MicroCap Tech Earnings April 09: Route1 (ROI.V) Shows Glimmers of Qwest in Q4 - More to Come

Route1 has been on the brink of breakout for about 5 years now. Every year investors are disappointed. Progress was made in Q4, but the real story started on January 9th, 2009

• Revenue for Q4 2008 was reported at $0.3 million, up 30% for previous Q4 2007
• Gross Margins for the quarter were reported at 50% versus a negative gross margin during Q4 2007
• Company is showing onesy-twoesy progress in sales for Q4 with a leaner operating structure
• After burning through $4.2 million, the company retained $2.1 million in cash on the balance sheet entering FY2009
• On January 9, the Company announced a 30,000 unit commitment from the US federal government through its US government channel - Qwest Communications (Q)

As the Obama administration attempts to streamline government agencies, while maintaining its objective to reduce energy consumption and greenhouse gas emmissions, the Mobikey solution may be at the intersection of these opportunities. Considering that the 30,000 unit order is for one division within one department, prospects look very good at Route1. However, nothing is assured beyond the 30,000 units already guaranteed and anything may happen as the US government budgets are negotiated. Investors should see revenues associated with network setup during Q1 and Q2, which could be in the $2 million range, plus some early mobikey deliveries. The potential major lift in sales should start occuring in H2, 2009. The balance sheet for ROI is a concern for investors, although favourable payment schedules from Qwest may mitigate some of the risk until the devices start to flow. By the end of 2009, there may be several opportunistic network security vendors circling ROI as it gains momentum.

MicroCap Tech Earnings April 09: Angoss Software (ANC-V) Banks on Intellimax Synergies

Angoss Software provides data analytics for risk management, integrated marketing and sales management. It has a diverse customer base in insurance, banking, telecom, and online retail. Highlights of Q1 2009 earnings report.

• Recent Intellimax acquisition now operationally breakeven and contributing 15% of sales.
• Total sales for the quarter of $2.0 million up 3% from Q1 2009.
• Operating earnings were essentially breakeven for Q1 down from $0.3 million, due to incremental expenses related to the Intellimax deal.
• Weakness in UK offset by Intellimax and N.A operations.
• More Intellimax synergies as integration continues throughout 2009.
• Outlook is "challenging" for 2009 with improving conditions expected during H2.

With Intellimax, the Company is planning to extend its robust analytics core to include elements of marketing execution. The overall outlook for this Company should be considered positive as clients become increasingly data driven in marketing, risk management, and sales execution. If the Company can find ways to maximize synergies and then consolidate niche players in the market over the next few quarters, the stock may be a sleeper. It is a supermicro-cap at $4.0 million.

Disclosure: I do not own shares of ANC

Cyberplex Crushes It Out Of the Park

After markets closed today Cyberplex (CX.TO) reported Q4 and full-year results. In a good economy, the results would be considered outstanding. During this recession, the results could be considered astounding, especially considering that all of the reported growth was essentially organic. Sales for Q4 increased 429% to $28. 9 million from $5.5 million reported for the previous year Q4. Sequentially sales increased by 162% from $11.0 million reported for Q3 2008. When reported, Q3 2008 results were considered by analysts to be an excellent quarter.

The Company reported $4.9 million in Net Income, or $0.09 EPS for Q4, which represents a 17% NIM on sales. Gross Margin for the quarter was 34%, which has been inline with previous quarters, and EBITDA was reported at $5.0 million. Shareholders should be ecstatic with the margin leverage demonstrated during Q4 2008.

Earnings results from Q4 also represent a vast majority of full-year earnings. FY 2008 Net Income was reported at $5.7 million or $0.11 EPS, which represents a 10.7% NIM. Blended gross margins for the year were reported at 35% and EBITDA was $6.7 million or nearly $0.13 per fully diluted share. Total sales for the year were reported at $57.3 million from which Management was able to extract $19.8 million in Gross Margin.

The TTM EV/EBITDA multiple on this stock is 3.8X, at the low-end of a range of EV/EBITDA multiples among the Top 30 Canadian Small-Cap Tech Stocks.

The company has approximately $5.3 million in cash, although its balance sheet may spook more conservative investors because the net cash position is $1.8 million right now. The earnings performance from the past two quarters should hint at the free cashflow potential of the Cyberplex model in future quarters, which may put concerned investors at ease.

Cyberplex is at the top end of the online advertising spectrum in terms of measureability. Performance-based advertising by its nature shortens the discover-decide-do cycle so that marketing risk is reduced for advertisers. Marketers only pay for desired outcome. Cyberplex reduces perceived advertising risk for marketing managers, which tends to preserve careers during recessions. This is why Cyberplex is currently crushing it out of the ballpark.

During the conference call, a participant asked if the performance of this quarter is sustainable. On percentage growth basis, it is likely improbable for two reasons:

1. The 4th quarter calander year is usually the best performing quarter seasonally for the Internet-based economy. As a result, Q1 should show a seasonal decline.
2. The extent of offerings is still growing, so there may be product or category-related lumpiness in quarterly performance. As was the case for Q4, a particular segment (Health & Beauty) was really strong. Until the offerings and the client-base are broadened, there may be a few swings in quarterly performance due to the impact one or two items. Although the Q4 results are spectacular in the face of a recession, investors should look at the results for the full year. By the way, FY2008 results were excellent.

The FY2009 outlook for Cyberplex should be considered positive for the following reasons:

1. Measurable online advertising is expected to grow by approximately 17% during 2008 according to market research firms like IDC. Primarily this means Cost-per-Click advertising or paid search offered by Google (GOOG-Q). Cyberplex is at a level of measureability beyond CPC, so we may see Cyberplex grow at a faster rate than the category as a whole. Annualized growth in the mid-20% range for 2009 could be possible, and should be viewed by shareholders as positive.
2. Using significant insight gained from its analytic tools, CX can deliver excellent earnings efficiency from its campaigns. EBIT margins may increase as a result, regardless of quarterly revenue fluctuations. These efficiencies could offset the potential risk of gross margin pressure as competition intensifies and the recession lingers.
3. Earnout payments to IncentaClick should be completed by the end of Q1, which means that free cashflow should accelerate by H2 2009.
4. The Company has proven that there is potential for upside performance surprises as it scales its business, which may benefit shareholders during future quarters.

Cyberplex is a toughened tech bubble survivor whose stock value may be suffering from historical investor perceptions. Smart investors should get over it because this Company has re-invented itself into a cash machine that is growing. Not many companies can say that they are having historic quarterly performance during this recession. The stock should move tomorrow.

On second thought, this is the second tech company in the last two days that has reported historical Q4 performance during the recession. Maybe it's a trend.

A final interesting thought. For the past two quarters, strong performance by CX has been followed up by Google beating analyst expectations. If it happens three quarters in a row, is there trading information there?

I do not own shares of CX or GOOG.

Nstein Reports a Good 4th Quarter.

I suppose this is an adjunct to the post that I completed last night and thank you Nstein management for making me look prescient. Nstein (EIN.V) reported its 4th quarter and full-year results. In particular, the 4th quarter results were substantially higher than expectations, probably a full $2 million ahead of my forecast. Net Income was strongly positive for the quarter at $1.35 million or $0.03 per share.

More importantly, the Company was able to generate $0.03 per share in free cash flow. The Company now has $7.4 million in cash along with $6.8 million in receivables and very little long-term debt exposure at $0.5 million. The NAV of the Company could be inferred at $21.9 million or $0.41 per fully diluted share based on the balance sheet ending Dec 31, 2008.

Earlier in the year, performance was a little dicey due to market uncertainty. There was some concern that Nstein's newspaper clients would delay investment decisions as balance sheets were eroded. It appears as though many decisions were delayed until the 4th quarter when a lot of publishers were probably reacting to the freefall in print advertising dollars. Nstein appears to have benefitted directly from "Yikes...do something now!" reactions throughout the industry.

Last year, Q4 performance was also a positive surprise to the market. Big 4th quarters should be better modeled into future forecasts because there appears to be bias towards 4th quarter buying decisions, probably correlated to budget cycles. Notwithstanding, it was a great quarter for the market conditions. Based on reported A/R, Q1 2009 should show some strength as well.

Market conditions should remain very positive for EIN.V for another 4 quarters as its clients scramble online (see previous post). The Nstein semantic content management suite is also well aligned to the next stage of the Internet, which some are calling web 3.0, or the contextual web. So, the longer-term outlook may be considered positive as well, especially as the Company leverages favourable R&D tax credits offered by the Province of Quebec. With a pretty outstanding world-wide client base, a well positioned and patent protected solution, and a proven growth profile, EIN.V may be an interesting target to a larger middleware, content management, or infrastructure player.

With over $7.0 million in the bank, there is a chance that EIN.V itself could begin to roll-up some complimentary solutions providers that can extend its own solutions.

Although Nstein is clearly well positioned, there should be some investor caution. Nstein's client base still prefers to acquire perpetual license software. Although the Company's revenue streams are becoming more recurring in nature, the Nstein still suffers from lumpy quarterly performance, and the quarterly live/die sales cycle due to the perpetual licensing model.

Notwithstanding, investors may still view EIN stock as being currently undervalued and we may see a continued run up in the share price for the next few days. The stock has performed well since the beginning of the year with a 116% increase in the stock price since January 6th.

Points International (PTS.TO): Nice top-line, but where is the leverage?

Points International reported Q4 and FY 2008 earlier today. The revenue line was ahead of its top-line guidance for the year at between $65.0 million and $75.0 million. Actual annual sales performance was $75.6 million, which happens to also fall above my expectations of $75.3 million. The company has a solid $22.8 million balance sheet and no debt. During this recession, Companies with solid balance sheets that exceed guidance are usually viewed positively by the market. As a SaaS provider with over 95% recurring revenue and a first mover lock on its niche, one would expect this listing to fit squarely within the Top 30 Small-Cap Tech Stocks on the TSX.

But wait...

A closer look at bottom-line performance may erode some of the first-look "looks good" sentiment in the market. Despite growing revenues dramatically throughout the year, operating earnings have eroded since the first quarter. EBITDA was negative $0.54 million for Q3, and only $0.04 million for Q4 2008 on record sales $21.7 million. This is incongruous with the intent of the wholesale model (described by the Company as Principal Revenue) when it was first introduced to the market during 2007. Expectations at the time were that real contribution margins would initially triple, and then with the introduction of new higher margin clients, operating earnings would increase from there. Based on its reported earnings, the margins that it receives from the wholesale points business is around 14.8%. It is certainly an improvement over the average of 8% that it was generating in commissions, although it is a far cry from a triple. With over 96% of its revenue now reflected in the wholesale model, there is a lot more clarity in the results. It would appear that PTS is getting the squeeze as a wholesaler. Passengers may be utilizing their loyalty currency with greater frequency, but Points International appears to be bearing the brunt of price discounting risk - possibly passed on by its airline clients.

Personally, I have always been skeptical of the viability of the consumer portal and have never in the past modeled revenues associated with Points.com, or the Global Points Exchange (GPX). Although creating a secondary trading market seems like a reasonable idea with future earnings potential, the airlines need to better understand that the trading fees are incremental revenue streams (found money) with high margins. Earning $1 a hundred times is the same as earning $100 once. However, doing a hundred trades creates a market, whereas 1 trade is not a market. Basically, the high trading fees (however they are justified) appear to be slowing adoption and impairing the liquidity required to make a secondary market viable and profitable. On the beta site there are still only 130 trades posted at any time, up by only 30 posts since July.

There has been a lot of management effort and development costs applied to the GPX project. Airlines are signing up to the program, which also presumably brings many cross-sell opportunities for other PTS solutions if the GPX stalls. There are still a couple more quarters of "wait-and-see" goodwill left in the market, but the wick may burning on this concept.

Looking forward, the guidance for revenue of between $85 million and $95 million during FY 2009 is a modest 12% to 25% forecasted increase in sales. Considering that 95% of its revenue streams are supposed to be recurring, and sales are benefitting from recent launches at British Airways, Northwest Airlines, and Hawaiian Air, there appears to be not much forecasted growth momentum.

Shareholders would likely be satisfied with modest top-line guidance as long as the wholesale model demonstrates the potential for earnings leverage. Otherwise, the much vaunted conversion to the Principal Revenue model may have been a whole lotta whatever.

Earlier this year PTS would have ranked in the lower half of the Top 30 Small-Cap Tech Stocks, but with this 4th quarter profit result, it may have fallen out of the rankings for the time being. With some earnings momentum over the next couple of quarters, it could return to the list.

As a reminder, there are over 300 tech and cleantech small-cap stocks listed on the combined TSX and TSXV exchanges. Being ranked among the top 30 is pretty tough.

Disclosure: I do not own PTS shares, nor do I own any airline shares.

Tech Earnings This Week: Google Beat As Expected

After the outstanding earnings report from IBM (IBM-NYSE) earlier this week, I suggested that Google (GOOG-Q) would also beat analyst expectations. It did.

Revenues of $5.70 billion were 18% higher than the same quarter of 2007, and a 3% sequential improvement over Q3 2008. Adjusted earnings for the quarter were reported at $5.10 per share versus expectations of $4.95.

Looking deeper into the performance metrics reported, indeed Google seems to be benefiting from the flight to safety by marketing budgets, along with its increasingly international footprint.

Aggregate paid clicks increased 18% over Q4 2007, and 10% sequentially. Revenue from Google owned sites, essentially search, increased by 22% over Q4 2007. AdSense revenues grew by 4%. Revenues from international sources increased as percentage of total sales to 50% from 48%.

Google management chose to take some impairment charges in the quarter, which impacted negatively on reported earnings. However, operationally, it could be inferred that Google performed ahead of expectations. As I expected.

Investors should marvel at the margins of this Company which was reported at 33% in the 4th quarter, which is a 10% improvement sequentially over Q3. It should be interesting to see what happens during Q1 2009, which is typically the weakest quarter for media spending. Notwithstanding, Google should continue to benefit from the "flight to safety" for at least two more quarters.

More surprising this week was the strong earnings report from Apple (AAPL-Q). Although iPhone sales were weak as expected, strong performance from the laptop line of business was a big surprise. As a premium priced product in a declining market, one could predict that this business would crater during the quarter, but instead it powered earnings. International sales again helped push iPod performance ahead of forecasts. Essentially, Apple's diversified product base was critical to its surprise performance.

On the other hand, Nokia (NOK-NYSE) showed a deep decline in performance due to weak handset replacement activities worldwide. As I have stated in an earlier post, people find their mobile subscriptions to be essential, but are choosing to hold off on fancier phone upgrades. On top of that, for consumers actually looking for new bling, they are choosing the iPhone over Nokia products in Europe.

Because Research In Motion (RIMM-Q) looks more like Nokia than Apple from a product perspective, there is probably a greater chance than not that RIM could miss analyst expectations when it reports. However, it was reported during the fall of 2007 that shipments of Storm were better than expected. Unlike Nokia, RIM has been launching new devices throughout 2008, which should benefit performance. However, with iPhone being Apple's weakest product line, and Nokia reporting significant declines in sales, it doesn't bode well for RIM's quarter.

Because Yahoo! (YHOO-Q) has a greater exposure to the U.S market than Google, and because it relies more on impression-based display ad revenue than Google, it could report earnings next week that miss expectations. Management instability, and the erosion of brand equity by incessant takeover speculation do not help, either. Marketers probably do not feel as safe allocating budgets to Yahoo! as compared to Google. Social media players like Facebook and MySpace are a direct susbstitutes for Yahoo!'s portal business, and are nipping at the edges of Yahoo!'s traffic while gaining more mindshare with marketers, which also does not help. If the dominant online media player is showing 18% growth in sales in a market where total growth is forecasted to be around 10%, the performance gaps need to occur somewhere.

I do not own any share in the Companies discussed above.