Video compression specialist ATEME released its complete first half 2020 results today.

As with all media technology supplier financial results in this environment, the release is a timely, objective view into the impact of COVID on the industry.  Particular to ATEME release, the first half results are a further indication of the acceleration of the industry’s transition to cloud infrastructure, the merits of new business models in the supplier community, and – always a favorite – likely additional supplier consolidation.

It is also a good reminder of the importance of market context when interpreting supplier results.

Revenue for the first half of 2020 was €29.0 million, a decline of 3% versus 1H 2019.  Viewed in the abstract or against ATEME’s streak of eight consecutive years of revenue growth (2012 – 2019), this could appear disappointing.  In the context of the current market environment there are more arguments for this representing a laudable result.  For comparison purposes, Harmonic’s video segment experienced a more than 26% year-over-year drop in the first half of 2020.

The revenue breakdown by geography suggests a wide divergence across regions.

EMEA and Latin America showed considerable declines versus the year-earlier period, whereas North America and Asia Pacific exhibited exceptional growth.  One more note on the above geography breakdown, though domiciled in Europe, ATEME now generates a majority of its revenue from the Americas geography (54% in both 1H 2019 and 1H 2020).

The above snapshot of ATEME’s income statement presents a comparison of several categories against the year-earlier period (1H 2019) and provides a comparative analysis of those same income statement categories (i.e. expressed as percentage of revenue in the period).

On a gross margin basis, first half 2020 results exceeded the year-earlier period by 4% (even though total revenue declined).  This is attributable to positive business model developments where server hardware sales declined, while software sales increased.  The resulting gross margin increase more than offset the hardware revenue decline.

A continued migration of customers to sourcing software as opposed to appliances is a trend accelerated by the current market circumstances.  The greatest realization of this development is a movement into cloud environment.  ATEME makes this very observation in its release.  “A major consequence on our business has been the acceleration of the transition to cloud-based operations. An increasing number of our customers are either already deploying or considering deploying public, hybrid or multi-cloud strategies” reads the ATEME release.

Despite the savings accruing from a lack of trade events and reduced travel ATEME still saw growth in sales & marketing expenditures by 4% during the first half of 2020.  Sales & marketing expenditures were 32.7% of sales during the first half of 2020, a considerable figure.

In fairness, it is less important to manage the amount spent, than it is to ensure an appropriate return is achieved by the expenditure.  On that score, ATEME has generated organic growth for each of the past 8 years, has grown its revenue profile outside of the European region, and has guided investors to expect growth in 2020. Of equivalent note, there has been a steady improvement in the quality of ATEME’s revenue model, in the form of higher-margin (software) revenue streams and a larger amount of recurring sales. ATEME’s monthly recurring revenues for July 2020 was €1.1 million, a 25% increase from six months earlier, and more than double the first from 18 months previous.

More striking than the increase in sales & marketing expenditures is the 25% year-over-year increase in R&D expenditures in the first half of 2020.  Such an investment increase in this market environment is a sign of confidence (at a minimum).  Management attributed the increase to strategic investments in future software solutions.

Consistent across most recent supplier financial announcements has been some degree of financial assistance from government entities in response to the COVID disruption.  In this instance, ATEME was supported by bank and government-based loans in the amount of €8 million (there was no disclosure on the nature of the loans).  To cast the amount in the context of ATEME’s operating business, that level of government support is a bit more than 80% of ATEME’s entire R&D expenditures for the 2019 year.

Anevia Acquisition

The boldest of management’s activities in 2020 is the intended acquisition of Anevia, a provider of various video distribution technology solutions.  On July 31, 2020, ATEME and Anevia announced the start of exclusive acquisitions negotiations by ATEME with the majority shareholders of Anevia, representing 87% of the outstanding share capital.  At the time of the announcement the transaction had already received unanimous support of both board of directors.

The sequence of steps may seem awkward, but this is not terribly unusual.  The economics of the deal are substantially agreed (discussed below) and as a practical matter the only party’s voice of consequence is the main shareholders (when owning such a super-majority).  Once that transaction is completed, ATEME and Anevia must then undergo an “information-consultation” with employees and then must execute the tendering of the remaining shares.

Unanimous support is unsurprising given the straightforward rationale of the deal for both parties.

Starting with the seller, Anevia ended the month of June 2020 with a net cash position of €900,000.  Anevia had not managed to generate positive operating income for the past two fiscal years.  We make this observation not to suggest Anevia faced an imminent crisis, rather the pathway to materially growing shareholder value was severely constrained by Anevia’s financial resources and the current market environment (1H 2020 revenues were down just under 10%).

Accepting a deal from ATEME at an enterprise value of €19 million or 1.2x 2019 revenues (remember 2020 was already down 10% at time of deal) is appealing given the totality of the circumstances.  Versus the average daily close for the thirty days prior to the deal announcement, the valuation represents a more than 40% premium.  Moreover, the majority shareholders are set to receive approximately 40% of their compensation in the form of ATEME stock (if our parsing of the deal terms is accurate).  Meaning if the shareholders continue to believe in Anevia and the combination with ATEME, then they have an opportunity to participate in further upside.

Form ATEME’s perspective, management has cited the technology portfolio synergy, which is better highlighted using the below chart from ATEME’s latest investor presentation.

The combined business has a pro forma (for 2019) revenue level of €80 million, and we would not expect them to spend 30%+ of revenue on sales & marketing in the near future given the tremendous commercial synergies.

Both businesses are based in the greater Paris area, a less than 30-minute drive from each other, and each company has offices in Dubai and Singapore.  More broadly, both salesforces are going to the exact same tradeshows, targeting the same global customer base, and selling adjacent technology components of the same distribution use case.

Commenting on the acquisition, ATEME’s CEO Michel Artieres stated “A merger with Anevia and its high-performance solutions for optimizing video flow delivery is a key step in our expansion strategy in our customers’ value chain and the conquest of new markets.”

ATEME’s stock has traded up more than 10% since the announcement.

Related Content:

Press release on ATEME Q2 2020 Results

Press release on ATEME and Anevia announcement

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