Every year around this time and for nearly a decade, a debate opens regarding the feasibility and awesome potential of mobile advertising, and the speculation continues this year unabated. I am "from Missouri" on this one.
Junior exchanges everywhere are littered with the tiny little corpses of mobile advertising start-ups that barely made it out of the incubators. Even the incubators and VCs that are spawning these nascient Googles are backing up with the sick, the dying, and the "redefining". Public entities lucky enough to have relatively strong balance sheets heading into the recession are re-inventing, or more likely, getting acquired as fast as Management teams can find a willing buyer.
There is no denying that the mobile screen is a platform for advertising with outstanding potential. It is an even better platform for integrated marketing. The question is, is there a viable new industry to emerge from this potential. For the most part, the answer is probably "no".
The Reuters article suggests that the business models are not well understood and that there is some "heavy lifting" remaining before there is a breakthrough...or is there?
The primary reason why the online advertising industry evolved into the relative giant that it is (some market analysts estimate it to be worth $70 billion to $80 billion now) is because it was a substitute for other media such as radio, print and television. More importantly, it operated within its own separate technical infrastructure (Internet Protocol). New players could emerge with new business models with protected technical property that incumbents failed to recognize initially. Ventures such as Google (GOOG-Q), Yahoo!(YHOO) and others had the protection of time to perfect business models and become major Companies. Others, whose shareholders often benefitted no less, were gobbled up by traditional media players such as News Corp, Disney, and Viacom once the high margin models showed promise and became a threat. Even still, independent online publishers and advertising networks remain sustainable, profitable small-cap and mid-tier operations.
So why isn't mobile advertising an even bigger opportunity? With ten times more mobile susbcriptions worldwide than Internet connections, the potential should dwarf the current online marketing industry. It may someday, but current entrenched publishers and ad networks are likely to reap most of the benefit. This leaves little room for new specialized entrants, and here is why:
1> The mobile screen is not a substitute for the internet connected screen, it is an extension. Even more so now with advances in small screen resolution and wireless network capacity, there is no discernable or sustainable gap in the technical infrastructure to allow for a specialist to have the benefit of time to emerge. An eyeball viewing a website on an iPhone is measured the same way as an eyeball viewing a website on a Dell laptop, or an HP desktop. To an advertiser, it does not matter. As a result, there is no long-term need for an arbitrar; which is what most of the failed Companies were positioned for. For a very short timeframe, there was a gap, but the window has closed, or is closing quickly.
2> There is no clear economic gap to be filled. Most business models and processes are already determined, and publishers and advertisers can simply extend their contracts to include mobile activity. Again, there appears to be little room for another layer of arbitrars that could add significant value to the ecosystem.
The mobile data channel offers significant upside to new ventures in payment systems, stored value, integrated marketing, content, and applications. There is massive amounts of potential and economic benefit to be gained. However, for now, unlike online advertising that preceded it, mobile advertising does not appear to be a big sector. In fact, it may not be a sector at all.
I do not own shares in any of the Companies mentioned in this post.
2/19/09
Bridgewater Systems (BWC-TSX) May Be The Real Deal
Bridgewater Systems has been an active issuer of press releases this month, demonstrating progress in customer wins and service development. It also seems to have retained some good IR support. Based on current screening models, BWC would be considered a Top 30 tech stock on the TSX.
BWC was possibly the last technology IPO (December 2007) before the market began to collapse throughout 2008. It suffered along with most other small-cap issuers as the liquidity crisis took hold. However, since the beginning of 2008, the stock has been a star, with the share price increasing in value by approximately 72%. Brave tech investors who bought the stock at its lows in early December, are experiencing a 111% return. Not bad for these market. As of its last reported quarter, the Company had about $39 million in cash on its balance sheet and no long-term debt. It had a large receivables line item of just over $14 million, and a significant deferred revenue liability of over $17 million. However, the net cash position was approximately $22 million, and the Company is likely to show strong earnings and cashflow momentum for 2009. Essentially, the Company has a strong balance sheet and the string of recent press releases appears to reflect momentum, and clearly, the market appears to like what it sees.
Bridgewater Systems helps mobile carriers ensure that mobile subscribers receive the applications and content that they subscribe to, and that the data that they exchange is relevant, private, and secure. Recently, the Company has announced a policy engine that is designed to help carriers optimize traffic to manage traffic congestion and improve data channel efficiencies. Unlike the Internet, mobile licenses give carriers better opportunities to tier data services - which subscribers should expect to see more often over the coming quarters. BWC is designing solutions to benefit from this opportunity.
The mobile data channel is where revenue growth is expected to occur for mobile carriers for the foreseeable future. Despite the worldwide economic recession, demand for mobile data is up and new applications are being developed at a torrid pace with thousands of new apps developed over the past few months. Matching subscribers to data services should become increasingly challenging for carriers over time. There are 3.5 billion mobile subscriptions worldwide, and because a mobile phone is considered a "necessity", there is expected to be very little drop off in subscriptions. Essentially, the data channel, and associated mobile applications should continue to experience significant growth with probable acceleration exiting the recession. With recent customer wins, BWC is poised to benefit. Yes, there is a decline in mobile device sales, but the application layer remains robust.
It appears that BWC could be trading at a TTM EV/EBITDA multiple somewhere around 30x, however, the forward EV/EBITDA multiple may be less than half that. Some investors may find the stock relatively expensive right now. However, those that are fundamentalists, and tend to hold long, BWC seems to have all of the hallmarks of a new Canadian technology success story as long as future executional bumps are not significant. It should report a solid outlook.
The Company will host a conference call on Thursday, February 26, 2009 at 8:30 a.m. ET to discuss its fiscal 2008 fourth quarter and year-end financial results. The call-in numbers are 416-644-3426 or 1-800-590-1817.
I do not own shares in Bridgewater Systems.
BWC was possibly the last technology IPO (December 2007) before the market began to collapse throughout 2008. It suffered along with most other small-cap issuers as the liquidity crisis took hold. However, since the beginning of 2008, the stock has been a star, with the share price increasing in value by approximately 72%. Brave tech investors who bought the stock at its lows in early December, are experiencing a 111% return. Not bad for these market. As of its last reported quarter, the Company had about $39 million in cash on its balance sheet and no long-term debt. It had a large receivables line item of just over $14 million, and a significant deferred revenue liability of over $17 million. However, the net cash position was approximately $22 million, and the Company is likely to show strong earnings and cashflow momentum for 2009. Essentially, the Company has a strong balance sheet and the string of recent press releases appears to reflect momentum, and clearly, the market appears to like what it sees.
Bridgewater Systems helps mobile carriers ensure that mobile subscribers receive the applications and content that they subscribe to, and that the data that they exchange is relevant, private, and secure. Recently, the Company has announced a policy engine that is designed to help carriers optimize traffic to manage traffic congestion and improve data channel efficiencies. Unlike the Internet, mobile licenses give carriers better opportunities to tier data services - which subscribers should expect to see more often over the coming quarters. BWC is designing solutions to benefit from this opportunity.
The mobile data channel is where revenue growth is expected to occur for mobile carriers for the foreseeable future. Despite the worldwide economic recession, demand for mobile data is up and new applications are being developed at a torrid pace with thousands of new apps developed over the past few months. Matching subscribers to data services should become increasingly challenging for carriers over time. There are 3.5 billion mobile subscriptions worldwide, and because a mobile phone is considered a "necessity", there is expected to be very little drop off in subscriptions. Essentially, the data channel, and associated mobile applications should continue to experience significant growth with probable acceleration exiting the recession. With recent customer wins, BWC is poised to benefit. Yes, there is a decline in mobile device sales, but the application layer remains robust.
It appears that BWC could be trading at a TTM EV/EBITDA multiple somewhere around 30x, however, the forward EV/EBITDA multiple may be less than half that. Some investors may find the stock relatively expensive right now. However, those that are fundamentalists, and tend to hold long, BWC seems to have all of the hallmarks of a new Canadian technology success story as long as future executional bumps are not significant. It should report a solid outlook.
The Company will host a conference call on Thursday, February 26, 2009 at 8:30 a.m. ET to discuss its fiscal 2008 fourth quarter and year-end financial results. The call-in numbers are 416-644-3426 or 1-800-590-1817.
I do not own shares in Bridgewater Systems.
2/18/09
Branding: Lessons at G.M. (nothing to do with SaaS, Mobile, Broadband, or any other tech)
On the weekend, while travelling to a local ski hill, it struck me that I could hardly remember any of the models of the various G.M. brands. In fact, I could hardly remember all of the brands that GM sold. While sipping on our coffee, my wife and I contemplated what was wrong at GM, and we agreed that there was no identity to its brands. The product was ubiquitous but invisible. There seems to be no lineage to any of the models with the possible exception of the Camaro. Long-lived brand names like the Malibu were a mystery to us both. What does a 2008 Malibu look like? What does a 2002 Malibu look like? Why does a Chevrolet "insert model here" look exactly like a Pontiac "insert model here"? For as long as I can remember a Chevrolet and a Pontiac were exactly the same vehicle with a different nameplate. Why? Today, I noticed an article that seemed to echo our conversation.
http://www.nytimes.com/2009/02/18/business/18brands.html?_r=1&em
I don't really have any business commenting on the auto industry. However, I feel that our discussion in the car illuminated some key universal brand management issues, which may be:
1. Focus: In the face of unrelenting competition, GM has far too many brands, models, and submodels to allocate effective marketing, sales and production budgets. GM may have had the largest marketing budgets in the past, but model-to-model, category-to-category the Company had no advantage, and in some cases, even a disadvantage when battling in the trenches for sales.
2. Brand Continuity: When people see a BMW, or a Mercedes, or even a Toyota or a Honda, consumers know it. More interestingly, consumers may have difficulty detecting the difference between a new BMW and one that is 5 years old. Although there may be marked innovations in the product, design continuity strengthens the brand, improves resale value, and carries forward positive attributes valued by consumers. In the 1970s, GM had that with a single model - the Camaro.
3. Brand Identity: This is an item that runs to the core of operations. In the 1970s and 1980s, Honda and Toyota had nurtured a brand identity of low-cost, fuel efficient entry level transportation in North America. In the 1990s Hyundai repeated this strategy, while the Japanese manufacturers, through unrelenting cultural, engineering and process focus, were able to evolve brand identity towards unsurpassed quality at reasonable prices. In the meantime, GM fostered a culture of seeming entitlement (always first to the trough!), and slowly lost its edge. Yes, it was the largest car company in the world, but it was losing market share every minute, and losing mindshare even within domestic markets. The many brands managed by GM were somewhere in the mushy middle...ok...but not distinctive. This is quicksand for a brand.
Granted, all of the automotive manufacturers were blindsided by this recession. It was not caused by the manufacturing sector. It was a one-two punch from Wall Street. First, the rampant speculation in the commodities sector killed the SUV market (and GM's cashcow), and then the collapse of credit started largely by the bankruptcy of Lehman Brothers. Almost all of the automotive industry is losing money and there are likely to be many casualties. However, GM's operational weaknesses have been laid to bare, and it looks ugly.
Its appeasement of the unions during the SUV/pickup heyday has left it as quoted by some "a healthcare company that happens to manufacture cars". Its pervasive muddiness, and legacy of bad decisions does not attract people who can make a difference. There is no Steve Jobs, no Bill Gates, no Lou Gerstner, not even a Lee Iacocca or even a Shelby anywhere near GM.
Outsiders like the author of the article that I linked to seem to be able to grasp the obvious. Shed brands, shed models, shed and restructure distribution, and define a brand quality. There is no status quo - dominance is gone. Instead of staying dominant, get great. Look to IBM in the early 1990s for a blueprint.
"We are Chevrolet/Cadillac and we make an entry-level car, a family car, a truck and a van. We also make a really nice family car, truck, van and a sportscar" "We only make 9 vehicles, but they are the most reliable, safest and comfortable hybrids in the world. And you want your friends to know that you drive one". How hard can that be? I guess about a $100 billion hard.
Tomorrow I will return to writing about what I know best, although this was a fun diversion.
I do not own shares in the Companies mentioned in this post.
http://www.nytimes.com/2009/02/18/business/18brands.html?_r=1&em
I don't really have any business commenting on the auto industry. However, I feel that our discussion in the car illuminated some key universal brand management issues, which may be:
1. Focus: In the face of unrelenting competition, GM has far too many brands, models, and submodels to allocate effective marketing, sales and production budgets. GM may have had the largest marketing budgets in the past, but model-to-model, category-to-category the Company had no advantage, and in some cases, even a disadvantage when battling in the trenches for sales.
2. Brand Continuity: When people see a BMW, or a Mercedes, or even a Toyota or a Honda, consumers know it. More interestingly, consumers may have difficulty detecting the difference between a new BMW and one that is 5 years old. Although there may be marked innovations in the product, design continuity strengthens the brand, improves resale value, and carries forward positive attributes valued by consumers. In the 1970s, GM had that with a single model - the Camaro.
3. Brand Identity: This is an item that runs to the core of operations. In the 1970s and 1980s, Honda and Toyota had nurtured a brand identity of low-cost, fuel efficient entry level transportation in North America. In the 1990s Hyundai repeated this strategy, while the Japanese manufacturers, through unrelenting cultural, engineering and process focus, were able to evolve brand identity towards unsurpassed quality at reasonable prices. In the meantime, GM fostered a culture of seeming entitlement (always first to the trough!), and slowly lost its edge. Yes, it was the largest car company in the world, but it was losing market share every minute, and losing mindshare even within domestic markets. The many brands managed by GM were somewhere in the mushy middle...ok...but not distinctive. This is quicksand for a brand.
Granted, all of the automotive manufacturers were blindsided by this recession. It was not caused by the manufacturing sector. It was a one-two punch from Wall Street. First, the rampant speculation in the commodities sector killed the SUV market (and GM's cashcow), and then the collapse of credit started largely by the bankruptcy of Lehman Brothers. Almost all of the automotive industry is losing money and there are likely to be many casualties. However, GM's operational weaknesses have been laid to bare, and it looks ugly.
Its appeasement of the unions during the SUV/pickup heyday has left it as quoted by some "a healthcare company that happens to manufacture cars". Its pervasive muddiness, and legacy of bad decisions does not attract people who can make a difference. There is no Steve Jobs, no Bill Gates, no Lou Gerstner, not even a Lee Iacocca or even a Shelby anywhere near GM.
Outsiders like the author of the article that I linked to seem to be able to grasp the obvious. Shed brands, shed models, shed and restructure distribution, and define a brand quality. There is no status quo - dominance is gone. Instead of staying dominant, get great. Look to IBM in the early 1990s for a blueprint.
"We are Chevrolet/Cadillac and we make an entry-level car, a family car, a truck and a van. We also make a really nice family car, truck, van and a sportscar" "We only make 9 vehicles, but they are the most reliable, safest and comfortable hybrids in the world. And you want your friends to know that you drive one". How hard can that be? I guess about a $100 billion hard.
Tomorrow I will return to writing about what I know best, although this was a fun diversion.
I do not own shares in the Companies mentioned in this post.
2/17/09
Stimulus Packages and Healthcare...A Checkup on the Eve of the $787 Billion Federal Stimulus Package
On November 13, 2008 I wrote a blog entry called Obama and Healthcare Technology regarding the potential for an Obama Healthcare plan to benefit some publicly-listed Canadian healthcare technology vendors in the future. At the time, there was speculation that the new President could allocate up to $100 million towards health care initiatives during his first term. During the 96 days since that was written, a lot has happened...and a lot has changed. What a ride!
First, the raging worldwide economic recession has forced the new administration to ratchet up the stimulus spending initiated by the outgoing Bush regime. The immediate economic crisis, and continued intransigent partisanship has forced the Obama White House to re-prioritize programs and requisite spending. The impact is a more honed healthcare budget focused on Electronic Health Records (EHR), and related network infrastructure. The total bill for this initiative encapsulated in the $787 Billion U.S. Stimulus Package is $19 Billion, or 2.4% of the total package and 6.1% of new spending in the package. The U.S Government plans to spend $63.50 per U.S citizen, or $165 per household, to computerize all health records within 5 years. (Source for population data: US Census(2006))
The last 96 days has been pretty eventful in Canada, also. The deepening recession almost brought down the minority government and has resulted in a $64 Billion Canadian Government Stimulus Budget with $0.5 Billion or 4.1% of all immediate infrastructure spending allocated to Electronic Medical Records (EMR). For clarity EMR and EHR could be referred to interchangeably, so I will choose to use the Canadian definition for the rest of this post.
By comparison to the American package, the Canadian Government is budgeting $14.90 per capita in immediate spending towards EMR, or $40.20 per household.(Source for population data: Statscan Census (2006)).
Notwithstanding the per capita spending levels, the focus of spending has an impact on the list of potential winners among Canadian healthcare information technology vendors. Previously, small and mid-capped vendors with significant U.S market exposure were speculated to benefit mostly from spillover effects of U.S. healthcare spending on technology. Example Companies that I referenced on November 13th included Logibec (LGI-TSX), CGI (GIB.A-TSX), and Systems Xcellence (SXC-TSX). Although these vendors should still experience some spillover benefits in the U.S. market, another group of healthcare vendors engaged directly in the EMR space are likely to experience more direct benefit. With U.S. government spending focus on EMR, along with the unexpected and immediate Canadian budget allocation, smaller vendors with footholds in the sector should be positioned to capitalize. Again, capital is the operative term.
As stated in earlier posts, the Canadian technology sector is suffering from poor liquidity, and micro-cap public entities are struggling to fund growth, often with weak balance sheets. The EMR market may be indicative of this struggle. Several public micro-cap EMR vendors including Medworxx (MWX-TSXV), Nightingale (NGH-TSXV), and Healthscreen Solutions (MDU-TSXV) stand to benefit directly from Canadian federal spending on EMR. However, these entities may require future growth capital to take advantage of the federally accelerated domestic opportunities. As well, as stated in previous blog entries, this is a sector that could benefit from consolidation because, combined with small regional privately funded Companies, there may be as many as 50 healthcare software vendors vying for between $1.5 billion and $2.0 billion in potential annualized domestic EMR revenue. Clearly, the space is highly fragmented, and few would have the scale to compete effectively for U.S. market share. Consolidation would create scale, which could potentially create more liquidity (if the consolidators were to be public) and shareholder value. Essentially, the sector could benefit from fewer, stronger players competing in the domestic niche with more robust potential for U.S. expansion.
Business models matter. Investors interested in benefitting from focus on the sector should consider how vendors plan to scale. Investors should take heed of the Medcomsoft failure, a vendor with seemingly outstanding technology, but with a poor commercialization strategy. At risk of dating myself, I was involved in a plan (by the Canadian banks) to leverage smart health cards to help create central EMRs in the early 1990s. That concept failed, and since then and despite the nearly universally understood potential benefit to stakeholders, EMR has struggled to gain acceptance in the health care industry. It is easiest to blame a lack of political will, and professional arrogance among healthcare professionals for the collective lack of success in creating effective EMR. However, the main issue may be that previous business models have generally failed to align interests among stakeholders. The numbers seem to support this. Dr. Alan Brookstone and Greg Pothan issued a study in August 2008 with the following data:
Of 23, 292 Specialist and General Practice (GP) Doctors surveyed at the end of 2007, 70% still used paper-based medical records despite over a decade of effort by vendors to move Doctors towards electronic EMR. Even among those converting to EMR, most do not fully embrace the switchover because 16.7% use a combination of paper and electronic medical records. Only 13.7% of those surveyed have switched to fully electronic records (remember this is after more than a decade of effort). Those Doctors are benefitting from greater efficiencies which decrease wait-time by 38% compared to paper-based doctors, and by 62% compared to combo practices. Electronic EMR doctors can also benefit from servicing 41% more new patients annually than paper-based Doctors. With a well-documented Doctor shortage, which leaves between 4 million and 5 million Canadians without access to a family Doctor, the federal government recognizes the potential benefit of scale and through-put associated with electronic EMRs. Notwithstanding, based on these data, there is a lot of room for domestic market penetration.
Circling back to business models that matter, if Software-as-a-Service (SaaS) works for the enterprise, it should work for the GP. In general, Doctors do not want an IT professional on staff, nor do they want to be database managers. In general, the resistance to EMR has not been about professional arrogance, it has been about practice management. At this point, the likely winners in the space are those that make EMR adoption transparent, easy, and economically beneficial. Solutions with the least friction should win. This probably means that business models offering SaaS and outsourced EMR with minimal upfront investment, integration, training, and maintenance should win. Vendors with this model already deployed should be early consolidators. Vendors that can adopt this model quickly could be secondary consolidators. Investors need to recognize the models as they consider the space.
To summarize:
First, the raging worldwide economic recession has forced the new administration to ratchet up the stimulus spending initiated by the outgoing Bush regime. The immediate economic crisis, and continued intransigent partisanship has forced the Obama White House to re-prioritize programs and requisite spending. The impact is a more honed healthcare budget focused on Electronic Health Records (EHR), and related network infrastructure. The total bill for this initiative encapsulated in the $787 Billion U.S. Stimulus Package is $19 Billion, or 2.4% of the total package and 6.1% of new spending in the package. The U.S Government plans to spend $63.50 per U.S citizen, or $165 per household, to computerize all health records within 5 years. (Source for population data: US Census(2006))
The last 96 days has been pretty eventful in Canada, also. The deepening recession almost brought down the minority government and has resulted in a $64 Billion Canadian Government Stimulus Budget with $0.5 Billion or 4.1% of all immediate infrastructure spending allocated to Electronic Medical Records (EMR). For clarity EMR and EHR could be referred to interchangeably, so I will choose to use the Canadian definition for the rest of this post.
By comparison to the American package, the Canadian Government is budgeting $14.90 per capita in immediate spending towards EMR, or $40.20 per household.(Source for population data: Statscan Census (2006)).
Notwithstanding the per capita spending levels, the focus of spending has an impact on the list of potential winners among Canadian healthcare information technology vendors. Previously, small and mid-capped vendors with significant U.S market exposure were speculated to benefit mostly from spillover effects of U.S. healthcare spending on technology. Example Companies that I referenced on November 13th included Logibec (LGI-TSX), CGI (GIB.A-TSX), and Systems Xcellence (SXC-TSX). Although these vendors should still experience some spillover benefits in the U.S. market, another group of healthcare vendors engaged directly in the EMR space are likely to experience more direct benefit. With U.S. government spending focus on EMR, along with the unexpected and immediate Canadian budget allocation, smaller vendors with footholds in the sector should be positioned to capitalize. Again, capital is the operative term.
As stated in earlier posts, the Canadian technology sector is suffering from poor liquidity, and micro-cap public entities are struggling to fund growth, often with weak balance sheets. The EMR market may be indicative of this struggle. Several public micro-cap EMR vendors including Medworxx (MWX-TSXV), Nightingale (NGH-TSXV), and Healthscreen Solutions (MDU-TSXV) stand to benefit directly from Canadian federal spending on EMR. However, these entities may require future growth capital to take advantage of the federally accelerated domestic opportunities. As well, as stated in previous blog entries, this is a sector that could benefit from consolidation because, combined with small regional privately funded Companies, there may be as many as 50 healthcare software vendors vying for between $1.5 billion and $2.0 billion in potential annualized domestic EMR revenue. Clearly, the space is highly fragmented, and few would have the scale to compete effectively for U.S. market share. Consolidation would create scale, which could potentially create more liquidity (if the consolidators were to be public) and shareholder value. Essentially, the sector could benefit from fewer, stronger players competing in the domestic niche with more robust potential for U.S. expansion.
Business models matter. Investors interested in benefitting from focus on the sector should consider how vendors plan to scale. Investors should take heed of the Medcomsoft failure, a vendor with seemingly outstanding technology, but with a poor commercialization strategy. At risk of dating myself, I was involved in a plan (by the Canadian banks) to leverage smart health cards to help create central EMRs in the early 1990s. That concept failed, and since then and despite the nearly universally understood potential benefit to stakeholders, EMR has struggled to gain acceptance in the health care industry. It is easiest to blame a lack of political will, and professional arrogance among healthcare professionals for the collective lack of success in creating effective EMR. However, the main issue may be that previous business models have generally failed to align interests among stakeholders. The numbers seem to support this. Dr. Alan Brookstone and Greg Pothan issued a study in August 2008 with the following data:
Of 23, 292 Specialist and General Practice (GP) Doctors surveyed at the end of 2007, 70% still used paper-based medical records despite over a decade of effort by vendors to move Doctors towards electronic EMR. Even among those converting to EMR, most do not fully embrace the switchover because 16.7% use a combination of paper and electronic medical records. Only 13.7% of those surveyed have switched to fully electronic records (remember this is after more than a decade of effort). Those Doctors are benefitting from greater efficiencies which decrease wait-time by 38% compared to paper-based doctors, and by 62% compared to combo practices. Electronic EMR doctors can also benefit from servicing 41% more new patients annually than paper-based Doctors. With a well-documented Doctor shortage, which leaves between 4 million and 5 million Canadians without access to a family Doctor, the federal government recognizes the potential benefit of scale and through-put associated with electronic EMRs. Notwithstanding, based on these data, there is a lot of room for domestic market penetration.
Circling back to business models that matter, if Software-as-a-Service (SaaS) works for the enterprise, it should work for the GP. In general, Doctors do not want an IT professional on staff, nor do they want to be database managers. In general, the resistance to EMR has not been about professional arrogance, it has been about practice management. At this point, the likely winners in the space are those that make EMR adoption transparent, easy, and economically beneficial. Solutions with the least friction should win. This probably means that business models offering SaaS and outsourced EMR with minimal upfront investment, integration, training, and maintenance should win. Vendors with this model already deployed should be early consolidators. Vendors that can adopt this model quickly could be secondary consolidators. Investors need to recognize the models as they consider the space.
To summarize:
- Some small-cap and mid-cap healthcare software vendors should still benefit from the U.S. stimulus package, however the focus on EMR may limit some of the benefits compared to the original $100 million healthcare technology plan contemplated by the Obama Administration soon after the election.
- The Canadian stimulus budget should offer healthcare software vendors that are focused on EMR solutions more immediate domestic market opportunities than contemplated last fall prior to the budget.
- The current $1.5-$2.0 billion potential annual domestic EMR market is gaining momentum, although it is highly fragmented and under-capitalized, with possible consolidation required for scale.
- SaaS and/or outsourced EMR business models are likely best aligned to the remaining 86.6% of GPs yet to adopt EMR fully.
- Saas and/or outsourced EMR vendors with high margin recurring revenue are also possibly the best candidates as market consolidators.
- Domestic EMR vendors with scale and solid balance sheets could gain access to the U.S. EMH market directly, or through partnerships.
- Multinationals that may soon take notice in Canada include IBM (IBM-NYSE), and Microsoft (MSFT-Q) among others.
There is a lot of discussion regarding EMR, and a lot of blogs on the subject. I find Canadian EMR particularly informative.
I do not own shares of any of the public Companies mentioned in this post, nor do I receive compensation in any form from those Companies, or from Canadian EMR.
2/13/09
Mobile Apps Market Already Bigger than Online Advertising?
A Reuters article this morning suggests that Nokia is joining the rush towards mobile software sales. This is old news.
More interesting is that, in the article, Strategy Analytics forecasts the value of the mobile content market -- including downloadable games, ringtones, wallpapers, video, mobile TV, text alerts and mobile web browsing -- to grow 18 percent to $67 billion this year. Last week, I was writing a profile on the sector for a good friend of mine, and I was estimating that the mobile content market would range in size between $50 billion and $70 billion. I am more pessimistic than Strategy Analytics on growth forecasts for this year. Based on the people I am speaking to in the industry, 2009 is likely to show a flat to 5% growth over 2008, so I suggest that there is a greater likelihood that the market could measure slightly less than $60 billion. However, it doesn't matter what the growth rate is. The more important notion is the sheer scale of the market. Whether 2009 is worth $50 billion, or $70 billion, it is a massive market that has developed in record time.
I will put this into perspective. This is a quote from the last year's call transcript when Microsoft (MSFT-Q) announced its proposed takeover of Yahoo! (YHOO-Q). "The online advertising industry is a very large industry today at over $40 billion and it's forecasted to grow quite rapidly to reach nearly $80 billion in the next three years".
Many investors would likely be very surprised at the scale of the mobile content industry in comparison to online advertising. The mobile content market may even be larger than online advertising right now. Not only that, it is likely that the mobile content market will show sustained growth higher than the online advertising market over the next 5 years. As well, its sheer potential is probably over 10x greater due to the number of mobile subscriptions worldwide ( based on stats from IDC).
The reason why investors are likely to be surprised at the scale of the market is that there is no equivalent to Google (GOOG-Q) for investors to be wowed by. Essentially, there is no dominance and, in fact, the sector is marked by incredible fragmentation. Hundreds of thousands of content developers, thousands of content distributors and aggregators, hundreds of service providers including carriers, handset developers, online retailers, and software vendors are all vying in this market.
With the exception of some of the headline grabbers like Apple (APPL-Q), RIM (RIMM-Q), and Google, most of the ecosystem is undercapitalized and toiling in relative obscurity. The fragmentation makes it hard to make money, and the complexity of the ecosystem spooks investors. However, in this problem lies a really robust opportunity for consolidation. In end (within 10 years), the majors will divide this giant pie amongst themselves. However, in the meantime, there are potential small-cap consolidators on every continent.
Earlier this winter some of Bay Street got a chance to see a possible consolidator candidate operating out of Europe. I believe that there are few other potential candidates operating in North America that are generating cashflow and recognize the opportunities for roll-ups. Investors that back some of these operators could make a lot of money as the ecosystem matures (BTW...none are operating in Toronto).
More interesting is that, in the article, Strategy Analytics forecasts the value of the mobile content market -- including downloadable games, ringtones, wallpapers, video, mobile TV, text alerts and mobile web browsing -- to grow 18 percent to $67 billion this year. Last week, I was writing a profile on the sector for a good friend of mine, and I was estimating that the mobile content market would range in size between $50 billion and $70 billion. I am more pessimistic than Strategy Analytics on growth forecasts for this year. Based on the people I am speaking to in the industry, 2009 is likely to show a flat to 5% growth over 2008, so I suggest that there is a greater likelihood that the market could measure slightly less than $60 billion. However, it doesn't matter what the growth rate is. The more important notion is the sheer scale of the market. Whether 2009 is worth $50 billion, or $70 billion, it is a massive market that has developed in record time.
I will put this into perspective. This is a quote from the last year's call transcript when Microsoft (MSFT-Q) announced its proposed takeover of Yahoo! (YHOO-Q). "The online advertising industry is a very large industry today at over $40 billion and it's forecasted to grow quite rapidly to reach nearly $80 billion in the next three years".
Many investors would likely be very surprised at the scale of the mobile content industry in comparison to online advertising. The mobile content market may even be larger than online advertising right now. Not only that, it is likely that the mobile content market will show sustained growth higher than the online advertising market over the next 5 years. As well, its sheer potential is probably over 10x greater due to the number of mobile subscriptions worldwide ( based on stats from IDC).
The reason why investors are likely to be surprised at the scale of the market is that there is no equivalent to Google (GOOG-Q) for investors to be wowed by. Essentially, there is no dominance and, in fact, the sector is marked by incredible fragmentation. Hundreds of thousands of content developers, thousands of content distributors and aggregators, hundreds of service providers including carriers, handset developers, online retailers, and software vendors are all vying in this market.
With the exception of some of the headline grabbers like Apple (APPL-Q), RIM (RIMM-Q), and Google, most of the ecosystem is undercapitalized and toiling in relative obscurity. The fragmentation makes it hard to make money, and the complexity of the ecosystem spooks investors. However, in this problem lies a really robust opportunity for consolidation. In end (within 10 years), the majors will divide this giant pie amongst themselves. However, in the meantime, there are potential small-cap consolidators on every continent.
Earlier this winter some of Bay Street got a chance to see a possible consolidator candidate operating out of Europe. I believe that there are few other potential candidates operating in North America that are generating cashflow and recognize the opportunities for roll-ups. Investors that back some of these operators could make a lot of money as the ecosystem matures (BTW...none are operating in Toronto).
2/12/09
More newsflow from GXI...and implications.
Yesterday GXI announced its second rail deal and first one in North America with the Atlantic City Express Service (ACES). ACES is an express rail service offered by Ceasars Entertainment and Borgato that runs from Penn Stations in New York and Newark to Atlantic City and is operated by New Jersey Transit. Like the deal in the UK, it is small, but it is the catalyst for a couple of key developments that may have longer reaching positive impact on future performance:
1. Transactions are completed with real-time authorization for the first time. Due to current communications restrictions, all airline deployments to date have been deployed as store-and-forward transactions, executed upon landing. As a terrestial service, GXI was able to develop real-time solutions. It has been deployed in poroduction for a few weeks already, so it works. As real-time inflight communications links emerge, work with the rail providers should make it fairly straightforward to move to real-time inflight authorization. With real-time authorization, transaction values could be increased substantially. "Sir, would that be coffee, tea, or a BMW?" (just kidding...kinda)
2. As a result of this deal, GXI now has a partnership with another significant caterer/logistics manager beyond its highly successful relationship with LSG SkyChefs. Compass Group is C$3.4 billion equivalent hospitality operation that provides food and logistics services to ACES. With its extensive hospitality and resort catering services, there could be future alignment for more destination services to be sold onboard.
With its flow of announcements, GXI continues to demonstrate progress for investors. Based on my current forecasts, the operating break-even point is likely to be somewhere in the $1.6 to $1.7 million monthly runrate. On January 22nd, the company provided guidance that it should be exiting Q1, 2009 with a run-rate of approximately $1.5 million. With over 300 million passenger trip in its disclosed backlog, investors could infer that starting sometime in Q2, the Company may hit its breakeven inflection point. Deployment delays could create some variance risk to breakeven forecasts. Deployment delays during Q4 2008 have already pushed back breakeven by more than a quarter. With $5.6 million in cash and cash equivalents, the Company has a lot cushion. The most important takeaway is that the Company should emerge from this recession as dominant wordwide player in onboard retailing services where it is could be exposed to over 1 billion captured consumers...err...travellers annually. How many other Canadian stocks sport that type of profile, let alone one with a market cap below $30 million.
I do not own shares of GXI.
1. Transactions are completed with real-time authorization for the first time. Due to current communications restrictions, all airline deployments to date have been deployed as store-and-forward transactions, executed upon landing. As a terrestial service, GXI was able to develop real-time solutions. It has been deployed in poroduction for a few weeks already, so it works. As real-time inflight communications links emerge, work with the rail providers should make it fairly straightforward to move to real-time inflight authorization. With real-time authorization, transaction values could be increased substantially. "Sir, would that be coffee, tea, or a BMW?" (just kidding...kinda)
2. As a result of this deal, GXI now has a partnership with another significant caterer/logistics manager beyond its highly successful relationship with LSG SkyChefs. Compass Group is C$3.4 billion equivalent hospitality operation that provides food and logistics services to ACES. With its extensive hospitality and resort catering services, there could be future alignment for more destination services to be sold onboard.
With its flow of announcements, GXI continues to demonstrate progress for investors. Based on my current forecasts, the operating break-even point is likely to be somewhere in the $1.6 to $1.7 million monthly runrate. On January 22nd, the company provided guidance that it should be exiting Q1, 2009 with a run-rate of approximately $1.5 million. With over 300 million passenger trip in its disclosed backlog, investors could infer that starting sometime in Q2, the Company may hit its breakeven inflection point. Deployment delays could create some variance risk to breakeven forecasts. Deployment delays during Q4 2008 have already pushed back breakeven by more than a quarter. With $5.6 million in cash and cash equivalents, the Company has a lot cushion. The most important takeaway is that the Company should emerge from this recession as dominant wordwide player in onboard retailing services where it is could be exposed to over 1 billion captured consumers...err...travellers annually. How many other Canadian stocks sport that type of profile, let alone one with a market cap below $30 million.
I do not own shares of GXI.
2/11/09
HotThoughts: GXI-TSXV; RIM-TSX
GXI
Yesterday, the Company announced that American Airlines (AMR-NYSE) has adopted cashless in-flight retailing using the GXI Virtual Store Platform. This is important for Guestlogix for three reasons:
> Entrenches the platform for possible future transaction growth in areas beyond food and beverages including entertainment and destination-based services.
> This defacto standardization on its platform by American Airlines helps Guestlogix' negotiating position as AMR (its oldest client) renews its contract sometime later this year.
> Increases referenceability as a major client appears make the GXI system more integral to its core services.
The elimination of cash handling could reduce costs for GXI in providing the service. With most of the major airlines in North America adopting the GXI solution, and with the impending AMR renewal more likely, GXI has a lock on the North American airline industry. With the recently announced contract with an unnamed major airline, the Company has penetration in the North American industry possibly over 80%. It still has some short-term deployment challenges as the Company attempts to clean up a backlog of over 300 million passenger trips, however heading out of this recession, GXI is well positioned for strong growth in sales and earnings. Prior to this recession, an announcement like this would result in upgrades by analysts. There are already big targets on the stock relative to most other micro-caps, so this announcement may make analysts more comfortable that the Company could hit performance forecasts, with consensus forecasts more than a double over 2008 performance. Currently, liquidity is an issue with this stock, but investors should be pleased with progress.
RIM
No investor should be surprised by the lacklustre data coming from RIM this morning. As stated in previous posts, and supported by weak mobile device numbers from Nokia (NOK-NYSE) and Apple (APPL-NASDAQ) among others, RIM is not immune to the marked decline in mobile device upgrades during the 4th quarter. Consumers are simply delaying device upgrades as the economic situation deteriorates. As mentioned in the same previous posts, mobile subscriptions should be considered an essential consumer service. However, many could be converting subscriptions to lower cost pre-paid plans over the next few months as household budgets become tighter. The stock should take a hit today, although it likely remains a very good long-term stock to own.
I do not own shares in the Companies mentioned in this post.
Yesterday, the Company announced that American Airlines (AMR-NYSE) has adopted cashless in-flight retailing using the GXI Virtual Store Platform. This is important for Guestlogix for three reasons:
> Entrenches the platform for possible future transaction growth in areas beyond food and beverages including entertainment and destination-based services.
> This defacto standardization on its platform by American Airlines helps Guestlogix' negotiating position as AMR (its oldest client) renews its contract sometime later this year.
> Increases referenceability as a major client appears make the GXI system more integral to its core services.
The elimination of cash handling could reduce costs for GXI in providing the service. With most of the major airlines in North America adopting the GXI solution, and with the impending AMR renewal more likely, GXI has a lock on the North American airline industry. With the recently announced contract with an unnamed major airline, the Company has penetration in the North American industry possibly over 80%. It still has some short-term deployment challenges as the Company attempts to clean up a backlog of over 300 million passenger trips, however heading out of this recession, GXI is well positioned for strong growth in sales and earnings. Prior to this recession, an announcement like this would result in upgrades by analysts. There are already big targets on the stock relative to most other micro-caps, so this announcement may make analysts more comfortable that the Company could hit performance forecasts, with consensus forecasts more than a double over 2008 performance. Currently, liquidity is an issue with this stock, but investors should be pleased with progress.
RIM
No investor should be surprised by the lacklustre data coming from RIM this morning. As stated in previous posts, and supported by weak mobile device numbers from Nokia (NOK-NYSE) and Apple (APPL-NASDAQ) among others, RIM is not immune to the marked decline in mobile device upgrades during the 4th quarter. Consumers are simply delaying device upgrades as the economic situation deteriorates. As mentioned in the same previous posts, mobile subscriptions should be considered an essential consumer service. However, many could be converting subscriptions to lower cost pre-paid plans over the next few months as household budgets become tighter. The stock should take a hit today, although it likely remains a very good long-term stock to own.
I do not own shares in the Companies mentioned in this post.
2/9/09
Was February Week One a Tipping Point?
The Dow tested the November lows again last week, and held, in the face of bad economic news associated with job losses. Earnings continued to be a mixed bag with the tech sector performing a bit better than expected, consumers performing a bit worse than expected, and financials performing as badly as expected.
With the Obama stimulus package getting closer to reality, along with various other government stimulus packages enacted worldwide, there is a sense within the market that the worst is upon us now. Because the Dow often leads the economy out of recessions by a couple of quarters, the current resolve of traders may translate into a recovery in the equity markets over the coming months. Historians may look back at the first week of February 2009 as a possible tipping point in sentiment.
Unlike 2003, when there was a bit of a snap-back, one could expect this stock market recovery to be slower, with a few scares along the way. The U.S. economy has already been on pretty long decline with economic fundamentals eroding since August of 2007.
With the Obama stimulus package getting closer to reality, along with various other government stimulus packages enacted worldwide, there is a sense within the market that the worst is upon us now. Because the Dow often leads the economy out of recessions by a couple of quarters, the current resolve of traders may translate into a recovery in the equity markets over the coming months. Historians may look back at the first week of February 2009 as a possible tipping point in sentiment.
Unlike 2003, when there was a bit of a snap-back, one could expect this stock market recovery to be slower, with a few scares along the way. The U.S. economy has already been on pretty long decline with economic fundamentals eroding since August of 2007.
2/6/09
Oceanwide: A Quintessential Descartes (DSG-TSX) Acquisition
Yesterday, Descartes Systems Group announced that it has acquired privately held Oceanwide Inc. for $10.4 million in cash. Oceanwide provides compliance Software-as-a-Service (SaaS) to customs brokers and sports a 90% recurring revenue stream. The accquisition extends DSG's logistics ecosystem to include customs brokers, and probably adds annualized EBITDA of between $1.2 million to $1.5 million, and initial sales of between $5.0 and $6.0 million. This is without synergies - which are likely.
With close to $60 million in the bank, and an annualized cashflow of between $14 million and $16 million (depending on how bad the recession is), this could be considered a quintessential DSG tuck-under that meets the following criteria:
- fits strategically
- is accretive
- delivers synergies
- makes its clients happy
- helps set it up for a massive lift in earnings exiting the recession.
In my opinion, Descartes Systems Group is one of only a very few public Canadian small cap technology Companies that understands the leverage that can be gained from cashflow and a strong balance sheet during this recession. Descartes shareholders should be applauding.
Management teams from Companies like the aforementioned RDM Corp. (RC-TSX) (see previous post), should be taking notes.
I do not own shares in the Companies mentioned in this post, nor do I receive compensation from these companies in any way.
With close to $60 million in the bank, and an annualized cashflow of between $14 million and $16 million (depending on how bad the recession is), this could be considered a quintessential DSG tuck-under that meets the following criteria:
- fits strategically
- is accretive
- delivers synergies
- makes its clients happy
- helps set it up for a massive lift in earnings exiting the recession.
In my opinion, Descartes Systems Group is one of only a very few public Canadian small cap technology Companies that understands the leverage that can be gained from cashflow and a strong balance sheet during this recession. Descartes shareholders should be applauding.
Management teams from Companies like the aforementioned RDM Corp. (RC-TSX) (see previous post), should be taking notes.
I do not own shares in the Companies mentioned in this post, nor do I receive compensation from these companies in any way.
2/5/09
HotThoughts: GXI-TSXV; RC-TSX
This morning GXI announced another contract with a U.S. major. Based on its preview of Q4 results published on January 22nd, one could suppose that its passenger trips under contract likely increases from 703 million to close to 770 million and its backlog increases from 250 million to close to 320 million. If this contract includes minimum transaction guarantees, investors should see a notable step up in month run-rates sometime near the end of the second quarter. Company has about 6 million in cash, and should begin generating earnings by mid-year.
RDM Corp reported its Q1 2009 quarter, which was flat from Q1 2008 at $7.1 million. It lost $0.08 per share compared to $0.00 EPS in the previous quarter due primarily to losses on forward FX contracts. However, its cash position was virtually unchanged from Q4 2008 with $17.3 million in cash. Excellent growth in its payment processing business was offset by continued weakness in its device business. With a market cap of $16.6 million, and no debt, it is trading at a negative enterprise value. RDM Corp is one of those microcap tech Companies that could use its balance sheet to make accretive acquistions in the payment processing industry. (see the Feb 3 post). Management could also get really bold and jettison its device business. Clearly, investors don't seem to value it.
I do not own shares of either Company.
RDM Corp reported its Q1 2009 quarter, which was flat from Q1 2008 at $7.1 million. It lost $0.08 per share compared to $0.00 EPS in the previous quarter due primarily to losses on forward FX contracts. However, its cash position was virtually unchanged from Q4 2008 with $17.3 million in cash. Excellent growth in its payment processing business was offset by continued weakness in its device business. With a market cap of $16.6 million, and no debt, it is trading at a negative enterprise value. RDM Corp is one of those microcap tech Companies that could use its balance sheet to make accretive acquistions in the payment processing industry. (see the Feb 3 post). Management could also get really bold and jettison its device business. Clearly, investors don't seem to value it.
I do not own shares of either Company.
Cisco (CSCO-Q) Beats Expectations; Downward Guidance Good Opportunity for Longs
Cisco reported Q2 earnings last night and managed to beat lowered analyst expectations handily in terms of top-line and especially bottom line, reporting $0.38 EPS versus the consensus of $0.32 EPS. The Company generated $3.2 billion dollars in cashflow during the quarter on $9.1 billion in sales. The cashflow margin was 35% and the Company now has $29.5 billion dollars in cash on its balance sheet. Normally, this would be a very good spot to be...except for the 3rd quarter guidance offered by the Company.
Analysts had expected a flat Q3, but the Company has guided for a 15% to 20% decline in sales. As a technology company with one of the most international footprints around, Cisco has an unparalleled viewpoint on the strength of the world economy, and as expected, the first quarter of calendar 2009 looks really bad. The first half looks just plain bad.
The CEO continues to guide that it expected the Company to grow on an annualized basis between 12% and 17% for the long term. So there is longer-term optimism. With its huge balance sheet, cash generating capabilities, and its long-term growth prospects, it would be a great time to get into the stock after the traders are done pummelling it today.
I do not own Cisco stock...yet.
Analysts had expected a flat Q3, but the Company has guided for a 15% to 20% decline in sales. As a technology company with one of the most international footprints around, Cisco has an unparalleled viewpoint on the strength of the world economy, and as expected, the first quarter of calendar 2009 looks really bad. The first half looks just plain bad.
The CEO continues to guide that it expected the Company to grow on an annualized basis between 12% and 17% for the long term. So there is longer-term optimism. With its huge balance sheet, cash generating capabilities, and its long-term growth prospects, it would be a great time to get into the stock after the traders are done pummelling it today.
I do not own Cisco stock...yet.
2/4/09
Active Control Technologies has Achieved its Looooong Awaited "Company-Maker" Milestone: MSHA Certification
The folks at Active Control Technologies (ACT-TSXV) are probably waking up this morning with slight hangovers after popping the champagne corks last night. The Company has finally won certification by the Mine Safety and Health Adminstration (MSHA) to deploy its 802.11 WiFi mesh network, branded ActiveMine, in all underground mines in the United States, including coal mines.
From submission to certification, the entire process has taken nearly two years of fairly intense engagement with the U.S. federal body to get the technology approved. Many times through that process, Management has come within a hair's breadth of certification, only to experience another time-sucking setback. But, it's done. And here are the implications:
> It is only one of two approved and deployable technologies that actually meets the requirements of the the Mine Improvement and New Emergency Response Act of 2006 (MINER Act). According to the MINER Act, mine operators are required to deploy wireless tracking and communications systems that can operate before, during, and after mine emergencies. It is legislated that mine operators must deploy the technology by July 31, 2009 (although one could expect that deadline to be relaxed). The enforcement of the deadline is supported by substantial financial penalties, and recently, tax incentives. Coal mine operators are compelled to deploy, and this greatly benefits ACT.
> Apparently, the only other wireless network technology with MSHA certification is a solution developed by L3 (LLL-NYSE), although for lower data rates at 900MHZ, inferring limited capacity.
> ActiveMine can potentially bring U.S. mine production into the 21st century. With the ActiveMine mesh network acting as a robust data network, mine operators can monitor production in real-time, operate machinery remotely, and improve efficiencies simply with better communications. Enhanced production efficiencies could reduce production costs and help preserve margins as coal prices decline. Current clients such as Patriot Coal (PCX-NYSE) understand the potential competitive advantages.
> ACT has a current backlog of $6 million, which should be deployed and recognized before the Company's fiscal year-end of July 31, 2009. It should be receiving deposits almost immediately, so it could have enough cash to execute, although there may be a need for a further raise of working capital for deployment if the pipeline converts quickly.
> Although not confirmed by Management, it is widely believed that the Company has a 12-month sales pipeline of approximately $60 million. With MSHA approval, we may see the pipeline increase, and we could see accelerated conversions as the MINER Act deadlines loom.
> There are several technology Companies such as Rockwell, Motorola, and L3 that provide some elements of technology that may find ActiveMine to be a compelling certified solution in the future.
The share prices peaked as high as $0.69 in late 2007 as Management believed that it was close to MSHA approval at that point. Since that time, the stock has declined in price, bottoming at $0.045 in November and now sitting at $0.085 per share. My 12-month target at the end of 2007 and during the beginning of 2008 was $0.80. Based on the current situation and current markets, I would expect that analysts would put a 12-month target on the stock in the $0.40 to $0.60 range, depending on their assumptions regarding backlog deployment, pipeline conversion, and breakeven margins. Notwithstanding, with federal certification, impending legislation, happy reference customers, a backlog with a significant pipeline, there is a lot of potential for upside in the stock.
The stock is widely held and has surprising liquidity for a microcap technology story. With such a major milestone announcement today, we should see brisk trading throughout the day.
I own shares in ACT, but do not own shares in any of the other Companies mentioned.
From submission to certification, the entire process has taken nearly two years of fairly intense engagement with the U.S. federal body to get the technology approved. Many times through that process, Management has come within a hair's breadth of certification, only to experience another time-sucking setback. But, it's done. And here are the implications:
> It is only one of two approved and deployable technologies that actually meets the requirements of the the Mine Improvement and New Emergency Response Act of 2006 (MINER Act). According to the MINER Act, mine operators are required to deploy wireless tracking and communications systems that can operate before, during, and after mine emergencies. It is legislated that mine operators must deploy the technology by July 31, 2009 (although one could expect that deadline to be relaxed). The enforcement of the deadline is supported by substantial financial penalties, and recently, tax incentives. Coal mine operators are compelled to deploy, and this greatly benefits ACT.
> Apparently, the only other wireless network technology with MSHA certification is a solution developed by L3 (LLL-NYSE), although for lower data rates at 900MHZ, inferring limited capacity.
> ActiveMine can potentially bring U.S. mine production into the 21st century. With the ActiveMine mesh network acting as a robust data network, mine operators can monitor production in real-time, operate machinery remotely, and improve efficiencies simply with better communications. Enhanced production efficiencies could reduce production costs and help preserve margins as coal prices decline. Current clients such as Patriot Coal (PCX-NYSE) understand the potential competitive advantages.
> ACT has a current backlog of $6 million, which should be deployed and recognized before the Company's fiscal year-end of July 31, 2009. It should be receiving deposits almost immediately, so it could have enough cash to execute, although there may be a need for a further raise of working capital for deployment if the pipeline converts quickly.
> Although not confirmed by Management, it is widely believed that the Company has a 12-month sales pipeline of approximately $60 million. With MSHA approval, we may see the pipeline increase, and we could see accelerated conversions as the MINER Act deadlines loom.
> There are several technology Companies such as Rockwell, Motorola, and L3 that provide some elements of technology that may find ActiveMine to be a compelling certified solution in the future.
The share prices peaked as high as $0.69 in late 2007 as Management believed that it was close to MSHA approval at that point. Since that time, the stock has declined in price, bottoming at $0.045 in November and now sitting at $0.085 per share. My 12-month target at the end of 2007 and during the beginning of 2008 was $0.80. Based on the current situation and current markets, I would expect that analysts would put a 12-month target on the stock in the $0.40 to $0.60 range, depending on their assumptions regarding backlog deployment, pipeline conversion, and breakeven margins. Notwithstanding, with federal certification, impending legislation, happy reference customers, a backlog with a significant pipeline, there is a lot of potential for upside in the stock.
The stock is widely held and has surprising liquidity for a microcap technology story. With such a major milestone announcement today, we should see brisk trading throughout the day.
I own shares in ACT, but do not own shares in any of the other Companies mentioned.
2/3/09
Web 1.0 Redux?
Recent positive earnings and outlooks from Amazon (AMZN-Q), Netflix (NFLX-Q), and Digital River (DRIV-Q) seems to have caught the market a little by surprise. Why has the old Web 1.0 e-commerce model experienced such a relative resurgence? And should investors buy, hold or sell in the sector?
The overall upward trend in online usage benefits from both demand-side and supply-side drivers. This alone should be seen as positive.
Demand Side
During the Holiday Season, it appears that consumers were less about shopping experience and more about buying utility. As well, higher unemployment and economic insecurity means fewer commuting trips and less destination travel, both of which typically generate more in-store shopping. Its a lot less fun trudging to the local Wal-Mart than it is to shop at Sak Fifth Avenue on the cancelled trip to New York. Furthermore, "deals" can be repeated online with less consumer hassle associated with parking and crowds.
As the economy worsens, we should see this trend strengthen because, well, it's happened before. In the early 1990s, Faith Popcorn rose to fame in part because she coined the term "cocooning", which described the trend of people staying at home more. In retrospect, this trend was due primarily to the recession, and once the economy returned to health, the niteclubs began to fill again. It's reasonable to suggest that 17 years later, people are likely to behave similarly. Netflix appears to be a clear beneficiary of this trend. During the early 1990s, the clear beneficiary was...Blockbuster (BBI-NYSE). Same trend, different delivery.
E-commerce is benefitting from maturity. In these uncertain times, e-commerce has been around for nearly 15 years, and most consumers have online buying experience. As well, the technology has greatly evolved to offer better perceived security, privacy and choice. Unlike in the past, there is consumer pull, which is far more cost effective.
Brand matters. Just like marketing budgets flow to Google (GOOG-Q), and IT services contracts flow to IBM (IBM-NYSE), e-commerce flows to "safe" dominant brands. This benefits Amazon directly. On the other hand, eBay (EBAY-Q) has experienced lingering service issues that has eroded some of its brand equity recently, which could be partially reflected in its poor Q4 performance.
Supply Side
Based on the transcripts of the various conference calls, it appears that retailers and manufacturers are rationalizing distribution channels, and moving towards highest efficiency, highest measureability. Increasingly, transactions are being moved online.
Benefiting Digital River directly, manufacturers and retailers are cutting more costs by outsourcing the online retail infrastructure. The Company has reported some impressive contract wins. Amazon has taken it further by outsourcing its excess infrastructure through its Elastic Cloud Computing (ECC) business, which grew year-over-year by over 30%.
During 2009, we should see more retailers rationalizing physical networks, while attempting to hold onto consumers via online marketing programs and more e-commerce activity. Multi-channel retailers with the most advanced online retailing capabilities should benefit most.
An area of increased investment is likely to be in the area of transaction efficiency. How can the discovery/decision/buy process be shortened? We should see more attempts at integrating transactions into marketing with more mobility. Look for more integration between affiliate marketing and e-commerce, possibly in the form of increased M&A during the year.
So are the stocks buy, hold or sell? It depends on the investment time horizon, but stocks like Amazon, and Digitial River, with clear hooks into the infrastructure are likely more appealing long-term than category plays such as Netflix where competition could become fierce fast. The stock has had a nice run since the fall and I would be taking profits. It may be a good time for Netflix to think about strategic acquisitions. eBay may find itself in the wilderness during this recession as it struggles to evolve its business model, mitigate some of the potential channel conflicts associated with its Power Sellers, regain consumer confidence, and figure out what to do with Skype. eBay may sit this one out.
I do not own any of the stocks mentioned above.
The overall upward trend in online usage benefits from both demand-side and supply-side drivers. This alone should be seen as positive.
Demand Side
During the Holiday Season, it appears that consumers were less about shopping experience and more about buying utility. As well, higher unemployment and economic insecurity means fewer commuting trips and less destination travel, both of which typically generate more in-store shopping. Its a lot less fun trudging to the local Wal-Mart than it is to shop at Sak Fifth Avenue on the cancelled trip to New York. Furthermore, "deals" can be repeated online with less consumer hassle associated with parking and crowds.
As the economy worsens, we should see this trend strengthen because, well, it's happened before. In the early 1990s, Faith Popcorn rose to fame in part because she coined the term "cocooning", which described the trend of people staying at home more. In retrospect, this trend was due primarily to the recession, and once the economy returned to health, the niteclubs began to fill again. It's reasonable to suggest that 17 years later, people are likely to behave similarly. Netflix appears to be a clear beneficiary of this trend. During the early 1990s, the clear beneficiary was...Blockbuster (BBI-NYSE). Same trend, different delivery.
E-commerce is benefitting from maturity. In these uncertain times, e-commerce has been around for nearly 15 years, and most consumers have online buying experience. As well, the technology has greatly evolved to offer better perceived security, privacy and choice. Unlike in the past, there is consumer pull, which is far more cost effective.
Brand matters. Just like marketing budgets flow to Google (GOOG-Q), and IT services contracts flow to IBM (IBM-NYSE), e-commerce flows to "safe" dominant brands. This benefits Amazon directly. On the other hand, eBay (EBAY-Q) has experienced lingering service issues that has eroded some of its brand equity recently, which could be partially reflected in its poor Q4 performance.
Supply Side
Based on the transcripts of the various conference calls, it appears that retailers and manufacturers are rationalizing distribution channels, and moving towards highest efficiency, highest measureability. Increasingly, transactions are being moved online.
Benefiting Digital River directly, manufacturers and retailers are cutting more costs by outsourcing the online retail infrastructure. The Company has reported some impressive contract wins. Amazon has taken it further by outsourcing its excess infrastructure through its Elastic Cloud Computing (ECC) business, which grew year-over-year by over 30%.
During 2009, we should see more retailers rationalizing physical networks, while attempting to hold onto consumers via online marketing programs and more e-commerce activity. Multi-channel retailers with the most advanced online retailing capabilities should benefit most.
An area of increased investment is likely to be in the area of transaction efficiency. How can the discovery/decision/buy process be shortened? We should see more attempts at integrating transactions into marketing with more mobility. Look for more integration between affiliate marketing and e-commerce, possibly in the form of increased M&A during the year.
So are the stocks buy, hold or sell? It depends on the investment time horizon, but stocks like Amazon, and Digitial River, with clear hooks into the infrastructure are likely more appealing long-term than category plays such as Netflix where competition could become fierce fast. The stock has had a nice run since the fall and I would be taking profits. It may be a good time for Netflix to think about strategic acquisitions. eBay may find itself in the wilderness during this recession as it struggles to evolve its business model, mitigate some of the potential channel conflicts associated with its Power Sellers, regain consumer confidence, and figure out what to do with Skype. eBay may sit this one out.
I do not own any of the stocks mentioned above.
2/2/09
If You Are A Public Market CEO in the Long-Tail of the Small Cap Tech Sector; You Are Either a Buyer or a Seller
Last week on BNN during his call-in show, Bob McWhirter made an interesting point (15:58 mins, part two) that public Companies should take heed. He said that there is very limited liquidity for public Companies worth less than $100 million on the TSX/TSXV. I respect Bob's opinion very much, and I also happen to agree with him.
According to the TSX website, there were 312 technology companies listed on the combined TSX and TSXV exchanges. This is down 7% in one year from 334 listings as at the end of 2007. This trend should accelerate during 2009.
Of those 312 Companies, only 29 exited 2008 with market capitalization in excess of $100 million, with possibly another 5 listings within reasonable shooting distance to that benchmark.
Based on Bob's assertions regarding $100 million market cap, 283 Toronto-listed technology Companies, or 91% of the technology sector currently falls into the long-tail of the small cap market with market capitalization below $100 million. Even worse, 267 of those Companies are worth below $50 million and fall into a liquidity trap as capital flows to the relative safety of more liquid larger cap stocks. Will liquidity return to this part of the market? Not any time soon. The BMO Small Cap Index is down 46% from the previous year, and billions of dollars have left the market along with countless hedge funds that once traded small caps. It could be many years into a recovery before we see liquidity return to the long-tail of the small cap sector. However, we should see increasing liquidity among tech small caps with market capitalization above $100 million because of the horizontal nature of the sector, and the relative performance compared to other sectors during 2009.
As a CEO, what decisions could one make to get out of the liquidity trap? Here is a prescription (this could apply to other sectors such as media, too):
1. Reality Check: Too many CEOs are using pre-recession multiples to evaluate where their Company's stock should be trading. During the past few weeks I have heard it over and over again. My stock is trading at (insert nominal amount here), but it should be worth 10 times that. Well, maybe in 2007. But now profitable, cash generating, high growth tech Companies are being evaluated at 4x to 6x EV/EBITDA multiples. Earlier stage Companies with time to profits and weakening balance sheets are just not worth much because investors are no longer measuring investments on a revenue multiple basis. Bottom line, with few exceptions, current market capitalization reflects current value below $100 million. In the current market, very few Companies have the future earnings potential to grow profits organically to get to the $100 million market cap benchmark. As stated in previous posts, a lot of consolidation needs to occur in the sector, and among the 267 technology Companies worth under $100 million, its almost a binary decision...am I a buyer or a seller?
2. Options for profitable Companies worth below $100 million: There are some Companies worth below $100 million that are cashflow positive with strong balance sheets. It depends on where a Company is during its lifestage whether its Board should decide to become a buyer or a seller. A recently profitable Company ( with less than 4 quarters of consecutive profits) should be a buyer because its future earnings growth will be discounted by an acquirer. A strategic acquisition may be more easily accretive for a recently profitable Company if synergies are present. A consistently profitable Company with a decent balance sheet worth less than $100 million may think about becoming a seller because shareholders may realize more value from future profits on a relative basis. However, with cash in the bank, and consistent earnings, it may be worth buying or merging with a higher growth recently profitable Company to add some juice to future earnings. Notwithstanding, as a profitable Company, there are a lot more options with positive impacts on future earnings.
3. Options for near profitable Companies worth below $100 million and with strong balance sheets: An option for these Companies is to simply ride out the recession and hope that investors take notice when its all over and liquidity returns to the small cap sector. Shareholders are likely to suffer from this decision. Smart CEOs should look to become aggressive consolidators, picking off smaller, distressed strategic and competitive assets. Basically, put the balance sheet to work. A Company with a strong balance sheet that is nearly profitable likely raised capital prior to small cap decline. Gain more value by arbitraging on the multiples. Acquire for scale and for profitability.
4. Options for profitable Companies worth below $100 million and with weak balance sheets. Buy distressed competitors with stock. With limited market liquidity, dilution is likely not that impactful, but by taking out competitors, and creating operating synergies, cashflow could be accelerated. Buying distressed competitors could further weaken a balance sheet, however an effective roll-up strategy could attract investors to shore up balance sheets.
5. Options for unprofitable Companies worth below $100 million and with weak balance sheets (even with great potential). Investors are no longer interested in potential at this time. CEOs (and Boards) should look for strategic merger and sell opportunities. There is very little chance that these Companies will attract investor capital any time soon, and there is probably a "best before date" on the operation. Attempting to raise equity to fund working capital is probably a waste of management time. There is very little appetite among investors. Management should spend its time:
1) bridge financing operations until sold.
2) removing overheads and cleaning up balance sheets.
3) valuing assets and operations.
4) finding buyers that maximize shareholder value.
5) completing transaction.
6) assisting with integration (if required).
The public markets have been fractured, and for some reason the CEOs that operate within them seem to be the last ones to have gotten the message. The small-cap long tail is likely to be a lot shorter by 2011, and Management teams must find creative ways to improve liquidity. Right now, the magic point of liquidity may be $100 million market cap. CEOs buried in the long-tail of the small-cap markets should be asking every day, how can I get to $100 million market cap...soon?
According to the TSX website, there were 312 technology companies listed on the combined TSX and TSXV exchanges. This is down 7% in one year from 334 listings as at the end of 2007. This trend should accelerate during 2009.
Of those 312 Companies, only 29 exited 2008 with market capitalization in excess of $100 million, with possibly another 5 listings within reasonable shooting distance to that benchmark.
Based on Bob's assertions regarding $100 million market cap, 283 Toronto-listed technology Companies, or 91% of the technology sector currently falls into the long-tail of the small cap market with market capitalization below $100 million. Even worse, 267 of those Companies are worth below $50 million and fall into a liquidity trap as capital flows to the relative safety of more liquid larger cap stocks. Will liquidity return to this part of the market? Not any time soon. The BMO Small Cap Index is down 46% from the previous year, and billions of dollars have left the market along with countless hedge funds that once traded small caps. It could be many years into a recovery before we see liquidity return to the long-tail of the small cap sector. However, we should see increasing liquidity among tech small caps with market capitalization above $100 million because of the horizontal nature of the sector, and the relative performance compared to other sectors during 2009.
As a CEO, what decisions could one make to get out of the liquidity trap? Here is a prescription (this could apply to other sectors such as media, too):
1. Reality Check: Too many CEOs are using pre-recession multiples to evaluate where their Company's stock should be trading. During the past few weeks I have heard it over and over again. My stock is trading at (insert nominal amount here), but it should be worth 10 times that. Well, maybe in 2007. But now profitable, cash generating, high growth tech Companies are being evaluated at 4x to 6x EV/EBITDA multiples. Earlier stage Companies with time to profits and weakening balance sheets are just not worth much because investors are no longer measuring investments on a revenue multiple basis. Bottom line, with few exceptions, current market capitalization reflects current value below $100 million. In the current market, very few Companies have the future earnings potential to grow profits organically to get to the $100 million market cap benchmark. As stated in previous posts, a lot of consolidation needs to occur in the sector, and among the 267 technology Companies worth under $100 million, its almost a binary decision...am I a buyer or a seller?
2. Options for profitable Companies worth below $100 million: There are some Companies worth below $100 million that are cashflow positive with strong balance sheets. It depends on where a Company is during its lifestage whether its Board should decide to become a buyer or a seller. A recently profitable Company ( with less than 4 quarters of consecutive profits) should be a buyer because its future earnings growth will be discounted by an acquirer. A strategic acquisition may be more easily accretive for a recently profitable Company if synergies are present. A consistently profitable Company with a decent balance sheet worth less than $100 million may think about becoming a seller because shareholders may realize more value from future profits on a relative basis. However, with cash in the bank, and consistent earnings, it may be worth buying or merging with a higher growth recently profitable Company to add some juice to future earnings. Notwithstanding, as a profitable Company, there are a lot more options with positive impacts on future earnings.
3. Options for near profitable Companies worth below $100 million and with strong balance sheets: An option for these Companies is to simply ride out the recession and hope that investors take notice when its all over and liquidity returns to the small cap sector. Shareholders are likely to suffer from this decision. Smart CEOs should look to become aggressive consolidators, picking off smaller, distressed strategic and competitive assets. Basically, put the balance sheet to work. A Company with a strong balance sheet that is nearly profitable likely raised capital prior to small cap decline. Gain more value by arbitraging on the multiples. Acquire for scale and for profitability.
4. Options for profitable Companies worth below $100 million and with weak balance sheets. Buy distressed competitors with stock. With limited market liquidity, dilution is likely not that impactful, but by taking out competitors, and creating operating synergies, cashflow could be accelerated. Buying distressed competitors could further weaken a balance sheet, however an effective roll-up strategy could attract investors to shore up balance sheets.
5. Options for unprofitable Companies worth below $100 million and with weak balance sheets (even with great potential). Investors are no longer interested in potential at this time. CEOs (and Boards) should look for strategic merger and sell opportunities. There is very little chance that these Companies will attract investor capital any time soon, and there is probably a "best before date" on the operation. Attempting to raise equity to fund working capital is probably a waste of management time. There is very little appetite among investors. Management should spend its time:
1) bridge financing operations until sold.
2) removing overheads and cleaning up balance sheets.
3) valuing assets and operations.
4) finding buyers that maximize shareholder value.
5) completing transaction.
6) assisting with integration (if required).
The public markets have been fractured, and for some reason the CEOs that operate within them seem to be the last ones to have gotten the message. The small-cap long tail is likely to be a lot shorter by 2011, and Management teams must find creative ways to improve liquidity. Right now, the magic point of liquidity may be $100 million market cap. CEOs buried in the long-tail of the small-cap markets should be asking every day, how can I get to $100 million market cap...soon?
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