We estimate that the average size of a typical deployment, measured as revenue, is approximately $400,000 with approximately 25% per year in recurring maintenance. Essentially, investors could conclude that the Company has burnt just under 15% of its declared backlog. The Company has been working diligently to structure favorable upfront payments, which could be higher than 50%, which may benefit its cash position as the backlog is deployed.
Management has aligned its supply chain to receive payments on the same terms and conditions as negotiated by ACT with its clients. As a result, the Company utilizes cash in a relatively efficient manner.
Investors should view the speed of backlog burn as positive, and the stock is likely to respond positively today.
Disclosure: I own shares of ACT
In Jaunary, its exclusive government reseller partner, Qwest (Q.NYSE) Government Services inc, commited to deliver 30,000 Mobikeys and related TruOffice subscriptions during 2009. The total expected value of those subscriptions is expected to reach $8 million in year 1 and $5 million annually once the roll-out is completed. To put this into perspective, we estimate that to date, Route1 has deployed somewhere in the range of 4000 to 6000 subscriptions under various pricing models. The Qwest commitment is approximately 8x total historical deployments. Unlike in the past, the pricing for these subsciptions is set, making future cash flows more predictable than in the past, so shareholders should expect fewer downside surprises. With guaranteed free hosting by Quest Communications, the gross margins on the TruOffice subscriptions may reach over 90%, which is impressive.
Expect the Company to finally become break-even shortly, and to begin to generate free cash flow by 2010 based on reaching this important milestone (right on schedule). It is unlikely that Qwest will stop selling Mobikeys and TruOffice subscriptions to government agencies, so investors should expect the level of subscriptions to grow beyond 30,000 over the next several quarters, adding to free cash flow potential.
The market conditions appear favorable for more U.S. government agency subscriptions. The new U.S. administration has a stronger bias towards "green" initiatives, and reduced energy consumption. The security afforded by the DEFIMNET platform combined with Mobikeys and TruOffice subscriptions allows U.S. Federal Agencies of all levels of data security access to more easily and cost-effectively tele-commute. DEFIMNET/TruOffice aligns with President Obama's stated Agenda (which should reflect budget prioritization) in several areas including:
- "Bring Government into the 21st Century"
- "Modernize Public Safety Networks"
- Homeland Security:
- "Protect Our Information Networks"
- Energy and Environment:
- "Reduce our Greenhouse Gas Emissions 80 Percent by 2050"
The stock should benefit from today's announcement. Is it a good entry point for investors? First of all, with approximately 400 million shares, there are a LOT of shares outstanding for a Company at this stage of development. The stock is highly liquid on a share basis, although the daily value traded is modest. It is unlikely now that the company will return to the market to raise more equity, so there is little chance that that the fully diluted share count will increase in the short-term. However, the capital structure could be a value impediment. Secondly, as the Company scales and becomes profitable, shareholders could see its market valuation align to similar recurring revenue technology companies that have reported one or two consecutive EBITDA positive quarters. Many of those Companies have experienced significant share price increases since March, and appear to be trading in the $30 million to $50 million range measured in terms of market cap. As ROI progresses, the market cap may reach similar levels once it begins to report positive earnings, which on a share basis, implies upside from current levels. However, the excessive shares outstanding creates inherent volatility. At current prices, a half a penny swing in the shareprice could mean up to a 10% swing in valuation.
I do not own shares of ROI.V or Q.
During the conference call, the Company disclosed that the entire $4.0 million in sales recorded during the quarter was recurring. The EBITDA margin was 21% and the Company disclosed that EBITDA margin is expected to increase to closer to 30% by fiscal year end. The Company disclosed that it expected monthly recurring revenue to increase to $2.0 million by year end, inferring that quarterly EBITDA should be in the $1.8 million range. If the Company is able to successfully conclude its ongoing litigation situation with Abanco (from Chicago), EBITDA would be positively impacted by approximately $0.25 million per quarter.
Please see my post on April 15th. The story remains fundamentally intact with possible acceleration related to future deployments, and roll-outs and adoption of merchandising programs.
The seven analysts are likely to find Q1 results and the general outlook to be positive. The Company is guiding EBITDA and sales generally higher than the mean estimate by analysts. Conservative analysts are likely to adjust forecasts upward. Bullish analysts are likely to remain bullish.
As a result, investors should see two trends occur. First, the variance among analysts is likely to tighten as some that were predicting lower annualized EBITDA and net income losses for the year are more likely to increase forecasts. This would infer that the mean target could be upgraded to a consensus target. Secondly, the mean forecasted target of $1.26 (in previous post) may increase by a few cents and become more of a consensus.
With tighter variances in forecasts by analysts, and possibly a higher consensus, investors may be more comfortable with the general direction of forecasts, and may be more inclined to buy the stock. Even with its remarkable run to todays price at $0.71 from $0.30 at the beginning of April, investors may take comfort that there is more upside in the stock.
To re-iterate: Guestlogix is positioned as the dominant platform for in-flight retailing in the North American market, and is the self-proclaimed de-facto standard. Over time, GXI could become the primary gateway to in-flight retailing for merchandisers in North America. This is a good spot to be for investors.
Today, ACT announced that it has received certification for the final component of the ActiveMine wireless mesh network from U.S. Federal Mine Safety and Health Administration (MSHA). The certified telephone fills out the final elements of the Two-Way Communications and Electronic Tracking Requirements of the Mine Improvement and New Emergency Response Act (MINER Act) of 2006 (was it that long ago?). Here is a list of approved "wireless" communications technology as published by MSHA today.
It is difficult not to notice that ACT is the only wireless mesh network approved with both tracking and a telephone device. In addition, it is the only network that offers excess backhaul capacity for additional monitoring, production, and maintenance applications. The Company has announced partnerships already with Motorola (MOT) and an outfit called 3D-P, which provides data collection solutions for mine machinery.
As stated in previous posts, the Company has approximately $6.0 million in contracted backlog that is dependent upon MSHA approval. These deployments can now proceed. In addition, the Company has a $60 million unfactored pipeline with an estimated $20 million factored pipeline. The sales team should be immediately closing the factored pipeline deals. There are no decision barriers left.
A good sign of potential came last week when a fairly significant long-term contract was signed with a Kentucky mine operation that may turn out to be its first 7-figure deal. Although the contract was ahead of MSHA approval, the mine operator was probably well assured by MSHA that certification risk was low.
Rubber Hits Road
Notwithstanding the great news item today, after some quick cork-popping tonight, the Company needs regroup and refocus on closing deals, getting P.Os converted and turning potential into cashflow. This means that management needs to focus hard on not only sales management, but also manufacturing processes, deployment, training, and service quality. From this day forward, these are likely to be the new measurement sticks that shareholders will use to prod management with.
Investors Likely Positive
Clearly the stock should react positively to this long awaited news as investors assume that MSHA certification means at least $6 million worth of actual sales potential before the end of FY2009 (July 31 Y/E). FY2010 sales could range in the mid-teens.
Disclosure: I own shares of ACT, I do not own shares of MOT.
- flat to slightly lower sales of $11.9 million for 2008 versus sales of $12.3 million during 2007. Subsequent to year-end several incremental contracts should re-establish growth for 2009.
- Although sales were flat for 2008, the revenue mix leaned more towards software licensing than in the past, pushing gross margins to 51% for Q4 2008 versus 36% for Q4 2007. Gross margins should be maintained or grow slightly from there.
- The company was able to improve EBITDA by $0.5 million moving from a $0.3 million loss for 2007 to a $0.2 million gain for 2008.
- During Q1, 2009 the Company signed no less than four multimillion dollar contracts with courts from the United Kingdom and Australia.
- There has been a significant increase in RFPs originating from the United States as Federal Stimulus money allows previously underfunded court systems to invest in modernization.
Most of its client contracts run for between 3 and 5 years with a typical 40/60 split between software licensing and services. A majority of the software licensing revenue occurs within year 1 of the contract. Based on Q1 contracts alone, there could be as much as a 30% lift on annual sales for 2009 with three quarters remaining.
With the Stimulus funding finally reaching the federal, state, and local jurisdictions, Management is detecting significant growth activity within the United States. During the last term of the previous US administration, funding for the courts had all but dried up.
The Company may be cashflow positive on an operating basis now, and with its new margin profile, VIQ may actually be generating free cashflow by H2 2009. The Company has about $1.0 million in cash and $0.5 million in long-term debt. The EV is approximately $24.2 million for this company based on today's shareprice. Some future potential may already be priced into the stock, however there are a lot of big contracts up for grabs, which may infer more upside potential. Without question, this is a microcap story that should benefit from infrastructure stimulus spending by the governments of advanced economies.
Disclosure: I do not own shares of VQS.
Today there are some numbers reported by various US carriers that support the notion of downchurning as the recession deepens. Here is the article. Electronic prepaid network providers should benefit, as well as Virtual Mobile Network Operators (VMNOs) that specialize in prepaid. According to the article Sprint (S) seems to be benefitting the most among US carriers from this trend. As the recession extends, more financially stressed consumers are likely to switch from post-paid contracts to prepaid services. Investors should see more action in the space in terms of consolidation as the main carriers gobble up some of the high growth MNVOs.
I do not own any shares of the Companies identified in this post.
- Revenue for Q4 2008 was reported at $0.3 million, up 30% for previous Q4 2007
- Gross Margins for the quarter were reported at 50% versus a negative gross margin during Q4 2007
- Company is showing onesy-twoesy progress in sales for Q4 with a leaner operating structure
- After burning through $4.2 million, the company retained $2.1 million in cash on the balance sheet entering FY2009
- On January 9, the Company announced a 30,000 unit commitment from the US federal government through its US government channel - Qwest Communications (Q)
As the Obama administration attempts to streamline government agencies, while maintaining its objective to reduce energy consumption and greenhouse gas emmissions, the Mobikey solution may be at the intersection of these opportunities. Considering that the 30,000 unit order is for one division within one department, prospects look very good at Route1. However, nothing is assured beyond the 30,000 units already guaranteed and anything may happen as the US government budgets are negotiated. Investors should see revenues associated with network setup during Q1 and Q2, which could be in the $2 million range, plus some early mobikey deliveries. The potential major lift in sales should start occuring in H2, 2009. The balance sheet for ROI is a concern for investors, although favourable payment schedules from Qwest may mitigate some of the risk until the devices start to flow. By the end of 2009, there may be several opportunistic network security vendors circling ROI as it gains momentum.
- Recent Intellimax acquisition now operationally breakeven and contributing 15% of sales.
- Total sales for the quarter of $2.0 million up 3% from Q1 2009.
- Operating earnings were essentially breakeven for Q1 down from $0.3 million, due to incremental expenses related to the Intellimax deal.
- Weakness in UK offset by Intellimax and N.A operations.
- More Intellimax synergies as integration continues throughout 2009.
- Outlook is "challenging" for 2009 with improving conditions expected during H2.
With Intellimax, the Company is planning to extend its robust analytics core to include elements of marketing execution. The overall outlook for this Company should be considered positive as clients become increasingly data driven in marketing, risk management, and sales execution. If the Company can find ways to maximize synergies and then consolidate niche players in the market over the next few quarters, the stock may be a sleeper. It is a supermicro-cap at $4.0 million.
Disclosure: I do not own shares of ANC
This is the most recent of a string of announcements that includes a contract with Continental Airlines in the US, a new in-flight ticketing agreement with Heathrow Express, along with an extension of its In-Flight Box Office solution to include a major theme park operator. Although the Company has not disclosed the operator, there is a possibility that it may be Disney (DIS).
After trading as low as $0.30 as late as April 6, 2009, the shareprice has shot to $0.50 over the past week. With seven analysts covering the story, investors may be taking notice of the progress. As the Company continues to rollout its contracted backlog, quarterly revenue should continue to be lumpy. Sales and earnings were below expectations for Q4, 2008 because a couple of expected roll-outs slipped into Q1, 2009. When the Company reports Q1, 2009, the slippage from Q4 may be reflected in good performance for the quarter. Quarterly performance should continue to show volatility throughout 2009 as the Company continues to deploy major airlines. Once major rollouts are completed, revenue should be easier to forecast because most revenue (starting in FY 2010) should be recurring.
With respect to the full-year, the variance among analyst forecasts is high for 2009. However, the mean forecast for sales appears to indicate more than a doubling of sales over 2008 to around $19.5 million (adjusted). EBITDA forecasts infer a mean of approximately $5.8 million, with similar high variance in estimates. With the current shareprice at $0.50, the FYE mean EV/EBITDA multiple calculates to approximately 3.8x, which is 47% below the current of the mean for the Canadian technology sector. For a high growth Company with a near regional monopoly in North America, this multiple may seem low to some investors.
Based on its current trajectory, the Company may be generating cash and net income by H2 of FY 2009. The amount of free cashflow generated would depend upon how much is re-invested by Management to extend its retail offerings, and expand its European footprint both in airlines and rail. Investors should expect Management to continue to add retail and service offerings in order to position itself as a defacto on-board retailing platform for the airline industry, starting with North America. Incredible leverage can be gained by becoming a primary gateway to airline passengers for retailers, and the primary way to do that is to deliver more retail services through the platform.
Guestlogix has willing partners among airlines because an airplane is a closed system. By controlling access to retail services through the GXI gateway, airlines should benefit from new, previously unattainable revenue streams related to entertainment, retailing, and destination services. An analogous relationship would be between mobile app stores and mobile carriers. The app stores are the gateway for developers, and the mobile carrier networks are the closed system. All parties benefit as long as the offerings are perceived as valuable by consumers.
Investors may be reticent to invest in a stock closely related to the airline industry. There is a pervasive investor fear of bankruptcy associated GXI's client base. However, most of the major American carriers have restructured through bankruptcy in the past and have maintained and even expanded operations during restructuring periods. As a result, the probability that GXI's large global carriers will cease to operate any time soon are low. Notwithstanding, GXI owns all components of its network, which means that it can reallocate assets to other deploying clients if an airline shuts down. The Company has already done this in the past.
The lowest analyst target is nearly a double from the current price and the mean is $1.26, which suggests that there is potential strong upside to the stock price according to analysts. Although there may be still be a couple of minor executional stumbles as the Company scales, Management continues to make significant progress in a tough market. Guestlogix could ultimately become to airline carriers what mobile app stores are to mobile carriers.
I do not own shares of GXI, DIS, or any airline.
When I first found StumbleUpon I became an immediate fan and downloaded the Stumble toolbar in 2006. I spent the next couple of years or so Stumbling throughout the nether recesses of the Internet. For me, StumbleUpon became my personalized art gallery and curiosity museum with millions of other Stumblers acting as curator. It was a lot of fun, bordering on addicting.
As a Canadian start-up in the social networking space, StumbleUpon began to attract interest from Investment Bankers sniffing out IPO fees by the end of 2006. It came as a moderate surprise that eBay (EBAY) offered $75 million to buy the Company outright in 2007.
From the beginning, the acquisition appeared to make little sense. There was not much alignment between Stumblers and eBay buyers and the StumbleUpon toolbar as recommendation engine seemed far too random to be leveraged commercially by Power Sellers. Maybe with a few tweaks, eBay management envisioned a social competitor to Google (GOOG). Whatever the monetization strategies forward were for eBay, it was background noise as I continued to Stumble, installing the toolbar on nearly every computer that I used regularly.
And then it happened. One fateful evening during the spring of 2008 I Stumbled and fell into a vicious malware trap that became an expensive nightmare which put my home network out of commission for nearly two weeks and cost several hundred dollars in real money to clean up the mess. The attack was clearly designed for StumbleUpon. As soon as the Stumble button was clicked, the browser was highjacked and the malware was loaded. The attacker had gamed the system so that the malware became a recommended site. How many other Stumblers were attacked?
I was furious that StumbleUpon, or eBay for that matter, would allow itself to be a security threat. I attempted to contact customer support at both eBay and StumbleUpon with no luck. I left lengthy emails explaining the exact conditions by which I was attacked. No response. I requested information regarding StumbleUpon security policy. Silence.
As my malware event unfolded I stopped Stumbling. And then I uninstalled the trail of Stumble toolbars that I left on unsuspecting computers. To me the Stumble toolbar was a gateway to malware. A security threat. Gone.
In my mind, eBay has spent a lot of capital buying technology that carries intrinsic security risk. The security risks associated with Skype are well known to the point where many in the VoIP telephony segment deride Skype as the "terrorist telephone network" due to its inherent lack of traceability. Paypal? I have an account that I do not use any more because I associate eBay with security risk. Paypal may be very safe, but due to my history with eBay I am not interested in risking my funds with any of its subsidiaries.
Maybe a response to my inquiries from eBay or from the StumbleUpon subsidiary would have eased my concerns about security and possibly saved me as a client. But nothing happened.
With Garrett Camp and his team now buying back StumbleUpon (likely at a fraction of its original purchase price), maybe the Company can regain its mojo as it unshackles from eBay. Maybe somebody there will finally call me back and ensure me that the Stumble button is no longer a security threat. In the meantime, I remain a retired Stumbler.
mobile application storefronts tend to fall into 3 primary categories.
The most entrenched retailing group continues to be the carriers (or operators in Europe), that have, for several years, been involved in ringtone, games, music, video and, more recently, application downloading . In North America, there are a handful of carriers, while in Europe there are between 40 and 50 operators plus dozens more MVNOs (mobile virtual network operators) that have helped to pioneer the market. Downloads are considered a core business for most carriers.
Soon after the market began, another group of vendors emerged, which are often called "off-portal" retailers. These Companies have similar offerings as the carriers, but with independent storefronts and provisioning systems, albiet hooked directly into the carriers' billing systems. Typically, off-portal retailers such as Jamster, Playphone, Zed, and dozens of others like them generate high margin revenue for the carriers through revenue-sharing models and they are tolerated, if not embraced, by the carriers.
More recently, beginning with the iPhone application store in 2008, leading smartphone and mobile OS manufacturers have begun to launch applications storefronts. Both Apple and RIM operate completely independent of the carriers, including billing, while Microsoft has chosen to integrate with carrier billing systems. All three vendors plus Nokia (which recently acquired the Symbian OS) and Google are attempting to foster active developer communities. Famously, the iPhone store already boasts over 30,000 independently created applications offered through its storefront. The Symbian OS had nearly 10,000 applications developed on it as of Q2 2008.
Who will be the ultimate winners and losers as the market takes off? In the end, the common denominator for success may not be at the customer interface, and there are likely few new killer apps that could drive traffic. If the storefront is not important, and the applications are neutral, what is the potential silver bullet for success?
Billing systems may determine winners and losers.
Experienced marketers agree that it is easier and more profitable to sell new services to current customers than it is to attract new customers. Carriers have a long billing history with millions of subscribers, and experience in exploiting the data channel. Content and application downloads are a simple extension of current carrier subscriber billing. A game, song or ringtone is simply added to a subscriber's monthly or prepaid bill with minimal effort by the consumer. More interestingly, carriers are masters at service bundling. As the market evolves, carriers are in a favourable position to offer service bundles for consumers that include mobile applications with household services packages. Such bundling may be difficult to counter by independent application stores.
Notwithstanding the recent entry by handset manufacturers and the future entry by OS vendors, the vast majority of the $60 billion in annual revenue to date has been realized by carriers. Mobile content and applications are core revenue stream that will grow in importance to carriers as voice becomes increasingly commoditized. Once the euphoria of the current development rush is over, and developers actually want to make money, applications will need to reside and operate equally on all enabled devices and networks. At some point in the future, as the market matures, the easiest way for consumers to discover, buy, and use the most popular and widest selection of applications may still be via carriers and their off-portal partners.
Over the next few years, major carriers are likely to accelerate investment in appropriate infrastructure to exploit their billing advantage in an effort to maintain or grow share of the application market. Third party infrastructure players such as Denmark's End2End, Canada's Wmode, Italy's Bournjourno (BNG.MI), and Seattle's struggling Motricity (which merged with InfoSpace (INSP) last year) may benefit from an upsurge in carrier, off-portal and MVNO investment.
Many could predict that off-portal retailers, especially ones that rely on the the fading ringtone market, may be at the beginning of an extinction cycle. This may be true with one goliath exception...Microsoft. Microsoft has been lost in the background to the iPhone/Blackberry hype. However, it is currently forming relationships and is building out infrastructure to become a primary off-portal partner to most carriers in North America, Europe and Asia. Although Microsoft may give up some margin to its carrier partners in return for easy billing, carrier alignment may help to accelerate Microsoft's land grab of the apps market. This marketing approach is in Microsoft's DNA and is a variant of earlier channel marketing that helped to drive MS-Dos and Windows success. Microsoft has proven to be a master product bundler, which should align well with carrier bundling.
Despite its exclusive deal with AT&T, and its "walled-in" billing system, the App Store from Apple should maintain the momentum of its early success. It owes much of its future to the past. Without the success of the iPod and the iTunes media sales platform before it, the App Store would be challenged as an independent app retailer. As it stands now, the App Store is a simple extension of one of the largest billing account bases around...iTunes. Apple and the carriers are utilizing similar product line extension strategies.
With RIM's launch of App World, it introduced a completely new account base which is fundamentally unaligned with carriers. or with media. Paypal requires a new account commitment by mobile subscribers, which may be a barrier to uptake. With no "killer app" such as iTunes, consumers may find it too much trouble to download the App Store and set up a new billing account (if it does not overlap with a current paypal account). Are eBay (EBAY) buyers/sellers likely to download Blackberry apps? How much alignment is there between Paypal account holders, Blackberry users, and a desire to download an application? Whatever the number is at that intersection, the potential account base is probably a small fraction of any of the major US carriers, or of the Apple iTunes account base.
During its launch year, RIM may find difficulty gaining market traction. It is a smart company, and it is possible that the Management could find a way to integrate into the carrier billing systems at some future date in a similar way as Microsoft is preparing. However, based on conversations with industry insiders, there has been some resistance by RIM to integrate with carrier billing systems.
Within a broader strategic framework, RIM may simply be biding its time until an effective mobile payment system begins to proliferate, which could remove the need for intermediaries such as Paypal, and change the future dynamics of the entire market once again.
There is speculation that Google Android may come to market with Google Checkout as its billing backbone. The size of the Google Checkout account base does not register among the largest account bases among research sources at this point. If the speculation is true, there would need to be some heavy lifting on the billing side if Google were to compete head-to-head with the carriers.
Billing Systems for the Mobile App market ranked by scale.
- Cingular: 82 million mobile accounts
- Verizon: 78 million mobile accounts
- AT&T: 75 million mobile accounts
- Paypal: 70 million payment accounts (active)
- iTunes: 65 million media accounts (active)
- Sprint: 40 million mobile accounts
Sources: IE Market Research, Piper Jaffrey, Wikipedia,
Based the data above, although Microsoft would give up margin through carrier billing agreements, it could have nearly 5 times the reach as Apple would with iTunes in the United States alone. However, Apple is likely pleased with the scale of its iTunes account base because branding strength and focus should generate more revenue and margin per account then any other competitor. It does not need as much scale to be really successful. By introducing a non-aligned payment system into the mix, albeit a large one in the form of Paypal, RIM may be limiting its initial scaling capability. Although it is likely that the Company will adjust tactics as it gains more experience. A go-it-alone billing strategy may impede Google's future launch because Checkout does not appear to have the acceptance and scale of other billing systems. It is more likely that Nokia would follow Microsoft and align with carriers, especially since there are so many players in the European market where it is strongest.
The carriers and MVNOs will defend what they already consider to be a core business. Investment in infrastructure and marketing should increase. In the end, those entities with the largest and most advanced billing systems should prevail, which may suggest that the carriers could end up being major players in the space despite the hype surrounding the market entry by handset manufacturers. The ongoing decoupling of applications from hardware may also help to strengthen the future position of carriers and OS vendors like Microsoft and Nokia.
The mobile applications market is not well-formed yet, and there is a potential for some really interesting developments over the next 6 quarters as the mobile apps market goes through an adoption phase.
A couple of years ago Kaboose was one of the hotter stocks on the TSX. As one of only a few pure online media publishers from Canada, it had the potential to establish a global footprint. And online media was considered one of the fastest growing, potentially profitable industry sectors in the world. With over 90% of its audience in the US, the Company had already crossed the transborder chasm and was beginning to show success. Shareholders benefited.
Management had made a couple of astute strategic move by switching its focus from low-value kids to highly coveted moms, and by acquiring babyzone.com soon after becoming a public entity. Shareholders were pleased that the Company was ranked among the top 3 trafficked websites for moms on the Internet. Only Disney tracked consistently ahead of Kaboose, while once in a while Kaboose would switch positions with Viacom for the number 2 or 3 ranking. It was operating with some pretty heady company. It's only challenge seemed to be increasing CPC rates and revenue per unique user, where is lagged it main competitors.
The strategic objective was to generate high margin revenue by engaging tens of millions of mothers in a parenting dialogue from pregnancy to when their kids turned into sullen teens. In summary, this was a solid strategy for a valuable niche in an exploding market. By the spring of 2007, the stock peaked at $4.00, increasing 167% from its IPO issue price 8 months earlier. Analyst targets, including mine, were in the $5.00 to $6.00 range. Quarterly organic growth rates were consisently above 100%.
And then the U.S. housing bubble burst.
The evidence of how dramatic of an impact the housing bubble had on Kaboose's financial performance did not materialize until the Q4 2007 results were released. Long-term CPG clients began to unexpectedly cancel committed programs and after multiple quarters of double-digit and even triple-digit growth, ad sales contracted. To this day, media sales in the U.S. continue to contract.
In December of 2007, Kaboose acquired the U.K-based parenting club Bounty Group Limited for approximately $140 million on the back of a $115 million bought deal priced at $2.70 per share, and a $25 million credit facility. It was a seemingly fortuitous acquisition because, for the first half of 2008, Bounty performance was substantially better than expected as the U.K economy was yet to feel the full brunt of the U.S. recession. Even as Kaboose's U.S. online publishing revenues continued to erode, Bounty was exceeding expectations and driving operating earnings.
However, investors never really understood the business, and the Bounty performance was not well-reflected in the share price, which continued to decline throughout the first half of 2008, as investors fretted about the state of the the Company's U.S. online ad market.
And then the credit markets crashed. Worldwide.
The impact of the credit crisis is apparent in the Q4 numbers that were reported earlier today. Sales for the quarter totalled $21.3 million, below most analyst expectations, and EBITDA was $5.2 million, which was also somewhat below expectations. FY2008 revenue was $81.9 million, and EBITDA was reported at $12.1 million. Both of these numbers were generally below analyst forecasts from the beginning of 2008.
Despite some executional moves towards a vertical ad network, and localization, CPM-based display ad rates in the U.S. continue to decline, compressing margins. The credit crisis has even taken some of the wind out of Bounty's UK sales. One could suspect that when Management looks to the immediate future, prospects are pretty grim, which is the likely backdrop to the announcements today. With limited Bounty performance reflected, the share price entering 2009 was $0.36 and has bounced around in a range between $0.35 and $0.40 since. With a once stellar balance sheet burdened by long-term debt, and H1 2009 results unlikely to impress, the shareprice is unlikely to move anywhere but down, or best case, sideways. To Management, a C$120 million dollar windfall right now probably seems a lot better than a 2009 grind towards potential oblivion.
Kaboose was designed to be an attractive roll-up business for a much larger media player like Disney (DIS), Viacom (VIA) or NewsCorp (NWS), however the price was supposed to be a lot higher than what was reported today. Maybe Management could have held out for a few more quarters in hopes of a rebound. However, there is so much uncertainty in the market, that it is more likely than not that potential suitors like Disney would stop calling, or that the future price offered would be lower. With the financial stress throughout the media sector, Disney may actually be the only one calling right now.
This may be cold comfort to institutional shareholders that participated in the 2007 financing at $2.70 per share and are long in the stock. Others, who sold KAB shares for tax losses in 2008, and then bought back in again should benefit from a decent windfall.
Kaboose suffered from a one-two punch combination starting with the bursting housing bubble in 2007, and then the credit freeze of 2008. With a grim outlook, an asset sale right now probably looks like the best option to Management. Although there is no Hollywood ending to this story, at least there is some value salvaged.
I own shares of KAB; I do not own shares of DIS, VIA, or NWS