For 2010, selecting the Top Picks is more difficult than for 2009 because there is no fracture in the market. In fact, many believe the total market to be at or near full value. As a result, returns are likely to be more modest for the full year than the 189% return reported so far for 2009. I have attempted to find stocks that could produce performance momentum during 2010 that may be ahead of the total market. As a result, there are a few more riskier picks this year than last year.
The general themes remain the same for 2010 as for 2009. There is an emphasis among the picks on mobility - both infrastructure and applications - and on transactional systems with recurring revenue models. All of the companies on the list (so far) now have solid, or at least de-risked, balance sheets and strong probabilities of generating growth in operating earnings during 2010.
Here is the list:
12/15/09
RES Free Thinking: 2009 Year In Review.
Overall, 2009 has been a fun ride for RES Free Thinking with the Top 5 Tech Picks returning 184.9% from the beginning of the year, and 156.9% since the market lows during the week of March 8, 2009.
12/3/09
Descartes Systems (TSX:DSG): Q3 In-Line While New Services Strengthen Outlook.
On Tuesday, Descartes Systems (TSX:DSG) reported Q3 2010 earnings with revenue up 11% to $18.9 million from $17.0 million reported for previous year Q3, and 2% higher than revenue reported for Q2 2010. Revenue was essentially inline with consensus forecasts which were $18.5 million for the quarter.
11/30/09
CEO Series: Interview with Tom Douramakos, CEO Guestlogix, Onboard Retailing Pioneers.
This is the second in a series of interviews conducted with CEOs of interesting Canadian technology companies. The intent of this project is to provide investors with a unique understanding of what various companies are doing - directly from the top dog. Hopefully, the interviews conducted over the next few weeks will help investors to gain insight into the fundamentals of the companies to which they may not otherwise have access.
The second interview conducted is with Tom Douramakos, Chief Executive Officer, Guestlogix (GXI.V). The company is headquartered in Toronto, Ontario and provides airlines and rail carriers with technology that allows them to sell just about anything to passengers while they are immobilized in their seats for hours at a time.
The second interview conducted is with Tom Douramakos, Chief Executive Officer, Guestlogix (GXI.V). The company is headquartered in Toronto, Ontario and provides airlines and rail carriers with technology that allows them to sell just about anything to passengers while they are immobilized in their seats for hours at a time.
11/27/09
Logibec (LGI.TO) Reports a Solid Q4 and Full Year.
For the base five years, the team of Claude Roy and Marc Brunet have been quietly building a solid Canadian success story in the North American health care technology sector.
11/26/09
Redknee (RKN.TO) Surprises With Weak Q4.
In its Q4 and Full-Year press release, the company downplayed its weak Q4 and focused on Full-Year profitability, which was strong.
CEO Series: Interview with Andrew Osis, CEO Multiplied Media - developers of the Poynt Mobile App
This is the first in a series of interviews conducted with CEOs of interesting Canadian technology companies. The intent of this project is to provide investors with a unique understanding of what various companies are doing - directly from the top dog. Hopefully, the interviews conducted over the next few weeks will help investors to gain insight into the fundamentals of the companies to which they may not otherwise have access.
The first interview conducted is with Andrew Osis, Chief Executive Officer, Multiplied Media (MMC.V). The company is headquartered in Calgary, Alberta and has developed the wildly successful and award-winning mobile search application for Blackberry called Poynt.
The first interview conducted is with Andrew Osis, Chief Executive Officer, Multiplied Media (MMC.V). The company is headquartered in Calgary, Alberta and has developed the wildly successful and award-winning mobile search application for Blackberry called Poynt.
11/12/09
More on the Commercialization of Intellectual Property in Canada - With a Link to Mark McQueen
In August I posted an opinion on why R&D subsidies in the technology sector are currently an ineffective tool to support technology innovations and posed some general solutions to re-energize investment into all industries that commercialize Intellectual Property (I/P), including information technology, communications, life sciences, cleantech, and instrumentation. It is also posted on the DVC SmallTech Newsletter.
In essence, the RES Free Thinking post offered the following solutions:
In essence, the RES Free Thinking post offered the following solutions:
11/11/09
Cyberplex exceeds analyst expectations again while fundamentals solidify
From an operational perspective, Cyberplex beat consensus forecasts, extending the Google/Cyberplex trend to seven quarters.
Yesterday Cyberplex (CX.TO) reported Q3 sales of $28.2 million, a 158% increase over Q3 2008 sales of $11.2 million and a 10% sequential increase over Q2 2009 sales of $25.7 million. Analysts were expecting a sequential decline in sales due to historically weak Q3 related to seasonality in media spending. Seasonality trends were broken for this quarter, and revenue was reported approximately 28% ahead of consensus forecasts. The Company reported net income of $0.7 million, or $0.01 EPS for the quarter, which was a 12.5% year-over-year increase from Q3 2008 net income of $0.6 million. Because a vast majority of its revenue is recognized in U.S. dollars, and it reports in Canadian dollars, the company continues to struggle with currency volatility related to the relationship between the U.S. dollar and the Canadian dollar. The company reported $1.6 million in foreign exchange losses for the quarter despite attempting to apply FX hedging programs this quarter. Management still needs to get a handle on this issue. The company reported $2.7 million in EBITDA ahead of FX adjustments, which was a 390% improvement over Q3 2008 EBITDA before FX of $0.6 million. This was also ahead of consensus. The Company is demonstrating earnings leverage from operations, although due to currency risk, it is not necessarily being reflected in net income for this quarter.
This was a cash flow neutral quarter, and the company exited Q3 with $21.4 million of cash.
Yesterday Cyberplex (CX.TO) reported Q3 sales of $28.2 million, a 158% increase over Q3 2008 sales of $11.2 million and a 10% sequential increase over Q2 2009 sales of $25.7 million. Analysts were expecting a sequential decline in sales due to historically weak Q3 related to seasonality in media spending. Seasonality trends were broken for this quarter, and revenue was reported approximately 28% ahead of consensus forecasts. The Company reported net income of $0.7 million, or $0.01 EPS for the quarter, which was a 12.5% year-over-year increase from Q3 2008 net income of $0.6 million. Because a vast majority of its revenue is recognized in U.S. dollars, and it reports in Canadian dollars, the company continues to struggle with currency volatility related to the relationship between the U.S. dollar and the Canadian dollar. The company reported $1.6 million in foreign exchange losses for the quarter despite attempting to apply FX hedging programs this quarter. Management still needs to get a handle on this issue. The company reported $2.7 million in EBITDA ahead of FX adjustments, which was a 390% improvement over Q3 2008 EBITDA before FX of $0.6 million. This was also ahead of consensus. The Company is demonstrating earnings leverage from operations, although due to currency risk, it is not necessarily being reflected in net income for this quarter.
This was a cash flow neutral quarter, and the company exited Q3 with $21.4 million of cash.
11/5/09
Bridgewater Systems Q3 2009 - Beats Consensus Forecasts and Increases FY Guidance.
This morning Bridgewater Systems reported Q3, 2009 earnings and subsequently discussed the results and outlook during an analyst call. Analysts are likely to view the results and the business outlook as positive for the stock.
Net income for the quarter was reported at $1.7 million or $0.07 EPS, ahead of consensus forecasts of $0.05 EPS. Revenue was reported at $15.8 million, a 53% increase over prior year Q3 revenue of $10.3 million and ahead of consensus forecasts of $14.6 million for the quarter. Gross Margins contracted sequentially to 64% from Q2 2009 Gross Margins of 75% and from Q3 2008 Gross Margins of 75%. The gross margins contraction is related to the deployment of the Widespan contract and activities related to various trials and deployment preparations associated with various recent contract wins - basically scaling costs. Management expects Gross Margins to continue in the mid-60s range until H2 2010, when it anticipates that Gross Margins will expand to a target of 70% where it is expected to stabilize.
Net income for the quarter was reported at $1.7 million or $0.07 EPS, ahead of consensus forecasts of $0.05 EPS. Revenue was reported at $15.8 million, a 53% increase over prior year Q3 revenue of $10.3 million and ahead of consensus forecasts of $14.6 million for the quarter. Gross Margins contracted sequentially to 64% from Q2 2009 Gross Margins of 75% and from Q3 2008 Gross Margins of 75%. The gross margins contraction is related to the deployment of the Widespan contract and activities related to various trials and deployment preparations associated with various recent contract wins - basically scaling costs. Management expects Gross Margins to continue in the mid-60s range until H2 2010, when it anticipates that Gross Margins will expand to a target of 70% where it is expected to stabilize.
11/3/09
Bridgewater Systems (BWC.TO): More Takeover speculation
Since some Boardroom maneuvering earlier this year, there has been some speculation of a takeover of BWC. Here is some more detailed speculation reported on by Andrew Willis - all in quotes.
From Andrew Willis
Bridgewater (BWC-T9.940.212.16%) is in the wireless software business, and sports at $240-million market capitalization. Backers include tech billionaire Terry Matthews. Earlier this year, the company was targeted by money manager Crescendo Partners, with a proxy fight ending peacefully and Crescendo executives joining the Bridgewater board.
As this boardroom activity played out, Bridgewater posted increasingly strong results. The company is winning new telecom clients and rolling out a new business model that draws more recurring revenue from existing customers, a list that includes most of the major global phone companies. The stock is up 241 per cent over the past 12 months.
Now National Bank Financial is speculating that Ottawa-based Bridgewater could be on the receiving end of a bid from Nokia Siemens Networks.
While the concept isn’t new - Bridgewater has long been seen as a potential target - National Bank Financial analyst Kris Thompson is taking an aggressive view on what’s coming, as he predicts a bidding war is in the offing.
“We've been suggesting that Bridgewater would be an acquisition target of NSN for many months for both its technology and key customer Verizon Wireless,” said Mr. Thompson in a report on Tuesday. He then added: “Also recall that we've suggested that Cisco would likely defend its evolved packet core position by acquiring Bridgewater if Nokia Siemens Networks were to bid for the company.”
National Bank Financial has a $13 target price on Bridgewater, and an “outperform” ranking, with "above average” risk rating."
Disclosure: I own shares of BWC.
11/2/09
Could Multiplied Media Be "The Next Big Thing"?
Last week, the DVC SmallTech Newsletter identified ten breakout smallcap technology stocks for YTD 2009. Many of those intersect with the RES Free Thinking Top 5 picks for 2009. Investors in all of those stocks are smiling so far as we enter the last two months of the year. Alas, but there may be one more stock that could make a lot of noise over the next few months.
10/30/09
Just in time for Holloween: A Few Spooky Stats YTD 2009.
Here are some random statistics from various sources:
Canadian Tech Sector
TSX/TSXV technology sector listings September 2009 - 284 including 5 new listings. Down from 310 at the beginning of the year. A 9% drop.
YTD deals in the TSX Tech Sector - 83
Mean deal size: $5.05 m
TSXV deals - 71 with a mean deal size of $1.3 million
TSX deals - 12 with a mean deal size of $27.3 million
YTD Cleantech deals
Mean deal size: $13.5 m
Top performing sector YTD TSX: InfoTech at 69%
(Source: TSX)
Canadian Tech Sector
TSX/TSXV technology sector listings September 2009 - 284 including 5 new listings. Down from 310 at the beginning of the year. A 9% drop.
YTD deals in the TSX Tech Sector - 83
Mean deal size: $5.05 m
TSXV deals - 71 with a mean deal size of $1.3 million
TSX deals - 12 with a mean deal size of $27.3 million
YTD Cleantech deals
Mean deal size: $13.5 m
Top performing sector YTD TSX: InfoTech at 69%
(Source: TSX)
10/27/09
Bridgewater Systems (BWC.TO) Q3 2009 Preview: Will momentum continue?
Earlier this month, BWC stock peaked at $9.80 per share, more than quadrupling the share price of $2.17 as it entered 2009. It has come off those highs since and it looks like it is now trading in the mid $8 range ahead of its Q3 financial report, which is scheduled to be released at 7:00AM on November 5, 2009. The investor conference call is scheduled for 8:30AM that day, and the call-in numbers are:
1-416-844-3432
1-877-974-0446
After a remarkable run since the beginning of the year, investors may wonder how much upside remains in the stock. As a reminder, performance for H1 2009 was as follows:
1-416-844-3432
1-877-974-0446
After a remarkable run since the beginning of the year, investors may wonder how much upside remains in the stock. As a reminder, performance for H1 2009 was as follows:
10/16/09
GOOG Beats Expectations...Will CX .TO Follow Again?
During the Q4 earnings season I began highlighting an interesting pattern between Google earnings performance and Cyberplex performance. Essentially, each time that Google exceeded earnings expectations, Cyberplex also exceeded forecasts when it reported approximately two to three weeks later. In July, I became a little bolder and proposed a trading idea that Google performance has consistently foreshadowed Cyberplex performance, suggesting that traders could accumulate ahead of CX.TO earnings report.
10/15/09
Top 5 Pick Guestlogix: Good news flow plus growing Q3 earnings
Guestlogix has presented some good news flow recently. During the past 30 days, the company has made seven corporate announcements including a settling of an IP dispute with Abanco (at 0 cost), an airline deal with Horizon Air, an ad serving deal with JETERA, merchandising deals with Forum Telecom (mobile subscriptions), Facilities Partner Ltd (train tickets), and Vegas.com (Vegas shows). In addition, it announced a product enhancement for NFC contactless payment options.
The Rubber Hit The Road...Where Was ACT?
Earlier this year I posted an item on Active Control Technologies after it had, after two years, finally secured certification by the Mine Health and Safety Administration (MSHA), otherwise known on Bay Street as "emshaw", to deploy its wireless system in American coal mines.The title was Active Control Technology (ACT.V): Rubber Hits Road and the note was upbeat but cautionary. The gist of the post was this: the Company has lots of potential, but it needs to execute well in the short-term to leverage potential. Management had communicated to analysts that it had $6 million in contracted backlog ready to immediately convert upon MSHA approvals and that it had a qualified pipeline in excess of $20 million. It set an expectation that the company was about to transform from a speculative promise to a high growth company that was not far away from actual earnings. This was six months ago.
What has happened in the intervening six months? Nearly nothing. The rubber hit the road and ACT was nowhere to be found. Since its potentially transformative MSHA announcement, management has spent most of the time shoring up its diminishing working capital while it waits for contracts...and waits. In retrospect, the $6 million backlog that was communicated to the street was either not well understood, or simply unrealistic. The persistent over-promise throughout the last couple of years may have finally caught up to the CEO.
What has happened in the intervening six months? Nearly nothing. The rubber hit the road and ACT was nowhere to be found. Since its potentially transformative MSHA announcement, management has spent most of the time shoring up its diminishing working capital while it waits for contracts...and waits. In retrospect, the $6 million backlog that was communicated to the street was either not well understood, or simply unrealistic. The persistent over-promise throughout the last couple of years may have finally caught up to the CEO.
10/14/09
INTC flies by forecasts - strong beat and analyst upgrades everywhere.
Intel is the first of technology sector bellwethers to report. It had already pre-reported that it would have a strong third quarter, although the actual numbers surpassed all analysts expectations - both top line and bottom line. The sequential quarterly growth was reported by Management to be the strongest in 30 years. Analysts are raising targets, and already some are whispering stretch targets of $40.00, with official 12-month targets appearing to settle in a range between $26 and $30.
10/5/09
Why The IT Sector Has Outperformed the General Market YTD 2009: Licensing.
As of September 18th, the TSX Information Technology Index has increased year-to-date by 69.8% and has been the best performing sector in the market.(Global Equity Weekly - BMO). As a corollary to this, in the case that skeptics believe it to be a RIM-only measurement, the information technology sector of the S&P 500 has been the top performing sector with a 44.9% year-to-date improvement (Global Equity Weekly - BMO). From the March 6th market lows, the performance has been even better.
The RES Free Thinking Top 5 Small Cap Tech Picks performed better than the IT Sector as a whole. The aggregate stock price performance of TSX:DSG, TSX:CX, TSX:BWC, TSX:RKN, and TSXV:GXI is 196% since March 6th, and 185% YTD since January 1st. As well, during that time CX and DSG were able to raise $17 m, and $40 m in new equity respectively.
The RES Free Thinking Top 5 Small Cap Tech Picks performed better than the IT Sector as a whole. The aggregate stock price performance of TSX:DSG, TSX:CX, TSX:BWC, TSX:RKN, and TSXV:GXI is 196% since March 6th, and 185% YTD since January 1st. As well, during that time CX and DSG were able to raise $17 m, and $40 m in new equity respectively.
9/30/09
Healthscreen (MDU.V) Adds to Its Network
MDU increases the size of its physician network by nearly 6% with an agreement announced this morning with East GTA Family Health Group. It should be noted that this is the first buying group that is selecting the entire suite of Healthscreen services and solutions, which could represent significant increases in revenue and earnings for the Company for FY 2010. See the press release.
| Healthscreen Selected by East GTA Family Health Group | |
| TORONTO, ONTARIO--(Marketwire - Sept. 30, 2009) - Healthscreen Solutions Inc. (TSX VENTURE:MDU), Canada's premier provider of physician practice enhancement services and electronic medical record (EMR) software, today announced that it has been selected by the East GTA Family Health Group to deploy its HS Practice software suite to its more than 300 family physician members. The software suite will include a full complement of billing, scheduling and electronic medical record software. Once complete, this agreement will represent by far the largest Family Health Group to purchase and implement EMR software in Canada. "We are very excited to have been selected, and we are looking forward to working with the East GTA Family Health Group and its IT Committee to assist its doctors in delivering the highest quality health services, while improving the efficiency of their practices," said Justin Belobaba, President and CEO of Healthscreen. About Healthscreen Solutions Healthscreen Solutions (www.healthscreen.com) provides a comprehensive suite of practice enhancing products and services to increase physician productivity and revenue while reducing costs and improving patient care. The Company's portfolio includes billing and scheduling software, electronic medical records software, CallerMD which assists physicians in managing a range of uninsured medical services, PrevCareMD which helps physicians earn supplemental income by achieving government-set preventive care targets, and HealthAlert which allows physicians to help their patients in managing complex healthcare issues. Healthscreen's and its partners' services and software are used by over 8,000 full-time physicians who are responsible for the health care of more than seven million Canadians. (C) 2009 Healthscreen Solutions Inc. All Rights Reserved. All other trademarks and trade names are the property of their respective owners. Disclaimer: Forward Looking Statements This press release contains information that is forward looking information with respect to Healthscreen within the meaning of Section 138.4(9) of the Ontario Securities Act and other applicable securities laws. In some cases, forward-looking information can be identified by the use of terms such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "intend", "estimate", "predict", "potential", "continue" or the negative of these terms or other similar expressions concerning matters that are not historical facts. In particular, statements about future revenues or profitability, including the estimated timing of profitability, and any other statements regarding Healthscreen's future expectations, beliefs, goals or prospects are or involve forward-looking information. Forward-looking information is based on certain factors and assumptions. While the company considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect. Forward-looking information, by its nature necessarily involves risks and uncertainties, including risks and uncertainties relating to government regulation and funding in the healthcare industry, financial and capital market risks, technology development and adoption, Healthscreen's ability to maintain its competitive position and effectively implement it's acquisition strategy, liability for software malfunction, management of growth, and length of sales cycles. Additional risks and uncertainties affecting Healthscreen can be found in Healthscreen's 2008 Annual Report and Management's Discussion and Analysis for the Fiscal Year ended September 30, 2008 filed on SEDAR at www.sedar.com. If any of these risks or uncertainties were to materialize or if the factors and assumptions underlying the forward-looking information were to prove incorrect, actual results could vary materially from those that are expressed or implied by the forward-looking information contained herein. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. Trading in the securities of Healthscreen should be considered highly speculative. Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release. |
| CONTACT INFORMATION: Healthscreen Solutions Inc. Justin Belobaba President and CEO 1-866-534-DOCS ext. 7015 ir@healthscreen.com www.healthscreen.com |
| INDUSTRY: Computers and Software - Software, Medical and Healthcare - Alternative, Medical and Healthcare - Healthcare |
9/24/09
INTC places a bet with Transgaming (TNG.V) for on-demand consumer gaming
Transgaming has been grinding it out for some time now creating a converged platform for consumer games. The team's hard work appears to be paying off in the form of GameTree.tv, a funded collaboration with Intel. Long suffering Transgaming investors should note that Intel believes that the this deal is material enough to include it in its press release flow.
This puts Transgaming right in the middle of media convergence to the home. Congratulations to Vikas and team.
Here is the press release.........
This puts Transgaming right in the middle of media convergence to the home. Congratulations to Vikas and team.
Here is the press release.........
9/22/09
Another inflight merchandising milestone for Guestlogix
Earlier today, Guestlogix announced an agreement to merchandise Las Vegas events onboard participating airlines flying to Las Vegas. Guestlogix now sells Disney, CityPass, Broadway, and Las Vegas event tickets inflight with participating airlines. This announcement shows continued progress, and should be seen as a positive for the stock, which started moving upwards again yesterday.
Here is the press release
Here is the press release
9/21/09
Guestlogix (GXI.V) and Abanco settle lawsuit. Positive outcome.
Stemming from GXI's first contract with American Airlines a few years back, this is a long-term legal action that cost several hundred thousand dollars per annum in legal expenses for Guestlogix. The dismissal of the suits should have a small but immediate beneficial impact on earnings , and also reduce investor uncertainty regarding intellectual property and the potential for some future royalty payments related to a settlement. The outcome also reduces the chances that GXI would be required to purchase Abanco assets in order to solidify IP rights. The outcome should be viewed as positive for the stock.
Attached is the press release.
Attached is the press release.
9/18/09
Check out Poynt: An award winning mobile search app for BBerry...iPhone next?
This application won the grand prize for RIM's Blackberry Developer Challenge at the end of 2008. It is well designed. Not only can you find stuff nearby, but you can actually do something after you find what you are looking for - like buy movie tickets. Spend a couple of minutes checking it out.
Multiplied Media (MMC.V) has taken longer than expected to perfect the app, and the company is still at the early stages of commercialization, but the app seems like it should be a grand prize winner. Look for an iPhone version of Poynt to follow soon.
Earlier this week, the Company announced that it has reached the 1 million user milestone, which suggests that it has the potential to go viral. Investors are taking note. In August, the Company was able to raise $2.9 million in growth financing. Over the past couple of weeks, the penny stock has doubled in value.
Disclosure: I do not own shares of MMC.V
Multiplied Media (MMC.V) has taken longer than expected to perfect the app, and the company is still at the early stages of commercialization, but the app seems like it should be a grand prize winner. Look for an iPhone version of Poynt to follow soon.
Earlier this week, the Company announced that it has reached the 1 million user milestone, which suggests that it has the potential to go viral. Investors are taking note. In August, the Company was able to raise $2.9 million in growth financing. Over the past couple of weeks, the penny stock has doubled in value.
Disclosure: I do not own shares of MMC.V
9/14/09
Bridgewater Systems (BWC.TO) On A Roll - Announces Major New Contracts
As mobile data usage continues to grow exponentially around the world, Bridgewater Systems' suite of policy and data management solutions should continue to become more popular among carriers as they attempt to meet the increasing demand from consumers and businesses.
On Friday, Bridgewater Systems announced a contract with Verizon (VZ.NYSE) for its Widespan product estimated to be work over $18 million. Most of the revenue should be recognized by H2 2010, but with no impact on 2009 revenue. This should have meaningful impact on FY 2010 revenue and earnings forecasts. Forecasted revenue could increase between 12% and 18% above consensus depending upon the recognition of revenue, while EPS could be ahead of 2010 forecasts by between 80% and 100%. Expect analysts to increase targets substantially, which should continue to impact positively the share price momentum.
On Friday, Bridgewater Systems announced a contract with Verizon (VZ.NYSE) for its Widespan product estimated to be work over $18 million. Most of the revenue should be recognized by H2 2010, but with no impact on 2009 revenue. This should have meaningful impact on FY 2010 revenue and earnings forecasts. Forecasted revenue could increase between 12% and 18% above consensus depending upon the recognition of revenue, while EPS could be ahead of 2010 forecasts by between 80% and 100%. Expect analysts to increase targets substantially, which should continue to impact positively the share price momentum.
9/13/09
New Design...Why?
RES Free Thinking is building a small but loyal following throughout Canada, and to a lesser extent on Wall Street and in The Valley. As it turns out, although originally targeted to only a few hundred Bay Street insiders, RES Free Thinking now appears to be viewed regularly by several thousand readers across the country. Surprisingly, there also appears to be a loyal user base from some countries in the EU, South America and Southeast Asia.
Usage is increasing by about 15% per month, over 46% of all users return at least once a month to get information, and over 170 external sites link to RES Free Thinking content of some type. Since its launch in November of 2008, there have been 105 posts to the blog, profiling dozens of North American technology companies; micro-cap to monolith-cap, both public and private. In addition, there have been several theme or sectoral posts - and the odd political rant.
What does this mean?
Well, there is a lot of content, a lot of people are looking for the content, and a lot of people link to the content. I wanted to find a way to make it easier for people to find what they are looking for faster. I also wanted to find an easy way for people to discover the theme of a story over time, and to be able to connect together industry trends (example: progress (or not) of a Company over multiple quarters). My goal is also to highlight more effectively the flow of information and good ideas emanating from sources such as Twitter.
The old design was limited by a single dimension (no horizontal navigation menu), and by only two columns - one of which was reserved for posts. As a result, all of the ways to find and use blog information was stuffed into a single long column. As the archive of posts became longer, interesting and timely investor information had been falling off the screen - such as TwitterFlow and Tech Voices.
Usage is increasing by about 15% per month, over 46% of all users return at least once a month to get information, and over 170 external sites link to RES Free Thinking content of some type. Since its launch in November of 2008, there have been 105 posts to the blog, profiling dozens of North American technology companies; micro-cap to monolith-cap, both public and private. In addition, there have been several theme or sectoral posts - and the odd political rant.
What does this mean?
Well, there is a lot of content, a lot of people are looking for the content, and a lot of people link to the content. I wanted to find a way to make it easier for people to find what they are looking for faster. I also wanted to find an easy way for people to discover the theme of a story over time, and to be able to connect together industry trends (example: progress (or not) of a Company over multiple quarters). My goal is also to highlight more effectively the flow of information and good ideas emanating from sources such as Twitter.
The old design was limited by a single dimension (no horizontal navigation menu), and by only two columns - one of which was reserved for posts. As a result, all of the ways to find and use blog information was stuffed into a single long column. As the archive of posts became longer, interesting and timely investor information had been falling off the screen - such as TwitterFlow and Tech Voices.
9/11/09
Descartes Systems (DSG:TO) Strong Quarter; Bullish Outlook
For convenient sequential quarterly reference, here is a link to the post for the previous quarter.
The themes remain the same: Strong quarter despite worldwide recession, improving operational efficiency, and more accretive acquisitions planned for the future. Here are the Q2 2010 performance highlights:
Management indicated that H2 2010 should benefit from the current upswing in worldwide shipments as economic recovery takes hold. The company should benefit from the integration of both the Oceanwide and the Scancode acquisitions, and should see continued adoption of the 10+2 regulatory solution positively impact financial performance. The outlook is bullish.
Management re-iterated more forcefully its plan to become a global "federated" end-to-end platform for logisitics. By comparison, think of Salesforce.com's AppExchange for CRM. As the Company implements this strategy, investors should anticipate that Descartes will use some of its war chest of cash to make tuck-under acquisitions that will expand its capability as an end-to-end platform.
As a result, the company may look to expand capabilities in asset tracking, transaction management, accounting, workforce mobility, platform computing, and even cloud services via partnerships and acquisitions.
With a strong Q2 2010, a bullish H2 outlook from Management, and a plan to dominate through federation, investors are likely to continue to find the stock attractive. The share price has doubled in value since its lows in March.
Disclosure: I own shares of DSG
The themes remain the same: Strong quarter despite worldwide recession, improving operational efficiency, and more accretive acquisitions planned for the future. Here are the Q2 2010 performance highlights:
- $18.6m in revenue, up 9% fiscally over Q2 2009, and 7% sequentially over Q1 2010
- GM at 68%, up from 64% fiscally, and down from 70% sequentially.
- Adjusted Net Income (EBITDA) at $5.2m, up 27% fiscally, and 11% sequentially. The EBITDA margin for the quarter was 28%, which exceeded consensus expectation.
- Pre-tax NI at $2.7m, up 35% over Q2 2009, and up 50% sequentially.
- NI of $0.8m or $0.02 EPS versus $1.4m or $0.03 EPS for Q2 2009, and $2.2m or $0.04 EPS for Q1 2010. Both of the comparative quarters benefited from income tax recovery.
- DSO was reported at 48 days, a 2 day decline fiscally, and a 1 day decline sequentially.
- $4.4m in cashflow for the quarter, exiting with $51.2m in cash and short-term investments.
Management indicated that H2 2010 should benefit from the current upswing in worldwide shipments as economic recovery takes hold. The company should benefit from the integration of both the Oceanwide and the Scancode acquisitions, and should see continued adoption of the 10+2 regulatory solution positively impact financial performance. The outlook is bullish.
Management re-iterated more forcefully its plan to become a global "federated" end-to-end platform for logisitics. By comparison, think of Salesforce.com's AppExchange for CRM. As the Company implements this strategy, investors should anticipate that Descartes will use some of its war chest of cash to make tuck-under acquisitions that will expand its capability as an end-to-end platform.
As a result, the company may look to expand capabilities in asset tracking, transaction management, accounting, workforce mobility, platform computing, and even cloud services via partnerships and acquisitions.
With a strong Q2 2010, a bullish H2 outlook from Management, and a plan to dominate through federation, investors are likely to continue to find the stock attractive. The share price has doubled in value since its lows in March.
Disclosure: I own shares of DSG
9/10/09
Current Anecdotal Trends in VC Funding - From the Trenches
It is amazing that, despite how everything changes, some things never seem to change. Below is an email missive from the trenches in New York from Sheldon Lutch of Fusion IR.
The fundamental sentiment of the note is that after 8 quarters of being brutalized by the market, tech start-ups have become increasingly "pennywise and pound foolish". Not surprisingly, entrepreneurs continue to maintain unrealistic notions of the value of their creations. This has been such a consistent finding for the past couple of decades, that it may simply be in the DNA of entrepreneurs to think that way.
Anyway, we see many of the same trends as Sheldon, and I thought that it would be best to simply re-publish his email.
-------------------------------------------------------------
"Throughout the summer at Fusion IR have seen many companies stop by/call-in ranging from companies needing "A" round capital to pre-IPO-generating revenues and meeting financial milestones.
1.Use of unregistered/unlicensed financial professionals in search of capital.
2.Requesting solely pay per performance services. Risk not shared-reward impractical or impossible to quantify and justify by expenditures of time or effort and market conditions.
3. Unprepared companies from presentation to presentation skills to business plan and throughout all marketing literature. Yet they believe they are and wonder why others don't see it their way.
4.Unrealistic view of financial markets this is not pre- 2008 or pre- 2003.
5. Use of other service professionals to fill gaps -but no real follow up and or guidance( nice meetings -no results).
6. Mapping out of IP not complete or at the highest level of international standards.
7. IP not as robust -learned during deep drill downs.Unaware of conflicting, competing, complimentary IP.
8. Companies unaware of how many vc's ,private equity etc.. have seen/heard of company/deal/raise out on the street-they have been "shopped".
9.An oxymoron- overexposed companies not using or understanding the value of press releases- tweaked for the financial community.
10.Not identifying a business development opportunity from a venture capital opportunity with a strategic player(s) in their industry. Over emphasizing one over the other or at the exclusion of the other.
11.Companies unaware or sensitive to the Wall Street "calendar' are you in the queue or not?
12. Unrealistic sense of timing of potential investment /grant by government or quasi government economic development arms.
The fundamental sentiment of the note is that after 8 quarters of being brutalized by the market, tech start-ups have become increasingly "pennywise and pound foolish". Not surprisingly, entrepreneurs continue to maintain unrealistic notions of the value of their creations. This has been such a consistent finding for the past couple of decades, that it may simply be in the DNA of entrepreneurs to think that way.
Anyway, we see many of the same trends as Sheldon, and I thought that it would be best to simply re-publish his email.
-------------------------------------------------------------
"Throughout the summer at Fusion IR have seen many companies stop by/call-in ranging from companies needing "A" round capital to pre-IPO-generating revenues and meeting financial milestones.
1.Use of unregistered/unlicensed financial professionals in search of capital.
2.Requesting solely pay per performance services. Risk not shared-reward impractical or impossible to quantify and justify by expenditures of time or effort and market conditions.
3. Unprepared companies from presentation to presentation skills to business plan and throughout all marketing literature. Yet they believe they are and wonder why others don't see it their way.
4.Unrealistic view of financial markets this is not pre- 2008 or pre- 2003.
5. Use of other service professionals to fill gaps -but no real follow up and or guidance( nice meetings -no results).
6. Mapping out of IP not complete or at the highest level of international standards.
7. IP not as robust -learned during deep drill downs.Unaware of conflicting, competing, complimentary IP.
8. Companies unaware of how many vc's ,private equity etc.. have seen/heard of company/deal/raise out on the street-they have been "shopped".
9.An oxymoron- overexposed companies not using or understanding the value of press releases- tweaked for the financial community.
10.Not identifying a business development opportunity from a venture capital opportunity with a strategic player(s) in their industry. Over emphasizing one over the other or at the exclusion of the other.
11.Companies unaware or sensitive to the Wall Street "calendar' are you in the queue or not?
12. Unrealistic sense of timing of potential investment /grant by government or quasi government economic development arms.
It is a three legged stool- The Company- The Financial Community and Key Service Provider. Matching and meeting the needs of all - to accomplish the mutual goals of a success and mutually profitable business relationship.
We pride ourselves at Fusion IR at working hand n' hand with clients and all Wall Street professionals. No negative surprises. A fully coordinated approach to accessing the capital markets. Utilizing a top down approach to the investment community on behalf of clients. Meeting with heads of investment banking firms and the related specialty investment bankers at the most senior level of the Wall Street firms. For the companies a bottoms up approach making sure assumptions are replaced with facts. Working with companies to assist them in preparation so that their materials are as good as their technology/science. Driving the value proposition to engagement letters, term sheets, and maybe ad nausea if necessary.
To do it right takes time, money and dedication- this is a labor intensive effort. No short cuts,no tricks-roll up your sleeves and work as team to get the mandate accomplished.Time is money for all of us- investing properly in the right resource,working in an organized fashion to get the answers quickly and efficiently as possible. Build on the information acquired ,become as flexible and open to feedback that will allow the company to adjust to market conditions. Investor relations is not a sprint and need not be a marathon- it is about being Persistent and Consistent. It is about execution of a strategy,it is about tweaking and revising. It is presenting the company with strategic alternatives and access to growth capital and growth ideas, perhaps not considered.
If you aren't raising capital properly your competition is-those with the best technology aren't winners necessarily-those with the capital to complete the task ,execute according to plan and ramp up revenues are.
All the best,
Sheldon
Sheldon Lutch, Principal
Fusion IR & Communications, Inc.
62 West 45th-4th floor
New York,NY.10036
(T) 212.268.1816, (C) 917.570.1179
Sheldon Lutch, Principal
Fusion IR & Communications, Inc.
62 West 45th-4th floor
New York,NY.10036
(T) 212.268.1816, (C) 917.570.1179
8/29/09
R&D subsidies do not create wealth: How do we modernize policy to incent innovation?
I have spoken to hundreds of Canadian entrepreneurs and investors in the tech sector over the past dozen years. A common lament among all stakeholders is that Canadians are good at R&D, but poor at commercialization.
Based on current thinking, this is a decidedly bad thing, becoming worse.
What actually sparked this blog post has been the frustration of seeing really good ideas suffer from persistent and chronic underfunding. The result of which is truncated or even abandoned commercialization of ideas that may have been major successes if funded and supported elsewhere. How many RIMs have been left behind because entrepreneurs could not attract appropriate growth capital? How many entrepreneurs have simply left the country? How many great technologies have been sold before maturity for minimal shareholder return? Exiting this recession, it is an increasingly popular notion that future wealth creation will be generated though innovation...bringing ideas to life. Not production. Not resources.
How are we doing as innovators, and is it even important?
Because wealth creation is increasingly correlated to the presence of innovation in local economies, it now has its own worldwide ranking called the Global Innovations Index (GII).
When the GII was first published in 2003, the Canadian economy ranked 9th in the world out of 82 countries. The 2009 publication ranks Canada 14th, with a projection to 15th before 2013. Canada is included in a cluster of "Second-tier Innovators". Top-ten or First-tier Innovators include the US (8th but dropping), and also Japan (1), South Korea, Singapore, Finland, Ireland and Sweden among others. The Global Innovation Index tends to favor smaller, highly urban countries with a large "creative class" of idea generators. Does this sound familiar? It should. Canada is over 80% urban with hub cities such as Vancouver, Toronto, and Montreal possessing "creative class" populations in excess of 30% of the total population. This ratio is among the highest in the world. And this does not include technology clusters such as Kitchener-Waterloo or Ottawa where the ratios are likely higher. Why are countries like Singapore, South Korea, China, and Finland racing up the charts while, despite the ingredients for success, we stagnate as Second-Tier Innovators?
It's not that policy makers at all levels of government are ignoring the issue. On the contrary. There are a myriad of tax incentives (e.g. IRAP, SR&ED), grants, loans, and direct applied science through the National Research Council, and a multitude of Provincial programs. Almost all of these initiatives are focused on Research & Development. For nearly two decades, policy makers have held true that R&D creates innovation. Many now believe this to be wrong. Although R&D contributes to the process, commercialization actually creates innovation. So how does the Canadian Government shift policies to facilitate innovation?
First. What is an innovation?
At least one of the following five:
1. A new good or a new quality of a good.
2. A new method of production.
3. Opening a new market.
4. A new source of supply.
5. New organization of an industry.
R&D on its own, in isolation, as it is currently funded cannot deliver ANY of those five outcomes. R&D is usually a task within the implementation period of an innovation process, which is defined as:
Conceptualization -> Implementation -> Marketing
Despite the myths, innovation usually does not sprout out of thin air. Consistent and persistent innovation requires an infrastructure or ecosystem.
Access to Knowledge -> Local Adaption -> Financial Incentives.
It is within the innovation infrastructure where policy makers may be able to make some tweaks in order to better support the "creative class" and to help facilitate the commercialization of ideas. The primary problem with the Canadian market is that capital is becoming less available for innovation.
Re-Incent Venture Capital: Both private institutional and Labour Sponsored Venture Capital Corporations (LSVCC) are available to entrepreneurs for commercialization and this has been the primary engine of innovation since the 1980s. However the VC sector is not working as well now as it has in the past because a smaller percentage of available funds are actually invested, and the pool itself is drying up. Relative to VCs elsewhere in the world, there is an unusually large overhang of uninvested capital in the Canadian sector because VCs here may be incented towards risk aversion. As well, rules regarding investment criteria and tax incentives have not been updated for 20 years, making LSVCCs unattractive to the retail investors that they were designed for, relative to recent investment innovations that are more liquid. Policy makers need to update tax rules to facilitate more VC activity, attract more capital, and support higher tax-adjusted returns relative to other newer investment instruments.
Better Enable Public Venture: As VC funding has declined since the tech bubble, more entrepreneurs have taken the public route to commercialization via the Toronto Venture Exchange. Currently, there are over 200 early stage technology companies listed on the TSXV that have become listed through Capital Pool Corporation (CPC) mergers. However, there are only a handful of Canadian institutions that regularly invest in venture technology companies, and that number has declined with liquidity. The single biggest adjustment that can be made in the public markets is to offer flow-through shares for venture technology stocks. Currently, investors can benefit directly from mineral exploration tax incentives with flow-through shares. Considering that mineral exploration and technical innovations carry similar risks, and innovation is a potentially greater wealth creator, a class of flow-through shares should be created for publicly-listed technology companies that can benefit from tax incentives.
Modernize Direct Tax Incentives: A research report in 2005 from Booz Allen Hamilton suggests that R&D spending does not necessarily result in more innovation or performance from by an individual company. In fact, when R&D is effective, it often only benefits gross margin. The key to performance is cross department collaboration and effective innovation processes in the context of a scalable business model. Without a business model and processes, R&D alone is ineffective. Right now government agencies continue to focus tax incentives on the least effective activity in the context of commercialization and performance. Modernizing tax incentives to better encompass commercialization, while reducing administrative burden may help to promote more effective innovation, and ultimately, wealth creation.
Here is a link to a op-ed article by Ron Freedman published by the Toronto Star. He argues that current federal R&D funding needs to be modernized with direct university-based research re-directed.
Knowledge Clustering: K-W, or the Golden Triangle is the best example of knowledge clustering related to computer engineering and the University of Waterloo (and more recently Wilfrid Laurier University). Home grown VCs like Waterloo Tech Ventures, and an active mentoring community through Communitech have also helped to spawn some of the most innovative and successful technology companies in Canada (RIM, Open Text, Descartes Systems, MKS among others). Communities can adjust local tax jurisdictions to help promote knowledge clusters in other industries such as measurement devices, and biotech.
Education: There is probably a bigger issue in the development of finance, business management, and organizational management capabilities focused on technology and innovation. A new generation of people need skills to help to pump out more valuable intellectual capital going forward. Again, policymakers may look at grants and loan incentives to help bring more capability online.
These options discussed are only but a few, and they may not be practical. There are probably many more ideas. It would be interesting to see what others think about this issue.
Disclosure: I own shares of DSG.
Based on current thinking, this is a decidedly bad thing, becoming worse.
What actually sparked this blog post has been the frustration of seeing really good ideas suffer from persistent and chronic underfunding. The result of which is truncated or even abandoned commercialization of ideas that may have been major successes if funded and supported elsewhere. How many RIMs have been left behind because entrepreneurs could not attract appropriate growth capital? How many entrepreneurs have simply left the country? How many great technologies have been sold before maturity for minimal shareholder return? Exiting this recession, it is an increasingly popular notion that future wealth creation will be generated though innovation...bringing ideas to life. Not production. Not resources.
How are we doing as innovators, and is it even important?
Because wealth creation is increasingly correlated to the presence of innovation in local economies, it now has its own worldwide ranking called the Global Innovations Index (GII).
When the GII was first published in 2003, the Canadian economy ranked 9th in the world out of 82 countries. The 2009 publication ranks Canada 14th, with a projection to 15th before 2013. Canada is included in a cluster of "Second-tier Innovators". Top-ten or First-tier Innovators include the US (8th but dropping), and also Japan (1), South Korea, Singapore, Finland, Ireland and Sweden among others. The Global Innovation Index tends to favor smaller, highly urban countries with a large "creative class" of idea generators. Does this sound familiar? It should. Canada is over 80% urban with hub cities such as Vancouver, Toronto, and Montreal possessing "creative class" populations in excess of 30% of the total population. This ratio is among the highest in the world. And this does not include technology clusters such as Kitchener-Waterloo or Ottawa where the ratios are likely higher. Why are countries like Singapore, South Korea, China, and Finland racing up the charts while, despite the ingredients for success, we stagnate as Second-Tier Innovators?
It's not that policy makers at all levels of government are ignoring the issue. On the contrary. There are a myriad of tax incentives (e.g. IRAP, SR&ED), grants, loans, and direct applied science through the National Research Council, and a multitude of Provincial programs. Almost all of these initiatives are focused on Research & Development. For nearly two decades, policy makers have held true that R&D creates innovation. Many now believe this to be wrong. Although R&D contributes to the process, commercialization actually creates innovation. So how does the Canadian Government shift policies to facilitate innovation?
First. What is an innovation?
At least one of the following five:
1. A new good or a new quality of a good.
2. A new method of production.
3. Opening a new market.
4. A new source of supply.
5. New organization of an industry.
R&D on its own, in isolation, as it is currently funded cannot deliver ANY of those five outcomes. R&D is usually a task within the implementation period of an innovation process, which is defined as:
Conceptualization -> Implementation -> Marketing
Despite the myths, innovation usually does not sprout out of thin air. Consistent and persistent innovation requires an infrastructure or ecosystem.
Access to Knowledge -> Local Adaption -> Financial Incentives.
It is within the innovation infrastructure where policy makers may be able to make some tweaks in order to better support the "creative class" and to help facilitate the commercialization of ideas. The primary problem with the Canadian market is that capital is becoming less available for innovation.
Re-Incent Venture Capital: Both private institutional and Labour Sponsored Venture Capital Corporations (LSVCC) are available to entrepreneurs for commercialization and this has been the primary engine of innovation since the 1980s. However the VC sector is not working as well now as it has in the past because a smaller percentage of available funds are actually invested, and the pool itself is drying up. Relative to VCs elsewhere in the world, there is an unusually large overhang of uninvested capital in the Canadian sector because VCs here may be incented towards risk aversion. As well, rules regarding investment criteria and tax incentives have not been updated for 20 years, making LSVCCs unattractive to the retail investors that they were designed for, relative to recent investment innovations that are more liquid. Policy makers need to update tax rules to facilitate more VC activity, attract more capital, and support higher tax-adjusted returns relative to other newer investment instruments.
Better Enable Public Venture: As VC funding has declined since the tech bubble, more entrepreneurs have taken the public route to commercialization via the Toronto Venture Exchange. Currently, there are over 200 early stage technology companies listed on the TSXV that have become listed through Capital Pool Corporation (CPC) mergers. However, there are only a handful of Canadian institutions that regularly invest in venture technology companies, and that number has declined with liquidity. The single biggest adjustment that can be made in the public markets is to offer flow-through shares for venture technology stocks. Currently, investors can benefit directly from mineral exploration tax incentives with flow-through shares. Considering that mineral exploration and technical innovations carry similar risks, and innovation is a potentially greater wealth creator, a class of flow-through shares should be created for publicly-listed technology companies that can benefit from tax incentives.
Modernize Direct Tax Incentives: A research report in 2005 from Booz Allen Hamilton suggests that R&D spending does not necessarily result in more innovation or performance from by an individual company. In fact, when R&D is effective, it often only benefits gross margin. The key to performance is cross department collaboration and effective innovation processes in the context of a scalable business model. Without a business model and processes, R&D alone is ineffective. Right now government agencies continue to focus tax incentives on the least effective activity in the context of commercialization and performance. Modernizing tax incentives to better encompass commercialization, while reducing administrative burden may help to promote more effective innovation, and ultimately, wealth creation.
Here is a link to a op-ed article by Ron Freedman published by the Toronto Star. He argues that current federal R&D funding needs to be modernized with direct university-based research re-directed.
Knowledge Clustering: K-W, or the Golden Triangle is the best example of knowledge clustering related to computer engineering and the University of Waterloo (and more recently Wilfrid Laurier University). Home grown VCs like Waterloo Tech Ventures, and an active mentoring community through Communitech have also helped to spawn some of the most innovative and successful technology companies in Canada (RIM, Open Text, Descartes Systems, MKS among others). Communities can adjust local tax jurisdictions to help promote knowledge clusters in other industries such as measurement devices, and biotech.
Education: There is probably a bigger issue in the development of finance, business management, and organizational management capabilities focused on technology and innovation. A new generation of people need skills to help to pump out more valuable intellectual capital going forward. Again, policymakers may look at grants and loan incentives to help bring more capability online.
These options discussed are only but a few, and they may not be practical. There are probably many more ideas. It would be interesting to see what others think about this issue.
Disclosure: I own shares of DSG.
8/18/09
Zoompass is destined to succeed: So what is the potential fallout in the Canadian market?
This is a follow-up commentary to a previous post "Enstream: A Mobile Moneris or Dexit Revisited?" published on June 15, 2009. The article was an attempt to contextualize the beta launch of Zoompass within the current Canadian and international mobile billing and payments ecosystem. The fundamental question posed was "Does this venture have a chance to succeed, or is it doomed to fail like so many other attempts in the past?" And if it does succeed, what are the implications for the market?
Two months later, and after spending some time interviewing Enstream management, along with management from other companies within the Canadian mobile ecosystem, I will call an early verdict:
Zoompass is destined to succeed and here is why:
1. The carrier coalition (T.TO, BCE.TO, RCI.TO) funding the Enstream venture is more committed than ever after initial feedback. So far, it has refrained from the typical eye gouging that makes these types of ventures implode early. Most of its competition would come from chronically underfunded start-ups - so it has a definite capital advantage (and apparently patience).
2. The bench strength is deep. Most of the management team and the 35 or so developers iterating through the beta have been poached from companies like Verisign (VRSN.Q) (Mqube), which suggests deep experience in mobile SMS-based billing gateways, and mobile transactions.
3. There is pent-up demand. Canada is behind countries like Kenya in getting mobile micro-payments launched. In a study conducted by Gartner, Inc, it forecasts that 190 million people worldwide will be making mobile payment by 2012, and that the current annual growth rate is 70%. To put this into perspective, as of 2009, there are 250 million smart phones in the market. Recent North American surveys conclude that between 26% and 32% of mobile users would immediately adopt mobile payments if they were offered. These surveys, regardless of variances in methodologies, appear to point to mass adoption potential. The tweetsphere appears to indicate some consumer impatience for access to such services.
4. Target market is trained and willing. Zoompass is targeted at the 18 - 30 age cohort. There is almost 100% intersection among this group of previous experience downloading paid mobile content and applications thanks to iTunes, PayPal, and a myriad of on-portal and off-portal mobile content malls. There is little education required, and mobile micro-payments are a simple extension of what they are already accustomed to doing.
5. A vast majority of the capital risk is willingly borne by the consumer. Unlike previous failed electronic payment solutions, there is little financial risk at the endpoint assumed by the provider or merchants. Consumers have already invested in the wallet for other reasons. As a result, Zoompass can be tweaked relatively efficiently, with limited capital consequence, as it gets feedback from consumers. With limited capital risk, there is more flexibility in the design of potential offerings. More importantly, there is limited scaling friction caused by capital constraints. In this regard Zoompass is more like Twitter, less like Interac.
6. Zoompass is being developed collaboratively with its target market. Unlike many previous attempts at new electronic payment systems, Enstream is fully engaged in a collaborative design process with its potential consumers. In the end, this approach is most likely to result in success because it is not pushed into the market. The consumer is pulling it. Enstream has ripped a page from the US-based handbook of "how to launch a successful digital application". It is being very un-Canadian in its aggressive interaction via social media, ensuring better buy-in from a highly educated, elusive, and often cynical target market.
Where can this go?
Ultimately, Zoompass has its sights set on about 20 million subscribers with a factory installed application that includes active RFID and NFC components. The carriers have a little pull with handset manufacturers, so the ultimate factory install objective is obtainable. As well, Zoompass is not interested just in the cash that resides in your wallet, it is interested in the whole wallet. Think about what is in your wallet right now: Credit cards galore, various gift cards, a coffee card, loyalty cards, a phone card, your license, your health card, maybe a transit pass.
What does this mean to the mobile ecosystem and to Canadian consumers?
First, the Canadian consumer...
1. A potential carrier oligopoly in mobile payments is a risk to consumers. Already, Canadian mobile subscribers pay some of the highest mobile bills in the world due to market distortions caused by the CRTC and to a related lack of competitive choice. The Enstream Joint Venture represents a potential to perpetuate oligopoly risk. The extent of the oligopoly depends upon how successful Enstream is in co-opting the financial services industry into its offerings.
2. A potential meta-oligopoly only perpetuates risk to consumers. Canadian financial institutions could band together as in the past (e.g. Interac) in order to offer an alternative mobile payments solution. Already there are whispers of Big 5 summit meetings on the topic of a competitive offering. Before consumers begin to cheer, this only represents two choices operated by a total of 8 very large institutions. It doesn't necessarily create a fully baked competitive environment that gives consumers adequate choice. As an aside, Canadian financial institutions are simply not wired to build out consumer services iteratively like Enstream is doing, so the chances of success are more limited, which means that consumers could be more likely than not saddled with a mere oligopoly.
3. But what about the new broadband spectrum wireless carriers? The future entry of new carriers such as Globalive (Wind Mobile), Publix Mobile, and DAVE Mobile could present a viable alternative in mobile payments for consumers by creating its own JV/coalition. Possibly. However, these folks have a lot on their plates just to get services launched by 2010. In the meantime, Zoompass could deliver to the Enstream JV an insurmountable lead before new players could respond. Independent developers are mostly ignored by capital markets, so there is not likely to be any effectively funded, meaningful competitive "white knights" appearing out of the woodwork any time soon.
4. RIM to the rescue? New Nortel (RIM) may have a couple of things cooking but probably at an earlier stage of development than Enstream. It could leverage its balance sheet to acquire (similar to Nokia buying Obopay) but it has been mostly dabbling. As stated in June, RIM is likely to try to leverage its new PayPal relationship before it hunts for another Obopay. Even still, what if you are an iPhone user?
In the not-to-distant future, it is feasible for someone at the Canadian Competition Bureau to have another file dropped on their desk. Ironically, the near certain success of Zoompass may create some market uncertainty for investors as consumer protection raises the specter of government intervention.
Now the Canadian mobile ecosystem...
1. There are probably some small exploitable market niches around the edges of the possible Zoompass juggernaut. Enstream is not targeting what I would coin the "Money Mart Cohort". These are people with limited traditional banking access, and no credit. A vast majority are the working poor and recent immigrants who tend to be "cash-oriented". Depending on sources, this group represents between 10% and 12% of the population depending upon the year. For over a decade now, these people have already been engaged in card-based micro-payments by buying billions of long-distance minutes and pre-paid mobile time. The carriers have been making hay with this group for a while. An independent mobile payments offering could sprout up for these people. However, the size of the market limits the amount of potential competitors in this niche. And there will be a lot of microcaps scrapping over this business. Even with considerable consolidation, there are likely to be a couple of winners and a lot of losers in this market.
Other interesting potential mobile payment market niches could include payroll, government stipend, and international remittance. The common thread among these solutions, is that they are not necessarily micro-payments, and they do not have person-2-person elements to them.
2. Start-ups could take their cookies and simply leave the room. Enstream would certainly be happy. Micro-payments are a worldwide phenomenon with much larger opportunities outside of Canada. Enstream management states that it is (for now) a Canadian-only venture. Vendors with current international footprint may choose to apply their limited capital resources to exploit those markets more aggressively. Investor may also see Canadian companies with good IP and weak balance sheets snapped up by foreign interests over the next few quarters. This is a good thing for shareholder of such companies.
3. Complimentary and indirect competitors may find opportunities to hitch their fortunes to Zoompass. This could be a good way for a diverse group of vendors to maximize shareholder value. Enstream has been fairly vocal that it would like Zoompass to be an open platform for other developers and that it has (as alluded to earlier in this post) designs on getting a piece of the entire wallet. This is the exciting stuff for the mobile ecosystem based on feedback that I am receiving. However, I am skeptical that it will truly be an open development platform. Is Apple's Safari really an open platform? Enstream will pick its partners regardless of its current public postering. Notwithstanding, opportunities abound for partnerships in gift and re-loadable cards, loyalty management, EMR/health services, government services, RFID, POS, and NFC. There are potential technical and infrastructure partnerships related to billing systems, and provisioning along with cloud services related to transaction processing, ecommerce, identity and security. Although most of these solutions are likely to be provided by large cap vendors, there is likely room for Canadian small-cap, micro-caps and start-ups to participate (and a spot for investors to potentially benefit from considerable gains). As the solution matures, there are likely to be as of yet unimagined consumer applications that can be developed for commercial benefit.
In summary
Zoompass is here to stay. There is demand for mobile payments, success elsewhere in the world is well documented, and Zoompass appears to be destined for a successful launch in 2010. It may experience some bumps along the way, but it will likely be a market force within the next 24 months.
With its success will come uncertainty related to consumer choice, even if there is a direct competitive response from the financial services industry. Will there be a consumer outcry that compels government regulators to force the Enstream JV to open its platform to future competitors? If so, the ultimate benefit to shareholders of the main JV participants could be muted.
Investors should expect a lot of angst among the myriad of smaller under-capitalized players that have been developing solutions in this space so far. How does a management team respond to this competitive cluster bomb? Those that underestimate or ignore the potential for Zoompass do so at their peril. Shareholders should expect, and even encourage, increased M&A activity and strategic recalibration. Some companies may even attract new investment.
The impending Zoompass launch, and its likely success, should make thing very interesting for some time in the Canadian mobile market. Some investors could make some nice returns, others not so much. It will all depend on the reaction of management teams and subsequent execution. As always.
Please feel free to comment.
Disclosure: I do not own shares of any of the companies mentioned in this post.
Two months later, and after spending some time interviewing Enstream management, along with management from other companies within the Canadian mobile ecosystem, I will call an early verdict:
Zoompass is destined to succeed and here is why:
1. The carrier coalition (T.TO, BCE.TO, RCI.TO) funding the Enstream venture is more committed than ever after initial feedback. So far, it has refrained from the typical eye gouging that makes these types of ventures implode early. Most of its competition would come from chronically underfunded start-ups - so it has a definite capital advantage (and apparently patience).
2. The bench strength is deep. Most of the management team and the 35 or so developers iterating through the beta have been poached from companies like Verisign (VRSN.Q) (Mqube), which suggests deep experience in mobile SMS-based billing gateways, and mobile transactions.
3. There is pent-up demand. Canada is behind countries like Kenya in getting mobile micro-payments launched. In a study conducted by Gartner, Inc, it forecasts that 190 million people worldwide will be making mobile payment by 2012, and that the current annual growth rate is 70%. To put this into perspective, as of 2009, there are 250 million smart phones in the market. Recent North American surveys conclude that between 26% and 32% of mobile users would immediately adopt mobile payments if they were offered. These surveys, regardless of variances in methodologies, appear to point to mass adoption potential. The tweetsphere appears to indicate some consumer impatience for access to such services.
4. Target market is trained and willing. Zoompass is targeted at the 18 - 30 age cohort. There is almost 100% intersection among this group of previous experience downloading paid mobile content and applications thanks to iTunes, PayPal, and a myriad of on-portal and off-portal mobile content malls. There is little education required, and mobile micro-payments are a simple extension of what they are already accustomed to doing.
5. A vast majority of the capital risk is willingly borne by the consumer. Unlike previous failed electronic payment solutions, there is little financial risk at the endpoint assumed by the provider or merchants. Consumers have already invested in the wallet for other reasons. As a result, Zoompass can be tweaked relatively efficiently, with limited capital consequence, as it gets feedback from consumers. With limited capital risk, there is more flexibility in the design of potential offerings. More importantly, there is limited scaling friction caused by capital constraints. In this regard Zoompass is more like Twitter, less like Interac.
6. Zoompass is being developed collaboratively with its target market. Unlike many previous attempts at new electronic payment systems, Enstream is fully engaged in a collaborative design process with its potential consumers. In the end, this approach is most likely to result in success because it is not pushed into the market. The consumer is pulling it. Enstream has ripped a page from the US-based handbook of "how to launch a successful digital application". It is being very un-Canadian in its aggressive interaction via social media, ensuring better buy-in from a highly educated, elusive, and often cynical target market.
Where can this go?
Ultimately, Zoompass has its sights set on about 20 million subscribers with a factory installed application that includes active RFID and NFC components. The carriers have a little pull with handset manufacturers, so the ultimate factory install objective is obtainable. As well, Zoompass is not interested just in the cash that resides in your wallet, it is interested in the whole wallet. Think about what is in your wallet right now: Credit cards galore, various gift cards, a coffee card, loyalty cards, a phone card, your license, your health card, maybe a transit pass.
What does this mean to the mobile ecosystem and to Canadian consumers?
First, the Canadian consumer...
1. A potential carrier oligopoly in mobile payments is a risk to consumers. Already, Canadian mobile subscribers pay some of the highest mobile bills in the world due to market distortions caused by the CRTC and to a related lack of competitive choice. The Enstream Joint Venture represents a potential to perpetuate oligopoly risk. The extent of the oligopoly depends upon how successful Enstream is in co-opting the financial services industry into its offerings.
2. A potential meta-oligopoly only perpetuates risk to consumers. Canadian financial institutions could band together as in the past (e.g. Interac) in order to offer an alternative mobile payments solution. Already there are whispers of Big 5 summit meetings on the topic of a competitive offering. Before consumers begin to cheer, this only represents two choices operated by a total of 8 very large institutions. It doesn't necessarily create a fully baked competitive environment that gives consumers adequate choice. As an aside, Canadian financial institutions are simply not wired to build out consumer services iteratively like Enstream is doing, so the chances of success are more limited, which means that consumers could be more likely than not saddled with a mere oligopoly.
3. But what about the new broadband spectrum wireless carriers? The future entry of new carriers such as Globalive (Wind Mobile), Publix Mobile, and DAVE Mobile could present a viable alternative in mobile payments for consumers by creating its own JV/coalition. Possibly. However, these folks have a lot on their plates just to get services launched by 2010. In the meantime, Zoompass could deliver to the Enstream JV an insurmountable lead before new players could respond. Independent developers are mostly ignored by capital markets, so there is not likely to be any effectively funded, meaningful competitive "white knights" appearing out of the woodwork any time soon.
4. RIM to the rescue? New Nortel (RIM) may have a couple of things cooking but probably at an earlier stage of development than Enstream. It could leverage its balance sheet to acquire (similar to Nokia buying Obopay) but it has been mostly dabbling. As stated in June, RIM is likely to try to leverage its new PayPal relationship before it hunts for another Obopay. Even still, what if you are an iPhone user?
In the not-to-distant future, it is feasible for someone at the Canadian Competition Bureau to have another file dropped on their desk. Ironically, the near certain success of Zoompass may create some market uncertainty for investors as consumer protection raises the specter of government intervention.
Now the Canadian mobile ecosystem...
1. There are probably some small exploitable market niches around the edges of the possible Zoompass juggernaut. Enstream is not targeting what I would coin the "Money Mart Cohort". These are people with limited traditional banking access, and no credit. A vast majority are the working poor and recent immigrants who tend to be "cash-oriented". Depending on sources, this group represents between 10% and 12% of the population depending upon the year. For over a decade now, these people have already been engaged in card-based micro-payments by buying billions of long-distance minutes and pre-paid mobile time. The carriers have been making hay with this group for a while. An independent mobile payments offering could sprout up for these people. However, the size of the market limits the amount of potential competitors in this niche. And there will be a lot of microcaps scrapping over this business. Even with considerable consolidation, there are likely to be a couple of winners and a lot of losers in this market.
Other interesting potential mobile payment market niches could include payroll, government stipend, and international remittance. The common thread among these solutions, is that they are not necessarily micro-payments, and they do not have person-2-person elements to them.
2. Start-ups could take their cookies and simply leave the room. Enstream would certainly be happy. Micro-payments are a worldwide phenomenon with much larger opportunities outside of Canada. Enstream management states that it is (for now) a Canadian-only venture. Vendors with current international footprint may choose to apply their limited capital resources to exploit those markets more aggressively. Investor may also see Canadian companies with good IP and weak balance sheets snapped up by foreign interests over the next few quarters. This is a good thing for shareholder of such companies.
3. Complimentary and indirect competitors may find opportunities to hitch their fortunes to Zoompass. This could be a good way for a diverse group of vendors to maximize shareholder value. Enstream has been fairly vocal that it would like Zoompass to be an open platform for other developers and that it has (as alluded to earlier in this post) designs on getting a piece of the entire wallet. This is the exciting stuff for the mobile ecosystem based on feedback that I am receiving. However, I am skeptical that it will truly be an open development platform. Is Apple's Safari really an open platform? Enstream will pick its partners regardless of its current public postering. Notwithstanding, opportunities abound for partnerships in gift and re-loadable cards, loyalty management, EMR/health services, government services, RFID, POS, and NFC. There are potential technical and infrastructure partnerships related to billing systems, and provisioning along with cloud services related to transaction processing, ecommerce, identity and security. Although most of these solutions are likely to be provided by large cap vendors, there is likely room for Canadian small-cap, micro-caps and start-ups to participate (and a spot for investors to potentially benefit from considerable gains). As the solution matures, there are likely to be as of yet unimagined consumer applications that can be developed for commercial benefit.
In summary
Zoompass is here to stay. There is demand for mobile payments, success elsewhere in the world is well documented, and Zoompass appears to be destined for a successful launch in 2010. It may experience some bumps along the way, but it will likely be a market force within the next 24 months.
With its success will come uncertainty related to consumer choice, even if there is a direct competitive response from the financial services industry. Will there be a consumer outcry that compels government regulators to force the Enstream JV to open its platform to future competitors? If so, the ultimate benefit to shareholders of the main JV participants could be muted.
Investors should expect a lot of angst among the myriad of smaller under-capitalized players that have been developing solutions in this space so far. How does a management team respond to this competitive cluster bomb? Those that underestimate or ignore the potential for Zoompass do so at their peril. Shareholders should expect, and even encourage, increased M&A activity and strategic recalibration. Some companies may even attract new investment.
The impending Zoompass launch, and its likely success, should make thing very interesting for some time in the Canadian mobile market. Some investors could make some nice returns, others not so much. It will all depend on the reaction of management teams and subsequent execution. As always.
Please feel free to comment.
Disclosure: I do not own shares of any of the companies mentioned in this post.
8/14/09
Nstein positioned to thrive in H2 2009?
Yesterday EIN reported revenue of $6.2 million, up slightly from $6.0 million reported for the previous year Q2.
More importantly, Management has re-adjusted its cost structure, reducing overall expenses by 19.1% compared to Q2, 2008. For H1, 2009, the total cost structure has been reduced by 16.3% compared to H1, 2008, while total revenues for the same period have remained relatively flat, with a 3% YoY decline. Cost cutting measures have resulted in positive EBITDA of $0.34m for Q2, 2009 versus a $1.12m loss for the previous quarter, representing a $1.46m YoY improvement. Most of the expense reduction has come in the sales and marketing area.
Investors would typically view cost cutting in sales and marketing as a yellow flag for future sales growth. However, management believes that it has a robust pipeline for H2, 2009 with prospects for another Q4 sales record (for the past 3 years, Q4 has delivered sales and earnings records). With a honed down marketing budget, this is a testament to the quality of Nstein's solutions. According to Management, nearly all of the current pipeline is a direct result of referrals from its current client base. Essentially, Nstein has gone viral among at the "C-level" in its market niche. Investors should view this condition as positive.
Here is a great example of an innovative use of the Nstein platform from the Financial Times Group: Newssift
A robust pipeline does not represent robust sales, it needs to be converted. Macro-economic conditions appear to be aligning to Nstein's benefit. Some of the pipeline is pent-up demand from earlier in 2009, when capital budgets were frozen as the world economy cratered. Feedback from the market suggests more confidence in the economy, and some urgency among major news/information publishers to maximize digital revenues. Capital budgets are un-thawing and digital revenue is a priority. As the economy begins to recover from the world recession, publishers almost universally believe that the print-based advertising model is irreversibly impaired. This belief should benefit EIN in Q4, with some carry-over to Q1 2010 and beyond.
Among the public companies that I follow, Nstein has been one of the most "at risk" in relationship to the world economic recession because its client base was highly sensitive to the downturn, and dependent upon capital budgets. The company entered 2008 with approximately $6.5 million in cash, and appears to be exiting the recession with about $6.0 million in cash. Investors may take comfort that the Company has successfully navigated the recession, and has the resources to continue thrive even if the world is experiencing a false recovery.
To be profitable on a NI basis, the company probably needs to generate about $26 million in sales for the year. It will be close. However, the outlook for 2010 could infer more profitability.
Disclosure: I do not own shares of EIN.
More importantly, Management has re-adjusted its cost structure, reducing overall expenses by 19.1% compared to Q2, 2008. For H1, 2009, the total cost structure has been reduced by 16.3% compared to H1, 2008, while total revenues for the same period have remained relatively flat, with a 3% YoY decline. Cost cutting measures have resulted in positive EBITDA of $0.34m for Q2, 2009 versus a $1.12m loss for the previous quarter, representing a $1.46m YoY improvement. Most of the expense reduction has come in the sales and marketing area.
Investors would typically view cost cutting in sales and marketing as a yellow flag for future sales growth. However, management believes that it has a robust pipeline for H2, 2009 with prospects for another Q4 sales record (for the past 3 years, Q4 has delivered sales and earnings records). With a honed down marketing budget, this is a testament to the quality of Nstein's solutions. According to Management, nearly all of the current pipeline is a direct result of referrals from its current client base. Essentially, Nstein has gone viral among at the "C-level" in its market niche. Investors should view this condition as positive.
Here is a great example of an innovative use of the Nstein platform from the Financial Times Group: Newssift
A robust pipeline does not represent robust sales, it needs to be converted. Macro-economic conditions appear to be aligning to Nstein's benefit. Some of the pipeline is pent-up demand from earlier in 2009, when capital budgets were frozen as the world economy cratered. Feedback from the market suggests more confidence in the economy, and some urgency among major news/information publishers to maximize digital revenues. Capital budgets are un-thawing and digital revenue is a priority. As the economy begins to recover from the world recession, publishers almost universally believe that the print-based advertising model is irreversibly impaired. This belief should benefit EIN in Q4, with some carry-over to Q1 2010 and beyond.
Among the public companies that I follow, Nstein has been one of the most "at risk" in relationship to the world economic recession because its client base was highly sensitive to the downturn, and dependent upon capital budgets. The company entered 2008 with approximately $6.5 million in cash, and appears to be exiting the recession with about $6.0 million in cash. Investors may take comfort that the Company has successfully navigated the recession, and has the resources to continue thrive even if the world is experiencing a false recovery.
To be profitable on a NI basis, the company probably needs to generate about $26 million in sales for the year. It will be close. However, the outlook for 2010 could infer more profitability.
Disclosure: I do not own shares of EIN.
8/13/09
Delta Airlines deals a blow to Points International - guidance reduced.
Yesterday, Points International reported Q2, 2009 results. Sales came in at $21.3 million, a 23% increase over the previous quarter sales results reported at $17.3 million.
The Company reported an EBITDA loss of $0.4 million or (0.00) loss per share, versus positive EBITDA of $0.5 million or $0.01 EPS, in the previous year quarter. Sequentially, there was a slight EBITDA performance improvement from a $0.6 million loss reported for Q1, 2009.
The real news is that the Company disclosed that Delta Airlines (DAL) is "recasting" its relationship with PTS. During the conference call, this disclosure was better clarified. Delta is leveraging the Northwest merger to "insource" key point management services on Delta.com that PTS currently offers. Management admitted that this could represent up to 60% of current revenue, and that this would take effect as of October 1, 2009. As a result, the Company has reduced full year revenue guidance by $15 million to between $70 million and $80 million.
Not only did PTS lose Delta Airlines, but also through the merger, Northwest Airlines. This bad news offset the good news during the quarter, which was the signing of KLM-Air France.
Right now, Point International appears to be struggling. It is reducing its headcount by 20%, it is redeploying a new platform, redesigning its consumer websites (yet again), and it is grasping at social networking product development, among a myriad of activities announced during the conference call. Notwithstanding all of this activity, and even prior to the Delta bombshell, the company has been going backwards on profitability for the past 4 quarters, despite the promises made at the end of 2007 regarding improved margins and earnings leverage from the principle model. It never materialized.
Although losing most of the Delta revenue should improve gross margins, there is a lot of work to do to rescale the company and get to profitability. Analysts are likely to be concerned and may be losing patience, this sentiment should result in target reductions and changes in recommendations, which are likely to have a negative impact on the share price.
Disclosure: I do not own PTS or DAL shares.
The Company reported an EBITDA loss of $0.4 million or (0.00) loss per share, versus positive EBITDA of $0.5 million or $0.01 EPS, in the previous year quarter. Sequentially, there was a slight EBITDA performance improvement from a $0.6 million loss reported for Q1, 2009.
The real news is that the Company disclosed that Delta Airlines (DAL) is "recasting" its relationship with PTS. During the conference call, this disclosure was better clarified. Delta is leveraging the Northwest merger to "insource" key point management services on Delta.com that PTS currently offers. Management admitted that this could represent up to 60% of current revenue, and that this would take effect as of October 1, 2009. As a result, the Company has reduced full year revenue guidance by $15 million to between $70 million and $80 million.
Not only did PTS lose Delta Airlines, but also through the merger, Northwest Airlines. This bad news offset the good news during the quarter, which was the signing of KLM-Air France.
Right now, Point International appears to be struggling. It is reducing its headcount by 20%, it is redeploying a new platform, redesigning its consumer websites (yet again), and it is grasping at social networking product development, among a myriad of activities announced during the conference call. Notwithstanding all of this activity, and even prior to the Delta bombshell, the company has been going backwards on profitability for the past 4 quarters, despite the promises made at the end of 2007 regarding improved margins and earnings leverage from the principle model. It never materialized.
Although losing most of the Delta revenue should improve gross margins, there is a lot of work to do to rescale the company and get to profitability. Analysts are likely to be concerned and may be losing patience, this sentiment should result in target reductions and changes in recommendations, which are likely to have a negative impact on the share price.
Disclosure: I do not own PTS or DAL shares.
8/6/09
CX Q2 results: Did it beat consensus?
Well, kinda mostly.
Cyberplex reported $26.0 in revenue for the quarter, a 172% improvement over Q2, 2009, and a 18.8% sequential decline from the $32 million reported for Q1, 2009. Due to historical seasonality in performance, the consensus forecast implied a 29.3% sequential decline, or $22.6 million. So, CX beat this estimate.(and the Google correlation seems to hold)
EBITDA was reported at $2.5 million or $0.03 per fully diluted share, ahead of $2.2 million consensus forecast, implying a 10% margin on revenue. CX beat this estimate.
Management stated during the investor conference call that margins were inline with expectations, and that EBITDA margins going forward should be maintained at around the 10% level for the next few quarters.
Net Income was reported at $1.0 million or $0.01 EPS, versus $0.02 EPS consensus estimate. This was a miss.
Foreign currency translation losses were high for the quarter at $1.3 million or $0.02 per share due to the surging loonie versus the U.S. dollar. During the conference call, management admitted that currency hedging strategies for the quarter did not work. For Q3, the company has hedged currency translation for the month of July and plans to continue to implement more aggressive "layered" hedging strategies for currency going forward, which should benefit earnings for Q3 and Q4.
Notwithstanding the FX-driven EPS miss, according to management, the company generated $3.4 million in free cashflow, or $0.05 per fully diluted share for the second quarter.
Gross Margins were reported at 30% for the quarter, a 13% decline from 34% reported during Q2, 2008, and a small sequential decline from 31% reported for Q1, 2009. Management is targeting 30% GM +/- 2% going forward and Q2 GM was in range. Gross Margins were inline with expectations. However, Gross Margin is a measurement that analysts need to monitor for further erosion going forward. Increasing competition could result in price erosion. Executionally, the company could offset pricing pressure through new categories (eg. social networking platforms), and both leveraging and building out its analytical capabilities to provide advertisers and publishers more value-added services. As well, management hinted at the possibility of increasing the scale of its own ad inventory, thus reducing its reliance on affiliates and third-party publishers.
As for H2 outlook, to reflect historical patterns, revenue should be forecast by analysts to decline sequentially again in Q3 from Q2, with a surge in Q4. Upside performance surprises could come in the form of deals with top 50 publishers, or more likely, significant national and multi-national advertisers. As well, the Company continues to expand its sales force with digital ad sales specialists (there is probably quite a bit of talent hanging around after all of the recent media cuts). More sales horsepower should increase revenue momentum for Q4 and Q1 2010, although analysts should be watching operating margins closely over the next few quarters to measure sales effectiveness.
Fundamentally, this story remains intact for H2 2009 as one of the more intriguing success stories during this recession. It is unlikely that we will see another major "gap up" in H2 performance this year like we did for Q4 2008. However, with a solid balance sheet, an improving world economy, a bullish outlook by management, and increasing interest in CPA advertising, H2 looks to be very solid. Analysts are likely to overlook the FX issues for now, and they should be pleased that the company beat forecasts for sales and EBITDA. Analysts are likely to scrutinize margin risk in future quarters.
With respect to potential acquisitions, the Burst Media opportunity is probably over for now. However, there are a lot of potentially accretive substitute opportunities around.
Disclosure: I own CX.
Cyberplex reported $26.0 in revenue for the quarter, a 172% improvement over Q2, 2009, and a 18.8% sequential decline from the $32 million reported for Q1, 2009. Due to historical seasonality in performance, the consensus forecast implied a 29.3% sequential decline, or $22.6 million. So, CX beat this estimate.(and the Google correlation seems to hold)
EBITDA was reported at $2.5 million or $0.03 per fully diluted share, ahead of $2.2 million consensus forecast, implying a 10% margin on revenue. CX beat this estimate.
Management stated during the investor conference call that margins were inline with expectations, and that EBITDA margins going forward should be maintained at around the 10% level for the next few quarters.
Net Income was reported at $1.0 million or $0.01 EPS, versus $0.02 EPS consensus estimate. This was a miss.
Foreign currency translation losses were high for the quarter at $1.3 million or $0.02 per share due to the surging loonie versus the U.S. dollar. During the conference call, management admitted that currency hedging strategies for the quarter did not work. For Q3, the company has hedged currency translation for the month of July and plans to continue to implement more aggressive "layered" hedging strategies for currency going forward, which should benefit earnings for Q3 and Q4.
Notwithstanding the FX-driven EPS miss, according to management, the company generated $3.4 million in free cashflow, or $0.05 per fully diluted share for the second quarter.
Gross Margins were reported at 30% for the quarter, a 13% decline from 34% reported during Q2, 2008, and a small sequential decline from 31% reported for Q1, 2009. Management is targeting 30% GM +/- 2% going forward and Q2 GM was in range. Gross Margins were inline with expectations. However, Gross Margin is a measurement that analysts need to monitor for further erosion going forward. Increasing competition could result in price erosion. Executionally, the company could offset pricing pressure through new categories (eg. social networking platforms), and both leveraging and building out its analytical capabilities to provide advertisers and publishers more value-added services. As well, management hinted at the possibility of increasing the scale of its own ad inventory, thus reducing its reliance on affiliates and third-party publishers.
As for H2 outlook, to reflect historical patterns, revenue should be forecast by analysts to decline sequentially again in Q3 from Q2, with a surge in Q4. Upside performance surprises could come in the form of deals with top 50 publishers, or more likely, significant national and multi-national advertisers. As well, the Company continues to expand its sales force with digital ad sales specialists (there is probably quite a bit of talent hanging around after all of the recent media cuts). More sales horsepower should increase revenue momentum for Q4 and Q1 2010, although analysts should be watching operating margins closely over the next few quarters to measure sales effectiveness.
Fundamentally, this story remains intact for H2 2009 as one of the more intriguing success stories during this recession. It is unlikely that we will see another major "gap up" in H2 performance this year like we did for Q4 2008. However, with a solid balance sheet, an improving world economy, a bullish outlook by management, and increasing interest in CPA advertising, H2 looks to be very solid. Analysts are likely to overlook the FX issues for now, and they should be pleased that the company beat forecasts for sales and EBITDA. Analysts are likely to scrutinize margin risk in future quarters.
With respect to potential acquisitions, the Burst Media opportunity is probably over for now. However, there are a lot of potentially accretive substitute opportunities around.
Disclosure: I own CX.
Redknee (RKN.TO) Strong Q3 - Outlook Encouraging
Tweet Last Night: As expected $TSE:RKN reported a strong quarter - 21% growth, 23% GM growth, 17.2% EBITDA margin, $0.01 EPS
Redknee reported
Management has hinted at future tuckunder acquisitions both in important local international markets, and in triple play OSS. It has stated that it would like to normalize cash on hand at between $17 and $20 million. Currently, the Company has $22.4 million, so there is budget for tuckunder acquisitions available.
The company continues to predict continued profitable growth into 2010 and 2011 despite continued currency risk related to the value of the Canadian dollar. Currency volatility continues to be Redknee's largest risk, and it may result in slower deployments as international clients attempt to manage costs related to currency fluctuations.
Earning for the first 9 months of 2009 are reported at $0.06 EPS
Fundamentally, the stock is trading in the 10x EV/EBITDA range on a conservative FYE estimate. There is probably room for this stock to continue to ascend on a comparative basis. Notwithstanding the general over valuation of the current equity market, RKN and its peers such as BWC are profitable with international presence in high growth market sectors and strong balance sheets. A good spot to be for stock pickers.
Disclosure: own BWC, do not own RKN.
Redknee reported
- $14.5 million in sales for the quarter, up 21% from $11.9 million in previous quarter
- Gross Margins of 79%, up 23% from 64% in previous quarter.
- EBITDA of $2.5 million versus an EBITDA loss of $2.5 million in previous quarter
- Earnings of $0.8 million or $0.01 EPS versus a loss of $3.5 million or a $0.06 loss per share.
- Income from operations impacted by $1.1 million in FX loss for this quarter due to CAD$ strength.
- Current backlog is $28.3 million with 30% or approximately $8.5 million to be recognized in Q4, 2009.
- It expects Gross Margins to normalize to between 73% and 75%
- Recurring revenue as a percentage of total has increased from 33% to 38% due mostly to more maintenance renewals.
- Breakeven revenue benchmark has declines from $58 m annualized to $51 m annualized over the past 6 quarters.
- DSO has declined from 81 days to 75 days.
- SG&A expenses as a percentage of revenue should decline as management leverages headcount. Expect EBITDA margins to increase from 17.2% over the next few quarters.
- It plans to continue international expansion with Tier 1 market.
- Begin focusing on Tier 2 and Tier 3 players in North America and Europe.
- Expand into broadband triple play OSS.
Management has hinted at future tuckunder acquisitions both in important local international markets, and in triple play OSS. It has stated that it would like to normalize cash on hand at between $17 and $20 million. Currently, the Company has $22.4 million, so there is budget for tuckunder acquisitions available.
The company continues to predict continued profitable growth into 2010 and 2011 despite continued currency risk related to the value of the Canadian dollar. Currency volatility continues to be Redknee's largest risk, and it may result in slower deployments as international clients attempt to manage costs related to currency fluctuations.
Earning for the first 9 months of 2009 are reported at $0.06 EPS
Fundamentally, the stock is trading in the 10x EV/EBITDA range on a conservative FYE estimate. There is probably room for this stock to continue to ascend on a comparative basis. Notwithstanding the general over valuation of the current equity market, RKN and its peers such as BWC are profitable with international presence in high growth market sectors and strong balance sheets. A good spot to be for stock pickers.
Disclosure: own BWC, do not own RKN.
8/4/09
CX Performance Preview: Could it beat consensus?
Cyberplex (CX.TO) reports Q2 earnings on August 6, 2009 after close of the market. In conjunction with the release, Cyberplex will host a conference call on Thursday, August 6, 2009 at 4:30 p.m. EST to discuss the financial results.
Call details:
During the Q1 conference call, management confirmed that there is inherent seasonality in performance. Typically, both Q2 and Q3 results decline sequentially from Q1, and then improve again for Q4. Most analysts are likely to reflect this seasonality in their forecasts for this reporting period, especially after Q1 results came in much stronger than consensus.
However, there is better than 50% probability that CX could exceed consensus analyst forecasts for the following reasons:
Are there downside risks? Yes.
Notwithstanding the identified risks, the generally positive market conditions for performanced-based online advertising (as reflected through Google results), and the recent injection of capital could point to better than forecasted performance by Cyberplex for the reporting period. With an improving economy and new capital, the outlook for Cyberplex is likely to also improve.
Disclosure: I own shares of CX, I do not own shares of GOOG
Call details:
Participant Dial-in Numbers:There is greater likelihood than not that Cyberplex could beat consensus forecasts.
U.S. Toll Free: 1-877-737-1669
Canadian Toll Free: 1-800-501-6064
International Toll: 302-709-8008
Verbal Passcode (to be given to the operator): VR63282
During the Q1 conference call, management confirmed that there is inherent seasonality in performance. Typically, both Q2 and Q3 results decline sequentially from Q1, and then improve again for Q4. Most analysts are likely to reflect this seasonality in their forecasts for this reporting period, especially after Q1 results came in much stronger than consensus.
However, there is better than 50% probability that CX could exceed consensus analyst forecasts for the following reasons:
- Google foreshadows Cyberplex. Google results beat published analyst forecasts for Q2, showing some sequential growth in revenue and earnings. During the depths of the recession, marketing managers were increasingly seeking performance-based advertising in the form of Cost-per-Click programs (Google's primary revenue engine). Cost-per-action (CPA) based advertising is even more performance based than CPC, which could bode well for Cyberplex performance, especially as some mainstream accounts begin to take notice and sign on.
- Cash acceleration. At the two-third point of the quarter, the Company closed approximately $16 million in financing by way of a bought deal equity issue, increasing total working capital from $8.9 million ($4.7 million cash) to approximately $25 million ($21 million cash). This extra capital could have been deployed towards more aggressive affiliate marketing during the last weeks of the quarter, implying a late quarter bump in revenue performance.
Are there downside risks? Yes.
- As earnings have surged for this company over the past three quarters, it has a clearly identified risk in category concentration. Essentially, its Health & Beauty line of business has represented over 50% of total performance. Without further diversification, a small decline in sales for this category would have a relatively larger negative impact on performance.
- The new capital could be a distraction to management. With a significant injection of cash comes more intense pressure on management to do something with it - such as making an acquisition. More time on acquisition strategies may imply less time spent on core business activities, which could negatively impact performance in the short-term.
Notwithstanding the identified risks, the generally positive market conditions for performanced-based online advertising (as reflected through Google results), and the recent injection of capital could point to better than forecasted performance by Cyberplex for the reporting period. With an improving economy and new capital, the outlook for Cyberplex is likely to also improve.
Disclosure: I own shares of CX, I do not own shares of GOOG
7/31/09
RDM Corp results offer a glimmer of what could be
In early 2008, I slapped a sell rating on RDM Corp (RC.TO) with a $0.60 target. The company was being rocked by a stressed out and capital constrained client base (banks), a stuffed channel, and really poor visibility. Revenues were declining drastically as the client base stopped buying its various digital check scanners. The only thing that it had going for it at the time was about $17 million in cash, no debt, and a relatively minor payment processing business.
Last November and then again this previous March, the stock bounced against the $0.60 range as expected. Since then, there has been a fairly remarkable recovery for the share price where it has recently traded in the $1.20 range. There may be a legitimate reason for the move in share price.
RC reported $5.9 million in revenue for Q3 2009, a 13.4% improvement over previous year sales - although nice, this is not the story. Gross Margins for Q3 2009 increased to 42% from 34% the previous year, a 23% improvement, which should be considered very positive. The root cause of this substantial increase in GM is directly related to the success RDM Corp is experiencing as a payment processor. For q3 2009, payment processing revenue represented 42% of total revenue for the quarter versus the previous year where it represented only 33% of total sales. Why is this good? Payment processing generates close to 70% GM, whereas the device business delivers between 30% and 35% GM. In addition, payment processing is essentially 100% recurring revenue, which has helped to improve management's visibility on a growing percentage of its total revenue. Improving margins have helped the company to eek out a modest net income for the quarter of $0.175 million or $0.01 EPS. Right now the company executes 3.8 million transactions per day on its payment network, a 35% increase over the previous year. Revenue for the segment increased to $2.5 million or 48% over Q3 2009. Organic growth is expected to continue to be strong, so there may be a trend towards more profitable quarters coming.
Management must find away to better use its capital in order to accelerate a move towards payment processing, and to get out of the declining device gig. More payment processing begets more visibility, more earnings leverage, and more cash flow for shareholders.
Disclosure: I do not own shares of RC.
Last November and then again this previous March, the stock bounced against the $0.60 range as expected. Since then, there has been a fairly remarkable recovery for the share price where it has recently traded in the $1.20 range. There may be a legitimate reason for the move in share price.
RC reported $5.9 million in revenue for Q3 2009, a 13.4% improvement over previous year sales - although nice, this is not the story. Gross Margins for Q3 2009 increased to 42% from 34% the previous year, a 23% improvement, which should be considered very positive. The root cause of this substantial increase in GM is directly related to the success RDM Corp is experiencing as a payment processor. For q3 2009, payment processing revenue represented 42% of total revenue for the quarter versus the previous year where it represented only 33% of total sales. Why is this good? Payment processing generates close to 70% GM, whereas the device business delivers between 30% and 35% GM. In addition, payment processing is essentially 100% recurring revenue, which has helped to improve management's visibility on a growing percentage of its total revenue. Improving margins have helped the company to eek out a modest net income for the quarter of $0.175 million or $0.01 EPS. Right now the company executes 3.8 million transactions per day on its payment network, a 35% increase over the previous year. Revenue for the segment increased to $2.5 million or 48% over Q3 2009. Organic growth is expected to continue to be strong, so there may be a trend towards more profitable quarters coming.
Management must find away to better use its capital in order to accelerate a move towards payment processing, and to get out of the declining device gig. More payment processing begets more visibility, more earnings leverage, and more cash flow for shareholders.
Disclosure: I do not own shares of RC.
7/30/09
Bridgewater Systems exceeds expectations, increases guidance
BWC share should be positively impacted by news, and analysts should continue to raise forecasts.
BWC.TO reported Q2 2009 revenue of of $16.1 million, a 37% year over year increase in sales from $11.8 million. Gross margins were 74% for the quarter. Earnings reported for Q2 were $4.1 million or $0.17 EPS versus $1.3 million or $0.05 EPS for the previous year quarter, a 215% increase.
The Company now reports $57.6 million of cash on its balance sheet.
Management has increased full year guidance to between $58 million and $64 million with full year gross margin expected at 70%, which implies that gross margins may decline in the second half. Encapsulated within full-year guidance is $23 million in contracted backlog for H2, and approximately $7 million in upsell and new client revenue.
H1 revenue is reported at $30.2 million with $0.29 EPS. The mid-point of guidance infers that it expects to generate an identical back half with slightly lower potential EPS.
On the conference call management stated that RFP interest for all of its products is increasing during H2 2009, that it is on track to sign a Tier 1 GSM client.
Management confirmed that the explosion of smart phones, and the requisite application stores associated with them worldwide is providing exceptional opportunity for BWC as carriers/operators attempt to manage the scale and complexity of their growing data channels.
With only 5.4% smartphone penetration within the total world mobile subscriber base, there remains a lot of opportunity for BWC.
Analysts have been increasing forecasts and targets for the past few days, and after today's financial results and conference call, investors should expect analysts to continue to increase forecasts and targets.
As mentioned in earlier posts, BWC is among a handful of "connectivity" stocks that should perform ahead of the general market as mobile data networks expand.
Also included in that group are: RIM, CGI, BWC, DWI, RCM, WIN, RKN, SVC, PIX, and TUN
Disclosure: I own BWC stock, but do not own any of the other stock mentioned in this post.
BWC.TO reported Q2 2009 revenue of of $16.1 million, a 37% year over year increase in sales from $11.8 million. Gross margins were 74% for the quarter. Earnings reported for Q2 were $4.1 million or $0.17 EPS versus $1.3 million or $0.05 EPS for the previous year quarter, a 215% increase.
The Company now reports $57.6 million of cash on its balance sheet.
Management has increased full year guidance to between $58 million and $64 million with full year gross margin expected at 70%, which implies that gross margins may decline in the second half. Encapsulated within full-year guidance is $23 million in contracted backlog for H2, and approximately $7 million in upsell and new client revenue.
H1 revenue is reported at $30.2 million with $0.29 EPS. The mid-point of guidance infers that it expects to generate an identical back half with slightly lower potential EPS.
On the conference call management stated that RFP interest for all of its products is increasing during H2 2009, that it is on track to sign a Tier 1 GSM client.
Management confirmed that the explosion of smart phones, and the requisite application stores associated with them worldwide is providing exceptional opportunity for BWC as carriers/operators attempt to manage the scale and complexity of their growing data channels.
With only 5.4% smartphone penetration within the total world mobile subscriber base, there remains a lot of opportunity for BWC.
Analysts have been increasing forecasts and targets for the past few days, and after today's financial results and conference call, investors should expect analysts to continue to increase forecasts and targets.
As mentioned in earlier posts, BWC is among a handful of "connectivity" stocks that should perform ahead of the general market as mobile data networks expand.
Also included in that group are: RIM, CGI, BWC, DWI, RCM, WIN, RKN, SVC, PIX, and TUN
Disclosure: I own BWC stock, but do not own any of the other stock mentioned in this post.
7/27/09
How does MSFT get its groove back?
Last week Microsoft reported its first year over year decline in revenues...ever. Although the performance could be blamed on the worldwide recession, many of its peers and competitors have reported both growth in revenue and earnings despite the recession. A decade of being second or third best (or worse) in many new innovations may finally be catching up to MSFT.
For the past decade, Microsoft has attempted to use its massive cash reserves to exploit the value of technical innovation. However, it has demonstrated a curious knack for being slow to the punch, or picking the wrong horse, as new concepts have captured the imagination of the market. The company has been responding to the market instead of leading the market, often finding itself to be a distant counterpoint to the dominant player - which costs money. Here are some examples:
- iPod -> Zune
- YouTube -> Soapbox
- Google -> MSFT Live
And in areas of strength, MSFT is beginning to lose ground:
- XBOX Live -> Wii
- Internet Explorer -> Mozilla Firefox
To management's credit, it keeps trying. The launch of Bing in June has elicited some rare positive reviews for MSFT from the tech press. After initial the curiosity associated with this direct threat to Google Search wore off, so did traffic. Microsoft shareholders are hopeful that Bing evolves more like Internet Explorer, and less like Zune.
Among MSFT fans, there remains a of lot of hope for Windows 7, which is expected to be launched later this year. Even there, danger lurks as GOOG has begun to make waves about its new Chrome OS.
Sramana Mitra offers nice synopsis of Microsoft's current situation.
This may seem like a bizarre comparison, however MSFT finds itself in the same position as GM in the late 1970s and IBM in the mid 1990s. MSFT is a long-time dominant company that is on a path towards the mushy middle. As a whole it is colossal, but in the many trenches in which it battles, it rarely dominates. Like many before it, Microsoft may need to re-assess its strengths and re-invent itself after a little creative destruction.
Looking back, GM never seized the opportunity, and ended up (albeit a few decades later) a shell of its former self. On the other hand, IBM, which struggled against the onslaught DELL, HP, Compaq, ORCL, MSFT, and countless others in the 1990s has worked hard to get out of the hardware business and turn itself into arguably the most dominant technology services company in the world.
Regardless of the pundit bashings that it has received over the past few years, MSFT is a legendary American company. It has created real wealth for a great many people. Management can choose to ignore the repeating patterns of history and fade towards a punchline a la GM, or it can choose (like IBM did in the 1990s) to redefine and refocus to remain relevant and vital 10 years from now.
For the past decade, Microsoft has attempted to use its massive cash reserves to exploit the value of technical innovation. However, it has demonstrated a curious knack for being slow to the punch, or picking the wrong horse, as new concepts have captured the imagination of the market. The company has been responding to the market instead of leading the market, often finding itself to be a distant counterpoint to the dominant player - which costs money. Here are some examples:
- iPod -> Zune
- YouTube -> Soapbox
- Google -> MSFT Live
And in areas of strength, MSFT is beginning to lose ground:
- XBOX Live -> Wii
- Internet Explorer -> Mozilla Firefox
To management's credit, it keeps trying. The launch of Bing in June has elicited some rare positive reviews for MSFT from the tech press. After initial the curiosity associated with this direct threat to Google Search wore off, so did traffic. Microsoft shareholders are hopeful that Bing evolves more like Internet Explorer, and less like Zune.
Among MSFT fans, there remains a of lot of hope for Windows 7, which is expected to be launched later this year. Even there, danger lurks as GOOG has begun to make waves about its new Chrome OS.
Sramana Mitra offers nice synopsis of Microsoft's current situation.
This may seem like a bizarre comparison, however MSFT finds itself in the same position as GM in the late 1970s and IBM in the mid 1990s. MSFT is a long-time dominant company that is on a path towards the mushy middle. As a whole it is colossal, but in the many trenches in which it battles, it rarely dominates. Like many before it, Microsoft may need to re-assess its strengths and re-invent itself after a little creative destruction.
Looking back, GM never seized the opportunity, and ended up (albeit a few decades later) a shell of its former self. On the other hand, IBM, which struggled against the onslaught DELL, HP, Compaq, ORCL, MSFT, and countless others in the 1990s has worked hard to get out of the hardware business and turn itself into arguably the most dominant technology services company in the world.
Regardless of the pundit bashings that it has received over the past few years, MSFT is a legendary American company. It has created real wealth for a great many people. Management can choose to ignore the repeating patterns of history and fade towards a punchline a la GM, or it can choose (like IBM did in the 1990s) to redefine and refocus to remain relevant and vital 10 years from now.
7/23/09
Worldwide Connectivity Statistics.
Some interesting numbers for technology investors interested in companies that participate in the connectivity ecosystem. Worldwide recession notwithstanding, there are some areas of significant growth which should bode well for companies in several sectors. The NASDAQ has outperformed the Dow index significantly this year, and some of the statistics below may reveal some of the reasons why. During earnings season AAPL, IBM, NOK, INTC, GOOG all beat consensus estimates and all but GOOG (which does not provide guidance) have indicated positive outlooks entering H2 2009. In fact, IBM has increased its guidance for the last half of the year. Investors should expect positive outlooks for both CSCO and RIMM when they report next, although positive outlook may have been priced into these stocks.
Notwithstanding a pause in growth in some areas during H2 2008 and H1 2009, the global march towards greater connectivity continues.
Internet Usage:
Total worldwide: 1.5 billion or 23.6% of total world population.
Most users: China with 288 million or 22.4% of population.
Regions with greatest penetration: N.A. 62.7%, EU 60.7%
For China to obtain similar levels of connectivity as North America or the European Union, another 500 million or so Chinese users would need to come online over the coming years, requiring massive investments in base infrastructure.
Emerging economies continue to drive internet connectivity growth, but are more likely to leverage fixed wireless broadband infrastructure to compensate for under-built wireline infrastructure. Even still, BRIC countries are likely to represent the vast majority of backbone investment as mega-operators in countries such as China and India continue to lay down the fundamental capacities to support growth in internet traffic.
Mobile subscriptions:
Total worldwide: 4.1 billion
Fastest growing regions: Middle East 32% CAGR and Africa 24% CAGR over past 5 years.
Basic mobile subscriptions in emerging economic regions are being used as a means by people to get access to basic services including banking. EEFT and First Data, among others, are likely to be vendors providing access to low-cost financial services options.
Mobile data services:
Total worldwide: 225 million
2009 growth rate: 93%
The most compelling growth rates that exist, even in the depths of a major recession, continue to be related to the mobile data services channel. Hence, investors continue to see better than expected results from companies associated with this niche. As stated many times in previous posts, the scale and complexity of the emerging infrastructure should benefit technology companies that supply solutions to this niche. Eventually, all current mobile subscribers worldwide are likely to adopt mobile data services at some point. The current penetration of data services into the mobile subscriber market is still very modest at 5.4%.
As the world continues to become more connected, capacity, capability, energy consumption and security should remain key issues. Worldwide, there should be more investment and innovation in these areas.
The top basket of Canadian stocks to think about in the connectivity ecosystem include: RIM, CGI, BWC, DWI, RCM, WIN, RKN, and TUN. Most of these companies have demonstrated excellent recent earnings performance, sustained and sometime expanding gross margins, with solid balance sheets and low debt ratios. These could represent a pretty good "connectivity" portfolio. Others to possibly consider include ABS, SVC, PIX, Q, and AXX.
I have probably overlooked a few key favorite stocks, feel free to add.
Disclosure: I own CSCO and BWC. I do not own any of the other stocks mentioned.
Notwithstanding a pause in growth in some areas during H2 2008 and H1 2009, the global march towards greater connectivity continues.
Internet Usage:
Total worldwide: 1.5 billion or 23.6% of total world population.
Most users: China with 288 million or 22.4% of population.
Regions with greatest penetration: N.A. 62.7%, EU 60.7%
For China to obtain similar levels of connectivity as North America or the European Union, another 500 million or so Chinese users would need to come online over the coming years, requiring massive investments in base infrastructure.
Emerging economies continue to drive internet connectivity growth, but are more likely to leverage fixed wireless broadband infrastructure to compensate for under-built wireline infrastructure. Even still, BRIC countries are likely to represent the vast majority of backbone investment as mega-operators in countries such as China and India continue to lay down the fundamental capacities to support growth in internet traffic.
Mobile subscriptions:
Total worldwide: 4.1 billion
Fastest growing regions: Middle East 32% CAGR and Africa 24% CAGR over past 5 years.
Basic mobile subscriptions in emerging economic regions are being used as a means by people to get access to basic services including banking. EEFT and First Data, among others, are likely to be vendors providing access to low-cost financial services options.
Mobile data services:
Total worldwide: 225 million
2009 growth rate: 93%
The most compelling growth rates that exist, even in the depths of a major recession, continue to be related to the mobile data services channel. Hence, investors continue to see better than expected results from companies associated with this niche. As stated many times in previous posts, the scale and complexity of the emerging infrastructure should benefit technology companies that supply solutions to this niche. Eventually, all current mobile subscribers worldwide are likely to adopt mobile data services at some point. The current penetration of data services into the mobile subscriber market is still very modest at 5.4%.
As the world continues to become more connected, capacity, capability, energy consumption and security should remain key issues. Worldwide, there should be more investment and innovation in these areas.
The top basket of Canadian stocks to think about in the connectivity ecosystem include: RIM, CGI, BWC, DWI, RCM, WIN, RKN, and TUN. Most of these companies have demonstrated excellent recent earnings performance, sustained and sometime expanding gross margins, with solid balance sheets and low debt ratios. These could represent a pretty good "connectivity" portfolio. Others to possibly consider include ABS, SVC, PIX, Q, and AXX.
I have probably overlooked a few key favorite stocks, feel free to add.
Disclosure: I own CSCO and BWC. I do not own any of the other stocks mentioned.
7/17/09
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:
There are two downside risks to CX results:
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?
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.
- 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.
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
7/16/09
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.
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.
7/14/09
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.
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:
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
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.
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
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