It used to be that a round-the-world-trip was something you might have done in the gap year between the end of education and starting work. For Chris Yewdall, it’s part of the job. I manage to catch up with the chief executive officer (CEO) of 2D-to-3D conversion technology developer DDD (DDD:AIM) on, quite literally, a flying visit. He’s swooped in from the US west coast to touch base with investors and shareholders in London before jetting off to Australia. By the time he gets back to his desk, he’ll have clocked up nearly 24,000 air miles, by my back-of-notebook calculations.

Yewdall’s odyssey can be partly explained by DDD’s origins. The £24.5 million cap was first set-up in Perth, Australia, but these days operates out of headquarters on the doorstep of Hollywood in Los Angeles, and it has spent almost 20 years developing its TriDef suite of 3D technology. In the past it has struggled to get its kit accepted by mainstream electronics device manufacturers but the landscape has been transformed thanks to key licensee agreements with Koreans Samsung Electronics (005930:KS) and LG Electronics (066570:KS), plus Sony (6758:T) of Japan. According to analysis by NPD Display Research, a little over 41 million 3D-ready TVs were sold last year, nearly 60% of these units were made by DDD’s three biggest customers. Sales of these high-definition sets are expected to rise rapidly, hitting 125 million this year, before doubling to 250 million in 2014.

‘Industry research suggests that around 400 million 3D-capable TVs will be in living rooms by the end of 2015 most of which will have Smart TV internet capabilities,’ says Yewdall.

The Avatar effect

The 3D market would appear to owe a debt of gratitude to film maker James Cameron, whose box-office smash Avatar, released in 2009, scooped three Oscars, and set the ball rolling for mainstream 3D movies. The problem in the past has been that making films and computer games 3D has been terrifically expensive. Avatar is reckoned to have cost over $300 million to make, so the ability of DDD’s TriDef technology to retro convert 2D images into a proper glasses-free 3D experience is proving a huge hit. It also makes 3D TVs the obvious
start point.

‘Around 230 million to 240 million TVs will ship this year and I see about 70 million to 80 million of them being 3D-ready,’ estimates Yewdall, taking a conservative view of the market compared to widely accepted market forecasts.

The CEO explains how DDD offers electronic display manufacturers an embedded, system on chip solution, or as an app, giving original equipment manufacturers (OEMs) options. ‘Not all users will want 3D capability,’ says Yewdall, and they won’t want to be forced to cough up extra to buy a TV featuring technology they are never going to use.

DDD has also planted deep roots in the 3D PC market, a segment that this relative minnow has perhaps surprisingly come to dominate. TriDef, which is capable of automatically converting photos, PC media files, DVD movies and many interactive PC games to 3D in real time, shipped 2.4 million units to its PC licensees in 2012, 172% more than in 2011. And while the launch of Microsoft’s (MSFT:NDQ) Windows 8 could cap PC sales this year, DDD has exciting opportunities in mobile devices (smartphones/tablets) to offset the slack.

PC gaming is one key area. According to estimates, China alone is home to over 144,000 gaming iCafes where nearly 14 million PCs are used for games, internet surfing and movies. Several of the group’s existing licensees are working towards creating a solution allowing them to sell 3D PC monitors into this market for gaming, and DDD is partnering with Lenovo (0992:HK), China’s largest iCafe software management vendor, and of course LG.

OEM options

The embedded approach is also interesting. This means TriDef can be ‘integrated onto microchips an OEM is already buying’, an alternative approach to other 2D-to-3D technologies, claims Yewdall. He tells me that rivals are trying to sell OEMs separate processors, which need to be integrated into the product, and will potentially have to compete for battery power with core processor and graphics applications, for example. That’s at odds with current requirements to cut the energy drain on batteries that are already struggling to keep pace with the power needs of the wealth of tech tools and toys consumers are demanding from their gadgets. Finding ways to extend battery life and cut recharging frequency is a big plus to sell to consumers.

TriDef is also operating system and OEM agnostic, so it doesn’t matter whether you own a Samsung, LG or Sony telly, for example. It’s the same with smartphones and tablets, so an iPad owner using iOS can enjoy a 3D experience by plugging in TriDef technology just as easily as Android, Blackberry or Windows users. He shows me a demo version of the Angry Birds game on a Samsung tablet, and the picture is impressive, sharp and clearly watchable at an angle.

All in all, seven new or renewed licensees were signed in 2012, with 16 shipping products, up from seven a year ago. Chinese electronics manufacturer Gadmei signed a license deal in March for a 3D tablet launch. TriDef has been made compatible with Intel (INTC:NDQ) and ARM (ARM) microprocessor designs. Overall, licensees shipped over 15 million units of TriDef in 2012, making it 26 million since 2010.

Streaming 3D to the masses

DDD is also diversifying into high potential new revenue streams. Yabazam is the company’s 3D smart TV app that lets viewers watch 2D films in 3D glory, either for a one-off payment or for a $9 to $10 a month subscription, just launched in the US. ‘It [Yabazam] was only launched in February 2012 and we’ve already had 175,000 downloads,’ says Yewdall. The current download run rate is over 1,000 a day, he reckons. Were the firm to convert just 1% of those users to subscriptions it would generate $180,000 a year, by my calculations. But DDD needs to add content, the library looks pretty ropey at the moment (I don’t recognise any of the available titles), and it requires a proper marketing push. A deal with a major studio for a popular TV series would go down well, say, something I suspect DDD is working hard to pull off.

An increasingly widespread acceptance of TriDef helped DDD make its first ever profit in the second half of 2011, and record a full-year profits breakthrough in 2012. Preliminary numbers to the end December showed $2 million (£1.33 million) of taxable profit on $8.6 million (£5.7 million) royalty revenues, beating the $8.4 million (£5.6 million) forecast of broker Canaccord Genuity. Earnings before interest, tax, depreciation and amortisation (EBTIDA) more than doubled from $1.4 million (£0.93 million) to $3.2 million (£2.1 million).

Yewdall grins as he admits to being ‘more of a capitalist that a technologist,’ and he certainly seems to have a clear idea of the future. He sees DDD taken over in time, once it’s built decent critical mass, claiming that an ‘IP-led company’ would probably fit the mould of a likely buyer. UK chip design specialists ARM or Imagination Technologies (IMG) might be candidates as after all the latter made its name in top-notch graphics tech, while ARM is pushing deeper into the space with its Mali chips.

Concentrated revenues

Something to keep an eye on is DDD’s current hefty exposure to just a few large licensees. Between them, Samsung, LG and Sony represented nearly 90% of last year’s revenue. That’s partly due to the undoubted coup of winning licensing deals with the three biggest 3D device OEMs, but in time this could even itself out as new licensees are brought on board, and start to ship. Says Yewdall: ‘We are working on about 12 licensing deals at the moment, we’d hope to sign three or four of them this year.’

Canaccord expects 2013 revenues to hit $12.1 million (£8 million), implying earnings per share (EPS) of 3¢ (2p) versus 0.55¢ (0.36p) in 2012. This implies a price/earnings multiple of 8.9, or an enterprise value (EV)/EBITDA ratio of 5.9-times, based on forecast EBTIDA of $5.3 million (£3.5 million) and anticipated net cash of £4 million by the year end. That’s inexpensive for a rapidly growing, high margin business (EBITDA margins run at 37.2% and rising), which underpins Canaccord’s own discounted cashflow model that calls for 50p. We wouldn’t argue with that, and neither would Yewdall.

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