spurs and is now being taken very seriously with expansion into Europe is being muted. The planned demerger of the two divisions has been put on hold due to the market turbulence and the fact that the Intellectual Property division isn't really capable of standing alone. My interpretation of these results and the business in general is that Chorion has an excellent management team who are "owner manager" minded combined with two profitable and growing divisions. The demerger news is disappointing but not surprising and the 50% increase in the dividend is most welcome. The company remains cash positive and debt free, I intend to continue to be a part owner.

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First Property Online

Recent Events

FPO has been operating as a listed company for just over three months and is still very much in the early stages of development, so there hasn't been that much news to gauge current progress. The website has not seen much business with the number of properties available ranging from between 15 to 21. The quality of these properties has been mixed and not the market originally muted of properties valued at up to £5m. The original partners have been conspicuous by their lack of input on the marketing front which is particularly apparent due to lack of awareness of the site.

However, the business model put forward at the time of the reversal into Hansom Group is well thought out. The company has not launched into a blitz of pointless advertising but instead has quietly gone about interviewing further prospective partners in the industry. The costs are held down by the small number of staff and the marketing spend will be borne by the partners, when it finally happens.

Conclusion

The strategy that the management is working to is one that will not be liable to produce meteoric growth of profits in the short-term. It has taken the right moves to involve as many of the major movers in the industry thereby increasing the likelihood of the venture being a success. It will be important that it signs up those who would be likely to set up rival operations and this news will be very important when the company next reports to shareholders. The service the company is offering is unique in the UK and remains relatively unproven but in the US and other countries similar offerings are being increasingly accepted. 

Information is very thin on the ground as to the current situation, I am having to accept verbal reassurances that things are going to plan. In normal circumstances I would find it totally unacceptable to take decisions on trust from a management team that I have not had dealings with before without being able to back-up with hard facts. This is balanced by the continued enthusiastic involvement of Alasdair Locke and Edinburgh Smaller Companies Trust who have both increased their holdings. It also comes down to whether or not I accept that the business model and the service the company hopes to provide is capable of delivering long-term results.

I have decided to retain my holding and if possible, to increase it at the current lower price. The term of the investment will be at least three years and more likely five or more.