Trading Idea: GOOG performance foreshadows CX performance?

For 5 of the past 6 quarters, whenever GOOG beatforecasts, so did CX. The common thread between Google and Cyberplex is that they both deliver to marketing managers measureability and performance-based ad budgets.

It is well published that GOOG beat analyst estimates for both sales and earnings for the third quarter in a row. As stated in earlier posts, there are three trends that continue to propel better than expected performance at Google:

• Marketing and advertising budgets are being focused on performance. Cost per Click (CPC) advertising is considered to be one of the most performance-oriented advertising approaches around. It is Google's strength, the source of its dominance, and as more marketers shift budgets, the driver of better-than-expected performance. Paid click- through increased 15% YoY while most other media (including online display advertising) declined.
  
• Unemployment. People being laid off are spending more time online to network, research, find jobs, or create new businesses. Comments by the CEO of domain vendor Tucows (TCS:TSX) last quarter suggested that domains are being bought at record levels as laid off people start-up their own businesses or blogs.
  
• Brand Dominance. Most people are finding their way around with Google. The introduction of Bing in June has had little impact on Google. Traffic to Google search in June increased by 12%, while pageviews increased by 31%. The remainder of the sector enjoyed a 2% increase in traffic, and a 1% increase in pageviews. IT managers don't get fired for selecting IBM; Marketing Managers don't get fired for selecting Google.

CX is one of the vendors at the forefront of an even more measureable performance-based online advertising method called Cost-per-Action (CPA). Essentially, marketers only pay Cyberplex if a user actually does something after they click on an ad. It could be a survey fill, a poll, or even a purchase. It has piqued the interest of mainstream advertisers who are beginning to deploy significant prgrams with CX.

Similar to Google, Q2 results for CX may show a sequential decline from Q1 due to seasonality, although the decline may be less than analysts expect. Notwithstanding, the quarter should show significant annual quarterly growth in sales and earnings over Q2 2008.

There are two downside risks to CX results:

• The company has category concentration in the Health & Beauty sector. Weakness in this sector could create downside risk. A segment proxy to this performance may be Shoppers Drug Mart (SC.TO). SC reported strong earnings for Q1 2009.


• Users stop engaging. If more people click on CX ads, but do not take action, performance could be impeded. This would show up as worse than expected sales and more than expected declines in gross margin.

There are two upside risks:

• With its recent capital raise, the Company has been in a position to accelerate the development of its affiliate network during Q2, creating more revenue opportunity, and a broader footprint that attracts larger advertisers.


• Unemployed people are putting emphasis on improving fitness and overall health. This trend could benefit the health and beauty category, which is where CX has concentration.

Google had to pay more to its affiliate network last quarter, and it should be expected that CX would need to do the same, so gross margins should decline similarly for Q2.

There is more potential forecasting risk with CX, but as a performance-based online ad network, it has similar DNA to Google. For the 5 of the past 6 quarters a GOOG BEAT has foreshadowed a CX beat two weeks later. The only quarter where this did not happen, GOOG missed and CX beat (Q3 2008).

Since CX raised capital in May, the share price has trended sideways on light volume and it is now trading below its 50-day moving average, so good performance for Q2 may result in a potential move up. Google moved up well ahead of its 50 day moving average for two weeks ahead of its Q2 report as investors anticipated results to beat expectations. The stock price is declining on the news. With GOOG as a foreshadow, could CX show a similar pattern?

Disclosure: I own CX.TO. I do not own GOOG or SC.TO

Hailing taxis from the sky: Guestlogix (GXI.V) announcement.

A new press release from GXI announces the launch of ground services delivered through it onboard retail platform.

This could be the "killer app" for the GXI retail platform because it is a natural extension of the travel experience, and there is clear value add to passengers. As most business travellers know, there is nothing worse than trying to figure out how to get from the airport to the first meeting after a five hour flight. Destination ground connections are an easier sale by flight attendents who perceive them as a way to improve the travel experience of "their" passengers. If executed well, uptake should be strong.

The company has been building multiple partnerships with ground service vendors and claims to be able to deliver to 50 of the top airports in the world, which is clearly a good start.

This announcement should be considered more evidence of execution, which should satisfy the horde of analysts that cover this stock. As a result, estimates and targets are likely to be maintained.

The biggest catalyst for the stock continues to be how quickly it can deploy its backlog in comparison to analyst expectations, and how effectively it can dominate the segment by signing up more carriers and merchandisers over the next few quarters.

US Employment Analysis: Supports Short-term Volatility

This is a sobering analysis of current U.S. employment metrics. As per the earlier post today, investors should not gain any solid conviction from these charts as to whether the worst is over, or if there is more pain and agony still to come for the American economy. Almost every positive chart is offset by a negative one, and vice versa. This helps support the potential for more short-term volatility. Crossroads.

Right now feels like that few seconds of silent suspense before something really big happens. And no one knows which way it's going to go. Whichever way it goes, the charts seem to indicate that the downside looks steep and fast, and the upside looks slow. The U.S. Treasury is likely looking at more precise data, and it does not want to risk the potentially harrowing downside. This may be why it has hinted that it is willing to step in to provide even more stimulus later this year if it needs to, despite all of the green shoots sprouting up.

The outlook from Q2 may help. INTC reported a BEAT with nice growth in sales and, more importantly, a margin surprise. It has maintained it full-year outlook, which should be considered a neutral indicator.

Let's all sing:

Should I stay or should I go, now
If I stay there will be trouble
If I go it will be double
C'mon and let me know
Should I cool it or should I blow...

Disclosure: I do not own INTC shares.
RIP Joe Strummer.

Q2 2009 Earnings Season: Crossroads

As Q2 earnings season begins, the market appears to be at a crossroads. A lot of portfolio managers are humming along to the old Clash refrain "Should I Stay or Should I Go Now?" Interestingly, the song has a different meaning depending on how much cash is in the mix.

Based on a sampling of portfolio managers, it appears as though most funds are still weighted towards cash. Recent declines in the market suggest that many who dipped into the market since March have taken profits from the recent run up, and have shored up cash positions again leading into the 4th quarter.

Since the market bottom in March, and leading into the month of July, the VIX had been on a steading decline and was flirting with an 8-month low. During the most recent correction, volatility has increased as uncertainty begins to creep back into the market.



Investors appear to be uncertain because there are a lot of offsetting data and opinion in the market as reporting season begins. Here are some examples:

• Good quarters are expected from belweathers such as Google (GOOG), Nokia (NOK), Goldman Sachs (GS), and JP Morgan (JPM). Offsetting these data points, Q2 performance in many sectors could be weaker than expected as analysts overshoot the "green shoots". This could be especially true in the commodities and materials sectors as hedging in some commodities like oil distorted pricing. In general, investors may see more surprise earnings "misses" than surprise "beats" in many sectors (including technology) for Q2 with greater than anticipated pressure on margins. See Dell (DELL) and Matrikon (MTK) as prime examples. YoY declines in performance in the commodity sector should be significant as Q2 2008 was positively impacted by a commodities bubble.
  
• Positive analyst statements regarding the financial sector, positive resale housing data in Canada, better than expected job loss performance, and improving CEO sentiment point to positive economic conditions leading into the 4th quarter, and into FY2010. Offsetting this positive sentiment, unemployment is still increasing, and there are whispers that the U.S Administration may need to apply more stimulus to the U.S economy, implying that the "green shoots" are tenuous and in danger of shriveling, and that the positive sentiment may not yet reflect reality.
  
• The positive impact of government stimulus programs should begin to show up in construction, materials, commodities, and technology sectors during Q4. However, these positive benefits are likely to be offset by the impact of new regulations related to commodity speculation planned by the U.S. Government, and the potential for passive trade protectionism.

These are but a few examples of multiple offsetting datapoints that investors are mulling over during this reporting season. For every positive data point, there appears to be an offsetting negative data point to consider. Hence, investors are at a crossroad.

In the Tech Sector, there was a pretty strong move from the lows of March. In discussions with my friend Adam Adamou from Caseridge Capital it appears that, exiting June, the market had been priced to imply a 12% to 15% increase in gross margins over the coming year. For the previous year, the actual decline of GM was 15%, and for the March 2009 quarter, GM growth was measured at 0.5%. The market was pricing a snap-back recovery that is a lot to expect from any sector considering the level of economic uncertainty. The recent correction brings more credibility to future expectations.

The uncertainty regarding Q2 earnings appears to be setting up for a volatile few weeks of trading, but not a lot of movement until the end of the summer when nicely tanned portfolio managers begin to redeploy cash.

When they return to the markets, Portfolio Managers are likely to find healthcare, technology, and consumer staples stocks with lots of cash and low debt ratios to be attractive. The long-term prospect of the financial sector is a little more uncertain as new regulations impede future earnings potential. Although Canadian banks may look a lot better than their American counterparts. Commodities are likely to rebound as the market begins to drool again for 2010 BRIC demand.

With respect to small cap tech stories in Canada; I am still sticking with CX, BWC, DSG, and RKN as favorites. All continue to show growth, margin leverage, with low debt and a lot of cash in the till. More interestingly, each probably have future catalysts which should benefit shareholders. As for the US tech sector, AMZN and CSCO still look good.

Disclosure: I own CX, BWC, DSG, CSCO shares. I do not own RKN, GOOG, GS, JPM, NOK, AMZN, or DELL

Redknee (RKN.TO) continues to show momentum.

Yesterday, Redknee announced its second major contract in two days, and the third in less than a month. See the post from June 6th.

The trend for Redknee continues to be international with the June contract located in the Middle East, Monday's multi-million dollar contract with a Tier1 operator in Europe, and then yesterday's announced contract in Pac-Asia. Investors should expect this trend to continue as operators in these regions look for mobile infrastructure and middleware solutions to support significant growing demand for mobile data services. In many parts of EMEA and Pac-Asia, wireless devices will be the dominant access point to the internet and related data. As operators expand billing to accomodate, Redknee should be among the vendors to benefit, and management at RKN appears to be executing well to capture market share.

Mobile infrastructure should continue to be a significant area of growth over the coming years as operators worldwide attempt to manage some of the emerging complexities associated with billing, provisioning, and capacity for 3.2 billion subscribers worldwide.

With that in mind, there are a handful of small-cap public Canadian companies to watch including (in alphabetical order):

Bridgewater Systems (BWC.TO)
Dragonwave (DWI.TO)
Redknee (RKN.TO)
Wi-Lan (WIN.TO)

Disclosure: I own shares of BWC. I do not own shares of DWI, RKN, or WIN.

Canada Day 2009 Week In Review - Guestlogix (GXI.V)

While I was relaxing on the dock, not many meaningful announcements were made during Canada Day week (surprise!).

On July 2, 2009 Guestlogix reported results for Q2, 2009 with sales of $4.6 million up 150% from Q2 2008 sales of $1.8 million. More significantly, it reported positive net income of $.03 million or 0.00 EPS. The company has 824 million passenger trips under contract with 563 million deployed and generating revenue. With recurring revenue averaging around 90%, contractual minimum guarantees, and a substantial install base, investors should consider future revenue streams to be more predictable than in previous reporting periods for this company. The company reported $1.5 million in monthly revenue for May, inferring a forward 12-month baseline of $18.0 million excluding new deployments or the expansion of its OnTouch merchandising platform. With monthly operating expenses in the $1.2 million range, 12-month EBITDA baseline could track to approximately $4.0 million, assuming that the Company continues to manage its expenses.

With the recent introduction of its OnTouch merchandising platform, and a couple of key pilots soon going into production, investors should start to see a steady increase in commission-based revenue on higher priced items sold onboard. As the company rolls these services out, associated revenue streams should begin to be reflected in accelerated EBITDA and net income margins during future reporting periods, even as total revenues increase. Investors could see GXI exit FY2009 with a baseline monthly revenue stream nearing $2.0 million.

Since tripling from its lows of early April during a 10-day period, the share price has more or less traded in a range near $0.90 on low volumes. Since reporting its first net income quarter last week, volumes have increased and the stock is beginning to nudge $1.00. The stock is trading at approximately 48x TTM EBITDA, and 13x FTM baseline EBITDA. As the Company deploys the remainder of its passenger trip backlog over the next 3 quarters and begins to roll-out merchandising services, the baseline EBITDA forecast should be positively impacted, decreasing the forward EBITDA multiple.

Guestlogix has attained a net income inflection point without the earnings benefit of some of its more powerful merchandising programs, which should be launched later this year. Investors should see accelerated earnings over the coming quarters as a result.

Disclosure: I do not own shares of GXI

British Airways Deploys with Guestlogix (GXI.V)

This morning Guestlogix announced that BA has begun to deploy its onboard retailing platform on 245 planes serving approximately 33 million passengers annually. Although terms were undisclosed, most multi-year agreements to date have ranged between three and five years, and this contract likely falls into that range with typical monthly minimum revenue guarantees.

BA should be considered a reference European account that can help to validate the solution to other major carriers in the region. In order to win this contract, GXI has worked hard over the past several months with BA to obtain PCI PED 2.0 certification for its handheld devices. This certification should help to align the solution to banks and credit card companies, which should help GXI to secure more potential European deals in coming months.

The 33 million passengers have been previously accounted for in the company's Q1 disclosure of 824 million passenger trips under contract. According Management, the company is currently generating revenue from the contract. Once switched on, GXI benefits immediately from all current inflight transactions by recognizing percentage-based fees. British Airways generates significantly more revenue per passenger than its North American counterparts, which typically generate about $0.5 per passenger in onboard transaction revenue. As a result, transaction revenue could exceed monthly minimum guarantees quickly.

Analysts are likely to have included the BA revenue streams in recent forecasts, so it is unlikely that estimates or targets would be adjusted upward as a result of this deployment. However, these revenue streams help to de-risk forecasts, and continue to provide evidence that execution continues on track.

Disclosure: I do not own shares of GXI or BA