I have spoken to hundreds of Canadian entrepreneurs and investors in the tech sector over the past dozen years. A common lament among all stakeholders is that Canadians are good at R&D, but poor at commercialization.
Based on current thinking, this is a decidedly bad thing, becoming worse.
What actually sparked this blog post has been the frustration of seeing really good ideas suffer from persistent and chronic underfunding. The result of which is truncated or even abandoned commercialization of ideas that may have been major successes if funded and supported elsewhere. How many RIMs have been left behind because entrepreneurs could not attract appropriate growth capital? How many entrepreneurs have simply left the country? How many great technologies have been sold before maturity for minimal shareholder return? Exiting this recession, it is an increasingly popular notion that future wealth creation will be generated though innovation...bringing ideas to life. Not production. Not resources.
How are we doing as innovators, and is it even important?
Because wealth creation is increasingly correlated to the presence of innovation in local economies, it now has its own worldwide ranking called the Global Innovations Index (GII).
When the GII was first published in 2003, the Canadian economy ranked 9th in the world out of 82 countries. The 2009 publication ranks Canada 14th, with a projection to 15th before 2013. Canada is included in a cluster of "Second-tier Innovators". Top-ten or First-tier Innovators include the US (8th but dropping), and also Japan (1), South Korea, Singapore, Finland, Ireland and Sweden among others. The Global Innovation Index tends to favor smaller, highly urban countries with a large "creative class" of idea generators. Does this sound familiar? It should. Canada is over 80% urban with hub cities such as Vancouver, Toronto, and Montreal possessing "creative class" populations in excess of 30% of the total population. This ratio is among the highest in the world. And this does not include technology clusters such as Kitchener-Waterloo or Ottawa where the ratios are likely higher. Why are countries like Singapore, South Korea, China, and Finland racing up the charts while, despite the ingredients for success, we stagnate as Second-Tier Innovators?
It's not that policy makers at all levels of government are ignoring the issue. On the contrary. There are a myriad of tax incentives (e.g. IRAP, SR&ED), grants, loans, and direct applied science through the National Research Council, and a multitude of Provincial programs. Almost all of these initiatives are focused on Research & Development. For nearly two decades, policy makers have held true that R&D creates innovation. Many now believe this to be wrong. Although R&D contributes to the process, commercialization actually creates innovation. So how does the Canadian Government shift policies to facilitate innovation?
First. What is an innovation?
At least one of the following five:
1. A new good or a new quality of a good.
2. A new method of production.
3. Opening a new market.
4. A new source of supply.
5. New organization of an industry.
R&D on its own, in isolation, as it is currently funded cannot deliver ANY of those five outcomes. R&D is usually a task within the implementation period of an innovation process, which is defined as:
Conceptualization -> Implementation -> Marketing
Despite the myths, innovation usually does not sprout out of thin air. Consistent and persistent innovation requires an infrastructure or ecosystem.
Access to Knowledge -> Local Adaption -> Financial Incentives.
It is within the innovation infrastructure where policy makers may be able to make some tweaks in order to better support the "creative class" and to help facilitate the commercialization of ideas. The primary problem with the Canadian market is that capital is becoming less available for innovation.
Re-Incent Venture Capital: Both private institutional and Labour Sponsored Venture Capital Corporations (LSVCC) are available to entrepreneurs for commercialization and this has been the primary engine of innovation since the 1980s. However the VC sector is not working as well now as it has in the past because a smaller percentage of available funds are actually invested, and the pool itself is drying up. Relative to VCs elsewhere in the world, there is an unusually large overhang of uninvested capital in the Canadian sector because VCs here may be incented towards risk aversion. As well, rules regarding investment criteria and tax incentives have not been updated for 20 years, making LSVCCs unattractive to the retail investors that they were designed for, relative to recent investment innovations that are more liquid. Policy makers need to update tax rules to facilitate more VC activity, attract more capital, and support higher tax-adjusted returns relative to other newer investment instruments.
Better Enable Public Venture: As VC funding has declined since the tech bubble, more entrepreneurs have taken the public route to commercialization via the Toronto Venture Exchange. Currently, there are over 200 early stage technology companies listed on the TSXV that have become listed through Capital Pool Corporation (CPC) mergers. However, there are only a handful of Canadian institutions that regularly invest in venture technology companies, and that number has declined with liquidity. The single biggest adjustment that can be made in the public markets is to offer flow-through shares for venture technology stocks. Currently, investors can benefit directly from mineral exploration tax incentives with flow-through shares. Considering that mineral exploration and technical innovations carry similar risks, and innovation is a potentially greater wealth creator, a class of flow-through shares should be created for publicly-listed technology companies that can benefit from tax incentives.
Modernize Direct Tax Incentives: A research report in 2005 from Booz Allen Hamilton suggests that R&D spending does not necessarily result in more innovation or performance from by an individual company. In fact, when R&D is effective, it often only benefits gross margin. The key to performance is cross department collaboration and effective innovation processes in the context of a scalable business model. Without a business model and processes, R&D alone is ineffective. Right now government agencies continue to focus tax incentives on the least effective activity in the context of commercialization and performance. Modernizing tax incentives to better encompass commercialization, while reducing administrative burden may help to promote more effective innovation, and ultimately, wealth creation.
Here is a link to a op-ed article by Ron Freedman published by the Toronto Star. He argues that current federal R&D funding needs to be modernized with direct university-based research re-directed.
Knowledge Clustering: K-W, or the Golden Triangle is the best example of knowledge clustering related to computer engineering and the University of Waterloo (and more recently Wilfrid Laurier University). Home grown VCs like Waterloo Tech Ventures, and an active mentoring community through Communitech have also helped to spawn some of the most innovative and successful technology companies in Canada (RIM, Open Text, Descartes Systems, MKS among others). Communities can adjust local tax jurisdictions to help promote knowledge clusters in other industries such as measurement devices, and biotech.
Education: There is probably a bigger issue in the development of finance, business management, and organizational management capabilities focused on technology and innovation. A new generation of people need skills to help to pump out more valuable intellectual capital going forward. Again, policymakers may look at grants and loan incentives to help bring more capability online.
These options discussed are only but a few, and they may not be practical. There are probably many more ideas. It would be interesting to see what others think about this issue.
Disclosure: I own shares of DSG.
8/29/09
8/18/09
Zoompass is destined to succeed: So what is the potential fallout in the Canadian market?
This is a follow-up commentary to a previous post "Enstream: A Mobile Moneris or Dexit Revisited?" published on June 15, 2009. The article was an attempt to contextualize the beta launch of Zoompass within the current Canadian and international mobile billing and payments ecosystem. The fundamental question posed was "Does this venture have a chance to succeed, or is it doomed to fail like so many other attempts in the past?" And if it does succeed, what are the implications for the market?
Two months later, and after spending some time interviewing Enstream management, along with management from other companies within the Canadian mobile ecosystem, I will call an early verdict:
Zoompass is destined to succeed and here is why:
1. The carrier coalition (T.TO, BCE.TO, RCI.TO) funding the Enstream venture is more committed than ever after initial feedback. So far, it has refrained from the typical eye gouging that makes these types of ventures implode early. Most of its competition would come from chronically underfunded start-ups - so it has a definite capital advantage (and apparently patience).
2. The bench strength is deep. Most of the management team and the 35 or so developers iterating through the beta have been poached from companies like Verisign (VRSN.Q) (Mqube), which suggests deep experience in mobile SMS-based billing gateways, and mobile transactions.
3. There is pent-up demand. Canada is behind countries like Kenya in getting mobile micro-payments launched. In a study conducted by Gartner, Inc, it forecasts that 190 million people worldwide will be making mobile payment by 2012, and that the current annual growth rate is 70%. To put this into perspective, as of 2009, there are 250 million smart phones in the market. Recent North American surveys conclude that between 26% and 32% of mobile users would immediately adopt mobile payments if they were offered. These surveys, regardless of variances in methodologies, appear to point to mass adoption potential. The tweetsphere appears to indicate some consumer impatience for access to such services.
4. Target market is trained and willing. Zoompass is targeted at the 18 - 30 age cohort. There is almost 100% intersection among this group of previous experience downloading paid mobile content and applications thanks to iTunes, PayPal, and a myriad of on-portal and off-portal mobile content malls. There is little education required, and mobile micro-payments are a simple extension of what they are already accustomed to doing.
5. A vast majority of the capital risk is willingly borne by the consumer. Unlike previous failed electronic payment solutions, there is little financial risk at the endpoint assumed by the provider or merchants. Consumers have already invested in the wallet for other reasons. As a result, Zoompass can be tweaked relatively efficiently, with limited capital consequence, as it gets feedback from consumers. With limited capital risk, there is more flexibility in the design of potential offerings. More importantly, there is limited scaling friction caused by capital constraints. In this regard Zoompass is more like Twitter, less like Interac.
6. Zoompass is being developed collaboratively with its target market. Unlike many previous attempts at new electronic payment systems, Enstream is fully engaged in a collaborative design process with its potential consumers. In the end, this approach is most likely to result in success because it is not pushed into the market. The consumer is pulling it. Enstream has ripped a page from the US-based handbook of "how to launch a successful digital application". It is being very un-Canadian in its aggressive interaction via social media, ensuring better buy-in from a highly educated, elusive, and often cynical target market.
Where can this go?
Ultimately, Zoompass has its sights set on about 20 million subscribers with a factory installed application that includes active RFID and NFC components. The carriers have a little pull with handset manufacturers, so the ultimate factory install objective is obtainable. As well, Zoompass is not interested just in the cash that resides in your wallet, it is interested in the whole wallet. Think about what is in your wallet right now: Credit cards galore, various gift cards, a coffee card, loyalty cards, a phone card, your license, your health card, maybe a transit pass.
What does this mean to the mobile ecosystem and to Canadian consumers?
First, the Canadian consumer...
1. A potential carrier oligopoly in mobile payments is a risk to consumers. Already, Canadian mobile subscribers pay some of the highest mobile bills in the world due to market distortions caused by the CRTC and to a related lack of competitive choice. The Enstream Joint Venture represents a potential to perpetuate oligopoly risk. The extent of the oligopoly depends upon how successful Enstream is in co-opting the financial services industry into its offerings.
2. A potential meta-oligopoly only perpetuates risk to consumers. Canadian financial institutions could band together as in the past (e.g. Interac) in order to offer an alternative mobile payments solution. Already there are whispers of Big 5 summit meetings on the topic of a competitive offering. Before consumers begin to cheer, this only represents two choices operated by a total of 8 very large institutions. It doesn't necessarily create a fully baked competitive environment that gives consumers adequate choice. As an aside, Canadian financial institutions are simply not wired to build out consumer services iteratively like Enstream is doing, so the chances of success are more limited, which means that consumers could be more likely than not saddled with a mere oligopoly.
3. But what about the new broadband spectrum wireless carriers? The future entry of new carriers such as Globalive (Wind Mobile), Publix Mobile, and DAVE Mobile could present a viable alternative in mobile payments for consumers by creating its own JV/coalition. Possibly. However, these folks have a lot on their plates just to get services launched by 2010. In the meantime, Zoompass could deliver to the Enstream JV an insurmountable lead before new players could respond. Independent developers are mostly ignored by capital markets, so there is not likely to be any effectively funded, meaningful competitive "white knights" appearing out of the woodwork any time soon.
4. RIM to the rescue? New Nortel (RIM) may have a couple of things cooking but probably at an earlier stage of development than Enstream. It could leverage its balance sheet to acquire (similar to Nokia buying Obopay) but it has been mostly dabbling. As stated in June, RIM is likely to try to leverage its new PayPal relationship before it hunts for another Obopay. Even still, what if you are an iPhone user?
In the not-to-distant future, it is feasible for someone at the Canadian Competition Bureau to have another file dropped on their desk. Ironically, the near certain success of Zoompass may create some market uncertainty for investors as consumer protection raises the specter of government intervention.
Now the Canadian mobile ecosystem...
1. There are probably some small exploitable market niches around the edges of the possible Zoompass juggernaut. Enstream is not targeting what I would coin the "Money Mart Cohort". These are people with limited traditional banking access, and no credit. A vast majority are the working poor and recent immigrants who tend to be "cash-oriented". Depending on sources, this group represents between 10% and 12% of the population depending upon the year. For over a decade now, these people have already been engaged in card-based micro-payments by buying billions of long-distance minutes and pre-paid mobile time. The carriers have been making hay with this group for a while. An independent mobile payments offering could sprout up for these people. However, the size of the market limits the amount of potential competitors in this niche. And there will be a lot of microcaps scrapping over this business. Even with considerable consolidation, there are likely to be a couple of winners and a lot of losers in this market.
Other interesting potential mobile payment market niches could include payroll, government stipend, and international remittance. The common thread among these solutions, is that they are not necessarily micro-payments, and they do not have person-2-person elements to them.
2. Start-ups could take their cookies and simply leave the room. Enstream would certainly be happy. Micro-payments are a worldwide phenomenon with much larger opportunities outside of Canada. Enstream management states that it is (for now) a Canadian-only venture. Vendors with current international footprint may choose to apply their limited capital resources to exploit those markets more aggressively. Investor may also see Canadian companies with good IP and weak balance sheets snapped up by foreign interests over the next few quarters. This is a good thing for shareholder of such companies.
3. Complimentary and indirect competitors may find opportunities to hitch their fortunes to Zoompass. This could be a good way for a diverse group of vendors to maximize shareholder value. Enstream has been fairly vocal that it would like Zoompass to be an open platform for other developers and that it has (as alluded to earlier in this post) designs on getting a piece of the entire wallet. This is the exciting stuff for the mobile ecosystem based on feedback that I am receiving. However, I am skeptical that it will truly be an open development platform. Is Apple's Safari really an open platform? Enstream will pick its partners regardless of its current public postering. Notwithstanding, opportunities abound for partnerships in gift and re-loadable cards, loyalty management, EMR/health services, government services, RFID, POS, and NFC. There are potential technical and infrastructure partnerships related to billing systems, and provisioning along with cloud services related to transaction processing, ecommerce, identity and security. Although most of these solutions are likely to be provided by large cap vendors, there is likely room for Canadian small-cap, micro-caps and start-ups to participate (and a spot for investors to potentially benefit from considerable gains). As the solution matures, there are likely to be as of yet unimagined consumer applications that can be developed for commercial benefit.
In summary
Zoompass is here to stay. There is demand for mobile payments, success elsewhere in the world is well documented, and Zoompass appears to be destined for a successful launch in 2010. It may experience some bumps along the way, but it will likely be a market force within the next 24 months.
With its success will come uncertainty related to consumer choice, even if there is a direct competitive response from the financial services industry. Will there be a consumer outcry that compels government regulators to force the Enstream JV to open its platform to future competitors? If so, the ultimate benefit to shareholders of the main JV participants could be muted.
Investors should expect a lot of angst among the myriad of smaller under-capitalized players that have been developing solutions in this space so far. How does a management team respond to this competitive cluster bomb? Those that underestimate or ignore the potential for Zoompass do so at their peril. Shareholders should expect, and even encourage, increased M&A activity and strategic recalibration. Some companies may even attract new investment.
The impending Zoompass launch, and its likely success, should make thing very interesting for some time in the Canadian mobile market. Some investors could make some nice returns, others not so much. It will all depend on the reaction of management teams and subsequent execution. As always.
Please feel free to comment.
Disclosure: I do not own shares of any of the companies mentioned in this post.
Two months later, and after spending some time interviewing Enstream management, along with management from other companies within the Canadian mobile ecosystem, I will call an early verdict:
Zoompass is destined to succeed and here is why:
1. The carrier coalition (T.TO, BCE.TO, RCI.TO) funding the Enstream venture is more committed than ever after initial feedback. So far, it has refrained from the typical eye gouging that makes these types of ventures implode early. Most of its competition would come from chronically underfunded start-ups - so it has a definite capital advantage (and apparently patience).
2. The bench strength is deep. Most of the management team and the 35 or so developers iterating through the beta have been poached from companies like Verisign (VRSN.Q) (Mqube), which suggests deep experience in mobile SMS-based billing gateways, and mobile transactions.
3. There is pent-up demand. Canada is behind countries like Kenya in getting mobile micro-payments launched. In a study conducted by Gartner, Inc, it forecasts that 190 million people worldwide will be making mobile payment by 2012, and that the current annual growth rate is 70%. To put this into perspective, as of 2009, there are 250 million smart phones in the market. Recent North American surveys conclude that between 26% and 32% of mobile users would immediately adopt mobile payments if they were offered. These surveys, regardless of variances in methodologies, appear to point to mass adoption potential. The tweetsphere appears to indicate some consumer impatience for access to such services.
4. Target market is trained and willing. Zoompass is targeted at the 18 - 30 age cohort. There is almost 100% intersection among this group of previous experience downloading paid mobile content and applications thanks to iTunes, PayPal, and a myriad of on-portal and off-portal mobile content malls. There is little education required, and mobile micro-payments are a simple extension of what they are already accustomed to doing.
5. A vast majority of the capital risk is willingly borne by the consumer. Unlike previous failed electronic payment solutions, there is little financial risk at the endpoint assumed by the provider or merchants. Consumers have already invested in the wallet for other reasons. As a result, Zoompass can be tweaked relatively efficiently, with limited capital consequence, as it gets feedback from consumers. With limited capital risk, there is more flexibility in the design of potential offerings. More importantly, there is limited scaling friction caused by capital constraints. In this regard Zoompass is more like Twitter, less like Interac.
6. Zoompass is being developed collaboratively with its target market. Unlike many previous attempts at new electronic payment systems, Enstream is fully engaged in a collaborative design process with its potential consumers. In the end, this approach is most likely to result in success because it is not pushed into the market. The consumer is pulling it. Enstream has ripped a page from the US-based handbook of "how to launch a successful digital application". It is being very un-Canadian in its aggressive interaction via social media, ensuring better buy-in from a highly educated, elusive, and often cynical target market.
Where can this go?
Ultimately, Zoompass has its sights set on about 20 million subscribers with a factory installed application that includes active RFID and NFC components. The carriers have a little pull with handset manufacturers, so the ultimate factory install objective is obtainable. As well, Zoompass is not interested just in the cash that resides in your wallet, it is interested in the whole wallet. Think about what is in your wallet right now: Credit cards galore, various gift cards, a coffee card, loyalty cards, a phone card, your license, your health card, maybe a transit pass.
What does this mean to the mobile ecosystem and to Canadian consumers?
First, the Canadian consumer...
1. A potential carrier oligopoly in mobile payments is a risk to consumers. Already, Canadian mobile subscribers pay some of the highest mobile bills in the world due to market distortions caused by the CRTC and to a related lack of competitive choice. The Enstream Joint Venture represents a potential to perpetuate oligopoly risk. The extent of the oligopoly depends upon how successful Enstream is in co-opting the financial services industry into its offerings.
2. A potential meta-oligopoly only perpetuates risk to consumers. Canadian financial institutions could band together as in the past (e.g. Interac) in order to offer an alternative mobile payments solution. Already there are whispers of Big 5 summit meetings on the topic of a competitive offering. Before consumers begin to cheer, this only represents two choices operated by a total of 8 very large institutions. It doesn't necessarily create a fully baked competitive environment that gives consumers adequate choice. As an aside, Canadian financial institutions are simply not wired to build out consumer services iteratively like Enstream is doing, so the chances of success are more limited, which means that consumers could be more likely than not saddled with a mere oligopoly.
3. But what about the new broadband spectrum wireless carriers? The future entry of new carriers such as Globalive (Wind Mobile), Publix Mobile, and DAVE Mobile could present a viable alternative in mobile payments for consumers by creating its own JV/coalition. Possibly. However, these folks have a lot on their plates just to get services launched by 2010. In the meantime, Zoompass could deliver to the Enstream JV an insurmountable lead before new players could respond. Independent developers are mostly ignored by capital markets, so there is not likely to be any effectively funded, meaningful competitive "white knights" appearing out of the woodwork any time soon.
4. RIM to the rescue? New Nortel (RIM) may have a couple of things cooking but probably at an earlier stage of development than Enstream. It could leverage its balance sheet to acquire (similar to Nokia buying Obopay) but it has been mostly dabbling. As stated in June, RIM is likely to try to leverage its new PayPal relationship before it hunts for another Obopay. Even still, what if you are an iPhone user?
In the not-to-distant future, it is feasible for someone at the Canadian Competition Bureau to have another file dropped on their desk. Ironically, the near certain success of Zoompass may create some market uncertainty for investors as consumer protection raises the specter of government intervention.
Now the Canadian mobile ecosystem...
1. There are probably some small exploitable market niches around the edges of the possible Zoompass juggernaut. Enstream is not targeting what I would coin the "Money Mart Cohort". These are people with limited traditional banking access, and no credit. A vast majority are the working poor and recent immigrants who tend to be "cash-oriented". Depending on sources, this group represents between 10% and 12% of the population depending upon the year. For over a decade now, these people have already been engaged in card-based micro-payments by buying billions of long-distance minutes and pre-paid mobile time. The carriers have been making hay with this group for a while. An independent mobile payments offering could sprout up for these people. However, the size of the market limits the amount of potential competitors in this niche. And there will be a lot of microcaps scrapping over this business. Even with considerable consolidation, there are likely to be a couple of winners and a lot of losers in this market.
Other interesting potential mobile payment market niches could include payroll, government stipend, and international remittance. The common thread among these solutions, is that they are not necessarily micro-payments, and they do not have person-2-person elements to them.
2. Start-ups could take their cookies and simply leave the room. Enstream would certainly be happy. Micro-payments are a worldwide phenomenon with much larger opportunities outside of Canada. Enstream management states that it is (for now) a Canadian-only venture. Vendors with current international footprint may choose to apply their limited capital resources to exploit those markets more aggressively. Investor may also see Canadian companies with good IP and weak balance sheets snapped up by foreign interests over the next few quarters. This is a good thing for shareholder of such companies.
3. Complimentary and indirect competitors may find opportunities to hitch their fortunes to Zoompass. This could be a good way for a diverse group of vendors to maximize shareholder value. Enstream has been fairly vocal that it would like Zoompass to be an open platform for other developers and that it has (as alluded to earlier in this post) designs on getting a piece of the entire wallet. This is the exciting stuff for the mobile ecosystem based on feedback that I am receiving. However, I am skeptical that it will truly be an open development platform. Is Apple's Safari really an open platform? Enstream will pick its partners regardless of its current public postering. Notwithstanding, opportunities abound for partnerships in gift and re-loadable cards, loyalty management, EMR/health services, government services, RFID, POS, and NFC. There are potential technical and infrastructure partnerships related to billing systems, and provisioning along with cloud services related to transaction processing, ecommerce, identity and security. Although most of these solutions are likely to be provided by large cap vendors, there is likely room for Canadian small-cap, micro-caps and start-ups to participate (and a spot for investors to potentially benefit from considerable gains). As the solution matures, there are likely to be as of yet unimagined consumer applications that can be developed for commercial benefit.
In summary
Zoompass is here to stay. There is demand for mobile payments, success elsewhere in the world is well documented, and Zoompass appears to be destined for a successful launch in 2010. It may experience some bumps along the way, but it will likely be a market force within the next 24 months.
With its success will come uncertainty related to consumer choice, even if there is a direct competitive response from the financial services industry. Will there be a consumer outcry that compels government regulators to force the Enstream JV to open its platform to future competitors? If so, the ultimate benefit to shareholders of the main JV participants could be muted.
Investors should expect a lot of angst among the myriad of smaller under-capitalized players that have been developing solutions in this space so far. How does a management team respond to this competitive cluster bomb? Those that underestimate or ignore the potential for Zoompass do so at their peril. Shareholders should expect, and even encourage, increased M&A activity and strategic recalibration. Some companies may even attract new investment.
The impending Zoompass launch, and its likely success, should make thing very interesting for some time in the Canadian mobile market. Some investors could make some nice returns, others not so much. It will all depend on the reaction of management teams and subsequent execution. As always.
Please feel free to comment.
Disclosure: I do not own shares of any of the companies mentioned in this post.
8/14/09
Nstein positioned to thrive in H2 2009?
Yesterday EIN reported revenue of $6.2 million, up slightly from $6.0 million reported for the previous year Q2.
More importantly, Management has re-adjusted its cost structure, reducing overall expenses by 19.1% compared to Q2, 2008. For H1, 2009, the total cost structure has been reduced by 16.3% compared to H1, 2008, while total revenues for the same period have remained relatively flat, with a 3% YoY decline. Cost cutting measures have resulted in positive EBITDA of $0.34m for Q2, 2009 versus a $1.12m loss for the previous quarter, representing a $1.46m YoY improvement. Most of the expense reduction has come in the sales and marketing area.
Investors would typically view cost cutting in sales and marketing as a yellow flag for future sales growth. However, management believes that it has a robust pipeline for H2, 2009 with prospects for another Q4 sales record (for the past 3 years, Q4 has delivered sales and earnings records). With a honed down marketing budget, this is a testament to the quality of Nstein's solutions. According to Management, nearly all of the current pipeline is a direct result of referrals from its current client base. Essentially, Nstein has gone viral among at the "C-level" in its market niche. Investors should view this condition as positive.
Here is a great example of an innovative use of the Nstein platform from the Financial Times Group: Newssift
A robust pipeline does not represent robust sales, it needs to be converted. Macro-economic conditions appear to be aligning to Nstein's benefit. Some of the pipeline is pent-up demand from earlier in 2009, when capital budgets were frozen as the world economy cratered. Feedback from the market suggests more confidence in the economy, and some urgency among major news/information publishers to maximize digital revenues. Capital budgets are un-thawing and digital revenue is a priority. As the economy begins to recover from the world recession, publishers almost universally believe that the print-based advertising model is irreversibly impaired. This belief should benefit EIN in Q4, with some carry-over to Q1 2010 and beyond.
Among the public companies that I follow, Nstein has been one of the most "at risk" in relationship to the world economic recession because its client base was highly sensitive to the downturn, and dependent upon capital budgets. The company entered 2008 with approximately $6.5 million in cash, and appears to be exiting the recession with about $6.0 million in cash. Investors may take comfort that the Company has successfully navigated the recession, and has the resources to continue thrive even if the world is experiencing a false recovery.
To be profitable on a NI basis, the company probably needs to generate about $26 million in sales for the year. It will be close. However, the outlook for 2010 could infer more profitability.
Disclosure: I do not own shares of EIN.
More importantly, Management has re-adjusted its cost structure, reducing overall expenses by 19.1% compared to Q2, 2008. For H1, 2009, the total cost structure has been reduced by 16.3% compared to H1, 2008, while total revenues for the same period have remained relatively flat, with a 3% YoY decline. Cost cutting measures have resulted in positive EBITDA of $0.34m for Q2, 2009 versus a $1.12m loss for the previous quarter, representing a $1.46m YoY improvement. Most of the expense reduction has come in the sales and marketing area.
Investors would typically view cost cutting in sales and marketing as a yellow flag for future sales growth. However, management believes that it has a robust pipeline for H2, 2009 with prospects for another Q4 sales record (for the past 3 years, Q4 has delivered sales and earnings records). With a honed down marketing budget, this is a testament to the quality of Nstein's solutions. According to Management, nearly all of the current pipeline is a direct result of referrals from its current client base. Essentially, Nstein has gone viral among at the "C-level" in its market niche. Investors should view this condition as positive.
Here is a great example of an innovative use of the Nstein platform from the Financial Times Group: Newssift
A robust pipeline does not represent robust sales, it needs to be converted. Macro-economic conditions appear to be aligning to Nstein's benefit. Some of the pipeline is pent-up demand from earlier in 2009, when capital budgets were frozen as the world economy cratered. Feedback from the market suggests more confidence in the economy, and some urgency among major news/information publishers to maximize digital revenues. Capital budgets are un-thawing and digital revenue is a priority. As the economy begins to recover from the world recession, publishers almost universally believe that the print-based advertising model is irreversibly impaired. This belief should benefit EIN in Q4, with some carry-over to Q1 2010 and beyond.
Among the public companies that I follow, Nstein has been one of the most "at risk" in relationship to the world economic recession because its client base was highly sensitive to the downturn, and dependent upon capital budgets. The company entered 2008 with approximately $6.5 million in cash, and appears to be exiting the recession with about $6.0 million in cash. Investors may take comfort that the Company has successfully navigated the recession, and has the resources to continue thrive even if the world is experiencing a false recovery.
To be profitable on a NI basis, the company probably needs to generate about $26 million in sales for the year. It will be close. However, the outlook for 2010 could infer more profitability.
Disclosure: I do not own shares of EIN.
8/13/09
Delta Airlines deals a blow to Points International - guidance reduced.
Yesterday, Points International reported Q2, 2009 results. Sales came in at $21.3 million, a 23% increase over the previous quarter sales results reported at $17.3 million.
The Company reported an EBITDA loss of $0.4 million or (0.00) loss per share, versus positive EBITDA of $0.5 million or $0.01 EPS, in the previous year quarter. Sequentially, there was a slight EBITDA performance improvement from a $0.6 million loss reported for Q1, 2009.
The real news is that the Company disclosed that Delta Airlines (DAL) is "recasting" its relationship with PTS. During the conference call, this disclosure was better clarified. Delta is leveraging the Northwest merger to "insource" key point management services on Delta.com that PTS currently offers. Management admitted that this could represent up to 60% of current revenue, and that this would take effect as of October 1, 2009. As a result, the Company has reduced full year revenue guidance by $15 million to between $70 million and $80 million.
Not only did PTS lose Delta Airlines, but also through the merger, Northwest Airlines. This bad news offset the good news during the quarter, which was the signing of KLM-Air France.
Right now, Point International appears to be struggling. It is reducing its headcount by 20%, it is redeploying a new platform, redesigning its consumer websites (yet again), and it is grasping at social networking product development, among a myriad of activities announced during the conference call. Notwithstanding all of this activity, and even prior to the Delta bombshell, the company has been going backwards on profitability for the past 4 quarters, despite the promises made at the end of 2007 regarding improved margins and earnings leverage from the principle model. It never materialized.
Although losing most of the Delta revenue should improve gross margins, there is a lot of work to do to rescale the company and get to profitability. Analysts are likely to be concerned and may be losing patience, this sentiment should result in target reductions and changes in recommendations, which are likely to have a negative impact on the share price.
Disclosure: I do not own PTS or DAL shares.
The Company reported an EBITDA loss of $0.4 million or (0.00) loss per share, versus positive EBITDA of $0.5 million or $0.01 EPS, in the previous year quarter. Sequentially, there was a slight EBITDA performance improvement from a $0.6 million loss reported for Q1, 2009.
The real news is that the Company disclosed that Delta Airlines (DAL) is "recasting" its relationship with PTS. During the conference call, this disclosure was better clarified. Delta is leveraging the Northwest merger to "insource" key point management services on Delta.com that PTS currently offers. Management admitted that this could represent up to 60% of current revenue, and that this would take effect as of October 1, 2009. As a result, the Company has reduced full year revenue guidance by $15 million to between $70 million and $80 million.
Not only did PTS lose Delta Airlines, but also through the merger, Northwest Airlines. This bad news offset the good news during the quarter, which was the signing of KLM-Air France.
Right now, Point International appears to be struggling. It is reducing its headcount by 20%, it is redeploying a new platform, redesigning its consumer websites (yet again), and it is grasping at social networking product development, among a myriad of activities announced during the conference call. Notwithstanding all of this activity, and even prior to the Delta bombshell, the company has been going backwards on profitability for the past 4 quarters, despite the promises made at the end of 2007 regarding improved margins and earnings leverage from the principle model. It never materialized.
Although losing most of the Delta revenue should improve gross margins, there is a lot of work to do to rescale the company and get to profitability. Analysts are likely to be concerned and may be losing patience, this sentiment should result in target reductions and changes in recommendations, which are likely to have a negative impact on the share price.
Disclosure: I do not own PTS or DAL shares.
8/6/09
CX Q2 results: Did it beat consensus?
Well, kinda mostly.
Cyberplex reported $26.0 in revenue for the quarter, a 172% improvement over Q2, 2009, and a 18.8% sequential decline from the $32 million reported for Q1, 2009. Due to historical seasonality in performance, the consensus forecast implied a 29.3% sequential decline, or $22.6 million. So, CX beat this estimate.(and the Google correlation seems to hold)
EBITDA was reported at $2.5 million or $0.03 per fully diluted share, ahead of $2.2 million consensus forecast, implying a 10% margin on revenue. CX beat this estimate.
Management stated during the investor conference call that margins were inline with expectations, and that EBITDA margins going forward should be maintained at around the 10% level for the next few quarters.
Net Income was reported at $1.0 million or $0.01 EPS, versus $0.02 EPS consensus estimate. This was a miss.
Foreign currency translation losses were high for the quarter at $1.3 million or $0.02 per share due to the surging loonie versus the U.S. dollar. During the conference call, management admitted that currency hedging strategies for the quarter did not work. For Q3, the company has hedged currency translation for the month of July and plans to continue to implement more aggressive "layered" hedging strategies for currency going forward, which should benefit earnings for Q3 and Q4.
Notwithstanding the FX-driven EPS miss, according to management, the company generated $3.4 million in free cashflow, or $0.05 per fully diluted share for the second quarter.
Gross Margins were reported at 30% for the quarter, a 13% decline from 34% reported during Q2, 2008, and a small sequential decline from 31% reported for Q1, 2009. Management is targeting 30% GM +/- 2% going forward and Q2 GM was in range. Gross Margins were inline with expectations. However, Gross Margin is a measurement that analysts need to monitor for further erosion going forward. Increasing competition could result in price erosion. Executionally, the company could offset pricing pressure through new categories (eg. social networking platforms), and both leveraging and building out its analytical capabilities to provide advertisers and publishers more value-added services. As well, management hinted at the possibility of increasing the scale of its own ad inventory, thus reducing its reliance on affiliates and third-party publishers.
As for H2 outlook, to reflect historical patterns, revenue should be forecast by analysts to decline sequentially again in Q3 from Q2, with a surge in Q4. Upside performance surprises could come in the form of deals with top 50 publishers, or more likely, significant national and multi-national advertisers. As well, the Company continues to expand its sales force with digital ad sales specialists (there is probably quite a bit of talent hanging around after all of the recent media cuts). More sales horsepower should increase revenue momentum for Q4 and Q1 2010, although analysts should be watching operating margins closely over the next few quarters to measure sales effectiveness.
Fundamentally, this story remains intact for H2 2009 as one of the more intriguing success stories during this recession. It is unlikely that we will see another major "gap up" in H2 performance this year like we did for Q4 2008. However, with a solid balance sheet, an improving world economy, a bullish outlook by management, and increasing interest in CPA advertising, H2 looks to be very solid. Analysts are likely to overlook the FX issues for now, and they should be pleased that the company beat forecasts for sales and EBITDA. Analysts are likely to scrutinize margin risk in future quarters.
With respect to potential acquisitions, the Burst Media opportunity is probably over for now. However, there are a lot of potentially accretive substitute opportunities around.
Disclosure: I own CX.
Cyberplex reported $26.0 in revenue for the quarter, a 172% improvement over Q2, 2009, and a 18.8% sequential decline from the $32 million reported for Q1, 2009. Due to historical seasonality in performance, the consensus forecast implied a 29.3% sequential decline, or $22.6 million. So, CX beat this estimate.(and the Google correlation seems to hold)
EBITDA was reported at $2.5 million or $0.03 per fully diluted share, ahead of $2.2 million consensus forecast, implying a 10% margin on revenue. CX beat this estimate.
Management stated during the investor conference call that margins were inline with expectations, and that EBITDA margins going forward should be maintained at around the 10% level for the next few quarters.
Net Income was reported at $1.0 million or $0.01 EPS, versus $0.02 EPS consensus estimate. This was a miss.
Foreign currency translation losses were high for the quarter at $1.3 million or $0.02 per share due to the surging loonie versus the U.S. dollar. During the conference call, management admitted that currency hedging strategies for the quarter did not work. For Q3, the company has hedged currency translation for the month of July and plans to continue to implement more aggressive "layered" hedging strategies for currency going forward, which should benefit earnings for Q3 and Q4.
Notwithstanding the FX-driven EPS miss, according to management, the company generated $3.4 million in free cashflow, or $0.05 per fully diluted share for the second quarter.
Gross Margins were reported at 30% for the quarter, a 13% decline from 34% reported during Q2, 2008, and a small sequential decline from 31% reported for Q1, 2009. Management is targeting 30% GM +/- 2% going forward and Q2 GM was in range. Gross Margins were inline with expectations. However, Gross Margin is a measurement that analysts need to monitor for further erosion going forward. Increasing competition could result in price erosion. Executionally, the company could offset pricing pressure through new categories (eg. social networking platforms), and both leveraging and building out its analytical capabilities to provide advertisers and publishers more value-added services. As well, management hinted at the possibility of increasing the scale of its own ad inventory, thus reducing its reliance on affiliates and third-party publishers.
As for H2 outlook, to reflect historical patterns, revenue should be forecast by analysts to decline sequentially again in Q3 from Q2, with a surge in Q4. Upside performance surprises could come in the form of deals with top 50 publishers, or more likely, significant national and multi-national advertisers. As well, the Company continues to expand its sales force with digital ad sales specialists (there is probably quite a bit of talent hanging around after all of the recent media cuts). More sales horsepower should increase revenue momentum for Q4 and Q1 2010, although analysts should be watching operating margins closely over the next few quarters to measure sales effectiveness.
Fundamentally, this story remains intact for H2 2009 as one of the more intriguing success stories during this recession. It is unlikely that we will see another major "gap up" in H2 performance this year like we did for Q4 2008. However, with a solid balance sheet, an improving world economy, a bullish outlook by management, and increasing interest in CPA advertising, H2 looks to be very solid. Analysts are likely to overlook the FX issues for now, and they should be pleased that the company beat forecasts for sales and EBITDA. Analysts are likely to scrutinize margin risk in future quarters.
With respect to potential acquisitions, the Burst Media opportunity is probably over for now. However, there are a lot of potentially accretive substitute opportunities around.
Disclosure: I own CX.
Redknee (RKN.TO) Strong Q3 - Outlook Encouraging
Tweet Last Night: As expected $TSE:RKN reported a strong quarter - 21% growth, 23% GM growth, 17.2% EBITDA margin, $0.01 EPS
Redknee reported
Management has hinted at future tuckunder acquisitions both in important local international markets, and in triple play OSS. It has stated that it would like to normalize cash on hand at between $17 and $20 million. Currently, the Company has $22.4 million, so there is budget for tuckunder acquisitions available.
The company continues to predict continued profitable growth into 2010 and 2011 despite continued currency risk related to the value of the Canadian dollar. Currency volatility continues to be Redknee's largest risk, and it may result in slower deployments as international clients attempt to manage costs related to currency fluctuations.
Earning for the first 9 months of 2009 are reported at $0.06 EPS
Fundamentally, the stock is trading in the 10x EV/EBITDA range on a conservative FYE estimate. There is probably room for this stock to continue to ascend on a comparative basis. Notwithstanding the general over valuation of the current equity market, RKN and its peers such as BWC are profitable with international presence in high growth market sectors and strong balance sheets. A good spot to be for stock pickers.
Disclosure: own BWC, do not own RKN.
Redknee reported
- $14.5 million in sales for the quarter, up 21% from $11.9 million in previous quarter
- Gross Margins of 79%, up 23% from 64% in previous quarter.
- EBITDA of $2.5 million versus an EBITDA loss of $2.5 million in previous quarter
- Earnings of $0.8 million or $0.01 EPS versus a loss of $3.5 million or a $0.06 loss per share.
- Income from operations impacted by $1.1 million in FX loss for this quarter due to CAD$ strength.
- Current backlog is $28.3 million with 30% or approximately $8.5 million to be recognized in Q4, 2009.
- It expects Gross Margins to normalize to between 73% and 75%
- Recurring revenue as a percentage of total has increased from 33% to 38% due mostly to more maintenance renewals.
- Breakeven revenue benchmark has declines from $58 m annualized to $51 m annualized over the past 6 quarters.
- DSO has declined from 81 days to 75 days.
- SG&A expenses as a percentage of revenue should decline as management leverages headcount. Expect EBITDA margins to increase from 17.2% over the next few quarters.
- It plans to continue international expansion with Tier 1 market.
- Begin focusing on Tier 2 and Tier 3 players in North America and Europe.
- Expand into broadband triple play OSS.
Management has hinted at future tuckunder acquisitions both in important local international markets, and in triple play OSS. It has stated that it would like to normalize cash on hand at between $17 and $20 million. Currently, the Company has $22.4 million, so there is budget for tuckunder acquisitions available.
The company continues to predict continued profitable growth into 2010 and 2011 despite continued currency risk related to the value of the Canadian dollar. Currency volatility continues to be Redknee's largest risk, and it may result in slower deployments as international clients attempt to manage costs related to currency fluctuations.
Earning for the first 9 months of 2009 are reported at $0.06 EPS
Fundamentally, the stock is trading in the 10x EV/EBITDA range on a conservative FYE estimate. There is probably room for this stock to continue to ascend on a comparative basis. Notwithstanding the general over valuation of the current equity market, RKN and its peers such as BWC are profitable with international presence in high growth market sectors and strong balance sheets. A good spot to be for stock pickers.
Disclosure: own BWC, do not own RKN.
8/4/09
CX Performance Preview: Could it beat consensus?
Cyberplex (CX.TO) reports Q2 earnings on August 6, 2009 after close of the market. In conjunction with the release, Cyberplex will host a conference call on Thursday, August 6, 2009 at 4:30 p.m. EST to discuss the financial results.
Call details:
During the Q1 conference call, management confirmed that there is inherent seasonality in performance. Typically, both Q2 and Q3 results decline sequentially from Q1, and then improve again for Q4. Most analysts are likely to reflect this seasonality in their forecasts for this reporting period, especially after Q1 results came in much stronger than consensus.
However, there is better than 50% probability that CX could exceed consensus analyst forecasts for the following reasons:
Are there downside risks? Yes.
Notwithstanding the identified risks, the generally positive market conditions for performanced-based online advertising (as reflected through Google results), and the recent injection of capital could point to better than forecasted performance by Cyberplex for the reporting period. With an improving economy and new capital, the outlook for Cyberplex is likely to also improve.
Disclosure: I own shares of CX, I do not own shares of GOOG
Call details:
Participant Dial-in Numbers:There is greater likelihood than not that Cyberplex could beat consensus forecasts.
U.S. Toll Free: 1-877-737-1669
Canadian Toll Free: 1-800-501-6064
International Toll: 302-709-8008
Verbal Passcode (to be given to the operator): VR63282
During the Q1 conference call, management confirmed that there is inherent seasonality in performance. Typically, both Q2 and Q3 results decline sequentially from Q1, and then improve again for Q4. Most analysts are likely to reflect this seasonality in their forecasts for this reporting period, especially after Q1 results came in much stronger than consensus.
However, there is better than 50% probability that CX could exceed consensus analyst forecasts for the following reasons:
- Google foreshadows Cyberplex. Google results beat published analyst forecasts for Q2, showing some sequential growth in revenue and earnings. During the depths of the recession, marketing managers were increasingly seeking performance-based advertising in the form of Cost-per-Click programs (Google's primary revenue engine). Cost-per-action (CPA) based advertising is even more performance based than CPC, which could bode well for Cyberplex performance, especially as some mainstream accounts begin to take notice and sign on.
- Cash acceleration. At the two-third point of the quarter, the Company closed approximately $16 million in financing by way of a bought deal equity issue, increasing total working capital from $8.9 million ($4.7 million cash) to approximately $25 million ($21 million cash). This extra capital could have been deployed towards more aggressive affiliate marketing during the last weeks of the quarter, implying a late quarter bump in revenue performance.
Are there downside risks? Yes.
- As earnings have surged for this company over the past three quarters, it has a clearly identified risk in category concentration. Essentially, its Health & Beauty line of business has represented over 50% of total performance. Without further diversification, a small decline in sales for this category would have a relatively larger negative impact on performance.
- The new capital could be a distraction to management. With a significant injection of cash comes more intense pressure on management to do something with it - such as making an acquisition. More time on acquisition strategies may imply less time spent on core business activities, which could negatively impact performance in the short-term.
Notwithstanding the identified risks, the generally positive market conditions for performanced-based online advertising (as reflected through Google results), and the recent injection of capital could point to better than forecasted performance by Cyberplex for the reporting period. With an improving economy and new capital, the outlook for Cyberplex is likely to also improve.
Disclosure: I own shares of CX, I do not own shares of GOOG
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