NeuLion Inc. (NLN T) Enabling Streaming Video Content - Hear the Lion Roar. Initiating Coverage

Transcription

1 (NLN T) Enabling Streaming Video Content - Hear the Lion Roar June 19, 2013 Doug Cooper, MBA (416) dcooper@beaconsecurities.ca The Internet is finally starting to have a meaningful impact on the traditional TV industry. The combination of technology advancements and the proliferation of Internet-connected devices (Smart TVs, gaming consoles, tablets, smart phones), has enabled changing consumer behavior. They want to watch high quality video content when and where they want. To satisfy this demand, owners of content are looking to make it available and interactive on all devices. NeuLion s strategy is to partner with content rights holders (primarily sports today), and seamlessly enable the conversion of live video (TV feeds) to streaming HD video through its cloud based, end to end solution. Its initial focus on sports has resulted in a blue chip client base including the NHL, NFL, NBA and UFC. NeuLion has begun to leverage this experience into the larger TV Everywhere market and target traditional cableco s and broadcasters. NeuLion has an excellent market position in a large dynamic industry, EBITDA break-through in Q4/FY12 and strong operating leverage (~60-70% EBITDA flow through above $10 million quarterly revenue). Initiating Coverage BUY C$1.05 Previous Close $ month Target Price Potential Return 52 W eek Price Range $ % YE: Dec 31 FY12 FY13E FY14E Rev enue ($000s) 38,983 44,792 54,576 EBITDA ($000s) -3,298 2,271 6,003 FD EPS FY12 FY13E FY14E EV/Sales 2.64x 2.30x 1.89x EV/EBITDA x 17.14x P/E - nmf 24.18x Shares Outstanding Basic 166,973 FD 201,767 Market Cap (C$) Estimates Valuation Stock Data ( 000s) Basic 85,156 FD 102,901 EV (C$) 102,901 About the Company $0.15-$0.51 NeuLion was founded in 2004 and merged with JumpTV in October The company offers a true end- to- end solution for delivering live and on- demand content to any Internet- connected device. NeuLion enables content owners and distributors as well as cable operators and broadcasters to optimally address the massive consumer demand for viewing video content on laptops, smartphones, tablets and other connected devices. NeuLion's sports customers include major leagues, colleges & universities, regional networks and broadcasters. NeuLion's technology also provides innovative solutions to general entertainment companies and broadcasters. NeuLion is based in Plainview, NY. 2,500 2,000 A ll prices in US$ unless o therwise stated Stock Performance Volume (Thousands) Price (CAD) We initiate coverage with a BUY rating and a 12- month target price of C$1.05 based on the average on our DCF valuation at 11% discount rate and on 4x our F2014 sales estimates. 1,500 1, Jul Sep Nov Jan Mar May Beacon Securities Ltd. 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H

2 Table of Contents Investment Thesis... 3 Industry Overview... 4 Case Study #1 Newspapers... 4 The Television Industry The Internet s Next Victim... 6 Case Study #2 Netflix... 7 Enabling Streaming Video Content - Hear the Lion Roar... 8 Revenue Model Case Study #3 NHL GameCenter Live Competitive Landscape Financial Forecast Valuation Risks Initiating Coverage with Buy Rating and C$1.05 Target Price Appendix A: Comparable Company Appendix B: Financial Statements June 19, 2013 Page 2

3 Investment Thesis The Consumer Internet Revolution has caused dramatic changes in the way many traditional businesses operate. The manner in which consumers read the news, buy books, listen to/buy music and book travel has been forever altered. Investors who foresaw this seismic shift in consumer behavior, driven by technology advances, have been handsomely rewarded. The Four Horsemen of this Consumer Internet Revolution pertaining to news, books, music and travel (Google, Amazon, Apple and Priceline) have seen their shares up an average of 700% over the past 5 years (before Apple s recent slide). In our opinion, consumers are not altering their behavior and buying patterns because the technology is cutting edge but rather the opposite. Once the technology has enabled ease of use, (from early adopters to early majority), consumers have flocked to the Net given the better selections and/or cheaper prices than traditional distribution channels (i.e. brick and mortar outlets). We believe we are finally seeing the Internet have a similar impact on television and the distribution of its content. Traditional means of watching television through cable and satellite providers has been, until recently, the preferred medium by far. That, however, is starting to change quickly. Led by the Fifth Horseman of the Internet Consumer Revolution, Netflix (3- year return of 700%) has dramatically impacted the way in which consumers watch movies. With almost 30 million subscribers in the United States alone (~25% of all US households), consumers have discovered a distribution channel through the Internet that has more choices and is cheaper than traditional bundled cable/satellite options. In essence, Netflix has been the Trojan Horse through which consumers have discovered the ease of use watching movies over the Internet and has opened the door to them being amenable to viewing other traditional bastions of cable/satellite TV over the Internet. Consumer demand for alternative viewing means has forced content providers to rethink their distribution strategies to include PCs, tablets, smartphones and video game consoles. Making content available across all devices would expand the viewing audience (for sports leagues) and/or keep them (cableco s), leading to increased (or at least stable in the case of cableco s) subscribers and thus revenue. To enable streaming content, however, is complicated, especially for live sporting events. NeuLion (the Company) has proven its end-to-end solution and has made itself an indispensable part of the process. With an initial focus on sports, NeuLion has partnered with all of the major North American leagues (except MLB), who have trusted their multi-billion dollar brand and the execution of their streaming experience to NeuLion. We believe this speaks volumes to NeuLion s technology and its reliability. As the sports June 19, 2013 Page 3

4 franchises attract more subscribers, we believe NeuLion s revenue will grow significantly. With its high profile clients, NeuLion is now pursuing cableco s who are in the first inning of rolling out their TV Everywhere (streaming) products. With very positive macro trends and a very scalable operating model, we believe NeuLion has the potential to grow its EBITDA exponentially. Trading at a significant discount to its peers, we believe NeuLion represents an excellent risk-return proposition. We are therefore, initiating coverage with a Buy recommendation and a C$1.05 target price. Industry Overview Not since Henry Ford s introduction of the assembly line in 1913 has an innovation had such an impact on the way businesses operate than the Internet. The impact of the assembly line reduced the time required to manufacture a car and thus reduced its price by over 30% over a 4-year period to $575. This dramatically expanded the market as the price was now within reach of the average American consumer (note that an assembly line worker could buy a Model T with 4 months pay) and forever changed the world. This is but one example of how technology has changed the course of history. While we can have a spirited debate about which has had the greatest impact (my vote is for the printing press and the light bulb), there should be little debate over what has been the greatest innovation over the last 25 years. It is clearly the Internet. Its widespread adoption has completely altered the manner in which consumers live their everyday lives, from the way they get their news, to the way they do their shopping. This widespread consumer adoption has, in turn, forced companies to change their distribution strategies. Just like with Henry Ford s Model T, new innovations have resulted in lower prices, which in turn, drive more consumer adoption. We think we are finally starting to see the Internet s impact on the television world, albeit we also believe it is very early in the game. Before we delve into specific details of the current state of the TV business, we think is instructive to detail the Internet s impact on another industry. Case Study #1 Newspapers When the Commercial Internet Revolution started in the 1990s, many felt its first victim would be the newspaper industry. Why would consumers subscribe to receive a paper when they could get more up-to-date June 19, 2013 Page 4

5 information for free? However, throughout the 1990s, subscriptions increased as did advertising revenue. Stock prices rallied, seemingly oblivious to the Grim Reaper at their door. The reality kicked-in in According to the Newspaper Association of America, print newspaper advertising revenue dropped from ~$65 billion in 2000 to $20 billion in 2010, a drop of 70%. Shares of publically traded newspapers collapsed, as seen in the price of the New York Times, which dropped from $50 to $6.00. Source: BigCharts.com The reality is not that consumers don t want the content offered by the New York Times, but rather that they didn t want the physical manifestation of that content s delivery system. Understanding what their customers want has forced newspapers to change their business models. In an effort to keep readers, the NY Times obviously went on-line. But also, in May 2011, the paper started charging for subscriptions to its online June 19, 2013 Page 5

6 content. The result is that revenue stabilized and profitability improved and its stock price rallied back to $11.00 per share. The lesson, in our view, is twofold: a) Purveyors of content must make that content available on the medium their customers want to view/buy it; b) Consumers are willing to pay for content on the Internet if it adds value and is high quality The Television Industry The Internet s Next Victim Will the traditional television industry, long dominated by cableco s and satellite providers, learn from the aforementioned newspaper example? Already, the pieces are in place to force a change in their business model: a) The widespread adoption of set-top boxes and PVRs has conditioned consumers to watch their favourite shows when they want to. This also means they can fast forward past the advertisements (which represent ~50% of network s revenues); b) The widespread adoption of alternative means of watching their shows. For example, in 2011, ~25% of all flat panel televisions shipped were Internet enabled. By 2015, shipment of Internetenabled TV shipments is expected to double to 138 million units. This is in addition to the vast numbers of Internet connected gaming consoles and smart phones. In essence, the home television is becoming a giant monitor with a user friendly quasibrowser interface as the primary function (turn on the monitor and choose from Netflix, Apple TV, Rogers, YouTube or NFL Network, as examples). Note that increasingly, consumers are cutting the cord (to a cable subscription), or for the young demographic, never buying it in the first place. Meanwhile, throughout the household, family members are deploying their 2 nd screen (tablets, smart phones, laptops) as ubiquitous substitutes for the television. The idea of the tethered television (either through a cable or satellite connection) as the centre of a household viewing activity will become as quaint as that image of a 1950s family gathering to watch the latest episode of the Ed Sullivan Show; June 19, 2013 Page 6

7 c) The widespread implementation by ISP (Internet Service Providers) of 4G technology, which enables high quality streaming video. In fact, on June 12, 2013, Cisco Systems announced that its new router, the CRS-X is capable of providing speeds of 400 Gigabits per second. Each rack is scalable up to 6.4 Terabits per second and the entire system is capable of nearly 1 Petabit per second if multiple racks are set up. According to Cisco, this would represent a doubling of the speeds currently available. The culmination of all of these factors has resulted in consumer demand for streaming video content, where, when and on what device they want it. Case Study #2 Netflix Netflix was founded in 1997 and originally offered DVDs on a fee for service basis and then introduced a monthly subscription service in However, its real competitive advantage was its first mover status into the world of on-line, streaming rentals in As of December 31, 2012, Netflix had 33 million members in over 40 countries, watching more than 1 billion hours of TV shows and movies per month. Since 2008, revenue has grown by a 28% CAGR and hit $3.6 billion in While there is no doubt that Netflix has competition from other content aggregators such as Hulu as well as the growth of TV Everywhere, the conclusion from this case study is simply: a) The use of the Internet to enjoy streaming video content is fully adopted and accepted by consumers; b) At 3.0x EV/sales and 43x EV/EBITDA, the stock market ascribes a premium multiple to a stock that is at the forefront of this changing consumer viewing behavior. The following graph highlights the growth of Netflix subscribers juxtaposed against Comcast subscribers over the past decade. One can see that after 2008, cable cutters began to have a significant impact. Source: nscreenmedia, April 2013 June 19, 2013 Page 7

8 To summarize our analysis thus far: a) There is no going back to old business practices once any technology genie is out of the bottle; b) The Internet is the biggest technological change to which businesses have had to adopt over the past 25 years; c) Businesses that try to ignore its impact, like the newspaper industry, do so at their own peril; d) A combination of the technology pieces and consumer acceptance/adoption will continue to force video content providers to change their distribution methodologies and business models. Against this macro backdrop, we now turn our attention to NeuLion and its role in the evolving world of the distribution of TV content. Enabling Streaming Video Content - Hear the Lion Roar NeuLion was founded in 2004 by Nancy Li (President and CEO) and counts her husband Charles Wang (founder of Computer Associates and owner of the New York Islanders hockey team) as its Chairman. The Company went public in 2008 through a 50/50 merger with JumpTV. NeuLion is a pure B2B technology company whose core competency is enabling their partners to get their content to market very quickly on multiple devices (e.g. Connected TVs, gaming consoles, tablets, smart phones, computers). As a complete end-to-end service provider, NeuLion takes care of the distribution of the content as well as its monetization (i.e. billing, authentication), which leaves the content provider free to concentrate on marketing and growing their subscriber base. June 19, 2013 Page 8

9 NeuLion s Cloud-Based, End-to-End Solution Source: NeuLion has historically concentrated on the sports market in which it has amassed a very blue chip client base including: Pro Sports: NHL, NFL, NBA, UFC, MLS, CFL, AHL, WHL and the OHL. Pro Sports revenue has grown from $7 million in revenue in 2010 to $13.5 million in FY12. In fact, we believe the FY12 revenue is understated as revenue was negatively impacted by the NHL strike, which delayed the start of the season to January 19, 2013 versus the normal October 2012 start date (Q4/FY12). We believe the truer growth rate was apparent in Q1/FY13 as Pro Sports revenue was up ~50% y-o-y. College Sports: Over 175 US colleges, including recent wins such as The Ivy League, PAC 12 and The University of Miami, use NeuLion s College Technology platform. While College revenue has been flat over the last 3- years ($10.9 million in FY12 versus $10.8 million in FY10), we believe this segment is set for growth in the coming years resulting from a change in its sales leadership as well as the migration of College customers to the advanced technology used for NeuLion s Pro Sports customers. Our confidence is buoyed by the recent wins noted above. June 19, 2013 Page 9

10 In our view, this early concentration on sports is as a result of two primary factors: a) Charles Wang, as owner of the New York Islanders, has a relationship with the NHL. While this certainly did not guarantee the contract (perhaps the opposite as the NHL may have been worried about nonarm s length contract awards), it certainly allowed NeuLion an audience; b) Sports franchises realize they have a perishable product. Once the game is played, it loses significant appeal and value. As such, they are looking to increase distribution (and revenue) for their live product. TV Everywhere: NeuLion s success within the sports world has enabled it to expand its reach into the cable/satellite world of TV Everywhere, initially for its sports content (i.e. providing a service for Rogers Sportsnet for curling and Shaw s NFL Network, delivering this content to multiple connected devices for Rogers and Shaw subscribers, respectively). Using its experience in enabling live streaming for sports as a Trojan Horse, NeuLion is attempting to leverage into the cableco s more general TV Everywhere product offering (TV shows, movies). While its TV Everywhere business is starting from a smaller revenue base than its Pro and College sports clients (24% of consolidated service revenue in Q1/FY13), the number of potential cableco/satellite companies in North America, coupled with their large number of subscribers, makes NeuLion s TV Everywhere a significant growth opportunity. Strategy As we have alluded to in the report thus far, content providers are looking to expand their distribution capabilities to an array of Internet-connected devices in order to satisfy consumer demand as well as generate incremental revenue (or stabilize revenue for cableco s who are afraid of cord cutters). Generally, these content providers are looking to outsource the enabling of that streaming video to technology service providers. NeuLion s strategy, therefore, is to seek the owner of content rights (either the direct owner itself or the entity to whom the direct owner has sold the rights) and partner with them. By segment, such content owners could include: a) Pro Sports: While NeuLion has partnerships with all of the major sports leagues in North America (except MLB), we believe there is still significant room to grow. We would point to two main opportunities. Firstly, there is an opportunity to partner with major European (or other June 19, 2013 Page 10

11 non-north American) sports leagues (soccer, rugby, etc.), to expand their fan base and stream their content to other countries. Secondly, pursue partnerships with the domestic (i.e. USA) rights holders of such franchises as the NFL and NBA (Note that NeuLion s current revenue from these leagues comes predominantly from streaming outside the US). For example, DirecTV owns the domestic digital rights to the NFL for streaming to Xbox and PCs. Verizon recently announced that it will pay the NFL $1 billion over 4 years for the right to stream to smartphones. b) College Sports: NeuLion s primary competitor within the US college market is CBS College Sports Network. CBS is a media company who aggregates the technology pieces to provide NCAA colleges and conferences a streaming solution. Given the recent high profile wins by NeuLion (i.e. PAC 12, Ivy League), we believe it is clear that a premium end-to-end solution is being selected by customers as a preferred solution. With an ~40% share of the US college market that matters (i.e. Division I and Division II represent 60% of US colleges), we believe NeuLion is primed to take additional market share as CBS old contracts come up for RFP. c) TV Everywhere: We believe we are very early in the process of cable/satellite providers providing their subscribers a TV Everywhere experience. As such, there is a long list of potential clients including broadcast networks (i.e. CBS, ABC, NBC, etc.), cable networks (i.e. Discovery, ESPN, Timer Warner, Turner), cableco/satellite (i.e. Rogers, Shaw, Comcast, DirecTV and BrightHouse, with whom NeuLion just signed a partnership etc.) and studios (i.e. Disney, Paramount, Sony, etc.). Growth within this channel could be explosive. As a point of reference, NeuLion has begun to work with Rogers on several TV Everywhere projects. Revenue Model NeuLion s model is based primarily on recurring revenue as the Company shares in the revenue stream with the content provider. In the 12-month period ended March 31, 2013, 85% of its revenue was recurring in nature. In general, NeuLion s revenue model is based on: a) A set-up fee; b) An annual licensing fee; June 19, 2013 Page 11

12 c) A variable fee based on either a revenue share of subscriber fees or a fee based on usage. In essence, we believe that NeuLion has the potential to grow its revenue significantly over our projection period through a combination of: a) Material growth through the expansion of business with their current customers. For example, subscriptions to NHL s GameCenter Live (powered by NeuLion) have grown very materially since (Of note: we found in a straw poll that huge hockey fans were not even aware today of the service, giving us comfort that hyper growth will continue as the macro trends continue to reach the masses.) b) Signing new partnership contracts, especially TV Everywhere deals. Case Study #3 NHL GameCenter Live We believe the NHL is NeuLion s largest customer at 13% of FY12 revenue (NeuLion disclosed that one customer was 13% of revenue), or ~$5.1 million in revenue. We further know that from its filing, NeuLion had a client that represented 10% of sales in FY08. Assuming that was also the NHL, revenue has grown from $1.3 million in FY08 to that aforementioned $5.1 million; a CAGR of 41%. In fact, given the NHL strike that negatively impacted Q4/FY12 revenue, we believe its contribution would have been significantly higher. The following is an indication of how NeuLion s relationship with the NHL has expanded (Source: NeuLion): Year 1: Built out the digital platform for nhl.com and 30 team sites including video portals for each club. First implementation of NHL GameCenter. Year 2: Launched NHL GameCenter LIVE which focused on fan experience and integrated features like live chat, multi-camera views, and highlights. Year 3: Expanded NHL digital experience to mobile devices and rolled out over 20 new versions on handheld devices: iphone, ipad, Android. Year 4: Further expanded to smart TVs and connected devices: Xbox, Apple TV, PS3, Roku. Added internal apps like Hockey Operations. Year 5: Built out next-gen infrastructure and asset management system. As per NHL Commissioner Gary Bettman: NeuLion has been indispensable to us in making sure we are state of the art, particularly as it relates to digital applications. We re grateful to be June 19, 2013 Page 12

13 associated with NeuLion because we know they will keep us at the forefront. (Source: NeuLion). While neither the NHL nor NeuLion will disclose absolute subscriber information, the Company has indicated that as of March 2013, subscriptions to NHL GameCenter LIVE are tracking at a very significant increase over last season s record number. Also interestingly, US viewership on NBC Sports Network for game 2 of this year s Stanley Cup finals averaged 4 million viewers versus 1.18 million a year ago a 235% increase. Clearly as interest in the NHL in general and subscribership and usage on NHL GameCenter LIVE in particular grows, NeuLion s revenue (as per its revenue model noted above) also grows. Competitive Landscape We believe that NeuLion s competitive position is based on its high video quality (as much as 60 frames per second and the usage of adaptive streaming), its ability to offer interactive features (multi camera, social media interaction) and its ability to get the product to market quickly on a myriad of devices (computers, game consoles, smart phones all of which require different architecture). While our due diligence indicates that NeuLion is certainly not alone in its ability to enable streaming video content, it is one of the only players that can offer an end-to-end, featurerich solution. This has led to NeuLion s ability to claim such high profile clients as the aforementioned NHL, NFL, NBA and Rogers, amongst others. These high profile clients have significant brand equity and would not do anything to cause brand impairment. Take the NFL as an example. As 4wallmarketing (industry blog) said: The NFL is a branding machine. Sponsors line up to pay huge amounts to associate themselves with the NFL. Fans pay large sums for jerseys and other merchandise. How have they done it? Part of the success is because the NFL puts forth its brand in a cohesive manner. Their trademarks are well protected most teams own trademark registration for several variations of their logos, helmets designs and uniform designs. Only two brands, besides the NFL teams, are allowed to be a part of the game in any manner Gatorade beverages and Motorola headsets worn by the coaches and those rights come at a cost These leagues want to surround themselves with the best possible technology to grow their respective brands. We think NeuLion s association with them speaks volumes as to its technology, reliability and June 19, 2013 Page 13

14 customer service. Nevertheless, NeuLion does have competition within each of its verticals: a) Pro Sports: The other primary players in this segment are MLB.com (Major League Baseball) and Perform Group (PER:UK). While the former concentrates primarily for its own market segment, Perform has focused its sports streaming solution to date primarily in Europe and Asia on sports such as soccer and tennis. b) College Sports: NeuLion s primary competition in this segment is CBS College Sports Network. As we have previously indicated, CBS is primarily a media company who aggregates the technology pieces to offer a solution. NeuLion has been winning market share versus CBS recently. c) TV Everywhere: There is still a little bit of the Wild West at work here and it is unclear how it will ultimately play out. Many early adopters of TV Everywhere (e.g. HBO Go) have elected thus far for an in-house solution but largely, we think, because scalable third party outsourced solution are only just evolving (i.e. NeuLion). NeuLion s strategy is to use its unique market position with its sports league customers (i.e. NFL) to develop cable/network TV Everywhere customers (i.e. Shaw NFL Go). NeuLion s dominant position with major sports leagues opens the door for the Company to work potentially with every North American MSO (cable, satellite) to provide some or all of their TV Everywhere solution in due course. Financial Forecast Income Statement In our view, the two key take-aways from an examination of NeuLion s historical income statement is its revenue growth and the expansion of its adjusted gross margin (as defined by us as Service revenue Cost of service revenue ). From FY08 FY12, revenue grew from $13.4 million to $39 million; a 31% CAGR. Service gross margin has expanded from 52% in FY08 to 67% in FY12 and 72% in Q1/FY13. At the same time, SG&A and R&D have been flat since FY10 at ~$29 million. The combination of rising sales, expanding gross margins and flat overhead reduced NeuLion s EBITDA loss from $14 million in FY09 to a $3.3 million loss in FY12 and a trailing 6-month (Q1/FY13 + Q4/FY12) EBITDA profit of $1.6 million. Q1/FY13 saw record revenue of $11.9 million and EBITDA of ~$1 million. We note that there is some seasonality in the business given so many of NeuLion s customers have their peak following during Q4 and Q1. Therefore, we are anticipating y-o-y higher highs and lower lows with respect to quarterly June 19, 2013 Page 14

15 revenue and EBITDA. To be specific, we would expect Q2/FY13 to be lower in revenue and EBITDA than Q1/FY13 but materially better on both metrics than Q2/FY12. From an annual perspective, we anticipate EBITDA to turn positive in FY13 and NeuLion to expand its EBITDA margin significantly over our projection period. As a point of reference, Perform Group currently attains a 25% EBITDA margin. NeuLion s EBITDA Breakthrough in Q4/FY12 Source: From a forecast perspective, we model revenue growing from $39 million in FY12 to $43 million and $54.6 million in FY13 and FY14 respectively. Growth in FY13 is predominately from Pro Sports (up 47% y-o-y in Q1/FY13). In FY14, our growth assumptions are more diversified amongst its segments (30% growth in Pro Sports, 25% in TV Everywhere and 20% in College Sports). Assuming 70% gross margin (note we have assumed zero equipment revenue in our forecast) with relatively smaller increases in overhead, our EBITDA margin expands from (8.5%) in FY12 to 5.1% in FY13 and 11% in FY14. Based on the Treasury Method of 202 million fully diluted shares outstanding (@ C$0.50), our EBITDA forecasts translate to EPS of $0.00 and $0.02. From a longer-term perspective, if revenue continues to ramp at 20% beyond our projection period and reaches $80 million in FY16, we believe NeuLion could hit our target EBITDA margin of 25% (as per Perform) or $20 million in that year. June 19, 2013 Page 15

16 Balance Sheet From a balance sheet perspective, NeuLion had $15 million in cash at the end of March with no debt. From an adjusted working capital perspective (Cash + AR AP), the Company ended Q1/FY13 with $6.6 million. With minimal cap-ex required (averaging $1.5 million over the last 5 years), we expect the Company to be free cash flow positive going forward. Additional capital could be required to fund working capital given our revenue growth expectations and/or to fund acquisitions. Charles Wang, Chairman of NeuLion, has a track record of successful acquisitions while building Computer Associates and we believe that selected acquisitions may make sense in certain areas including gaining market share within the TV Everywhere vertical. Share Capital NeuLion s share capital structure consists of: Basic Shares million Warrants 19.4 million (average strike price: $0.37) Options 16.5 million (average strike price: $0.45) Preferred Shares Total FD Shares 28.1 million (1 for 1 basis) 231 million Total Treasury Method 202 million (at $0.50) Management and Board members own 67% of the basic shares, including 43% owned by Charles Wang and Nancy Li. Insiders also own the preferred shares (@ $0.45 and $0.58), which we expect will be converted in due course. Charles Wang and Vice Chairman G. Scott Paterson bought 27% of the Company s last $5 million financing (@ C$0.20 with a half warrant at C$0.30). As such, we believe that management and the Board s interests are fully aligned with shareholders. June 19, 2013 Page 16

17 Valuation From a valuation perspective, we have examined NeuLion using two methods: Peer Group: While there are several companies who participate in the streaming industry including content players (i.e. Comcast, DirecTV and Netflix) as well as last mile companies (i.e. Akamai and Limelight), there are few companies that offer a cloud-based, end-to-end, white labeled solution such as NeuLion. As such, finding an applicable public peer group is difficult. Furthermore, such companies as MLB.com, that would make an interesting comparable, are private. Consequently, we believe that investors will look to Perform Group (PER:UK) and value NeuLion at a discount given its smaller size and EBITDA margin at his stage of its life cycle. With Perform trading at 5.3x FY14 revenue, we believe NeuLion should trade at a 25% discount to that multiple. At 4x our FY14 revenue forecast, NeuLion would trade at C$1.10. DCF: Based on our growth assumptions beyond our forecast period and using a 11% discount rate, we arrive at a target price of C$0.99. Risks Loss of Major Contract: With 13% of revenue from one client, and we estimate close to 25% of revenue from 3 clients (NHL, NFL and NBA), a loss of one of them would be a negative development. Subscribership Stalls: NeuLion s revenue is based on usage and/or sharing of subscriber fees. If subscribers to any of NeuLion s partners stall, it will negatively impact its growth rate. We would note that NeuLion is vulnerable to whether their customers promote their digital offerings and/or price them to attract a growing subscriber base. Fails to Grow in TV Everywhere: The opportunity within TV Everywhere is very significant. However, it is not clear yet who will win the majority of subscribers between such players as Netflix, Hulu or the cable/satellite providers. In this dynamic and competitive environment, NeuLion is competing against much larger and well financed companies. June 19, 2013 Page 17

18 Initiating Coverage with Buy Rating and C$1.05 Target Price We are initiating coverage of NeuLion with a Buy rating and a target price of C$1.05. In summary, our recommendation is based on the following: a) The Internet is the biggest technological change to which businesses have had to adopt over the past 25 years. It is finally starting to have an impact on the distribution of TV content. b) The proliferation of Internet-connected devices has changed consumers viewing patterns. No longer is the living room TV the only viewing option. c) As such, the technology pieces are in place such that consumers are able to watch content when and where they want. d) Owners of content are therefore increasingly look to make their content available on multiple devices such as Smart TVs, tablets, gaming consoles and smart phones to increase viewership/revenue and/or retain subscribers. e) NeuLion s strategy is to partner with the owners of content rights and quickly enable the transmission of streaming video through its cloudbased end-to-end solution. f) NeuLion s will leverage its blue chip client base in sports to significantly expand its presence in the large TV Everywhere market. g) The Company s financials have hit an inflection point as it turned EBITDA positive in Q4/FY12 and Q1/FY13. With its strong operating leverage, we would expect strong flow through to EBITDA (~60-70%) above $10 million in quarterly revenue. In essence, NeuLion is at the centre of the biggest change in the television industry since the cableco s attained dominance of broadcast TV in the 1980s. Its revenue growth, improving margin profile and best in class technology leave investors very well positioned to benefit either from an appreciating stock price or ultimately a potential acquisition of it. As such, we are initiating coverage of NeuLion with a Buy recommendation and 12-month target price of C$1.05, which represents the average of our peer group and DCF valuation analysis. June 19, 2013 Page 18

19 Appendix A: Comparable Company Comparable Company Sales EBITDA EBITDA Margin EPS EV/EBITDA EV/Sales Price/Earnings Company Ticker Last Price Enterprise Market Value Capitalization (Millions)* (Millions) CFY NFY CFY NFY CFY NFY CFY NFY CFY NFY CFY NFY CFY NFY NLN-TSE $0.51 $102.9 $71 $44.57 $54.58 $2.27 $ % 11.0% $0.00 $ x 17.1x 2.3x 1.9x nmf 24.2x Perform Group PLC PER-LON $5.80 $1,330 $1,386 $ $ $56.14 $ % 30.0% $0.17 $ x 17.6x 6.3x 5.3x 33.4x 26.8x Source: FactSet and Beacon Research * NeuLion's EV includes $ preferred equity June 19, 2013 Page 19

20 Appendix B: Financial Statements Income Statement Year End: December 31 FY08 FY09 FY10 FY11 FY12 FY13e FY14e (US$000s) Revenue: Service revenue 9,543 26,464 31,500 36,613 37,178 44,567 54,576 Equipment revenue 3,901 1,629 1,673 3,054 1, Total Revenue 13,443 28,094 33,174 39,666 38,983 44,792 54,576 Operating Expenses: Cost of service 4,519 12,850 12,842 13,985 12,281 13,118 16,373 Cost of equipement 3,120 1,537 1,575 2,391 1, SG&A 12,372 27,599 24,741 23,965 21,914 22,438 24,559 R&D 0 0 5,048 6,201 6,673 6,799 7,641 Total operating expenses 20,012 41,986 44,207 46,543 42,281 42,521 48,573 EBITDA -6,568-13,893-11,033-6,877-3,298 2,271 6,003 Amortization 1,572 4,141 5,178 5,367 4,407 1,917 1,748 EBIT -8,141-18,034-16,211-12,244-7, ,255 Total net interest expense EBT & other expenses -8,011-17,740-16,149-12,212-7, ,255 Other expenses (FX, Charges, stock based comp) 3,626 1,901 1,018 1,862 1, EBT -11,636-19,641-17,167-14,074-9, ,255 Tax Expense and Non Controlling Interest Net income -11,636-19,641-17,521-14,373-10, ,255 Shares Outstanding 55, , , , , , ,973 EPS (basic) Shares Outstanding (FD) 55, , , , , , ,767 EPS (FD) Source: Company Reports and Beacon Securities Ltd. June 19, 2013 Page 20

21 Balance Sheet Year End:December 31 FY08 FY09 FY10 FY11 FY12 FY13e FY14e (US$000s) ASSETS Cash $27,323 12,958 $12,929 $12,347 $11,108 $8,985 $15,671 Accounts receivable 2,284 1,809 2,357 3,494 4,194 4,295 5,233 Other receivables 1, Inventories Prepaid expenses 1, ,015 1,189 1,185 1,185 1,185 Other , Total Current Assets 33,320 17,766 18,806 18,872 18,153 16,164 23,977 Plant, property and equipment 6,475 5,754 5,119 4,294 3,447 3,333 3,227 Intangible assets 5,749 9,542 9,283 6,609 4,015 3,212 2,570 Goodwill 6,846 6,757 11,240 11,328 11,328 11,328 11,328 Other 1, Total Assets 53,738 40,269 44,708 41,330 37,104 34,199 41,264 Liabilities and Shareholders' Equity Bank debt Accounts payable 4,465 5,384 5,504 9,597 9,813 5,930 7,401 Accrued liabilities 7,595 5,822 5,431 5,314 4,767 5,391 6,729 Due to related parties Deferred revenue 3,092 3,908 6,432 6,625 5,715 5,715 5,715 Convertible note, net of discount Other 0 1, Total Current Liabilities 15,209 16,801 17,368 21,550 20,628 17,369 20,178 Long-term deferred revenue ,050 1,134 1,134 1,134 Other long-term liabilities Deferred tax liability Total Liabilities 16,724 17,999 18,412 23,331 23,032 19,773 22,582 Redeemable preferred stock ,129 14,865 14,895 14,895 14,895 Share capital 63,053 66,075 76,663 78,448 84,571 84,571 84,571 Retained earnings (26,040) (43,804) (60,496) (75,315) (85,393) (85,039) (80,784) Total Shareholders' Equity 37,014 22,270 26,296 17,998 14,072 14,426 18,682 Total Liabilities and S.E. 53,738 40,269 44,708 41,330 37,104 34,199 41,263 Source: Company Reports and Beacon Securities Ltd. June 19, 2013 Page 21

22 Statement of Cash Flows Year End:December 31 FY08 FY09 FY10 FY11 FY12 FY13e FY14e ($000's) Net Income (11,637) (19,641) (17,167) (14,373) (10,079) 354 4,255 Depreciation 1,572 4,141 5,178 5,367 4,407 1,917 1,748 Other 3,892 1, ,174 2, Cash Flow Operations (6,172) (13,531) (11,019) (6,832) (3,353) 2,271 6,003 Changes in non-cash WC 558 1,838 2,913 3,276 (1,524) (3,394) 1,683 CFO (inc. changes in WC) (5,615) (11,692) (8,106) (3,556) (4,877) (1,123) 7,687 Capital expenditures (1,443) (1,198) (1,952) (1,876) (1,107) (1,000) (1,000) Acquisitions 0 (1,562) Other (Net) 21, Cash Flow Investing 20,295 (2,760) (1,709) (1,876) (1,107) (1,000) (1,000) Principal Repayments New Equity 12, ,786 4,850 4, New Debt Other (Net) Cash Flow Financing 12, ,786 4,850 4, Other (Net) Cash Flow 26,714 (14,365) (28) (583) (1,239) (2,123) 6,687 Cash, begin period ,323 12,958 12,929 12,347 11,108 8,985 Cash, end period 27,323 12,958 12,930 12,347 11,108 8,985 15,671 Source: Company Reports and Beacon Securities Ltd. June 19, 2013 Page 22

23 Disclosure Requirements Does Beacon, or its affiliates or analysts collectively, beneficially own 1% or more of any class of the issuer's equity securities? Yes No Does the analyst who prepared this research report have a position, either long or short, in any of the issuer s securities? Yes No Does Beacon Securities beneficially own more than 1% of equity securities of the issuer? Yes No Has any director, partner, or officer of Beacon Securities, or the analyst involved in the preparation of the research report, received remuneration for any services provided to the securities issuer during the preceding 12 months? Yes No Has Beacon Securities performed investment banking services in the past 12 months and received compensation for investment banking services for this issuer in the past 12 months? Yes No Was the analyst who prepared this research report compensated from revenues generated solely by the Beacon Securities Investment Banking Department? Yes No Does any director, officer, or employee of Beacon Securities serve as a director, officer, or in any advisory capacity to the issuer? Yes No Are there any material conflicts of interest with Beacon Securities or the analyst who prepared the report and the issuer? Yes No Is Beacon Securities a market maker in the equity of the issuer? Yes No Has the analyst visited the head office of the issuer and viewed its operations in a limited context? Yes No Did the issuer pay for or reimburse the analyst for the travel expenses? Yes No Beacon analysts are not permitted to own the securities they cover, but are permitted to have a position, either long or short, in securities covered by other members of the research team, subject to blackout conditions. All information contained herein has been collected and compiled by Beacon Securities Limited, an independently owned and operated member of the IIROC. All facts and statistical data have been obtained or ascertained from sources, which we believe to be reliable, but are not warranted as accurate or complete. All projections and estimates are the expressed opinion of Beacon Securities Limited, and are subject to change without notice. Beacon Securities Limited takes no responsibility for any errors or omissions contained herein, and accepts no legal responsibility from any losses resulting from investment decisions based on the content of this report. This report is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell securities discussed herein. Based on their volatility, income structure, or eligibility for sale, the securities mentioned herein may not be suitable or available for all investors in all countries. as at Mar 31, 2013 # Stocks Distribution BUY % Speculative BUY 1 4% HOLD % SELL 0 0% Restricted 0 0% Total % BUY Total 12-month return expected to be >15% SPECULATIVE BUY Potential total 12-month return is high (>15%), but given elevated risk, investment could result in a material loss HOLD Total 12-month return expected to be between 0% and 15% SELL Total 12-month return expected to be negative Dissemination Beacon Securities distributes its research products simultaneously, via , to its authorized client base. All research is then available on via login and password. Analyst Certification The Beacon Securities Analyst named on the report hereby certifies that the recommendations and/or opinions expressed herein accurately reflect such research analyst s personal views about the company and securities that are the subject of the report; or any other companies mentioned in the report that are also covered by the named analyst. In addition, no part of the research analyst s compensation is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report. Beacon Securities Ltd. 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H