Downchurning...

Last week, Gartner released some market data on worldwide cell phone sales. For anyone with a reasonable understanding of the mobile handset market, these data should not be viewed as surprising:


- 3rd quarter mobile handset sales growth was about 40% less than the year earlier.
- Gartner forecasts a 1% to 4% decline in handset sales in 2009.
- As reported by various sources, most of the growth worldwide has been driven by first-time buyers in emerging economies such as China, India, and throughout the Middle East.
- Gartner predicts weakness in the replacement market - especially in advanced economies.

So what are the implications of this report?

First of all, the demand characteristics of mobile subscriptions need to be separated from the demand for mobile handsets. Subscriptions are less economically sensitive than devices.

People all over the world continue to indicate that their mobile phones are essential to them in an economic downturn. This infers that a mobile subscription (not the phone) is non-discretionary, and may be categorized as a staple utility - right up there in priority with electricity and heat and water. This means that carriers such as Verizon (VZ-NYSE), AT&T (T-NYSE), and Rogers Communications (RG-NYSE) among others in North America should benefit from subscriber stickiness despite the recession.


However, as consumer budgets tighten, marginal usage may decline over the next 2 quarters, which could reduce earnings outlooks. Similarly, the conversion rate from the 2G network to the 3G network may not be as dramatic as forecasted earlier this year because people are more inclined to wait until their economic situations improve in order to upgrade their subscriptions. Although the phone is essential, the bling is not.

Carriers use device subsidies and bundling to switch and commit people to long-term data contracts in return for access to the latest and greatest devices. The threat of switching (also known as churn) drives the handset business. Based on the data from Gartner, most people may be inclined to hold on to their current subscriptions and devices for the next 2 quarters, including the Holiday season.


So what does this mean?

Innovators should gain ground. Only the most innovative handset manufacturers, which attract early adoptors with aggressive product release schedules, should benefit from the replacement market. This means that in North America, we should see innovators like Research in Motion (RIMM-Q), and Apple (APPL-Q) continue to grow market share in a declining segment, at the expense of all other smartphone and cell phone manufacturers. More than ever, in these markets, innovation matters.


Even the market leaders should see muted growth over the next two to three quarters:


- Smartphone upgrade delayed in emerging markets. In the remainder of the world, where Nokia (NOK-NYSE) is dominant, there should be significant delays in handset upgrade cycles in most emerging economies. As a result, Nokia should be able to protect its market share against the market entries by both RIM and Apple.

- Downchurning. There is a greater than 50% chance of significant increases in subscriber churn as carriers attempt to hang on to economically stressed subscribers in increasingly commoditized emerging markets. This should cause pricing pressure, which could compress margins for both handset manufacturers and carriers worldwide. Downchurning could benefit re-design leaders such as Samsung and LG, who are leaders at offering solid low-cost handset versions to emerging populations. We may see that trend occuring in advanced economies now as well.


- Crime. There is likely to emerge a gap between the essential utility of mobile subscriptions and the ability to pay for access in many economies. Considering that up to 85% of these subscribers are prepay users, there is significant organized crime risks related to prepaid phone cards, and subscriber fraud. Emerging secure payment networks should benefit from this increased risk. Look for electronic prepaid network providers such as Euronet (EEFT-Q), and Safeway's (SWY-NYSE) Blackhawk Network to benefit from the need for more transaction security, along with Canadian-listed Vendtek Systems (VSI-TSXV).

So the bottom line is this: Unless a carrier has utilized a lot of debt to upgrade its capacity, network providers should fare relatively well during a recession, although with reduced earnings potential. Handset manufacturers, which are reliant on subscription upgrades should see a few more choppy quarters. Innovators should exit this current economic downturn will better market positioning than followers.

In the end, it may be all about the Operating System. RIM, Apple, Nokia, Microsoft (MSFT-Q), Google (GOOG-Q), and Palm have all made significant efforts to open up their operating systems to independent application developers. Increasingly, handset manufacturers will be blurring value proposition between themselves and carriers.

I do not own shares of any of the Companies mentioned above, nor do I receive compensation from any of the Companies mentioned.

With Shareholders Rights Plan, Vendtek Anticipates Potential Future Takeover.

After markets closed last night, Vendtek Systems (VSI.V) announced that it has adopted a Shareholders' Rights Plan (SRP). Clearly, this SRP is a prudent response to the accumulation of stock by its Middle East distribution partner. Through Privinvest, its UAE partner has acquired to date nearly 17% of VSI.V shares outstanding via the public markets. As far as I can tell, Privinvest has invested approximately $6.5 million to date based on the price range of accumulation. Within current stock price ranges, it would take approximately $1.0 to $1.2 million to acquire the remain 3.07% of the shares outstanding, which would give Privinvest effective beneficial interest in the Company. In other words, effective control.

The SRP is a tool that gives VSI shareholders an ability to block or delay unsolicited bids in order to maximize share value by creating a bid market through alternatives. Although I believe that a potential creeping takeover bid by Privinvest is essentially friendly, it is a prudent move by VSI management to protect shareholders. VSI is in a very good spot in the market that both its larger competitors, and complimentary payment networks would find valuable.

I suspect that there are to be some fairly major catalysts to be announced either at the end of this year, or early next year that could have positive impact on share value. The interesting question may be - will VSI still be an independent public entity when anticipated catalysts occur?

I do not own shares in Vendtek Systems, nor do I receive compensation from the Company, Management, or the Board.

Descartes Systems: In Dark Days The Sun Shines on DSG

Descartes Systems operates an unsexy SaaS messaging network for the worldwide supply chain that helps to lubricate the flow of goods across international borders by automating customs and regulatory filings associated with shipping. In addition, DSG provides logistics services for fleets, which has experienced increasing demand due to higher fuel and declining shipments.

Third Quarter was better than expected.

The Company was slightly below expectations in topline sales reporting $7.1 million versus my expectation of $7.3 million due to shipping headwinds. However EBITDA was higher than expected at $4.4 million versus my expectation of $4.1 million. I believe that this is due to greater demand for higher margin services during the quarter. Cashflow was reported at $5.9 million, substantially higher than our forecast of $4.9. This better than expected result was due partly to Days Sales Outstanding (DSO) declining from 53 days to 47 days versus our expectation that DSO would increase to 60 days due to the economic stress of its client base. Reported earnings were 64% higher than my forecast at $2.3 million versus $1.4 million. Part of this difference can be explain by lower than forecasted tax expenses. EPS was $0.04 and a penny higher than my expectations of $0.03 EPS. This Company is growing at a solid rate while many others are faltering.

Outlook Is Positive For Three Reasons.

1. Regulations will increase and make shipping more complex - With the announcement of the 10+2 regulation (aimed at improving product safety) in the US, DSG is well positioned to help its clients comply at minimal relative expense, while the US government continues to keep the supply chain lubricated. By 2011, European Union regulatory harmonization will boost demand again.
2. Worldwide Recession - Shippers will need to become more efficient to survive. Only 5% of all documentation is automated. More automation should be expected, and DSG is in a great position to benefit - especially in North America.
3. Volatility and Uncertainty - These two conditions benefit DSG the most because shippers will need to contend with increasingly complex orders and contracts that may be ammended by the second. This should benefit DSG in the near-term as the only way to deal with this is through automated messaging.

A Stock for the Times

Descartes Systems Group provides a boring but essential service to the Supply Chain. As conditions deteriorate, and volatility increases, while more regulations get enacted, Descartes Systems becomes more essential to Supply Chain.

The Company has no debt and $53.5 million in cash.

A Potential Consolidator

Descartes is in great position to use its balance sheet to accelerate its capture of more regulations worldwide for automation. Its acquisition of Dexx in Europe is an early foray. I expect more to come. I also believe that the Company can extend its messaging concept to other transactions in the value chain. Finally, DSG could leverage its balance sheet to evolve into an outsources fleet management system.

I do not own shares of Descartes Systems, nor do I receive any compensation from the Company, Management, or the Board.

Post 9/11 Head Fake

Yesterday, the Dow closed at 7552, below the lowest monthly close of 7591 in September of 2002. The 2002 bear market was caused by uncertainty related to post-9/11, post-tech bubble and various high profile accounting scandals. Mostly, consumers were feeling insecure about their future (due to the fear of more terrorist attacks) and investors were mistrustful of the stock market.

At the time, the U.S government intervened aggressively to prevent a further deterioration of the stock market, and to prevent its malaise from spreading to the general economy. Sarbanes Oxley legislation combined with aggressive monetary policy and credit deregulation was an attempt by the US government to restore faith in the stock markets and to induce consumers to spend more. By 2002, it was un-American not to spend. The problem was that the Consumer only had pocket change. Individual savings were at historical lows in 2002 and 2003, with less than 1% savings rates compared to the three previous decades when consumers typically saved 7% of their incomes. There was the proverbial problem of getting blood from a stone, a challenge that was solved (as we all know) through asset leverage.

Consumers were induced to leverage their net worth in order to buy more. According to testimony to Congress by Alan Greenspan on February 17, 2005, by 2004 consumers were creating disposable cash by leveraging increases in Net Worth driven primarily by the value of their real estate. According to Mr. Greenspan at the time, the Net Worth to Income ratios were at historically high levels and even higher than the ratios leading up to the tech bubble. Persistently low interest rates, combined with increasing home values and ongoing credit deregulation provided mortgage brokers and bankers incentives to create high risk credit products that were used to induce lower income families to become homeowners…and spend. Everyone was becoming upwardly mobile, consumerism ruled, and the American Dream was thriving. People leveraged their inflated Net Worth to spend above their economic bracket. Meanwhile, the financial engineers that created and managed the architecture underlying the Great Spend made gobs of money.

The US consumer spending frenzy became globalized. Suddenly Chinese, Indonesian, and Indian factories were deluged with orders to help fulfill the American Dream. Giant middle classes formed, creating their own spending power and consumer demand. Resulting materials shortages and the thirst for energy created possibly the single largest commodity boom ever, which persisted a full year beyond the beginning of the collapse starting in August 2007, and we know well what has transpired since.

Are we at the bottom? Earlier this year I was certain that the stock market would bottom at 2002 levels and then begin a slow recovery spanning the following 6 to 8 quarters. It was my belief that once the false post 9/11 boom was effectively wiped out, markets would regain momentum as consumer net worth to income ratios aligned to those of previous decades, and consumer savings rates returned to 5% to 7% of net income. With current deflationary pressures, caused by a clamp on consumer spending, we may in fact be seeing the front end of the adjustments happening right now. It should be an austere Christmas.

However, there remains risk that a bottom has yet to be reached. Unlike today, in 2002 the financial markets were fairly sound. Uncertainty was limited to unsavory accounting practices of a handful of high profile Companies. Despite continued intervention by Governments worldwide, the current state of the worldwide financial sector remains unstable at best – this a much greater scale of pain than illegal accounting practices by a handful of US companies. This is not a stock market issue; it is a fundamental financial issue.

In 2002, government intervention along with the underlying theme that, if American consumers didn’t spend, the terrorists would win, drove an already leveraged consumer to more leverage. But it worked, and the Wall Street declines did not spread to Main Street. In hindsight, maybe it should have. If the 2002 downturn became a natural recession as it probably should have, maybe we would be dealing with a less severe reality today.

Main Street is probably just as opaque as Wall Street. In the infamous words of Dick Rumsfeld “there are known knowns, known unknowns, and unknown unknowns”. What happens if the buffoons that lead the US auto sector are unable to convince Congress that they have a plan? What is the next big industry at risk of collapsing? Who will bail out the construction industry? And what happens to municipalities as the tax base declines? Are the Chinese and Indian middle classes real, or will they disappear? Is the American middle class real? Will all of this uncertainty foment the re-emergence of trade union power and the unrest associated with it? And while the world reels, what are the terrorists planning?

I am hopeful that we have reached the bottom that seemed apparent earlier this year based on a 20 year chart. If not, the next leg down could be 6500 based on a 50 year chart.

Although there are many risks, there are also bright spots including the new Presidency. Hope is a powerful emotion to harness. If the new Administration can execute the basics while instilling hope with the battered American middle class, there is more upside than downside to the economy by the second half of President-elect Obama’s first term.

By attacking world symbols of capitalism on 9/11, Al Qaeda had hoped to throw the world economy into turmoil and immediate economic collapse. It is widely believed that Al Qaeda failed because the American consumer threw the world economy on its back and dragged it out of perceived danger. The question now is how much danger was there, really? How much damage was done to the American consumer and how long will it take for it to recover? And what will it become? While the US consumer recuperates, where are we heading? What are the possibilities of worse things to come?

Guestlogix (GXI.V) Upgrades Onboard Devices: Watch for New EU Carriers

Headline (and its a doozy): GUESTLOGIX LAUNCHES FIRST FULLY-INTEGRATED MOBILE POS WITH PIN PAD AND PRINTER FOR AIRLINES; NEW DEVICE FEATURES MOST COMPREHENSIVE PAYMENT AND SECURITY INDUSTRY CERTIFICATIONS, INCLUDING PCI PED 2.0 AND PA-DSS

This device upgrade is targeted at European carriers, which all require industry certifications. Investors could expect to see announcements of new significant European carriers relatively soon - possibly before the end of calendar 2009. If you are an investor that considers the addition of new carriers like KLM/Air France, Luftansa, or Britith Airways to be meaningful, then today's announcement may telegraph these opportunities.

Some investors may have some lingering doubt as to whether GXI has the potential to manage all potential retail transactions on a flight including those done with mobile devices.

"The unit sports a large touch-screen interface for quick and easy use, and it supports a full spectrum of wireless communication technology, including Tri-band GSM/GPRS, WLAN 802.11 b/g and Bluetooth, to interface with other devices and services on-board."

Based on the above statement in the press release, I think that the communications support listed above should make the system extensible enough to potentially manage multiple commercial transaction on a flight including content downloads to consumer devices as well as onboard entertainment systems.

The Company has either deployed to, or has in its backlog over 700 million passenger trips worldwide. At between $0.036 and $0.04 in revenue per passenger trip, the Company has a potential aggregate revenue stream opportunity of between $25 million and $28 million in annualized sales. I estimate that, realistically, the Company could deploy 600 million by the end of Q1, which would put the Company on a 2009 run rate of approximately $21 million in sales. This could represent a double over 2008 sales (all organic growth) and the Company could be cashflow positive when it reports Q4 2008 results, which should be sustained during 2009.

Guestlogix is a Company to watch. There may be deployment bumps along the way, but the trajectory is impressive, especially in current markets. Based on its previous Q3 results, it had about $6 million in cash and short-term investments.

I do not own GXI shares, nor do I receive compensation from the Company, its Board, or Management.

Points Adds Midwest to the GPX...Now 8 Programs Live

This morning Points International announced that Midwest Airlines has joined the GPX. It is a modestly sized program representing 2.5 million members. As of today, 16% of the trades posted on the system included Midwest Miles.

Over the past few weeks, the total number of trades posted daily has been been between 100 and 110. However, it is difficult to understand the trading liquidity at this point. Does a trade typically stay posted for week? day? or hour before it gets executed?

Notwithstanding, more parters represent more liquidity, which can only contribute to the ultimate success of the concept as it leaves the beta phase, likely at the end of this year, or at the beginning of 2009. I believe that there are few more GPX partners that have been announced including Taca and Mexicana which have yet to launch. There is good possibility that the Company can exit 2008 with double-digit partner base for the GPX. This is ahead of my expectations going into the year. I have not attributed any Global Points Exchange revenue into my 2008 forecast of sales at $75.2 million. It looks like the Company could be poised to beat my, (and consensus) sales forecasts for the year.

Partner Accumulation of Vendtek System (VSI.V) Stock May Indicate Positive Catalysts

Yesterday, VSI announced that Privinvest Holding SAL of Beirut Lebanon has acquired 915,000 additional shares at between $0.75 anf $0.78, bringing the total effective shares outstanding held by Privinvest to 7,367,500 or 16.3% of the total equity.

The accumulation of shares by Privinvest is notable because it is the investment arm of Vendtek Systems' distribution partner for the Middle East. Earlier this year, VSI and Privinvest entered a 5 year regional deal which includes approximately 17 countries in MENA (Middle East North Africa).

I find it highly encouraging that VSI's operating partner has been accumulating stock throughout the year. The price range has been between $0.70 and $0.90. Currently, VSI generates about $1.0 million in net contribution per annum from the deployment of its software in the UAE, the first market in the region with a pre-paid subscriber based of approximately 6 million.

I estimate that the total number of mobile subscribers in the MENA region is approaching 130 million. Egypt, Saudi Arabia, Morrocco, and Algeria combined represent close to 100 million prepaid subscribers.

Privinvest has invested approximately $5.0 million in its partner VSI because it is likely confident that there are going to be some significant country rollouts soon. Saudi Arabia has been hinted at for for some time, although I think that there may be more than Saudi Arabia to come. If 6 million subscribers can generate $1.0 million in net contribution for VSI, a subscriber base of 30 million offers 5 times the potential income potential, or $0.11 per share in contribution. But that includes only Saudi Arabia. What if there is more?

In addition to its potential in the Middle East, VSI is finally ramping up its US rollout and is expected to be deployed on as many as 200 - 300 terminals per month by January. I firmly believe that the market conditions in the United States are aligned to VSI's success. As early as last December it was clear to me that Vendtek should benefit from an economic recession in the United States. Survey after survey in the United States indicate that consumers consider their mobile subscription to be essential. Surpisingly, most surveyed are willing to give up landline telephones, and cable TV ahead of their mobile phones. However, an increasing percentage of the population does not qualify for post-billing services. As more Americans prepay for their service, I expect that over-the-counter topups will increase in frequency. As the economy declines, and petty crime increases, more and more retailers are likely to opt for more secure electronic topup systems. These two trends should benefit VSI.If the rollouts in the US continue to pick up steam, Vendtek Systems is in an advantageous position.

Privinvest's accumulation of VSI stock hints at the potential for major rollouts in the Middle East, while the US recession pushes more American mobile subscribers towards VSI's solutions. As the world economy contracts, and many Companies struggle for earnings, the future couldn't be brighter for Vendtek Systems. Certainly Privinvest thinks so; and it likely has some pretty good insight on future demand.

I do not own shares of VSI, nor do I recieve compensation from the Company, its Directors, or its employees.

Nstein (EIN.V): Weak Q3 Results Leading Into a Rosier Q4

NStein reported Q3 yesterday with sales of $5.6 million, EBITDA loss of $0.8 million, and a net loss of $1.0 million or $0.02 loss per share. Although sales increase by 37% year over year, EBITDA losses increased. Late in 2007, the Company made incremental investments into its sales force to support scaling initiatives. Since that investment, the Company has been selling into a headwind of weakened balance sheets, and constrained credit. Although the sales pipeline remains solid, the ability of that pipeline to actually buy has been reduced.

On a relative basis, as I had expected, Q3 was a tough quarter due to continued delays in buying decisions by its prospects. The good news is that some of those delayed decisions have popped up during Q4 with major announcements with Hearst Newspapers, and Scripps Networks among others. As a result, I think that there is a better than 50% chance that EIN's Q4 could exceed my sales expectations of approximately $6.0 million and show positive earnings performance. Because a substantial percentage of sales to Nstein are in US$, and most of its expenses are in C$, there is also an expected benefit of between $0.3 and $0.4 million if the Canadian dollar remains below $0.85 compared to its US counterpart. If this market condition remains, EIN could gain additional marginal benefit from it.

Although there is an expected Q4 pop in sales, which has proven to be typical for this sector, it is unlikely to be as strong as Q4 performance during 2007. I expect that the company is likely to continue to reduce expenses in order to enhance marginal performance during 2009.

I think that 2009 could be as challenging a year as 2008 in terms of sales. Most of EIN's prospects are likely to continue to be careful with their capital, and time-to-revenue should remain extended for the foreseeable future. Also, its client base should continue to face uncertainty regarding online marketing revenues for at least the next two quarters. As the world economy continues to contract, I see CPA, and CPC advertising continuing to attract a greater percentage of a diminishing spend. In human speak, I see search advertising maintaining growth, with display advertising continuing to struggle. Most of Nstein publishers generate revenue from display ads.

The good news is that the Company has $6.3 million in treasury, and only $0.5 in long-term debt, which is easily serviceable. Although I doubt that the Company will engage in new acquisitions during the next 12 months, it has more than sufficient funds to survive even catastrophic market conditions.

Notwithstanding the market conditions, Nstein has developed an outstanding product that its market niche remains desperate for. The Company continues to innovate, and there are new applications of its semantic algorithms to come, just in time for a market upswing.

I really like this Company and, after holding up through much of the technology downturn earlier this year, the shareprice has come off quite a bit recently. It is currently trading at 2.4x cash and between .70x .75x forecasted sales for the year. If the Canadian dollar remains surpressed and the company remains vigilant on cost containment during 2009, there is probably a better than 30% chance that the Company could be cashflow positive next year even on modest sales growth. I expect that sales should grow between 8% and 15% next year with the Hearst contract representing over 5% of total sales.

I do not own Nstein shares, nor do I receive compensation in any form from the Company, its directors, or its employees.

Obama and Healthcare Technology

The Obama presidency is probably the most anticipated since Reagan. He has instilled a sense of hope in the world even as it sinks into the most severe economic recession since, well, the beginning of the Reagan era.

The man has a lot to do, although he is running out of levers even before he enters office. However, lets assume that he is able to do what he says he can do and he finds $100 billion or so to initiate his healthcare program. Is there a spillover effect that benefits Canadian IT vendors in the healthcare sector? Possibly. As I outline below, it depends on political will. Notwithstanding, I would argue that those Companies that are already in the US market and employing Americans may benefit most.

Throughout his campaign, Obama stated that one of the cornerstones to his healthcare plan was an investment in information technology. His objective is to find ways to consolidate medical records and to improve access by both health care workers and patients to consolidated medical information on every American securely.

Clearly the capacity and the capabilities already exist to do this. Most major internet portals and especially social networks have gathered significant amounts of data about hundreds of millions of people in a fairly short period of time. SaaS providers have been building sophisticated permission and privacy algorithms for years, so secure access to private information should be a no brainer. In fact, since the early stages of the commercial internet, the technical capability has been there to establish centralized healthcare databases that could help improve doctors' access to and understanding of a patient's health situation. There has been limited political will.

The medical and pharmaceutical lobbies are among the most powerful in the United States. For decades, doctors have been resistant to information technology to the point of intransigence. Underlying this resistance has been suspicion and a "doctor knows best" attitude that has resulted in failure for many initiatives. Let's assume that Obama can instill the political will - so far he seems capable.

There are a few Canadian IT vendors that already derive a good portion of business from the needs of US hospital administrators and pharmacies including CGI Group (GIB.A.TO), Systems Excellence (SXC.TO) and Logibec (LGI.TO) among others. All three generate cash, have relatively strong balance sheets, are net income profitable and have footholds into the US healthcare sector. Systems Excellence and Logibec are healthcare pureplays and are more sensitive to conditions in the healthcare sector. Both are acquisitive, and I expect that they will continue to make strategic acquisitions as the US healthcare system undergoes its upgrade.

As Obama begins to formulate his plans, keep an eye on SXC, LGI and GIB.A because they could each be positioned to gain incremental upside. The underlying risk is that the AMA and the pharma lobbies impede Obama's progress once he enters office, which would, in turn, reduce the potential for incremental upside for these Companies.

PTS Signs Middle East Partner for GPX

Deal with Turkish computer distributor Hitit is designed to establish extensions into the Middle East. Local partnerships are integral to success in the region. Management at both Guestlogix and Vendtek Systems can attest to that. However, it could take several months to see the first GPX partnership to come to fruition.

Success with the GPX rollout notwithstanding, I am hopeful that more outsourced principal deals continue to come on stream to offset the margin contraction of the Delta Airlines relationship. Over 90% of this Software as a Service (SaaS) provider's current revenue is derived from managing consumer solutions for approximately 25 major loyalty programs in the world.

The bottom line is that as long as PTS continues to execute (and doesn't give away margin), the world economic conditions should continue to benefit performance.

Nstein lands a big'un

Today, Nstein (EIN.V) announced that Hearst Newspapers has contracted the Nstein platform for its entire content supply chain - representing 16 newspapers. This is Nstein's largest single deal - probably worth over $1.5 million in licensing alone. Services could be valued at twice that.

During 2009, Hearst Newspapers could represent more than 10% of revenue streams to Nstein. In the meantime, it is my understanding that the Company could recognize revenue from licensing during Q4, 2008. This would mean that there is a greater than 50% chance that the Company could exceed my expectations for Q4 in terms of sales and profitability.

More importantly, this transaction reduced balance sheet risk. The Company likely has sufficient funds to be able to survive the current downturn in the markets. However, I think that it would be an excellent time for the Company to more aggressively look to offering some SaaS licensing options to its client base. Although revenue ramp may not be as fast, NStein would not lose many clients to "stand-pat" decisions used to preserve weakened balance sheets. A subscription or user-based licensing solution would probably entice reticent prospects to more aggressively adopt Nstein's content management solutions during 2009. The cost/benefit equation tips dramatically towards deriving more revenue when capital is preserved.

Context

I am still going to direct some thought towards some of the companies that I have followed previously including Descartes Systems, Points International, Kaboose, Vendtek Systems, Guestlogix and Nstein. However, I expect to broaden my scope to other subject matter. From time to time I will comment on Companies that I have not covered in the past.

I will disclose if I own any shares of Companies that I talk about.

Kaboose (KAB.TO) I don't understand.

After reporting its 3rd quarter last week, the share price has fallen off a cliff. Currently, the market cap appears to be less than $60 million. Considering that sales should exceed $84 million this year, and EBITDA should surpass $8 million for the full year, shares are trading at less than 8x EBITDA. The company was inline with my expectations on EBITDA for Q3 at $2.7 million and ahead of forecasts regarding sales. Margins were a little weaker, although this trend should be reversed as the Company rolls out its vertical ad network. Three things are important to this stock:

1. 70% of its revenue comes from long-term contracts with PGCs.
2. Motherhood is not sensitive to economic swings - neither is household decision-making influence.
3. Company is likely to continue to jettison its money losing e-commerce properties. This is likely to help improve profit margins going forward - especially as the ad network expands.

I am looking at about $95 million in sales next year and between $15 million and $16 million in EBITDA.

This stock appears to be really undervalued at this point considering that its forecasted EBITDA is likely to nearly double. Worst case, the stock should be worth $0.80 in 12 months if the multiples remain contracted as they are. If multiples for the stock were to improve to 10x (which is still slightly below the sector performance), then we could see the stock worth $1.10 to $1.20 in twelve months, inferring nearly a triple from these current prices.

I do not own KAB.TO shares, nor do I receive any financial compensation from the Company.

Point International (PTS.TO); extends GPX - key to liquidity

Headline: InterContinental Hotels Group's Priority Club(R) Rewards Joins Loyalty Program Marketplace.

I think that this could be considered a fairly important milestone for the Global Points Exchange (GPX). People can now essentially trade hotel rooms for flights with other people, and vice versa. The extension beyond air travel enhances the value of the service, and further extensions into other sectors should continue to add value.

I hope that the loyalty program participants in this secondary market begin to more aggressively re-evaluate pricing. It appears that some like Aeroplan have already made the decision to reduce transaction fees. Hopefully other market participants will follow.

As PTS exits 2008 with around $75 million in sales and a couple of million in EBITDA, this Company is poised to be a near monopoly player in a market that appears to be somewhat insensitive to the current recessionary cycles.

At $0.52 share price and a fully dilute market cap of less than $80 million, PTS is a stock to own for the long-term. Three years from now when it has the potential to generate $25 to 30 million in EBITDA, it will seem remarkably inexpensive.

I do not own this stock, nor do I receive any financial benefit from Points International.

Remembrance Day

I cannot recall a Remembrance Day that has not been raw and gray. I am thankful to the generations before me for the sacrifices that they suffered so that I may be able to live my life free, with prosperity and peace. I hope that our children and our grandchildren live without the violence of war. Too many children today in the Middle East and Africa are born into violent conflict.

Based on human nature, it appears to be unlikely that future generations could live without being touched by war of some type. It is in our nature. I just hope that territorial aggression can be supressed and channeled enough to protect the world from the catastrophes of total world war - the tragedy of the 20th century.

Contact Us

Ron Shuttleworth

161 Bay Street
27th Floor
Toronto, ON
M5J 2S1


647-500-7371 (cell)
ron@razorpartners.com

About RES

RES stands for Ronald Edward Shuttleworth. Yes that is a hefty moniker.

It was Andrew Abouchar at Tech Capital who began to refer to me as "RES", probably due to the ridiculous number of documents that I had to initial with him at one time in the past.  "Free Thinking" is more about removing the some of the constraints from opinion and analysis, and creating a dialogue.

I currently act as Technology Analyst at M Partners, Managing Partner at Razor Capital Partners and President, RES Group Inc. I hope that you reading this as much as I enjoy putting it together.

I have been VC, CEO, CTO. This blog is syndicated by Seeking Alpha and Backbone Online.

Interests

• small cap
• micro cap
• technology
• strong management
• business models
• defensible market positions
• mobile infrastructure
• mobile commerce
• billing
• online media
• online advertising
• SaaS
• broadband
• cloud computing
• telecom
• technology ecosystems

New Realities

With some notable exceptions, the Canadian technology sector has largely been ignored by investors for the past five to six years. After the tech wreck, and during the commodities boom, investment banking talent has been focused on mining, materials, and O&G. As institutional and retail brokers pumped exploration deals in far-flung barely functioning states, capital for innovation and research into information technology became harder to come buy, and more expensive. Investors didn't care because copper and moly were at historical levels.

I think that this may have a long-lasting impact on Canada's ability to compete once the world emerges from this current recession. Without adequate capital, our tech companies can no longer keep domestic talent, nor attract international talent.

As a veteran of the sector, I remember Canadian technology players attracting some of the best technical minds from Eastern Europe, China, and India. We are likely to see intellectual power flowing the other way for quite some time to come because China, Korea, and others may emerge as a major design and engineering centers once the world economy is shaken out by this recession. Capital follows innovation, which creates wealth.

The bottom line is that Canadian investors still feel compelled to invest in holes. Despite the the opportunity to become a significant world IT player during the past decade, we are likely to emerge as a middling player in the most important evolution in history. In the meantime, the Canadian economy will likely follow its traditional boom-bust trends of the past; tied to the holes.

Points International (PTS.TO) Reported Yesterday: Earnings Miss

Although sales were ahead of consensus expectations, margins were compressed and the Company missed on EBITDA and earnings. Based on the conference call, it sounds to me that the low margin Delta Airlines (DAL-NYSE) principal contract dominated sales for the quarter. Not only that, I think that Management increased its payment to Delta Airlines to induce the airline to promote Buy/Tranfer services more aggressively, which drove higher sales at lower margin.

The company needs to continue to sign large principal contracts and get them rolled out rapidly in order to diffuse the margin compression impact of Delta Airlines. This condition could become more acute as Delta rolls Northwest airlines into its loyalty operations over the next few months. The Company continues to announce new clients including three more during the conference call, although these are dwarfed in size by Delta.

During the conference call, Management adjusted its 2008 guidance towards the high end of its original guidance range of between $65 million and $75 million. I think that revenue could exceed its guidance for the year. However, due to the impact of a weakened economy on the airline sector, I don't believe that the earnings leverage is as strong as I had hoped for and forecasted at the beginning of the year.

Management has stated that it expects to return to EBITDA positive during Q4. This is due to an increase in sales from its dominant clients and the emergence of some of its newer, higher margin clients in its revenue mix. The mid-term outlook for the Company remains positive as consumers continue to leverage their loyalty points to get rewards during a U.S. recession.

We expect expenses to increase as the company invests in marketing for its core business, and for the launch and expansion of its GPX secondary trading platform. I think that the success of GPX will be dependent on the trading fees. Lower fees by the participating airlines would help drive more liquidity. Despite the investment, we still have a wait and see stance on this part of the business.

The Company has approximately $37 million of cash on its balance sheet and no debt, so it is in a very sound position to fund its growth towards market dominance during a period of constrained access to capital worldwide. During Q3, the Company invested in growth by sacrificing margin for market penetration.

In terms of earnings growth potential, cash, and cashflow, Points International ranks among the top 30 small cap tech stocks on the Toronto exchanges. I continue to think that Points International is great buy at current price levels. For long-term value investors, the stock is probably worth between $2.00 and $3.00 within 12 to 24 months. In the short-term, there is a greater than 50% chance that the stock could trade down to the $0.50 level again before recovering.