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Investor Insight Initiates Coverage on Psychic Friends Network Inc. With a Price Target of $2.55 Per Share

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© Marketwire 2012
2012-12-04 19:00:56 -

HONG KONG, HONG KONG -- (Marketwire) -- 12/04/12 --
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Investor Insight announced today that is has initiated coverage on Psychic Friends Network Inc. (OTCBB:PFNI) with a $2.55 target price, commenting that "the upside potential is sizable," with the outstanding marketing opportunities and distribution pipelines available to the firm offering huge membership growth potential.
Company Overview - Summary of Opportunities
The Psychic Friends Network (OTCBB:PFNI) first hit the airwaves back in the 1990s, and was a huge cash-generation success story. Circumstances beyond the company's control compromised its status as a going concern at the end of that decade. With new technologies, better marketing apparatus, and a more efficient advertising structure, PFNI is back to recreate the magic.

--  The rapid globalization that has occurred over the past 10 years opens
    international markets to service firms like never before. The potential
    for penetration in overseas venues is impressive.  
--  The proliferation of mobile communication devices makes connecting to
    customers easier, more economical, and more fluid than ever imaginable
    in the '90s.  
--  Video interfacing options personalize the connection between customer
    and advisor to a level not possible with the telephone.  
--  Advances and streamlining in the area of payment options help tighten
    verifiable commerce exchange, significantly lower delinquencies, and
    increase cash flow and income capture. 
--  A myriad of marketing avenues through multimedia platforms and bundling
    partnerships with successful services firms should help catapult the
    company's image to new heights of recognition in the popular culture.  
--  In the past decade, the psychic/astrological space has expanded its
    footprint in the realm of popular culture making now a more optimal time
    than ever for the company's re-establishment. 
--  The industry as a whole has expanded to over $2.5 billion in revenue. It
    is highly fragmented, with few recognizable players, leaving the door
    open for a firm like PFNI to gain immediate traction, and capture
    sizable market share. 
--  The management team that propelled the firm in the '90s is back with its
    past experience, vast customer databases, and an even stronger stable of
    industry contacts. 
--  Lower cost structure, opportunities for partnerships with brick and
    mortar shops, and increases in the potential for advertising revenues
    all help bolster the claim that the company is re-engaging the market
    place at the perfect time. 
--  The firm expects to generate revenues from a variety of sources
    including its benchmark phone network, advertising on its website and
    social media platforms, mobile app subscriptions, PSMS text content
    (daily horoscopes, for example), and video interfacing on mobile and
    website platforms.  

Potential Sources of Revenue for the Company
PFNI is in its developmental stage, and thus is in need of substantial funding to capitalize on the huge potential revenue opportunities that exist in the current marketplace. Estimated costs for the coming year are approximately $1.2 million; real money-but a fraction of potential revenues awaiting the model 12-18 months out.
The company is already beginning to make strides in the right direction with an appearance at the Daytime Emmys this past summer, a recent presentation at a San Francisco investors conference, the launching of its tricked-out 2.0 version website, and the development of its mobile app platform.
Based on PFNI's ability to secure the proper financing, and execute on its game-plan, the upside potential is sizable. In a sense, the stock can be viewed as a long-term option, with no time decay or expiration date. Applying the company's aggressive projection for sales and net income, we arrive at a valuation of $2.55 on a 15x forward P/E basis. In the near term, we believe that the "option" value of owning the firm's revenue stream potential would be reasonably enumerated at $.80 to $1.00.
The Numbers Indicate a Very Promising Future for PFNI
Second chances abound in life-relationships, sports, etc. - but in the business world they are quite rare. Ideas typically have one shot at success; a window opens only briefly. It is not often that an idea, a business schematic, is afforded an opportunity to come to the starting line with the knowledge that its model has worked in the past, and can work again. That is what I believe the folks at the Psychic Friends Network (PFNI) are looking at today. They are in possession of a proven formula, a cash producing business model, that has been deployed before, experienced smashing success, but whose life cycle was cut short by external forces beyond their control - and more important, forces that are no longer relevant.
In fact, various developments in the marketplace over the past 10 years make for a more attractive landscape than PFNI could ever have imagined in the 1990s.
A Brief History of PFNI
The Psychic Friends Network was launched as a concept in 1990. If you were born prior to the mid-1980s, you know the name. It's astonishing brand recognition was achieved in a very short time window through a targeted system of infomercials, print, radio and direct mail marketing that would be the envy of many Fortune 500 companies. That marketing mechanism produced $4 of revenue for each $1 in advertising expenditure.
This outstanding marketing-to-revenue conversion ratio fueled rapid growth. From 1993 to 1999, PFNI generated more than $1 billion in revenue, delivering psychic advice and daily horoscopes on topics ranging from financial matters and relationships to health, family and career concerns.
PFNI's network of outsourcing, and at-home employment, was low cost. Their state-of the art (at the time) telecom system was efficient. Their celebrity-centric marketing scheme was attention getting. At the peak of its popularity, the operation was averaging 14,000 calls and nearly $600,000 in revenues each day.
In the mid-1990s, a group of activists sought to address the 900-number business in the telecommunications industry. Government, never an institution to miss out on an opportunity to meddle in the affairs of the private sector, started down a road that would eventually render the business environment in which PFNI operated so hostile that the company was forced into "retirement."
By the latter part of the 1990s, the FCC restricted telecom companies from enforcing payment from customers for delinquent bills, and prohibiting firms such as MCI and AT&T from suspending service for non-payment of services. Essentially regulatory changes allowed telecom customers to retain their phone service...while not paying 900 number charges. The progression was easy to forecast: Telecom firms began to withhold fees owed to service venders such as PFNI, eventually pushing the firm into bankruptcy in late 1998. Although originally intended to cripple the seedy phone sex business, the laws served as a death blow to otherwise legitimate operators in the arena. In the end, theirs was a very solid overall business model, undone by outside forces.

It is important to note that most businesses and industries die out due to declining demand for product or service. This is clearly not the case with PFNI, its industry, or business model. And in the interim, revenues in the space have more than doubled in the U.S. alone.

Fast Forward to 2012:                                                       
The 21st Century Version of a Winning Concept                               

In 2009, the original management team secured $400k in capital to begin a revitalization of the concept. A reverse merger in the beginning of 2012 raised an additional $780k. The re-launch has begun: PFNI, with an experienced team, has the potential to regain its standing, and use its hallmark brand to gain significant market share in a multibillion-dollar marketplace.
Consider this: In the '90s, the firm was able to generate enormous revenues with only the telephone system and television advertising. The world is a very different business environment today-one that should prove to be quite advantageous to a services concern such as PFNI, whose sole focus is the overall experience of its customers. Imagine the possibilities today. Let's examine the variables:
Market Overview
For customers with specific advisors they wish to speak with, text and mobile app options will allow them to schedule appointments with their selected advisor, when that advisor is unavailable - rather than waiting on hold or terminating a connection. This represents another example of technology - unavailable even 10 years ago - streamlining the client/advisor process.
Bill-to-mobile will provide customers with a direct payment option through their existing mobile service provider. Data estimates relating to the explosion of mobile application technology use is all over the map, but one thing is certain: the near parabolic trend.
Technological Advances
The industry is estimated to generate revenues upward of $2 billion in the U.S. alone. The composition, however, is extremely fragmented. The largest organized participant is Keen, owned by Yellow Page Holdings and AT&T (ironically enough, one of the phone companies that helped drive PFNI into bankruptcy).At the next level down, CA Psychics and Hollywood Psychics are successful enterprises that operate in the fertile ground of the West Coast. And then you have thousands of brick and mortar shops, online "reading" sites, and public fair venues garner business around the country.
These all lack the benefits of scale and organization, though, that PFNI has proven successful at implementing in the past, and is intent on replicating in the near future.
Moreover, even with PFNI absent from the industry for close to 12 years, how many of those competitor names can an average person on the street cite? Short answer: None. PFNI represents a sizable edge in today's brand-centric world.
Financial Review
Below are income statement projections for the company. The estimated growth pattern is sharp. However, as depicted in the second small exhibit, the history of the business model suggests such expectations have some precedence. These are ambitious estimates, and are certainly no guarantee of success. However, if proper forward funding is secured, and many if not all of the business avenues discuss in this report are successfully executed by management, these projections could easily be met-or possibly exceeded.
Although the business concept is a proven one, the re-engagement of PFNI is, in all respects, a development stage entity. Its success as a going concern will depend largely on its early stage execution. That, in turn, is almost completely dependent on the firm's cash reserves. The company recently received the third and final installment of a $780k financing package through Right Power.
With much work to do in the launching of various tech platforms, more funding will be needed in the intermediate term. The company currently has no lines of credit or other bank financing arrangements. Generally, they have been financing operations to date through the proceeds of the private placement of debt and equity instruments, and the financial backing of officers, friends and family members. The company's intention is to finance forward expenditures in a similar fashion. This will not only require new investment interest in the fledgling concern, but will be dilutive to existing shareholders. Many of these new issues may require senior rights, and privileges to the existing investors.
This additional capital is imperative to the development of the company. No matter how outstanding the potential for a business idea, it needs cash to fuel it. If necessary financing is not made available on acceptable terms, the firm may be unable to take advantage of prospective new business opportunities, and the wealth of potential revenue pipelines in its sights. In my estimation, a combination of equity, debt, and the initiation of bank credit should be aggressively pursued by management.
The company estimates expenses for the coming critical 12-month period to be approximately $1.2 million. It could be a delicate balance, in the coming months, between initial revenue streams and additional funding. I believe they should and can get there. The opportunities 12-18 months out are extraordinary, in my opinion. However, one cannot discount the going-concern risk.
The estimated cost of initial launch is shown in the chart below. Not insignificant, but a fraction of the potential revenues available to the firm's model.
The Coming Year
Developments are beginning to happen quickly for PFNI, and opportunities abound. The "soft" launch of the company's website, PFNI 2.0, has just taken place. It will serve as the "nerve center" of the company's operations. Targeted test market trials are scheduled to begin before the end of Q4 2012. The critical important mobile app platform launch is scheduled to occur within the coming 3 months. By all indications, the initial investment capital infusions are being allocated to good use.
A coordinated press release program, designed to draw attention to rapidly developing events on the company's calendar, is also being initiated. A targeted marketing campaign is taking form, and will pick up momentum in Q1 2013. The company recently operated spot locations at the 2012 Emmy Awards in Los Angeles, and presented at an investors conference in San Francisco. All of these are positive first steps in the focused approach of returning PFNI to the pop-cultural center stage.
In addition to the outstanding organic growth opportunities that exist for the company, substantial joint venture, and industry roll-up potential could provide momentum for growth, consolidate a fragmented industry, streamline costs, enhance intellectual capital deployment, and eliminate competition. Put it all together, and it could be a busy year indeed for the folks at PFNI.
At an estimated $2.5 billion globally, the corner of the entertainment industry in which PFN occupies has expanded dramatically during the decade since they took leave of the space. Popular culture has further embraced the astrological and psychic realm. Generally speaking, popularity of this industry grows in periods of economic strife. We are certainly embroiled in exactly one of those periods, with absolutely no end in sight.
Businesses usually fail due to one of the following factors: 1) Their products or services becoming old or obsolete; 2) the population sours to an idea and loses its appetite for said product/service; or 3) the product/service in question is replaced by something better, faster, stronger, more informative, or more entertaining. None of these was the case with the past demise of PFNI in the 1990s. As discussed earlier in this document, the company's fate was determined by an unprecedented shift in the regulatory environment. And more important, those changes are no longer a factor.
The company was an absolute cash machine during its prior run-with little more than two tin cans and a string compared to what is at its disposal technologically today. The marketing opportunities and distribution pipelines available to the firm at present are outstanding, and offer huge membership growth potential. Mastery of this new social, multimedia environment is the key to the company's fortunes.
For PFNI, this is a moment of significant opportunities to regain its dominant market position. As in any business venture, risks are present, and cannot be disregarded-additional funding/investment in operations are imperative to business plan execution. Time will tell, but a look at the numbers and the overall landscape indicates the Psychic Friends Network has all the makings for a uniquely inspiring entrepreneurial second coming.
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