Signs of Brighter Days

Signs of Brighter Days

Wireless Ronin—and its shareholders—look for the stars to align over the digital signage industry.

It looks like a business-news Web site, but Infopoint, a Thomson Reuters’ service, plays on a digital sign in the lobby of the company’s Eagan campus. A stream of continually updated articles appears on the flat-screen monitor along with local weather conditions. Stock-market indices are displayed across the bottom of the screen.

For information giant Thomson Reuters, Infopoint is a branding and promotional tool. It appears on about 300 such signs in 44 countries (in several languages). Some signs are in Thomson Reuters offices, others are in the offices of banking companies or at sites such as the Chicago Mercantile Exchange; at least two, in London and Singapore, are outdoor Jumbotrons.

Infopoint also plays in the Minnetonka office-park lobby of Wireless Ronin Technologies, Inc. But the digital sign there is meant to demonstrate what the company does.

The same is true of screens in Wireless Ronin’s conference room that show a menu from KFC (Kentucky Fried Chicken). About 150 KFC stores have replaced their plastic menu boards with digital ones. Also in the conference room is an interactive touch screen that walks shoppers through the features and specs of vehicles sold at Chrysler, Dodge, and Jeep dealerships.

Wireless Ronin, with about 55 employees in Minnetonka and 30 more in Windsor, Ontario, sells software that runs digital signs for those clients. It also maintains and manages the signs—6,500 screens for 190 clients—from a small operations center at its Minnetonka offices. Thomson Reuters’ screens qualify Wireless Ronin as a “global” business, though almost all of its sign networks are in North America.

Its stock (Nasdaq: RNIN) is publicly traded. But Wireless Ronin, 10 years old, is still in investment and start-up mode. In 2008, it posted a net loss of $20.7 million on $7.4 million in revenue. In the first three quarters of 2009, it showed a net loss of $8 million on $3.5 million in revenue. It has yet to achieve profitability. But the company’s executives say, and some analysts agree, that Wireless Ronin could be poised for much bigger things.

 

Samurai with a Cell Phone?

The company name is an anachronism that has little to do with the current business. Wireless Ronin was founded in 2000 by a small group of engineers, none of them on the current executive team. They were working with seed money to develop software for a handheld wireless device to be used in health care. Some of the engineers were martial-arts enthusiasts. A ronin is a masterless samurai. Hence, Wireless Ronin.

As Chief Operating Officer and Executive Vice President Scott Koller tells the story, the start-up caught the interest of a client who said, “I love what you’re doing in Wi-Fi, but I don’t want to do a quick wireless transaction [with only text and data]. I want to create rich media and push it out to a wireless network of displays.”

This occurred before the company had any actual sales, Koller says. The software engineers, inflamed by the vision of a paying customer, started writing code for a system that would transmit fat digital files wirelessly and schedule them to play at appropriate times. Their first installation was in 2003. Simultaneously, they applied for a patent on the software, called RoninCast.

Early installations were in large wireless environments including the Las Vegas Convention Center. The signs displayed announcements and advertisements. Today, only about 30 percent of Ronin’s digital signs are wireless; most are connected to Ethernet cables.

“Maybe we should be calling ourselves WRT,” muses President and CEO Jim Granger, who headed other small technology firms before joining Wireless Ronin in December 2008. But the full name—including “wireless”—is too well known in its industry to abandon it, he says.

According to Koller, one happy side effect of developing RoninCast for wireless applications is that the software is unusually robust. Once you’ve worked through the issues of delivering content securely and reliably in a wireless environment, he says, “if you then plug in a cable, it’s very easy to do what we’re doing.” The company boasts an “uptime” rate of 97.25 percent, meaning its signs go down due to software or maintenance failures only 2.75 percent of the time.

The reliability of its software led Wireless Ronin to the particular niche of the digital signage business in which it now intends to specialize and in which it has ambitious hopes to grow. The company refers to that niche as “mission-critical” applications.

 

Signs That Run So Businesses Can

Menus in fast-food outlets such as KFC are a perfect example of “mission critical.” (Wireless Ronin executives are careful to refer to these customers as “quick-service restaurants,” or QSRs, the industry’s preferred term.) If a restaurant has replaced its paper or plastic menu boards with digital versions, it is critical that the digital menus function properly. If they go down, the restaurant grinds to a virtual standstill.

The same applies to most of the 89 digital signs installed last fall in St. Paul’s Xcel Energy Center, primarily as menus for food concessions. And to signs in cafeteria operations run by client Aramark in hospitals, schools, and office buildings. And to the digital signs that display services and prices in retail operations, including the East Coast chain of Sun Tan City tanning salons.

It’s a bit of a stretch to describe the Thomson Reuters service or the interactive Chrysler screens as “mission critical,” but Granger points out that if they go down or malfunction, it means public embarrassment for those companies. That isn’t necessarily the case in more typical digital signage applications, where one party might own the signs and rent advertising time to other parties.

Along with its robust software, Wireless Ronin claims its hosting service as a competitive differentiator. Christopher Burtt, global signage product manager for Thomson Reuters in New York, says that he jumped at the chance to offload the management of Infopoint to Wireless Ronin.

Thomson Reuters launched its Infopoint service in 2002, using software from another vendor. The software was fine, but the system was managed and maintained by Thomson Reuters’ own IT department.

“It was a very low priority for them,” Burtt says. It could take weeks or months to install a screen or to fix one that developed a glitch. By late 2006, Burtt says he was ready to pull the plug. “Then we found that [Wireless Ronin] could manage it for us. Their [24-hour-a-day] operations center was their real selling point.”

Granger says that more than 90 percent of the customers for RoninCast software now opt for the ongoing hosting service as well. Managing customers’ signs accounts for about 15 percent of the company’s total revenues.

 

Why Go Digital?

Digital signage—the so-called “digital out-of-home market”—includes everything from electronic highway billboards and giant displays in New York’s Times Square to the TV-sized screens that appear in airports, hospitals, retail stores, and the restrooms at bars. In 2008, industry analyst PQ Media estimated the size of the U.S. market at about $2.4 billion and growing.

Even if that figure is accurate, it means little to Wireless Ronin, Granger says, because most of that money is tied up in hardware: commercial-grade screens from makers such as NEC and Samsung, and the computers that are used as players. Wireless Ronin is in the software-and-services side of the industry.

Similarly, the sales pitch for digital signs in general is only moderately interesting to Wireless Ronin, because the standard pitch applies mainly to advertising rather than the mission-critical segment the company is pursuing. Nevertheless, Koller says, “we quote the same figures that everyone else does” with regard to the basic effectiveness of the medium.

For instance, in a 2007 media-awareness study by research firm OTX (Online Testing eXchange), 63 percent of respondents said that advertisements on digital signs catch their attention. That outscored television, billboards, magazines and newspapers, radio, the Internet, and mobile phones. Fifty-three percent found ads on digital signs “interesting,” and 36 percent “took some action” after seeing a digital ad.

A 2005 Arbitron study zeroed in on digital signs in retail locations, striking closer to Wireless Ronin’s sweet spot. Of shoppers who had seen digital signs in stores, 78 percent found them at least somewhat helpful, and 29 percent said they had made an “unplanned purchase” after seeing product information on an in-store digital sign.

Those figures explain why a merchant might pay to install a few screens that promote sale items and whatnot. But Granger says that more fundamental forces are pushing the demand for digital signage, and some of those forces are specific to mission-critical applications.

 

On the Menu: Drivers and Enablers

Granger says that conditions have reached a “tipping point” that should spark an explosion in digital signage. The main enabler is falling hardware prices. The cost of flat-screen monitors, just like that of flat-screen televisions, has dropped dramatically in the past five years. Monitors under about 40 inches in size now can be had for $1,000 or less. Five-year warranties are replacing three-year protection.

The price of players for digital media—i.e., desktop computers—also has dropped consistently. That changes the economics of converting from paper or plastic signage to digital.

As for mission-critical applications, restaurant menus are a prime example of both old and new “drivers” pushing a conversion to digital, Granger says. Because the information on digital signs is easy to change, restaurants find it much simpler to test new menu items, promote special deals, and present only the items they choose to from the parent company’s offerings.

For instance, many KFC restaurants in southern states offer fried okra as a side dish. Most in northern states do not. With Wireless Ronin’s system, an individual restaurant manager can go to a KFC Web site and select particular items for his menu, changing them as often as he likes to see which ones sell best. The same applies to managers who want some or all of their menus to appear in another language, like Spanish.

Restaurants also can “day-part” their menus if they’re digital, listing breakfast items only until 11 a.m., for instance, then switching to lunch offerings (most of KFC’s lunch sales are of plates, not buckets of chicken), then dinner items. One surprising advantage: This helps quick-serve restaurants deal with drunks who show up at night demanding breakfast items (“Hey, ish’ on your menu!”) that the restaurant isn’t serving at that hour.

Those selling points for signs that can change quickly and easily have been present for years. But a new driver for digital menus has arisen more recently: a growing interest in nutritional information. A few local and state governments, including New York City, already mandate that chain restaurants include calorie counts with each of their menu items. Similar national regulations are expected to follow soon.

This isn’t a simple matter of attaching nutritional details when a new item is launched, Granger says. “If you change the mayonnaise you’re using, or if you get a new supplier for cheese, that usually changes the calorie count.”

Another driver: Digital signs and menus can create “lift” by urging shoppers to “add things to the buggy” at the point of purchase, as Koller puts it. In restaurants, soft drinks are a highly profitable addition to food orders. In October, Aramark rolled out a new Wireless Ronin–powered “Burger Studio” in some of its college cafeterias. A touch-screen kiosk lets customers build their own sandwiches by choosing add-ons and side orders. Unlike a human cafeteria server, Koller says, “one thing the kiosk never forgets to do is to say, ‘And what would you like to drink with that?’”

Similarly, he says, a digital display can mean that a retailer like Sun Tan City no longer has to depend on “a 16-year-old behind the counter” to sell its add-on products. As consistently as the retailer likes, the screen can say, “You just got tanned, now don’t forget the bronzer.”

 

Big Things in Store?

Granger’s “tipping point”—those factors that look to bring a wave of new sales for Wireless Ronin—was reached at about the same time that the global economy fell off a cliff.

Wireless Ronin lost nearly $21 million in 2008, Granger says, because it had beefed up for a major growth spurt. Instead, the economy tanked, commercial credit practically vanished, and businesses started hoarding cash. Late that year, Wireless Ronin laid off about 70 people. That, combined with other cost-cutting measures, slashed its 2009 cash-burn rate to half of what it was the previous year, according to Chief Financial Officer Darin McAreavey.

But economic conditions remained lousy last year. The company’s customers and prospects that had plans to add digital signage put those plans on hold.

For instance, 2,300 Chrysler Group dealerships already have free access to an online version of Wireless Ronin’s new iShowroom application that they can use on their desktops; Chrysler provided it for all of its dealers. But only a handful of dealers have put touch-screen iShowroom kiosks at the point of purchase, on their showroom floors; dealers have to cover that expense ($5,000 to $10,000) themselves.

Chrysler has obvious growth potential, and Wireless Ronin is working on similar projects with other carmakers, including Ford. But success will depend not only on the financial strength of the car companies, but on dealers’ willingness to invest in new technology.

The same business-structure hurdle appears in fast-food chains. KFC has 5,100 restaurants, but about 4,200 of them are owned by franchisors. Granger says that’s typical of the industry. Wireless Ronin is doing trials with other fast-food chains that he is not free to name yet. But falling hardware prices or not, it still costs somewhere in the neighborhood of $15,000 to $20,000 to convert a restaurant to digital menus. Not many want to take on the expense right now.

Still, some analysts look at Wireless Ronin and like what they see: a tiny company in an industry that is bound to grow; a company that has both ongoing deals and irons in the fire with major automakers and restaurant chains.

Investment analyst James Goss, who follows Wireless Ronin for Barrington Research Associates, Inc., in Chicago, says he isn’t in aggressive “buy” mode but has placed a “market perform” rating on the stock. He sees enormous possibilities for the company. He points out that its client KFC is part of Yum! Brands, Inc., which also owns Taco Bell, Pizza Hut, and Long John Silver’s. And Goss commends Granger and CFO McAreavey for cutting expenses to create “a cost structure not built for what they might be but accommodating who they are.”

Goss’s reservations, however, include a tough economy and the fact that Wireless Ronin is “not the only digital signage company” that will be competing for those huge restaurant, auto, and retail accounts. Competitors vary by industry, Koller says. In retail, for example, they include Nebraska’s Nanonation, Ohio’s Stratacache, and London’s EnQii.

Jay Meier, a securities analyst for Minneapolis brokerage and investment banking firm Feltl and Company, has issued a “strong buy” rating for Wireless Ronin and set a $6 target for its stock, which was trading in early February at around $3.

Meier is quite familiar with the company, colleagues at Feltl having handled a registered-direct stock offering last fall in which Ronin raised $7.8 million. He likes the fact that the company has about $14 million in cash and no debt. He also likes its hosting service, which offers a steady stream of revenue not subject to the vagaries of initial software sales. (Wireless Ronin charges from $15 to more than $100 a month per location to manage a customer’s digital signs, depending on the complexity of the customer’s needs.)

Above all, Meier likes the growth potential of some of Wireless Ronin’s relationships, including the Yum! Brands connection. A number of multimillion-dollar deals are very real possibilities for Wireless Ronin, he says. If only one or two of them happen, his prediction that the company finally will achieve a profitable quarter in 2010 could look very conservative.