A few interesting announcements were made last week while I was on my pilgrimmage to Mickey.
Last Monday, Active Control Technologies (ACT.V) revealed that the first partner signed to the recently announced certification program is Motorola (MOT.NYSE) for its MC9090 handheld device, which will be loaded with Snively Inc.'s Safety Tracker bar-code application for MSHA mine compliance and reporting requirements. As posted earlier this month, ACT is positioning to become a defacto standard for data transportation within the US coal mining industry. This announcement marks a first step towards such an objective. As a reminder, the network nodes are already certified by MSHA, so there should be no delays. The relationship with Motorola may be perceived by some investors as an early positive step towards future exit opportunities. As ACT leverages its competitive advantages in the future, the possibility increases that a major communications vendor may take a run at this technology. The stock is up 283% since the beginning of the year and peaked at $0.26 last week. The current run-up in the stock is likely in anticipation of MSHA certification of the phone, which should be considered a positive for its current backlog. However, the long-term traction for the Company is likely more related to the success its own partner certification program. The first announcement with Motorola could be considered a solid corporate development.
Throughout the week, Descartes Systems Group (DSG.TO) made a series of announcements to co-incide with its users conference. Investors should be confident that it remains on track for the "10+2" roll-out in partnership with its clients, which could add 3% - 5% to revenues during FY2009 as a start. As well, it is really beginning to leverage its federated messaging network to provide end-to-end shipping management as a service that is independent of endpoint technology. This data-centric approach is far more scalable and extensible than device-dependent alternatives, which gives Descartes a significant bundling and pricing advantage over potential competitors. New service announcements include Automated Vehicle Locator(tm) (AVL) along with the Wireless Global Logistics Network (wGLN). Continued data-centric service roll-outs (such as the ones announced last week) should further entrench DSG with current clients, and make it highly competitive for new business in the supply chain. Investors appear to like what DSG is doing because the stock is up 36% since it released results on March 10, 2009.
Axia NetMedia (AXX.TO) announced last Tuesday that it had completed a $19.5 million contingent equity financing based on its Intellinet Consortium being awarded a significant broadband network development contract in Singapore. Axia has been showing steady progress in France, and now has a foothold in Southeast Asia with a recent win in Singapore. With infrastructure stimulus budgets announced by governments worldwide, Axia NetMedia is well positioned to benefit from potential government contracts in Australia, the United States, and France among others. The Company has about $16 million or $0.25 net cash per share excluding the potential contingent capital raise. Axia NetMedia is profitable with modest growth in Canada via the Alberta Supernet but with strong emerging growth in France as its subsidiary continues to win and roll-out regional networks. AXX.TO ranks among the Top 30 Small-Cap Tech Stocks. If the consortium is not awarded the Singapore contract, the funds held in escrow will be returned to subscribed investors on pro-rata basis.
Disclosures: I own shares of ACT and DSG. I do not own shares of MOT or AXX
3/19/09
Cyberplex Crushes It Out Of the Park
After markets closed today Cyberplex (CX.TO) reported Q4 and full-year results. In a good economy, the results would be considered outstanding. During this recession, the results could be considered astounding, especially considering that all of the reported growth was essentially organic. Sales for Q4 increased 429% to $28. 9 million from $5.5 million reported for the previous year Q4. Sequentially sales increased by 162% from $11.0 million reported for Q3 2008. When reported, Q3 2008 results were considered by analysts to be an excellent quarter.
The Company reported $4.9 million in Net Income, or $0.09 EPS for Q4, which represents a 17% NIM on sales. Gross Margin for the quarter was 34%, which has been inline with previous quarters, and EBITDA was reported at $5.0 million. Shareholders should be ecstatic with the margin leverage demonstrated during Q4 2008.
Earnings results from Q4 also represent a vast majority of full-year earnings. FY 2008 Net Income was reported at $5.7 million or $0.11 EPS, which represents a 10.7% NIM. Blended gross margins for the year were reported at 35% and EBITDA was $6.7 million or nearly $0.13 per fully diluted share. Total sales for the year were reported at $57.3 million from which Management was able to extract $19.8 million in Gross Margin.
The TTM EV/EBITDA multiple on this stock is 3.8X, at the low-end of a range of EV/EBITDA multiples among the Top 30 Canadian Small-Cap Tech Stocks.
The company has approximately $5.3 million in cash, although its balance sheet may spook more conservative investors because the net cash position is $1.8 million right now. The earnings performance from the past two quarters should hint at the free cashflow potential of the Cyberplex model in future quarters, which may put concerned investors at ease.
Cyberplex is at the top end of the online advertising spectrum in terms of measureability. Performance-based advertising by its nature shortens the discover-decide-do cycle so that marketing risk is reduced for advertisers. Marketers only pay for desired outcome. Cyberplex reduces perceived advertising risk for marketing managers, which tends to preserve careers during recessions. This is why Cyberplex is currently crushing it out of the ballpark.
During the conference call, a participant asked if the performance of this quarter is sustainable. On percentage growth basis, it is likely improbable for two reasons:
1. The 4th quarter calander year is usually the best performing quarter seasonally for the Internet-based economy. As a result, Q1 should show a seasonal decline.
2. The extent of offerings is still growing, so there may be product or category-related lumpiness in quarterly performance. As was the case for Q4, a particular segment (Health & Beauty) was really strong. Until the offerings and the client-base are broadened, there may be a few swings in quarterly performance due to the impact one or two items. Although the Q4 results are spectacular in the face of a recession, investors should look at the results for the full year. By the way, FY2008 results were excellent.
The FY2009 outlook for Cyberplex should be considered positive for the following reasons:
1. Measurable online advertising is expected to grow by approximately 17% during 2008 according to market research firms like IDC. Primarily this means Cost-per-Click advertising or paid search offered by Google (GOOG-Q). Cyberplex is at a level of measureability beyond CPC, so we may see Cyberplex grow at a faster rate than the category as a whole. Annualized growth in the mid-20% range for 2009 could be possible, and should be viewed by shareholders as positive.
2. Using significant insight gained from its analytic tools, CX can deliver excellent earnings efficiency from its campaigns. EBIT margins may increase as a result, regardless of quarterly revenue fluctuations. These efficiencies could offset the potential risk of gross margin pressure as competition intensifies and the recession lingers.
3. Earnout payments to IncentaClick should be completed by the end of Q1, which means that free cashflow should accelerate by H2 2009.
4. The Company has proven that there is potential for upside performance surprises as it scales its business, which may benefit shareholders during future quarters.
Cyberplex is a toughened tech bubble survivor whose stock value may be suffering from historical investor perceptions. Smart investors should get over it because this Company has re-invented itself into a cash machine that is growing. Not many companies can say that they are having historic quarterly performance during this recession. The stock should move tomorrow.
On second thought, this is the second tech company in the last two days that has reported historical Q4 performance during the recession. Maybe it's a trend.
A final interesting thought. For the past two quarters, strong performance by CX has been followed up by Google beating analyst expectations. If it happens three quarters in a row, is there trading information there?
I do not own shares of CX or GOOG.
The Company reported $4.9 million in Net Income, or $0.09 EPS for Q4, which represents a 17% NIM on sales. Gross Margin for the quarter was 34%, which has been inline with previous quarters, and EBITDA was reported at $5.0 million. Shareholders should be ecstatic with the margin leverage demonstrated during Q4 2008.
Earnings results from Q4 also represent a vast majority of full-year earnings. FY 2008 Net Income was reported at $5.7 million or $0.11 EPS, which represents a 10.7% NIM. Blended gross margins for the year were reported at 35% and EBITDA was $6.7 million or nearly $0.13 per fully diluted share. Total sales for the year were reported at $57.3 million from which Management was able to extract $19.8 million in Gross Margin.
The TTM EV/EBITDA multiple on this stock is 3.8X, at the low-end of a range of EV/EBITDA multiples among the Top 30 Canadian Small-Cap Tech Stocks.
The company has approximately $5.3 million in cash, although its balance sheet may spook more conservative investors because the net cash position is $1.8 million right now. The earnings performance from the past two quarters should hint at the free cashflow potential of the Cyberplex model in future quarters, which may put concerned investors at ease.
Cyberplex is at the top end of the online advertising spectrum in terms of measureability. Performance-based advertising by its nature shortens the discover-decide-do cycle so that marketing risk is reduced for advertisers. Marketers only pay for desired outcome. Cyberplex reduces perceived advertising risk for marketing managers, which tends to preserve careers during recessions. This is why Cyberplex is currently crushing it out of the ballpark.
During the conference call, a participant asked if the performance of this quarter is sustainable. On percentage growth basis, it is likely improbable for two reasons:
1. The 4th quarter calander year is usually the best performing quarter seasonally for the Internet-based economy. As a result, Q1 should show a seasonal decline.
2. The extent of offerings is still growing, so there may be product or category-related lumpiness in quarterly performance. As was the case for Q4, a particular segment (Health & Beauty) was really strong. Until the offerings and the client-base are broadened, there may be a few swings in quarterly performance due to the impact one or two items. Although the Q4 results are spectacular in the face of a recession, investors should look at the results for the full year. By the way, FY2008 results were excellent.
The FY2009 outlook for Cyberplex should be considered positive for the following reasons:
1. Measurable online advertising is expected to grow by approximately 17% during 2008 according to market research firms like IDC. Primarily this means Cost-per-Click advertising or paid search offered by Google (GOOG-Q). Cyberplex is at a level of measureability beyond CPC, so we may see Cyberplex grow at a faster rate than the category as a whole. Annualized growth in the mid-20% range for 2009 could be possible, and should be viewed by shareholders as positive.
2. Using significant insight gained from its analytic tools, CX can deliver excellent earnings efficiency from its campaigns. EBIT margins may increase as a result, regardless of quarterly revenue fluctuations. These efficiencies could offset the potential risk of gross margin pressure as competition intensifies and the recession lingers.
3. Earnout payments to IncentaClick should be completed by the end of Q1, which means that free cashflow should accelerate by H2 2009.
4. The Company has proven that there is potential for upside performance surprises as it scales its business, which may benefit shareholders during future quarters.
Cyberplex is a toughened tech bubble survivor whose stock value may be suffering from historical investor perceptions. Smart investors should get over it because this Company has re-invented itself into a cash machine that is growing. Not many companies can say that they are having historic quarterly performance during this recession. The stock should move tomorrow.
On second thought, this is the second tech company in the last two days that has reported historical Q4 performance during the recession. Maybe it's a trend.
A final interesting thought. For the past two quarters, strong performance by CX has been followed up by Google beating analyst expectations. If it happens three quarters in a row, is there trading information there?
I do not own shares of CX or GOOG.
Nstein Reports a Good 4th Quarter.
I suppose this is an adjunct to the post that I completed last night and thank you Nstein management for making me look prescient. Nstein (EIN.V) reported its 4th quarter and full-year results. In particular, the 4th quarter results were substantially higher than expectations, probably a full $2 million ahead of my forecast. Net Income was strongly positive for the quarter at $1.35 million or $0.03 per share.
More importantly, the Company was able to generate $0.03 per share in free cash flow. The Company now has $7.4 million in cash along with $6.8 million in receivables and very little long-term debt exposure at $0.5 million. The NAV of the Company could be inferred at $21.9 million or $0.41 per fully diluted share based on the balance sheet ending Dec 31, 2008.
Earlier in the year, performance was a little dicey due to market uncertainty. There was some concern that Nstein's newspaper clients would delay investment decisions as balance sheets were eroded. It appears as though many decisions were delayed until the 4th quarter when a lot of publishers were probably reacting to the freefall in print advertising dollars. Nstein appears to have benefitted directly from "Yikes...do something now!" reactions throughout the industry.
Last year, Q4 performance was also a positive surprise to the market. Big 4th quarters should be better modeled into future forecasts because there appears to be bias towards 4th quarter buying decisions, probably correlated to budget cycles. Notwithstanding, it was a great quarter for the market conditions. Based on reported A/R, Q1 2009 should show some strength as well.
Market conditions should remain very positive for EIN.V for another 4 quarters as its clients scramble online (see previous post). The Nstein semantic content management suite is also well aligned to the next stage of the Internet, which some are calling web 3.0, or the contextual web. So, the longer-term outlook may be considered positive as well, especially as the Company leverages favourable R&D tax credits offered by the Province of Quebec. With a pretty outstanding world-wide client base, a well positioned and patent protected solution, and a proven growth profile, EIN.V may be an interesting target to a larger middleware, content management, or infrastructure player.
With over $7.0 million in the bank, there is a chance that EIN.V itself could begin to roll-up some complimentary solutions providers that can extend its own solutions.
Although Nstein is clearly well positioned, there should be some investor caution. Nstein's client base still prefers to acquire perpetual license software. Although the Company's revenue streams are becoming more recurring in nature, the Nstein still suffers from lumpy quarterly performance, and the quarterly live/die sales cycle due to the perpetual licensing model.
Notwithstanding, investors may still view EIN stock as being currently undervalued and we may see a continued run up in the share price for the next few days. The stock has performed well since the beginning of the year with a 116% increase in the stock price since January 6th.
More importantly, the Company was able to generate $0.03 per share in free cash flow. The Company now has $7.4 million in cash along with $6.8 million in receivables and very little long-term debt exposure at $0.5 million. The NAV of the Company could be inferred at $21.9 million or $0.41 per fully diluted share based on the balance sheet ending Dec 31, 2008.
Earlier in the year, performance was a little dicey due to market uncertainty. There was some concern that Nstein's newspaper clients would delay investment decisions as balance sheets were eroded. It appears as though many decisions were delayed until the 4th quarter when a lot of publishers were probably reacting to the freefall in print advertising dollars. Nstein appears to have benefitted directly from "Yikes...do something now!" reactions throughout the industry.
Last year, Q4 performance was also a positive surprise to the market. Big 4th quarters should be better modeled into future forecasts because there appears to be bias towards 4th quarter buying decisions, probably correlated to budget cycles. Notwithstanding, it was a great quarter for the market conditions. Based on reported A/R, Q1 2009 should show some strength as well.
Market conditions should remain very positive for EIN.V for another 4 quarters as its clients scramble online (see previous post). The Nstein semantic content management suite is also well aligned to the next stage of the Internet, which some are calling web 3.0, or the contextual web. So, the longer-term outlook may be considered positive as well, especially as the Company leverages favourable R&D tax credits offered by the Province of Quebec. With a pretty outstanding world-wide client base, a well positioned and patent protected solution, and a proven growth profile, EIN.V may be an interesting target to a larger middleware, content management, or infrastructure player.
With over $7.0 million in the bank, there is a chance that EIN.V itself could begin to roll-up some complimentary solutions providers that can extend its own solutions.
Although Nstein is clearly well positioned, there should be some investor caution. Nstein's client base still prefers to acquire perpetual license software. Although the Company's revenue streams are becoming more recurring in nature, the Nstein still suffers from lumpy quarterly performance, and the quarterly live/die sales cycle due to the perpetual licensing model.
Notwithstanding, investors may still view EIN stock as being currently undervalued and we may see a continued run up in the share price for the next few days. The stock has performed well since the beginning of the year with a 116% increase in the stock price since January 6th.
3/18/09
Newspaper = buggy whip?
There has been a spate of recent announcement regarding the disappearance of traditional print newspapers and here is the latest from Hearst. The market is not surprised, and there is little sentimentality towards the demise of the industry.
According to the Newspaper Association of America, (NAA) print advertising revenue has been in decline since 2005. The category has been in free fall since the end of 2007 with Market Research reporting a 16.4% decline in revenues for 2008. Since peeking at $47.4B during 2005, US newspaper advertising expenditures have declined by 40.5% over a three year period to $28.4B. The outlook for 2009 may be even more bleak with JP Morgan predicting a 20% decline in advertising revenues to approximately $23.7B. This prediction infers a 50% decline in revenue for the industry in only 4 years. Put into historical perspective, the last time that the newspaper industry generated less than $24B in revenue was when Ronald Reagan was finishing his first term...1984.
The major media companies are obviously suffering. It was reported on March 9 that McClatchy (MNI) cut 1600 jobs as it struggles to service $2 billion of debt. Gannett (GCI), Hearst and New York Times Co (NYT) are also attempting to sell assets and shed jobs in order to cope with the cratering of the ad business. Some, like Tribune Co., have already declared bankruptcy.
Management at these operations have not been completely blindsided by the sudden emergence of the big bad Internet. Although there has been a lot of hang-wringing, spurious plans, ego-coddling, and various other forms of executional doddling, newspapers have been shifting focus onto the web for the past few years. However, this shift may have come too late to effectively compensate for eye-popping declines in print advertising sales. As late as 2007, online advertising still only represented 7.5% of total revenues according to the NAA, and the industry organization didn't even start calculating online revenue until 2003, a full decade after the commercialization of the Internet. Instead of viewing online publishing as a complimentary source of revenue streams, most newspapers initially viewed the Internet as a threat, or worse, a fad. This lack of initial recognition is the root of the damage being wrought on the industry now. This industry has missed so much opportunity to transform. Here is the laundry list of already missed billion dollar opportunities: search, RSS, ad networks, video, blogsphere, social networking, social broadcasting...uh...the point is made. To be fair to the much maligned buggy whip manufacturers, they only failed to recognize the threat/opportunity of one new innovation.
Just as newspaper publishers have begun to really press forward on the potential of monetizing the Internet, a significant recession has impaired the migration online. The only area of growth remaining appears to be paid search advertising, a category dominated by Google (GOOG). Online display advertising is expected to show a decline in revenues by up to 5% during H1 2009 before recovering. Newspapers were hiding, and now they have nowhere to hide.
They must forge ahead...but with what?
A really valuable data asset that newspapers retain via editorial systems is...context. One could even extend this value to historical narrative. Unlike social networks where history is a mere 3 years at best, and content portals where history is at most 10 years, newspapers have the potential ability to seemlessly link today's breaking events to literally millions of local and historical events, opinions, and commentary that are decades deep. Newspapers could be the gateway to context for online users, however they interact with information, or each other. And the technology is there. Nstein (EIN.V) has some advanced web content management solutions that can help newspapers create context on the fly. It has the ability to extract and index meaning from any article, advertisement, or caption. The system can then connect the meaning of multiple articles to deliver narrative and insight on-the-fly. This is pretty powerful stuff, and could represent some value-add that only a newspaper editorial system could deliver. Hearst became one of Nstein's biggest clients last year as it got serious about re-inventing itself.
In order to be relevant and make money, already leveraged media companies will need to find ways to continue to invest in the federation of proprietary data sources. Clearly, there is a lot of ongoing investment required in infrastructure, storage, middleware, and at the application layer. Besides Nstein, which is a micro-cap with limited liquidity, Open Text (OTC) should still be considered a good bet to benefit from the continued need for advanced content management solutions.
For newspapers, the geographic monopoly is long gone. the primacy of context, the "why" things happen has been deeply eroded. The print production and distribution techniques that were once barriers to empires are largely irrelevant. It took the leadership at once seemingly invincible newspaper empires a decade too long to recognize and then act upon the threats and opportunities posed by digital media. It may have been Mark Twain who said that history does not repeat itself, but it sure does rhyme. Newspaper = buggy whip.
Those media enterprises that are reacting now are investing as aggressively as possible into enabling technologies. Not all of the ideas will work, not all of the transforming media companies will succeed, however the technology companies that provide content management, storage, and data solutions should continue to benefit from this mad scramble for the next 4 to 6 quarters.
I do not own shares in any of the public companies referenced in this post.
According to the Newspaper Association of America, (NAA) print advertising revenue has been in decline since 2005. The category has been in free fall since the end of 2007 with Market Research reporting a 16.4% decline in revenues for 2008. Since peeking at $47.4B during 2005, US newspaper advertising expenditures have declined by 40.5% over a three year period to $28.4B. The outlook for 2009 may be even more bleak with JP Morgan predicting a 20% decline in advertising revenues to approximately $23.7B. This prediction infers a 50% decline in revenue for the industry in only 4 years. Put into historical perspective, the last time that the newspaper industry generated less than $24B in revenue was when Ronald Reagan was finishing his first term...1984.
The major media companies are obviously suffering. It was reported on March 9 that McClatchy (MNI) cut 1600 jobs as it struggles to service $2 billion of debt. Gannett (GCI), Hearst and New York Times Co (NYT) are also attempting to sell assets and shed jobs in order to cope with the cratering of the ad business. Some, like Tribune Co., have already declared bankruptcy.
Management at these operations have not been completely blindsided by the sudden emergence of the big bad Internet. Although there has been a lot of hang-wringing, spurious plans, ego-coddling, and various other forms of executional doddling, newspapers have been shifting focus onto the web for the past few years. However, this shift may have come too late to effectively compensate for eye-popping declines in print advertising sales. As late as 2007, online advertising still only represented 7.5% of total revenues according to the NAA, and the industry organization didn't even start calculating online revenue until 2003, a full decade after the commercialization of the Internet. Instead of viewing online publishing as a complimentary source of revenue streams, most newspapers initially viewed the Internet as a threat, or worse, a fad. This lack of initial recognition is the root of the damage being wrought on the industry now. This industry has missed so much opportunity to transform. Here is the laundry list of already missed billion dollar opportunities: search, RSS, ad networks, video, blogsphere, social networking, social broadcasting...uh...the point is made. To be fair to the much maligned buggy whip manufacturers, they only failed to recognize the threat/opportunity of one new innovation.
Just as newspaper publishers have begun to really press forward on the potential of monetizing the Internet, a significant recession has impaired the migration online. The only area of growth remaining appears to be paid search advertising, a category dominated by Google (GOOG). Online display advertising is expected to show a decline in revenues by up to 5% during H1 2009 before recovering. Newspapers were hiding, and now they have nowhere to hide.
They must forge ahead...but with what?
A really valuable data asset that newspapers retain via editorial systems is...context. One could even extend this value to historical narrative. Unlike social networks where history is a mere 3 years at best, and content portals where history is at most 10 years, newspapers have the potential ability to seemlessly link today's breaking events to literally millions of local and historical events, opinions, and commentary that are decades deep. Newspapers could be the gateway to context for online users, however they interact with information, or each other. And the technology is there. Nstein (EIN.V) has some advanced web content management solutions that can help newspapers create context on the fly. It has the ability to extract and index meaning from any article, advertisement, or caption. The system can then connect the meaning of multiple articles to deliver narrative and insight on-the-fly. This is pretty powerful stuff, and could represent some value-add that only a newspaper editorial system could deliver. Hearst became one of Nstein's biggest clients last year as it got serious about re-inventing itself.
In order to be relevant and make money, already leveraged media companies will need to find ways to continue to invest in the federation of proprietary data sources. Clearly, there is a lot of ongoing investment required in infrastructure, storage, middleware, and at the application layer. Besides Nstein, which is a micro-cap with limited liquidity, Open Text (OTC) should still be considered a good bet to benefit from the continued need for advanced content management solutions.
For newspapers, the geographic monopoly is long gone. the primacy of context, the "why" things happen has been deeply eroded. The print production and distribution techniques that were once barriers to empires are largely irrelevant. It took the leadership at once seemingly invincible newspaper empires a decade too long to recognize and then act upon the threats and opportunities posed by digital media. It may have been Mark Twain who said that history does not repeat itself, but it sure does rhyme. Newspaper = buggy whip.
Those media enterprises that are reacting now are investing as aggressively as possible into enabling technologies. Not all of the ideas will work, not all of the transforming media companies will succeed, however the technology companies that provide content management, storage, and data solutions should continue to benefit from this mad scramble for the next 4 to 6 quarters.
I do not own shares in any of the public companies referenced in this post.
3/11/09
Points International (PTS.TO): Nice top-line, but where is the leverage?
Points International reported Q4 and FY 2008 earlier today. The revenue line was ahead of its top-line guidance for the year at between $65.0 million and $75.0 million. Actual annual sales performance was $75.6 million, which happens to also fall above my expectations of $75.3 million. The company has a solid $22.8 million balance sheet and no debt. During this recession, Companies with solid balance sheets that exceed guidance are usually viewed positively by the market. As a SaaS provider with over 95% recurring revenue and a first mover lock on its niche, one would expect this listing to fit squarely within the Top 30 Small-Cap Tech Stocks on the TSX.
But wait...
A closer look at bottom-line performance may erode some of the first-look "looks good" sentiment in the market. Despite growing revenues dramatically throughout the year, operating earnings have eroded since the first quarter. EBITDA was negative $0.54 million for Q3, and only $0.04 million for Q4 2008 on record sales $21.7 million. This is incongruous with the intent of the wholesale model (described by the Company as Principal Revenue) when it was first introduced to the market during 2007. Expectations at the time were that real contribution margins would initially triple, and then with the introduction of new higher margin clients, operating earnings would increase from there. Based on its reported earnings, the margins that it receives from the wholesale points business is around 14.8%. It is certainly an improvement over the average of 8% that it was generating in commissions, although it is a far cry from a triple. With over 96% of its revenue now reflected in the wholesale model, there is a lot more clarity in the results. It would appear that PTS is getting the squeeze as a wholesaler. Passengers may be utilizing their loyalty currency with greater frequency, but Points International appears to be bearing the brunt of price discounting risk - possibly passed on by its airline clients.
Personally, I have always been skeptical of the viability of the consumer portal and have never in the past modeled revenues associated with Points.com, or the Global Points Exchange (GPX). Although creating a secondary trading market seems like a reasonable idea with future earnings potential, the airlines need to better understand that the trading fees are incremental revenue streams (found money) with high margins. Earning $1 a hundred times is the same as earning $100 once. However, doing a hundred trades creates a market, whereas 1 trade is not a market. Basically, the high trading fees (however they are justified) appear to be slowing adoption and impairing the liquidity required to make a secondary market viable and profitable. On the beta site there are still only 130 trades posted at any time, up by only 30 posts since July.
There has been a lot of management effort and development costs applied to the GPX project. Airlines are signing up to the program, which also presumably brings many cross-sell opportunities for other PTS solutions if the GPX stalls. There are still a couple more quarters of "wait-and-see" goodwill left in the market, but the wick may burning on this concept.
Looking forward, the guidance for revenue of between $85 million and $95 million during FY 2009 is a modest 12% to 25% forecasted increase in sales. Considering that 95% of its revenue streams are supposed to be recurring, and sales are benefitting from recent launches at British Airways, Northwest Airlines, and Hawaiian Air, there appears to be not much forecasted growth momentum.
Shareholders would likely be satisfied with modest top-line guidance as long as the wholesale model demonstrates the potential for earnings leverage. Otherwise, the much vaunted conversion to the Principal Revenue model may have been a whole lotta whatever.
Earlier this year PTS would have ranked in the lower half of the Top 30 Small-Cap Tech Stocks, but with this 4th quarter profit result, it may have fallen out of the rankings for the time being. With some earnings momentum over the next couple of quarters, it could return to the list.
As a reminder, there are over 300 tech and cleantech small-cap stocks listed on the combined TSX and TSXV exchanges. Being ranked among the top 30 is pretty tough.
Disclosure: I do not own PTS shares, nor do I own any airline shares.
But wait...
A closer look at bottom-line performance may erode some of the first-look "looks good" sentiment in the market. Despite growing revenues dramatically throughout the year, operating earnings have eroded since the first quarter. EBITDA was negative $0.54 million for Q3, and only $0.04 million for Q4 2008 on record sales $21.7 million. This is incongruous with the intent of the wholesale model (described by the Company as Principal Revenue) when it was first introduced to the market during 2007. Expectations at the time were that real contribution margins would initially triple, and then with the introduction of new higher margin clients, operating earnings would increase from there. Based on its reported earnings, the margins that it receives from the wholesale points business is around 14.8%. It is certainly an improvement over the average of 8% that it was generating in commissions, although it is a far cry from a triple. With over 96% of its revenue now reflected in the wholesale model, there is a lot more clarity in the results. It would appear that PTS is getting the squeeze as a wholesaler. Passengers may be utilizing their loyalty currency with greater frequency, but Points International appears to be bearing the brunt of price discounting risk - possibly passed on by its airline clients.
Personally, I have always been skeptical of the viability of the consumer portal and have never in the past modeled revenues associated with Points.com, or the Global Points Exchange (GPX). Although creating a secondary trading market seems like a reasonable idea with future earnings potential, the airlines need to better understand that the trading fees are incremental revenue streams (found money) with high margins. Earning $1 a hundred times is the same as earning $100 once. However, doing a hundred trades creates a market, whereas 1 trade is not a market. Basically, the high trading fees (however they are justified) appear to be slowing adoption and impairing the liquidity required to make a secondary market viable and profitable. On the beta site there are still only 130 trades posted at any time, up by only 30 posts since July.
There has been a lot of management effort and development costs applied to the GPX project. Airlines are signing up to the program, which also presumably brings many cross-sell opportunities for other PTS solutions if the GPX stalls. There are still a couple more quarters of "wait-and-see" goodwill left in the market, but the wick may burning on this concept.
Looking forward, the guidance for revenue of between $85 million and $95 million during FY 2009 is a modest 12% to 25% forecasted increase in sales. Considering that 95% of its revenue streams are supposed to be recurring, and sales are benefitting from recent launches at British Airways, Northwest Airlines, and Hawaiian Air, there appears to be not much forecasted growth momentum.
Shareholders would likely be satisfied with modest top-line guidance as long as the wholesale model demonstrates the potential for earnings leverage. Otherwise, the much vaunted conversion to the Principal Revenue model may have been a whole lotta whatever.
Earlier this year PTS would have ranked in the lower half of the Top 30 Small-Cap Tech Stocks, but with this 4th quarter profit result, it may have fallen out of the rankings for the time being. With some earnings momentum over the next couple of quarters, it could return to the list.
As a reminder, there are over 300 tech and cleantech small-cap stocks listed on the combined TSX and TSXV exchanges. Being ranked among the top 30 is pretty tough.
Disclosure: I do not own PTS shares, nor do I own any airline shares.
Descartes (DSG.TO) Execution Remains Strong Despite Economic Conditions.
This morning the market is reacting positively to Descartes Systems Group results for Fiscal 2009 Fourth Quarter and Year End Financials. Despite challenging worldwide markets and currency fluctuations, which were reflected in top-line sales performance, the Company had a record quarter for EBITDA, reporting $4.5 million and a 29% EBITDA margin on Q4 sales, up from 24% reported for Q4 FY2008. Cashflow and net income from operations was also higher than expected. Descartes is demonstrating impressive leverage from its SaaS business model.
Cash and cash equivalent balances increased to $57.6 million for FY2009. The Company generated $18.7 million in cash from operations for the year, while also reporting $16.7 million in EBITDA. The TTM EV/EBITDA multiple for DSG.TO calculates to 5.4x based on yesterday's closing shareprice. If the company sustains its EBITDA growth trajectory of 21% for FY2010, the FYE EV/EBITDA multiple would be implied at 4.5x.
With its recent acquisitions, along with the potential impact on performance of the new "10+2" regulations in the U.S, EBITDA margins could range between 25% and 30% for the next 4 quarters, possibly increasing EBITDA trajectories.
Based on comments by management, Descartes Systems could have had a better month in February than most others in the supply chain. In these current brutal market conditions, this datapoint should be seen as a lead indicator for continued performance for Q1 and for the remainder of FY2010.
Investors should expect Management to continue to be acquisitive. This morning's announced C$8.5 million acquisition of Scancode is an example of the type of tuck under acquisitions that could be expected in the future. These type of acquisitions increase the customer base, while extending the capabilities of Descartes solutions within the supply chain ecosystem. The Company continues to move towards a more comprehensive end-to-end compliance and monitoring network for shippers.
Although the stock has jumped this morning, shares are trading near 52 week lows. By most indications, earnings should continue to grow during the recession and DSG should be considered among the top performing small-cap technology companies listed on the TSX.
I do not own shares of DSG.
Cash and cash equivalent balances increased to $57.6 million for FY2009. The Company generated $18.7 million in cash from operations for the year, while also reporting $16.7 million in EBITDA. The TTM EV/EBITDA multiple for DSG.TO calculates to 5.4x based on yesterday's closing shareprice. If the company sustains its EBITDA growth trajectory of 21% for FY2010, the FYE EV/EBITDA multiple would be implied at 4.5x.
With its recent acquisitions, along with the potential impact on performance of the new "10+2" regulations in the U.S, EBITDA margins could range between 25% and 30% for the next 4 quarters, possibly increasing EBITDA trajectories.
Based on comments by management, Descartes Systems could have had a better month in February than most others in the supply chain. In these current brutal market conditions, this datapoint should be seen as a lead indicator for continued performance for Q1 and for the remainder of FY2010.
Investors should expect Management to continue to be acquisitive. This morning's announced C$8.5 million acquisition of Scancode is an example of the type of tuck under acquisitions that could be expected in the future. These type of acquisitions increase the customer base, while extending the capabilities of Descartes solutions within the supply chain ecosystem. The Company continues to move towards a more comprehensive end-to-end compliance and monitoring network for shippers.
Although the stock has jumped this morning, shares are trading near 52 week lows. By most indications, earnings should continue to grow during the recession and DSG should be considered among the top performing small-cap technology companies listed on the TSX.
I do not own shares of DSG.
3/9/09
Active Control Technologies (ACT.V): Exploiting its Competitive Advantage?
Last week ACT announced that it was initiating a partner certification program for third-party applications providers. The intent of this program is to federate its extreme environment Wi-Fi network to third-parties in an effort to offer mine operators a level of functional extensibility that does not yet exist. The objective is to quickly and cost effectively leverage excess backhaul capacity to become a highly reliable, self-healing data backbone for maintenance, monitoring, process control, and mine automation applications.
As commodity prices continue to decline, improved production efficiencies could mean the difference between sustained production and a costly mine shutdown at some operations. Management at ACT hopes to leverage this reality.
At highly regulated mine operations, maintenance is an issue. If equipment breaks down, some operations will often shut down for as long as the equipment is non-operational. Real-time monitoring of preventative maintenance, and of maintenance engineers could dramatically improve operations. By some estimates, there could be up to a 20% production improvement in some mines by solving this issue. At large production facilities, a 3% to 5% improvement could have dramatic results on the financial performance of mine operations.
The Company hopes that its extension beyond emergency communications and tracking (as defined by the MINER Act) becomes a pronounced competitive differentiator as mine operators begin to select vendors later this year according to the legislated timelimes. The currently certified ActiveMine network offers significant data capacity advantages over other certified systems, and may be the only system to scale for add-on apps. The gross backhaul capacity of the ActiveMine data network is 54 Mbps with a throughput of 22 Mbps. Combined, the data requirements of voice and tracking applications leave 3/4 of the throughput unused. As a result, there is relatively vast amounts of unused available capacity for sensor monitoring, advanced video monitoring, and remote control applications. With packet prioritization algorithms, the effective capacity is probably a few percentage points higher. Its nearest competitive solution offers a fraction of the capacity - just enough for voice and tracking. The node certification by MSHA contemplates upgrades, which allows management to scale the backhaul throughput without significant future certification delays. Management plans to double throughput for future node upgrades.
To review, the Company has a backlog of approximately $6 million ready to deploy once the telephone devices have been certified by the Mine Safety & Health Administration (MSHA), and another $60 million in its gross sales pipeline. The factored pipeline could be worth between $15 million and $20 million right now. The promise of extensibility could increase closure probabilities on the current pipeline, which may imply an increase in the factored pipeline.
Depending on how terms are structured, the Company may be in a better position, with its new partner program, to increase recurring revenue streams. Based on its limited deployment experience to date, annual recurring revenue may represent between 20% and 25% of the deployed system cost for the life of a mine based on mine face movement and device replacement schedules. With properly negotiated contracts, ACT could benefit from higher future recurring revenue by charging access fees to the network, data fees, or a combination of both. It is unknown at this point whether ACT will charge for certification programs.
In of itself, the announcement could be discounted by investors waiting for final MSHA certification for the Wi-Fi phones. However, as a sales differentiator and potential recurring revenue engine, third-party certification could have longer term positive impact on margins, and it could help the Company compete for sales as coal mine operators select vendors. Clearly, the production monitoring and process control layer is highly appealing to mine operators that extract other commodities. We may finally see an increase in non-coal deployments as a result. If the Company executes reasonably well, it begins to head strategically in the direction of Ruggedcom (RCM.T), or Matrikon (MTK.T) both of which generate excess free cash flow.
The MSHA certification process has been excruciating. However, the Company has never compromised on data capacity, which presumably it could have to expedite certification. For those reasons it has the opportunity now to exploit unique competitive advantages in network capacity via third-party applications.
Disclosure: I currently own shares of ACT. I currently do not own shares of RCM or MTK.
As commodity prices continue to decline, improved production efficiencies could mean the difference between sustained production and a costly mine shutdown at some operations. Management at ACT hopes to leverage this reality.
At highly regulated mine operations, maintenance is an issue. If equipment breaks down, some operations will often shut down for as long as the equipment is non-operational. Real-time monitoring of preventative maintenance, and of maintenance engineers could dramatically improve operations. By some estimates, there could be up to a 20% production improvement in some mines by solving this issue. At large production facilities, a 3% to 5% improvement could have dramatic results on the financial performance of mine operations.
The Company hopes that its extension beyond emergency communications and tracking (as defined by the MINER Act) becomes a pronounced competitive differentiator as mine operators begin to select vendors later this year according to the legislated timelimes. The currently certified ActiveMine network offers significant data capacity advantages over other certified systems, and may be the only system to scale for add-on apps. The gross backhaul capacity of the ActiveMine data network is 54 Mbps with a throughput of 22 Mbps. Combined, the data requirements of voice and tracking applications leave 3/4 of the throughput unused. As a result, there is relatively vast amounts of unused available capacity for sensor monitoring, advanced video monitoring, and remote control applications. With packet prioritization algorithms, the effective capacity is probably a few percentage points higher. Its nearest competitive solution offers a fraction of the capacity - just enough for voice and tracking. The node certification by MSHA contemplates upgrades, which allows management to scale the backhaul throughput without significant future certification delays. Management plans to double throughput for future node upgrades.
To review, the Company has a backlog of approximately $6 million ready to deploy once the telephone devices have been certified by the Mine Safety & Health Administration (MSHA), and another $60 million in its gross sales pipeline. The factored pipeline could be worth between $15 million and $20 million right now. The promise of extensibility could increase closure probabilities on the current pipeline, which may imply an increase in the factored pipeline.
Depending on how terms are structured, the Company may be in a better position, with its new partner program, to increase recurring revenue streams. Based on its limited deployment experience to date, annual recurring revenue may represent between 20% and 25% of the deployed system cost for the life of a mine based on mine face movement and device replacement schedules. With properly negotiated contracts, ACT could benefit from higher future recurring revenue by charging access fees to the network, data fees, or a combination of both. It is unknown at this point whether ACT will charge for certification programs.
In of itself, the announcement could be discounted by investors waiting for final MSHA certification for the Wi-Fi phones. However, as a sales differentiator and potential recurring revenue engine, third-party certification could have longer term positive impact on margins, and it could help the Company compete for sales as coal mine operators select vendors. Clearly, the production monitoring and process control layer is highly appealing to mine operators that extract other commodities. We may finally see an increase in non-coal deployments as a result. If the Company executes reasonably well, it begins to head strategically in the direction of Ruggedcom (RCM.T), or Matrikon (MTK.T) both of which generate excess free cash flow.
The MSHA certification process has been excruciating. However, the Company has never compromised on data capacity, which presumably it could have to expedite certification. For those reasons it has the opportunity now to exploit unique competitive advantages in network capacity via third-party applications.
Disclosure: I currently own shares of ACT. I currently do not own shares of RCM or MTK.
3/5/09
Small Indulgences in Uncertain Times
A good friend of mine revealed to me on the weekend that December was his Company's best month EVER in its 10-year history on all measurements; sales, cashflow and profitability. This wasn't an anomoly as Q4 was his best quarter EVER, and January was the best January since inception. He is not a bankrupcy lawyer, nor is he involved in cloud computing, mobile applications, or social networks.
He distributes books.
You know, those masses of paper, ink, cardboard and glue that have survived for centuries. No screens, no buttons, no ports or dongles. The only operating system is a slightly moistened fingertip. A lot of people, including myself, believed that Amazon's (AMZN) outstanding Q4 and best December ever was impacted positively by its cloud services. On the contrary, books may have drove performance.
There are some things for fundamentalists to think about.
Regardless of economic conditions, there is a basic human need for enjoyment; pleasure in life; indulgence. Fashion, travel, art, music, games, dining, sports and hobbies all bring pleasure into the lives of people and all represent multi-billion dollar industries worldwide (for example, according to some analysts, scrapbooking is a $2.5 billion industry). During the past 15 years or so, pastimes have become increasingly conspicuous, expensive and, well, frothy. As American consumers continue to de-leverage, more slightly used scuba gear, kite boards and Versace bags hit Craigslist. However, there is still a need for pleasure, and this is where the basic book regains its mojo. Books offer relatively cheap and portable pleasure with an aftermarket. It does not matter if your 3,500 square foot McMansion has been foreclosed and you have moved into a 800 square foot 1 bedroom apartment, the book is there. There is no monthly subscription and a book can be enjoyed while one is curled up under a blanket on a couch at home as much (if not more) than if one is bundled up on the patio of a local Starbucks. Better yet, there is no electronic copy restriction. When you are done reading a book, you can sell it or trade it for a book that someone else has enjoyed.
My friend distributes books to both offline and online retailers. All are reporting outstanding results during the recession. So its not about the delivery system (electronic/terrestial). All book sales are taking off. Its about the book; a small indulgence in uncertain times.
Which are the technology-centric vendor groups, or sectors that may benefit from the de-leverage of indulgence? It appears that the companies that were mentioned in the Web 1.o Redux post should continue to benefit for a while more. Apple's iTunes/iPhone media portal should offset some potential weakness in its future hardware sales as people download small indulgences in the form of songs, video, and iPhone applications. Both mobile networks, and Virtual Mobile Network Operators (VMNO) with media portals could also benefit to the extent that mobile content portals exist. The infrastructure players that support these mobile content portals should benefit, although most are private entities.
Internet activity should spike during 2009 as people get more involved in social networking and general surfing. Growth in these activities could follow unemployment/underemployment growth. However, there is a downside. The CPC value of advertising is likely to continue to decline as corporate marketing budgets get slashed. Until ad rates improve, margins for internet publishers and portals may be squeezed by higher costs associated with more usage. As these players struggle to find network efficiencies, infrastructure players could benefit from investments in better utility.
Going deeper into the ecosystem, although net neutrality has eliminated the potential for tiered pricing by network providers, there is a significant amount of traffic management required to maximize efficiencies for both terrestial and mobile networks. Two small-cap Canadian companies stand to benefit directly from the need by network providers to improve traffic efficiencies: Bridgewater Systems (BWC.TO) and Sandvine (SVC.TO).
The trend towards small indulgences during a recession is not new. It has happened during every past recession. People still want to have fun, enjoy their lives and indulge in pleasurable activities regardless of their financial condition. Fun that requires big cash outlay or leverage is likely to be put on the backburner by many households. Dream trips to Tuscany, new fishing boats, big screen TVs are examples of delayed big-ticket indulgences. For some, this recession may put those dreams on hold permanently. However, people adjust and they still seek pleasure in smaller, more economical packages. The re-emergence of the book could be a lead indicator of fun and entertainment in smaller packages. Unlike in previous recessions, the technology, processes, and methods of getting the small indulgences is a little different.
Trends for technology investors:
> online/mobile media retailers are benefitting now and should benefit more throughout 2009.
> more traffic on the web combined with lower ad rates may squeeze margins for online publishers and portals.
> Network providers will need better tools to manage traffic as usage increases and more media is moved around. This could require significant ongoing investment, and may be an area positively impacted by various infrastructure stimulus plans as the US govenment supports net neutrality. Although two small cap tech stocks have been highlighted that could benefit, there are several other Canadian companies that operate within the broadband and networking ecosystem that could also benefit.
I do not own any shares in the Companies mentioned above.
He distributes books.
You know, those masses of paper, ink, cardboard and glue that have survived for centuries. No screens, no buttons, no ports or dongles. The only operating system is a slightly moistened fingertip. A lot of people, including myself, believed that Amazon's (AMZN) outstanding Q4 and best December ever was impacted positively by its cloud services. On the contrary, books may have drove performance.
There are some things for fundamentalists to think about.
Regardless of economic conditions, there is a basic human need for enjoyment; pleasure in life; indulgence. Fashion, travel, art, music, games, dining, sports and hobbies all bring pleasure into the lives of people and all represent multi-billion dollar industries worldwide (for example, according to some analysts, scrapbooking is a $2.5 billion industry). During the past 15 years or so, pastimes have become increasingly conspicuous, expensive and, well, frothy. As American consumers continue to de-leverage, more slightly used scuba gear, kite boards and Versace bags hit Craigslist. However, there is still a need for pleasure, and this is where the basic book regains its mojo. Books offer relatively cheap and portable pleasure with an aftermarket. It does not matter if your 3,500 square foot McMansion has been foreclosed and you have moved into a 800 square foot 1 bedroom apartment, the book is there. There is no monthly subscription and a book can be enjoyed while one is curled up under a blanket on a couch at home as much (if not more) than if one is bundled up on the patio of a local Starbucks. Better yet, there is no electronic copy restriction. When you are done reading a book, you can sell it or trade it for a book that someone else has enjoyed.
My friend distributes books to both offline and online retailers. All are reporting outstanding results during the recession. So its not about the delivery system (electronic/terrestial). All book sales are taking off. Its about the book; a small indulgence in uncertain times.
Which are the technology-centric vendor groups, or sectors that may benefit from the de-leverage of indulgence? It appears that the companies that were mentioned in the Web 1.o Redux post should continue to benefit for a while more. Apple's iTunes/iPhone media portal should offset some potential weakness in its future hardware sales as people download small indulgences in the form of songs, video, and iPhone applications. Both mobile networks, and Virtual Mobile Network Operators (VMNO) with media portals could also benefit to the extent that mobile content portals exist. The infrastructure players that support these mobile content portals should benefit, although most are private entities.
Internet activity should spike during 2009 as people get more involved in social networking and general surfing. Growth in these activities could follow unemployment/underemployment growth. However, there is a downside. The CPC value of advertising is likely to continue to decline as corporate marketing budgets get slashed. Until ad rates improve, margins for internet publishers and portals may be squeezed by higher costs associated with more usage. As these players struggle to find network efficiencies, infrastructure players could benefit from investments in better utility.
Going deeper into the ecosystem, although net neutrality has eliminated the potential for tiered pricing by network providers, there is a significant amount of traffic management required to maximize efficiencies for both terrestial and mobile networks. Two small-cap Canadian companies stand to benefit directly from the need by network providers to improve traffic efficiencies: Bridgewater Systems (BWC.TO) and Sandvine (SVC.TO).
The trend towards small indulgences during a recession is not new. It has happened during every past recession. People still want to have fun, enjoy their lives and indulge in pleasurable activities regardless of their financial condition. Fun that requires big cash outlay or leverage is likely to be put on the backburner by many households. Dream trips to Tuscany, new fishing boats, big screen TVs are examples of delayed big-ticket indulgences. For some, this recession may put those dreams on hold permanently. However, people adjust and they still seek pleasure in smaller, more economical packages. The re-emergence of the book could be a lead indicator of fun and entertainment in smaller packages. Unlike in previous recessions, the technology, processes, and methods of getting the small indulgences is a little different.
Trends for technology investors:
> online/mobile media retailers are benefitting now and should benefit more throughout 2009.
> more traffic on the web combined with lower ad rates may squeeze margins for online publishers and portals.
> Network providers will need better tools to manage traffic as usage increases and more media is moved around. This could require significant ongoing investment, and may be an area positively impacted by various infrastructure stimulus plans as the US govenment supports net neutrality. Although two small cap tech stocks have been highlighted that could benefit, there are several other Canadian companies that operate within the broadband and networking ecosystem that could also benefit.
I do not own any shares in the Companies mentioned above.
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