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.

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