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Tuesday, April 21, 1998
Brilliant Digital Entertainment
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Phone: 818-346-3653
Website: www.bde3d.com
Price (4/20/98): $3 3/16
HOW DID IT FIND TROUBLE?
How is this for a Multipath Movie? You begin with Brilliant Entertainment, a company that is full of promise and a balance sheet to die for. Then things begin to fall apart.
The company hoping to revolutionize the software industry with interactive stories, rich in graphic detail and with a free-flowing interface, chooses some poor paths. Products get delayed. New venues for growth have potholes. Earning estimates turn into deficit estimates. The public goes cyber-bear on the maker of Cyberswine. For a stock that just a few months ago was trading close to the $9.99 suggested retail price of its features, the drastic markdown has turned this celluloid into selluloid.
BUSINESS DESCRIPTION
Am I showing my age by saying how much I enjoyed the old Activision text-based games like Zork? This evolved into the more artistic Sierra epics, and it is here where one has to make the distinction on the new ground that Brilliant is breaking. Those were games. Multipath Movies are interactive stories.
Unlike the standard fare of storybooks, where clickable Easter eggs come to life, Multipath gives you plenty of forks -- each prong leading to different plot twists, and, naturally, more forks.
Brilliant has proprietary software in its Digital Projector and by storing vast amounts of data on CD-ROMS, it can also allow the user to eventually dial up the company's website to pay-per-view new interactive episodes.
The first four available titles are Popeye, the in-house Cyberswine, and two horror stories. Later this year there will be offerings based on Ace Ventura, Xena, and Superman.
FINANCIAL FACTS
Income Statement
12-month sales: $2.5 million
12-month income: ($2.3 million)
12-month EPS: ($0.31)
Profit Margin: N/A
Market Cap: $30 million
Balance Sheet
Cash: $12.3 million
Current Assets: $14.7 million
Current Liabilities: $2.0 million
Long-term Debt: None
Ratios
Price-to-earnings: N/A
Price-to-sales: 12
HOW COULD YOU HAVE SEEN IT COMING?
Brilliant Entertainment's karma can be best defined not by who it has teamed up with, but rather who it hasn't teamed up with. The company agreed to a bundling deal with Packard Bell last year -- not market leaders like Compaq or Dell. When it came time to be packaged with 3D accelerator chip sets, it signed up with Matrox and S3 -- not 3Dfx. And when the time came to pick an online service in which to house message boards and the ease of episode purchases, it went with 1.5 million member CompuServe's CSI, rather than the 12 million subscriber strong America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %>.
These second tier outlets proved to be far from perfect. The CSI site has been late in its introduction. The 3-year Packard Bell NEC deal, which sounded so lucrative last summer considering the 6 million computers expected to ship over that time, has been slow in its launch as well.
The lone brokerage house following the company, Cruttendon Roth, helped with a secondary offering the company completed last year. Yet its $0.70 a share earnings estimate for this year, for a company in which 80% of its revenue last year came from a $2 million lump sum payment from Packard Bell, seemed way too ambitious and was based on a young software company meeting release dates -- something even the big players like Electronic Arts <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERTS)") else Response.Write("(Nasdaq: ERTS)") end if %> are prone to slip up on.
Not that many took the projection at face value -- since even at its peak the stock would have been trading at a relatively cheap 13 times 1998 earnings. As attractive as the Brilliant business plan read, few would expect flawless execution from a two-year-old venture.
WHERE TO FROM HERE?
Expecting the worst I picked up Popeye and the Quest for the Woolly Mammoth at my local Best Buy. While Halloween Party sounded more enticing, I went with what I figured my 4-year-old son would enjoy. Having read about the smooth 3D animation, I was a bit disappointed by the graphic shots on the back of the box.
Then I installed the player, and despite being absent the great frame rates a 3D card or an MMX-based Pentium would provide, I was impressed. While no Pixar <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PIXR)") else Response.Write("(Nasdaq: PIXR)") end if %>, for a product that accepts changes on the fly, this was not shabby at all. Does Popeye fix the engine or the flat tire? Does Olive Oyl go with Bluto or our spinach-chomping hero? With rich-rendered graphics and perfect lip-sync on the audio with genuine Popeye voices -- why is this a penny stock?
Some may take exception to company's plan to sell initial titles cheap, hoping that users will pony up for additional episodes over the Internet. You could wallpaper a den with penny stock certificates from the likes of NTN <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: NTN)") else Response.Write("(AMEX: NTN)") end if %> and 3DO <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: THDO)") else Response.Write("(Nasdaq: THDO)") end if %> who have struggled to find operating profits selling Net-based entertainment.
Yet Brilliant is a bit more, dare I say, brilliant. Since these are stories, the company also plans on pre-packaging some of these features as linear videos. For the proprietary brands like Cyberswine, or the Bantam book-based Choose Your Nightmare series, why not? The production costs are minimal even if they turn out to be nothing more than bargain bin impulse items.
Cruttendon Roth has had to trim its expectation from $0.70 a share in earnings to barely breakeven this year, and just $0.36 a share next year. This is a more fathomable projection and gives the company plenty of elbowroom to get over the delays faced earlier this year.
In the meantime, thanks to the secondary offering, the company is now selling for less than two times book value with the bulk of that being debt-free cash. With a young company on an ambitious development schedule, the cash hoard will no doubt dwindle -- but probably in direct correlation to how the company's prospects brighten.
-Rick Aristotle Munarriz
([email protected])
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