Redknee (RKN.TO) positioned well to benefit from emerging mobile markets.

RKN.TO is a bit "under-the-radar" because it has only recently began trading on the TSX (October 21, 2008). It has good operating fundamentals with consistent earnings, and a little over $20 million in cash and equivalents with zero debt, although it retains an unused USD$10 million credit facility allocated for future acquisitions.

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.

The company has focused on improving its gross margins and expects to report between 73% and 75% gross margins for upcoming quarters, depending upon how many hardware deployments are required. In addition, it has worked to reduce its total operating expenses as a percentage of revenue. During Q2 2008, expenses were repored at 71% of revenue, while gross margins came in at 79% of sales. Management expects operating expenses to decline marginally over the next few quarters to somewhere in the high 60s percentage range.

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.

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