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.

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