Redknee (RKN.TO) positioned well to benefit from emerging mobile markets.

RKN.TO is a bit "under-the-radar" because it has only recently began trading on the TSX (October 21, 2008). It has good operating fundamentals with consistent earnings, and a little over $20 million in cash and equivalents with zero debt, although it retains an unused USD$10 million credit facility allocated for future acquisitions.

Headquartered in Mississauga, Redknee provides converged billing, rating, charging and policy solutions to tier 1 and emerging market mobile operators globally. Recently, it has introduced interesting prepaid billing solutions for the Blackberry, along with mobile payments solutions, which both play well in emerging markets such as Eastern Europe, Latin America, Middle East, Africa, and Southeast Asia. Prepaid services for smartphones should also be attractive to carriers in Europe, and even in North America where a major shift to prepaid accounts is occuring.

To provide some macro context, even as the current worldwide recession deepens, emerging economies represent nearly all of the current growth in mobile susbcriptions worldwide. For example, during 2008, mobile subscriptions in the Middle East grew by 47%. By several measures, Africa is beginning to emerge as the fastest growing market in the world. Additionally, in most regions, between 80% and 90% of subscriptions are prepaid. In some countries like UAE, total mobile subscription represents more than double the official population. This phenomenum is due to a significant population of foreign workers. Most of these workers do not have local bank accounts, and need to wire money home. As a result, there is significant demand for mobile money transfer solutions as mobile operators look to fill the demand gap by deploying technology similar to what RKN offers. In many emerging mobile markets, populations are far more likely to have a mobile subscription than a bank account. This condition is most acute where Redknee is having the most success; in Africa, the Caribbean, and Latin America where as high as 85% of the population remains unbanked.

Redknee reported financial results for Q2 2009 after markets closed yesterday, and conducted an analyst call at 8:30 this morning. Revenue for the quarter increased by 9% to $13.8 million versus $12.6 million for Q2 2008. The company reported EBITDA of $1.1 million for the quarter versus a loss of $0.6 million for Q2 2008, an increase of $1.7 million. Cash and equivalents increased to $20.3 million from $15.3 million for Q2 2008.

Since the beginning of calendar 2009, the Company has announced significant contracts with mobile operators in Africa, the Caribbean, and Latin America. Based on the conference call, investors should expect more contract announcements in these regions, along with others in the Middle East. Management has stated that it has a contract backlog of approximately $27.5 million, and that it anticipates recognizing slightly less than half of this revenue during Q3, which infers a revenue potential of approximately $13.2 million with gross margins of approximately $9.9 million. Cost containment should continue to reduce OpEx margin to around 70%, inferring an operating margin of approximately $0.6 million. Investors should be aware that typically Q3 performance is seasonally the weakest.

The company has focused on improving its gross margins and expects to report between 73% and 75% gross margins for upcoming quarters, depending upon how many hardware deployments are required. In addition, it has worked to reduce its total operating expenses as a percentage of revenue. During Q2 2008, expenses were repored at 71% of revenue, while gross margins came in at 79% of sales. Management expects operating expenses to decline marginally over the next few quarters to somewhere in the high 60s percentage range.

With $20.3 million in the bank, no debt, and consistent annualized growth in profitability, and improving margins, this is a stock to keep an eye on as it continues to benefit from worldwide trends in the mobile sector.

ACT 3D-P Distribution Deal.

ACT announced this morning that it has formalized its deal with 3D-P to distribute 3D-P's equipment monitoring devices to both underground and above ground mining operations. This extends ACT's effective reach above ground, and eventually brings the 3D-P devices underground once MSHA certification is completed.

Currently, the estimated average revenue per ActiveMine deployment is approximately $400k. Management believes that 3D-P extensions could bring an additional 15% to the average total deployment value.

Strategically, the above ground distribution of 3D-P hardware becomes a lead sale to a more comprehensive mesh data network deployment for ACT.

There are likely to be no specific deals pending that are dependent on this relationship. More similar relationships should be announced over the coming months that are likely to help entrench ACT as a near defacto standard data network for mine operators in the US.

Cyberplex Q1 Results: Maintains Remarkable Momentum

When a micro-cap company reports an anomalous blow-out quarter (like Cyberplex did for Q4 2008 results), investors often become nervous about successive quarterly results. Is the blow-out quarter evidence of a single lucky event, or is it a true sign of progress? Experienced investors have been burned in the past by false trends disguised as inflection points, so Q1 performance was an important gauge of true progress.

Based on the Q1 results reported by Cyberplex (CX-TSX) last night, investors should be heartened that the company has hit a significant inflection points and has progressed from a story with future potential, to one measured by earnings performance for investors. Sales for the quarter increased to $32.1 million, up 307% from sales reported for Q1, 2008. EBITDA was reported at $4.3 million, and net income came in at $4.1 million or $0.07 EPS for the quarter. By comparison, the company reported EPS of $0.00 for Q1, 2008, and $0.11 for Q4, 2009. As a reminder, typically, one-third of sales and earnings occur during the Q4 reporting period. Earnings margins, excluding foreign exchange fluctuations were reported at 12% versus 13% for Q4, 2008, while gross margins came in at 31%, down 1% from Q4, 2008. The margin fluctuation should be considered in-line with analysts expectations.

During the conference call, Management continued to stress that performance-based advertising is relatively new to the market and is at the early stages of adoption by marketers and advertising agencies. Campaign concentration has decreased for Q1, with the top ten campaigns representing 55% of revenues versus 67% during Q4, 2008. As more campaigns are adopted by more advertisers, investors should continue to see less campaign concentration over the coming quarters, which should strengthen the quality of revenue streams as they grow. Management reported that approximately 70% of Q1 campaigns were repeated from the previous quarter, which infers that clients are maintaining investments in CPA-based online marketing.

Net income for Q2 onward should be impacted by taxes, measured at approximately 30%. As well, seasonality should impact performance for both Q2 and Q3, where traditional dips in online activity occur, with Q4 generating 30% of sales and earnings for the year.

Based on the earnings preview from earlier this week, the Company exceeded expectations for this quarter in both sales and earnings. Clearly, the market has been anticipating a solid quarter, although performance may still have exceeded elevated expectations. Currently, the shareprice is trading at approximately 5.7x run-rate EBITDA and 7.5x fully taxed run-rate EPS for FY 2009. The P/E ratio ratio for the TSX Equity index is currently 15.6 with many issuers reporting earnings declines for Q1, 2009. With its impressive earnings growth, and apparently robust outlook, the stock appears to continue to be undervalued relative to the TSX based on a P/E comparison, despite its recent share price run. Adding to this, high growth earnings stocks typical trade higher than the index mean.

Investors may still be concerned about fragile revenue streams due to campaign and product category concentration. However, with new publishers, affiliates, and advertisers coming on, and a 21% sequential decline in reported concentration, this risk appears to be diminishing.

Finally, the Company has $4.7 million in cash and generated approximately $0.05 per fully diluted share of free cashflow for the quarter.

Investors should anticipate that performance exceeded most analysts elevated expectations for Q1 results.

Disclosure: I own shares of CX.

Points International (PTS.TO) Q1 Results: Concedes More Margin; Bullish Outlook

Revenue for Q1 2009 was reported at $21.1 million, a 30% increase over previous year Q1. Principle revenue represented $19.8 million or 94% of total revenues. The company reported a 48% increase for this revenue stream over previous year Q1.

Sequentially from Q4, revenues were down approximately 3% from Q4, 2008. There is typically some seasonality in revenues, so the sequential decline is not unexpected.

The Company lost $1.1 million or $0.01 loss per share for Q1 2009 versus $0.9 net income, or $0.01 EPS during Q1, 2009.

Management still maintains revenue guidance of between $85 million and $95 million for FY 2009 with positive annual EBITDA. Guidance would suggest that management is anticipating significantly better quarterly performance for the remainder of 2009. Since revenue is over 90% recurring, the company has historically had pretty good visibility on future performance.

The company continues to provide margin concessions to its biggest clients (in particular Delta Airlines (DAL.NYSE)) in order to drive more transactions, and more revenue. As its clients continue to grind Points International on margins, investors should begin to wonder if the shift to the principal model has delivered the margin leverage that was originally expected.

The company has finally signed Continental Airlines as a client (Global Points Exchange). This is good news, although the potential for GPX continues to be speculative. Today the service is still in beta and there are 134 trades posted on the website, up by a dozen or so from earlier this year. The company does not publish results for this program, so the daily volume of trades is not known. Also, Management signalled that it was about to ramp investment into the points.com consumer portal. Transactions on the consumer site represent 11% of the total volume of reported total transactions for the quarter. There are approximately 2.1 million registered users, up 15% from Q1 2008. However, the website is not perceived by consumers to be a destination, and traffic levels have averaged in the 100k - 200k range per month for some time.

Investors may like the bullish outlook for the remainder of 2009, however there should continue to be some concerns regarding the 3 quarters of reported declining margins on the principal revenue. The aggressive investment focus on the consumer portal may concern some investors since that line of business has remained (over many quarters) a small contributor to total sales and profits.

What will the analysts think? Expectations for this company have declined significantly since the beginning of 2008. The margin performance should continue to be a concern to some, and the GPX story may begin to lose its lustre. As a result, today investors should expect mixed opinions from analysts that cover the story and it is unlikely that there would be upward adjustment to forecasts and targets.

Disclosure: I do not own shares of PTS or DAL.

Cyberplex (CX.TO) to Report May 7th After Market.

Preview

• Sales and earnings should show significant growth over Q1 2008
• Sequentially, sales and earnings should be lower than the Q4 blowout quarter due to seasonality.
• Recent increases in share price may indicate that the market anticipates a solid quarter.

Q1 performance should reinforce for investors that, although Q4 may have been a blow-out, the overall trend in business performance still shows sustained and substantial progress in both sales growth and earnings on an annualized basis. There is also a possibility that Q1 may catch some residual Q4 momentum . The question for investors may be whether Q1 results could support a further run-up in the share price, or if the stock price bases at current levels. Since it reported Q4 results on March 19th, the stock has shot up by 244% to yesterday's close of $1.72. Although there appears to be little chance that CX could report disappointing results for the quarter, analyst expectations have probably also increased significantly after its remarkable Q4 performance. The reaction to Thursday's results should be interesting, and trading volume could be high on Friday.

From a fundamental (long) perspective, CX offers some of the most measureable online advertising programs in the market ,which tends to shorten the discover-decide-buy process for consumers. Shortened sales cycles and pay-for-performance pricing is novel for marketers, and also tends to make them very happy repeat customers. Only recently has the Company began to attract some A-list marketers with relatively large budgets, so there is potentially significant scaling potential. Additionally, the Company is gathering, analysing, and leveraging some pretty unique buying data that could enhance future performance. Essentially, the long-term potential appears to be solid.

Dial 888-892-3255 for the conference call at 4:30 on May 7th.

Disclosure: I own shares of CX.

Bridgewater Systems' (BWC-TSX) Most Excellent Quarter

Today, BWC reported Q1 2009 earnings of $2.9 million or $0.12 EPS. Earnings reported for Q1 were nearly 5% higher than full-year 2008. Sales for Q1 2009 were reported at 14.0 million, a 64% increase over Q1 2008. Earnings appear to have soundly beat analyst expectations, and investors should be pleased.

In its outlook, the Company provided forward guidance for sales of between $54.0 million and $58.0 million with earnings of between $7.0 million and $9.0 million, or $0.29 EPS and $0.36 EPS respectively. Guidance implies earnings growth of between 159% and 233% from FY2008 earnings of $2.8 million.

If quarterly patterns for the previous two years hold out for FY2009, then Company guidance with respect to earnings may be conservative. The implied run-rate on earnings for FY2009 is $11.6 million, or $0.48 EPS, based on Q1 results. For the past two years, Q1 earnings were the weakest and Q4 earnings were the strongest, representing approximately 30% of total reported annual earnings. Even with seasonal dips in sales that may occur in Q3, trends may suggest that there is a strong possibility that earnings would come in at the high end of guidance, or possibly exceed guidance.

With current market trends related to mobile data usage and the resulting associated complexities, the Company should see continued robust demand for its solutions from carriers worldwide. The Company may also benefit from improved market conditions during Q4, traditionally its strongest quarter, as the world economy begins to recover.

With $53.9 million of cash on its balance sheet, and free cash flow possibly in excess of $10 million, the Company could end the year with approximately $2.60 cash per share on its balance sheet if it does no acquisitions.

At the end of day yesterday, shares were trading at 13.75x the most conservative earnings guidance, and 10.7x the most aggressive guided earnings growth. Historically, similar earnings growth would result in multiples that could range between 20x and 30x, depending on earnings margins. Basically, there is a lot of room for the share price to increase.

With such a strong Q1 beat on estimates, and a typical seasonal performance weighting towards Q4, investors may see analysts adjust their forecasts upward for BWC and the stock price should continue on its upward trend.

Disclosure: I own shares of BWC.