Gross margins should continue to improve into the mid-70 percentage range as services continue to increase as percentage of total sales, while the company further leverages its messaging platform as it scales with the integration of new acquisition of Oceanwide Logistics and Scancode. The 10 + 2 reporting regulations should also help contribute to both scale and gross margins as more of its clients adopt DSG's electronic solution.
The company exited the quarter with $46.9 million in cash and equivalents and no long-term debt. Cashflow from operations was $4.4 million for the quarter, or $0.09 per share.
The outlook for the company should be considered by investor to be strong. With the un-thawing of credit, the beginnings of an upturn in durable goods shipments, and increasing regulatory regimes, Descartes Systems Group is positioned to experience an uptick in traffic on its messaging network. At the same time, the recent acquisitions add more services to its platform and increase its overall footprint as the economy begins to improve during H2, 2009.
DSG is a well operated, well positioned SaaS vendor in the global supply chain. The company should see an acceleration of organic growth in revenue as the world economy grows and margins are likely to remain robust. Investors should expect Descartes to continue to look for more strategic acquisitions during the last half of the year, possibly within the European market.
Analysts are likely to increase their forecasts and 12-month targets for this stock after results from this quarter.
Disclosure: I own shares of DSG
See the April post related to FY 2008 results for this Company. The fundamental outlook for this Company has not changed. The performance outlook for VIQ Solutions should be enhanced by the rollout of various national infrastructure stimulus plans announced by governments throughout Europe and North America.
Sales results weak for Q1; but as expected
Q1 results (which are typically the weakest seasonally) reflect the pre-stimulus challenges the company has faced, particularly in the United States. The previous US Administration and Congress had dramatically cut back funding for courts during the 2008 budgets. Election year uncertainty, combined with a deepening recession, made the situation worse. As a result, US contracts all but dried up for VIQ Solutions, reflected in Q1 2009 sales, which were $2.5 million, down from $2.8 million for the previous year Q1.
Margins improve for Q1
Management cut input expenses, and signed more software contracts, resulting in gross margins improving to 39% up from 37% for Q1 2008. Management expects gross margins to continue to improve going forward as the company continues to sign more software deals. EBITDA loss increased to $0.14 million for Q1 2009 versus $0.12 million loss for the previous year, although it should be considered virtually unchanged. Margin performance improved even as the company increased activity related to major signed contracts and ramped up sales execution during the quarter to take advantage of the more positive market conditions. Net loss for the quarter was virtually unchanged at $0.24 million loss, or $0.00 loss per share versus a $0.25 million loss for Q1, 2008, $0.00 loss per share.
Management drove positive cashflow; should stay that way
Despite a $0.3 million quarter-over-quarter decline in sales, the Company was able to report positive cashflow from operations of $0.06 million for Q1 2009 versus a cash outflow of $0.23 million for the same quarter 2008. The company has accelerated cash by reducing expenses, and by negotiating better terms on newer deals, resulting in DSO (Days Sales Outstanding)declining from nearly 70 days previously to approximately 40 days now. Investors should be pleased with management activities related to maximizing cashflow. Management has stated that it expects to remain cashflow positive for the foreseeable future.
Major contracts from Q1
During Q1, the company announced major contract signings in the UK (3.3 million Euro over 8 years) and in Australia (AUT$2.5 million over 3 years), which should begin to positively impact performance for Q2 2009 and onward. According to management, a majority of the revenue associated with new software-oriented contracts is recognized within the first year of multi-year contracts.
Subsequent to Q1, the company has been active signing and deploying new contracts and contract extensions with undisclosed clients. Revenue associated with these transactions should positively impact performance for Q3 and Q4 2009 and beyond. The stimulus funds are starting to flow through the system from various governments worldwide including the United States. As a result, the company is beginning to see large opportunities for bid, which could positively impact performance as early as Q4, 2009.
Positive outlook enhanced by management's focus on cashflow
Notwithstanding the positive market outlook for the company, investors should be pleased that management has been able to generate positive operating cashflow for a weak sales quarter.
However, since the beginning of this decade when Internet Corporation for Assigned Names and Numbers (ICANN) agreed to break Network Solutions domain name registration monopoly, the company has essentially been a wholesaler of domain names along with some of the peripheral services around it such as email and security. Since then it has exhibited steady, albeit unspectacular, growth while being eclipsed by younger start-ups like GoDaddy.
Interestingly, recently reported Q1 performance shows 17% growth in its domain business over the previous year, while the rest of the business remained flat or contracted. Total sales for the quarter were reported at $20.1 million, or 7.4% ahead of last year's performance. Reported earnings for the quarter were $1.0 million, or $0.01 EPS versus a $1.1 million loss, or $(0.01) loss per share last year. In the depths of a significant recession, investors may find this surprising.
However, as more people get laid off from "jobs", many are likely to begin new careers as self-employed contractors. And, as during past recessions, laid-off skilled workers are establishing start-up businesses in their fields of expertise. The numbers may support this trend now. According to StatsCan "The surprising rise in the number of people working in April in Canada was the result of an increase in self-employment, the federal government agency said. Self-employment rose by 37,000 in April, while there was little in public- and private-sector employment". These trends are likely to strengthen elsewhere in the world where entrepreneurship is encouraged.
The rise of the independent contractor is good news for Domain registrars. Through various blogging applications, it is easier and more cost effective than ever for people to create a web presence with an individual domain. Cha-ching for domain registrars!
Many of the new businesses are likely to fail in the short-term, or become abandoned as the economy picks up and independent contractors begin to get hired by larger entities. All of this potential future volatility means domain names do not renewed, which means that they get recycled and resold. Cha-ching for domain registrars!
The domain-name game is boring, and margins are pretty thin through commoditization. However, we should see a continued resurgence in the business for the next few quarters as the employment markets become more volatile. In its quarterly results press release, Elliot Noss, CEO of Tucows appears to confirm the trend. "During the first quarter of 2009, we saw continued strength in domain registrations through our OpenSRS wholesale services business, marked by the highest number of new registrations since the second quarter of 2000 and strong year-over-year growth in renewal transactions." The stock is trading at 8x FYE runrate EPS.
Are there other technology vendors that could benefit from this emerging self-employment trend? Besides online employment services like MonsterOnline, investors should look at specific SaaS software verticals such as accounting, converged communications including VoIP, email, and calendaring solutions that start-ups may need. OpenSource word processing, spreadsheet and presentation software may be popular as long as they integrate with MSOffice formats.
Social networking sites should benefit from increased self-employment, but not in a way the media seems to expect. For sustained value creation over time, investors may find an IPO from LinkedIn could be more interesting than one from Facebook. Independent contractors are likely to spend more time on LinkedIn, and find value that they are more likely to pay for (in comparison to Facebook).
On the downside, mobile susbcriber churn may be higher as people migrate off corporate mobile plans to personal plans with more modest rate plans. Vendors with giant corporate clients may be hurt, while SME specialists and low-cost VMOs may benefit.
I do not own shares of any of the Companies mentioned in this post.
Gross margins were reported at 73%, which Management believes to be a typical range going forward. This is good news for investors as the Qwest deployment begins to take off. Management expects that a vast majority of the Qwest's first order should be shipped by the end of the summer, with close to 10% of the order already shipped only three weeks subsequent to completion of the DEFIMNET roll-out.
An Interesting Market Development: The Swine Flu Pandemic has created more urgency among U.S. government agencies to get government employees set up to work from home. The TruOffice deployments on the DEFIMNET fits under several "emergency preparedness" initiatives that have become more prominent as the cases of Swine Flu have increased. Route1 should benefit from increased velocity of deployment, as well as from more potential demand from U.S. Government agencies thoughout the year.
Don't Forget Europe: The Company has had a couple of reference deployments operating in Europe for several quarters. Subsequent to Q1, we may see a marked increase in activity from Europe as governments in this region begin to deploy relatively significant numbers of units. There may be a possibility of regional distribution agreements (similar to Qwest) by the end of fiscal 2009.
Fly in the Ointment: The Company has reported a skinny balance sheet at the end of Q1, with $0.75 million and a high quarterly burn of over $1.4 million. Of the $1.4 million, approximately $0.5 million could be categorized as one-time expenses, leaving $0.85 million of operating burn. Notwithstanding, this presents forward risk. Offsetting the future burn is a portion of cash received from the approximately $2 million DEFIMNET deployment, along with cash received from the rolling Qwest purchase order. In the short-term Management will be required to manage cash diligently as shipments ramp.
Bottom Line: The Company is finally now in the middle of the ramp that investors have been waiting for patiently for many quarters. The new challenge is that growth will need to be managed with a skinny balance sheet.
Disclosure: I do not own shares of Qwest or Route1.
Nstein's Q1 results are impacted by delays in purchasing decisions by its publisher market niche because the sector is under extreme financial stress due mostly to the cratering of CPM rates, and a significant decline in advertising campaigns by marketers. Essentially, publishers were conserving cash during the quarter. In the future, economists are likely to identify Q1, 2009 as the bottom of the recession, which is good news for Nstein, and may result in some performance recovery in the latter half of FY 2009.
As the world economy begins to recover during the last half of 2009, investors may see some pent up performance as delayed CMS investment decisions pile up, especially during Q4, 2009. During the past two years, Nstein's Q4 has consistently performed ahead of expectations.
The Company has $6.7 million in cash and only $0.4 million in long-term debt, so it has adequate balance sheet strength for the remainder of the recession. A focus on recurring revenue by Management, either through business model tweaks, or via acquisitions would also help to smooth out quarterly performance and help to improve predictability on future cashflows.
Headquartered in Mississauga, Redknee provides converged billing, rating, charging and policy solutions to tier 1 and emerging market mobile operators globally. Recently, it has introduced interesting prepaid billing solutions for the Blackberry, along with mobile payments solutions, which both play well in emerging markets such as Eastern Europe, Latin America, Middle East, Africa, and Southeast Asia. Prepaid services for smartphones should also be attractive to carriers in Europe, and even in North America where a major shift to prepaid accounts is occuring.
To provide some macro context, even as the current worldwide recession deepens, emerging economies represent nearly all of the current growth in mobile susbcriptions worldwide. For example, during 2008, mobile subscriptions in the Middle East grew by 47%. By several measures, Africa is beginning to emerge as the fastest growing market in the world. Additionally, in most regions, between 80% and 90% of subscriptions are prepaid. In some countries like UAE, total mobile subscription represents more than double the official population. This phenomenum is due to a significant population of foreign workers. Most of these workers do not have local bank accounts, and need to wire money home. As a result, there is significant demand for mobile money transfer solutions as mobile operators look to fill the demand gap by deploying technology similar to what RKN offers. In many emerging mobile markets, populations are far more likely to have a mobile subscription than a bank account. This condition is most acute where Redknee is having the most success; in Africa, the Caribbean, and Latin America where as high as 85% of the population remains unbanked.
Redknee reported financial results for Q2 2009 after markets closed yesterday, and conducted an analyst call at 8:30 this morning. Revenue for the quarter increased by 9% to $13.8 million versus $12.6 million for Q2 2008. The company reported EBITDA of $1.1 million for the quarter versus a loss of $0.6 million for Q2 2008, an increase of $1.7 million. Cash and equivalents increased to $20.3 million from $15.3 million for Q2 2008.
Since the beginning of calendar 2009, the Company has announced significant contracts with mobile operators in Africa, the Caribbean, and Latin America. Based on the conference call, investors should expect more contract announcements in these regions, along with others in the Middle East. Management has stated that it has a contract backlog of approximately $27.5 million, and that it anticipates recognizing slightly less than half of this revenue during Q3, which infers a revenue potential of approximately $13.2 million with gross margins of approximately $9.9 million. Cost containment should continue to reduce OpEx margin to around 70%, inferring an operating margin of approximately $0.6 million. Investors should be aware that typically Q3 performance is seasonally the weakest.
With $20.3 million in the bank, no debt, and consistent annualized growth in profitability, and improving margins, this is a stock to keep an eye on as it continues to benefit from worldwide trends in the mobile sector.
Currently, the estimated average revenue per ActiveMine deployment is approximately $400k. Management believes that 3D-P extensions could bring an additional 15% to the average total deployment value.
Strategically, the above ground distribution of 3D-P hardware becomes a lead sale to a more comprehensive mesh data network deployment for ACT.
There are likely to be no specific deals pending that are dependent on this relationship. More similar relationships should be announced over the coming months that are likely to help entrench ACT as a near defacto standard data network for mine operators in the US.
Based on the Q1 results reported by Cyberplex (CX-TSX) last night, investors should be heartened that the company has hit a significant inflection points and has progressed from a story with future potential, to one measured by earnings performance for investors. Sales for the quarter increased to $32.1 million, up 307% from sales reported for Q1, 2008. EBITDA was reported at $4.3 million, and net income came in at $4.1 million or $0.07 EPS for the quarter. By comparison, the company reported EPS of $0.00 for Q1, 2008, and $0.11 for Q4, 2009. As a reminder, typically, one-third of sales and earnings occur during the Q4 reporting period. Earnings margins, excluding foreign exchange fluctuations were reported at 12% versus 13% for Q4, 2008, while gross margins came in at 31%, down 1% from Q4, 2008. The margin fluctuation should be considered in-line with analysts expectations.
During the conference call, Management continued to stress that performance-based advertising is relatively new to the market and is at the early stages of adoption by marketers and advertising agencies. Campaign concentration has decreased for Q1, with the top ten campaigns representing 55% of revenues versus 67% during Q4, 2008. As more campaigns are adopted by more advertisers, investors should continue to see less campaign concentration over the coming quarters, which should strengthen the quality of revenue streams as they grow. Management reported that approximately 70% of Q1 campaigns were repeated from the previous quarter, which infers that clients are maintaining investments in CPA-based online marketing.
Net income for Q2 onward should be impacted by taxes, measured at approximately 30%. As well, seasonality should impact performance for both Q2 and Q3, where traditional dips in online activity occur, with Q4 generating 30% of sales and earnings for the year.
Based on the earnings preview from earlier this week, the Company exceeded expectations for this quarter in both sales and earnings. Clearly, the market has been anticipating a solid quarter, although performance may still have exceeded elevated expectations. Currently, the shareprice is trading at approximately 5.7x run-rate EBITDA and 7.5x fully taxed run-rate EPS for FY 2009. The P/E ratio ratio for the TSX Equity index is currently 15.6 with many issuers reporting earnings declines for Q1, 2009. With its impressive earnings growth, and apparently robust outlook, the stock appears to continue to be undervalued relative to the TSX based on a P/E comparison, despite its recent share price run. Adding to this, high growth earnings stocks typical trade higher than the index mean.
Investors may still be concerned about fragile revenue streams due to campaign and product category concentration. However, with new publishers, affiliates, and advertisers coming on, and a 21% sequential decline in reported concentration, this risk appears to be diminishing.
Finally, the Company has $4.7 million in cash and generated approximately $0.05 per fully diluted share of free cashflow for the quarter.
Investors should anticipate that performance exceeded most analysts elevated expectations for Q1 results.
Disclosure: I own shares of CX.
Sequentially from Q4, revenues were down approximately 3% from Q4, 2008. There is typically some seasonality in revenues, so the sequential decline is not unexpected.
The Company lost $1.1 million or $0.01 loss per share for Q1 2009 versus $0.9 net income, or $0.01 EPS during Q1, 2009.
Management still maintains revenue guidance of between $85 million and $95 million for FY 2009 with positive annual EBITDA. Guidance would suggest that management is anticipating significantly better quarterly performance for the remainder of 2009. Since revenue is over 90% recurring, the company has historically had pretty good visibility on future performance.
The company continues to provide margin concessions to its biggest clients (in particular Delta Airlines (DAL.NYSE)) in order to drive more transactions, and more revenue. As its clients continue to grind Points International on margins, investors should begin to wonder if the shift to the principal model has delivered the margin leverage that was originally expected.
The company has finally signed Continental Airlines as a client (Global Points Exchange). This is good news, although the potential for GPX continues to be speculative. Today the service is still in beta and there are 134 trades posted on the website, up by a dozen or so from earlier this year. The company does not publish results for this program, so the daily volume of trades is not known. Also, Management signalled that it was about to ramp investment into the points.com consumer portal. Transactions on the consumer site represent 11% of the total volume of reported total transactions for the quarter. There are approximately 2.1 million registered users, up 15% from Q1 2008. However, the website is not perceived by consumers to be a destination, and traffic levels have averaged in the 100k - 200k range per month for some time.
Investors may like the bullish outlook for the remainder of 2009, however there should continue to be some concerns regarding the 3 quarters of reported declining margins on the principal revenue. The aggressive investment focus on the consumer portal may concern some investors since that line of business has remained (over many quarters) a small contributor to total sales and profits.
What will the analysts think? Expectations for this company have declined significantly since the beginning of 2008. The margin performance should continue to be a concern to some, and the GPX story may begin to lose its lustre. As a result, today investors should expect mixed opinions from analysts that cover the story and it is unlikely that there would be upward adjustment to forecasts and targets.
Disclosure: I do not own shares of PTS or DAL.
- Sales and earnings should show significant growth over Q1 2008
- Sequentially, sales and earnings should be lower than the Q4 blowout quarter due to seasonality.
- Recent increases in share price may indicate that the market anticipates a solid quarter.
Q1 performance should reinforce for investors that, although Q4 may have been a blow-out, the overall trend in business performance still shows sustained and substantial progress in both sales growth and earnings on an annualized basis. There is also a possibility that Q1 may catch some residual Q4 momentum . The question for investors may be whether Q1 results could support a further run-up in the share price, or if the stock price bases at current levels. Since it reported Q4 results on March 19th, the stock has shot up by 244% to yesterday's close of $1.72. Although there appears to be little chance that CX could report disappointing results for the quarter, analyst expectations have probably also increased significantly after its remarkable Q4 performance. The reaction to Thursday's results should be interesting, and trading volume could be high on Friday.
From a fundamental (long) perspective, CX offers some of the most measureable online advertising programs in the market ,which tends to shorten the discover-decide-buy process for consumers. Shortened sales cycles and pay-for-performance pricing is novel for marketers, and also tends to make them very happy repeat customers. Only recently has the Company began to attract some A-list marketers with relatively large budgets, so there is potentially significant scaling potential. Additionally, the Company is gathering, analysing, and leveraging some pretty unique buying data that could enhance future performance. Essentially, the long-term potential appears to be solid.Dial 888-892-3255 for the conference call at 4:30 on May 7th.
Disclosure: I own shares of CX.
In its outlook, the Company provided forward guidance for sales of between $54.0 million and $58.0 million with earnings of between $7.0 million and $9.0 million, or $0.29 EPS and $0.36 EPS respectively. Guidance implies earnings growth of between 159% and 233% from FY2008 earnings of $2.8 million.
If quarterly patterns for the previous two years hold out for FY2009, then Company guidance with respect to earnings may be conservative. The implied run-rate on earnings for FY2009 is $11.6 million, or $0.48 EPS, based on Q1 results. For the past two years, Q1 earnings were the weakest and Q4 earnings were the strongest, representing approximately 30% of total reported annual earnings. Even with seasonal dips in sales that may occur in Q3, trends may suggest that there is a strong possibility that earnings would come in at the high end of guidance, or possibly exceed guidance.
With current market trends related to mobile data usage and the resulting associated complexities, the Company should see continued robust demand for its solutions from carriers worldwide. The Company may also benefit from improved market conditions during Q4, traditionally its strongest quarter, as the world economy begins to recover.
With $53.9 million of cash on its balance sheet, and free cash flow possibly in excess of $10 million, the Company could end the year with approximately $2.60 cash per share on its balance sheet if it does no acquisitions.
At the end of day yesterday, shares were trading at 13.75x the most conservative earnings guidance, and 10.7x the most aggressive guided earnings growth. Historically, similar earnings growth would result in multiples that could range between 20x and 30x, depending on earnings margins. Basically, there is a lot of room for the share price to increase.
With such a strong Q1 beat on estimates, and a typical seasonal performance weighting towards Q4, investors may see analysts adjust their forecasts upward for BWC and the stock price should continue on its upward trend.
Disclosure: I own shares of BWC.