GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Thinking about PNI Digital Media

If nothing else, after reading this, you will think differently about "2 cts".

PNI Digital Media (aka Photochannel) was first brought to my attention on this forum. http://www.gurufocus.com/forum/read.php?2,29081,29081#msg-29081

Ever since, I have been sitting on the fence thinking. Last week I fell off that fence.


Thesis

The bulls are right but impatient; the bears are wrong.


What does PNI do and who are its customers ?

PNI is a Canadian company that hosts retailer’s personlized printing websites. When you go to www.samsclub.com and click on "photo" the site that comes up is samsclub.pnimedia.com. PNI handles everything from uploading images, storing the images online, and sending the jobs to the correct store to be printed. In short, retailers outsource their personalized printing websites to PNI.


What caused me to fall off the fence ?

Shutterfly announced customers are now able to pick up their prints at CVS. Shutterfly used to send all its prints to customers by mail. On the other hand, CVS used to only print images from their own site. It is not hard to imagine that a significant percentage of the prints picked up at CVS stores next year will come from Shutterfly. The deal obviously makes sense to CVS as well as Shutterfly. I expect to see similar deals with other sites and retailers. The brick-and-mortar retailer wants extra customers walking through the door. http://ir.shutterfly.com/releasedetail.cfm?ReleaseID=520719

Importantly CVS pays PNI 2 cts for every print routed to a store. Yes, that now also includes print jobs they route from Shutterfly's site to a CVS store.

Never mind the profitability of this deal.... PNI doesn't even have to host the Shutterfly site like it does for CVS ! The most important aspect of the deal is that it creates a barrier to entry.

In fairness, Shutterfly also announced a similar deal with Walgreens. Walgreens uses HP hardware and routes its pictures through PNIs only competitor..... Snapfish. Probably because HP owns Snapfish, Snapfish does not like to serve retailers with non-HP hardware.


Summary of the Bull case

For years, bulls (starting with Aaron Edelheit aka Issambres839 on VIC) have argued PNI is going to grow to 200m of revenue. The personalized printing business in the USA is a 10B business (conservatively). If 50% of this is taken by retailers of which 50% are PNI customers (non-HP), of which PNI takes 10% as "routing" fees..... 250m in the US alone. Snapfish "only" has WAG and WMT. Bulls expect the stock to explode when Walmart USA switches to PNI.

PNI serves Wal-mart Canada, UK & Argentina, Costco Canada & US, CVS (U.S.), Black’s (Canada), Kmart (U.S.), Eckerd’s (U.S.), Sam's Club (US), Tesco (UK), Shoppers Drug Mart (Canada), Loblaw (Canada)

That's at least 3B of personalized printing with a growing percentage coming from the web. Customers who used to walk in with their memory cards now realise it makes sense to create stuff online from the comfort of their homes. From a retailer’s perspective, there’s little appeal in consumers tying up kiosks for long periods.

The bulls are impatient. Triple digit growth has not materialised as expected. Organic growth in this case depends on changing customers behavior. For this and other reasons, PNI has only reported double digit growth.


Summary of the Bear case

For years, the bears have pointed to the GAAP bottom line and argued that any expectation of future profits is speculative. Revenue is nothing without margin.


My opinion

The estimate of potential revenue is reasonable and given that PNI is growing internationally too it's probably conservative. The rate of growth is hard to predict from year to year. Current margins are understated because costs include expenses for growth and are overstated.

Walmart USA unlike Walmart Canada is unlikely to switch to PNI. Walmart just finished installing HP kiosks nationwide..... they get the Snapfish service "for free". HP would probably rather buy Kodak and/or PNI than lose Walmart USA.


Valuation

Everyone has his/her own method so I will not get into too much detail. No projections, just current data.

1) A company that grows unit volume for years at double digit rates without taking on debt or significant dilution is from an owners perspective, extremely profitable. 1x TTM revenue with christmas yet to come => C$ 50m

2) 5m of TTM FCF which is likely understated because the holiday season is yet to come... costs stay flat but operating income is mainly from the holiday season..... 10x FCF => C$ 50m

3) HP’s 10-k for the year 2005 mentions five acquisitions totaling $645m. Snapfish was the largest. The cost of the largest acquisition should be at least equal to the average. 645m/5 => US$ 130m.

Snapfish is comparable in every way and PNI has taken Sam's Club and Costco from Snapfish since then.

In short, you are not paying much for growth.


Barriers to entry

1) PNI stores your photos for free. Once they're online, you can order them again and again without uploading them. This is sticky. A retailer wishing to outsource to another company must copy all the data while maintaining service to its customers..... nah.... that's not a barrier. The guy selling me this new software says he'll do it in february when nobody wants to order pics and he can do it without a hitch.

2) There are economics of scale. This is the reason retailers outsourced thier sites in the first place. PNI's costs are in storage and bandwith. The more you need, the cheaper it gets. I estimate PNI has about 250 - 1250 Terabytes of storage depending on how they store the data.

- note - Storage and bandwidth..... depreciation charges of PNI overstate replacement cost !

We have a one foot hurdle.

3) PNI connects a site to various HP and non-HP kiosks. PNI spent 10m - 20m developing this software. An individual retailer will not build its own stuff. Kiosk sellers might want to. This is precisely why HP bought Snapfish.

We raise the hurdle another foot.

4) PNI now connects diverse sites (non retailer sites) to retail outlets....... THAT is what caused me to fall off the fence. If PNI connects say.... five sites to your store including your own site..... you have no hope. You do not want to swith to some other guy. You will not be able to recoup the loss of revenue ....you are lost.... Aaaaaaahhhhhh...... I'll pay the bl33ding two cents and try to squeeze those cents out of some other supplier.

Your only hope is to call Snapfish. You don't want to do this.... HP sells what are basically high volume photo printers. Nothing wrong with that but you and the sites you partner with want to offer your clients personalised mugs and other high margin stuff. HP doesn't do that so Snapfish won't want serve you.

In short, PNI is highly profitable now and is highly likely to remain profitable if and when growth slows. Its core assets are worth much more than book.


Specific Risk

- Canadian dollar continues to appreciate rapidly against the dollar. PNI pays its salaries in C$.

- HP takes more than 50% of the market in the US and elsewhere.

- Facebook or someone else decides to create their own PNI to distribute their photos (but to where ?)

- No one prints photos at retail shops in 2020 (or personalised mugs, flags, banners etc.)

- PNI overreaches while trying to integrate say.... Carrefour.

The other 834752 risks I haven't thought of yet.

just my 2 cts; any and all comments and questions welcome as usual.

http://www.ephotozine.com/article/Photo-merchandise-market-10035

http://smallcapvalues.com/2009/01/photochannel-networks-overview/

http://demystifyingdigital.com/dd_blogs/PhotoIndustryNews/archive/2010/05/24/hp-augments-walmart-photo-departments-with-prints-in-minutes-services.aspx

http://www.kis-kiosk.com/public/archives/cat_photo_kiosk.html

About the author:

batbeer2
I define intrinsic value as the price I would gladly pay to own the business outright. With current management in place. For most stocks, that value is 0. As of September 2012, I'm the author of the monthly Buffett-Munger Best Bargains Newsletter. I can be reached at fvandenbroek AT gurufocus DOT com

Visit batbeer2's Website


Rating: 3.7/5 (23 votes)

Comments

Hester1
Hester1 - 3 years ago


Batbeer,

You make a very convincing case for the stock. I have two questions

1. What do you think margins would look like if/when the costs go down to your expected level?

2. What is your opinion of management?
batbeer2
Batbeer2 premium member - 3 years ago
Thanks for the comment and questions.

1) Assuming they do not get new clients or lose existing ones.... I expect net margin of 10% to 20%. Mainly because revenue can grow organically from here without them investing as heavily as they have. The Shutterfly/CVS deal would be the best example of this happening.

2) I don't see anything about management not to like. They are paid reasonably and insiders own some 20% of the stock. Age.... OK. The new CEO comes from within and the old CEO (now chairman of the board) has been with the company since 1995 and comes from a senior postion at Kodak.

They have decided this year to start returning excess cash to shareholders (stock buyback).

FWIW I read somewhere that the former CEO likes to sail on workdays.....

The only thing I don't like is the lack of women in senior postions ;o)

- EDIT -

They fixed that too. Ms. Susan Page now does marketing & sales.
AlbertaSunwapta
AlbertaSunwapta - 3 years ago
Batbeer2, your fence sitting has been a wise move.

I've sat on a small and fortunately inconsequential, 'go nowhere' position for ages. However, for the first time in years, (in late September or early October) I finally added to my position.

Still, while the numbers look quite appealing I'm still not convinced that it's a great long-term business model. My spouse has compiled a few photo-books via an Apple iPhoto service and has them mailed directly to us. (She's also used Shutterfly but the book quality was much poorer than Apple for some reason.) Thus, the convenience of picking up prints at a local retailer just doesn't seem to offer a significant moat. I'm tempted to take my profits and buy more Apple shares. :-)
batbeer2
Batbeer2 premium member - 3 years ago
1) Did anyone say facebook ? http://www.marketwire.com/press-release/ASDA-Stores-Fujifilm-UK-PNI-Digital-Media-Add-Key-Social-Media-Features-All-ASDA-Photo-TSX-VENTURE-PN-1280820.htm

Jun 23, 2010 14:14 ET

ASDA Stores, Fujifilm UK and PNI Digital Media Add Key Social Media Features to All ASDA Photo Kiosks

.....

Beginning immediately, ASDA photo kiosk customers can easily access their Facebook® photo albums by logging in with Facebook directly from all of ASDA's photo kiosks, which are powered by PNI's Connected Kiosk® software. ASDA photo kiosk customers can grab their Facebook photos, combine with them with their photos from their media card and instantly create photo prints and gifts to suit any occasion. Other social media photo collections will be added in the coming weeks.

.....


2) Tesco UK uses HP hardware and outsources its website to PNI an interesting combination.

https://www.tescophoto.com/help_panel/help/help_panel.htm

http://www.hp.com/hpinfo/newsroom/press/2009/090302xc.html

AlbertaSunwapta
AlbertaSunwapta - 3 years ago
Excellent point about Facebook. It has something like 1/2 billion users doesn't it. If only a small percentage use PNI's service...

This brings me to another point... Just as many young people live with only a cell phone and no longer use land lines, I've increasingly been wondering whether the retail printer business is doomed as it is replaced by the convergence of cheap and small memory, wireless connectivity and super high quality screens everywhere.

I hate my HP printer, I've always hated all the cryptic problems printer menus and settings create, I hate the space printers take up and I hate having to buy printer cartridges. Moreover, I hardly ever print anything at home anymore.

Now add increasing levels of home networking and there may soon be no need to print anything. (Photos and other documents could be wirelessly connected to any number of screens around the home. Plus they are easily available on my wife's iPhone etc.) Photos have gone from a precious few prints saved in boxes and albums to being thousands of digitized photos stored on hard drives and backed up up on line. Photos are now so plentiful in most households that the task now is to find a select few worth presenting well. Hence, the growth of professional quality photo books (eg. Our Child's First Year, Our Wedding, Our Daughter's College Graduation, Our Great Cruise Vacation, etc.)

As for printing and framing photos at home... well, I can see frame shops quickly adopting kiosks so people can print a family photo and have it framed and delivered to their house saving further hassle.

So with dirt cheap print and "presentation" services with kiosks everywhere, why even clutter up my desktop with a printer? Or even with wireless printers why clutter up any space at all?

CanadaGoose
CanadaGoose - 3 years ago


Hi BatBeer2,

Very excellent points you made here. I just have a few questions here:

1. What's your opinion on PNI's competitive advantages when it is compared with its main competitors, such as Snapfish? PNI has partnership with all top retailers in Canada, such as Walmart, Shoppers and Costco, along with top 3 out of 5 retailers in US; while Snapfish has Walmart USA, Walgreens etc. PNI currently has partnership with most retail stores at current stage, but how easy for Snapfish to steal retailers from PNI, or vice versa.

2. How likely do you think for photo storage websites, such as Shutterfly, Picasa, or Flickr to create its own photo printing platform?

Thanks!
batbeer2
Batbeer2 premium member - 3 years ago
Hi CanadaGoose

Thanks the questions and kind words. In response to your questions:

#1 The fact is, PNI has taken many clients from Snapfish and the reverse is not true.

My interpretation of these facts is that Snapfish is part of HP and is not free to serve all comers with say..... Samsung hardware. PNI will be happy to. Having said that, being part of HP obviously does have its advantages.

In short, I have no reason to believe either has a fundamental competitive advantage over the other but Snapfish is limited in its ability to compete.

Stealing customers can be done... or else how could PNI have done it ? The switching costs are still low but will grow over time because:

- these companies own the data. Poeple have already uploaded all their pictures to the site of their favourite retailer; that stuff is stored on their servers

- As PNI connects more Facebook/Shutterfly type sites to your shop you will not want to switch to someone who doesn't. Walking to the shop and logging into facebook to print pictures is one thing. The guy routing that job is replaceable. Using your iPhone to print your pics to the nearest retail outlet is something else. The guy routing that second job is quite powerful.

#2 They could but IMHO they won't. The opportunity cost; it's not worth it. Such sites have lots of options to generate revenue and earnings at a low cost of capital. The guy who writes the proposal to create an infrastructure to connect to retailers will have a very hard time getting the CEO of Flickr to listen. If he does get his plan through, the both of them go to the retailer with their brilliant plan....

Alternatively, just add a nice button (courtesy of PNI) to your Flickr site. Then visit that retailer in 2015 and tell him you'll not route any jobs to his shop if he doesn't pay up...... the ROI is MUCH better.

Case in point... Shutterfly. They have a platform for printing in place and decided NOT to develop software to distribute the print jobs to retailers. They link to PNI and Snapfish instead.

my 2 cts.
Dr. Paul Price
Dr. Paul Price premium member - 3 years ago
Batbeer-

You really liked this when Daniel Wahl was touting it in June 2008 at $4.

Read all your inane and very positive comments about it from that original post you referred to.

It's now $1.59 /share - down 60.25% from that time when you and others made many positive comments. You were not 'fence sitters' back in June 2008.

Why should we believe you know any more about it now than you did then? All its supporters 2 1/2 years ago thought it was about to turn very profitable at that time (which did NOT happen).

batbeer2
Batbeer2 premium member - 3 years ago
Hi Stockdocx99

Thanks for your comment and question.

... your inane and very positive comments about it from that original post you referred to ....

Whether or not the thoughts I shared on that 2008 thread are inane or very positive is a matter of opinion. Yours is clear. I leave it to each forum member to decide for him/herself. Here's the link. http://www.gurufocus.com/forum/read.php?2,29081,page=1


Why should we believe you know any more about it now than you did then?

Don't, I don't. What has changed is the way I think about the company.... that is why I gave the article the title it has.

batbeer2
Batbeer2 premium member - 3 years ago
http://www.sec.gov/Archives/edgar/data/1036642/000114420411010492/v212393_6k.htm

Shares are dropping like a stone due to a less than spectacular quarter.

- Canadian dollar appreciating against the US dollar and the pound.

- Drop in "installation" revenue; professional fees.

- UK didn't do well.

All said, revenue is flat YOY. Transactions of course increased 14% organically.
DaveinHackensack
DaveinHackensack - 3 years ago
I dumped this one last May.
AlbertaSunwapta
AlbertaSunwapta - 3 years ago
Folks you may want to look at this old news... integration with Microsoft - so this should foreshadow integration with a lot of handheld devices. You'd think there'd be quite a bit of potential at that point.

http://www.stockhouse.com/Blogs/ViewDetailedPost.aspx?p=12896


I've noticed some insider selling so I imagine the rise of the Canadian dollar will hit them again. However, a slowing in the economy and a drop in fx might just be the catalyst to give them that ever elusive positive news.

Same fx issue applies to another very intriguing potentially monopolistic company I've owned for a while now. (Points International / Points.com (PTS TSX or PCOM NASDAQ)
AlbertaSunwapta
AlbertaSunwapta - 3 weeks ago

PNI Shareholders Approve Arrangement Transaction Involving Acquisition by Staples

http://www.sys-con.com/node/3118373

I no longer owned it, selling out at a far lower price.

However, in playing in the microcap arena, I've seen several promising companies get taken out when they are down. Just recently my ZEDI and 360 Vox shares were taken out just as the future looked more promising. I find management led or inspired takeouts particularly distasteful to me as a longer term oriented shareholder. Though I have to say, I did pack it in on PNI desite its appealing value (cash over half market cap at one point) - but I just don't print much of anything anymore so I didn't see a great future for PNI.

batbeer2
Batbeer2 premium member - 3 weeks ago

Yeah, I am beginning to learn this too.

Small company sells some shares to fund growth; it hits some bumps and then when it finally begins to show some strength (frustrated) minority shareholders are "robbed" of the bright future they were promised. Heads you don't win much, tails you lose it all.

Figuring out why a company is publicly traded is becoming an increasingly important part of my analysis.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide