Shares Unfairly Tossed Out After A Broken IPO?

First, a little background on the company and its industry. ENVI's business is creating video encoding software that enables cable, satellite and phone companies to deliver, and end users to view, video on "second screen" devices in the home. ENVI's largest customer, according to the S-1, is Time Warner Cable, which deploys its software to allow authenticated clients to stream live cable programming to iPads and other tablets in the home. Think of ENVI's software as empowering the iPad or smartphone to add "set top box" to its array of functionality. Enabling video compatibility between devices is at the core of ENVI's product suite.

The multi-screen video service provided

The multi-screen video service provided by pay TV operators to its clients is known as TV Everywhere. It's in the early stages of customer adaption and is growing rapidly. Maybe only 5% of the 100 million pay TV household universe currently streams live TV to iPads and smartphones in the U.S.. Needham & Co. estimates that 30% of households will be TV Everywhere users by 2016. If you're not one of them, let me tell you: it's a terrific user experience and a compelling value-add for the pay TV providers. I use my iPad to view linear cable programming from Cablevision's Optimum near every day and I prefer the HD video quality, portability, navigation, channel guide and user interface to the conventional video product on the TV. To my way of thinking, having the iPad in your hands delivering ultra-crisp live television is a better viewing experience than watching the same program with a clumsy remote control and a TV from across the room, even if that TV is a wide flat screen. I can't speak for the OTT experience on the iPad or laptop, as I am not a Netflix or Hulu customer, however reviews are similarly positive.

As noted, ENVI's software enables virtual set-top box functionality on the tablet or smartphone. Until now, customer premise equipment has always included intelligence and functionality in the hardware itself. Now, much like other computing applications, it's moving into the network and the cloud and the hardware isn't provided by the pay TV provider nevertheless by the customer. It wasn't that long ago that Motorola bought General Instrument and Cisco bought Scientific-Atlanta, the cable set-top box duopoly. Set-box vendors now must scramble to retain relevance as second screens and smart TVs emerge and the value moves back upstream.

Technological risk in this space is high, clearly, and non-programming vendors to the cable television industry have a lousy track record of creating value for shareholders. The reasons, historically, have been many: a lack of industry standards and protocols, the "closed" cable network infrastructure discouraged research, an undercapitalized cable industry for much of its history kept spending tight - all of which probably conspired to send the brightest technologists to design products and services for other industries, most notably the Internet. However this trend could in short be shifting as there are a number of interesting young companies now serving the cable industry with infrastructure innovations. A few of them, like ENVI, are now openly traded.

ENVI is after all in its post-IPO quiet period, which means that the S-1 is the investor's sole guide until the company releases Q1 revenues on May 30. ENVI generated roughly $51 million of revenue and $1 million of operating income in the 12 months ended January 31, 2012, both significantly higher than in fiscal 2011. It's not much more than an educated guess nevertheless I'm looking for $80 million of revenue and $7 million of operating income in fiscal 2013 ending January and for the OI number to near double on improving margins to $14 million in fiscal 2014. That puts ENVI's valuation multiple at about 11x OI using 30 million diluted shares and $76 million of IPO cash proceeds on the balance sheet. That's not wildly inexpensive on a pure valuation basis, yet the calculation overlooks ENVI's intellectual property portfolio and its scarcity value in a burgeoning new industry.

Synacor came public on February 11, 2012 with a very similar profile to ENVI. SYNC is as well a TV Everywhere solutions provider, providing pay TV providers with an online, customized user interface, authentication gateway and billing solution, among other features. SYNC's brief trading history may be instructive for ENVI. Like ENVI, SNYC came public below the range on its S-1, in its case at $5 per share - a drastic price cut from the $10-$12 range on the S-1, suggesting the deal barely got done. SYNC and ENVI had other similarities, including revenue levels, and each had selling shareholders in the IPO..