RES Free Thinking

M Partners: 2011 Year-end Review and Outlook for 2012

2011-12-15T13:45:00.001-05:00

We have had some great reviews from clients on this year-end recap and 2012 outlook for small cap technology stocks, so I thought it would be a good idea to share it here.

Small cap tech year end review 2011

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Communitech is doing a great job in Kitchener-Waterloo

2011-11-09T23:03:00.000-05:00

I just returned from a meet-and-greet arranged in Kitchener by Communitech to connect early stage technology companies to potential investors. Although tonights event felt a bit like an awkward high school dance, I think that the efforts being made by Communitech in K-W are exceptional. Although there were a few wonky concepts, I was impressed by the general quality of the ideas, the execution, and the people passionately fronting them.

Communitech did a solid job screening the opportunities for potential investors, and there was a nice cross-section of potential capital for entrepreneurs. We will be back. And this is important. The more that Communitech facilitates access to capital, skills, and connections, the more vibrant the K-W technology community will be.

I think that Communitech should be held up as an example for other communities of how to establish a cultural core for a vibrant centre of entrepreneurial excellence. More of this needs to be done in order to support intellectual ecosystems and innovation.

Next step is to get these beautiful little startups to maturity.

Where is my representative?

2011-11-07T22:06:00.000-05:00

I find it disturbing how extreme opinions and actions have hijacked the political and economic discourse worldwide since the beginning of the 2007 recession. Since that time the world has seen the polemic rise of the Tea Party and then Occupy Wall Street. A presidential candidate has threatened physical harm to the Chairman of the US Federal Reserve and there have been violent uprisings worldwide from Cairo to Athens and all the way to Oakland. And of course, everyone hates bankers.

Through all of this I feel more isolated and strangely deceived. Reasonableness has been subsumed by anger. Optimism has been darkened by the shadow of fear. People seem to hate more now than they did prior to the recession.

Maybe its the way media has evolved. With 24-hour cable news and millions of notes published every week somewhere on the web - opinion is pervasive. Expert or not. And every opinion published by a credible expert seems to be commented on by increasingly random angry people. It must be exhausting to be so angry. But anger begets drama and drama attracts viewers, which makes money. And the anger has permeated all facets of politics, resulting in an ugly extremism that I can no longer relate to. As a fiscally conservative person with moderate views, I feel lonely.

So I thought that I may take this opportunity to list 22 things that I believe to be true. Is there anyone out there that aligns with my less-than-extreme views?

1. Capitalism, with all of its warts, is essential to the human condition and the only economic model of hope. There is no alternative approach.
2. Capitalism operates with game dynamics, which means that it needs specific rules and impartial, transparent enforcement of those rules by independent third-parties in order to operate effectively. Rules and referees with whistles.
3. There is no "invisible hand" of capitalism because it should all be measurable and transparent.
4. Public service unions are the antithesis of service and withold value from taxpayers and citizens for their own gain.
5. I am not religious, although I have friends that are religious. I respect that they are religious and they respect that I am not religious. But I don't want their views and morals imposed on me through social legislation.
6. Democracy and capitalism are not mutually inclusive or dependent.
7. Representation without taxation is as morally reprehensible as taxation without representation.
8. Ayn Rand was a fraud.
9. TARP was not about bailing out the banks but about preventing a worldwide financial meltdown.
10. Dogma like anti-tax pledges will destroy the future of America.
11. investing in infrastructure is a no-brainer - Barack Obama is right.
12. Investing in education is a no-brainer - as long as there is accountability - Jeb Bush is right.
13. The world needs collaboration and creativity to solve our endemic financial problems. There are too many purists who refuse to compromise. There are too many intractible positions like "Austrian school", "Chicago school", and "Keynesian". We need to find ways to examine the policies of all economic schools of thought.
14. Until there is real campaign finance reform, the United States policy is doomed to serve the narrow interests of corporations at the expense of most people.
16. Most of the wealthy that make over $1m per year are not "job creators". Typically, they are occupiers of positions in large multinational organizations that are not creating jobs. These organizations are hoarding cash and not necessarily hiring.
17. Those that are hiring are small businesses with great ideas. This is the economic engine of America.
18. America's economic engine is being starved of its fuel - skilled creators. Too many Americans attend university with skill deficiencies and graduate with useless degrees.
19. The Federal Reserve has been essential to preventing a worse financial crisis in the United States.
20. I believe in Modern Monetary Theory
21. I believe in science
22. Regulation does not work well because it has been compromised by special interests to be ineffective. To be effective, regulation needs to be clear, concise, and easy.
23. I think the "war on drugs" is mostly a waste of money that promotes criminality.
24. The US should focus defense spending on cheap things that work like drones and exit places like Germany and Japan.
25. there is too much inequality in the United States, which if left unattended could ruin the greatness of the country.

So based on these items, extremists from either end of the spectrum would likely label my views viciously. I guess I'm more Jon Huntsman with some Barack Obama and a touch of Ron Paul. In Canada, ultimately I am what was once described as a Red Tory - a fiscal, practical conservative that strives for success but is compassionate about the plight of fellow citizens.

Is there anybody out there that thinks this way?

Is there some type of political entity that represents this viewpoint?

Six Obvious Steps to Prevent the United States from Becoming a Banana Republic.

2011-08-10T10:38:00.000-04:00

To most reasonably informed Americans, there are some really basic things that its representatives in government should do, but lack the political will to execute. Without real reform, the middle class will continue to decline, forcing entrepreneurs to go to other markets, and the concentration of wealth in the hands of an increasingly smaller minority of people will accelerate the decline of the American Empire. Here are a few obvious steps that should be taken:

1. Campaign Finance Reform. It is well known to most Americans that powerful lobby groups control discourse in American politics. It's been a problem for decades. Some attempts were made recently to tweak campaign finance rules have had recent unintended consequences such as shadowy "arms-length" financiers like the Koch brothers that increasingly control the agenda. Here's the problem: currently, a Presidential Campaign costs $100M or more.When raising this much money, how do you build your war chest without big influential donors?

2. Tax Reform: Nobody wants to pay taxes. An entire industry has been built around finding loopholes in an increasingly complicated tax regime influenced by the lobby groups and shadow leaders that finance Senate and Congressional campaigns. A simple flat tax rate with no exceptions and no loopholes combined with a consumption tax should accelerate revenues, and help stem the decline of the middle class, which is the primary problem for the long-term growth prospects of the US economy. Tax reform is unlikely without campaign finance reform.

3. Cut all departmental spending in concert with tax reform. No sacred cows like Defense and Medicare, and no targets like the old and the poor. Eliminate entire government agencies that do useless things like the "War on Drugs".

4. Eliminate useless banking regulations, vigorously enforce obvious banking regulations, and improve transparency. In a word, simplify and enforce. This should help move the US banking industry back to where it actually contributes to the growth of the US economy. The cannot happen without campaign finance reform. Stop wasting time talking about the foolish gold standard.

5 Kill all corporate subsidies.

6. Focus budgets on growth oriented activities such as education, infrastructure, and health.

Of course, none of this will happen because the Tea Party is intent on turning the United States into a banana republic while the middle class gorges itself on religion, prescription drugs and inane reality TV. Richard Koo is right and Rand Paul is crazy.

Consensus earnings growth does not justify share price for AAPL, AMZN, NOK, VMW, or CRM

2010-10-05T15:00:00.002-04:00

We have been seeing a lot of price justification related to AAPL’s recent climb to near the $300 level. Arguments abound that despite trading at a P/E multiple of 25.3x, AAPL is cheap on a fundamental basis due on its growth trajectory and its cash position. Based on comparative multiples, this may be a flawed argument. A classic method to test whether the market is pricing appropriately for future growth is to calculate the PEG ratio (price-to-earnings-growth). If a stock had a PEG ratio of 1.0x, investors should consider future earnings growth to be fully priced into the stock, and that its growth trajectory is “fairly valued”. Below 1.0x, there is a gap between the stock price and future earnings, and there is a buying opportunity. A PEG ratio above 1.0x infers that the market is overpaying for earnings growth.

We have ordered some technology bellwether stocks based on the results of a PEG calculation using Capital IQ data from Friday. The only outright BUY based on earnings growth is RIMM. A group of stocks including MSFT, HPQ, CSCO, ORCL, GOOG, and IBM appear fairly priced, to slightly overvalued. INTC, and QCOM should be viewed more cautiously.

A group of stocks including AAPL, AMZN, NOK1V, VMW and CRM appear to priced well ahead of their future potential earnings growth capabilities, which suggests that the market appears to be ignoring the consensus estimates for FYE+1 earnings related to these stocks. A plausible argument could be that the market is expecting significant “surprise upside” to consensus earnings estimates.

With respect to a recent common argument that AAPL is undervalued if the cash balance is removed from P/E estimate, we calculated an EV/EBITDA multiple which excludes cash, debt and non-operating/non-cash expenses. In comparison to other bellwethers, AAPL could be considered over valued at 13.6x EV/EBITDA versus the median among peer bellwethers, calculated at 9.5x. The median calculation removes mean skewing caused by outlying stocks like VMW and CRM.

The bottom line is that AAPL should be considered “toppy” at these levels because a lot of “surprise upside” to earnings is baked into the price based on the PEG ratio calculation. Often AMZN is used by people as a comparison to justify AAPL’s current share price. Comparing “toppy” to “toppier” is probably a risky proposition. In comparison to the median EV/EBITDA multiples, AAPL should be considered expensive by investors, along with CRM, VMW, and AMZN.

Global technology companies that derive most of their business from the enterprise such as ORCL, IBM, MSFT, HP, RIMM and CSCO should be attractive at current multiples as they benefit from corporate investment in productivity, and natural replacement cycles. Although VMW and CRM fit into this category, there is a lot of speculation priced into these stocks.

AAPL is entering the realm of “cultural zeitgeist” where the share price trades on reputation, not on fundamentals. It could be a great time for savvy long investors to lock in some profits and sell their shares to hardcore AAPL fans. AAPL should not be compared favorably to AMZN, CRM, or VMW because these stocks are even more overbought based on typical earnings growth measurements like PEG ratio and EV/EBITDA multiples.

Companies that have a broad global client base within the enterprise sector look pretty good. RIMM is a fractured stock because of the incessant comparison of Blackberry to iPhone. To put it into car terms, its like comparing Ford trucks to Porche 911s. They are both very good products, but with different functionality for different markets. Despite some forays into consumer devices, RIMM is an enterprise solution, while iPhone is a consumer solution. And I haven't forgotten about GOOG's Android - which could ultimately become dominant as the engine and drivechain for a hundred other vehicles.

Disclosure: I do not own any of the shares discussed in this post

The New Normal: 10 Themes and Their Implications on the American Economy (Part 3) Media Saturation

2010-09-24T16:49:00.000-04:00

On September 17th I introduced 10 themes that we see as having significant impact on the future of the US economy. Along with the a description of the theme, I include what "The New Normal" could look like, along with the possible risks and opportunities for investors. Here is the third theme of ten.

3. Media Saturation

 Technology has unleashed a broad number of information dissemination opportunities for essentially anyone who wishes to have an audience. Ad-driven models require content in order generate income, which has resulted a massive increase in data, editorial, and opinion available to anyone at anytime. In order to attract audiences and break through the melee of content, content programmers aim for “dramatic arc” in order to retain audiences, and derive advertising revenue. Parties to the “dramatic arc” with typically undisclosed vested interest tend to control messages related to the economy, policy, and individual corporate activities. Because there is so much available information, and less time to make decisions, data is “headlined” and themed, which tends to omit key nuances which would otherwise moderate outcomes.The manipulation of messages and themes reduces the accuracy, credibility and objectivity of information, which tends to increase underlying market risk. Information is becoming a blunt-force object.

New Normal: More extreme bull/bear opinions presented via large media platforms reinforce volatility and undermine economic confidence, This reinforces the flight of capital to perceived safety like money markets and gold, while helping to sideline capital and erode investment into the "real" economy.

Risks: Lacking confidence, individual investors and companies are less willing to deploy capital in the form of equity which is often the fuel used by companies for research, commercialization, or improvements in productivity. Fund Managers, whether VCs or institutions, become more concerned with risk management than with manximizing returns through growth and innovation. Without growth capital, entrepreneurs stop inventing and innovating. Without innovation, GDP stagnates.

Opportunities: Research analysts are required to disclose their position on any stock on which they publish. Similar disclosures should be enforced for any individual providing market opinion in a public forum. It would be nice for the macro-economist predicting economic disaster and targeting $2000.00 GLD to disclose that he/she owns 10,000 oz at $600.00/oz. There is probably room for "throw-back" fundamental analysis business models as a competitive counterbalance to"stream-of-conciousness" flow of information prominent now in media.

Investor Sentiment: Considering that the equity market appears to be heading sideways for the foreseeable future as baby boomers act more cautiously while they retire, extreme viewpoints within the media provide excellent opportunities for younger investors to buy on fear and sell on greed as the “dramatic arc” drives short-term volatility.

Why MSFT ORCL RIMM VMW and HP will continue to post solid results.

2010-09-21T21:43:00.000-04:00

We have been building a thesis that, regardless of the recent deceleration of economic growth in the US economy, the enterprise IT sector is on a bit of a roll that should persist for the next several quarters. Investors may want to look at business/enterprise IT technology for overweighted returns. Please note that 26% of the aggregate market cap of the sector is in cash and/or equivalents.
RIMM, MSFT, ORCL, VMW, and HP all reported better than expected results, and all presented fairly positive outlooks. Although CSCO met expectations, its outlook was positive. Our channel sources confirm that American business is investing in productivity at the desktop, in the pocket, and in the back office.

Current growth estimates for technology upgrades and replacement:

data center -> 20%
desktop -> 10%.
mobile -> 40%.

The objective is to make current employees more productive ahead of hiring new ones.

Based on previous recession recovery periods, the channels see a repeat of past patterns. US companies are currently making fairly meaningful investments in productivity tools to enhance TCO of IT, and to maximize current employee productivity. Although timing is difficult to predict, the current investment pattern suggests that companies will begin rehiring in a meaningful way within 2 quarters. By H2 2011, US employee growth should boost the prospects of MSFT, RIMM, ORCL and HP – companies which benefit directly from more bums in seats.

Alas, but here is the catch for the general US economy. The first to hire will likely be companies with global markets, manufacturers, and exporters. The last area of employment recovery is likely to be the services industry targeted at the domestic consumer market. The concern for the long-term health of the US economy is that this represents approximately 70% of employment. Whereas full employment in the United States once meant an unemployment rate of 4%, there is a higher probability that the natural unemployment rate could be closer to 7% until domestic consumer-centric jobs shake out (how many real estate agents and mortgage brokers does America need now?).

Bottom line: As companies continue to wring productivity out of its reduced workforce, and as a modest employment recovery begins to take hold during 2011, enterprise IT suppliers are likely to benefit. Stocks like MSFT, ORCL and RIMM have been trading at historically low multiples, thus could be a buying opportunity.

Disclosure: I do not own shares of any of the companies mentioned.

The New Normal: 10 Themes and Their Implications on the American Economy (Part 2) Tax Inequity

2010-09-20T23:20:00.001-04:00

In my previous post I introduced ten themes that represent a "new normal" for the American economy as it continues to exit from the 2007-2009 recession. Evidence suggests that the potentially greatest impact on the economy, and the first theme of the "new normal" is simple demographics. Baby Boomers are getting older, wealthier, more cautious, and more powerful than ever as a cohort. To them its now about assets not equity; dividends not growth. If the United States recovers to maintain its economic leadership, its largest cohort will likely need to behave differently than any other previous cohort at a similar life stage and throw caution to the wind. More than ever, the American economy needs investment in new ideas, new business models, and the skills of its diminishing workforce in order harness American ingenuity to actually grow its economy. This is not likely to happen because Baby Boomers have accumulated vast wealth and they are unwilling to part with it for any reason.

The second theme is related to the first.

2. Tax Inequity

 The tax holiday to the wealthy, which was introduced almost a decade ago in 2002 while Baby Boomers were in the prime of their productive years are unlikely to benefit the US economy as intended entering into this new decade. As they move towards retirement age, wealthy boomers, which represent 64% of America’s net worth, are more interested in cash (and equivalents like gold) as an asset. As a result, the expected trickle-down benefits of these specific tax breaks are not re-circulating back into the general economy as intended, creating an asset bubble and reducing investment into the broader economy. As an influential voting block, wealthy baby boomers will resist changes to taxation which would not benefit them specifically.

New Normal: Opportunity costs (estimated at between $700B and $900B annually depending upon source) associated with general tax breaks to wealthy Baby Boomers are not paying back as expected, and are unlikely to pay back because the excess capital does return flow into the real economy as intended. Wealthy individuals are less likely to invest in growth, and cannot possibly spend accumulated wealth fast enough to affect incremental economic activity. By redistributing some of the tax benefit to the US Middle Class, spending power increases by as much as $7000 per household.

Risks: Declining growth capital, the deceleration of money and recurring asset bubbles.

Opportunity: Unlock the potential of excess accumulated capital by tweaking tax policy to incent wealthy baby boomers to resist their natural tendencies of their stage of life, and invest in the broader economy. Concurrently, there is an opportunity to redeploy a portion of the tax holiday to spenders, which would probably be described as the “middle class”, representing approximately 55%-70% of the total population (depending upon categorization). A reasonable strategy could be to both incent investment by wealthy baby boomers and spending by the middle class via updated tax policy. It does not look good for the implementation of new tax strategies, as wealthy baby boomers exert their influence on policy.

Investor Sentiment: The probability is low that tax inequity will be resolved soon. The American Middle Class should continue have impaired purchasing power, which should impact negatively on the earnings power of companies that rely on these consumers for growth. Earnings for capital markets could be impaired as cash remains sidelined for an extended period. Although corporate America has been leveraging its massive balance sheet recently for M&A in some sectors such as technology, uncertainty may cause M&A activity to be choppy over long periods. Emphasis on cashflow over growth should be an overhang on employment in the US. Highly efficient operations with growing international consumer and enterprise opportunities are more attractive long positions. Short the American Middle Class.

The New Normal: 10 Themes and Their Implications on the American Economy (Part 1)

2010-09-17T17:00:00.002-04:00

History clarifies the present and that won’t happen until it’s too late. In the meantime, we are left trying to make economic sense of this messy human condition in real-time. At no point in history has the mess been more interconnected and complex than it is today. Those that are able to distill situations and make effective decisions in real-time are most likely to succeed, and then there is the other 99% of us.

Investors can no longer easily “peel back the onion” to uncover fundamental risks and opportunities and act upon them. There are just too many onions and they are appearing at faster rates, compressing the available time to uncover, solve, and act upon opportunities. And even as the onions are peeled, sometimes they turn into completely different vegetables.

No wonder investors are hiding under their desks right now. They are being pummeled by data, commentary, opinion, and opinion disguised as data from everywhere and continuously. Not all of the data is valuable, valid, or unbiased, which makes it difficult to make objective decisions. Hence, we see low volume and high volatility in equity markets.

In an effort to decipher secular and objective trends and events which could impact the performance of companies that I cover for my clients, I have been scouring for objective research and data that can provide some backdrop to the recommendations that I make.

For the most part, I cover small cap technology stocks. At no time in recent history have technology companies had as much money on their balance sheets, and at no time have these companies traded at a discount to the main index, despite showing 15% growth in earnings year-over-year. Among technology bellwethers, nine out of ten reported earnings growth last quarter, six out of ten beat estimates and 7 guided higher. Prior to 2008, this would have represented a fairly significant move up for the NASDAQ and a perceived buying opportunity. For Q2 2010, it represented a meaningful move down for most of those same stocks. Behavior that I have taken for granted over the past two decades did not occur, which leads me to believe that there are new fundamental drivers and conditions affecting the market. In other words, there appears to be a “new normal” emerging from this recession that is impacting not only the narrow band of technology stocks that I follow, but also the broader economy. The trends are sobering. However, as a generally optimistic individual, I am hopeful that Americans will find a way to alter their path. The world economy will depend upon it.

I have organized the New Normal into ten themes. Within each theme, I attempt to identify the risks, opportunities, and investment sentiment. Without changes to policy that could alter the present course, the overall indicators are that the United States appears to be entering a period of persistent low economic growth with high volatility and increasing polarity between rich and poor. As with all things, Americans have the ability to alter course. The interesting question is whether they have the will to do so.

Here are the 10 themes:

1. Demographic Shift
2. Tax Inequity
3. Media Saturation
4. War(s)
5. Education Deficit
6. Health Deficit
7. Innovation Deficit
8. Debt
9. Accountability & Ethics
10. Political Intractability

I expect to publish one or two themes over the next several days. Here is the first and most in-depth theme.

1. Demographic shift

 Affluent Baby Boomers, who make up 14% of the cohort and represent 62% of US net worth, are entering a wealth preservation phase of life as they prepare for retirement. Of the 2% of Americans that control 37.2% of the net worth of the US, 80% of them are Baby Boomers. In essence, after accumulating massive wealth while helping to power growth in the American economy over the past three decades, these people are less interested in growth.

New Normal: American ingenuity is about to become “underfunded”. Wealth preservation means less risk capital available for American entrepreneurs to commercialize ideas and grow companies as affluent baby boomers shift investment strategies away from perceived higher risk equity to perceived lower risk hard assets (like gold), bonds, cash and treasuries as they attempt to preserve wealth. The effect is to sideline immense amounts of capital that would otherwise be available to fund investment in the real economy.
Risk: To thrive, modern economies need to invest in innovation. Without available capital, US innovation and entrepreneurship may face a funding shortage, resulting in fewer high paying “creative” jobs. Typically, these jobs create more jobs. Worse for Americans, emerging economies are beginning to evolve into engineering and design-based economies – which creates competition for skilled labor, and capital – both of which tend to flow towards innovation.
Opportunity: Incent affluent baby boomers to put their capital to work. Government can help via direct stimulus like the Energy Recovery Act, or via potential tax incentives which compel baby boomers to invest in economic growth and domestic employment. The Small Business and Credit Act 2010 is an attempt that was recently passed by Congress. Notwithstanding government intervention, entrepreneurs may be required to re-set cost-of-capital expectations versus recent historical pricing. Growth capital will be more costly. Export markets should become a priority…please see my next point.
Investor Sentiment: De-emphasis of growth should reinforce declines in forward valuation multiples for technology and services sectors. I believe that these declines should persist for the next three to five years. High growth companies with strong balance sheets should begin to offer investors dividend yield in order to better align to emerging Affluent Baby Boomer risk profiles. Investors have seen recent moves by both Cisco (CSCO) and Microsoft (MSFT) to introduce dividends.

 Core Baby Boomers are repairing balance sheets as they face an uncertain retirement after their primary asset value cratered (home equity).

New Normal: The US consumer is old and tired and redefining consumption as they “hunker-down” entering retirement. Leading up to the 2007 recession, these baby boomers leveraged their modest assets to become the most powerful consumer group in the world. Spurred on by the federal government to spend post-9/11, they imperiled their future to buy new homes, appliances, and cars. After the resulting credit crisis, household balance sheets are being repaired, removing consumer spending horsepower from the economy, which has represented 70% of the economy since the end of WWII and is counted on by economists for sustained GDP growth.
Risks: The American economy needs another horse to ride besides the consumer. Currently, the economy, measurement and policy are aligned to the consumer. What if housing starts are no longer meaningfully correlated to measuring GDP? There will be less domestic consumption which implies that there is a high probability of an extended period of disinflation and an ongoing risk of deflation in an American economy that relies on domestic consumption. Central bankers have become adept at managing inflation over the past two decades, but have had little experience managing deflationary risk, which infers systemic uncertainty.
Opportunities: While baby boomers embarked on their two decade-long spending spree, the United States became a net importer of goods. GenXers and Echo Boomers need to more than ever look outside of domestic borders to return the US to its net exporter status prior to 1990. The US Administration appears to recognize the opportunity by recently announcing the National Export Initiative with an objective to double exports within five years. A devalued USD could also spur on export activity. However, China would need to agree to stop pegging the Yuan to USD in order to give the dollar room to move. There is a reason why the United States is filing a grievance to the WTO in this regard right now.
Investor Sentiment: U.S. stocks that derive more than 50% of business outside of the United States should show revenue growth and margin expansion, especially if the USD declines in value. Focus on US domestic spending yardsticks such as home starts may become a less valid measurement of economic health. Accelerate investment into companies that sell innovative products and services to emerging BRIC middle class.

 There are not enough Gen-Xers and Echo-Boomers to replace retiring Baby Boomers at a pace that actually increases the labor force, even as more Baby Boomers remain in the workforce than past cohorts. In 1995 when Baby Boomers were in their prime productivity years they represented 29.8% of the total population, while the cohort retiring ahead of them represented 15% of the population. In 2010, retirement age Baby Boomers represent 22.6% of the total population while the prime productivity population has shrunk to 27.3% and should shrink more over the coming decade.

Wealth Creation 1995

Wealth Preservation 2010

New Normal: It is assumed that a growing economy needs increasing productivity, investment, and labor force. For the first time, the available labor force is about to shrink as Baby Boomers retire. In addition, the spending power of the post-Baby Boomer cohorts is likely to decline as more of their earnings are diverted to pay for the unfunded liabilities of their baby-boomer parents such as healthcare.
Risks: A smaller productive labor force with less spending power implies that GDP growth will be impaired in comparison to recent recoveries as the US economy exits from the 2007 -2009 recession.
Opportunities: The single largest opportunity is for the US to follow the lead of other industrialized economies and increase the age of mandatory retirement in order to maintain the size of the labor force, and to delay the impact of a declining workforce. Notwithstanding, unless the US introduces policy to attract a large number of skilled immigrants, the long-term trend for the US labor force is downward, implying that GDP growth is likely to be subdued for at least a generation.
Investor Sentiment: If the current trend continues over the next few years, investors should look to information technology companies that help US producers offset reduced labor access with more automation and efficiency. Off-shore investment should accelerate as capital flows towards growing skilled labor pools elsewhere.

 Baby Boomers will continue to be a major political force in the U.S.

New Normal: The GOF Syndrome (Grumpy Old Fart Syndrome) should shift US policy increasingly towards the preservation of individual wealth with priority investments in healthcare and security at the expense of investment in education, and economic development.
Risks: Funding will be less available to arm people with skills to compete with innovators and entrepreneurs of emerging economies. In an environment where China graduates 30M engineers per year, reduced investment priorities in education imperils future US competitiveness, productivity, and wealth creation.
Investor Sentiment: Investors considering US domestic stocks should look at health related stocks with particular emphasis on pharmaceuticals, genetics, long-term care, and disease management.

 Conclusion: Baby Boomers are:

Becoming net savers; not spenders
Hoarding assets and less interested in creating wealth
Delaying retirement in order to repair balance sheets
Not being replaced in the workforce by latter cohorts
Dictating policy priorities, which promote individual wealth preservation (such as tax benefits) over economic growth
New Normal: As Baby Boomers retire, they are sucking growth and innovation investment out of the economy, while at the same time becoming less of an economic engine as they reduce spending. They are likely to affect a shift in policy focus towards healthcare, and away from education. These trends could cause the economic rebound to be muted in comparison to previous recessions, and have a long-term impact on sustained GDP growth. Unless there are policy alterations focused on propping the labor force, and unlocking the power of accumulated Baby Boomer wealth, the US economy may be on a path towards economic decline relative to the rest of the world. The good news is that U.S. policy makers appear to be moving in a direction to at least partially address the affect conditions including the Small Business & Credit Act, and the National Export Initiative.
Investor Sentiment: Invest in multi-nationals with solid brand equity among BRIC middle class. US economic growth and innovation will be constrained by lack of capital and a shrinking workforce. Pockets of domestic investment opportunity reside in health care, technology, business services, net exporters, and banking. Entrepreneurs will need to re-set expectations for growth capital, and will probably need to incent Baby Boomers to invest with yield. This is already beginning to shake out as expected with traditional growth companies like MSFT and CSCO recently implementing dividends. Expect ongoing bubble risk in assets and treasuries as Baby Boomers run-up the value of gold and silver among others. Equity markets are likely to attract less investment than in the previous 15 years.

Sources:
McKinsey Global: Talking ‘Bout My Generation: The Economic Impact of Aging US Baby Boomers 2008

Capital IQ

Wikipedia
Population Bulletin

Export.gov

US Census

iLOOKABOUT (ILA.V): Deploys a transformative contract - investors should take note

2010-06-21T09:58:00.000-04:00

iLOOKABOUT is about to benefit from a significant software service being rolled out to the insurance industry in Ontario. The solution is called iClarify and will be available to about 700 broker offices in the province by the end of June. The deployment comes on the heals of a successful 30-day pilot where 37 broker offices generated approximately 40,000 queries over that timeframe. We believe that iLOOKABOUT should generate somewhere between $1.00 and $4.00 per query as the solution goes live. Ontario alone should have as step function impact on both revenue and earnings starting this quarter (which is fiscal Q3). Its solution partner SCM announced that both Quebec and British Columbia launched pilots for June. Investors could infer that, if the BC and PQ pilots show similar metrics to Ontario, then there is a good possibility that these provinces will be soon rolled out.

Notwithstanding, the revenue and earnings impact of the iClarify project to iLOOKABOUT is not currently priced into the stock. Please see my initiating report on behalf of MPartners published earlier this month.

20100607 ila - initiation

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I do not own shares of ILA.

MPartners RES Small Cap Tech Sector - June 15

2010-06-21T09:23:00.000-04:00

See the slide show of Small Cap Tech Sector performance as of June 15th.

Tech sector june 15

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Mpartners RES Canadian Small Cap Tech Index - April

2010-05-04T20:15:00.000-04:00

Published for institutional investors earlier today. The bottom line is that small cap technology stocks have demonstrated 12.5% better YTD returns than the main index. Even with solid returns so far this year, the Small Cap Tech Index is still trading at an earnings discount to the main index, inferring that there remains future upside. During April, approximately $92M in capital was raised, with OTC making two acquisitions. OTC bought Nstein for approximately $32 M, and then followed up later in the month with an acquisition of Burntsand for approximately $12M.

Various sources continue to call for a secular bull market for the technology sector due to a current IT replacement cycle, and the emergence of the mobile web which could be up to five times the size of the fixed line internet measured in terms of users.

M partners res small cap tech index April update

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Commentary on BNN regarding RKN, BWC and SVC

2010-05-04T19:38:00.001-04:00

On Friday April 30th, at 3:15, I was guest on BNN discussing three mobile ecosystem companies that I initiated official coverage on with Mpartners.

The investment concept is this: mobile operators worldwide are experiencing a data capacity and congestion crisis that is expected to get exponentially worse over the coming five years as web enabled smartphones proliferate the market. Even with significant network capacity upgrades, operators will continue to run up against capacity challenges and quality of service issues. Network optimization solutions will be required to help more efficiently manage how data is used in order to offset the expenses associated with network upgrades. With smartphones using 40 times more data than a typical feature phone, 10 million web enabled smartphones use as much data capacity as 390 million feature phones. According to Cisco, mobile data capacity requirements are forecasted to grow at a parabolic CAGR of 108% over the next four years. At the same time, subscriber ARPU is forecasted to grow at a CAGR of only 10%. As a result, mobile operators will struggle to grow profitably as they support popular smart phone devices like iPhone and Android platforms.

Investors can benefit from this problem by participating in the upside potential of the three software-oriented mobile infrastructure stocks that I mention in the clip. Often complimentary, sometimes competitive, each company plays at a different level within the stack from billing (RKN) to policy (BWC) to network awareness (SVC). Here is the link.

http://watch.bnn.ca/trading-day/april-2010/trading-day-april-30-2010/#clip296311

To return to RES Free Thinking, please click on the back button of the browser window in which the clip plays.

Why Investors Should Look at TSX/V Small Cap Tech

2010-04-16T13:12:00.001-04:00

Here is a slideshare presentation of a research piece that I wrote for MPartners earlier this week.

20100414 small cap tech update

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Cisco's Cr-3 Router - Streaming Media Players Drool

2010-03-10T16:43:00.000-05:00

Cisco's CR-3 322 Terabyte carrier-grade router is three times faster that its predecessor CR-1 router. Not certain if this is a "change the Internet forever" product. However, it may be a tipping point for rich media providers if it is well adopted by carriers. Considering that carriers are constantly scrambling to keep up with capacity demand, its probably a very good possibility that sales of this $90,000 router will be brisk.

John Chambers hyberbolic messaging around the capabilities of the router focused on the benefits to rich media (in particular video), which has been clogging pipe for years. The scenario painted is massively available rich media streamed from the cloud. Basically, consumers and business everywhere will be able to access rich, high quality media streamed to any device at any time from the cloud with DRM protection on content.

The most obvious immediate beneficiary of this evolving content model is Netflix (NFLX), which would immediately benefit from a streamlined distirbution model for rented movies. Clearly, large media conglomerates that create and manage content would also benefit, as would content originators like sports leagues, musicians, and entertainers. So too would the surrounding ecoystems.

There are several Canadian technology companies that could immediately benefit from the network capacity gains offered by the CR-3 router. These three come to mind:

Intertainment (INT:TSXV) is a micro-cap media company that appears to have caught lightning in bottle with its Itibiti desktop streaming media widget. With NBC as an anchor customer, and with Microsoft choosing it as a reference Silverlight 4.0 deployment, Intertainment is building an influential client fan base for its always on widget. Using the widget, NBC streams content continuously to users while disintermediating the browser. By disintermediating the browser, fans can get entertained in fewer steps, and there is less chance that NBC has to pay Google for the privilege. A big win for NBC, and a big win for Microsoft's media business.

Neulion (NLN:TSX) is a small -cap media company and successor to JumpTV that operates online rich media sports programming for hundreds of NCAA schools, NHL, NFL, and MLS sports leagues. improved capacity for streaming media creates substantial opportunities for live data mashups, playlists, highlights, and rich easy-to-access inventoy of game footage and data. Increased capacity delivers more accessibility and more packaging, which delivers more revenue.

Fluid Music (FMN:TSX) is a small-cap media company that has amassed a low-cost royalty song portfolio. It utilizes multiple distribution and packaging methodologies to generate profits from the millions of songs in the catalog including: background music, packaged lifestyle music and consumer digital downloads via Puretracks. Actually, most of Fluid Music's $90 m in annualized revenue is generated from a small percentage of the total catalog. Although the music industry is on the forefront of streaming media, increased network capacity enables DRM compliant distribution, swapping, and packaging opportunities that were previously not possible. The bottom line for this company is that, by utilizing the cloud, it can generate more profit from the song catalog by providing better, more interesting access to more songs in the catalog.

There are probably dozens more Canadian companies that will directly benefit from increased network capacity, these are three publicly traded companies that come to mind immediately.

With respect to "changing the Internet forever" - there is no "forever" when it comes to the Internet. Grey hairs can remember 1999 when Napster bogged down the Internet as millions of people swapped millions of MP3s. At one point in time, carriers complained that Napster P2P file sharing represented 80% of traffic. Fast forward to 2007 when Bit Torrent P2P media file sharing caused similar capacity issues. The bottom line is that people will find ways to use up data capacity and carriers will always be scrambling for capacity. Wait until consumers begin swapping 3D movie files!

Disclosure: I do not own shares of any stocks mentioned above.

Two-Month Performance: RES Free Thinking Top 10 Tech Picks for '10

2010-02-16T22:41:00.020-05:00

After two months, here is the current price performance of the first seven stocks picked for the RES Free Thinking Top 10 for 10. The baseline date is December 16, 2009. The basket of stocks is up 14.5% YTD, and up 3.8% sequentially over the past month. The high flyers continue to be GXI and MMC with PN, and especially CX, under performing to date.

	Price Performance
Symbol	Dec-16	Jan-13	Feb-16	Since Dec	Sequential
BWC	$ 8.10	$ 8.70	$ 9.19	13.5%	5.6%
DSG	$ 6.14	$ 6.70	$ 6.42	4.6%	-4.2%
CX	$ 1.17	$ 1.15	$ 0.92	-21%	-20.0%
GXI	$ 0.94	$ 1.15	$ 1.35	44%	17.4%
IEE	$ 0.18	$ 0.20	$ 0.20	8%	-2.5%
MMC	$ 0.17	$ 0.21	$ 0.27	59%	28.6%
PN	$ 1.76	$ 1.63	$ 1.66	-6%	1.8%
				14.5%	3.8%

It will be obvious to investors that there are only seven stocks in the Top 10. Three should be added by the end of February.

Disclosure: I owns shares of DSG, BWC, CX, MMC

M Partners Disclosures:

RKN:TSX Q1 2010 Results Down Again - Turning a corner or more turbulence to come?

2010-02-11T09:08:00.000-05:00

This morning, Redknee reported Q1 2010 results. Revenue was reported at $11.4m, down 17% from Q1 2009 revenue of $14.2m and up by 13.5% sequentially from $10.4 m reported in Q4 2009. Gross margins were reported at 77%, slightly higher than previous year quarter reported at 76%. Actual gross profit was reported at $9.1m, down from $10.8 m reported for Q1 2009.

There was an improvement in EBITDA to $1.7m for Q1 2010 versus $0.9m reported for the previous year Q1. However, when removing the impact of foreign exchange from the equation, there was an EBITDA loss of $1.2m for this quarter compared to $1.4m in EBITDA reported for Q1 2009.

After some really good quarters, the company surprised the market with a weak Q4. It signaled at that time that there were some rough waters ahead as its market suffered through some ARPU compression and constrained CAPEX budgets, which RKN depends on to drive sales of its integrated subscriber billing, charging and personalization solutions to carriers worldwide. The good news is that, unlike Q4, the company was able to close two new contracts during Q1 2009. With these new EMEA regional sales, is the company turning the corner? It is too early to tell right now, and management continues to re-organize to streamline sales and operations, suggesting that it is preparing for more challenges during 2010.

Investors should see analysts begin to cut forecasts for the company with contract uncertainty ahead. On a multiple basis, the company is trading at 5.2x forward EV/EBITDA versus the TSX tech sector adjusted mean of 8.9x. Once analysts get done adjusting their forecasts downward, investors could see the current price range of between $1.10 and $1.20 as fair value relative to the rest of the sector. In reality, investors may become impatient, and the stock could re-test the lows of December after the company announced Q4 as some of them head for the exit. Notwithstanding, RKN is in the mobile infrastructure space, and despite short-term turbulence, is still well positioned to benefit as overall market conditions expand. Patient investors may see upside in the stock during H2 2010. The company has about $23.5m in the bank, so RKN may look to be active in M&A.

Redknee was one of the RES Free Thinking Top 5 Tech Picks last year, and had a really good run until it reported Q4. Even then, the stock was up by almost 200% from its lows at the beginning of 2009. RKN did not make the RES Free Thinking Top 10 Tech Pick for 10.

Disclosure: I do not own shares of RKN.

Mutliplied Media (MMC.V) Announces Definitive Agreement to Acquire Unomobi.

2010-02-08T21:46:00.000-05:00

On Friday, February 5, 2009, Multiplied Media announced that it had signed a definitive agreement to acquire Unomobi for a total value of $6.125 million. As stated in earlier communication, MMC will issue 95,000,000 shares out of treasury at $0.065 per share. The transaction is expected to close on February 11th, 2010, a little ahead of the schedule communicated in late 2009.

Today, investors responded by pushing the shareprice up by 15% to $0.23. The UnoMobi platform is a key component of Multiplied Media's monetization engine as the Poynt user base heads towards 3 million worldwide. UnoMobi provides Multiplied Media with an opportunity to generate higher advertising rates by better targeting local offers to users based on their GPS-based location and their profile-based preferences. Once deployed fully, revenue-per-query could nearly double from current rates.

As well, the UnoMobi platform allows Multiplied Media to expand its product portfolio (while increasing its international reach) via the SMS-to-email product targeted at non-smartphones (which dominate emerging economy subscriber bases).

Investors are still awaiting an expected iPhone App Store announcement, which has been signalled to happen shortly. The iPhone app was previewed at the 2010 CES earlier in January.

Disclosure: I own shares of MMC

Mosaid (MSD:TSX): It's Been A Good Month

2010-02-02T14:25:00.001-05:00

In the spirit of Chris Bosh being named Eastern Conference Basketball Player of The Week, it seems appropriate to highlight the month enjoyed by Ottawa's technology patent licensing king, Mosaid Technologies.

On January 19th, the company was able to announce that its biggest licensee, Samsung Electronics has agreed to a five-year patent licensing agreement on non-memory integrated circuit products. Immediately subsequent to that announcement, MSD raised full-year 2010 guidance, and just about every analyst on the street raised 12-month target prices. As part of the agreement, MSD also acquires several more patents from Samsung and enters into a R&D partnership on new NAND flash storage technology. Interestingly, a day later, Samsung announced that it had settled a patent suit with Rambus, and entered into a multi-year $900 million licensing agreement related to DRAM patents. As part of the transaction, Samsung agreed to invest $200 million and to enter into a R&D partnership on new NAND flash storage technology. At the time of the transaction, a $200 million investment in Rambus was equivalent to approximately 18% of the company. Through the nearly simultaneous agreements signed by Samsung, it looks like there may be some joint IP development in the future for IP specialists Mosaid and Rambus. This should benefit MSD shareholders.

Why is NAND development interesting? As mobile devices developed by Samsung, Sony, MOT, RIMM, AAPL, NOK, and GOOG continue to get more powerful, they will need more onboard storage and solid state RAND technology is probably the most space efficient and cost-efficient way to increase storage. Apple's new iPad (unfortunate branding aside) depends on it. So to will affordable netbooks, notebooks, and any other portable computing devices that run local applications and that consumers will actually want in the future.

As R&D continues in earnest worldwide, within two years we could see read/write storage on smartphones eclipse the hard drive of the computer now sitting in front of you. Moore's Law perpetuated.

It's been a very good month for Mosaid and there are probably more good months to come because its patent portfolio aligns well to the exploding mobile infrastructure industry worldwide. Samsung and now Sony help to set the table for other multi-faceted multi-year licensing deals with major players in the mobile ecosystem worldwide. As well, the semi-conductor space seems to be recovering well after a tough 2009. So MSD's semi-conductor customer base is becoming financially de-risked.

Financially, Mosaid still has some customer concentration risk, and IP litigation itself is a risky activity because the government regulations that IP rights depend upon are inherently risky. However, with last quarter gross margins of 90%, EBITDA margins approaching 70% with net income margins of 46%, there is a lot of leverage for investors, along with a newly minted dividend announced last quarter. Past "lumpy earnings" risk is being mitigated by the acquisition of an increasingly broader array of communications and semi-conductor patents, which can be packaged into long-term multi-faceted bundled agreements like those signed with Samsung and Sony. A good real-life analogy may be the minutes bundling or the cable bundling by your local mobile and cable providers. Excluding the new Samsung patents, the company reports that it now retains over 1,800 major and minor patents, so it has a lot of bundling options.

The consensus analyst target is $25.95 right now. As the company monetizes its IP over the next twelve months, watch for more guidance adjustments and analyst target upgrades throughout the year. The stock opened today at $22.80 subsequent to yesterday's Sony announcement, which implies 8.87x forward PE on the low-end net income guidance with consensus forecast at 10x low-end net income guidance. To put this into perspective, the current mean PE Ratio of the QQQQ powershares (proxy to the NASDAQ 100) is 21.15x. So, as an IP portfolio manager in the middle of a mobile infrastructure boom, the stock appears relatively reasonably priced on a PE multiple basis.

Last year, the company began an IP licensing process with IBM, so there are likely to be some future blockbuster announcements. Long shareholders are likely already in the stock. If not yet there, any time is a good time.

Disclosure: I do not own shares of any of the stock mentioned above.

CEO Series: Interview with Geoff Rotstein, CEO of Cyberplex, Performance Advertising Pioneers.

2010-01-28T13:45:00.003-05:00

This is the third in a series of interviews conducted with CEOs of interesting Canadian technology companies. The intent of this project is to provide investors with a unique understanding of what various companies are doing - directly from the top dog. Hopefully, the interviews conducted over the next few weeks will help investors to gain insight into the fundamentals of the companies to which they may not otherwise have access.

After a bit of a hiatus, this interview is conducted with Geoff Rotstein, Chief Executive Officer, Cyberplex (CX.V). The company is headquartered in Toronto, Ontario and is a pioneer in the Cost per Action (CPA) online advertising category.

RES: Geoff, let's start off with a basic question. Can you give investors insight into how Cyberplex makes money?
GR: That's a really good first question because how we make money is fundamental to our success. I would say that our business model allows advertisers to engage with end users online. We have relationships with advertisers, and online publishers like media, social networks, communities, and blogs. We present advertiser campaigns to end-users who interact with the publishers (these are also referred to as affiliates), and we get paid every time an end-user transacts with an advertiser. We share the revenue with the publisher, and keep about 30% give or take a couple of points depending upon the campaign.

RES: So, what is a "transaction"?
GR: Well, its anything from a lead to a sale. A lead is relatively easy, and a sale is relatively complex. For lead generation, we may send out a huge e-mail blast asking end-users to simply provide their email address to the advertiser. For a sale, we have to do a lot more specific targeting, with a lot more feedback, measurement and interactions.So it is amazingly complex.

RES: Your stock has been sagging over the past couple of months after a nice run earlier in the year. What do you think investors are concerned about?
GR: Our current share price is disappointing because I feel like we've built a strong business for now and the future. The opportunities that we are looking at every day are better than they ever have been in the past. That being said, we've asked around and we think we can identify three reasons why our stock has been sagging. First, we had some big moves in 2009, and we had a lot of momentum investors get in and out of the stock. Second, I think that people are worried about our client base because we don't have enough teir 1 advertisers. We are an emerging industry, and early adopters and innovators usually don't come from the top tier. Its kinda like the Home Shopping Network in the 1980s. How many cubit zarconians were sold before the tier 1 and 2 brands started selling on HSN? CPA is in the same spot but we are at an inflection. Third, we have been fairly quiet, but we will be better with IR in 2010, providing announcements of meaningful stuff. You know, we bring on dozens of new clients, affiliates and programs a month, but we don't talk about it enough. We have to have a balance though. We don't want to innundate people with fluffy messages. We are working on this and we will get better at it.

RES: You had a huge bump in revenue and earnings during 2009, how do you maintain the momentum during 2010?
GR: Well, the industry is young and still growing, so we should see organic revenue grow as a result. Some people include Google in CPA even though its a CPC (Cost per Click) company. Including Google, our industry is growing at about twice the rate of CPM. Excluding Google, its growing at 4 or 5 times the rate. So there is a lot of organic growth. There are bunch of other things that we are doing. We are working hard to sign up tier 1 advertisers obviously, and we will make announcements as they occur. We have about 10,000 affiliates in our network, and we add about 25 to 50 new publishers a week. We do some heavy quality screening because about 3 to 4 times that many apply to the network every week. So we are focused on high quality growth. Also, we are looking at expanding our offer to become more full service, so we are adding SEM (Search Engine Management) and SEO (Search Engine Optimization) capabilites, and even some CPM. This will help strengthen our offer with tier 1 advertisers as we sign them up. Also, we could take a leap forward on M&A. We are looking for the right deal that fits strategically, financially, and culturally. We have a number in the pipeline, both small and large. We don't want to put this in a timebox that forces us to make an acquisition that doesn't fit, though.

RES: Other than quarterly financial reports, what are easy ways for investors to track your progress operationally?
GR: We don't want to be one of those companies that only announces financials once a quarter, and our program economics are all over the map. So I think we need to announce major programs so that investors can see the transitions to tier1 and full service. We should begin getting measured on that.

RES: So how much traffic do you handle on a monthly basis?
GR: Actually, we don't measure traffic although we would probably rank up there with some of the ad networks that report traffic. Unlike a CPM (Cost per Thousand) network, that gets paid based on how many eyeballs look at an ad, we get paid when someone does something. So I care about conversion rates. We could sent out millions of offers to generate a lead where someone gives an email, which is an easy thing to ask and we get conversion rates of 10% or 15%. The conversion rate on a sale is low - often in the 1% range, but we may have the same number of interactions as a lead generation. As a result, lead generation, which we do all the time is valued in the 25 cent range per transaction, and a sales transaction could be worth $25 or as high as $50, depending on the campaign. We spend a lot of time getting the right mix of campaigns flowing at the same time.

RES: What is your most proud accomplishment related to the business over the past year?
GR: Defnitely the team that we have built. We have added experienced industry leaders to our team that is really helping us to succeed. We have much more expertise now than we did a year ago. And we are strengthening our management with senior management emerging from within the company.

RES: What is unique about CPA versus CPM and how do you think the future will unfold in the market?
GR: Great question! CPA is different by risk allocation. With CPM, advertisers bear 100% of the risk of whether a campaign works - which they can't really measure anyway. With CPA, the network (us) and the publishers share in 100% of the risk. The advertiser only pays if something works. This is why CPA is growing so much faster than CPM. Avertisers can tie online advertising directly to the bottom line of their P&L. They've never had that before. CPA is also getting better. When we started, advertisers could measure ROI on a monthly basis. We can do it hourly now and soon, advertisers will be able to measure ROI in real-time and make adjustments on the fly. We have to be really good at campaign development, management, and measurement. Because of measurement, CPA will probably become the main way that advertisers run programs, although there will always be room for CPM related to brand management.

RES: Who are your biggest competitors?
GR: We see Epic Advertising and InterMark Media a lot. Also, we compete in some ways with Commission Junction, but the fee structures are so different that we don't see them too often.

RES: What about online direct marketers like Gilt?
GR: These are very specific niches, and they are subscription-based. We are more general and ten to hit huge numbers in comparison. So they don't really compete.

RES: How is your Facebook project coming along?
GR: We think that social media will play a big part in CPA, and we are learning a lot with Facebook, although its not a big money maker for us yet.

RES: Some investors don't see many barriers to the market - what do you think they are, and how are you erecting them?
GR: CPA is hard to do because we handle and interpret so much data. We are very data driven, and its hard to both set up the infrastructure and to manage the reams of data. We actually have more data than we can handle. I think that this is the barrier. CPM providers would need to totally revamp their skillsets and their technology to compete against someone like us. We track huge amounts of data on an hourly basis. We will continue to invest in technology to become better and better at collecting, tracking, and reacting to data feedback as close to real-time as possible, which strengthens our barrier.

RES: What are some of the best performing campaigns to date?
GR: As categories, nutriceuticals and entertainment are still our top performing areas. Dating is also big. We also have big events. This quarter it's the Superbowl and Valentine's Day.

RES: One of the challenges facing the industry is getting tier one advertisers and publishers bought into the industry. You have previously discussed American Express - how is that going, and what other categories seem interested in CPA?
GR: American Express is not big but we are learning a lot from it and making good progress with them. There are a lot of tier one advertisers in the pipeline and we are making the right investments in people and technology to maximize both reporting and our client's brand management. This will be a big year for tier one.

RES: What are some of the businesses that can benefit from CPA?
GR: All sectors. Anyone who sells to consumers. Branding will always be there, so advertisers will need a winning combination of CPA, CPC, and CPM.

RES: You raised aproximately $17 million in a bought deal equity issue last year - how are you planning to deploy the capital?
GR: We are investing in technology, people and geographies. Also, like I said earlier, we have an active M&A pipeline and we are focussing on technology and distribution.

RES: What can we expect to see in 3 years from Cyperplex?
GR: Well we will be much bigger and we will be able to offer everything. CPA will be much more prominent, but we are aiming to be a full service digital agency. Nobody is there yet. We will aim to provide the highest quality online full service advertising solutions to our clients. It should be a totally unique offer combining CPA, CPC, and CPM into a blended campaign.

RES: Final question, what keeps you up at night?

GR: Well, I'm naturally fairly paranoid. I want to make sure that we provide good quality results for our clients. So I worry about procedures, people, tools that drive success and protect the brands of our clients. I am always worried about heading strategically in the right direction without blinders. Basically not getting caught up in a single idea. How do I continuously improve and keep my clients happy? These are the things I think about all the time.
I would like to thank Geoff Rotstein for taking the time to provide his insight into the workings of Cyberplex for the benefit of investors. Cyberplex is one of the RES Free Thinking Top 10 Tech Picks for 10.

Disclosure: I own shares of CX

Guestlogix Pre-announces Record Q4 and FY2009: Margins Hint At Niche Dominance

2010-01-27T09:48:00.000-05:00

Clearly Management is proud of its accomplishments for 09Q4. Total revenue for the quarter was reported at $5.2 million, up 86% over $2.8 million reported for 08Q4. For FY09, revenue came in at $18.6 million, a 128% improvement over $8.5 million reported for FY08. For the first time, the company reported Net Income for Q4 2009 at $0.2 million. EBITDA was reported at $1.7 million, a $2.7 million total turnaround from a loss of $1.0 million reported a year earlier.

More interestingly, 09Q4 revenue was a healthy 8.3% sequential improvement over 09Q3, inferring a steady build in revenue as the onboard solutions continue to be rolled-out and gain traction among airline passengers. With its strengthened balance sheet, via a $7.2 million bought deal earlier in 2009, the Company can begin to accelerate some of its deployments, hinting at further scaling during FY2010.

EBITDA margins came in at a record 32%, an impressive sequential improvement of 18.5% over 09Q3 margins reported at 27% (which should be considered strong, too). Without the benefit of final audited numbers, it is difficult to understand how much of the kitchen sink was thrown at the "ITDA" of EBITDA, and how much of the margins were impacted by currency fluctuations. However, recurring revenue EBITDA margins above 30% tend to re-inforce the notion that a provider is dominant in a niche, with minimal competitive pricing pressure. On the surface, it appears that GXI is beginning to head in that direction for onboard retailing systems.

It will be interesting to see if GXI's ongoing deployments can continue to offset seasonality in passenger traffic. They should. If the company can continue to demonstrate earnings leverage as it scales, them shareholders should be pleased because the company is likely to have the ability to throw off excessive cash once at maturity.

If Guestlogix continues to report high growth, high margin quarters, then investors may see some industry heavyweights begin to take notice of its dominance in the onboard retail infrastructure niche. As GXI becomes more of the "go-to" player for retail infrastructure among carriers, there is less threat of substitution as passengers become more "connected" on aircraft. As predicted by Management in the past, it is more likely that the GXI platform will become a gateway for commerce onboard. In the meantime, investors should look at getting in on the ride.

GXI is a RES Free Thinking Top 10 Tech Pick for 10

Disclosure: I do not own shares of GXI...yet :-)

Can Bay Street Get Behind the Moral Abiguity of Avid Life Media?

2010-01-25T19:15:00.003-05:00

Andre Compte-Sponville, the French philosopher, argues that capitalism is neither moral nor immoral, but amoral. As an economic system, capitalism is outside any moral concern. Economic objectivists tend to also support capitalism as an objective existential system. Basically, if the numbers are good, the investment should be good.

Over the next few weeks, this theory will be put to the test on Bay Street.

According to a report today by the Globe and Mail, Avid Life Media plans to go public via an RTO and raise approximately $60 million concurrently in an effort to acquire Guelph Ontario-based Moxy Media. It just so happens that Avid Life owns Ashley Madison, the adultery-friendly website that famously offered free subway rides in return for billboard ads on the TTC. A public uproar ensued, and the TTC very publicly rejected the offer. (IMHO, this free PR campaign by Ashley Madison should win awards for ingenuity). Avid Life also owns CougerLife.com, EstablishedMen.com, and HotNotHot.com, three other online lifestyle properties that cater to ...uhh...specific dating needs.

Notwithstanding, GMP, arguably one of the top shops on Bay Street, is leading the syndicate for this not insignificant equity issue.

The brand association with Ashley Madison is imposing a moral quandary on both bankers and portfolio managers up and down the street. By participating in this issue, do I enrage, or at least create suspicious feelings with my spouse (that I already barely see)? Do I somehow endorse adultery? Does it matter?

If capital is truly amoral, as argued by Compte-Sponville, then Avid Life would be considered great investment opportunity into a solid organization that generates a boatload of high margin EBITDA. Its plan to acquire Moxy Media vastly diversifies its online media portfolio and includes reputable verticals as diverse as home improvement and law. The acquisition would set the stage for a future Canadian media juggernaut when there are not many left for public market investors after the disappearance last year (through acquisition by Disney and Barclays) of Kaboose.

Speaking of Kaboose, here is a bit of irony. Some of the same people who were behind family-friendly Kaboose, are now behind couger-friendly Avid Life. This pedegree is probably what attracted GMP, despite the Ashley Madison brand-association risk. It also helps to make Avid Life an even better investment bet...experienced management is difficult to find.

If the capital markets were truly behaving amoral, and with GMP acting as the syndicate lead, then the Avid Life issue would be a slam-dunk. In reality, the Street appears to be signalling that, in fact, there is some inherent morality in the Toronto capital markets. Bankers and portfolio managers are turning away from this issue at every turn due to the presense of Ashley Madison. If such morality was consistently present then this would be considered admirable. In reality, the markets are consistently amoral, and this showy disdain for Avid Life by some may, at best, be slightly hypocritical, and at worse, prevent investors from benefiting from a potentially good story.

The question that must be asked is how many of these same bankers and investor were neck deep into online gaming stocks when they were hot? What about packaged goods stocks like Atria, that still manage to push tons of tobacco? Are these the same portfolio managers that invest in tar sands companies that contribute to the degradation of the environment? Or that buy mining exploration stocks, whose management teams rub elbows with various tinpot dictators all over the world? In all of these cases, it can be argued that capital is behaving rationally, objectively, and amorally. Why is it any different for Avid Life Media?

Fundamentally, Avid Life Media is no less immoral than any of the examples cited above, and it could be argued that Avid Life is less immoral than some. It depends on perspective.

In the media subsector itself, Avid Life is no less immoral that other much larger players with diversified online portfolios. CollegeHumor.com has been a bastion of ribald humor, scandalous photos, and general poor taste, which has skirted the edges of pornography for nearly a decade. It's owner? None other than IAC/Interactive Corp (IACI:Q) trading at a $2.6 billion market cap. It just happens to be one of over 50 online properties owned by IACI (6 of which are dating sites).

And that is the rub...Avid Life Media is positioning itself to create a diversified online lifestyle portfolio that can compete on the world stage with the likes of IAC/Interactive Corp and Liberty Media among others - who appear not to be penalized by racy properties (only by bad earnings). Avid Life has a strong, experienced management team that already operates a high margin, high growth business, from which it can consolidate. It is a solid media play.

In the end, the amoral nature of capital should prevail, and GMP should be successful in raising capital. There are enough single bankers, and portfolio managers on their third marriages to be non-plussed by the moral quandary now coursing through Bay Street. And, based on the fundamentals, they should make their investors a lot of money on this stock.

Disclosure: I do not own shares of any of the Companies discussed in this post.

One Month Performance: RES Free Thinking Top 10 for 2010

2010-01-18T11:51:00.001-05:00

First of all, the RES Free Thinking Top 10 for 2010 is actually Top Seven for now. Three places have been reserved. Here is how the picks are tracking after 1 month.

The largest monthly gain within the basket of stocks is attributed to Multiplied Media. Since December 16th, the Company has made significant announcements related to distribution in France, Spain, and Italy and it has announced an upgrade to the application to include local weather along with local gas prices. During the 2010 Consumer Electronic Show, it demonstrated its beta iPhone deployment, which is expected to be live by the end of January. These announcements have contributed to the exceptional stock price performance over the past month.

Bridgewater Systems and Descartes Systems have shown both progress and share price volatility, each alternating between 6% and up to 15% gains from December 16th, depending upon the day. Notwithstanding, both companies have announced significant corporate developments, which should support continued share price gains throughout the year. Descartes Systems is making major strategic moves this year, and Bridgewater Systems will continue to benefit from the ongoing need by carriers worldwide to handle the explosion of data on wireless networks.

Guestlogix is at an interesting point in its history where large implementations during 2009 begin to generate revenue and earnings during 2010. To the extent that large contracts, and service extensions begin to perform will determine how well the stock performs. Although many investors expect good things, there is still a bit of a "wait and see" perspective on the stock. RES Free Thinking anticipates that performance is likely to exceed expectations as the world economy recovers. In addition, it is possible that the stock could graduate from the Venture Exchange to the Toronto Exchange. Graduation should increase liquidity, and participation from larger institutional funds could also provide a shot of price adrenaline before H1 concludes.

IseeMedia has, until recently, shown significant gains in share price, and probably has more announcements to make related to the Indian mobile market, which should help to propel the share price higher as it exits Q1 2010.

PNI has demonstrated significant improvements in profitability over the past three quarters as it continues to monetize its major contracts with photo retailers worldwide. However, this is not a stock that will provide news related catalysts. It could trade in a range until its announces Q4 2009 results, while providing a hint of its earnings growth potential during its subsequent conference call.

Cyberplex is trading at a 6x EBITDA TTM earnings multiple. Relative to its recent earnings performance, and its earnings growth trajectory, the stock may be considered undervalued relative to its peers. However, investors may be concerned that Q4 2009 may not show much growth over Q4 2008, and there is continued concern among investors regarding the quality of its advertising client base. Until Management demonstrates more progress towards upper tier advertisers, and demonstrates that it can generate earnings growth progress over 2008 and 2009, the share price may be stuck in neutral. The stock should begin to show steady progress forward beginning in H2 2010 as growth trajectories are confirmed. If the Company were to announce a meaningful accretive acquisition in the meantime, the share price could be kick started upward ahead of H2 2010.

The bottom line is that this basket of stocks appears to be performing well on an aggregate basis after one month. Over the same timeframe, the TSX composite index has increased by just over 2%. The stocks within the RES Free Thinking Top 10 should be considered higher risk stocks because they are small cap and micro cap stocks. However, all appear to have relatively solid balance sheets heading into 2010, and most are generating free cash flow.

Disclosure: I own shares of CX, MMC, DSG, and BWC

For those of you not at CES 2010 - Poynt for iPhone

2010-01-11T15:25:00.000-05:00

Expect Poynt for iPhone to be available for download by the end of the Month. Notice the "no touch" calling feature.

Multiplied Media is the developer of the Poynt application and is one the RES Free Thinking Top 10 in 10 Tech Picks.

Also last week Multiplied Media announced:

- new local gas station and weather search.
- France, Spain, and Italy deployments.

Disclosure: I own shares of MMC.V, I do not own shares of AAPL.

Route1 "Tipping Point" Eludes Agonizingly sigh

2010-01-11T14:57:00.001-05:00

Route1 (ROI.V) issued a press release today stating that its exclusive U.S. Government reseller, Qwest Communications, has not met one of the performance criteria of its three year exclusive contract, namely the guaranteed sale of 30,000 mobikey units and subscriptions to the Department of Homeland Security by the end of calendar 2009. This was to be the primary catalyst for the Company for the foreseeable future and a "tipping point" to cash flow and earnings. To date, the US Department of Homeland Security, has installed Route1's DEFIMNET platform in April of 2009 and has taken delivery of 5000 Mobikey devices and associated TruOffice subscriptions.

It is undetermined if and when the remaining 25,000 units will be delivered to DHS, although Route1 is confident that they will be procured during H1 2010 after some training and implementation issues are worked out.

In the meantime, although Route1 will maintain a distribution partnership with Qwest, it will no longer be an exclusive one, meaning that a new arrangement with Qwest will need to be negotiated. As well, the Company will need to, yet again, re-tool its sales and marketing strategies in order to adjust for the situation.

To very patient shareholders, this setback reduces the forecast substantially. It was felt that the initial 30,000 units would result in multiple re-orders by Qwest, representing 30,000 to 40,000 new annual orders each year of the three year contract. These potential orders are no longer likely, and what orders do come will come with potentially higher expenses as the Company brings on more direct and channel sales resources to compensate for the loss of this contract. As well, the Company was expecting recurring revenue to commence by the beginning of 2010. With an expected price point of between $16 and $18 per month, this represents approximately $5.0 million in lost revenue potential for 2010. More importantly, these revenue streams came with gross margins in excess of 80%.

As well, the Company is now sitting on a significant amount of inventory because it arranged for a line-of-credit in the fall to produce most, if not all, of 25,000 mobikeys in anticipation of the order that didn't materialize. There could be performance penalties associated with the financing which may result lower margins.

Considering that there are a little over 15,000 current users worldwide, the remainder of the "guaranteed" (according to the contract) Qwest order would have made Route1 solidly cash flow positive because the expected break-even mark is 30,000 total units. For the near-term, instead of generating cash, the company may find itself needing short-term working capital shored up, which means the company may need additional capital in order to attain delayed break-even. Total unit sales to break-even may also increase as the company invests in operational and sales and marketing resources that it did not originally budget.

The positive news is that the product is really strong with demand from governments worldwide, and DHS has not actually cancelled its order, it has simply delayed implementation. Analysts believe that the company will attain break-even during H2 2010. This is possible, but it will take a lot more effort and time. In addition, there is increased balance sheet risk.

In the meantime, the solid share price gains since April 2009 are likely to be eroded away. As well, future contract announcements will probably not generate as much speculative share movement as the Qwest announcement did during 2009. More investors are likely to be "from Missouri" on this stock and analysts are likely to slash earnings forecasts and share price targets.

Disclosure: I do not own shares of ROI or Qwest.

Fearless Random Predictions For 2010

2010-01-05T12:56:00.001-05:00

It is impossible to resist the temptation to share predictions for the coming year despite the potential for embarrassment twelve months from now. So, here they are:

Random Predictions for 2010:

Mobile payments will be "the killer app" for 2010. It should be an absolutely crazy year for mobile payment systems worldwide with thousands of players vying for a piece of the process all over the globe. By the end of the year, a majority of smart phone subscribers will have downloaded a mobile payment application of some type. A vast majority of those users will be confused and frustrated until 2011 when winning apps emerge and begin to create de facto transaction standards that people can understand. There should be a lot of consolidation in this space in international markets.

Social media will become "officially" boring: Even as social media networks like Facebook and MySpace (and the thousands of imitators) find ways to better monetize their vast networks, users will tire of wasting their time and giving up their privacy. The result: more dormant accounts, less activity, less engagement, and less revenue per user. There will be exceptions to "boring" with LinkedIn becoming more valuable as a corporate social media platform as more people go back to work.

Google will be a major story in mobile during 2010: Google will scare the pants off Apple, RIM, and Nokia. Window Mobile could be the most at risk. Android users will begin to see the power of Google's vast data resources delivered via the cloud - which is its main differentiator versus other mobile platforms. Here are some data.

As a result, Microsoft may take a run at RIM during 2010: Because Microsoft's mobile market share continues to be eviscerated, the persistent rumor that Microsoft could take a run at RIM is more likely to come true during 2010. RIM's significant corporate presence fits with Microsoft's core competencies. The big question is whether RIM is interested in what Microsoft has to offer.

Mobile infrastructure spending will accelerate throughout 2010: As more mobile applications are downloaded, investment in supporting data infrastructure should continue to grow. Carriers, especially in developing economies, will continue to struggle to expand bandwidth, manage traffic and improve billing. Sir Terry Matthews will have a gleeful 2010.

WiMAX ecosystem will maintain growth momentum in 2010: The 802.16e protocol will continue to gain momentum as carriers in developing economies aim to grow capacity quickly and inexpensively. U.S. broadband infrastructure spending will spur growth in mid-mile and last-mile deployments. High-flyers in the WiMAX equipment manufacturing sector should continue to benefit during 2010.

Vertical search will finally take off in 2010: local search enabled by GPS on mobile devices will capture the imagination of consumers during 2010. As well, people search should emerge as a significant area of development enabled by meta profiling of social network users. Watch for acquisitions as search leaders pick off point solutions.

More data-oriented solutions for health care: Unlocked by infrastructure spending and government incentives, EMR-based health services should begin to finally gain momentum during 2010. Watch for sector consolidation.

In 2010 3D is the new "color": "Avatar" is to 3D what "The Wizard of Oz" was to color. Expect a torrent of 3D films in 2010. The next step in the evolution of the movie experience will be "immersive", combining 3D with seat motion. Groundwork will be laid for 3D movies and games into the home. Could designer 3D glasses become a new fashion category?

eBooks will be hot for Christmas 2010: 3G connected eBooks with price points below $400 will emerge as a hot consumer item.

Apple's hotly anticipated new tablet device will not be so hot: Apple's magic run of iPod, iPhone, iTouch may be temporarily derailed by the introduction of the tablet if it is priced above $1000.00 for consumers. Apple's great design at affordable consumer price points was at the essence of Apple's amazing decade.

World economic recovery will be slowed by persistent high energy costs: Even as manufacturing begins to recover, commodity speculation in H1 2010 and persistent high costs of energy should dampen growth, possibly causing a decline in some markets during H2. Overall, after a bouyant H1, the year could end up flat to "up" slightly.

There it is, a fun look at the new year. Some of these are continuations of trends during 2009, and others may be self-evident. Although the general economic outlook may be flat, the technology sector led again by the mobile ecosystem should continue to perform ahead of the general economy. However, the tech sector is unlikely to demonstrate the returns of 2009.

Disclosure: I do not own any of the shares mentioned in this post.

RES Free Thinking Ten Top Tech Picks for 2010

2009-12-16T14:35:00.001-05:00

For 2010, selecting the Top Picks is more difficult than for 2009 because there is no fracture in the market. In fact, many believe the total market to be at or near full value. As a result, returns are likely to be more modest for the full year than the 189% return reported so far for 2009. I have attempted to find stocks that could produce performance momentum during 2010 that may be ahead of the total market. As a result, there are a few more riskier picks this year than last year.

The general themes remain the same for 2010 as for 2009. There is an emphasis among the picks on mobility - both infrastructure and applications - and on transactional systems with recurring revenue models. All of the companies on the list (so far) now have solid, or at least de-risked, balance sheets and strong probabilities of generating growth in operating earnings during 2010.

Here is the list:

Carry Overs from 2009:

DSG - Descartes Systems performance should benefit from the significant acquisition of Porthus with most of the upside appearing during H2 2010. Organically, the company may see more upside in the deployment of 10+2 reporting services. Even with the all-cash acquisition totaling $44 million, DSG should have a solid foundation with more than $50 million in the bank post-transaction. Porthus makes DSG more of a world player, and also helps to expand its transactional offering to current clients. There are integration risks, although management has proven that it can acquire and integrate effectively.

BWC - Even with its run-up in share price during 2009, there is room for more share price growth during 2010 for Bridgewater Systems. It has a strong backlog, and its client base has pressing needs to address traffic volumes caused by an increase in applications used by smartphone subscribers. 2010 should represent accelerated growth in smartphone subscribers, which adds more subscriber complexity when coupled with more application usage. The conditions remain very positive for BWC to continue to build on 2009 growth with more major long-term contract announcements during 2010.

CX - Cyberplex has had a monumental year in terms of growth in revenue, earnings and cash flow. It is highly unlikely that the Company will maintain its growth trajectories for 2010. However, it should produce solid earnings growth. Right now the stock is trading at a PE ratio of 8, which is not reflective of forward earnings potential. This is an undervalued stock based on its profile.

GXI - Guestlogix now has a balance sheet that allows it to more aggressively build its unique transactional business for airlines and rail carriers. The company spent 2009 consolidating its dominant position in the US and continues to deploy with significant carriers in Europe and the Middle East. Onboard retailing is catching on, with passengers pulling for more destination services. The company is likely to sign a slew of Pan Pacific airlines this year, and many of its merchandising live trials are scheduled to go into production during H1 2010.

New Picks for 2010:

PN - PNI Digital (previously Photochannel)has finally hit an earnings inflection point and continues to report record revenue and earnings. It has been cash flow positive for three quarters and its impressive client base continues to tap them for new programs in order to monetize digital images. Online photo management is a mundane but necessary activity, and PNI Digital is turning it into a solid, cash flowing business supported by long-term contracts. For 2010, investors should see solid revenue growth and strong cash flow. If you have developed a photo at Costco or Walmart recently, you've probably used PNI Digital and not known it.

MMC - Multiplied Media has yet to show significant revenue, but that is about to change. Its multiple award-winning Poynt local search application is a top 5 Blackberry application in all of the markets into which it is deployed. Unlike most mobile downloads, users actually use the application often. Multiplied Media enters 2010 with about 2 million users generating over 400,000 queries per day. With launches into France, Spain, and Italy this month, an iPhone launch in January, and an Android launch later in Q1 the user base and transactions should build quickly. Once the Unomobi acquisition closes during Q1, the company will be in possession of some pretty significant intellectual property that could make it a major player in mobile advertising. This is a momentum opportunity, and scaling friction is minimal.

IEE - Iseemedia has developed a solution that allows subscribers with feature phones to access email via the SMS channel. Considering that a vast majority of subscribers in emerging economies have feature phones, this is a highly desirable product in those markets. Potential was theoretical until the company announced a deal with Tata Docomo and Tata Indicom to deploy the solution to a 40 million subscriber base in India. Combined with recent announcements in Syria and China, the conditions are in place for revenue to scale dramatically during 2010. In addition, the company recently raised $2.7 million in an oversubscribed best-efforts financing to shore up its balance sheet. Currently, this is a microcap penny stock and this is a momentum opportunity which is dependent on execution by Tata.

Ultimately, this list should have ten stocks on it. Three spaces are reserved for stocks that will be added in January. Stay tuned...there may be a surprise on the list.

Disclosure: I own BWC, CX, MMC

RES Free Thinking: 2009 Year In Review.

2009-12-15T13:59:00.005-05:00

Overall, 2009 has been a fun ride for RES Free Thinking with the Top 5 Tech Picks returning 184.9% from the beginning of the year, and 156.9% since the market lows during the week of March 8, 2009.

RES Free Thinking Top 5 Canadian Tech Picks 2009

Performance Review
	Enter 2009	March 10 2009	Yesterday	FY Gain	Gain from TSX Lows
BWC	$2.22	$3.79	$8.39	277.93%	121.4%
CX	$0.34	$0.39	$1.19	250.00%	205.1%
DSG	$3.55	$2.78	$6.00	69.0%	115.8%
GXI	$0.60	$0.41	$0.98	63.3%	139.0%
RKN	$0.25	$0.30	$0.91	264.0%	203.3%
			Basket Ave.	184.9%	156.9%

By the time the year concludes, there will be well over 100 posts published on the blog with GXI topping the list at 15 articles. December has been a very busy month, so the posts have been few and far between. Expect 2010 picks and predictions to follow this post shortly.

Macro backdrop to picks

For many, the first quarter was a harrowing experience as the market plunged to its lowest levels since H2 2003, while suffering some of the greatest percentage losses since the 1930s. There was a lot of "end of world" prognosis from many market watchers. Free market "Ayn Randians" horrified themselves by orchestrating historical levels of government intervention first into the financial markets, and then into the general economy, to keep it from imploding. Despite ideology, they understood that, without adequate liquidity and stimulus, the interconnectedness among financial institutions and trade economies worldwide could have resulted in a financial armageddon that may have exceeded the economic destruction of the Great Depression. No government wanted the potential unrest that could have followed. Unprecedented global co-operation among central banks helped to ease the credit crisis, and create stimulus. And after a rocky start, initial skepticism finally gave way to "hope" as the Obama administration began to execute.

2009 Top Pick Criteria

With the macro-economic drama as a backdrop, it was actually relatively easy to pick stocks. The criteria was simple:

- solid balance sheets
- expanding gross earnings
- generating cash flow
- operating in protected high growth market niches.
- recurring revenue base.

The primary themes for the Top 5 picks were: mobility and transactions. I attempted to stay away from hardware.

Rock Star Stories Missed: Systems Xcellence (SXC); Dragonwave (DWI); WiLAN (WIN); Mosaid (MSD); Aastra (AAH)

Game-Changers of the Year: INTC goes all-in with Transgaming's GameTree.TV (TNG); Tata distributes Iseemedia's (IEE) ISeeMail in India.

Drama of the Year: Route1 (ROI) - you're fired! No YOU"RE fired! Boardroom drama.

Disappointment of the Year: Vendtek Systems (VSI) still not trading.

Themes, Concepts and Companies that Helped Shape the Year

Green Shoots - The world held its collective breath hoping that the early positive economic conditions would not shrivel.
Twitter - Not many start-ups can say they were integral to a political uprising (see Iran)
Stimulus - Economic pornography to some.
Mobile Applications - Pretty much all fun and games...unless you are a carrier.
Bailout - Has there ever been as much anger directed towards a profession?
10% unemployment - the sky fell and nothing happened.
Social Media - Is to 2009 what e-commerce was to 1999.
Apple (AAPL) - stellar year in the spotlight...but, alas, here comes Google (GOOG)
Cloud Computing - finally coming of age?
BRIC - In the future, will 2009 be regarded as the tipping point towards a new economic world order?
CleanTech - Has the industry finally hit its inflection point?

It is the opinion of many analysts that, in retrospect, stock picking during 2009 was fairly easy as the whole market was up 29% from the beginning of the year, and up 50% from the March trough. At the beginning of the year, it sure didn't feel that way.

Picking stocks for 2010 could be a whole lot harder because most believe that 2010 indices will likely show less dramatic growth than 2009, and may actually decline as macro conditions erode during H2 2010 related to US mortgage renewals, and monetary policy as government stimulus programs end. It is expected that 2010 will be a true stock pickers year.

Next post, RES Free Thinking Top Canadian Tech Picks 2010.

Descartes Systems (TSX:DSG): Q3 In-Line While New Services Strengthen Outlook.

2009-12-03T09:07:00.000-05:00

On Tuesday, Descartes Systems (TSX:DSG) reported Q3 2010 earnings with revenue up 11% to $18.9 million from $17.0 million reported for previous year Q3, and 2% higher than revenue reported for Q2 2010. Revenue was essentially inline with consensus forecasts which were $18.5 million for the quarter.

Adjusted Net Income, which is essentially EBITDA with a couple of non-cash items tossed in such as stock-based compensation, and contingent acquisition costs, was reported as $5.2 million up 13% y/y and flat q/q , which is inline with analysts expectations.

It should be of interest to investors that gross margin continues to strengthen over time. For Q3 2010, gross margin was reported at 69% versus 67% reported for previous year. As the company continues to move towards being a logistics data platform, investor should see gross margin continue to grow over time (notwithstanding the impact of future acquisitions). This a sign of earnings leverage. The company generated $3.2 million in operating cash flow during the quarter.

Management base-line outlook for the Q4 2010 is already ahead of analyst forecasts, and the company has been successful in signing up new clients in all regions. In addition, investors should expect more clients signing up to Descartes "10+2" electronic filing service during Q4 as enforcement begins in calendar year 2010. As a result, there is a chance of surprise upside in revenue growth during Q4 2010, along with earnings potential.

Descartes Systems is not a well understood stock. However, Management has plans to be a global technology platform for logistics data. As regulatory complexity increases over time, most shippers will be forced to move towards electronic records and data transfer in order to compete. Descartes Systems plans to be the only sheriff in town for companies that manage logistics and need documentation. With nearly $100 million in cash and short-term investments, and a history of accretive acquisitions, investors should see Descartes begin a global roll-up of the various pieces required to become an end-to-end data and messaging platform for logistics information globally. One day Descartes could be to logistics what Salesforce.com (CRM) is to sales.

Smart institutional investors are long on this stock because of its steady near-term earnings growth, and its future explosive potential. With the base-line "calibration" going into Q4 already ahead of analyst expectations, investors may see some upward adjustments by analysts in Q4 and FY 2011 forecasts. Some analysts may increase targets as well.

Disclosure: I do not own shares of DGS or CRM

CEO Series: Interview with Tom Douramakos, CEO Guestlogix, Onboard Retailing Pioneers.

2009-11-30T13:13:00.002-05:00

This is the second in a series of interviews conducted with CEOs of interesting Canadian technology companies. The intent of this project is to provide investors with a unique understanding of what various companies are doing - directly from the top dog. Hopefully, the interviews conducted over the next few weeks will help investors to gain insight into the fundamentals of the companies to which they may not otherwise have access.

The second interview conducted is with Tom Douramakos, Chief Executive Officer, Guestlogix (GXI.V). The company is headquartered in Toronto, Ontario and provides airlines and rail carriers with technology that allows them to sell just about anything to passengers while they are immobilized in their seats for hours at a time.

RES: Why don't we start with an update on progress to date. How many planes is Guestlogix on?
TD: Well, we don't really measure the planes that we are on, we measure passenger trips. For example, if you flew today from Toronto to Phoenix and back, it would be two passenger trips - one there and one back. So as of the end of Q3, our onboard retailing solution services 680 million passengers trips worldwide and we are adding another 160 million over the next two quarters. We are about to sign up two rail operators representing 75 million additional passenger trips and a couple of smaller airlines. We should be close to a billion passenger trips soon.

RES: How much of the total available market do you now serve?
TD: We have nine of the top eleven airlines in the world as clients, and eleven of the top twenty. Right now, our deployments cover 35% of all air passengers trips worldwide. Most of the remaining top twenty airlines are Asian, and we are just moving into that market now. We are also just scratching the surface of the rail market. ~~There are seven billion rail passenger trips in the world every year.~~ There 7x more intercity rail passengers in the world each year than there are airline passengers at approximately 21 billion. [RES: yes, I miss-read my notes - confused x with b. I also confirmed this number - most of the intercity passengers trips are generated in India and China]

RES: Clearly, you are making great progress in the market among airlines. How do you best describe to investors what Guestlogix actually does?
TD: We provide passenger carriers with the ability to create and manage retail stores in the plane or rail car during transit. We provide everything from merchandise planning and selling, to multiple payment options from credit card, to debit, loyalty, coupon, or even cash. We provide analytics, in-flight promotions with targeting and personalization. With OnTouch, we even provide some of the merchandise on the shelves like destination services, entertainment tickets, and product catalogs.

RES: Investors have been worried that as mobile devices and the web are accessed more often onboard during flights, there won't be as much need for your dedicated solution in the future. How will the inevitable march towards in-flight internet connectivity impact Guestlogix?
TD: First of all, it is a pretty expensive thing for airlines to do and it will take time. In the end, it will be good for us because then passengers could pay with any device. We don't have to supply as many payment terminals onboard. Dedicated internet connection is not a threat. The WiFi/satellite solution that is being deployed is plumbing and we plan to use the plumbing to make the onboard retail experience better for passengers and airlines. For example, we could do more big-ticket retailing with real-time authorization via dedicated connections.

RES: But doesn't a dedicated internet connection allow passengers to simply skip the airline store and go directly to something like Amazon or Best Buy online?
TD: The question is whether the airlines will protect their store. Would Walmart allow Target to sell in their stores? It is the same thing. The airlines control access in flight, and they have a captive audience, so they would need to determine who can sell or not. Amazon could sell in flight, as long as the airline gets compensation. As for us, as long as there is a transaction, we get paid. Anyway, the airlines will need to figure this out as internet access increases in-flight. We think that strong merchandising strategies and personalization supported by our technology will make in-flight retailing provided by the carriers increasingly popular among passengers.

RES: GXI recently completed a bought deal financing. How much cash do you have and what are you using it for?
TD: Right now we have about $11 million in cash with $7.0 million coming from the bought deal net of fees, and about $5.5 million already on the books. We are focusing on three areas: First, we are accelerating our deployments. Secondly, we are building out our infrastructure in terms of people, processes, technology, and facilities in order to support our growth. Finally, we are looking at strategic acquisitions possibly to accelerate our growth in the rail sector.

RES: Recently, you announced a partnership with Aeromechanical Services (AMA.V). What do you want to get out of that relationship?
TD: We are really concentrating on Asia right now, and we want to get to more real-time transactions. Aeromechanical Services provides real-time satellite uplinks to airlines, and we want to be able to use those uplinks to do real-time transactions. Also Aeromechanical Services has Asian carrier clients that we can provide our services to.

RES: People can buy train tickets, limo vouchers, anything from Skymall, various entertainment tickets - what are some of the cool new things that you have lined up that passengers will soon be able to purchase?
TD: We are now getting feedback from passengers, and they really want more destination services like airport transportation. So we are looking to expand the amount of destination services available to passengers onboard. We also want to be at the gate. We are working on things right now to do transactions for the airlines at the gate where people are waiting to get on a plane. We are also looking at destinations like hotel concierge. Ultimately, we could be an end-to-end platform for the airlines to act as travel concierge from the airport to the hotel. We are also working with in-flight entertainment vendors like Thales and Panasonic to provide payment mechanisms for in-flight entertainment services as well. We would like to continue to expand that as well.

RES: What is the biggest thing that anyone has purchased?
TD:Recently, someone bought a Nettlestone Library Ensemble worth $950.00 from Skymall.

RES: What are the most popular purchases?
TD: Our client base is still skewed towards North American carriers, so the most popular items purchased are still food and alcohol.

RES: Will the demand for your solutions by carriers be influenced by fluctuations in fuel prices? Will lower fuel prices mean that airlines are less likely to want to generate revenue in-flight?
TD: The fuel price crisis of 2008 was a tipping point. It forced airlines to begin to unbundle services to create more revenue streams to survive. Unbundling is here to stay and there is no turning back regardless of the cost of fuel.

RES: Three years from now, what will Guestlogix look like?
TD: We are just getting started so we will be much bigger. In terms of on-board, people will be transacting with all kinds of devices like their mobile phones and laptops. There will also be a Guestlogix device on board for printing vouchers for passengers, but we think a lot of fulfillment will be done with electronic bar-codes by email or SMS. There will be a lot more merchandise available, and duty free will be a big part of it in Europe and Asia. Passengers will enjoy the convenience of being able to arrange destination services and events on their flights. Airlines will compete on merchandising strategies.

RES: What are you most proud of to date?
TD: If you would have asked me when we first started if, by now, we would have become a global Canadian company with its own user group, I would have called you crazy.

RES: What are your challenges right now?
TD: We need to build out our infrastructure to support our growth as a global company. We need people with the right skills and the processes in place to support our worldwide growth. The need for money used to keep me up at night, now it is building the right infrastructure.

I would like to thank Tom Douramakos for taking the time for this interview. If there are any inaccuracies in this interview, they are probably due to my inability to read my own handwriting.

Disclosure: I do not own shares of GXI, AMA, or any airlines.

Logibec (LGI.TO) Reports a Solid Q4 and Full Year.

2009-11-27T12:11:00.004-05:00

For the base five years, the team of Claude Roy and Marc Brunet have been quietly building a solid Canadian success story in the North American health care technology sector.

With roots in Hospital Information Systems in the Quebec market, Logibec has been making smart acquisitions in the US market over the past few years that now makes LGI a player in the American long-term/acute care facilities market. As the baby-boomers enter geriatric age over the next dozen or so years, this is a good spot to be. Management has really tried to focus on strengthening its revenue streams and leverage technology infrastructure by delivering single-platform, software-as-a-service (and related ancillary services) via long-term, multi-year contracts. The earnings performance of this stock appears to support the leverage gained from this strategy.

Because the company tends to use large credit lines to make acquisitions, there was some investor skittishness entering 2009 regarding the credit markets and Logibec's balance sheet. As a result, the stock was trading at a bargain, well below $14.00. Now it trades in a range around $18.00.

Here are some full-year performance highlights:

Grew revenue to $73.3 m FY 2009, up 15% from FY 2008 revenue of $67.6 million.
Operating income grew to $27.7 million up 22% from FY 2008 operating income of $22.7 million.
Net income grew 37% to $10.3 million or $1.08 fd EPS, versus FY 2008 net income of $7.7 m or $0.79 EPS.
Operating margins increased to 36.3% of revenue from 33.6% reported in FY 2008.
Recurring revenue represented 90% of all sales.
Due partly to the acquisitions made during 2008 of Achieve and QuickCare, U.S. revenue grew 30% in 2009 to $39.9 million versus $30.1 million the previous year. For FY 2009, operations in the U.S. market contributed 54% of total sales.
Cashflow from operations totaled $22.3 million for the year.

Logibec has $1.5 million of cash on its balance sheet as at September 30, 2009. It has used most available operating cashflow to pay down debt that it used for acquistions. During 2009, the company paid down $24 million against its line of credit.

Q4 Highlights

Revenue was reported at $18.6 million versus $17.4 million reported for Q4 2008 up 7%. During Q4 2008, there were some one-time revenue contracts during the quarter.
Operating income was $7.6 million up 27% from $6.0 million reported for the previous quarter.
Operating margin was 40.8%, up substantially from an already impressive 34.4% reported for Q4 2008.
Net income was $3.0 or $0.32 EPS versus $2.4 million or $0.24 EPS, up 24% from the previous year.

The stock as reacted positively to its financial report. With highly predictable recurring revenue and high technical leverage expressed via exception earnings margins, investors should continue to see solid earnings and cash flow growth continue over the next few quarters. Institutional investors that own LGI shares tend to hold it for a long time, and with a limited float, the stock is not highly liquid. It may be a buy-forget-surprise stock.

Disclosure: I do not own shares of LGI

Redknee (RKN.TO) Surprises With Weak Q4.

2009-11-26T16:18:00.000-05:00

In its Q4 and Full-Year press release, the company downplayed its weak Q4 and focused on Full-Year profitability, which was strong.

Revenue for the quarter decreased sharply to $10.4 million, a 28% decline from its previous year Q4 revenue reported at $14.7 million.

The weak Q4 also impacted an otherwise stellar performance for FY 2009, which was reported at $53.3 million, an approximately 5% improvement over FY 2008 revenue reported at $50.0 million. Most analysts were probably expecting revenue growth to be nearly double what was reported. Nothwithstanding, the company was able to report EBITDA of $6.5 million versus a previous year loss of $4.2 million. This approximately $10.2 million of imrpovement was largely driven by reductions in expenses over the year as the company reduced its effective breakeven point to $49 million from approximately $58 million during the previous year.

EBITDA of $1.6 million reported for the quarter was an improvement over $0.6 million in EBITDA for the previous year, but that was enhanced by reduced commission payouts, which should not be considered a positive condition by analysts.

Management stated that Q4 performance suffered from delays in deployments and customer buying decisions by some of its client base due to lower subscription growth, compressed ARPU, and general market uncertainties, which led to poor capex spending conditions in the market. Management assured analysts during the conference call earlier today that it was experiencing delays in deployments and buying decisions, and not outright cancellations. The company also recognized $1.8 million in foreign exchange losses, which had an impact on earnings, resulting in a loss of $0.2 million or 0.00 loss per share for the quarter in comparison to net income of $0.9 million, or $0.02 EPS for Q4, 2008.

Although the company has increased its recurring revenue component to 41% of totals, it still depends upon capex budgets for growth. With uncertainty remaining for a return to capex spending by its client base for Q1, investors may see volatility in quarterly performance for H1 FY 2010. Essentially, visibility has been reduced.

Current clients represented 90% of total revenue for Q4, 2008, inferring that there were essentially no new sales for the quarter. However, the company still reported a $25 million backlog, although that was down from the $28 million backlog reported for Q3, 2009.Tellingly, management expressed that for future quarters, it expects current clients to represent 80% of total revenue, which implies that it does expect new client revenue to come back on line during FY 2010.

ARPU contraction worldwide is coming at a time when data requirements are skyrocketing due to more mobile activity. Both Tier 1 and high-growth carriers worldwide will need to adjust billing away from flat-rate "all you can eat" billing to more pay-as-you-go billing, while improving network efficiency. Redknee management believes that these market conditions are positive for future sales as carriers make adjustments to these realities.

The company also suggested that some vendors may not be able to survive the short-term spending freeze currently in the market, and that there may be future distressed assets available for acquisition. The company has $25.8 million in cash, which positions it well not only to weather the current conditions, but to also leverage its balance sheet to make acquisitions.

Analysts are likely to be disappointed in the Q4 performance, and may worry about the near-term outlook for Redknee. Some will ponder: is this a simple quarterly hiccup, or is it something more significant? However, it appears that some of the uncertainty may already be priced into the stock. Currently, the stock is trading at a TTM EV/EBITDA multiple of approximately 5x, which is a low multiple for the sector, where high growth multiples are in the low-teens.The TTM P/E ratio is 16.7, which is not unreasonable at current levels if future earnings growth is modest. Due to near-term uncertainty in outlook, some analysts may choose to adjust their forecasts and targets downward.

Look for RKN to drop out of the RES Free Thinking Top 5 Picks for the new year.

Disclosure: I do not own shares of RKN

CEO Series: Interview with Andrew Osis, CEO Multiplied Media - developers of the Poynt Mobile App

2009-11-26T00:24:00.005-05:00

This is the first in a series of interviews conducted with CEOs of interesting Canadian technology companies. The intent of this project is to provide investors with a unique understanding of what various companies are doing - directly from the top dog. Hopefully, the interviews conducted over the next few weeks will help investors to gain insight into the fundamentals of the companies to which they may not otherwise have access.

The first interview conducted is with Andrew Osis, Chief Executive Officer, Multiplied Media (MMC.V). The company is headquartered in Calgary, Alberta and has developed the wildly successful and award-winning mobile search application for Blackberry called Poynt.

RES: Considering that the Poynt application is one of the hottest Blackberry apps on earth right now, what are you doing to maintain momentum?
AO: Yeah, well we're pretty pleased with the ramp so far. We are in four countries right now, which are Canada, the US, all of UK, which includes Scotland, Wales and Ireland, and also Germany. So far, we have had over 3 million downloads and we have 1.5 million regular users a month and we average about 500,000 queries a day. And our user base is growing at about 1% per day. So far, we are the number 3 or 4 most popular RIM app in every country we are in. How are we maintaining momentum? First we are trying to deploy in every country that RIM is in, and on the 15th (Dec) we are scheduled to add France, Spain and Italy. We are also getting great feedback from our customer base, which gives us ideas for new services that they want. On December 15th we will be launching a gas prices service in the US. You'll be able to search for the best gas prices nearest you. Also, if your fuel light is on, you'll be able to search for the closest station. We get 400 emails a day from users giving us ideas so there are likely to be more services added to the platform in the future.

RES: So how do you make money from the new gas price service?
AO: It will be an ad model - its a good spot for gas retailers to advertise, auto insurance, or someone like Tim's. We expect to see meaningful revenues by the end of Q1 or early Q2.

RES: It's pretty well known that most free mobile apps downloaded don't generate any revenue and most are immediately ignored. What's different about Poynt?
AO: first of all, a lot of apps downloaded are novelties like iFart or iPuke which people giggle about for a few minutes, then forget about it. Other than that, most of the free mobile apps downloaded are still games and people tire of them quickly. It's like going to a dollar store and buying a glow-stick. Lots of cheap fun for a few minutes and then the glow-stick dies out. Poynt is a utility that solves real problems and supports a lifestyle. The good thing about it is that it is multi-locational and time-sensitive - it gets people out of jams - so people keep coming back and using it.

RES: So the big question is - how do you make money?
AO: We get paid in a lot of ways. If someone buys a movie ticket, we get $0.25, if someone makes a dinner reservation, we get $0.80. For search, depending on the local partner, we get paid in many ways. We get a query rate from our directory partners ranging from $0.20 to $50.00 depending on the company, the industry and the action taken by the user. In some cases, we receive a click-through fee ranging between $0.20 and $0.30, and we also get a page impression rate like on the web.

RES: Those are a lot of moving parts, so what is the simplest way for an investor to measure the progress of Multiplied Media?
AO: We think tracking user growth is one area. We should enter Q1 with about 2 million users. Right now about 70% of the user base represents about 10 to 12 queries per month. We are at an early stage of monetization, so we are looking at about $0.015 to $0.020 on average per query per month. So we are probably at about $0.20 per month per user going into the new year. As traffic builds, investors can follow us based on that.

RES: What is not well understood about Multiplied Media that investors should know about?
AO: Number one, I think is the revenue ramp over the next twelve months. There is a real multiplier effect - why do you think we call ourselves Multiplied Media? Just kidding. But seriously, we are tracking towards ten million users by the end of 2010. We will enter the year with two million users with four countries and three just launching. We will add several more countries during the year. On top of that we will launch on both the iPhone and the Android platforms during the first half, and add a few more services. But I think the real opportunity is that we are just scratching the surface of monetization. We are averaging just under two cents a query right now. We are learning every day, and the more we learn, the better we get at monetizing. Also, we won't begin benefiting from some advertising programs until Q1, and we won't be adding local couponing until Q3. We can see moving our revenue per query up from two cents to eight cents by the end of 2010. Combine that with 10 million users, and probably more than 10 queries per user per month, and, well, you can see the potential.

Secondly, people do not yet understand the power of Unomobi's intellectual property. It retains patents on GPS and user profiles to push advertising to mobile devices.We see the potential for significant future royalties because anybody who places an ad on a mobile device using GPS violates the patent. Also, it puts us in the position to be dominant among the ten or so serious competitors in local search on smartphones. Unomobi also brings some patents that allow us to deliver ads to feature phones in a similar way. As you know, there are billions of those handsets worldwide.These are key patents that give us a competitive edge.

RES: The Blackberry platform is a great starting point for you. Does RIM care about what you are doing?
AO: As one of the top three or four apps in each of the markets that we are in, RIM has taken notice. We are on RIM's Developer Advisory Committee, so we get really good insight into new capabilities as they are developing. Also, the RIM sales force promotes Poynt to telcos to put us on the deck wherever they have a presence. One day we hope that we are popular enough to be considered a native application.

RES: Porting to the iPhone platform seems like a natural progression. But with over 100,000 mobile applications sitting in the App Store, how to you stand out?
AO: The Poynt application for the iPhone is being reviewed in December by Apple and we expect to be live at the end of the month or in early January. We will have a big launch at the CES (Consumer Electronic Show) that runs from the 7th to the 10th. We will have a booth in the iLounge. Incidentally, we will also have a booth with RIM, too. Apple counts every country deployment as an individual app - so even with 100,000 apps, there is a lot of double counting. There may be around 20,000 actual individual applications on the platform. In our category there are only a handful of players and even fewer that would be considered serious. Probably Yelp, Where.net, and in the UK, Layar. We think that we have a definitive advantage over apps like Where.net and Yelp because we are international. Poynt works as well in London as it does in New York, or Toronto. Where and Yelp are US-based only. I should also say that there is so much room to grow for everyone that there is little chance of head-to-head competition for quite a while. The whole market is just formulating.

RES: Are you fully funded right now?
AO: We are unique in that we are intent on generating cashflow as we scale. We have resisted the advice of many to acquire users at all costs. As a result, we believe that we are fully funded to cashflow breakeven. That being said, if something really big happens like a native app deal, or a major telco platform deployment, we may need some additional working capital. But for now we are good.

RES: What about Android?
AO: We are working on that as the next platform after iPhone and we are targeting a beta launch in February.

RES: What are your per user acquisition costs?
AO: As of now, we have spent $1000.00 total to enter the RIM Developer Challenge and the GSMA developer contest. Since it first launched in the summer of 2008, the growth of the user base has been entirely viral. So, we have essentially spent $0 per user to get to where we are now. We are spending some marketing dollars on brand awareness to the telcos.

RES: At maturity, where do you see your margins?
AO: We don't know when we will get to maturity, but it could be in the next 24 to 36 month, we have near 100% gross margins, and our EBITDA margins could settle in at around 40%. Maturity is tough to predict because we are a fast growing company in a fast growing market.

RES: Where are you concentrating investment?
AO: Customer management, handling feedback and responding to it with new features and improvements. Also, deploying on more platforms.

RES: Do you plan on making any more acquisitions in the near future?
AO: For the next 24 months we are focusing on organic growth. However, if something comes up in the future that improves our technology, or increases our distribution of users, we would look at it. It would have to contribute to speed.

RES: Do you think that Multiplied Media will last until maturity?
AO: We are building a lasting business with a ten year horizon. Although we think it is highly likely that as the market expands someone will come knocking on our door. Local search is an area of intense interest right now so we think there may be companies within the search, handset, telco, and advertising industries that may find what we, and our competitors, are doing to be of interest.

RES: Where is the inflection point to critical mass?
AO: At 700,000 users you can say "we are real". At two to three million users, the industry pays attention. At seven to eight million users you can say you are a bit of a phenomenon. Above that, possibly a juggernaut. We believe that we can get to close to ten million users as we exit 2010.

RES: Now the final classic question, what keeps you up at night?
AO: My kids! Actually, the wind is at our back, and I'm enjoying the ride. The one thing that I think about is, are we going fast enough?

I would like to thank Andrew for his time, and if there are any inaccuracies within the interview, it is probably related to my inability to read my own handwriting.

Based on the momentum showed by this company so far in 2009, look for Multiplied Media to be on the RES Free Thinking Top 5 Pick list for 2010.

Next up: Tom Douroumakos, Chief Executive Officer, Guestlogix.

Disclosure: I own shares of MMC.V and I use the Poynt application a lot.

More on the Commercialization of Intellectual Property in Canada - With a Link to Mark McQueen

2009-11-12T11:45:00.001-05:00

In August I posted an opinion on why R&D subsidies in the technology sector are currently an ineffective tool to support technology innovations and posed some general solutions to re-energize investment into all industries that commercialize Intellectual Property (I/P), including information technology, communications, life sciences, cleantech, and instrumentation. It is also posted on the DVC SmallTech Newsletter.

In essence, the RES Free Thinking post offered the following solutions:

1. Deliver the same level of investor tax benefits to I/P companies as mineral exploration companies in the form of flow-through shares.Similar levels of initial risk exist, although the value of I/P has potentially more sustained impact on GDP and job creation over the long-run.

2. Streamline current tax incentives and industry credits so technology SMEs can benefit more quickly and with less administrative effort. The current net returns on available current tax credits are reduced by administration, and it often takes several quarters to actually receive funds.

3. Expand industry credits and incentives to focus on I/P commercialization and de-emphasize pure R&D. R&D on its own does not create a successful enterprise, and comprises only a small component of a commercialization process. Successful commercialization creates investor returns, jobs, and ultimately wealth.

4. Update legislation related to VC and PE funds so that they are more attractive to both retail and institutional investors by creating more liquidity and sustained returns. Unlike during the 1980s and 1990s, investors have access to more liquid financial instruments that generate more returns with less restrictions. Venture Capital investing needs to be put on more equal footing within the capital markets sector, otherwise capital will continue to dry up.

5. Tighten regulations (including compensation) so that VCs are more inclined to deploy available funds into emerging companies. Canadian VCs tend to deploy less capital as a percentage of available funds into ventures than their counterparts in other jurisdictions. In order to successfully support the I/P based economy, more available capital actually needs to be put to work.

6. Promote knowledge transfer and mentoring by better supporting knowledge clustering, using K-W as a reference model.

It is interesting that opinion from multiple sources appears to be coalescing around similar themes. Today Mark McQueen posted a note on the Wellington Financial blog that more eloquently addresses the topic. It links to a debate on SqueezePlay, along with CVCA letters written to politicians at the Federal and Provincial levels of government. For those that are concerned about the current state of the capital markets related to the I/P ecosystem, this is essential reading.

Cyberplex exceeds analyst expectations again while fundamentals solidify

2009-11-11T11:52:00.001-05:00

From an operational perspective, Cyberplex beat consensus forecasts, extending the Google/Cyberplex trend to seven quarters.

Yesterday Cyberplex (CX.TO) reported Q3 sales of $28.2 million, a 158% increase over Q3 2008 sales of $11.2 million and a 10% sequential increase over Q2 2009 sales of $25.7 million. Analysts were expecting a sequential decline in sales due to historically weak Q3 related to seasonality in media spending. Seasonality trends were broken for this quarter, and revenue was reported approximately 28% ahead of consensus forecasts. The Company reported net income of $0.7 million, or $0.01 EPS for the quarter, which was a 12.5% year-over-year increase from Q3 2008 net income of $0.6 million. Because a vast majority of its revenue is recognized in U.S. dollars, and it reports in Canadian dollars, the company continues to struggle with currency volatility related to the relationship between the U.S. dollar and the Canadian dollar. The company reported $1.6 million in foreign exchange losses for the quarter despite attempting to apply FX hedging programs this quarter. Management still needs to get a handle on this issue. The company reported $2.7 million in EBITDA ahead of FX adjustments, which was a 390% improvement over Q3 2008 EBITDA before FX of $0.6 million. This was also ahead of consensus. The Company is demonstrating earnings leverage from operations, although due to currency risk, it is not necessarily being reflected in net income for this quarter.

This was a cash flow neutral quarter, and the company exited Q3 with $21.4 million of cash.

Seasonality Trends Broken
On the conference call, Management explained that historical seasonality trends are being broken by new behavior among advertisers and publishers. Essentially, instead of running 2 week to 1 month tactical online programs that support larger integrated terrestrial campaigns, its clients are now running larger, more extensive multi-quarter online campaigns. According to management 99% of revenue generated during Q3 was from anchor campaigns. The data supports the notion of multi-quarter campaigns, which implies that the online advertising campaigns being managed by Cyberplex are becoming more strategic. This increases the recurring revenue potential for Cyberplex going forward, and increases potential client stickiness. This trend cuts both ways. Traditionally, Q4 has been the strongest quarter for Cyberplex due to seasonality. With less seasonality, will Q4 be another blow-out quarter like Q4 2008? During the analyst call, Management stated that the Q4 pipeline is solid with a more robust recurring revenue base, so it should be strong Q4, but with better underlying fundamentals than Q4 of the previous year.

International Diversification Continues

During Q3, approximately 23% of revenue generated was from international markets, up from 10% sequentially from Q2, 2009. Management anticipates that international campaigns could represent a greater portion of future quarterly sales results. International sales hedge revenue streams against potential future market weakness in the US, and provide a potential natural foreign exchange hedge based on sales being recorded in local currencies. As well, international sales recorded during Q3 2009 are a lead indicator that Cyberplex has a "world market" opportunity that it can exploit.

Tier 1 Advertisers Appearing
This quarter, Cyberplex partnered with OgilvyOne to deliver a significant Canadian campaign for American Express. The company believes that tier 1 agency partnerships and advertising clients are becoming more comfortable with Cost-Per-Action (CPA) performance-based online campaigns. Based on response by the market, Management believes that more tier 1 players in its pipeline are likely to convert over the next few quarters. With larger available budgets, this trend could enhance future revenue growth and expand recurring revenue.

Slight Margin Compression Temporary

The company reported gross margins of 28%, or $7.9 million on $28.2 million of revenue. Although gross margin rates are at the low-end of Management's target range, the better than expected sales number generates a higher than anticipated gross revenue total. Management stated that the gross margins were impacted by more agressive pricing as it continues to enter international markets, and that it does not anticipate increased margin compression in the near-term.

Year-to-Date Performance is Strong
YTD, the company has reported $86.0 million in sales versus 2008 YTD of $28.4 million, a 202% increase.
Total Gross Margin YTD is reported at $25.5 million versus 2008 YTD of $9.5 million, a 168% increase.
YTD EBITDA is reported at $6.6 million or $0.09 per share versus 2008 YTD of $1.3 million, a 407% improvement.
Net Income YTD is reported at $5.8 million or $0.08 EPS versus 2008 YTD of $0.9 million of $0.01 EPS, a 570% improvement.

Client-Base is Becoming De-Risked
Earlier in the year, the company generated more than 30% of its revenue from a single client. As of Q3, 2009 the largest client represented less than 10% of total revenue. The top 10 clients currently represent 70% of total revenue.

What Will Analysts Think?
Analysts will be encouraged by the continued strong progress made in international markets, and among tier 1 advertisers. Most will be surprised by the quarterly sales performance because it is ahead of consensus. More importantly, the underlying reason for the broken seasonality trend should be seen by analysts as positive. Cyberplex customers are designing longer, more strategic CPA campaigns, which should help to strengthen future revenue stream growth, increase earnings predictability, and improve Cyberplex brand recognition within the advertising industry. In what has been described as one of the worst recessions in recent memory, Cyberplex has managed to grow revenue YTD by over 200% while increasing earnings by 5x over YTD 2008. What will happen to Cyberplex performance during an improving economy? Analysts are likely to be bullish about recent growth trends intersecting with an improving economy.

Investors should expect that analysts will re-iterate BUY and STRONG BUY ratings with a small possibility of target upgrades, although the consensus targets are already more than double current share price levels.

Cyberplex remains an emerging player in the CPA market, which itself is an emerging market. As a result, the company should continue to demonstrate solid, and sometime spectacular growth over the coming quarters. The stock is trading at 9.0x TTM earnings with significant forcasted earnings growth. The stock appears to be trading at the multiples of a low-growth industrial stock. Analysts are likely to view Cyberplex stock as an inexpensive entry into the high-growth performance-based advertising market.If there are any Canadian technology investors remaining in Canada, they should be all over this stock.

Disclosure: I own shares of CX

Bridgewater Systems Q3 2009 - Beats Consensus Forecasts and Increases FY Guidance.

2009-11-05T10:28:00.003-05:00

This morning Bridgewater Systems reported Q3, 2009 earnings and subsequently discussed the results and outlook during an analyst call. Analysts are likely to view the results and the business outlook as positive for the stock.

Net income for the quarter was reported at $1.7 million or $0.07 EPS, ahead of consensus forecasts of $0.05 EPS. Revenue was reported at $15.8 million, a 53% increase over prior year Q3 revenue of $10.3 million and ahead of consensus forecasts of $14.6 million for the quarter. Gross Margins contracted sequentially to 64% from Q2 2009 Gross Margins of 75% and from Q3 2008 Gross Margins of 75%. The gross margins contraction is related to the deployment of the Widespan contract and activities related to various trials and deployment preparations associated with various recent contract wins - basically scaling costs. Management expects Gross Margins to continue in the mid-60s range until H2 2010, when it anticipates that Gross Margins will expand to a target of 70% where it is expected to stabilize.

Management raised FY 2009 revenue guidance from a range of $58 million to $62 million to a range of $62 million to $64 million. Earnings guidance was tightened towards the high end of previous guidance from a range of $8.0 million to $10 million to a range of $9.5 million to $10 million, or $0.38 to $0.40 EPS.

Bridgewater Systems generated $3.9 million in free cash flow for the quarter, exiting with $61.5 million of cash on its balance sheet. For F9M 2009, BWC has generated approximately $14.9 million in free cash flow.

During the conference call the company alluded to another multi-million dollar Tier 1 GSM contract in EMEA, which is expected to be announced shortly. A small portion of expected revenue is baked into 2009 guidance, however most of the revenue should be recognized during 2010.

Outlook

As stated in previous posts, BWC is positioned well in the "eye of the storm" as demand for the mobile internet intensifies. Here are a few trends that should positively impact BWC over the next 3 years:

- By 2014, traffic on the mobile internet is expected to be double the size of the wired network.
- By 2011 it is expected that there will be 1.5 billion 3G subscribers worldwide, up from about 350 million now.
- Wireless carriers worldwide will continue to struggle to scale data capacity to maintain quality service.
- Already there are over 150,000 mobile applications that subscribers can download, and this should continue to increase as Android devices gain traction among consumers. Service complexity should increase exponentially.
- BWC solutions help carriers to manage capacity, traffic flows, and the complexity of subscriber services.

Investors should expect an acceleration of new contract announcements as the growing pipeline continues to convert leading into FY 2010. Contract announcement should continue to roll throughout next year as international deployments increase via an expanding channel network, while current 4G and LTE trials convert. Currently, 7% of sales come from third-party channels (mostly HP). Investors should see an increasing amount of deals from third-party partners (not HP) over the coming quarters. By Q1 2010, channel partners could represent over 10% of sales and the third-party channel could represent 30% of sales exiting FY 2010.

The company guided that it expects expenses to be 10% higher in H2 2009 versus H1 2010 as it hires business development and professional service resources in order to support its global expansion.

Bottom line: BWC retains a competitive advantage in the areas of subscriber policy and data management because its solutions can be deployed across multiple technologies in a network include LTE, WiMAX and WiFi, allowing carriers to maximize the data capacity of invested technology.

Bridgewater Systems continues to exceed consensus forecasts and appears to have good visibility on future revenue and earnings. The outlook heading into 2010 and beyond, to at least 2012, suggests that conditions within the emerging mobile infrastructure are extremely favorable for continued high growth and earnings leverage at Bridgewater Systems.

There is some scaling risk associated with this stock as Management continues to build out infrastructure and capabilities a step ahead of the deals being won. As business accelerates, this could become a greater challenge.

Expect analysts with current 12 month targets below $10.00 to begin raising forecasts and targets based on accelerated contract announcements.

Disclosure: I own shares of BWC.

Bridgewater Systems (BWC.TO): More Takeover speculation

2009-11-03T15:30:00.000-05:00

Since some Boardroom maneuvering earlier this year, there has been some speculation of a takeover of BWC. Here is some more detailed speculation reported on by Andrew Willis - all in quotes.

From Andrew Willis

"While Bridgewater Systems would prefer to be loved for its fundamentals, the tech company is becoming accustomed to drawing investors with corporate intrigue.
Bridgewater (BWC-T9.940.212.16%) is in the wireless software business, and sports at $240-million market capitalization. Backers include tech billionaire Terry Matthews. Earlier this year, the company was targeted by money manager Crescendo Partners, with a proxy fight ending peacefully and Crescendo executives joining the Bridgewater board.
As this boardroom activity played out, Bridgewater posted increasingly strong results. The company is winning new telecom clients and rolling out a new business model that draws more recurring revenue from existing customers, a list that includes most of the major global phone companies. The stock is up 241 per cent over the past 12 months.
Now National Bank Financial is speculating that Ottawa-based Bridgewater could be on the receiving end of a bid from Nokia Siemens Networks.
While the concept isn’t new - Bridgewater has long been seen as a potential target - National Bank Financial analyst Kris Thompson is taking an aggressive view on what’s coming, as he predicts a bidding war is in the offing.
“We've been suggesting that Bridgewater would be an acquisition target of NSN for many months for both its technology and key customer Verizon Wireless,” said Mr. Thompson in a report on Tuesday. He then added: “Also recall that we've suggested that Cisco would likely defend its evolved packet core position by acquiring Bridgewater if Nokia Siemens Networks were to bid for the company.”
National Bank Financial has a $13 target price on Bridgewater, and an “outperform” ranking, with "above average” risk rating."

Disclosure: I own shares of BWC.

Could Multiplied Media Be "The Next Big Thing"?

2009-11-02T16:04:00.001-05:00

Last week, the DVC SmallTech Newsletter identified ten breakout smallcap technology stocks for YTD 2009. Many of those intersect with the RES Free Thinking Top 5 picks for 2009. Investors in all of those stocks are smiling so far as we enter the last two months of the year. Alas, but there may be one more stock that could make a lot of noise over the next few months.

2009 should be remembered as a breakout year for mobile app vendor Multiplied Media (MMC.V) where the "stars aligned" for the previously perpetually struggling microcap. Founded in 2002 and then taken public via a CPC merger in 2006, Multiplied Media had developed a "big idea" in the form of Location-Based Services (LBS) for mobile devices, but had access to limited infrastructure on which to deploy local search services. It chose what was available at the time, which was the Instant Messaging (IM) platform. Unfortunately, IM failed to gain widespread adoption as a platform for LBS and Multiplied Media had to reset its direction while suffering as a pre-revenue venture with limited resources, dwindling cash, and a restless investor base. By the time it had deployed its Poynt application on the RIM OS in June 2008, the future looked bleak despite the accomplishment and the as-of-yet realized potential of the application. Initially, downloads of Poynt were modest, measuring in the dozens, maybe in the hundreds per week.

It was not until the unanticipated and overwhelmingly successful launch of the iPhone App Store in July 2008 that events started aligning that could earn Multiplied Media "the next big thing" moniker this quarter. With the initial success and the potential competitive threat to RIM caused by the the iPhone App Store, RIM accelerated its mobile consumer applications strategies. First, it began by creating and publicizing the Blackberry Developer Challenge to identify and publicize the best consumer applications developed for RIM, and then it deployed Blackberry App World in March of 2009 as a direct response to Apple's iPhone App Store launched nine months earlier.

In November 2008, Poynt won the Grand Prize in the Blackberry Developer Challenge and was soon featured on Blackberry's mobile site ahead the App World launch.See this earlier blog post. Downloads of the application began to build, then moving into the thousands per month range and by the time App World was launched in April 2009, Poynt had been downloaded by approximately 100,000 consumers. Not long after, the Poynt application was named GSMA Most Innovative Consumer Application in the World.

In time for the App World launch, there were few free consumer RIM applications available for download in App World (cue the chirping crickets) and Poynt benefited from being a multiple award-winning application (big fish) that was only available on the RIM platform (little pond). Due to the quality of the application, it has gone "word-of-mouth" viral among users, helping to drive adoption. Since April, there have been 1.2 million downloads of the application by RIM users - adoption truly looks like a "hockey stick" and momentum continues as Management reports that the install base is growing at a sustained rate of 1% per day. More importantly for investors, people are using the application. As at the time of this post, we estimate that Poynt is transacting between 200,000 and 300,000 individual queries per day and users are currently averaging 10 queries per month. Entering November, user activity infers that there could be between 6 million and 9 million queries executed via the Poynt application this month alone. Considering that the restaurant service has only been available since the beginning of September, it is anticipated that queries per user should accelerate. Revenue potential is benefiting from two intersecting growth vectors. Individual usage is climbing, while the number users is going parabolic.

The near-term future growth of the Poynt application looks even brighter as Multiplied Media is busy porting the application to the iPhone and Android devices. We anticipate that a production version will be available for the iPhone App Store by early December and for the Android OS soon after that. Even within the crowded App Store, the Poynt solution should do well. As a top 10 RIM download and multiple award-winning application, its pedigree should garner a significant lift in downloads via iPhone, and then again with Android. It is important to put the Poynt application into the context of the App Store environment. As of today, AAPL announced that it had reached the 2 billion download mark, only five months after exceeding 1 billion downloads. There are 85,000 applications already developed for the iPhone and 50 million iPhone and iTouch users have downloaded on average 20 applications, most of which are games. But here is the rub. The average app is downloaded 2300 times and only 20% of those apps are ever used after initial download. On the other hand, with 10 queries per month per user, Poynt demonstrates some real stickiness so far. To put Poynt into further context, AAPL announced that the Pizza Hut app reached 1 million downloads last week, and today it was leaked that GoogleTalk has 1.4 million users. With approximately 1.3 million downloads and growing, Poynt is not an insignificant mobile application, which should be noticed by iPhone users when it is made available.

Until this summer, Poynt was only available to North American mobile subscribers. In June 2009, the Company announced that it had entered the U.K market, and it plans to rollout to several additional EU markets during 2010. The increased geographic distribution, combined with the multiple OS ports should help to re-enforce its accelerating market build.

From a revenue generating perspective, Multiplied Media has yet to turn on the taps for local LBS-based advertising, which could be launched sometime during H1, 2010. Ahead of this, the Company announced in June that it intends to acquire Toronto-based Unomobi, a privately-held mobile application developer that retains significant Intellectual Property (IP) related to both mobile LBS advertising, and SMS-to-Email solutions. If the transaction closes in Q4 as anticipated, then MMC will be well-positioned to fairly quickly open up a location-based local advertising revenue stream with intellectual property protection. With IP protection, and good execution Multiplied Media is positioned to be a meaningful player in the niche, which is anticipated to grow from a $0.1 billion market today to a $3 billion market by 2014.

From a financial perspective, the company was able to de-risk its precarious balance sheet by raising $3.0 million via an equity raise in announced August 6 2009, which should be an adequate amount to execute its business plan to cash-flow break-even. The Unomobi acquisition is expected to be an all-share transaction, which should preserve the balance sheet for growth.

As of June 30th, 2009, Multiplied Media was still a pre-revenue company. It reported quarterly revenue of $0.1 million and a loss of $0.6 million. A vast majority of the recent ramp in downloads and user activity was not included in the results. The revenue model employed by Multiplied Media is similar to that of RES Free Thinking Top 5 Pick Cyberplex (CX.TO), which is a performance-based revenue-share model. Multiplied Media gets paid when a user reserves a table, buys a movie ticket, or searches for a local business. Cyberplex is demonstrating both high revenue growth and earnings leverage with a similar model, which infers that Multiplied Media could possibly demonstrate similar traits going forward as it rolls the services out worldwide.

Bottom Line: The Poynt application is currently demonstrating significant ramp measured by both downloads and, more importantly, usage. Even as a single platform application, it should rank among some of the most downloaded applications over the past five months and should reach approximately 2 million downloads by the end of the year on the RIM platform alone. As the company ports the application to iPhone, and Android, downloads should accelerate. Adding to the potential for accelerated downloads, MMC is entering multiple local EU markets throughout 2010. As long as user activity continues, the company could be transacting over 10 million queries per month by the end of the year. Finally, with the anticipated close of the Unomobi acquisition and subsequent launch of profile-centric, location-based advertising, Multiplied Media may be prepared to open a potentially vast new revenue stream by Q1 2010 where it maintains potentially significant IP benefit.

Without a profitable operating history, the stock should be considered speculative. However, the recent shoring up of the balance sheet removes some risk for investors that are interested in benefiting from the emergence of the mobile Internet.

Disclosure: I own shares of MMC.V

Just in time for Holloween: A Few Spooky Stats YTD 2009.

2009-10-30T14:34:00.004-04:00

Here are some random statistics from various sources:

Canadian Tech Sector
TSX/TSXV technology sector listings September 2009 - 284 including 5 new listings. Down from 310 at the beginning of the year. A 9% drop.

YTD deals in the TSX Tech Sector - 83
Mean deal size: $5.05 m
TSXV deals - 71 with a mean deal size of $1.3 million
TSX deals - 12 with a mean deal size of $27.3 million

YTD Cleantech deals
Mean deal size: $13.5 m
Top performing sector YTD TSX: InfoTech at 69%
(Source: TSX)

Search
30% of all searches on Google, Yahoo and Bing are for people. Half of those are for celebrities.(Source: AOL)

RESpooky Opinion: People are looking for people and can't find them using current approaches and "celebrity" may be a major economic sector.

Mobile
Approaching 4 billion mobile subscribers worldwide.
Approaching 300 million "smartphones" worldwide.
1.6 billion internet users worldwide.
15 new mobile payment start-ups per minute (just kidding! - although it seems like it)
72% of all iPhone owners have downloaded 10 or more applications.(Source: Admob)
OpenTable iPhone app has secured more than 1 million dinner reservations. (Source:TechCrunch)
65% of all mobile internet traffic is generated by iPhone with 11% share of the handset market.(Source: Morgan Stanley)

RESpooky Opinion: The mobile web, especially powered by the cloud, will begin to dwarf the wired internet in terms of scale, complexity, and value within 2 to 3 years. Check out the new Google Maps Navigation for Android as evidence.

Some stats from the next three billion dollar IPOs:

21 million Twitter users as of July 2009 and growing by 8 million per month
80% of all Twitter users have joined in 2009.
5% of all Twitter users account for 75% of all activity
60% of all Twitter users abandon accounts within the first month.
6% of Twitter users have 100 or more followers.
(Source: Sysomos, Mashable)

300 million active Facebook users worldwide.
50% of those login daily.
65 million mobile Facebook users worldwide - number 1 mobile app.
Average user has 130 friends
350,000 applications have been developed so far for the platform (most of which are annoying time-wasters IMHO)
(Source: Facebook)

50 million active LinkedIn users worldwide as of Oct 14 2009 and growing by 1 million every 12 days.
$109,000 - mean user household income
41 - average age
64% - male
(Source: LinkedIn)

RESpooky Opinion: Although Facebook and especially Twitter enjoy the hype, LinkedIn may become the sleeper pick of the group.

Ok, that's it for now and have a safe Holloween. Look for posts on many Canadian technology companies expected to report Q3 earnings starting next week.

Bridgewater Systems (BWC.TO) Q3 2009 Preview: Will momentum continue?

2009-10-27T12:42:00.003-04:00

Earlier this month, BWC stock peaked at $9.80 per share, more than quadrupling the share price of $2.17 as it entered 2009. It has come off those highs since and it looks like it is now trading in the mid $8 range ahead of its Q3 financial report, which is scheduled to be released at 7:00AM on November 5, 2009. The investor conference call is scheduled for 8:30AM that day, and the call-in numbers are:

1-416-844-3432
1-877-974-0446

After a remarkable run since the beginning of the year, investors may wonder how much upside remains in the stock. As a reminder, performance for H1 2009 was as follows:

Revenue: $30.2 million, a 48% improvement over H1 2008 reported revenue.
Net Earnings: $7.0 million, or $0.29 EPS, a massive improvement over $0.6 million or $0.02 EPS reported for H1 2008.

During the Q2 conference call, Management increased full-year guidance to $58.0 to $62.0 million in revenue, and net earnings ranging between $8.0 million and $10.0 million. With H1 EPS reported at $7.0 million, guidance implies that EPS should drop for H2 2009 to between $1 million and $3 million. The stock is currently trading at approximately 21x top-end full-year EPS guidance at a share price ranging between $8.55 and $8.60 as of this morning. Is this expensive?

First of all, investors have been pricing in some of the value of the Verizon Widespan deal, which was announced in September and is worth over $18 million to BWC, implying a 30% bump in revenue and potential earnings over FY 2009 top-end guidance.

Secondly, With a 21x P/E ratio, the market may also be expecting the Company to exceed the top end of EPS guidance for the remainder of this year. Is this a reasonable expectation?

Although expenses may increase as a result of various 4G LTE and WiMAX pilots being deployed by BWC around the world, gross margins should remain in the mid 70s for the remainder of the year, which should help it to maintain current EBITDA margins. To obtain the bottom-end of EPS guidance, H2 revenue growth and earnings would need to collapse, and this does not seem plausible at this point. During FY 2008, H2 represented both the majority of revenue and earnings. With increased pilot expenses, the top-end of guidance could be plausible if the company simply maintains its current revenue trajectory. However, wireless broadband ecosystem conditions point to potential increasing revenue trajectory for BWC for H2, 2009, especially for Q4 and through to at least 2012. This would imply that both H2 revenue and earnings could come in above guidance.

Here are some mobile ecosystem conditions (sourced from Morgan Stanley via TechCrunch) that will benefit BWC until at least 2012:

- Mobile Internet is growing faster and is becoming bigger than expected.Will be 2x bigger than fixed Internet by 2012 and 3x bigger by 2014 (measured by usage).
- More applications and more media than ever expected due to the growing impact of social media.
- Network capacity needs to grow at rates previously unanticipated and carriers will have serious challenges keeping up to demand while maintaining quality service.
- 3G/WiMAX penetration is expected to triple between 2008 and 2011 (see DWI.T)
- Leading indicator - Apple iPhone has captured 11% of the smartphone market, but represents 65% of current mobile internet usage. Android owns 2% of the smartphone market and 8% of mobile internet usage. As these two OS/device ecosystems roll-out around the world, (and Google is just starting) there will be an exponential increase in mobile internet usage, which will create network capacity issues, subscriber complexity, and QoS challenges. This is Bridgewater Systems' sweet spot.

See this slide show from Mary Meeker at Morgan Stanley to gain better perspective.

So what is the conclusion? Due to conservatism, BWC should exceed its published guidance for H2 2009. Market conditions suggest that there is a good probability that BWC could exceed analyst expectations for H2 2009, too. The mobile infrastructure market did not experience the full brunt of the world recession, and market conditions are setting up for higher growth exiting the recession, with unknown levels of potential surprise upside. As BWC emerges, expectations are increasing, which creates some volatility. However, for investors that are long in the mobile ecosystem, BWC probably still has a lot of upside from the mid-$8 level.

Disclosure: I own shares of BWC, I do not own shares of DWI.

GOOG Beats Expectations...Will CX .TO Follow Again?

2009-10-16T10:07:00.000-04:00

During the Q4 earnings season I began highlighting an interesting pattern between Google earnings performance and Cyberplex performance. Essentially, each time that Google exceeded earnings expectations, Cyberplex also exceeded forecasts when it reported approximately two to three weeks later. In July, I became a little bolder and proposed a trading idea that Google performance has consistently foreshadowed Cyberplex performance, suggesting that traders could accumulate ahead of CX.TO earnings report.

For reference, here is the rationale described in a preview of Cyberplex Q2 results:

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.

Google exceeded expectations at both the topline and the bottom line, reporting $5.84 in adjusted earnings versus consensus expectations of $5.38. This is a very healthy beat. Since cash continues to be king, investors should be amazed that free cash flow increased by 40% over last year. Also, Google share price should trade higher today on the news after trading up by 3% in the aftermarket yesterday.

Online advertising is beginning to recover. However, the demand for measureability and performance by marketing managers has probably permanently shifted. The online display ad business will not recover at the rates of CPC-based advertising, which plays directly into Google's dominance. With more measureability associated with Cost Per Action (CPA) advertising, we should see Cyberplex continue to at least mirror Google performance as its market niche matures.

The CX.TO stock has traded off its highs over the past month due to some overhang caused by an early angel investor exiting the stock and taking profits. The investor is now essentially gone, leaving the share price trading between $1.20 and $1.30 a share. As at the end of Q2, the company reported $0.33 of cash and short-term deposits, and also generated $0.05 in free cash flow during the quarter. During H1 2009 alone, CX generated $0.10 per share in free cash from operations. Right now CX is trading at 4x cash.

The bottom line: If patterns continue, there is a good probability that Cyberplex could beat analysts forecasts for Q3 2009 based on Google's performance yesterday. On top of that, due to the recent stock overhang, the Cyberplex stock has traded down substantially over the past month. Instead of trading at the multiples of a high growth company churning out strong cashflow, the stock is trading at multiples similar to an industrial stock. The TTM P/E ratio is 6.0x right now. The next two weeks may represent a pretty good time to get into the stock.

Disclosure: I own shares of CX

Top 5 Pick Guestlogix: Good news flow plus growing Q3 earnings

2009-10-15T10:55:00.000-04:00

Guestlogix has presented some good news flow recently. During the past 30 days, the company has made seven corporate announcements including a settling of an IP dispute with Abanco (at 0 cost), an airline deal with Horizon Air, an ad serving deal with JETERA, merchandising deals with Forum Telecom (mobile subscriptions), Facilities Partner Ltd (train tickets), and Vegas.com (Vegas shows). In addition, it announced a product enhancement for NFC contactless payment options.

The deal making is starting to show up in performance. Today it reported solid progress in earnings growth and scale. The company reported record EBITDA of $1.3 million for the quarter, a 23% sequential improvement over Q2 2009 results of $1.05 million. The press release points out that the EBITDA margin for the quarter was 27%, which should be considered by investors as very positive leverage if the margin can be sustained over time while sales continue to ramp.

The company continues to scale well despite the impact of the recession on its client base. Revenue for the quarter increased by 100% to $4.8 million over the previous year Q3 and total sales for F9M of 2009 are reported at $13.4 million, 139% ahead of F9M for 2008. The company reported Net Income for the second quarter in a row, and investors should expect positive net income to be reported for the foreseeable future.

The stock has been on a run for the past few weeks at is at its highest level since the beginning of 2008. Since the lows of March, the stock price has increase 333%, and 116% since the beginning of the year.

With a spate of new deals announced during 2009, GXI has a robust growth profile with little meaningful competition in its niche market. If it can maintain EBITDA margins at around 27% while maintaining growth, then there is a lot of room for the stock to continue to appreciate in value now that liquidity has also increased. Analysts with current targets in the $1.50 range are likely to increase forecasts and targets.

Disclosure: I do not own shares of GXI.

The Rubber Hit The Road...Where Was ACT?

2009-10-15T09:07:00.002-04:00

Earlier this year I posted an item on Active Control Technologies after it had, after two years, finally secured certification by the Mine Health and Safety Administration (MSHA), otherwise known on Bay Street as "emshaw", to deploy its wireless system in American coal mines.The title was Active Control Technology (ACT.V): Rubber Hits Road and the note was upbeat but cautionary. The gist of the post was this: the Company has lots of potential, but it needs to execute well in the short-term to leverage potential. Management had communicated to analysts that it had $6 million in contracted backlog ready to immediately convert upon MSHA approvals and that it had a qualified pipeline in excess of $20 million. It set an expectation that the company was about to transform from a speculative promise to a high growth company that was not far away from actual earnings. This was six months ago.

What has happened in the intervening six months? Nearly nothing. The rubber hit the road and ACT was nowhere to be found. Since its potentially transformative MSHA announcement, management has spent most of the time shoring up its diminishing working capital while it waits for contracts...and waits. In retrospect, the $6 million backlog that was communicated to the street was either not well understood, or simply unrealistic. The persistent over-promise throughout the last couple of years may have finally caught up to the CEO.

Earlier this week, the Company announced that Steve Barrett is being sidelined to Executive Chairman of the Board (what is that?) and Cameron Sturgess is promoted to CEO and President. This is always a sign of struggle. In addition, it was announced today that Paradigm has filed a short-form prospectus on behalf of the company to raise more equity. The amount of capital sought is possibly in the $7 million to $10 million range, which raises the specter of significantly more dilution for current shareholders. The increase in working capital should reduce some of the perceived financial risk that may be delaying buying decisions, although there are no guarantees that potential buyers will pull the trigger.

Apparently, there are some contract announcements "coming soon", although that has been a mantra at ACT for many months, and investors will likely have difficulty believing without seeing. The credibility of the new CEO hinges upon exceeding the promise.

Longstanding shareholders may see a glimmer of hope in the quality of technology developed to date, and in the fact that the Company has a couple of very happy reference clients including Patriot Coal (NYSE:PCX). Although, this is cold comfort in the face of more dilution and yet more delays to cash flow as the company resets.

The bottom line is this: unfortunately, ACT was unable to execute effectively at a crucial point in its evolution which means that it has to go through the reset that it is now undertaking. Resetting the company is, by no means, guaranteed to be successful. However, if it is able to re-capitalize and execute better with new management, ACT may be able to regain some momentum lost. But this could take a while. In the end, its all about execution and ACT has a lot to prove to gain the confidence of investors as it goes forward.

Disclosure: I own shares of ACT, I do not own shares of PCX.

INTC flies by forecasts - strong beat and analyst upgrades everywhere.

2009-10-14T09:26:00.001-04:00

Intel is the first of technology sector bellwethers to report. It had already pre-reported that it would have a strong third quarter, although the actual numbers surpassed all analysts expectations - both top line and bottom line. The sequential quarterly growth was reported by Management to be the strongest in 30 years. Analysts are raising targets, and already some are whispering stretch targets of $40.00, with official 12-month targets appearing to settle in a range between $26 and $30.

Because INTC chipsets are dominant in PCs, Intel is considered to be a good predictor for PC manufacturers, and related software and IT services. Considering that growth in its mobile division was 19% sequentially, INTC may also be an early indicator that mobile stocks should also show strong outlooks from Q3 when they report. As a whole, the sector should move today with special emphasis on infrastructure, PC hardware, business software, IT services, and mobility.

The technology sector continues to lead the world economy out of the recession. Most technology companies entered the recession with relatively strong balance sheets after learning from the bursting of the technology bubble in 2002.

Related Canadian technology stocks should benefit from the overall move including GIB.A, ABT, RIM, CSU, DWI, BWC, Q, PIX, RKN, SVC, SW, WIN, MSD among others.

Disclosure: I do not own shares of stocks mentioned.

Why The IT Sector Has Outperformed the General Market YTD 2009: Licensing.

2009-10-05T14:58:00.001-04:00

As of September 18th, the TSX Information Technology Index has increased year-to-date by 69.8% and has been the best performing sector in the market.(Global Equity Weekly - BMO). As a corollary to this, in the case that skeptics believe it to be a RIM-only measurement, the information technology sector of the S&P 500 has been the top performing sector with a 44.9% year-to-date improvement (Global Equity Weekly - BMO). From the March 6th market lows, the performance has been even better.

The RES Free Thinking Top 5 Small Cap Tech Picks performed better than the IT Sector as a whole. The aggregate stock price performance of TSX:DSG, TSX:CX, TSX:BWC, TSX:RKN, and TSXV:GXI is 196% since March 6th, and 185% YTD since January 1st. As well, during that time CX and DSG were able to raise $17 m, and $40 m in new equity respectively.

The common themes among the RES Free Thinking Top Picks are as follows:

Unique solutions that solve problems within the respective market niches
High growth
Generating cash flow
Expanding Gross Margins
Recurring revenue licensing models
Strong cash balances (to a lesser extent)

The two most important themes has been the presence of recurring revenue licensing models, and solutions that solve current problems. In January, as the economy continued to dive, I posted this note extolling the virtues and possible risks of recurring revenue software licensing models during the then deepening recession. Now ten months later, it appears that the IT Sector is leading the world economy out of recession and the recurring licensing model may be one of the main reasons why.

Review of the Root Cause of the Recession

It is well understood that the root cause of this recession was excessive leverage among consumers and within the financial services sector. Credit dried up and people were unable to buy things that required a capital commitment (cars, homes, furniture, etc...).Frozen credit markets impeded capital investments by business.

Current Behavior

Consumers and businesses have been actively de-leveraging and preserving balance sheets. This means that both consumers and businesses are reducing capital spending and expenses to pay down debt, preserve cash balances and to increase cash flow. For business, this means cutting capital spending initiatives, reducing headcount and minimizing discretionary expenses while concurrently maximizing the productivity output of remaining resources. If your software solves a strategic problem, and you operate with a recurring revenue licensing model, this is a "perfect storm" earnings scenario.

Why is the IT Sector Benefiting?

Since the Tech Bubble burst in 2001, software vendors have been actively transferring software licensing from the balance sheets to the income statements of their customers. As a result, many leading IT vendors were unaffected by the recent cuts in capital spending. Instead of buying multi-million dollar perpetual licenses, many IT buyers pay monthly subscriptions or transaction fees that are more aligned and accountable to the income statement. Increasingly, clients can measure earnings against IT expenditure, which makes software license expenses on the income statement essential to cash flows and, thus non-discretionary - protecting these licenses from expense cuts.

Increased granularity of licensing makes recurring licensing susceptible to expense reductions as headcount is reduced. Logically, less headcount correlates to less software and less license revenue. However, because businesses are attempting to maximize cash flows, and the productivity of remaining resources, there is a tendency to acquire more IT services to improve the potential for cash flow, offsetting the impact of expense reductions for IT vendors. And because balance sheets are less likely to be impacted by an investment in software, businesses are more likely to acquire more information technology licenses in the short-term.

Software licenses acquired during the two (and even three) years prior to the recession are typically contracted with three and even five year terms, essentially insulating many IT companies from the downturn of the past two years.

So there it is, the evolution of licensing from perpetual to recurring licenses since the end of the Tech Bubble has positioned a significant component of the IT Sector to be insulated from balance sheet de-leveraging while concurrently benefiting from increased investment in productivity and cash flows. These are some of the primary reasons why the IT Sector has outperformed the rest of the market YTD 2009.

Will InfoTech Continue to Outperform the Market in the Short-term? Mid-term?

In the short-term, the IT sector should continue to show strong performance, although it may be overtaken by a couple of other industry groups such as Materials during Q4.

There are four positive conditions that could help to sustain IT earnings growth, and share prices for Q4 2009:

The IT Sector is beginning to benefit from infrastructure spending programs that have begun to trickle into the market
As the economy shows some signs of recovery, delayed spending may be resuscitated during Q4 - there may be more surprise upside contract announcements as a result.
As consumer confidence continues to edge ahead, Holiday spending may be less austere than in 2008- which bodes well for mobility, games, media, and consumer devices.
Q4 is historically the strongest quarter for IT Sector cash flows, and stock prices, so if the world economy improves as predicted by economists, there is a chance that earnings for the IT Sector could continue to outperform the market until the end of the year.

There is one negative condition for Q4 for new money to the sector:

Because the IT Sector has delivered one of the highest returns since the market bottomed, there is likely to be a lot of profit taking if there is a sustained correction over the next month or so. This means that it is a stock pickers market, and it is not necessarily the current high flyers of 2009 that offer the best returns for Q4. Caution is recommended.

The mid-term outlook for the IT Sector is a little less assured. Persistent unemployment could ultimately undermine future growth in the sector as most IT is aligned to either workers or consumers. The impact could show up as compressed margins as long-term contracts are renewed, or as declining revenue growth if job losses continue to mount during 2010. Returns from invested capital should normalize in the sector beyond 2009 as stocks become more fairly valued on earnings multiples.

However, the IT Sector is generally very healthy with strong balance sheets, and good cash flow so it probably should remain an area of emphasis for money managers. Portfolio Managers that bought into the sector in the spring may begin profit-taking as bonus season kicks in during Q4.

Disclosure: I own shares of CX.

Healthscreen (MDU.V) Adds to Its Network

2009-09-30T08:19:00.008-04:00

MDU increases the size of its physician network by nearly 6% with an agreement announced this morning with East GTA Family Health Group. It should be noted that this is the first buying group that is selecting the entire suite of Healthscreen services and solutions, which could represent significant increases in revenue and earnings for the Company for FY 2010. See the press release.

Healthscreen Selected by East GTA Family Health Group

TORONTO, ONTARIO--(Marketwire - Sept. 30, 2009) - Healthscreen Solutions Inc. (TSX VENTURE:MDU), Canada's premier provider of physician practice enhancement services and electronic medical record (EMR) software, today announced that it has been selected by the East GTA Family Health Group to deploy its HS Practice software suite to its more than 300 family physician members. The software suite will include a full complement of billing, scheduling and electronic medical record software. Once complete, this agreement will represent by far the largest Family Health Group to purchase and implement EMR software in Canada.

"We are very excited to have been selected, and we are looking forward to working with the East GTA Family Health Group and its IT Committee to assist its doctors in delivering the highest quality health services, while improving the efficiency of their practices," said Justin Belobaba, President and CEO of Healthscreen.

About Healthscreen Solutions

Healthscreen Solutions (www.healthscreen.com) provides a comprehensive suite of practice enhancing products and services to increase physician productivity and revenue while reducing costs and improving patient care. The Company's portfolio includes billing and scheduling software, electronic medical records software, CallerMD which assists physicians in managing a range of uninsured medical services, PrevCareMD which helps physicians earn supplemental income by achieving government-set preventive care targets, and HealthAlert which allows physicians to help their patients in managing complex healthcare issues. Healthscreen's and its partners' services and software are used by over 8,000 full-time physicians who are responsible for the health care of more than seven million Canadians.

(C) 2009 Healthscreen Solutions Inc. All Rights Reserved. All other trademarks and trade names are the property of their respective owners.

Disclaimer: Forward Looking Statements

This press release contains information that is forward looking information with respect to Healthscreen within the meaning of Section 138.4(9) of the Ontario Securities Act and other applicable securities laws. In some cases, forward-looking information can be identified by the use of terms such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "intend", "estimate", "predict", "potential", "continue" or the negative of these terms or other similar expressions concerning matters that are not historical facts. In particular, statements about future revenues or profitability, including the estimated timing of profitability, and any other statements regarding Healthscreen's future expectations, beliefs, goals or prospects are or involve forward-looking information.

Forward-looking information is based on certain factors and assumptions. While the company considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect. Forward-looking information, by its nature necessarily involves risks and uncertainties, including risks and uncertainties relating to government regulation and funding in the healthcare industry, financial and capital market risks, technology development and adoption, Healthscreen's ability to maintain its competitive position and effectively implement it's acquisition strategy, liability for software malfunction, management of growth, and length of sales cycles. Additional risks and uncertainties affecting Healthscreen can be found in Healthscreen's 2008 Annual Report and Management's Discussion and Analysis for the Fiscal Year ended September 30, 2008 filed on SEDAR at www.sedar.com. If any of these risks or uncertainties were to materialize or if the factors and assumptions underlying the forward-looking information were to prove incorrect, actual results could vary materially from those that are expressed or implied by the forward-looking information contained herein. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. Trading in the securities of Healthscreen should be considered highly speculative.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

CONTACT INFORMATION: Healthscreen Solutions Inc.
Justin Belobaba
President and CEO
1-866-534-DOCS ext. 7015
ir@healthscreen.com
www.healthscreen.com

INDUSTRY: Computers and Software - Software, Medical and Healthcare - Alternative, Medical and Healthcare - Healthcare

INTC places a bet with Transgaming (TNG.V) for on-demand consumer gaming

2009-09-24T13:53:00.003-04:00

Transgaming has been grinding it out for some time now creating a converged platform for consumer games. The team's hard work appears to be paying off in the form of GameTree.tv, a funded collaboration with Intel. Long suffering Transgaming investors should note that Intel believes that the this deal is material enough to include it in its press release flow.

This puts Transgaming right in the middle of media convergence to the home. Congratulations to Vikas and team.

Here is the press release.........

TransGaming Collaborates with Intel to Bring GameTree.tv Home

The Next Generation of On-Demand Gaming Service enabled by Intel® architecture
San Francisco, California and Toronto, Canada – September 24th,2009 — TransGaming Inc. (TSX-V: TNG) today announced a strategic collaboration with Intel Corporation to support TransGaming's on-demand gaming service, GameTree.tv. The GameTree.tv Service will deliver a comprehensive on-demand gaming solution optimized for HD TV through the next generation of consumer electronics (CE) devices based on Intel® CE Media Processors. TransGaming today also announced that Intel Capital, Intel'sglobal investment organization, has made an investment in TransGaming. Intel Capital's investment will be used to accelerate TransGaming's development ofthe GameTree.tv Service, which is expected to be commercially available in Q2 2010.

What is GameTree.tv
GameTree.tv is a unique on-demand digital distribution games service availableto consumers through their Intel® CE Media Processor powered set-top box or consumer electronics device. The service will provide consumers with theability to instantly play a broad range of games from the comfort of their living rooms, plus provide CE device manufacturers and cable/satellite providers with a new turn-key monetization strategy. The GameTree.tv Servicewill revolutionize the delivery and global consumption of video games through the next generation of internet connected consumer electronics.

"Innovation is at the heart of TransGaming's GameTree.tv Service which represents the culmination of technology, user experience, and the economic model required to realize sustainable innovation in the digital home," commented Vikas Gupta, CEO & President of TransGaming. "We are extremely pleased to be working with Intel on this important and exciting initiative. We are driving new monetization models for content developers, OEMs, and operators around the world."

"Intel CE media processors are based on Intel architecture, which makes a world of existing applications and services available on CE devices. The GameTree.TV service provides the platform to bring PC games to TV, which in turn offers new opportunities to the consumer electronics industry," said Eric Kim, Senior Vice President, Intel Digital Home Group,Â "Consumers will ultimately benefit from this innovation, as they will enjoy a broad library of games in their living room."

TransGaming is establishing business relationships with Managed Service Operators (MSO), Internet Service Operators (ISP), and Original Equipment Manufacturers (OEM) who are using Intel architecture in their devices. The GameTree.tv Service provides a turnkey global solution for the monetization of video games, which has been optimized for the Intel architecture to enhance the consumer entertainment experience.

TransGaming is leveraging its industry expertise and working with leading game publishers and content creators in order to create the richest and most comprehensive games library possible for the GameTree.tv Service. Content creators will be able to derive new revenue streams through GameTree.tv and consumers will have flexible transaction models to enjoy video games in their living rooms, ranging from purchase, rental, and subscription. Empowering the global video game development community to embrace this new service, TransGaming will be optimizing on the powerful and developer friendly Intel architecture to provide a Software Development Kit (SDK) for the GameTree.tv Service that will allow content developers to adapt and migrate their existing games to the platform, plus offer the development of new video games specifically for the service. Additional information on the GameTree.tv Service and the pending tools for developers can be found at http://www.gametree.tv

About TransGaming, Inc.
TransGaming Inc. (TSX-V: TNG), is a leader in the development of unique software portability products that facilitate the deployment of games across multiple platforms. TransGaming's portability technologies significantly reduce the time-to-market for and costs associated with multi-platform game releases. TransGaming works with many of the industry's leading developers and publishers to enable their games on the Mac and Linux operating systems, and currently markets its products under four brand names: Cider (Mac Gaming), Cedega (Linux Gaming), SwiftShader (Graphics Rendering) and GameTree (Game Publishing & Distribution). TransGaming is headquartered in Toronto, Canada and maintains a research and development center in Ottawa, Canada. To learn more about TransGaming's products visit www.transgaming.com

About Intel Capital
Intel Capital, Intel's global investment organization, makes equity investments in innovative technology start-ups and companies worldwide. Intel Capital invests in a broad range of companies offering hardware, software, and services targeting enterprise, home, mobility, health, consumer Internet, semiconductor manufacturing and cleantech. Since 1991, Intel Capital has invested more than US$9 billion in over 1,000 companies in 46 countries. In that timeframe, 174 portfolio companies have gone public on various exchanges around the world and 231 were acquired or participated in a merger. In 2008, Intel Capital invested about US$1.59 billion in 169 investments with approximately 62 percent of funds (excluding Clearwire) invested outside North America. For more information on Intel Capital and its differentiated advantages, visit www.intelcapital.com.

Contacts:

Paul Nowosad
VP of Marketing & Licensing
TransGaming, Inc.
416.979.9900 x323
TransGaming, Inc.
paul.nowosad@transgaming.com

Jean-Francois (JF) Dube
Investor Relations
TransGaming, Inc.
877.848.8790
investors@transgaming.com

Another inflight merchandising milestone for Guestlogix

2009-09-22T08:58:00.001-04:00

Earlier today, Guestlogix announced an agreement to merchandise Las Vegas events onboard participating airlines flying to Las Vegas. Guestlogix now sells Disney, CityPass, Broadway, and Las Vegas event tickets inflight with participating airlines. This announcement shows continued progress, and should be seen as a positive for the stock, which started moving upwards again yesterday.

Here is the press release

GuestLogix and VEGAS.com sign exclusive agreement to offer tickets to Las Vegas shows and more through OnTouchTM Box Office

September 22, 2009 – GuestLogix User Group Conference Toronto 2009 – GuestLogix Inc., (TSX-V: GXI), the world’s leading provider of onboard retail solutions to the airline industry, today announced that it has entered into a multi-year exclusive agreement with VEGAS.com to offer America’s most popular destination’s entertainment and tours through its recently launched OnTouchTM merchandising platform.

VEGAS.com’s tickets will be sold through GuestLogix’ OnTouchTM Box Office service, enabling carriers to capture new revenues by selling select tickets to events, tours, attractions and shows in-flight. Whether it’s a top Las Vegas show or a helicopter ride through the Grand Canyon, passengers can conveniently purchase tickets to popular tours, venues and productions in-flight, instead of taking valuable time searching and buying tickets before departure or when in Las Vegas. Transactions are performed in-flight via credit or debit card using state-of-the art handheld point-of-service devices that print ticket vouchers. Passengers can also earn reward miles on in-flight ticket purchases.

“This agreement capitalizes on the simple, yet important trend that entertainment and tourist attractions are already key draws for major cities, like Las Vegas ,” says Tom Douramakos, President and CEO, GuestLogix. “Many airline passengers wait until after they have arrived at their destination to buy tickets. Now, with OnTouchTM Box Office, they have a convenient way to make those purchases onboard, where they typically have a lot of idle time available.”

The OnTouchTM merchandising platform is powered by GuestLogix’ market-leading onboard retail transaction engine, which is deployed across numerous major airlines around the world, such as American Airlines, Delta Air Lines, United Airlines, Southwest Airlines and British Airways. The service helps airlines share in the revenues generated by ticket sales, while allowing entertainment and tour providers to quickly reach substantial pre-disposed buyers.

"We are thrilled to partner with GuestLogix for this innovative way to save people time and get more out of their trip before they even touch down,” says Howard Lefkowitz, President and CEO of VEGAS.com. "Offering visitors the ability to purchase tickets to popular shows, tours and more during their flights to Las Vegas is beneficial not only for consumers, but also for airlines and our hospitality and entertainment partners."

At a time when the airline industry is forecasted by IATA to lose US $11 billion in 2009, GuestLogix provides welcomed relief to operators while enhancing passenger experience to allow travellers to get more out of their trip. In a global study of more than 3,400 travellers by Ipsos SA, it was found that more than 50 per cent of today’s passengers would buy entertainment and other tickets in-flight if the purchase was convenient enough. According to GuestLogix analysis, the total global market opportunity represented by entertainment and attractions ticketing for airlines could generate over US $550 billion in sales when all passengers migrate to pre-booking such activities during flight.

“OnTouch’s partnership with VEGAS.com enables airlines to generate new profits,” says Chris Gardner, Managing Director of Global Onboard Merchandising at GuestLogix. “They can readily participate in the commissions provided by promoters and operators, as well as the advertising spend associated with entertainment and tours.”

VEGAS.com

VEGAS.com is the largest city destination travel website in the world with extensive, constantly updated information and a full range of travel products including hotel rooms, air-hotel packages, show tickets, tours and golf. Through its Casino Travel & Tours unit, the company operates retail and concierge desks at more than 70 locations including the Palms, Paris, Harrah's, Bally's, Mandalay Bay, Excalibur, New York-New York, Luxor and more. The company also offers a variety of excursions including city tours, the Hoover Dam and the Grand Canyon . VEGAS.com is a member of the Greenspun Family of Companies, privately owned and operating in Southern Nevada for more than 60 years.

About GuestLogix

GuestLogix is the leading provider of onboard retail technology and solutions to the passenger travel industry. Through its industry standard onboard transaction processing platform, the Company provides carriers the tools to become successful onboard retailers and by way of its OnTouchTM merchandising division it facilitates innovative products and services to enhance passenger experience and propel ancillary revenue growth. With a customer base comprising 9 of the top 10 global airlines GuestLogix maintains contracts to serve more than 35 per cent of the world airline passenger traffic via its proprietary platform based on the 2008 passenger data compiled by Air Transport Intelligence (ATI). Additional information on the Company can be found at guestlogix.com and ontouch.com.

Disclosure: I do not own shares of GXI

Guestlogix (GXI.V) and Abanco settle lawsuit. Positive outcome.

2009-09-21T09:02:00.002-04:00

Stemming from GXI's first contract with American Airlines a few years back, this is a long-term legal action that cost several hundred thousand dollars per annum in legal expenses for Guestlogix. The dismissal of the suits should have a small but immediate beneficial impact on earnings , and also reduce investor uncertainty regarding intellectual property and the potential for some future royalty payments related to a settlement. The outcome also reduces the chances that GXI would be required to purchase Abanco assets in order to solidify IP rights. The outcome should be viewed as positive for the stock.

Attached is the press release.

GuestLogix and Abanco Reach Settlement Agreement

TORONTO, ONTARIO, Sep. 21, 2009 (Marketwire) --

TORONTO, ONTARIO -- (Marketwire) -- 09/21/09 -- GuestLogix Inc. (TSX VENTURE: GXI) and Abanco Investments, LLC (and Abanco-related entities Abanco, LLC and Abanco International, LLC) have entered into a settlement agreement that resolves their lawsuits pending in the United States District Court for the Northern District of Illinois and the Ontario, Canada, Superior Court of Justice.

Under the terms of the settlement, Abanco and GuestLogix agreed to dismiss their claims, with prejudice, and neither party is required to make any cash payment or to provide any compensation to the other.

About GuestLogix

GuestLogix (TSX VENTURE: GXI) is the leading provider of onboard retail technology and solutions to the passenger travel industry. Through its industry standard onboard transaction processing platform, the Company provides carriers the tools to become successful onboard retailers and by way of its OnTouchTM merchandising division it facilitates innovative products and services to enhance passenger experience and propel ancillary revenue growth. With a customer base comprising 9 of the top 10 global airlines GuestLogix maintains contracts to serve more than 35 per cent of the world airline passenger traffic via its proprietary platform based on the 2008 passenger data compiled by Air Transport Intelligence (ATI). Additional information on the Company can be found at guestlogix.com and ontouch.com.

© 2009 GuestLogix. All Rights Reserved. All other trademarks and trade names are the property of their respective owners.

Forward-Looking Statements

This news release includes certain forward-looking statements that are based upon current expectations, which involve risks and uncertainties associated with GuestLogix' business and the environment in which the business operates. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking, including those identified by the expressions "anticipate", "believe", "plan", "estimate", "expect", "intend", and similar expressions to the extent they relate to the Company or its management. The forward-looking statements are not historical facts, but reflect GuestLogix' current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations, including the matters discussed under "Risks and Uncertainties" in the Filing Statement filed on June 29, 2009 with the regulatory authorities. GuestLogix assumes no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those reflected in the forward-looking statements.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

Disclosure: I do not own shares of GXI.V

Check out Poynt: An award winning mobile search app for BBerry...iPhone next?

2009-09-18T15:02:00.002-04:00

This application won the grand prize for RIM's Blackberry Developer Challenge at the end of 2008. It is well designed. Not only can you find stuff nearby, but you can actually do something after you find what you are looking for - like buy movie tickets. Spend a couple of minutes checking it out.

Multiplied Media (MMC.V) has taken longer than expected to perfect the app, and the company is still at the early stages of commercialization, but the app seems like it should be a grand prize winner. Look for an iPhone version of Poynt to follow soon.

Earlier this week, the Company announced that it has reached the 1 million user milestone, which suggests that it has the potential to go viral. Investors are taking note. In August, the Company was able to raise $2.9 million in growth financing. Over the past couple of weeks, the penny stock has doubled in value.

Disclosure: I do not own shares of MMC.V

Bridgewater Systems (BWC.TO) On A Roll - Announces Major New Contracts

2009-09-14T11:11:00.002-04:00

As mobile data usage continues to grow exponentially around the world, Bridgewater Systems' suite of policy and data management solutions should continue to become more popular among carriers as they attempt to meet the increasing demand from consumers and businesses.

On Friday, Bridgewater Systems announced a contract with Verizon (VZ.NYSE) for its Widespan product estimated to be work over $18 million. Most of the revenue should be recognized by H2 2010, but with no impact on 2009 revenue. This should have meaningful impact on FY 2010 revenue and earnings forecasts. Forecasted revenue could increase between 12% and 18% above consensus depending upon the recognition of revenue, while EPS could be ahead of 2010 forecasts by between 80% and 100%. Expect analysts to increase targets substantially, which should continue to impact positively the share price momentum.

Today, BWC announced a deal with four US carriers to launch 4G services to over 500 rural American communities. It appears that the products and services included are: Service Controller including the Prepaid Integrator Module, the Policy Controller, and the Subscriber Data Broker(TM).

As part of the Obama administration's stimulus spending plan, Bridgewater Systems should derive some benefit from a total of $7.2 billion in grants and loans that are being made available by the U.S. Commerce Department's National Telecommunications and Information Administration (NTIA) and the USDA's Rural Utilities Service to accelerate the deployment of broadband infrastructure services in areas of the country that are underserved by high-speed infrastructure. The terms of the contract were not disclosed.

Also today, BWC unveiled its Long Term Evolution (LTE) product suite for its subscriber, service, and policy control solutions.Several global trials are in the planning and implementation stage. Investors should see BWC on the forefront of major LTE rollouts as they begin by 2012 or 2013.

The bottom line is this: The company continues to sign significant contracts in the short-term, and appears to be working with its global client base to establish a leadership position in the long-term as LTE is deployed. As mobile data usage grows and the management of it becomes exponentially complicated, BWC is well positioned to gain increasing market share.

Analysts and investors should continue to like this stock on a fundamental basis. Stock is moving up today on the news.

Disclosure: I own shares of BWC

New Design...Why?

2009-09-13T22:36:00.003-04:00

RES Free Thinking is building a small but loyal following throughout Canada, and to a lesser extent on Wall Street and in The Valley. As it turns out, although originally targeted to only a few hundred Bay Street insiders, RES Free Thinking now appears to be viewed regularly by several thousand readers across the country. Surprisingly, there also appears to be a loyal user base from some countries in the EU, South America and Southeast Asia.

Usage is increasing by about 15% per month, over 46% of all users return at least once a month to get information, and over 170 external sites link to RES Free Thinking content of some type. Since its launch in November of 2008, there have been 105 posts to the blog, profiling dozens of North American technology companies; micro-cap to monolith-cap, both public and private. In addition, there have been several theme or sectoral posts - and the odd political rant.

What does this mean?

Well, there is a lot of content, a lot of people are looking for the content, and a lot of people link to the content. I wanted to find a way to make it easier for people to find what they are looking for faster. I also wanted to find an easy way for people to discover the theme of a story over time, and to be able to connect together industry trends (example: progress (or not) of a Company over multiple quarters). My goal is also to highlight more effectively the flow of information and good ideas emanating from sources such as Twitter.

The old design was limited by a single dimension (no horizontal navigation menu), and by only two columns - one of which was reserved for posts. As a result, all of the ways to find and use blog information was stuffed into a single long column. As the archive of posts became longer, interesting and timely investor information had been falling off the screen - such as TwitterFlow and Tech Voices.

To better help people find and link to information quickly, I have also decided to more effectively utilize content tagging/labeling so that people can more quickly find pertinent things by clicking on tags that are now located in the "Label" widget below TwitterFlow in the new right-hand sidebar (and the primary driver of the redesign). For example, if you click on BWC.TO, you would see all of the posts that mentioned BWC over the past 8 months, in chronological order.

Bottom line...RES Free Thinking needed more columns and navigation. Considering that I don't have the time or the inclination to build out a custom RES Free Thinking blog template, I decided to source one online from Deluxe Templates. What you see is (in comparison to most other blogger templates), a pretty clean three column design with a muted color scheme and simple font for (hopefully) easier reading.

This is a work in progress, but my objective is to continue to make RES Free Thinking easier to use.

Data suggests that most of you visit to read the latest post and then bolt (76% of you), so I know that you are time constrained. However, I would like to ask: Will this new design work for you? Please respond to the poll on your right. I will poll a couple of more times to find out what content is most useful, and what future features could be appealing.

Thanks for reading RES Free Thinking, it has been a rewarding experience for me (so far).

Cheers, Ron

Descartes Systems (DSG:TO) Strong Quarter; Bullish Outlook

2009-09-11T08:30:00.000-04:00

For convenient sequential quarterly reference, here is a link to the post for the previous quarter.

The themes remain the same: Strong quarter despite worldwide recession, improving operational efficiency, and more accretive acquisitions planned for the future. Here are the Q2 2010 performance highlights:

$18.6m in revenue, up 9% fiscally over Q2 2009, and 7% sequentially over Q1 2010
GM at 68%, up from 64% fiscally, and down from 70% sequentially.
Adjusted Net Income (EBITDA) at $5.2m, up 27% fiscally, and 11% sequentially. The EBITDA margin for the quarter was 28%, which exceeded consensus expectation.
Pre-tax NI at $2.7m, up 35% over Q2 2009, and up 50% sequentially.
NI of $0.8m or $0.02 EPS versus $1.4m or $0.03 EPS for Q2 2009, and $2.2m or $0.04 EPS for Q1 2010. Both of the comparative quarters benefited from income tax recovery.
DSO was reported at 48 days, a 2 day decline fiscally, and a 1 day decline sequentially.
$4.4m in cashflow for the quarter, exiting with $51.2m in cash and short-term investments.

The baseline revenue stream entering Q3 was disclosed on the conference call by management to be $17.7m with $13.7m in operating expenses, inferring a $4.0m or 23% margin.

Management indicated that H2 2010 should benefit from the current upswing in worldwide shipments as economic recovery takes hold. The company should benefit from the integration of both the Oceanwide and the Scancode acquisitions, and should see continued adoption of the 10+2 regulatory solution positively impact financial performance. The outlook is bullish.

Management re-iterated more forcefully its plan to become a global "federated" end-to-end platform for logisitics. By comparison, think of Salesforce.com's AppExchange for CRM. As the Company implements this strategy, investors should anticipate that Descartes will use some of its war chest of cash to make tuck-under acquisitions that will expand its capability as an end-to-end platform.

As a result, the company may look to expand capabilities in asset tracking, transaction management, accounting, workforce mobility, platform computing, and even cloud services via partnerships and acquisitions.

With a strong Q2 2010, a bullish H2 outlook from Management, and a plan to dominate through federation, investors are likely to continue to find the stock attractive. The share price has doubled in value since its lows in March.

Disclosure: I own shares of DSG

Current Anecdotal Trends in VC Funding - From the Trenches

2009-09-10T08:41:00.002-04:00

It is amazing that, despite how everything changes, some things never seem to change. Below is an email missive from the trenches in New York from Sheldon Lutch of Fusion IR.

The fundamental sentiment of the note is that after 8 quarters of being brutalized by the market, tech start-ups have become increasingly "pennywise and pound foolish". Not surprisingly, entrepreneurs continue to maintain unrealistic notions of the value of their creations. This has been such a consistent finding for the past couple of decades, that it may simply be in the DNA of entrepreneurs to think that way.

Anyway, we see many of the same trends as Sheldon, and I thought that it would be best to simply re-publish his email.

-------------------------------------------------------------

"Throughout the summer at Fusion IR have seen many companies stop by/call-in ranging from companies needing "A" round capital to pre-IPO-generating revenues and meeting financial milestones.

1.Use of unregistered/unlicensed financial professionals in search of capital.
2.Requesting solely pay per performance services. Risk not shared-reward impractical or impossible to quantify and justify by expenditures of time or effort and market conditions.
3. Unprepared companies from presentation to presentation skills to business plan and throughout all marketing literature. Yet they believe they are and wonder why others don't see it their way.
4.Unrealistic view of financial markets this is not pre- 2008 or pre- 2003.
5. Use of other service professionals to fill gaps -but no real follow up and or guidance( nice meetings -no results).
6. Mapping out of IP not complete or at the highest level of international standards.
7. IP not as robust -learned during deep drill downs.Unaware of conflicting, competing, complimentary IP.
8. Companies unaware of how many vc's ,private equity etc.. have seen/heard of company/deal/raise out on the street-they have been "shopped".
9.An oxymoron- overexposed companies not using or understanding the value of press releases- tweaked for the financial community.
10.Not identifying a business development opportunity from a venture capital opportunity with a strategic player(s) in their industry. Over emphasizing one over the other or at the exclusion of the other.
11.Companies unaware or sensitive to the Wall Street "calendar' are you in the queue or not?
12. Unrealistic sense of timing of potential investment /grant by government or quasi government economic development arms.

It is a three legged stool- The Company- The Financial Community and Key Service Provider. Matching and meeting the needs of all - to accomplish the mutual goals of a success and mutually profitable business relationship.

We pride ourselves at Fusion IR at working hand n' hand with clients and all Wall Street professionals. No negative surprises. A fully coordinated approach to accessing the capital markets. Utilizing a top down approach to the investment community on behalf of clients. Meeting with heads of investment banking firms and the related specialty investment bankers at the most senior level of the Wall Street firms. For the companies a bottoms up approach making sure assumptions are replaced with facts. Working with companies to assist them in preparation so that their materials are as good as their technology/science. Driving the value proposition to engagement letters, term sheets, and maybe ad nausea if necessary.

To do it right takes time, money and dedication- this is a labor intensive effort. No short cuts,no tricks-roll up your sleeves and work as team to get the mandate accomplished.Time is money for all of us- investing properly in the right resource,working in an organized fashion to get the answers quickly and efficiently as possible. Build on the information acquired ,become as flexible and open to feedback that will allow the company to adjust to market conditions. Investor relations is not a sprint and need not be a marathon- it is about being Persistent and Consistent. It is about execution of a strategy,it is about tweaking and revising. It is presenting the company with strategic alternatives and access to growth capital and growth ideas, perhaps not considered.

If you aren't raising capital properly your competition is-those with the best technology aren't winners necessarily-those with the capital to complete the task ,execute according to plan and ramp up revenues are.

All the best,

Sheldon

Sheldon Lutch, Principal
Fusion IR & Communications, Inc.
62 West 45th-4th floor
New York,NY.10036
(T) 212.268.1816, (C) 917.570.1179

www.fusionir.com"

--------------------------------------

R&D subsidies do not create wealth: How do we modernize policy to incent innovation?

2009-08-29T07:49:00.000-04:00

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.

Zoompass is destined to succeed: So what is the potential fallout in the Canadian market?

2009-08-18T10:25:00.000-04:00

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.

Nstein positioned to thrive in H2 2009?

2009-08-14T09:58:00.000-04:00

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.

Delta Airlines deals a blow to Points International - guidance reduced.

2009-08-13T08:54:00.000-04:00

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.

CX Q2 results: Did it beat consensus?

2009-08-06T18:08:00.000-04:00

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.

Redknee (RKN.TO) Strong Q3 - Outlook Encouraging

2009-08-06T08:22:00.000-04:00

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

$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.

During the conference call, Management revealed:

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.

The company plans to spend approximately 20% of sales on R&D for the foreseeable future, which is above industry averages for Canadian companies of similar size. In the long-term, this investment should create core competitive advantage. Even as management focuses on increasing recurring revenue as a percentage of sales, quarterly revenue is likely to remain somewhat lumpy into the future.

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.

CX Performance Preview: Could it beat consensus?

2009-08-04T11:53:00.000-04:00

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:

Participant Dial-in Numbers:
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

There is greater likelihood than not that Cyberplex could beat consensus forecasts.

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.

Both of these datapoints suggest that there could be surprise upside to forecasted performance as the company continues to catch lightning in a bottle.

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

RDM Corp results offer a glimmer of what could be

2009-07-31T10:43:00.000-04:00

In early 2008, I slapped a sell rating on RDM Corp (RC.TO) with a $0.60 target. The company was being rocked by a stressed out and capital constrained client base (banks), a stuffed channel, and really poor visibility. Revenues were declining drastically as the client base stopped buying its various digital check scanners. The only thing that it had going for it at the time was about $17 million in cash, no debt, and a relatively minor payment processing business.

Last November and then again this previous March, the stock bounced against the $0.60 range as expected. Since then, there has been a fairly remarkable recovery for the share price where it has recently traded in the $1.20 range. There may be a legitimate reason for the move in share price.

RC reported $5.9 million in revenue for Q3 2009, a 13.4% improvement over previous year sales - although nice, this is not the story. Gross Margins for Q3 2009 increased to 42% from 34% the previous year, a 23% improvement, which should be considered very positive. The root cause of this substantial increase in GM is directly related to the success RDM Corp is experiencing as a payment processor. For q3 2009, payment processing revenue represented 42% of total revenue for the quarter versus the previous year where it represented only 33% of total sales. Why is this good? Payment processing generates close to 70% GM, whereas the device business delivers between 30% and 35% GM. In addition, payment processing is essentially 100% recurring revenue, which has helped to improve management's visibility on a growing percentage of its total revenue. Improving margins have helped the company to eek out a modest net income for the quarter of $0.175 million or $0.01 EPS. Right now the company executes 3.8 million transactions per day on its payment network, a 35% increase over the previous year. Revenue for the segment increased to $2.5 million or 48% over Q3 2009. Organic growth is expected to continue to be strong, so there may be a trend towards more profitable quarters coming.

Management must find away to better use its capital in order to accelerate a move towards payment processing, and to get out of the declining device gig. More payment processing begets more visibility, more earnings leverage, and more cash flow for shareholders.

Disclosure: I do not own shares of RC.

Bridgewater Systems exceeds expectations, increases guidance

2009-07-30T08:59:00.000-04:00

BWC share should be positively impacted by news, and analysts should continue to raise forecasts.

BWC.TO reported Q2 2009 revenue of of $16.1 million, a 37% year over year increase in sales from $11.8 million. Gross margins were 74% for the quarter. Earnings reported for Q2 were $4.1 million or $0.17 EPS versus $1.3 million or $0.05 EPS for the previous year quarter, a 215% increase.

The Company now reports $57.6 million of cash on its balance sheet.

Management has increased full year guidance to between $58 million and $64 million with full year gross margin expected at 70%, which implies that gross margins may decline in the second half. Encapsulated within full-year guidance is $23 million in contracted backlog for H2, and approximately $7 million in upsell and new client revenue.

H1 revenue is reported at $30.2 million with $0.29 EPS. The mid-point of guidance infers that it expects to generate an identical back half with slightly lower potential EPS.

On the conference call management stated that RFP interest for all of its products is increasing during H2 2009, that it is on track to sign a Tier 1 GSM client.

Management confirmed that the explosion of smart phones, and the requisite application stores associated with them worldwide is providing exceptional opportunity for BWC as carriers/operators attempt to manage the scale and complexity of their growing data channels.

With only 5.4% smartphone penetration within the total world mobile subscriber base, there remains a lot of opportunity for BWC.

Analysts have been increasing forecasts and targets for the past few days, and after today's financial results and conference call, investors should expect analysts to continue to increase forecasts and targets.

As mentioned in earlier posts, BWC is among a handful of "connectivity" stocks that should perform ahead of the general market as mobile data networks expand.

Also included in that group are: RIM, CGI, BWC, DWI, RCM, WIN, RKN, SVC, PIX, and TUN

Disclosure: I own BWC stock, but do not own any of the other stock mentioned in this post.

How does MSFT get its groove back?

2009-07-27T09:38:00.000-04:00

Last week Microsoft reported its first year over year decline in revenues...ever. Although the performance could be blamed on the worldwide recession, many of its peers and competitors have reported both growth in revenue and earnings despite the recession. A decade of being second or third best (or worse) in many new innovations may finally be catching up to MSFT.

For the past decade, Microsoft has attempted to use its massive cash reserves to exploit the value of technical innovation. However, it has demonstrated a curious knack for being slow to the punch, or picking the wrong horse, as new concepts have captured the imagination of the market. The company has been responding to the market instead of leading the market, often finding itself to be a distant counterpoint to the dominant player - which costs money. Here are some examples:

- iPod -> Zune
- YouTube -> Soapbox
- Google -> MSFT Live

And in areas of strength, MSFT is beginning to lose ground:

- XBOX Live -> Wii
- Internet Explorer -> Mozilla Firefox

To management's credit, it keeps trying. The launch of Bing in June has elicited some rare positive reviews for MSFT from the tech press. After initial the curiosity associated with this direct threat to Google Search wore off, so did traffic. Microsoft shareholders are hopeful that Bing evolves more like Internet Explorer, and less like Zune.

Among MSFT fans, there remains a of lot of hope for Windows 7, which is expected to be launched later this year. Even there, danger lurks as GOOG has begun to make waves about its new Chrome OS.

Sramana Mitra offers nice synopsis of Microsoft's current situation.

This may seem like a bizarre comparison, however MSFT finds itself in the same position as GM in the late 1970s and IBM in the mid 1990s. MSFT is a long-time dominant company that is on a path towards the mushy middle. As a whole it is colossal, but in the many trenches in which it battles, it rarely dominates. Like many before it, Microsoft may need to re-assess its strengths and re-invent itself after a little creative destruction.

Looking back, GM never seized the opportunity, and ended up (albeit a few decades later) a shell of its former self. On the other hand, IBM, which struggled against the onslaught DELL, HP, Compaq, ORCL, MSFT, and countless others in the 1990s has worked hard to get out of the hardware business and turn itself into arguably the most dominant technology services company in the world.

Regardless of the pundit bashings that it has received over the past few years, MSFT is a legendary American company. It has created real wealth for a great many people. Management can choose to ignore the repeating patterns of history and fade towards a punchline a la GM, or it can choose (like IBM did in the 1990s) to redefine and refocus to remain relevant and vital 10 years from now.

Worldwide Connectivity Statistics.

2009-07-23T09:44:00.000-04:00

Some interesting numbers for technology investors interested in companies that participate in the connectivity ecosystem. Worldwide recession notwithstanding, there are some areas of significant growth which should bode well for companies in several sectors. The NASDAQ has outperformed the Dow index significantly this year, and some of the statistics below may reveal some of the reasons why. During earnings season AAPL, IBM, NOK, INTC, GOOG all beat consensus estimates and all but GOOG (which does not provide guidance) have indicated positive outlooks entering H2 2009. In fact, IBM has increased its guidance for the last half of the year. Investors should expect positive outlooks for both CSCO and RIMM when they report next, although positive outlook may have been priced into these stocks.

Notwithstanding a pause in growth in some areas during H2 2008 and H1 2009, the global march towards greater connectivity continues.

Internet Usage:

Total worldwide: 1.5 billion or 23.6% of total world population.
Most users: China with 288 million or 22.4% of population.
Regions with greatest penetration: N.A. 62.7%, EU 60.7%
For China to obtain similar levels of connectivity as North America or the European Union, another 500 million or so Chinese users would need to come online over the coming years, requiring massive investments in base infrastructure.

Emerging economies continue to drive internet connectivity growth, but are more likely to leverage fixed wireless broadband infrastructure to compensate for under-built wireline infrastructure. Even still, BRIC countries are likely to represent the vast majority of backbone investment as mega-operators in countries such as China and India continue to lay down the fundamental capacities to support growth in internet traffic.

Mobile subscriptions:

Total worldwide: 4.1 billion
Fastest growing regions: Middle East 32% CAGR and Africa 24% CAGR over past 5 years.

Basic mobile subscriptions in emerging economic regions are being used as a means by people to get access to basic services including banking. EEFT and First Data, among others, are likely to be vendors providing access to low-cost financial services options.

Mobile data services:

Total worldwide: 225 million
2009 growth rate: 93%

The most compelling growth rates that exist, even in the depths of a major recession, continue to be related to the mobile data services channel. Hence, investors continue to see better than expected results from companies associated with this niche. As stated many times in previous posts, the scale and complexity of the emerging infrastructure should benefit technology companies that supply solutions to this niche. Eventually, all current mobile subscribers worldwide are likely to adopt mobile data services at some point. The current penetration of data services into the mobile subscriber market is still very modest at 5.4%.

As the world continues to become more connected, capacity, capability, energy consumption and security should remain key issues. Worldwide, there should be more investment and innovation in these areas.

The top basket of Canadian stocks to think about in the connectivity ecosystem include: RIM, CGI, BWC, DWI, RCM, WIN, RKN, and TUN. Most of these companies have demonstrated excellent recent earnings performance, sustained and sometime expanding gross margins, with solid balance sheets and low debt ratios. These could represent a pretty good "connectivity" portfolio. Others to possibly consider include ABS, SVC, PIX, Q, and AXX.

I have probably overlooked a few key favorite stocks, feel free to add.

Disclosure: I own CSCO and BWC. I do not own any of the other stocks mentioned.

Trading Idea: GOOG performance foreshadows CX performance?

2009-07-17T09:33:00.000-04:00

For 5 of the past 6 quarters, whenever GOOG beatforecasts, so did CX. The common thread between Google and Cyberplex is that they both deliver to marketing managers measureability and performance-based ad budgets.

It is well published that GOOG beat analyst estimates for both sales and earnings for the third quarter in a row. As stated in earlier posts, there are three trends that continue to propel better than expected performance at Google:

Marketing and advertising budgets are being focused on performance. Cost per Click (CPC) advertising is considered to be one of the most performance-oriented advertising approaches around. It is Google's strength, the source of its dominance, and as more marketers shift budgets, the driver of better-than-expected performance. Paid click- through increased 15% YoY while most other media (including online display advertising) declined.
Unemployment. People being laid off are spending more time online to network, research, find jobs, or create new businesses. Comments by the CEO of domain vendor Tucows (TCS:TSX) last quarter suggested that domains are being bought at record levels as laid off people start-up their own businesses or blogs.
Brand Dominance. Most people are finding their way around with Google. The introduction of Bing in June has had little impact on Google. Traffic to Google search in June increased by 12%, while pageviews increased by 31%. The remainder of the sector enjoyed a 2% increase in traffic, and a 1% increase in pageviews. IT managers don't get fired for selecting IBM; Marketing Managers don't get fired for selecting Google.

CX is one of the vendors at the forefront of an even more measureable performance-based online advertising method called Cost-per-Action (CPA). Essentially, marketers only pay Cyberplex if a user actually does something after they click on an ad. It could be a survey fill, a poll, or even a purchase. It has piqued the interest of mainstream advertisers who are beginning to deploy significant prgrams with CX.

Similar to Google, Q2 results for CX may show a sequential decline from Q1 due to seasonality, although the decline may be less than analysts expect. Notwithstanding, the quarter should show significant annual quarterly growth in sales and earnings over Q2 2008.

There are two downside risks to CX results:

The company has category concentration in the Health & Beauty sector. Weakness in this sector could create downside risk. A segment proxy to this performance may be Shoppers Drug Mart (SC.TO). SC reported strong earnings for Q1 2009.

Users stop engaging. If more people click on CX ads, but do not take action, performance could be impeded. This would show up as worse than expected sales and more than expected declines in gross margin.

There are two upside risks:

With its recent capital raise, the Company has been in a position to accelerate the development of its affiliate network during Q2, creating more revenue opportunity, and a broader footprint that attracts larger advertisers.

Unemployed people are putting emphasis on improving fitness and overall health. This trend could benefit the health and beauty category, which is where CX has concentration.

Google had to pay more to its affiliate network last quarter, and it should be expected that CX would need to do the same, so gross margins should decline similarly for Q2.

There is more potential forecasting risk with CX, but as a performance-based online ad network, it has similar DNA to Google. For the 5 of the past 6 quarters a GOOG BEAT has foreshadowed a CX beat two weeks later. The only quarter where this did not happen, GOOG missed and CX beat (Q3 2008).

Since CX raised capital in May, the share price has trended sideways on light volume and it is now trading below its 50-day moving average, so good performance for Q2 may result in a potential move up. Google moved up well ahead of its 50 day moving average for two weeks ahead of its Q2 report as investors anticipated results to beat expectations. The stock price is declining on the news. With GOOG as a foreshadow, could CX show a similar pattern?

Disclosure: I own CX.TO. I do not own GOOG or SC.TO

Hailing taxis from the sky: Guestlogix (GXI.V) announcement.

2009-07-16T08:32:00.001-04:00

A new press release from GXI announces the launch of ground services delivered through it onboard retail platform.

This could be the "killer app" for the GXI retail platform because it is a natural extension of the travel experience, and there is clear value add to passengers. As most business travellers know, there is nothing worse than trying to figure out how to get from the airport to the first meeting after a five hour flight. Destination ground connections are an easier sale by flight attendents who perceive them as a way to improve the travel experience of "their" passengers. If executed well, uptake should be strong.

The company has been building multiple partnerships with ground service vendors and claims to be able to deliver to 50 of the top airports in the world, which is clearly a good start.

This announcement should be considered more evidence of execution, which should satisfy the horde of analysts that cover this stock. As a result, estimates and targets are likely to be maintained.

The biggest catalyst for the stock continues to be how quickly it can deploy its backlog in comparison to analyst expectations, and how effectively it can dominate the segment by signing up more carriers and merchandisers over the next few quarters.

US Employment Analysis: Supports Short-term Volatility

2009-07-14T18:00:00.000-04:00

This is a sobering analysis of current U.S. employment metrics. As per the earlier post today, investors should not gain any solid conviction from these charts as to whether the worst is over, or if there is more pain and agony still to come for the American economy. Almost every positive chart is offset by a negative one, and vice versa. This helps support the potential for more short-term volatility. Crossroads.

Right now feels like that few seconds of silent suspense before something really big happens. And no one knows which way it's going to go. Whichever way it goes, the charts seem to indicate that the downside looks steep and fast, and the upside looks slow. The U.S. Treasury is likely looking at more precise data, and it does not want to risk the potentially harrowing downside. This may be why it has hinted that it is willing to step in to provide even more stimulus later this year if it needs to, despite all of the green shoots sprouting up.

The outlook from Q2 may help. INTC reported a BEAT with nice growth in sales and, more importantly, a margin surprise. It has maintained it full-year outlook, which should be considered a neutral indicator.

Let's all sing:

Should I stay or should I go, now
If I stay there will be trouble
If I go it will be double
C'mon and let me know
Should I cool it or should I blow...

Disclosure: I do not own INTC shares.
RIP Joe Strummer.

Q2 2009 Earnings Season: Crossroads

2009-07-14T08:02:00.000-04:00

As Q2 earnings season begins, the market appears to be at a crossroads. A lot of portfolio managers are humming along to the old Clash refrain "Should I Stay or Should I Go Now?" Interestingly, the song has a different meaning depending on how much cash is in the mix.

Based on a sampling of portfolio managers, it appears as though most funds are still weighted towards cash. Recent declines in the market suggest that many who dipped into the market since March have taken profits from the recent run up, and have shored up cash positions again leading into the 4th quarter.

Since the market bottom in March, and leading into the month of July, the VIX had been on a steading decline and was flirting with an 8-month low. During the most recent correction, volatility has increased as uncertainty begins to creep back into the market.

Investors appear to be uncertain because there are a lot of offsetting data and opinion in the market as reporting season begins. Here are some examples:

Good quarters are expected from belweathers such as Google (GOOG), Nokia (NOK), Goldman Sachs (GS), and JP Morgan (JPM). Offsetting these data points, Q2 performance in many sectors could be weaker than expected as analysts overshoot the "green shoots". This could be especially true in the commodities and materials sectors as hedging in some commodities like oil distorted pricing. In general, investors may see more surprise earnings "misses" than surprise "beats" in many sectors (including technology) for Q2 with greater than anticipated pressure on margins. See Dell (DELL) and Matrikon (MTK) as prime examples. YoY declines in performance in the commodity sector should be significant as Q2 2008 was positively impacted by a commodities bubble.
Positive analyst statements regarding the financial sector, positive resale housing data in Canada, better than expected job loss performance, and improving CEO sentiment point to positive economic conditions leading into the 4th quarter, and into FY2010. Offsetting this positive sentiment, unemployment is still increasing, and there are whispers that the U.S Administration may need to apply more stimulus to the U.S economy, implying that the "green shoots" are tenuous and in danger of shriveling, and that the positive sentiment may not yet reflect reality.
The positive impact of government stimulus programs should begin to show up in construction, materials, commodities, and technology sectors during Q4. However, these positive benefits are likely to be offset by the impact of new regulations related to commodity speculation planned by the U.S. Government, and the potential for passive trade protectionism.

These are but a few examples of multiple offsetting datapoints that investors are mulling over during this reporting season. For every positive data point, there appears to be an offsetting negative data point to consider. Hence, investors are at a crossroad.

In the Tech Sector, there was a pretty strong move from the lows of March. In discussions with my friend Adam Adamou from Caseridge Capital it appears that, exiting June, the market had been priced to imply a 12% to 15% increase in gross margins over the coming year. For the previous year, the actual decline of GM was 15%, and for the March 2009 quarter, GM growth was measured at 0.5%. The market was pricing a snap-back recovery that is a lot to expect from any sector considering the level of economic uncertainty. The recent correction brings more credibility to future expectations.

The uncertainty regarding Q2 earnings appears to be setting up for a volatile few weeks of trading, but not a lot of movement until the end of the summer when nicely tanned portfolio managers begin to redeploy cash.

When they return to the markets, Portfolio Managers are likely to find healthcare, technology, and consumer staples stocks with lots of cash and low debt ratios to be attractive. The long-term prospect of the financial sector is a little more uncertain as new regulations impede future earnings potential. Although Canadian banks may look a lot better than their American counterparts. Commodities are likely to rebound as the market begins to drool again for 2010 BRIC demand.

With respect to small cap tech stories in Canada; I am still sticking with CX, BWC, DSG, and RKN as favorites. All continue to show growth, margin leverage, with low debt and a lot of cash in the till. More interestingly, each probably have future catalysts which should benefit shareholders. As for the US tech sector, AMZN and CSCO still look good.

Disclosure: I own CX, BWC, DSG, CSCO shares. I do not own RKN, GOOG, GS, JPM, NOK, AMZN, or DELL

Redknee (RKN.TO) continues to show momentum.

2009-07-07T09:43:00.000-04:00

Yesterday, Redknee announced its second major contract in two days, and the third in less than a month. See the post from June 6th.

The trend for Redknee continues to be international with the June contract located in the Middle East, Monday's multi-million dollar contract with a Tier1 operator in Europe, and then yesterday's announced contract in Pac-Asia. Investors should expect this trend to continue as operators in these regions look for mobile infrastructure and middleware solutions to support significant growing demand for mobile data services. In many parts of EMEA and Pac-Asia, wireless devices will be the dominant access point to the internet and related data. As operators expand billing to accomodate, Redknee should be among the vendors to benefit, and management at RKN appears to be executing well to capture market share.

Mobile infrastructure should continue to be a significant area of growth over the coming years as operators worldwide attempt to manage some of the emerging complexities associated with billing, provisioning, and capacity for 3.2 billion subscribers worldwide.

With that in mind, there are a handful of small-cap public Canadian companies to watch including (in alphabetical order):

Bridgewater Systems (BWC.TO)
Dragonwave (DWI.TO)
Redknee (RKN.TO)
Wi-Lan (WIN.TO)

Disclosure: I own shares of BWC. I do not own shares of DWI, RKN, or WIN.

Canada Day 2009 Week In Review - Guestlogix (GXI.V)

2009-07-06T09:29:00.000-04:00

While I was relaxing on the dock, not many meaningful announcements were made during Canada Day week (surprise!).

On July 2, 2009 Guestlogix reported results for Q2, 2009 with sales of $4.6 million up 150% from Q2 2008 sales of $1.8 million. More significantly, it reported positive net income of $.03 million or 0.00 EPS. The company has 824 million passenger trips under contract with 563 million deployed and generating revenue. With recurring revenue averaging around 90%, contractual minimum guarantees, and a substantial install base, investors should consider future revenue streams to be more predictable than in previous reporting periods for this company. The company reported $1.5 million in monthly revenue for May, inferring a forward 12-month baseline of $18.0 million excluding new deployments or the expansion of its OnTouch merchandising platform. With monthly operating expenses in the $1.2 million range, 12-month EBITDA baseline could track to approximately $4.0 million, assuming that the Company continues to manage its expenses.

With the recent introduction of its OnTouch merchandising platform, and a couple of key pilots soon going into production, investors should start to see a steady increase in commission-based revenue on higher priced items sold onboard. As the company rolls these services out, associated revenue streams should begin to be reflected in accelerated EBITDA and net income margins during future reporting periods, even as total revenues increase. Investors could see GXI exit FY2009 with a baseline monthly revenue stream nearing $2.0 million.

Since tripling from its lows of early April during a 10-day period, the share price has more or less traded in a range near $0.90 on low volumes. Since reporting its first net income quarter last week, volumes have increased and the stock is beginning to nudge $1.00. The stock is trading at approximately 48x TTM EBITDA, and 13x FTM baseline EBITDA. As the Company deploys the remainder of its passenger trip backlog over the next 3 quarters and begins to roll-out merchandising services, the baseline EBITDA forecast should be positively impacted, decreasing the forward EBITDA multiple.

Guestlogix has attained a net income inflection point without the earnings benefit of some of its more powerful merchandising programs, which should be launched later this year. Investors should see accelerated earnings over the coming quarters as a result.

Disclosure: I do not own shares of GXI

British Airways Deploys with Guestlogix (GXI.V)

2009-06-23T08:47:00.000-04:00

This morning Guestlogix announced that BA has begun to deploy its onboard retailing platform on 245 planes serving approximately 33 million passengers annually. Although terms were undisclosed, most multi-year agreements to date have ranged between three and five years, and this contract likely falls into that range with typical monthly minimum revenue guarantees.

BA should be considered a reference European account that can help to validate the solution to other major carriers in the region. In order to win this contract, GXI has worked hard over the past several months with BA to obtain PCI PED 2.0 certification for its handheld devices. This certification should help to align the solution to banks and credit card companies, which should help GXI to secure more potential European deals in coming months.

The 33 million passengers have been previously accounted for in the company's Q1 disclosure of 824 million passenger trips under contract. According Management, the company is currently generating revenue from the contract. Once switched on, GXI benefits immediately from all current inflight transactions by recognizing percentage-based fees. British Airways generates significantly more revenue per passenger than its North American counterparts, which typically generate about $0.5 per passenger in onboard transaction revenue. As a result, transaction revenue could exceed monthly minimum guarantees quickly.

Analysts are likely to have included the BA revenue streams in recent forecasts, so it is unlikely that estimates or targets would be adjusted upward as a result of this deployment. However, these revenue streams help to de-risk forecasts, and continue to provide evidence that execution continues on track.

Disclosure: I do not own shares of GXI or BA

CUPE is out of its collective mind.

2009-06-22T08:46:00.000-04:00

While Torontonians struggle through this recession with many thousands losing their jobs and many other thousands having their incomes and benefits cut, CUPE leadership somehow believes that it is a good time to hold these same taxpayers hostage for hundreds of millions of dollars worth of employee perks.

In the end, there is little difference between entitlement bonuses that the union rails against and bankable sick days that it chooses to strike for. CUPE is hypocritical to the extreme to hold its fellow financially distressed citizens hostage for such purpose.

Citizens of Toronto should harden against these actions and urge City of Toronto negotiators to stand fast against CUPE. In fact, Torontonians should demand that for every week that this strike continues, that it removes a few basis points from its offered salary increase.

CUPE leadership has thown out all of the worn cliches like "bargaining in bad faith" in order to justify its actions. On the contrary, the wage increases seem reasonable, people can keep their jobs, and they can even keep their 18 sick days. Citizens just don't want the sick days turned into a pseudo-pension instrument at their expense.

City workers have been on strike in Windsor since mid-April. In one of the staunchest union towns in Canada, citizens are urging the City of Windsor to hold fast against the CUPE demands. If CUPE leadership was not so out of touch with reality, it would see this as a pretty good indication that people (families) everywhere, even in places with the greatest sympathies, are rising up against its bullying tactics.

Another question that should be posed is: who is the brainiac that negotiated these contracts in the first place?

Active Control Technologies (ACT.V) Contract Announcement

2009-06-16T14:23:00.000-04:00

Earlier today, ACT announced that it has won a $1.4 million net new contract for two underground mines somewhere in the United States. According to management, this contract increases its current backlog, and will not be fully deployed until after its fiscal year-end (July 31). As a result, investors should expect revenue to be recognized during Q1, FY 2010.

Management believes that a small portion of the factored pipeline could turn into additional backlog before the end of its fiscal year, which is modest progress. The Company has clarified the definition of its factored pipeline as "written quotes". Management believes that "written quotes" total more than $20 million in potential contract value. However, it is difficult to understand how much of that total will actually translate into revenue during fiscal 2010.

As expected, the U.S. Federal Government has relaxed some of the guidelines for compliance to the MINER Act, allowing more time for mine operators to select vendors, and to substitute vendors later. As well, MSHA still has to approve the emergency communications and response plans submitted as of yesterday. As a result, investors should expect that a portion of quoted contracts may not be awarded for up to six months from now.

Due to the relaxation of various guidelines for compliance, competition for contracts is likely to intensify over the next few months. Although ACT appears to offer clear competitive differentiation in terms of throughput, breadth of offering, and MSHA certification, it has not yet developed local relationships (which can run generations deep). As a result, even with its technical superiority, investors should expect ACT to offer pricing discounts to win some business. As a result, gross margins may be impacted.

The value of the backlog has been clarified by management. The $6 million value cited earlier includes both contracted deployments, and future indicated deployments by current customers. As a result, prior to today's new contract announcement, the $5.2 million backlog (the company probably recognized approximately $0.8 million of the backlog since it last disclosed) was split approximately 50/50 between current and future indicated deployments. In essence, the current backlog was approximately $2.6 million prior to today. The new $1.4 million contract increases the current backlog to approximately $4.0 million. Without this understanding, expectations for near-term revenue recognition may have been too high.

For a more accurate reflection of near-term performance, investors should measure the current pipeline, and ignore/discount future indications by current clients. Analysts should continue to get clarification from Management on this measurement going forward.

The Company continues to find its footing as it begins to commercialize. The rubber is now hitting the road, and management must prove execution.

Disclosure: I own shares of ACT

Enstream: A Mobile Moneris or Dexit Revisited?

2009-06-15T23:05:00.000-04:00

Yesterday, Telus (T), Bell, and Rogers (RCI) launched mobile payment solution branded Zoompass, which is developed and operated by Enstream, a new mobile payment solution platform, which also just happens to be a three-way joint venture among them. This post will attempt to contextualize Enstream (where the intellectual property resides) within the mobile ecosystem. Will it dominate? Will it survive? As with most things, its future is probably somewhere in the middle and it could morph into something entirely different.

I have attempted to sign up for the beta service. The sign up process appears to be fairly straightforward from the web, although the system hangs once I have logged into my new account from my Blackberry 8700. I still have not got to the point where I can use it.

Mobile Payments Will Have a Major Worldwide Economic Impact
An earlier blog post analyses the importance of billing systems in a race to become top dog for mobile applications. Mobile payment systems are a genus closely related to billing systems within the mobile ecosystem, although with probably more far-reaching economic implications, especially for emerging economic blocks such as BRIC and MENA. Mobile payments have the ability to accelerate the flow of funds, improve liquidity, and improve economic access for hundreds of millions, closing in on billions, of people worldwide (more on that later). Mobile payments systems are operating in countries as varied as Kenya, Korea, the Phillipines, and Britain, which has have helped to provide a glimpse into a potentially massive worldwide opportunity.

Is Enstream Relevant?
Leadership at Enstream appears to understands the global potential, and is already positioning itself within an inferred world market opportunity. The question is; can it get there from here? Possibly. But there is a lot of work to do and the JV is nowhere near to being a first mover in the industry. Even in Canada. The inter-relationships and possible connectedness among participants is extremely complex with carriers, software vendors, device manufacturers, distribution channels, retailers, banks, and payment networks all vying for bits of transaction value. Many of those bits are still to be defined, and Enstream has to stake out its claim quickly.

Consumer Feedback Is Negative
For now, the Zoompass solution offers some additional convenience for Canadian consumers, although many appear to be choking on the high fees currently advertised at $0.50 per transaction. Consumer feedback via the blogsphere and twitter has been decidely negative related to fees and the potential for competitive concentration. CEOs that have been in the market for a while have all commented that the fee structure, as it stands, is a likely impediment to adoption.

Commentary From the Ecosystem Itself is More Positive
Notwithstanding the fee structure, most of the commentary offered by CEOs already operating in the ecosystem has been balanced and considers what Enstream means to their companies, to Canadian consumers, and to the world.

Universally, CEOs believe that it is a positive development that Canadian carriers are getting serious about mobile payments. Most of the vendors in the Canadian market are under-capitalized start-ups that have struggled to convince carriers of the market potential in Canada. As one CEO put it, carriers are finally showing that they "get it". Some believe that Enstream could behave as a universal gateway to the major carriers for independent mobile payment applications, which may kickstart another wave of development in the vertical.

Zoompass connects mobile transactions to a co-branded prepaid, reloadable Mastercard - not subscriber accounts. Presumably, this hybrid card system offers users maximum flexibility for consumers to withdraw funds via ABMs, pay via POS, and to transact via SMS or NFC from a mobile handset. There are already several prepaid Mastercard programs deployed, with many others in the works, which all appear to operate within a similar framework. Many CEOs believe that the Enstream platform may be an opportunity to better connect current prepaid programs to mobile devices both electronically, and at the POS.

Others believe that this move by the carriers may spur on more aggressive competition from banks and payment networks, which could deliver competitive gateway infrastructures, and ultimately better choice and lower costs to consumers. Several financial institutions are currently at early stages of developing applications to connect mobile devices directly and securely to consumer bank accounts for mobile payments. However, unless projects are sped up, consumers may have to wait several quarters until serious choice becomes available.

Some Global Comparatives
Device manufacturers such as Nokia (NOK), RIM (RIMM), and Apple (APPL) have a broader world view on mobile payments. In March 2009, Nokia made a substantial strategic investment in Silicon Valley-based Obopay. Obopay operates with a similar model to Enstream, but with deployments in both the United States and India. The price point is $0.25 to send up to $1000 and nothing to receive funds. In the meantime, RIM is actively testing ideas and pursuing multiple opportunities in the space, and has recently announced a partnership with payment giant PayPal (EBAY) to deliver billing and payment solutions for its AppWorld venture. PayPal Mobile is considered by many to be competitive to the new Enstream venture.

Euronet (EEFT) is a significant electronic transaction processor with 421,000 prepaid wireless, long-distance, and gift card endpoints worldwide. In 2007, it acquired RIA, the third largest money transfer agent in the world, and then last year attempted but failed to buy MoneyGram, the second largest money transfer agent in the world behind Western Union. Euronet, through its electronic network, is beginning to deliver a mobile payment and remittance infrastructure that can be cash-based. And here is why.

Between 80% and 85% of all mobile subscribers in emerging economies do not have bank accounts (not to mention credit), nor do they have easy access to local banking infrastructure. Most emerging economies operate as cash-based societies. This is a main driver behind the proliferation of prepaid subscriptions in BRIC, MENA and Latin America. Euronet and others like it are attempting to deploy ways to digitize cash via local merchants without banking infrastructure. By comparison, the Enstream solution appears to need banking infrastucture.
____________________________________________________

Bottom Line: Ecosystem
The Enstream launch is seen as positive by participants in the ecosystem as long as it evolves to a platform for multiple mobile payment applications tha can be offered to Canadian consumers. Enstream states that it is looking for development partners. The question is how economic will it be for independent developers to participate. Without participation by third-parties, the concept may struggle.

Bottom Line: Consumers
Consumers appear mistrustful of the enterprise, which implies that there is a branding deficit shared by the three founding partners that could impede progress. Pricing has been described by consumers and others in the ecosystem as the most immediate concern and potential barrier to adoption. Objections and barriers have been erected quickly by consumers, which may require time, capital, and effort to overcome before traction can be gained.

Bottom Line: Market Share
As for worldwide expansion, by comparison to other more advanced solutions worldwide, Enstream is late to the game and its business model may not be easily translatable to other regions of the world. As a result, Enstream should be viewed as regional play limited to the Canadian marketplace, with potential to buy its way into other markets in the future.

Bottom Line: Investors
Investors should expect that the JV will contribute little to the performance of RCI, T, or BCE over the next few years, unless the business model is revamped to go viral, which is quite possible. From a cost perspective, Enstream could contribute to the accelerated extinction of "hard cards" on display in many convenience stores, saving millions of dollars in the channels.

In the end, we may see Enstream positioned as a Moneris-type of mobile payment infrastructure that would likely compete directly with Moneris itself, or some other bank-based mobile payments system in Canada. As for other threats, handset manufacturers could provide substitution through some as-of-yet developed applications. Notwithstanding, to be successful Enstream would need to become a neutral Canadian platform for competing applications from local providers to multinationals.

Bottom Line: Joint Venture

However, there is no guarantee the the founding partners can resist meddling, or poking each other in the eye, long enough to give the venture an opportunity to feel its way towards success. For every successful JV among Canadian institutions - whether banks or telcos - there have been dozens that have failed.

I do not own shares of any of the Companies mentioned in this post. As well, I have chosen to generalize the commentary as opposed to attribute direct quotes.

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The New Normal: 10 Themes and Their Implications on the American Economy (Part 3) Media Saturation

Why MSFT ORCL RIMM VMW and HP will continue to post solid results.

The New Normal: 10 Themes and Their Implications on the American Economy (Part 2) Tax Inequity

The New Normal: 10 Themes and Their Implications on the American Economy (Part 1)

iLOOKABOUT (ILA.V): Deploys a transformative contract - investors should take note

MPartners RES Small Cap Tech Sector - June 15

Mpartners RES Canadian Small Cap Tech Index - April

Commentary on BNN regarding RKN, BWC and SVC

Why Investors Should Look at TSX/V Small Cap Tech

Cisco's Cr-3 Router - Streaming Media Players Drool

Two-Month Performance: RES Free Thinking Top 10 Tech Picks for '10

RKN:TSX Q1 2010 Results Down Again - Turning a corner or more turbulence to come?

Mutliplied Media (MMC.V) Announces Definitive Agreement to Acquire Unomobi.

Top 10 Posts on RES Free Thinking LTM

Mosaid (MSD:TSX): It's Been A Good Month

CEO Series: Interview with Geoff Rotstein, CEO of Cyberplex, Performance Advertising Pioneers.

Guestlogix Pre-announces Record Q4 and FY2009: Margins Hint At Niche Dominance

Can Bay Street Get Behind the Moral Abiguity of Avid Life Media?

One Month Performance: RES Free Thinking Top 10 for 2010

For those of you not at CES 2010 - Poynt for iPhone

Route1 "Tipping Point" Eludes Agonizingly *sigh*

Fearless Random Predictions For 2010

RES Free Thinking Ten Top Tech Picks for 2010

RES Free Thinking: 2009 Year In Review.

Descartes Systems (TSX:DSG): Q3 In-Line While New Services Strengthen Outlook.

CEO Series: Interview with Tom Douramakos, CEO Guestlogix, Onboard Retailing Pioneers.

Logibec (LGI.TO) Reports a Solid Q4 and Full Year.

Redknee (RKN.TO) Surprises With Weak Q4.

CEO Series: Interview with Andrew Osis, CEO Multiplied Media - developers of the Poynt Mobile App

More on the Commercialization of Intellectual Property in Canada - With a Link to Mark McQueen

Cyberplex exceeds analyst expectations again while fundamentals solidify

Bridgewater Systems Q3 2009 - Beats Consensus Forecasts and Increases FY Guidance.

Bridgewater Systems (BWC.TO): More Takeover speculation

Could Multiplied Media Be "The Next Big Thing"?

Just in time for Holloween: A Few Spooky Stats YTD 2009.

Bridgewater Systems (BWC.TO) Q3 2009 Preview: Will momentum continue?

GOOG Beats Expectations...Will CX .TO Follow Again?

Top 5 Pick Guestlogix: Good news flow plus growing Q3 earnings

The Rubber Hit The Road...Where Was ACT?

INTC flies by forecasts - strong beat and analyst upgrades everywhere.

Why The IT Sector Has Outperformed the General Market YTD 2009: Licensing.

Healthscreen (MDU.V) Adds to Its Network

INTC places a bet with Transgaming (TNG.V) for on-demand consumer gaming

TransGaming Collaborates with Intel to Bring GameTree.tv Home

Another inflight merchandising milestone for Guestlogix

Guestlogix (GXI.V) and Abanco settle lawsuit. Positive outcome.

Check out Poynt: An award winning mobile search app for BBerry...iPhone next?

Bridgewater Systems (BWC.TO) On A Roll - Announces Major New Contracts

New Design...Why?

Descartes Systems (DSG:TO) Strong Quarter; Bullish Outlook

Current Anecdotal Trends in VC Funding - From the Trenches

R&D subsidies do not create wealth: How do we modernize policy to incent innovation?

Zoompass is destined to succeed: So what is the potential fallout in the Canadian market?

Nstein positioned to thrive in H2 2009?

Delta Airlines deals a blow to Points International - guidance reduced.

CX Q2 results: Did it beat consensus?

Redknee (RKN.TO) Strong Q3 - Outlook Encouraging

CX Performance Preview: Could it beat consensus?

RDM Corp results offer a glimmer of what could be

Bridgewater Systems exceeds expectations, increases guidance

How does MSFT get its groove back?

Worldwide Connectivity Statistics.

Trading Idea: GOOG performance foreshadows CX performance?

Hailing taxis from the sky: Guestlogix (GXI.V) announcement.

US Employment Analysis: Supports Short-term Volatility

Q2 2009 Earnings Season: Crossroads

Redknee (RKN.TO) continues to show momentum.

Canada Day 2009 Week In Review - Guestlogix (GXI.V)

British Airways Deploys with Guestlogix (GXI.V)

CUPE is out of its collective mind.

Active Control Technologies (ACT.V) Contract Announcement

Enstream: A Mobile Moneris or Dexit Revisited?

Route1 "Tipping Point" Eludes Agonizingly sigh