Aubrey recently visited Barco’s new (to us!) HQ in Kortrijk, where the company has been able to bring all its Belgian employees under one roof.
Perhaps the most surprising thing was not the futuristic building, nor the flashy visuals it can display on multiple screens, using multiple technologies, nor the ability to link meeting rooms up worldwide using wireless connectivity, but this:
The company has come such a long way since its establishment in 1934 as the Belgium American Radio Corporation, assembling radios from parts imported from the United States. In 1949 the company started developing a multi-standard television that accepted different signals, including from RTF and the BBC. A jukebox called the Barcobox was introduced in the 1950s. In the 1960s it was one of the first European companies to introduce colour TV and the first producer of wireless ultrasonic remote controls. The company entered the professional broadcast market in the late 1960s supplying TV monitors to broadcasters. Video projection in airplanes followed in the 1970s.
Barco first came to the stock market in the late 1980s as a data projection technology supplier for computer giants IBM, Apple and Hewlett-Packard. By the 1990s it had reached dominance in rear projection for cinemas but was also developing new display technologies using liquid crystal (LCD) and light-emitting diodes (LED). In the 2010s the company produced its first 360-degree immersive domes for flight simulators and pilot training. Today its sales break down between: Media and Entertainment (43%), driven by a new wave of digital projection; Enterprise (33%), including screens for control rooms (14%) (for security and monitoring in airports, traffic control, oil & gas plants, electricity supply etc); corporate (19%) including their popular meeting room product, Clickshare: and Healthcare (24%), which is medical imaging for diagnostics and surgery.
Barco is agnostic as to whose content is shown and its products are installed by integrators or value-added resellers. Indra Sistemas and Thales are large customers for airports, in oil & gas Schlumberger would be a typical integrator. The company only has 4-5 competitors worldwide, which shows how consolidated the sector has become.
Technology changes can be both beneficial and disruptive. In the Enterprise division, control room customers in the mid and lower segments moved to lower priced LCD technologies last year and this impacted the company negatively, as it was late to that market at the end of 2017. They now have a product and although the resolution quality of their LCD screens is excellent, limits on size of “tiles” to 55 inches means they have to be joined by seams, which as viewers we found detracted somewhat from the overall effect.
However, LCDs are one third the price of rear projection i.e. a cost of €30k for a 2×2 tile screen vs €100k. The control room business just breaks even on EBITDA, with all of last year’s profits being made by Clickshare, Barco’s product for screensharing in corporate meeting rooms, which is showing double digit growth. Clickshare offerings can range in price from €800 to several thousand, depending on the functionality and numbers of users. EBITDA margin in 2018 was 18% for the Enterprise division with all of the profit coming from Clickshare. The product is manufactured in Shenzhen and sold through value added resellers. Barco was the first into wireless presentations in 2012 and has a market share of 30-35% with 4-5 competitors having 70% of the global market, Crestron and Mersive in the US, and Kramer based in Israel being the other players. Clickshare users can share content from any type of device onto a screen which gives it added functionality compared to Zoom, for instance.
Zoom can be used for conferencing from a laptop but it does not compare in quality to Clickshare used in conferences on a large screen with high quality speakers and cameras. Zoom doesn’t work with meeting room peripherals like Polycom and Logitech. Zoom only captures people with its own PC camera and microphone. Clickshare is also fully wireless which Zoom is not. The big screen serves as a hub where all peripherals can be used. The key competitive advantage, besides quality, is ease of use. It essentially puts an agnostic layer on top of all the peripherals, speakers, microphones and cameras. Only the person showing content on the screen needs the Clickshare button and this can be shared with others in the same room. Barco recently delivered a virtual classroom to French business school, ESSEC, which allows excellent interface with 50-60 students connecting from all over the world.
Barco is in conversations with several potential partners and is considering acquisitions because there is €300m of cash on the company’s balance sheet. No acquisitions are needed in the Clickshare area.
They are constantly thinking about how to monetise the installed base. Their strategy is to develop more software and services as opposed to hardware where they have traditionally been strong. The areas of interest are:
- Analytics solutions (they have good position)
- Workflow solutions (they have ok solutions)
- Device connectivity (interested in M&A in this area)
- Hardware projectors, videowalls, surgical and diagnostic imaging displays (they are growing market share organically but they could do acquisitions here)
We asked about EVS Broadcast Equipment, a Belgian company exposed to the sports broadcasting market which has become the standard replay technology for sporting events globally. Barco said that the sporting market is not one where they have been active, but EVS is well developed in (3) above and active in (4), so “who knows – maybe one day, but it is not a first priority target”.
The Entertainment division accounts for 43% of sales. As to future demand growth, China’s cinema demand is bottoming out. 2016 was the peak in the replacement cycle (2012-2016). There are over 50k cinema rooms in the country, with 60-70k projects expected in future. Barco believes China is in the last 3-4 years of digitisation. The replacement opportunity is the more exciting opportunity today.
In North America and Europe, the first generation of digital projection is now 8-10 years old. Barco recently signed a contract to supply Cinemark in the US with 6,000 projectors. A collaboration with Cineworld was announced last summer. Barco will provide a third of the projected fleet and competitor Christie another third. (NEC and Sony are smaller rivals). Barco is an exclusive provider for IMAX (proprietary system of high-resolution cameras, film formats, projectors for theatres with giant screens) and its contract was renewed last year. The latest generation of projectors which began to be supplied from late 2017 is laser-based, this being the leading technology for reducing energy consumption.
In its healthcare division (24% of sales) Barco sells diagnostic imaging to the likes of Philips, Agfa and GE. Systems can cost up to $50k. Barco’s systems provide image processing with connectivity possibilities. For instance, they can show pictures of surgery and graphs on the same screen and share these with a doctor offsite at a different hospital for a second opinion. The picture quality is so good that the surgeons will see exactly the same image, which is important. Approximately 75% of Barco’s revenue in this division is for digital pathology, for medical and dental markets. Surgical displays account for 25%. They are moving to 4K technology which gives enhanced resolution of the input from endoscopic cameras, i.e. really sharp quality images. They are also looking into 3D displays so surgeons can get a sense of ‘depth’ through the imagery. Barco was the first to transfer digitised images onto any display. Operating rooms are moving from analogue setups to digital which enables doctors to put more info on displays, such as cardiac monitoring.
LED is 2-3x more expensive today than LCD but Barco has installed some of these systems for customers in the Middle East. The screens are seamless, unlike LCD, but standing very close to the LED wall in Barco’s entrance foyer, we could see the pixels and if one is ‘dead’ it looks like a fly on the screen. If you stand further back the flaws disappear. This would seem to be the future, if LED screens can be produced at more competitive price levels. The technology is unlikely to become mainstream in cinemas any time soon as there are still technical challenges to overcome and it remains very expensive versus projector solutions.
The Barco share price doubled last year, understandable in view of the improvement the company has seen in its profitability. Operating margin (EBITDA) improved from 0.2% in 2015 to 12.1% in 2018, with an improvement to 14% expected in 2019 and with management’s stated outlook 2022 an EBITDA margin between 14% and 17%. This suggests double digit earnings growth is comfortably achievable so long as sales growth remains at least mid-single digit. The shares are not expensive on these expectations and may yet have further to run.
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