TIO NETWORKS CORP.
Equity Research | Technology
Recommendation
12-month Target
TSXV:TNC
BUY
$1.00
$0.50
(new)
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Ticker
Please see important disclosures at the end of this document
A Key Player In A Relatively Unknown But Major Market; Initiating with BUY
Event
Market Data
52-week High-Low
Shares Outstanding (millions)
Market Capitalization (millions)
Cash (millions)
Enterprise Value (millions)
Fiscal Year End
$0.70-$0.45
46.4
$23.2
$2.7
$20.5
st
July 31
$0.75
ƒ Leading multi-channel bill payment processor: With electronic
F2009A FY10A FY11E
FY12E
Revenue
EBITDA
EBITDA Margin
Adj. EPS
EV/Sales
EV/EBITDA
P/E
$21.5
$27.8
$35.4
$0.7
$0.5
$1.2
3.3%
1.9%
3.4%
($0.05) ($0.04) ($0.02)
1.0×
0.7×
0.6×
29.2×
39.8× 17.3×
NM
NM
NM
$45.1
$2.4
5.3%
$0.01
0.5×
8.6×
NM
6,000
4,000
$0.50
2,000
$0.25
Share Price
Volume (thousands)
Trading History (TSXV:TNC)
3,000
1,000
Apr-11
Feb-11
Jan-11
Nov-10
Oct-10
Aug-10
Jul-10
May-10
$0.00
Apr-10
0
Investment Thesis
$1.00
(Millions, except EPS)
5,000
Initiating coverage with a BUY recommendation and target price
of $1.00 per share, based on a DCF valuation.
Despite its relative size, TIO has become one of the leading North
American multi-channel bill payment processors with more than
58,000 location end-points supported by a strong referenceable
customer base. In our opinion, TIO is well positioned to accelerate
the strong top-line growth demonstrated over the last three years,
which includes a period of significant economic turbulence and
currency appreciation. With the stage set for achievement of a
sustainable level of profitability within the next 12-24 months, we
expect the gap between intrinsic and market valuation to narrow,
driven by additional customer wins and further penetration into the
mobile and online segments.
Financial Data & Valuation
Source: Bloomberg
Company Description
TIO Networks operates as a multi-retailer network of financial
services kiosks for the cash preferred consumer marketplace
in North America. It designs and distributes TIO Services,
which consist of a transaction processing system that
includes financial products and services, such as bill payment
and other payment-related products/services. The Company’s
principal products and services include bill payment
processing services extended to a multitude of platforms such
as POS (point of sale), automated kiosks, mobile Smartphone
applications and web. The Company offers its services
primarily to telecom, wireless, cable and utility bill issuers. The
Company is based in Vancouver, Canada, with a significant
part of its workforce in the US.
Sameet Kanade, CPA, MBA
(416) 644-8123
[email protected]
April 11, 2011
connectivity to over 410,000 biller customers (over 600 of which
are considered “expedited”) in its network and more than 58,000
location end-points connected to its processing platforms, TIO has
become an established multi-channel provider of convenient bill
payment solutions.
ƒ Marquee list of biller customers and partners: The Company’s
customer and partner list includes several tier-1 companies such
as AT&T, Cricket Communications, MetroPCS and Mobilicity.
Given the level of integration TIO has achieved with its biller
customers’ back-end infrastructure, we believe TIO’s solutions are
“sticky” and present strong barriers to entry for new entrants and
existing larger competitors.
ƒ Strong recurring revenue business model: TIO has developed a
strong recurring revenue model, driven by customer-funded
transaction fees (similar to ATM fees). With recurring revenues
consistently accounting for more than 98% of total revenues, the
current operations provide a platform for profitable growth.
ƒ Market opportunity is large and growing: Since TIO is focused on
providing expedited payment services to the cash-preferred
consumer marketplace, the underbanked and unbanked population
is a key target market. The FDIC estimates that 25.6% of US
households are either underbanked or unbanked. The expedited
bill market is a $1.4 billion per year industry and is estimated to
increase at 24% per year. Additionally, as TIO also moved up the
value chain to provide mobile and online solutions to meet the bill
payments needs of the entire spectrum of consumers, the real
market opportunity is significantly greater than that noted above.
Canada's Small Cap Investment Bank
2 – TIO Networks Corp.
Company Overview
April 11, 2011
Founded in 1997 and based in Vancouver, British Columbia, TIO
Networks specializes in processing bill payment transactions through a
secure Internet enabled platform (“TIO Transaction Processing
System”). The Company’s expedited bill payment processing platform
combines software platforms and payment processing capabilities to
serve the financial needs of the cash-preferred consumer marketplace in
North America.
With over 410,000 billers in its network and more than 58,000 location
end-points connected to its processing platforms, TIO has become an
established multi-channel (Point Of Sale, automated Kiosk, Mobile and
Online) provider of convenient payment solutions primarily for the
unbanked and underbanked population. With the launch of Mobile and
Online payment solutions, the Company has moved up the supply chain
to provide bill payment solutions to meet the needs of the entire
spectrum of North American consumers. TIO currently processes ~$1
billion per year in transactions.
TIO has close to 60 employees. The Company went public via an IPO on
the TSX Venture Exchange in 1999 under the name Info Touch
Technologies Corp., which was subsequently changed to TIO Networks
Corp. in April 2006. The management team is led by Chairman,
President & CEO, Mr. Hamed Shahbazi, who has been with TIO since
inception. He holds ~2.1 million shares (4.6% of total shares).
Institutional holding currently stand at ~31%, while management and
insiders own ~6% of total outstanding shares.
How Does TIO’s Ecosystem Work?
In all cases where a consumer uses TIO to make a payment (~99% cash
transactions), the transaction is processed via TIO’s secure cloud-based
platform, which is integrated with the accounting back-office of its biller
partners (e.g. telecoms, utility providers, etc.). This enables TIO to post
payments made by the billers’ customers accurately, directly and
expeditiously to the appropriate customer accounts. Supported by a small
transaction fee ($2.00 to $3.00 per transaction shared by TIO, the biller
and the retail partner), this integration provides cash-preferred customers
with the ability to pay their bills faster and securely using convenient
access points provided through multiple channels and at multiple
locations. This also provides additional revenue for billers and location
partners that use TIO’s platform.
TIO can own the payment infrastructure (“Platform + Processing”) or,
alternatively, have its API integrated with a host of third-party devices
(“Processing Via API Only”), as shown in Figure 1).
Figure 1: TIO Networks Ecosystem
WIRELESS
UTILITY
CABLE
DIRECT
CONTRACTED
BILLERS
OTHER
IPP/
ETAVANTE
ONLINE
RESOURCES
IPP/
RRPS
ONLINE
RESOURCES
IN-DIRECT
CONTRACTED
PAYMENT
ORIGINATION
PAYMENT
TERMINATION
PLATFORM +
PROCESSING
BILLER
AGGREGATION
PREPAID DEBIT CARD SALES
KIOSKS
SELF
SERVICE
NON
CONTRACTED
IVR
WEB
PHONE APP
MONEY TRANSFER
PREPAID DEBIT CARD SALES
PREPAID RELOADS
GIFT CARDS
DONATIONS
TICKET SALES
OTHER PRODUCTS/SERVICES
PROCESSING
VIA API ONLY
NON-BILL PAY
FINANCIAL
SERVICES
AGGREGATION
PREPAID TELECOM / E-PIN
NON
FINANCIAL
AGGREGATION
Source: Company reports
ASSISTED
SERVICE
HYBRID
CONSUMER
DIRECT
BUSINESS
OVER THE
COUNTER
PHONE
CALL
BILL
PAY
CARD
TIO AUTO PAY
MYTIO
Northern Securities Inc.
MONEY TRANSFER
ABILITY TO CREATE PERSONAL PROFILE &
STORE ACCOUNT INFO FOR
EASY BILL PAYMENT
DIRECT TO CONSUMER MARKETING
Sameet Kanade (416) 644-8123
April 11, 2011
TIO Networks Corp. – 3
1. TIO Networks-owned payment infrastructure: includes self-service
kiosks and clerk-assisted (“TIO Express”) point-of-sale terminals that
are deployed and/or activated in convenient retail locations and
collect cash and/or process bill payments via TIO’s integration with
the biller in question. The self-service kiosk’s touch screen interface
enables customers to insert cash directly into the kiosk’s cash
acceptor, where it is accepted and authenticated in real-time (Figure
2). Transactions are securely completed and all payments are
posted quickly to the customers’ accounts using TIO’s platform.
Customers then have the option to print and/or e-mail their receipt.
TIO Express allows retailers to accept cash payments for multiple
billing partners through a web-based application or through the
retailers’ own POS systems. Retail clerks can assist customers to
access their accounts and view balances. Once a payment is made,
TIO Express registers and records the transaction.
In essence, TIO Express combines the convenience of in-person
customer service with real-time posting to personal accounts, as well
as providing retailers that cannot support a self-serve kiosk with the
opportunity to accept payments through TIO at a lower deployment
cost.
Figure 2: TIO Networks Self-Service Kiosk
Upper Display
Touch Screen
Debit Card Swipe
Receipt Printer
Bill Acceptor
Lower Display
Source: Company reports
2. Third-party payment infrastructure: includes the TIO transactional
API that processes payments originated through third-party selfservice kiosks, IVR (Interactive Voice Response), the internet, mobile
applications, over-the counter and phone-call assistance, and bill
pay cards with the biller in question. As TIO does not own and,
therefore, is not required to provide any upfront capital costs, the
portion of transaction fee that the Company receives is lower than it
would be if it owned the hardware infrastructure (i.e. Kiosk, POS).
TIO integrates its transaction processing system with direct
contracted billers for customers to pay their wireless, utility, cable
and telecommunication bills; however, customers also use these
various platforms to process payments for a variety of non-bill
financial services such as money transfers, prepaid debit card sales,
prepaid reloads and gift cards (please refer to Figure 1).
Sameet Kanade (416) 644-8123
Northern Securities Inc.
4 – TIO Networks Corp.
April 11, 2011
Additional Services
Although TIO’s principal revenue driver is the pay-per-use transaction
fee from bill payments (~98% of revenue), it also provides additional
services, which include kiosk systems sales and related service
(hardware, software and implementation services related to the initial
sale of the Company’s kiosks), professional services and maintenance
services. We do not expect significant incremental revenue from these
additional services. Hence, the focus of our report is on transaction
revenue generated by TIO.
Recent Breakthrough in Transaction Volumes
Despite the economic slowdown witnessed during 2009 and 2010, TIO
has achieved significant breakthroughs in the number of transaction
end-points within its processing network that are being
configured/activated and transacted by consumers.
Since FQ3-08 (April 2008), TIO has gone from ~4,000 end-points
activated to 58,600 to date (including 35,000 MoneyGram agent locations
added Feb 2011), representing a 3-year CAGR of ~145%. During the
same period, the number of end-points transacted on has almost tripled,
from 3,300 transacting end-points to an estimated 11,000 to date,
representing a 3-year CAGR of 50% (Figure 3). Although currently less
than 20% of the end-points are actually transacted at, we expect growth in
transaction volumes and biller customers, and introduction of new
distribution channels, to drive an increase in transacting end-points.
Figure 3: Number of End-points Activated vs. Transacting
58,603
60,000
Locations Configured/Activated
Locations Transacted
50,000
40,000
End-points transacting 3-yr CAGR: 50%
30,000
20,055
20,000
21,658 21,803
23,982
25,558
13,261
11,815 12,339 12,577 12,959
10,000
2,749
0
2,436
3,235
2,895
3,983
3,321 5,427
6,588
6,813
7,160
7,623
8,617
9,085
9,584
9,704
9,651
11,036
Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11
Note: Q2-11 locations transacted based on NSI estimates
Source: Company reports, NSI
Industry Drivers & Market Size
Significant addressable market – 18 % of US
households are underbanked (~21 million) and
8% are unbanked (~9 million)
Since TIO is focused on providing expedited payment services to the
cash-preferred consumer marketplace in North America, the underbanked
and unbanked population is a key target market. We note that the
Company has moved up the value chain to provide solutions to meet the
bill payment needs of the entire spectrum of consumers. However, we
believe these additional opportunities are more mid-to-long term focused.
According to the Federal Deposit Insurance Corporation (FDIC), the
underbanked population is defined as US consumers who have a
checking or savings account but rely on alternative financial services; the
unbanked population does not have any form of bank account.
Combined, at least 25.6% of US households, or ~30 million, are either
unbanked or underbanked, which we believe presents a significant
addressable market for TIO’s services. Much of the unbanked and
underbanked communities are in situations where they cannot pay their
bills through a convenient banking solution, or they have poor credit
Northern Securities Inc.
Sameet Kanade (416) 644-8123
April 11, 2011
TIO Networks Corp. – 5
histories that make it more practical for them to pay bills in cash. We
highlight that TIO’s strategy of expanding its network of billers,
increasing the number of locations where self-service kiosks are
deployed and creating a diverse platform that enables a convenient
payment solution, bodes well to target this target audience.
Figure 4: Banking Status of US Households
Underbanked,
17.90%
Unbanked,
7.70%
Banked, but
Underbanked
Status Unknown,
4.10%
Banked, but Not
Underbanked,
70.30%
Source: FDIC National Survey of Unbanked and Underbanked Households
Below are some of the major findings from the FDIC’s Survey of
Unbanked and Underbanked Households reported on May 3, 2010.
Table 1: Unbanked and Underbanked Demographic
Unbanked Population Highlights
Underbanked Population Highlights
7.7% of US households (~9 million) are unbanked.
17.9% of US households (~21 million)
are underbanked.
The
majority
of
underbanked
households go to nonbanks for money
orders and check cashing because it is
convenient.
9 million unbanked households are approx-imately
split between households that have never had a bank
account (46.9%) and households that were
previously banked (49.0%).
A considerable proportion (41.1%) of unbanked
households believes that opening a bank account
in the future is “not likely at all.”
~20% of lower income US households—almost 7
million households earning <$30,000 per year—
do not currently have a bank account. Households
with earnings below $30,000 account for at least
71% of unbanked households.
Source: FDIC National Survey of Unbanked and Underbanked Households. December 2009
As can been seen from the statistics above, there is a significant market
of unbanked and underbanked population – 41% of unbanked
households believe opening a bank account is “not likely at all” and the
majority of underbanked households use non-bank financial services
because it is convenient. All of these conditions bode well for expansion
of TIO’s services and organic growth strategy.
As expected, another study highlights that ~50% of the underbanked
population uses cash as their primary method of payment, with a debit
card and credit card (18% and 15%, respectively) constituting the other
two most common forms of payment (Figure 5).
Figure 5: Consumer Spending By the Underbanked
(national study of 2,799 underbanked adults)
60%
51%
50%
40%
30%
18%
20%
10%
10%
10%
2%
2%
1%
Prepaid
Card
Payroll
Card
2%
6%
0%
Cash
Money Credit
Debit
Order
Card
Card
Source: Center for Financial Services Innovation
Sameet Kanade (416) 644-8123
Check
Food None of
Stamps These
Northern Securities Inc.
6 – TIO Networks Corp.
April 11, 2011
Although only marginally different, research firm Aite Group suggests
that cheques, cash and money orders are the primary bill payment
methods used by unbanked and underbanked consumers and that 32%
of unbanked and underbanked bill payments are made by cheque, 30%
by cash and 21% by money order.
The Expedited Market
Currently, the expedited bill market, a $1.4 billion per year industry, is
growing at 24% per year and has 35 million households using these
services (source: Javelin Research). Furthermore, the expedited
payment industry is estimated to increase at 5-year CAGR of 13% if the
economy improves and a 5-year CAGR of 5% per year if the economy
continues to struggle (Figure 6).
Millions of US Households Using
Expedited Payments
Figure 6: Expedited Payment Forecast According to Economic Condition
70
50
30
34
34
28
41
39
37
36
55
49
43
38
40
20
63
If Economy Improves
If Economy Continues to Struggle
60
43
22
10
0
2005A
2006A
2007A
2008A
2009E
2010E
2011E
2012E
2013E
Source: Javelin Strategy and Research
However, a conservative view is that the amount of dollars spent on
expedited payments will likely remain relatively constant over the next 45 years (Figure 7).
Figure 7: Forecast of Amount of Dollars Spent on Expedited Payments
Billions of Dollars Spent
on Expedited Payments
$1.6
$1.4
$1.4
$1.3
$1.2
$1.0
$0.8
$0.6
$1.1
$1.1
2009A
2010E
$1.1
$1.2
$1.2
$1.2
$0.7
$0.4
$0.2
$0.0
2006A
2007A
2008A
2011E
2012E
2013E
2014E
Source: Javelin Strategy and Research
In our opinion, even if growth in the dollar amount of expedited
payments remains flat over the next couple of years, TIO’s organic
growth strategy should drive higher revenues. We highlight that the
Company is aggressively expanding its cash-preferred customer base
by providing more convenient locations and means to pay bills through
increased deployment of TIO enabled locations (e.g. the MoneyGram
deal), by developing new access channels and increasing the number of
billers in its network. Utilizing a bear case scenario, even if the number
of people requiring expedited payments does not increase significantly
over upcoming years, we believe there will still exist a large population
that opts to pay their bills in cash, regardless if they are expedited or not.
Supported by an increase in the number of biller customers, we believe
this aspect bodes well for TIO.
Northern Securities Inc.
Sameet Kanade (416) 644-8123
April 11, 2011
TIO Networks Corp. – 7
Finally, we note that more than 70% of consumers have a preference for
making expedited payments directly with billers (Figure 8). This is
because consumers typically believe that a financial institution or other
third-party provider will not be able to post the payment and ensure the
account is in good standing. This is a positive sentiment for TIO, as its
integrated network provides it with direct connect relationships with
some of the largest telecom, wireless, cable and utility bill issuers, which
may be comforting to consumers when they are paying their expedited
bills. In essence, we believe expedited service has become a state of
“convenience” rather than a necessity based on financial need.
Figure 8: Venue for Expedited Bill Payment among Consumers
Another
institution, 1%
A bank or credit
union, 27%
Directly with the
biller, 73%
Source: Javelin Strategy and Research
To conclude, we note there is a significant addressable market
cash-preferred payment alternatives such as TIO’s. In our opinion,
current level of network developed by TIO is a strong indicator of
strength of the platform and, looking ahead, expected growth of
core business.
Organic Growth Strategy
Penetrate the cash-preferred consumer
marketplace by offering convenient and diverse
expedited payment solutions
for
the
the
the
TIO’s organic growth strategy is focused on establishing the Company as
the de-facto transaction processor and service provider of expedited bill
payments that primarily serve the financial needs of the underbanked and
unbanked population towards achieving sustainable and profitable growth.
The new initiatives (mobile and online solutions) are intended to
leverage current capabilities towards expanding target markets, which
cover the bill payment needs of the entire marketplace.
The three key elements of TIO’s growth strategy are:
1. Acquire relationships with new biller clients and location partners –
EXPAND TRANSACTION PROCESSING NETWORK;
2. Service a variety of new distribution channels (self-service, clerkassisted, mobile applications, online, integrated voice response,
etc.) – INFLUENCE ADOPTION; and
3. Develop a strong transaction, fee-based, recurring revenue business
model without onerous CapEx requirements – INCREASE
ECONOMIES OF SCALE AND REDUCE TRANSACTION COSTS
FOR CUSTOMERS
1. Acquire relationships with new biller clients and location partners – EXPAND TRANSACTION PROCESSING
NETWORK
Thus far, TIO has achieved significant success in increasing the number
of biller clients and location partners within its network. The Company
has over 10,000 billers connected to its back-office host capable of
supporting the bill payment needs of the vast majority of the US
population, as well as more than 58,000 location end-points in its
transaction processing network, primarily in the US (Figure 9).
Sameet Kanade (416) 644-8123
Northern Securities Inc.
8 – TIO Networks Corp.
April 11, 2011
A key example of this is the recent addition of MoneyGram Int., a leading
global payment services company. This alliance has enabled TIO to
expand its network to an additional 35,000 MoneyGram agent locations
across the US. Via this agreement, cash-preferred customers can make
payments to select wireless, utility and cable providers previously
unavailable at MoneyGram locations.
Figure 9: More Than 58,000 Transaction End-Points in the TIO Network
Source: Company reports
Sticky Biller Client Relationships
TIO provides billers with an end-to-end solution for its bill payment
services by developing and managing the biller’s Self Service Bill
Payment Solution. This enables its customers to focus on their core
business. We believe a key element in this relationship is TIO’s ability to
provide support service to its billers due to its relationships with the
largest field service and cash management companies in the US.
We highlight that the Company’s two largest clients in its biller network
are Cricket Communications and AT&T, who accounted for 66% and
20%, respectively, of TIO’s transactional revenue in F2010. Hence, at
least ~86% of TIO’s revenue is derived from the wireless segment and
represents customer concentration risk.
Extensive Portfolio of Location Partners
An integral component of TIO’s strategy is to increase the number of its
locations where cash-preferred consumers can pay their bills, thereby
increasing the convenience factor aimed at forcing/influencing its biller
customers to adopt TIO as its primary transaction processor for
expedited payments (thus driving transaction volume). We highlight that,
as TIO splits part of the transaction fee with participating retailers, there
is an incentive for retailers to provide TIO at its locations and generate
an additional stream of transaction revenue. There is also value for these
partners, as consumers who use TIO services are likely to browse and
buy other products before leaving.
We highlight that TIO has entered into agreements with some of the
largest US store chains including Exxon Mobil (Tiger Market and On the
Run stores), Couche-Tard (Circle K stores), Albertsons, Best Buy and
now MoneyGram, enhancing its portfolio of location partners and,
therefore, expanding its footprint of transacting end-points. Although
some of its biller partners, such as AT&T and Cricket, have deployed TIO
kiosks at their retail locations, the majority of TIO’s activated end-points
Northern Securities Inc.
Sameet Kanade (416) 644-8123
April 11, 2011
TIO Networks Corp. – 9
(over 53,000 end-points) are from its API relationships where only the
transaction processing is done by TIO as part of its OEM solution.
We note that the Company already has agreements with large, wellknown payment networks such as IPP of America (Softgate Systems),
Budget Prepay, Ace Cash Express and Dollar Express, allowing TIO to
leverage these existing partnerships and increase its exposure within
these networks (i.e. Softgate alone has over 17,000 locations across the
US). We highlight that this “OEM Express” distribution model is
significant as it permits large networks to plug into TIO’s application
programming interface and add TIO's bill payment products to their
agent networks, increasing TIO’s front-end distribution network without
additional CapEx, as well as marketing the Company’s portfolio of
payment products.
Top location partners by size:
1.
2.
3.
4.
5.
6.
IPP of America (Softgate Systems)
Budget Prepay
ACE Cash Express
Dollar Express
MoneyGram International
Couche-Tard (Circle K)
2. Service a variety of new distribution channels (self-service, clerk-assisted, mobile applications, online,
integrated voice response etc.) – INFLUENCE ADOPTION
The second key element in TIO’s growth strategy is the focus on delivery
of new distribution channels and convenient modes of payment to serve
the cash-preferred consumer marketplace and influence adoption of its
expedited transaction services.
To date, the majority of the Company’s activated location end-points are
within its OEM partners’ networks (i.e. third-party owned kiosks that offer
TIO expedited payments under their brand name), which comprise
58,000 total locations (Figure 10).
Although this is the largest and fastest growing segment of its
network, TIO has diversified its payment platform and expanded into
the Web/IVR and mobile platforms, which we expect will capture
further market share and transaction volume in the future.
Figure 10: Growth Strategy Evolution
BILLERS
SELF
SERVE
1,500
Over The
Counter
3,300
OEM
WEB/IVR
15,500
500 banks
Mobile
Self Serve (~1,500 end-points)
ƒ TIO-owned and third-party owned kiosks
OTC (~3,300 end-points)
ƒ Clerk-assisted POS
OEM (~53,000 end-points)
ƒ API relationships (i.e. Ace Cash Express, IPP of America,
etc.) where only the processing is done by TIO
Web/IVR (~500 end-points)
ƒ API relationships with banks
Source: Company Reports
Historically, TIO has offered the majority of its payment services through
walk-up, self-serve and clerk-assisted, kiosks, which represent ~20% of
Sameet Kanade (416) 644-8123
Northern Securities Inc.
10 – TIO Networks Corp.
April 11, 2011
the expedited payment market and a significant source of transaction
revenue and volume (~45% of transacted location end-points) for TIO.
According to ABI (an industry research firm), there are expected to be
more than 2.6 million financial kiosks worldwide by 2013, with more than
50% of them in the US, representing significant potential for TIO to
expand its services within the walk-up payment channel.
Figure 11: Expedited Payment Market By Platform
Overnight
Mail/Rush
Delivery, 8%
Mobile Phone,
3%
Other, 2%
Online through
a Web Site,
38%
Walk-up/In
Person, 17%
Phone
Call/IVR, 32%
Source: Javelin Strategy and Research
Although the walk-up channel is an important source of recurring
revenue for the Company, TIO has also begun to diversify its distribution
channels by offering expedited payment solutions through online
channels accessed via web sites as well as through its mobile platform,
launched in FQ3-10.
Diversifying The Platform Through Online Bill Payment
We believe online bill payment facilitation can become a significant
growth opportunity for TIO, if the Company continues to diversify its
payment platform.
As online bill payments account for the majority (~40%) of the expedited
market, we believe that leveraging its biller and location partnerships to
increase transaction end-points through this payment medium would
benefit TIO, thereby contributing to a greater user demographic and
larger distribution channel network.
According to Fiserv’s (an industry research firm) Consumer Billing and
Payment Trends 2010 survey, online banking payment continues to
grow exponentially, with the number of households using online banking
increasing more than 6× to ~73 million (80% of all US households with
internet access) between 2000 and 2010. Additionally, the number of
households that use online bill payment increased nearly 8× to 36
million (40% of all US households with internet access). The study also
notes that more than 33% of online bill payers had a yearly household
income of less than $50,000, demonstrating that this payment method is
growing amongst low-income and, therefore, most likely, cash-preferred
consumers.
Additionally, the electronic payment industry is growing in response to
the decline of paper cheques, which decreased from 61% of all
payments in 2000 to only 26% to date. In contrast, online bill payments
have grown from 12% to 45% of all payments during the same time
period. We believe this bodes well for TIO as it expands its online
payment platform to further incorporate financial institutions into its
network.
TIO has already begun to gain notable success in this area. In 2009 it
signed an agreement with Online Resources Corp. to service more than
500 US financial institutions, allowing bank customers to make timesensitive bill payments to various wireless, utility and cable billing
partners through online banking and bill payment portals.
Northern Securities Inc.
Sameet Kanade (416) 644-8123
April 11, 2011
TIO Networks Corp. – 11
Entirely New Ground in Mobile Bill Payment
Although mobile banking accounts for only 3% of the expedited market,
we believe this area represents a significant growth opportunity for TIO
as more cash-preferred customers adopt newer technologies for
payment.
In May 2010, TIO announced that it would begin providing a mobile bill
payment platform that will allow ~6 million energy customers (through a
contract with Pacific Gas and Electric Co.) in northern and central
California to make bill payments using their iPhone OS (and later,
Android-based devices). This application allows customers to make
expedited payments using their credit or debit cards (for less than
$2.00), as well as through their bank accounts (and eventually through
PayPal). Pacific Gas and Electric predicts that ~100,000 customers of its
15 million customer base may pay their bills using this app. We believe
that the significant growth potential in this payment platform bodes
extremely well for TIO as it will enable the Company to expand its
transaction location footprint as adoption of mobile payments becomes
mainstream.
According to Fiserv’s 2010 survey, in only two years the number of
mobile phone users who conducted one or more banking services via
their mobile phone increased from 23% in 2008 to 30% in 2010.
Furthermore, the number of mobile banking users who receive or pay
bills via their mobile phone increased from 18% to 30% in the same
period, as a result of increasing adoption of Smartphones. From a
global perspective, Frost and Sullivan notes that worldwide mobile
penetration continues to increase at a robust pace, with more than 50%
of the planet expected to have at least one mobile device by 2013,
representing an additional 865 million subscribers since 2009. We also
believe that the unbanked and underbanked population will have a
greater propensity to utilize TIO’s mobile payment platform compared to
banked consumers. According to Javelin Strategy and Research, 68% of
the underbanked population owns a mobile phone and 16% of these are
Smartphones, which is almost the same rate (20%) for all consumers
(Figure 12).
Figure 12: Mobile Phone and Smartphone Access for Unbanked,
Underbanked, All Consumers
All Consumers
60%
Underbanked
20%
57%
38%
Unbanked
16%
9%
Mobile feature phone
Smartphone
0%
10%
20%
30%
40%
50%
60%
Percentage of Consumers
70%
80%
90%
Source: Javelin Strategy and Research
Working Towards a Solution in IVR
To date, interactive voice response (IVR) payment platforms represent
~30% of the expedited market, the largest segment after online payment
through a web site.
TIO is developing a solution that will allow customers to pay their bills
through IVR, which will provide an additional convenient payment
solution for cash-preferred customers. Under this platform, consumers
Sameet Kanade (416) 644-8123
Northern Securities Inc.
12 – TIO Networks Corp.
April 11, 2011
will be able to make a phone call and use their prepaid debit or credit
cards to make expedited payments. According to industry research firm,
DMG Consulting LLC, the IVR market is growing rapidly due to strengths
in new applications and product innovation from managed service
providers. We believe that IVR is a viable payment solution for TIO to
incorporate into its platform as this adoption is increasing and will
provide another avenue to diversify TIO’s platform.
3. Develop a strong transaction fee-based recurring revenue business model without onerous CapEx
requirements – INCREASE ECONOMIES OF SCALE AND REDUCE TRANSACTION COST FOR CUSTOMERS
TIO has adopted a royalty-based business model that supports a strong,
recurring revenue business model combined with a low-CapEx strategy,
thereby positioning the Company to achieve a sustainable source of
revenue and scale.
TIO’s transactional revenues are based on premiums charged to
customers for using TIO’s payment services and this premium is shared
by the biller partner, location partner in question and TIO. The fees vary
according to which partner’s infrastructure is in use and what biller
partners charge, but the average fee is less than $3.00/transaction
shared amongst the partners. Compared to its OEM strategy, where
there is no capital outlay, TIO earns less on a gross basis but equal on a
net basis. Furthermore, some payments are customer funded and the
billers’ pay for their customers’ transactions and some companies, such
as public utilities, charge less.
We note that the majority of transaction location end-points are part of
TIO’s OEM strategy (~58,000 end-points), which includes API
relationships with various partners where only the processing is done by
TIO; this allows the Company to leverage its technology and employ a
“light” CapEx model, as it does not need to provide upfront costs for its
kiosks. Through this model, TIO is well positioned to increase its
economies of scale and reduce transaction premiums for customers in
the future.
Competitive Dynamics – Highly Fragmented
Although a wide variety of ways are available for customers to pay their
bills, such as through walk-up kiosks, online through websites, IVR,
mobile and the phone, most of TIO’s competitors offering these services
provide them as part of a larger and more diverse product portfolio,
primarily focusing on online bill payment solutions and other services
outside the bill payment market.
TIO. on the other hand. is focused on expanding its distribution
channels (i.e. mobile, IVR, self-service kiosks, etc.) to establish itself as a
leader in the expedited bill payment market by offering a payment
solution that is more convenient and affordable than that of its
competitors. Furthermore, TIO maintains a competitive edge by offering
guaranteed expedited payments whereas many other transaction
processors do not offer expedited payments. We note that TIO charges
very low transaction fees compared to some of its peers, which
facilitates adoption.
Some of the larger vendors within the transaction-processing arena
include Fiserv, InComm, Euronet, Western Union and Choice Pay.
ƒ Fiserv
(NASDAQ:FISV) is a global provider of information
management and e-commerce systems for the financial services
industry. Founded in 1984, it has ~200 locations worldwide,
Northern Securities Inc.
Sameet Kanade (416) 644-8123
April 11, 2011
TIO Networks Corp. – 13
generating ~$4.0 billion in annual revenue. As a significantly larger
vendor than TIO, with over 16,000 clients worldwide, Fiserv also
delivers a wide array of solutions beyond core bill payment services,
such as risk and compliance solutions, customer and channel
management and optimization and consulting. While Fiserv does offer
comparable payment and access platforms to its customers relative
to TIO’s, we highlight that TIO is more focused on targeting the cashpreferred consumer marketplace and bill payment market – a niche
subset of the overall market. Furthermore, the convenience premium
of ~$3 per transaction charged by TIO and its partners is lower than
Fiserv’s, which bodes well for TIO’s focus on increasing its subscriber
base as cash-preferred consumers are more likely to choose a low
cost alternative.
ƒ ChoicePay (a subsidiary of Tier Technologies; NASDAQ:TIER),
one of the closest comps for TIO, is also focused on the bill payment
market. However, we believe its network is still in the infancy stage as
it only has 27 billers in its network whereas TIO has more than 4,000,
making it more popular with consumers as they have multiple access
channels to pay a larger variety of their bills. TIO also offers a 24-hour/
7-days-a-week bill payment option on self-serve kiosks, whereas
ChoicePay’s network only processes bills between 9 am and 8 pm.
Resultantly, this gives TIO an advantage in RFPs to win new contracts
with various billers.
ƒ Founded in 2006, Western Union (NYSE:WU) provides money
transfer and payment services across 410,000 agent locations
worldwide. While Western Union is significantly larger, its bill payment
solution is not competitive to TIO’s. Through its Quick Collect service,
the Company’s money transfer platform, customers pay a fee of
$15.00 per transaction, whereas TIO provides this service for a much
lower, $3.00 per transaction. In addition, Western Union’s service
requires that the customer receive a Money Transfer Control Number
upon receipt as confirmation that the payment was sent to the biller,
which the customer can then use to contact the biller and confirm
receipt of the payment. TIO’s solution bypasses this additional step,
as its network is fully integrated with the back-end of its billers and a
receipt of payment is provided after the transaction is completed.
ƒ Founded in 1989, First Data Corporation (formerly, American
Express Information Services) provides e-commerce and payment
solutions for merchants, financial institutions, commercial
establishments, consumers and card issuers worldwide. In terms of
product portfolio, the company offers an extremely differentiated and
wider solution and service range relative to TIO. However, First Data
does not focus on solutions for the cash-preferred market, which is
TIO’s core competency.
Some of the key smaller players include eServGlobal (ASX:ASX), a
provider of Mobile Money solutions and Value-Added Services, primarily
in Europe and South America with limited presence in North America;
VersaPay (TSXV:VPY), a Canadian provider of payment processing
solutions that targets primarily SMBs; and Softgate Systems, a USbased provider of electronic payment services.
While there are several vendors, both large and small, providing a
variety of bill payment services to customers (the list above can easily be
extended to another 15 companies), we believe that TIO is one of the
few vendors solely focused on the bill payment market. This has led to
the development of a strong platform, as evidenced by TIO’s sizeable
Sameet Kanade (416) 644-8123
Northern Securities Inc.
14 – TIO Networks Corp.
April 11, 2011
customer portfolio and location presence. In addition, TIO offers an
expedited bill payment option, which is a unique offering in the market.
To conclude, we believe TIO is well positioned to grow both its customer
base and transactional volume as it offers competitive pricing and a
convenient and differentiated platform.
Recent Customer Win Announcements
ƒ February
28, 2011: TIO announced a strategic alliance with
MoneyGram International to offer expedited bill payment services at
more than 35,000 MoneyGram agent locations across the US.
ƒ February
22, 2011: TIO and Carolina West Wireless (CWW)
announced a business relationship to provide Carolina West Wireless
dealers with TIO Express, TIO’s “over the counter” real-time bill
payment service platform.
ƒ February 14, 2011: TIO announced the launch of the Pacific Gas and
Electric Company’s (PG&E) “mobile bill pay app”. This mobile
payment app is an industry first by a major utility and provides up to 6
million PG&E customers in northern and central California with the
convenience of paying their utility bills on an expedited basis through
their iPhones and iOS devices.
ƒ October
25, 2010: TIO announced that it had expanded its
partnership with IPP of America (IPP) and iSend to provide consumers
with easy access to cross border bill payment services at participating
convenience store and retail locations in the TIO network.
ƒ July 21, 2010: TIO and Florida Turnpike Enterprises (FTE) partnered
to provide payment services to FTE customers in the State of Florida.
ƒ May 25, 2010: TIO announced a multi-year exclusive agreement to
provide real-time consumer bill payment service for Mobilicity
customers in Canada.
Financings
Despite the relative infancy of operations, the Company has raised
limited capital since incorporation, which underscores the management
style and focus of the current team of achieving a sustainable and
profitable level of growth without significant dilution. The last five
financings are noted below:
ƒ April 22, 2008: TIO raised $3.65 million through issuance of 4.87 million
shares. The “bought deal” included a syndicate of underwriters led by
PI Financial and included GMP Securities. Proceeds from the private
placement were to be used for general working capital purposes.
ƒ May 4, 2006: TIO raised $7.0 million at an issue price of $0.95 per
share through the issuance of 7.37 million shares. The “bought deal”
included a syndicate of underwriters led by GMP Securities and
included PI Financial The proceeds were to be used for general
working capital purposes.
ƒ October 6, 2005:
TIO (then Info Touch Technologies) raised $5.1
million through the issuance of 7.8 million shares at an issue price of
$0.65 per share. The proceeds were to be used for general working
capital purposes. The offering was led by GMP Securities and
included PI Securities as a syndicate member.
ƒ April 8, 2005: TIO (then Info Touch Technologies) raised $2.1 million
through the issuance of convertible unsecured promissory notes. GMP
Securities acted as agent in respect of the financing.
Northern Securities Inc.
Sameet Kanade (416) 644-8123
April 11, 2011
Financial Estimates
TIO Networks Corp. – 15
A Lot Positives Thus Far
ƒ TIO has demonstrated significant acceleration in transaction volumes
during the LTM period (Figure 13). Transaction volume increased to
3.8 million in FQ2-11, +6.4% Q/Q and +89.5% Y/Y, driven by both
increases in customer wins and locations transacted. Resultantly,
recurring revenue (~98% of total revenue) has increased each and
every quarter to $8.8 million in FQ2-11 from $5.5 million in FQ1-11.
Figure 13: Transaction Growth, Revenue Per Transaction and Recurring
Revenue
$3.50
10.00
9.00
$3.00
8.00
$2.50
Millions
7.00
6.00
$2.00
5.00
$1.50
4.00
3.00
$1.00
2.00
$0.50
1.00
-
$0.00
Q1-08 Q2-08 Q3-08 Q3-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11
Total Number of Transactions
Total Recurring Revenues
Revenue Per Transaction
Source: Company reports, NSI
ƒ While the above chart indicates a decrease in revenue per transaction,
impacted by lower margin transactions, we believe this trend has been
negated in the last three quarters due to the expansion into new
channels (online and mobile). Going forward, we expect these levels
to at least be maintained as transaction growth accelerates.
ƒ While EBITDA levels have remained inconsistent (due partly on
account of FX), TIO has generated positive EBITDA for more than 10
quarters in a row. Given the relative size of the Company, we believe
this indicates the fiscal prudency of the current management team.
On a LTM basis, the Company has generated EBITDA of $1.2 million
(3.5%, and we expect margins to stabilize beyond F2012 once
operating leverages materialize.
ƒ Resultantly, cash flow from operations has been positive for seven of
the last ten quarters, impacted only by marginal increases in working
capital requirements on the back of increased transaction volumes.
During the LTM period, CFO was $0.6 million, while free cash flow was
$0.1 million. During recent years, TIO has significantly reduced its
CapEx, which peaked at ~$4.0 million F2006 and, since then, has
steadily decreased to less than $0.5 million per year. Going forward,
we do not expect any significant increase in CapEx as the Company is
focused on increasing its footprint through TIO Express (clerk-assisted
transactions) and the API licensing program. This is expected to
further reduce the need to fund any potential deployment of kiosks.
However, Certain Headwinds Remain
ƒ FX risk remains a key headwind for TIO.
The Company generates
more than 95% of revenue in US dollars and the strengthening of the
Canadian dollar (the reporting currency) has diluted the strong top-line
growth achieved thus far. While incurrence of more than 90% of direct
costs in US dollars does provide a natural hedge, we believe the
Company may be forced to implement some hedges in the future to
protect margins, given the expectation for further appreciation of the
Canadian dollar.
Sameet Kanade (416) 644-8123
Northern Securities Inc.
16 – TIO Networks Corp.
April 11, 2011
ƒ With increased competition and the likelihood of entry by one or two
major US software companies during the next 12-24 months, the
Company may face challenges to maintain the rapid customer
wins/adoption witnessed during the last two years. This risk, we
believe, is adequately reflected in our forecasts.
Key Forecast Assumptions
Our forecasts are based on the following key assumptions:
ƒ While revenue per transaction decreased to the sub-$2.25 level last
quarter, from more than $3.00 in FQ2-09, we believe the Company can
maintain existing levels going forward. Resultantly, we have utilized
revenue per transaction of $2.25 for F2011 and F2012.
ƒ Based on expectations for an increased number of transactions per
location, with the addition of more biller customers, we expect
transactions per location to increase to 360 per quarter in F2012, from
350 currently, and continued marginal increase thereafter.
ƒ We estimate that gross margins will remain flat at the 21% level going
forward, despite the focus on new channels (online and mobile). We
believe this is a conservative approach, given the limited visibility
currently provided by the Company.
ƒ While the Company has stopped reporting the “locations transacted at”
metric since FQ2-11 for competitive reasons, we estimate an increase in
locations transacted at to 11,500 by FQ4-11 and 15,700 by FQ4-12. This
represents a marginal increase from the 9,651 reported in FQ1-11.
F2011 and F2012 Estimates
Our F2011 and F2012 estimates are as follows:
ƒ Total revenue to increase to $35.4 million in F2011 (+27.6% Y/Y) and
$45.1 million in F2012 (+27.3%), driven by an increase in transacting
locations to 11,500 and 15,700, respectively.
ƒ EBITDA of $1.2 million (3.4% margin) in F2011, an increase of 130%
Y/Y, driven primarily by top-line growth. Our F2012 EBITDA estimate is
$2.4 million (5.3% margin).
ƒ With amortization of Kiosk infrastructure expected to remain at current
levels during F2011 and F2012, we estimate EPS of ($0.02) and $0.01
during the next two fiscal years.
Valuation
$1.00 per share based on DCF valuation.
We have valued TIO using a DCF analysis as the Company is at an early
stage in its development cycle. Utilizing a discount factor of 12.5%,
much higher than the 8% utilized for more mature companies, and
terminal growth rate of 2.0% from year 10 onwards, we arrive at a
valuation of $1.00 per share. This includes key assumptions as
mentioned in the forecast section. We highlight that our forecasts utilize
conservative estimates. The terminal multiple is 9.7× in 2020.
Northern Securities Inc.
Sameet Kanade (416) 644-8123
April 11, 2011
TIO Networks Corp. – 17
Table 2: DCF Valuation ($ millions, except per share data)
2011E
2012E
2013E
2014E
2015E
Revenue
Y/Y Growth
EBITDA
% of revenue
EBIT
$35.4
27.6%
$1.2
3.4%
($0.6)
$45.1
27.3%
$2.4
5.3%
$0.7
$60.5
34.3%
$5.1
8.5%
$4.9
$73.9
22.0%
$7.6
10.2%
$7.4
$82.7
12.0%
$9.1
11.0%
$8.9
Free Cash Flow
Y/Y Growth
$0.6
NM
$1.7
162%
$3.3
92%
$4.7
45%
$1.3
$2.3
$3.0
Present Value of FCF
Valuation
PV of FCF
Less: Debt
Add: Cash
Equity Value
Shares outstanding
Equity Value Per Share
$0.6
2016E
2017E
2018E
2019E Terminal Yr
$5.9
25%
$6.5
10%
$7.1
10%
$7.5
5%
$7.9
5%
$76.4
$3.3
$3.2
$3.1
$2.9
$2.7
$23.5
Implied Multiple
9.7×
$45.9
$0.0
$2.7
$48.6
46
$1.04
Note: 2011E NPV for six months only
Source: Company reports, NSI
Table 3: Sensitivity Analysis
Terminal Growth Rate
WACC
11.0%
11.5%
0.5%
$1.14
$1.08
1.0%
$1.17
$1.11
1.5%
$1.21
$1.14
2.0%
$1.25
$1.17
2.5%
$1.29
$1.21
3.0%
$1.34
$1.25
3.5%
$1.39
$1.30
4.0%
$1.46
$1.35
12.0%
12.5%
13.0%
$1.02
$0.97
$0.92
$1.05
$0.99
$0.94
$1.07
$1.01
$0.96
$1.10
$1.04
$0.98
$1.13
$1.07
$1.01
$1.17
$1.10
$1.04
$1.21
$1.13
$1.06
$1.25
$1.17
$1.10
13.5%
14.0%
$0.88
$0.84
$0.90
$0.85
$0.91
$0.87
$0.93
$0.89
$0.95
$0.91
$0.98
$0.93
$1.00
$0.95
$1.03
$0.97
Source: NSI
As a check, we have also utilized an EV/EBITDA multiple basis for
valuation. Based on our estimates, we expect the Company to reach a
sustainable EBITDA level from F2015 onwards. Utilizing 10× EV/EBITDA
and applying a discount rate of 12.5%, we arrive at value per share of
$0.93, which is in line with our valuation.
Table 4: EV/EBITDA Valuation ($ millions, except per share data)
2011E
2012E
2013E
2014E
2015E
$1.2
$2.4
$5.1
$7.6
10.0×
$75.6
$9.1
10.0×
$91.1
Cash
$12.0
$17.8
Equity value
Total shares
$63.6
46.4
$73.3
46.4
EBITDA
Multiple
EV
Value per share
$1.37
$1.58
Value per share discounted at 12.5%
$0.91
$0.93
Source: NSI
Investment Risks
Currency Risk: As the majority of revenue is derived in US dollars, FX is
a significant source of risk. Complicating this matter is that some
expenses are incurred in Canadian dollars and financial statements are
reported in Canadian dollars. The Company has implemented a hedging
strategy to mitigate the FX risk going forward.
Customer Concentration Risk: AT&T and Cricket Communications
accounted for 20% and 66%, respectively, of TIO’s revenue in F2010,
which indicates a high level of customer concentration. Based on
management’s outlook, we believe that the degree of dependence will
decline as the TIO expands its biller network and payment platforms.
Sameet Kanade (416) 644-8123
Northern Securities Inc.
18 – TIO Networks Corp.
April 11, 2011
Furthermore, AT&T and Cricket have been long-time partners of TIO
Networks and we do not expect this relationship to be compromised.
Infrastructure Risk: As demand for TIO’s services increases, the
Company may be required to make changes to its systems architecture,
resulting in possible interruptions in its services, which may impact
customer satisfaction levels.
Economic Risk: If the economic situation turns bearish, a decline in
consumer spending may impact transaction volumes and revenue.
However, we note that during unfavorable economic conditions, more
customers may become cash-preferred and use TIO’s payment
platform.
Equity dilution risk: In the event TIO incurs CapEx costs for its selfserve kiosks; we expect an increase in CapEx to coincide with
expansion of the Company’s footprint. Although the Company is also
focused on its OEM strategy, which reduces CapEx spending, we
highlight that additional financing may be needed to increase the
number of locations.
Conclusion and Recommendation
Northern Securities Inc.
Support by a strong management team, prudent fiscal discipline and
rapid growth in transaction volumes, we believe TIO Networks in on the
cusp of accelerated growth. We are initiating coverage with a BUY
recommendation and target price of $1.00 per share, based on a
DCF valuation.
Sameet Kanade (416) 644-8123
April 11, 2011
TIO Networks Corp. – 19
Appendix I: Financial Statements
Tio Networks Corp.
Statement of Operations
2009
Q1-10
(Oct 09)
Q2-10
(Jan 10)
Q3-10
(Apr 10)
Q4-10
(July 10)
2010
Q1-11
(Oct 10)
Q2-11
(Jan 11)
Q3-11E
(Apr 11)
Q4-11E
(July 11)
2011E
2012E
$21,471,403
$15,090,303
$5,158,030
$3,759,038
$5,511,536
$4,107,439
$8,351,687
$6,703,662
$8,749,941
$6,873,831
$27,771,194
$21,443,970
$8,591,194
$6,750,281
$8,727,255
$6,775,832
$8,964,432
$7,095,063
$9,143,171
$7,236,713
$35,426,052
$27,857,888
$45,083,463
$35,596,733
$6,381,100
29.7%
$1,398,992
27.1%
$1,404,097
25.5%
$1,648,025
19.7%
$1,876,110
21.4%
$6,327,224
22.8%
$1,840,913
21.4%
$1,951,423
22.4%
$1,869,370
20.9%
$1,906,458
20.9%
$7,568,164
21.4%
$9,486,730
21.0%
$4,019,704
18.7%
$1,058,468
20.5%
$1,014,675
18.4%
$946,397
11.3%
$1,172,597
13.4%
$4,192,137
15.1%
$1,074,387
12.5%
$1,117,123
12.8%
$1,195,322
13.3%
$1,255,088
13.7%
$4,641,919
13.1%
$5,289,946
11.7%
$774,743
3.6%
$180,407
3.5%
$180,039
3.3%
$179,860
2.2%
$210,043
2.4%
$750,349
2.7%
$197,208
2.3%
$214,903
2.5%
$218,127
2.4%
$221,398
2.4%
$851,636
2.4%
$903,461
2.0%
Sales & Marketing
% of sales
$1,149,150
5.4%
$290,408
5.6%
$279,269
5.1%
$309,935
3.7%
$262,598
3.0%
$1,142,210
4.1%
$239,757
2.8%
$229,657
2.6%
$235,398
2.6%
$241,283
2.6%
$946,096
2.7%
$993,227
2.2%
Operating Expenses
$5,943,597
$1,529,283
$1,473,983
$1,436,192
$1,645,238
$6,084,696
$1,511,352
$1,561,683
$1,648,847
$1,717,770
$6,439,651
$7,186,634
$704,534
3.3%
$1,385
0.0%
$65,623
1.2%
$214,991
2.6%
$234,029
2.7%
$516,028
1.9%
$349,066
4.1%
$389,740
4.5%
$240,523
2.7%
$208,688
2.3%
$1,188,018
3.4%
$2,400,096
5.3%
$2,346,774
($81,185)
$331,874
$507,118
($7,414)
$58,293
$506,736
$15,380
$52,916
$481,470
($37,396)
$58,758
$27,311
($39,602)
$1,996,148
($18,115)
$241,024
($17,143)
($42,739)
$460,963
$7,845
$67,268
$0
($3,868)
$433,973
$20,416
$54,017
$1,180
($1,410)
$438,760
$0
$55,000
$0
$0
$441,308
$0
$55,000
$0
$0
Revenue
Costs of product sales
Gross Profit
Gross margin %
Expenses
General & Admin
% of sales
Research and development
% of sales
EBITDA
EBITDA margin
Amortization
FX Loss/(Gain)
Interest Income/(Exense)
Other Income/Loss
Loss/(gain) on disposition
($7,755)
$500,824
$11,315
$71,057
($44,454)
$0
($992)
($2,145)
EBT
($2,152,205)
($669,033)
($626,891)
($361,054)
($259,669) ($1,916,647)
($202,647)
($118,436)
($273,237)
($307,619)
($901,939)
$364,219
Adjusted EBT
($2,152,205)
($669,033)
($626,891)
($361,054)
($259,669) ($1,916,647)
($202,647)
($118,436)
($273,237)
($307,619)
($901,939)
$364,219
$12,644
(0.6%)
$5,387
(0.8%)
$5,736
(0.9%)
$7,538
(2.1%)
$37,415
(2.0%)
$11,304
(5.6%)
$11,417
(9.6%)
$0
n/a
$0
n/a
$22,721
(2.5%)
($2,164,849)
(10.1%)
($674,420)
(13.1%)
($632,627)
(11.5%)
($368,592)
(4.4%)
($278,423) ($1,954,062)
(3.2%)
(7.0%)
($213,951)
(2.5%)
($129,853)
(1.5%)
($273,237)
(3.0%)
($307,619)
(3.4%)
($924,660)
(2.6%)
Reported Taxes
Tax rate
Net Income (cont.ops)
Margin
$18,754
(7.2%)
$1,775,004
$28,261
$231,285
$1,180
($5,278)
$1,735,877
$0
$200,000
$0
$0
$0
n/a
$364,219
0.8%
EPS (basic)
($0.05)
($0.01)
($0.01)
($0.01)
($0.01)
($0.04)
($0.00)
($0.00)
($0.01)
($0.01)
($0.02)
$0.01
EPS (f.d.)
($0.05)
($0.01)
($0.01)
($0.01)
($0.01)
($0.04)
($0.00)
($0.00)
($0.01)
($0.01)
($0.02)
$0.01
($2,164,849)
(10.1%)
($674,420)
(13.1%)
($632,627)
(11.5%)
($368,592)
(4.4%)
($278,423) ($1,954,062)
(3.2%)
(7.0%)
($213,951)
(2.5%)
($129,853)
(1.5%)
($273,237)
(3.0%)
($307,619)
(3.4%)
($924,660)
(2.6%)
$364,219
0.8%
($0.05)
($0.05)
($0.01)
($0.01)
($0.01)
($0.01)
($0.01)
($0.01)
($0.00)
($0.00)
($0.00)
($0.00)
($0.01)
($0.01)
($0.01)
($0.01)
($0.02)
($0.02)
$0.01
$0.01
Adjusted Net Income
Margin
Adjusted EPS (basic)
Adjusted EPS (f.d.)
Shares o/s - basic
Shares o/s - F.D.
46,117,711
46,117,711
46,343,151
46,343,151
46,348,712
46,348,712
46,403,205
46,403,205
($0.01)
($0.01)
46,403,205
46,403,205
($0.04)
($0.04)
46,382,913
46,382,913
46,443,340
46,443,340
46,443,340
46,443,340
46,493,340
46,493,340
46,543,340
46,543,340
46,480,840
46,480,840
46,668,340
46,668,340
Source: Company reports, NSI
Sameet Kanade (416) 644-8123
Northern Securities Inc.
20 – TIO Networks Corp.
April 11, 2011
Tio Networks Corp.
Balance Sheet
2009
Q1-10
(Oct 09)
Q2-10
(Jan 10)
Q3-10
(Apr 10)
Q4-10
(July 10)
Current Assets
Cash and equivalents
Short term investments
Restricted Cash
Derivate Fin. Instruments
Accounts receivable
Receivable from US Bank & other partners
Prepaid expenses and other assets
Inventories
$3,160,998
0
267,941
163,170
277,424
3,073,999
173,479
313,137
$2,648,205
$2,221,179
$2,455,195
$2,258,785
550,899
269,496
4,540,164
203,140
368,202
515,710
4,570
238,206
5,453,022
224,568
273,049
491,413
20,760
294,672
4,128,323
245,349
269,977
Total current assets
7,430,148
8,580,106
8,930,304
Property and Equipment
Intangible Assets
Deposit & Other assets
4,050,160
0
245,949
3,732,822
3,402,920
320,913
Total Assets
2010
Q1-11
(Oct 10)
Q2-11
(Jan 11)
Q3-11E
(Apr 11)
Q4-11E
(July 11)
2011E
2012E
540,225
29,530
402,608
5,861,434
200,101
317,562
$2,258,785
0
540,225
29,530
402,608
5,861,434
200,101
317,562
$2,682,665
0
534,870
8,320
276,623
5,126,663
157,739
326,479
$2,672,162
0
496,089
0
233,226
2,892,580
137,550
360,292
$2,512,105
0
496,089
0
298,814
2,892,580
177,377
622,033
$2,684,351
0
496,089
0
355,568
2,892,580
180,918
634,452
$2,684,351
0
496,089
0
355,568
2,892,580
180,918
634,452
$4,180,597
0
496,089
0
492,590
2,892,580
253,392
888,608
7,905,689
9,610,245
9,610,245
9,113,359
6,791,899
6,998,998
7,243,957
7,243,957
9,203,855
3,107,739
2,750,397
168,856
1,975,277
0
96,740
1,295,209
408,162
2,338,371
0
124,363
1,636,517
447,154
2,750,397
0
168,856
96,740
96,740
1,295,209
0
96,740
109,333
0
96,740
$11,726,257
$12,633,841
$12,780,378
$11,421,590
$12,529,498
$12,529,498
$11,576,093
$8,863,916
$8,732,255
$8,635,906
$8,635,906
$9,409,928
Current liabilities
Accounts payable & accrued liabilities
Payable to deployment partners
Derivate fin. Instruments
Current portion of asset retirement obl.
Current portion of leashold inducements
Obligations under capital lease
Customer deposit & def. Revenue
1,736,645
3,284,008
0
304,922
73,527
39,066
278,914
1,769,480
4,789,260
2,530
93,614
39,066
258,588
270,394
1,638,673
5,642,534
1,760,927
4,548,895
1,434,956
2,958,617
0
109,913
39,066
33,663
383,696
1,626,228
2,958,617
1,936,030
2,958,617
111,734
39,066
33,920
379,638
1,311,086
2,958,617
2,295
109,913
39,066
33,663
383,696
1,626,228
2,958,617
110,944
39,066
93,744
207,450
1,580,821
6,038,982
0
112,852
39,066
51,585
311,091
1,450,490
5,384,158
92,537
39,066
177,116
209,037
1,580,821
6,038,982
0
112,852
39,066
51,585
311,091
109,913
39,066
33,663
383,696
109,913
39,066
33,663
383,696
109,913
39,066
33,663
383,696
Total Current Liabilities
5,717,082
7,222,932
7,798,963
6,761,026
8,134,397
8,134,397
7,399,006
4,838,336
4,959,911
5,151,183
5,151,183
5,460,985
36,014
170,675
175,391
8,834
160,909
156,815
8,789
222,599
156,869
7,967
257,551
127,722
26,874
243,255
131,714
26,874
243,255
131,714
18,063
228,960
131,252
12,014
214,664
129,943
12,014
214,664
129,943
12,014
214,664
129,943
12,014
214,664
129,943
12,014
214,664
129,943
27,552,760
27,562,003
27,622,279
3,270,229
(25,738,638)
5,084,351
3,402,420
(26,371,265)
4,593,158
3,384,901
(26,739,856)
4,267,324
Obligations under capital lease
Leashold inducements
Asset retirement obligations
Shareholders' Equity
Capital stock
Warrants
Contributed surplus
Deficit
Total liabilities and share equity
27,552,760
259,312
2,879,241
(25,064,218)
5,627,095
$11,726,257
$12,633,841
$12,780,378
$11,421,590
27,624,151
0
3,387,387
(27,018,280)
3,993,258
$12,529,498
27,624,151
0
3,387,387
(27,018,280)
3,993,258
$12,529,498
27,624,151
27,624,151
27,624,151
27,624,151
27,624,151
27,624,151
0
0
0
0
3,406,892
3,406,892
3,426,892
3,446,892
3,446,892
3,546,892
(27,232,231) (27,362,084) (27,635,321) (27,942,940) (27,942,940) (27,578,721)
3,798,812
3,668,959
3,415,722
3,128,103
3,128,103
3,592,322
$11,576,093
$8,863,916
$8,732,255
$8,635,906
$8,635,906
$9,409,928
Tio Networks Corp.
Statement of Cash Flow
2009
Net Income
Cash flows from operations:
Amortization of PPE
Amortization of leasehold inducements
Amortization of other assets
Bad Debt
Rent abatement recd
Stock-based compensation
Unlreaised loss of der.fin.instruements
Gain/loss on disp of PPE
Cash flows from operations
Cash flows from investing
Purchase of PPE
Increase in deposits & other assets
Disposal of PPE
Cash flows from investing
Cash flows from financing
Shares issued
Proceeds from capital lease
Repayment of oblig. under Cap.lease
Repayment of LT Debt
Cash flows from financing
FX impact
Increase in cash and equiv
Cash at beginning of period
Change
Ending Cash
FCF
Q2-10
(Jan 10)
($632,627)
Q3-10
(Apr 10)
($368,592)
Q4-10
(July 10)
($674,420)
2,372,420
(39,066)
0
14,838
20,537
267,031
(163,170)
(7,755)
507,234
(9,766)
500,708
74,513
506,736
41,364
507,116
(145,177)
131,676
165,700
135,509
(7,100)
(993)
3,158
(16,190)
(2,144)
111,646
3,157
(8,770)
(39,602)
794,844
702,637
532,924
2,464,835
Changes in non-cash working cap:
Accounts receivable
Restricted cash
Receivable from US Bank & other partners
Prepaid expenses
Inventories
Accounts payable and accrued liabilities
Customer deposits & def revenue
Unrealised FX gain loss
Payable to deplyment partners
Q1-10
(Oct 09)
($2,164,849)
2010
($278,423) ($1,954,062)
428,370
2,021,794
(39,066)
467,374
(14,295)
440,384
(14,296)
438,760
111,646
273,500
133,640
(42,739)
19,505
21,210
(3,868)
10,615
(1,410)
2,458,775
489,926
(56,466)
24,297
1,324,699
(20,781)
3,072
122,253
(1,587)
(23,122)
(1,093,637)
(107,936)
(48,812)
(1,733,111)
45,248
(47,585)
(180,105)
103,641
(26,332)
1,490,085
(125,184)
(272,284)
(2,787,435)
(26,622)
(122,184)
(155,824)
32,177
(56,943)
2,754,974
125,985
5,355
734,771
42,362
(8,917)
(130,331)
68,547
(2,647)
(654,824)
278,728
$443,060
(504,907)
($354,960)
(759,325)
($254,612)
(132,269)
239,306
43,231
(601,992)
77,093
48,050
($476,849)
100,000
458,760
(245,580)
($60,057)
(54,894)
44,493
4,279
(76,424)
27,623
1,410
(100,000)
(100,000)
(331,318)
72,116
5,689
(550,000)
0
0
($6,122)
($47,391)
($100,000)
($100,000)
($253,513)
($550,000)
(314,914)
(26,274)
(5,650)
(31,924)
($268,189)
($26,274)
($5,650)
($31,924)
($263,116)
($189,067)
($174,934)
5,925
39,600
1,200
46,725
(303,775)
(72,949)
(77,900)
(73,710)
(90,355)
($132,424)
($72,949)
($71,975)
($34,110)
($89,155)
(196,410)
59,505
31,825
(5,278)
(262,902)
$42,538
($354,861)
$2,455,195
(196,410)
2,258,785
($487,229)
20,000
(3,541)
(12,419)
191,271
(216,071)
38,992
2,145
234,016
20,000
(39,827)
(261,741)
121,575
(65,500)
(126,241)
2,674
(427,026)
1,735,877
47,040
44,136
2,968,854
19,183
(316,890)
43,112
72,605
(7,299)
(3,080,365)
(188,152)
(74,964)
(512,793)
1,787,826
(28,591)
1,845,287
(486,585)
43,478
88,246
(162,394)
441,308
(56,753)
(235,994)
($165,984)
$3,323,392 $3,160,998 $2,648,205 $2,221,179
(162,394)
(512,793)
(427,026)
234,016
3,160,998
2,648,205
2,221,179
2,455,195
($99,270) ($364,880) ($231,484)
$226,989
2012E
$364,219
461,308
(297,152)
($176,728)
97,437
2011E
($924,660)
(65,588)
87,329
$387,315
180,301
$456,276
435,293
Q4-11E
(July 11)
($307,619)
43,397
38,781
2,234,083
20,189
(33,813)
(139,404)
4,058
(4,652)
(2,425,541)
31,290
35,189
(912,858)
(21,428)
(22,606)
(130,807)
(61,357)
(6,691)
853,274
(62,424)
Q3-11E
(Apr 11)
($273,237)
7,928
(282,958)
(1,466,165)
(29,661)
(55,065)
32,835
(8,520)
(798)
1,505,252
$150,268
Q2-11
(Jan 11)
($129,853)
159,193
(124,468)
(1,418,819)
(41,057)
16,388
(106,335)
41,605
127,009
1,433,813
171,351
Q1-11
(Oct 10)
($213,951)
118,558
$272,246
1,835,877
(137,022)
(72,474)
(254,156)
309,802
(209,624)
(153,850)
$711,003 $2,046,246
97,437
(902,213)
423,880
$3,160,998 $2,258,785
(902,213)
423,880
2,258,785
2,682,665
($856,604)
$401,382
172,246
425,566
1,496,246
$2,682,665 $2,672,162 $2,512,105
(10,503)
(160,057)
172,246
2,672,162
2,512,105
2,684,351
($33,886) ($160,057)
$172,246
(10,503)
(160,057)
$2,258,785
425,566
2,684,351
$379,685
$2,684,351
1,496,246
4,180,597
$1,496,246
Source: Company reports, NSI
Northern Securities Inc.
Sameet Kanade (416) 644-8123
April 11, 2011
Appendix II
TIO Networks Corp. – 21
Current Shareholding Structure
TIO’s shares are generally illiquid with the majority of shares comprised
of institutional ownership. We note that four institutions hold ~30% of
the Company’s shares, while management and insiders hold ~6%. We
believe potential investors may have to accept the risk of short-term
volatility created by certain types of market trades.
Holder Name
Shares Held
% Held
Management and Insiders
2,804,265
6.0%
Inter-Atlantic Fund
6,276,300
13.5%
Mawer Investment
1,627,049
3.5%
Jemekk Capital
5,366,100
11.6%
575,367
1.2%
Guardian Capital
HSBC Investment
Total
240,295
0.5%
16,889,376
36.3%
Management and Insiders
Shahbazi, Hamed
2,137,665
4.6%
Nakhla, Joseph
230,000
0.5%
Drury, Reid M
150,000
0.3%
Shahbazi, Sam
98,100
0.2%
Adler, Allan M
58,000
0.1%
Lai, Derek
12,000
0.03%
Ericksen, Chris
55,000
0.12%
Yassin, Talal
35,500
0.08%
Cawkell, Kenneth A
25,000
0.05%
Gonzales, Roy (ex-employee)
3,000
0.01%
2,804,265
6.0%
Total
Sameet Kanade (416) 644-8123
Northern Securities Inc.
April 11, 2011
Important Disclosures
Applicable disclosure items:
TIO Networks Corp.
1.
2.
3.
4.
5.
6.
7
8.
9.
none
Within the past 12 months, Northern Securities Inc. managed or co-managed a public offering of securities for the subject company.
Within the past 12 months, Northern Securities Inc. received compensation for investment banking services from the subject company.
Northern Securities Inc. is currently providing the subject company with investment banking services.
Within the past 12 months, Northern Securities Inc. received compensation for products or services other than investment banking services from the subject company.
Northern Securities Inc. is currently providing the subject company with non-securities services.
Northern Securities Inc. and its affiliates collectively beneficially own 1% or more of the equity securities of the subject company.
The research analyst or a member of the research analyst’s household has a long or short position in the shares of the subject company.
The research analyst has visited the material operations of the subject company.
The subject company provided a portion of the transportation and accommodation costs incurred during the visit of the material operations.
The particulars contained herein were obtained from sources that we believe to be reliable but are not guaranteed by us and may be incomplete. The opinions
expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation of offer to buy or sell the securities mentioned
herein. Northern Securities Inc. may act as financial advisor, fiscal agent or underwriter for certain of the companies mentioned herein, and may receive a remuneration
for its services. Northern Securities Inc. or its officers, directors, representations, associates, may have a position in the securities mentioned herein and may make
purchases or sales of these securities from time to time in the open market or otherwise. Northern Securities Inc. is a wholly owned subsidiary of Northern Financial
Corporation.
Investment Opinion Definition
STRONG BUY:
BUY:
HOLD:
SELL:
SPECULATIVE BUY:
NSI expects the share price to appreciate 30% or more over the next 12 months.
NSI expects the share price to appreciate 10% to 30% over the next 12 months.
NSI expects the share price to appreciate 10% or less over the next 12 months.
NSI expects the share price to have a negative rate of return over the next 12 months.
NSI expects the share price to appreciate substantially over the next 12 months, but with a high level
of inherent risk.
Note: Percentages are approximate and ratings are at the analyst’s discretion. Distribution of research ratings is available at
www.northernsi.com
Analyst Certification
All of the views expressed in this report accurately reflect the personal views of the responsible analyst about any and all of
the subject securities or issuers. No part of the compensation of the responsible analyst named herein is, or will be, directly
or indirectly, related to the specific recommendations or views expressed by the responsible analyst in this report.
Dissemination of Research
Northern Securities Inc. endeavours to make all reasonable efforts to provide research simultaneously to all eligible clients
via email. Additional distribution may be done by sales personnel via email, fax or regular mail. Please contact your
investment advisor or institutional salesperson for more information regarding Northern Securities’ research.
Material Disclosures
The analyst responsible for preparing this research report receives compensation that is based upon various factors,
including investment banking revenues of Northern Securities Inc.
Northern Securities Inc. may receive or may seek compensation for investment banking services from all companies under
research coverage within the next three months.
Canada's Small Cap Investment Bank
Research
Sameet Kanade, CPA, MBA
Nelson Mah, CA
Matthew Zylstra
[email protected]
Technology, Head of Research
Special Situations
Mining
Institutional Sales & Trading
Rob Bruggeman
Peter Kim
Jonathan Thompson
[email protected]
Toronto
Toronto
Toronto
Investment Banking
Matthew Cipolla
Craig Rogers
416-644-8174
416-644-8139
416-644-8141
145 King St. West
Suite 2020
Toronto, ON M5H 1J8
Tel:
(416) 644-8100
Fax:
(416) 644-0270
[email protected]
Toronto
Toronto
Private Client Group
Frederick Vance
Dave Murdoch
John Kvellestad
David Finley
OFFICES
416-644-8123
416-644-8127
416-644-8109
416-644-8147
416-644-8187
[email protected]
Toronto
Vancouver
Calgary
Brandon
416-644-8155
604-668-1778
403-313-5989
204-728-2239
Suite 1110
400 Burrard Street
Vancouver, BC V6C 3A6
Tel:
(604) 668-1800
Fax:
(604) 668-1816
Bamfield, BC
Tel/Fax: (250) 728-3494
Tel:
Fax:
Kamloops, BC
(250) 377-6900
(250) 372-8308
Tel:
Fax:
Peachland, BC
(250) 826-5465
(250) 767-2788
444 Fifth Avenue SW
Suite 300
Calgary, AB T2P 2T8
Tel:
(403) 398-7390
Fax:
(403) 313-5642
Member: Investment Industry Regulatory
Organization of Canada; the Canadian
Investor Protection Fund. A participating
organization of the Toronto Stock Exchange.
www.northernsi.com
5-1711 Kirkcaldy Drive
Brandon, MB R7A 0B9
Tel:
(204) 728-7866
Fax:
(204) 728-9448