Optimal Group: Divesting Optimal Payments Subsidiary, Growing WowWee

Optimal Group, Inc. (OPMR) expects to divest itself of its remaining U.S. Optimal Payment assets within the next 12 months. This means that the company will be focusing primarily on the growth of its WowWee subsidiary.

OPMR management indicated that they expect OPMR to be well capitalized going forward with their WowWee business, which was recently acquired last year. WowWee is a leading designer, developer, marketer and distributor of technology-based consumer robotic, toy and entertainment products. A video collection of WowWee’s 2008 expanded product lineup can be viewed at the following link.

WowWee revenues are seasonal, with approximately 80% of revenues booked from shipments in the second half of the year.

WowWee Revenue and EBITDA:

• 2005 rev: $131 million
• 2006 rev: $117 million
  
• 2007 rev: approx. $104 million
  
• 2008E rev: $130 to $140 million guidance today (8/6)
  

• 2005 EBITDA: $27.5 million
• 2006 EBITDA: $5 million
  
• 2007 EBITDA: TBD
  
• 2008E EBITDA: TBD

Finally we can move on to focusing on WowWee, and put Optimal Payments in the rear view mirror. Say goodbye to the bean counters and hello to the tech growth investors.

Having taken all the expected Optimal Payment goodwill charges, management likely views the PPS relative to its book value of $5.70 per share as oversold, which I concur with. OPMR will likely eventually be priced at between 1X and 2X WowWee revenues, with an expected revenue CAGR of 25% to 35% this year.

WowWee generated $27.5M of EBITDA in 2005 for $131M of revenue. Management is conservatively projecting $130M to $140M this year. Although manufacturing costs have increased in China, there is likely significant margin fluff on the distribution side to be realized in future revenues going forward. That will likely accelerate revenues more than what most folks are expecting.

Management said that they will be well capitalized going forward and did not see DOJ as a problem in the divestiture of Optimal Payment assets. That tells me that some folks may have been over emphasizing the DOJ issue and future impact on cash. Personally, I am not even factoring the DOJ issue in the valuation of OPMR. My biggest issue is management compensation and their anti-takeover staggered-board/golden-parachutes.

Disclosure: Long OPMR

Comments

[Badger TheLion]

OPMR for the Bean Counters:
badgerthelion.blogspot...

[Badger TheLion]

This market is dumber than a door knob. OPMR's value is likely about three times what it is currently selling for.

OPMR is selling its Optimal Payments subsidiary assets to focus on growing its WowWee subsidiary in the Personal Robotics market, projected to be $15 billion by 2015. Divestitures plus this year's EBITDA will likely result in OPMR having about $120 million in cash and equivalents available to expand its WowWee business. WowWee's business is seasonal with more than 80% of its revenue realized in the second half of the year. OPMR guidance for WowWee 2008 revenue is $130 to $140 million. In the 2008 Q2 conference call, the CEO confirmed that it was reasonable to expect WowWee to generate $8 to $10 million of EBITDA in the second half of 2008.

For more info about OPMR and WowWee visit badgerthelion.blogspot...