July 2004

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 88 -- July 5, 2004
In this digest:

1. RIM reports another record quarter for BlackBerry
   
2. Handshake attracts $3M in venture capital
   
3. Virtek sales fall below expectations

4. Navtech quarterly sales hit US$2M
   
5. CME Telemetrix leaves town, plans name change
   
6. STOCK REPORT: RIM market capitalization hits $17.5 billion

7. Miscellaneous tidbits from CheckFree, ATS, Descartes, Reqwireless, FibreTech, Sandvine, PrinterOn, Kaparel

RIM reports another record quarter for BlackBerry
June 29, 2004

RIM surpassed its own forecasts with another quarter of record sales in the period ended May 29 (Q1 05). The company reported net income of US$55.0 million (US$0.28/share) on revenue of US$269.6 million. Revenue was up 28% from the previous quarter and 158% from last year. RIM had forecast sales of US$250-265 million with profits in the US$0.21-0.26/share range.

There were about 270,000 new BlackBerry subscribers in the quarter -- up from 204,000 in Q4 -- boosting the total to 1.34 million. About one-third of all BlackBerry subscribers have signed up in the last six months. RIM shipped 478,000 devices in the quarter, up from 380,000 in Q4.

RIM put aside another US$15 million to cover the royalty payment that would be owed to NTP if the court finding of patent infringement against RIM is upheld (see November 2002 digest). Without that provision, RIM's net income would have been US$70.6 million.

At quarter-end, RIM had US$1.55 billion in cash and investments, up US$54.9 million from the end of Q4. Operations generated US$62.4 million in cash and another USUS$19.6 million was raised in the quarter through the sale of shares. RIM spent US$17.2 million on capital assets.

RIM added US$20 million to its forecast for the current quarter (Q2), bringing it to US$290-310 million. Net income is expected to be in the US$0.32-0.37/share range, which would be around the CDN$100 million level at the upper end -- and that's after the NTP provision. Revenue forecast for Q3 is US$340-360 million. By the end of that quarter, RIM should hit 2 million BlackBerry subscribers.

There were a couple of twists in the NTP dispute during the month. First, Nokia, which is launching BlackBerry-enabled devices, decided to play it safe and agreed to pay NTP an undisclosed licensing fee, removing any potential claims against Nokia by NTP. And then Thomas Campana, the inventor of the patents on which RIM was found to infringe, died at age 57 after a lengthy illness. He was one of NTP's three principal shareholders, but his death shouldn't have any significant impact on the dispute with RIM.

This was also the month when the U.S. Court of Appeals for the Federal Circuit in Washington, DC heard arguments from RIM and NTP on RIM's appeal of the 2002 finding that BlackBerry infringes on NTP patents. Theoretically, a decision could come down any time, but it will likely be at least a couple of months.

There's nothing particularly noteworthy in RIM's management circular for the AGM on July 12, except that Vancouver's Real Assets Investment Management Inc. (realassets.ca), which calls itself "the first investment manager in Canada to focus entirely on social investing," is proposing to shareholders that RIM make a greater effort to recruit women directors and executive officers, and wants the company to prepare a report outlining the efforts it is making to encourage gender diversity. RIM's board is recommending that shareholders vote against the proposal, which no doubt will be handily defeated.

Handshake attracts $3M in venture capital
June 17, 2004

Handshake VR -- the former Handshake Interactive -- has closed a $3 million round of funding. Tech Capital Partners, BDC Venture Capital and Trellis Capital all put money into the new VR. Handshake's technology enables the use of touch over a network without any perception of a time delay caused by network latency.

Handshake was founded three and a half years ago and for most of its history it was in danger of becoming the poster boy for companies with interesting technology that couldn't come up with a real product for an existing market. But a lot of progress has been made over the last year as the haptic VR space has matured into a real market with Handshake emerging as technology leader. Now the company is focused on getting its technology into other people's products with its TiDeC (time delay compensation) Teleoperation Toolbox, launched a couple of months ago. So far, Handshake has not announced any customers but it's unlikely that VCs would put money into the company if there weren't serious near-term prospects.

San Jose-based Immersion, one of the more established companies working in virtual touch, went public in the tech boom of 1999 and now trades on Nasdaq with a market value around US$140 million (it had a considerably higher value in the past).

Earlier this year, CITO invested $150,000 in Handshake through its accelerator investment program.

Virtek sales fall below expectations
June 14, 2004

Virtek's 2005 fiscal year got off to a poor start. In the period ended April 30 (Q1 05), the company lost $379,000 ($0.01/share) on sales of $11.4 million, down 22% from the previous quarter. Sales were flat year-over-year, but that's misleading, as the period last year included only about one month's worth of results from FOBA, which Virtek acquired in late March 2003.

Sales from Virtek's traditional imaging and templating business were down 25% from a year ago and 28% from the previous quarter. Gross margin for the segment fell sharply, leaving a 42% sequential decline in gross profits. The segment reported a profit of $171,000 -- all attributed to a foreign exchange gain -- on sales of $6.0 million. Sales a year ago were $8.0 million.

Sales from Virtek's marking and engraving business -- mostly what it acquired in FOBA -- were down 14% from Q4. The segment reported a net loss of $538,000 on sales of $5.5 million.

The notes to Virtek's financial statements mention a $283,000 reversal in the quarter of costs related to the FOBA acquisition that it had previously recognized.

The company is sticking with its April forecast of $56 million in revenue for the year, although it expects sales will remain soft in the current quarter. It expects revenue to pick up in the second half of the year. Virtek will have to average 14% sequential increase in revenue over the next three quarters to hit its target.

Virtek ended the quarter with $4.9 million in cash and investments, down $850,000 from the end of Q4. Operating activities used $168,000 in cash and an additional $372,000 was spent on capital assets. It also increased its bank indebtedness by $1.2 million, leaving net cash of $3.7 million. During the quarter, Virtek made a $1.3 million payment related to last year's FOBA acquisition.

The Record reported that Virtek chopped 10 jobs in June, including five in Waterloo.

Virtek also announced the first sale to China of its TrussLine laser projection system. It says that wood frame homes are expected to be a growing market in China.

Navtech quarterly sales hit US$2M
June 14, 2004

For the quarter ended April 30 (Q2 04), Navtech reported net income of US$48,000 (US$0.01/share) on revenue of US$2.0 million. Sales were up 9% from the previous quarter and 22% from last year.

The company had just US$75,000 in cash at the end of the quarter. Operations consumed US$51,000 in cash and an additional US$25,000 was spent on capital assets. Navtech has a US$500,000 operating line of credit with the Royal Bank which it had not drawn on at the end of Q2.

On paper, Navtech still has a US$19,000 working capital deficiency, but since US$411,000 of its current liabilities is deferred revenue, it has essentially erased its long-standing working capital shortfall, which was up to US$900,000 two-and-a-half years ago.

Summarizing its achievements in the quarter, Navtech pointed to sales of its dispatch software to airlines in Portugal, Iceland, Belgium, and Singapore, as well as the launch of a new crew management system, installed at an unidentified North American "low cost carrier."

CME Telemetrix leaves town, plans name change
June 17, 2004

This should be the final report on CME Telemetrix, as the company -- or what remains of it, anyway -- has relocated to Campbellville, Ontario and is planning to change its name to NIR Diagnostics.

CME has delivered disappointing results under well-compensated CEO Duncan MacIntyre. Its shares have lost 94% of their value over the last three years (edged out by Descartes' 95% decline for the worst performance among all stocks tracked here) and the company has fallen years behind plan for the development and commercialization of its technology.

Instead of replacing the CEO, the company is rewarding him by moving its operations to MacIntyre's home town and eliminating his commute to Waterloo. CME also got around to disclosing in June that its chief scientific officer left the company four months earlier. CME is down to just eight employees. At its peak in 1996-97, it had 60 employees in two divisions in Waterloo and London.

STOCK REPORT: RIM market capitalization hits $17.5 billion
June 2004

Less than a year ago, people could look back in amazement at the tech boom of February 2000 when RIM's market capitalization made it one of the most valuable companies in Canada. After the bubble burst, it wasn't something many people were expecting to see happen again. But it has. RIM closed Friday with a market value of $17.5 billion -- higher than it had at the close of trading on any day back in the boom.

RIM isn't quite up in big-5 bank territory yet (or Nortel turf, for that matter), but according to the numbers on globeandmail.com, its market value has surpassed those of Loblaw, CN, and Petro-Canada, and it's knocking on the door of Shell Canada. According to the Globe site, RIM ranks as the 18th most valuable company trading on the Toronto Stock Exchange.

RIM's highest end-of-day value in 2000 was about $16.1 billion on March 2. It's now within $1 billion of matching its all-time, momentary, intra-day trading, market capitalization peak of $18.5 billion, which it hit for maybe a minute on February 28, 2000. RIM is now trading about $2 billion above its closing valuation on that day.

RIM isn't the only big-cap company in the area reaching new highs. In June, Open Text shares set a new record for a monthly closing price, finishing the month at $42.70. That breaks the record set in February, which had beaten the previous mark set in February 2000.

For the month of June:

Com Dev [TSX: CDV] +21%
Turbosonic [OTCBB: TSTA] +19%
Open Text [TSX: OTC] +11%
ARISE [TSXV: APV] +10%
RIM [TSX: RIM] +9%
Navtech [OTCBB: NAVH] +3%
--S&P TSX COMPOSITE INDEX +2%
===============================
--S&P TSX VENTURE INDEX -2%
MKS [TSX: MKX] -3%
Descartes [TSX: DSG] -6%
Dalsa [TSX: DSA] -7%
RDM [TSX: RC] -8%
Virtek [TSX: VRK] -9%
Newlook Industries [TSXV: NLI] -28%
ClearFrame [TSXV: CLF] -33%

Dalsa shares were down for the month, but did match their all-time high in intra-month trading and were above $22 for the entire month -- the first time that's ever happened.

I've removed CME Telemetrix from the list as it no longer based in this area. Descartes shares fell to an all-time low during the month and ended June at $1.45, their lowest monthly close ever. MKS shares spent the entire month below $1.40 for the first time in nearly a year-and-a-half. ClearFrame stock gave back the two cents it gained in May.

Companies with core operations outside the area:

Blue Coat [Nasdaq: BCSI] +20%
CVF Technologies [Amex: CNV] +18%
McAfee [NYSE: MFE] +9%
Ansys [Nasdaq: ANSS] +9%
Senesco [Amex: SNT] +5%
Adobe [Nasdaq: ADBE] +4%
Sybase [NYSE: SY] +3%
==================================
Agfa-Gevaert [Brussels: AGFA] -0%
Siebel [Nasdaq: SEBL] -1%
CheckFree [Nasdaq: CKFR] -2%
LSI Logic [NYSE: LSI] -7%
SBS Technologies [Nasdaq: SBSE] -13%

We're now halfway through 2004, and there have been some impressive gains generated so far this year. Two companies (Navtech, RIM) have seen the value of their shares double, and four others have made significant jumps:

Navtech [OTCBB: NAVH] +146%
RIM [TSX: RIM] +111%
Open Text [TSX: OTC] +73%
Dalsa [TSX: DSA] +54%
Virtek [TSX: VRK] +29%
Com Dev [TSX: CDV] +26%
RDM [TSX: RC] +7%
--S&P TSX COMPOSITE INDEX +4%
ARISE [TSXV: APV] 0%
===============================
--S&P TSX VENTURE INDEX -10%
Turbosonic [OTCBB: TSTA] -17%
ClearFrame [TSXV: CLF] -20%
MKS [TSX: MKX] -21%
Descartes [TSX: DSG] -60%

Virtek got the year off to a great start, but has tailed off since April. Descartes, of course, has been the biggest decliner in 2004, and MKS is the only other non-microcap whose shares show a loss in value so far this year.

Market value as of Friday's close, in millions (change over the first six months of 2004 in brackets):

1. RIM -- $17,520 [+$10,650]
2. Open Text -- 2,180 [+1,190]
3. ATS -- 733 [-40]
4. Dalsa -- 370 [+130]
5. Com Dev -- 207 [+36]
6. Descartes -- 57 [-91]
7. EMJ -- 49 [-2]
8. MKS -- 47 [-17]
9. Newlook -- 38 [N/A]
10. Virtek -- 30 [+6]
11. RDM -- 22 [+2]
12. Navtech -- 5.9 [+3.3]
13. ARISE -- 5.4 [+0.2]
14. Turbosonic -- 3.5 [-1.3]
15. ClearFrame -- 1.4 [N/A]

Over the last six months, RIM has grown in value by an amount ($10.65 billion) that is almost three times the total market value of the other 14 companies on this list combined ($3.76 billion).

Even though Newlook/Onlinetel shares are down 54% over the last three months, they remain the area's most ridiculously overvalued stock. When you look at market value as a multiple of run-rate gross profits (below), you can see that Newlook shares could lose 90% of their value and still make the top half of this list:

Newlook -- 43 (market cap is 43x run-rate gross profits)
RIM -- 24
ARISE -- 11
Open Text -- 7
ClearFrame -- 6
ATS -- 5
Dalsa -- 5
Com Dev -- 4
EMJ -- 3
RDM -- 3
TurboSonic -- 2
Descartes -- 1.4
Virtek -- 1.3
Navtech -- 1.2
MKS -- 1.1

Miscellaneous Tidbits

• Ray Simonson has parted ways with CheckFree i-Solutions. In 1996, he co-founded BlueGill Technologies, which was acquired by CheckFree in 2000 in an all-stock deal valued at the time at US$250 million. Simonson had been SVP of North American operations with i-Solutions. He is now executive-in-residence with Tech Capital Partners in Waterloo.

• ATS formally opened a new 193,000 square-foot solar cell manufacturing plant in Cambridge for its Spheral Solar Power technology. Spheral Solar president Milfred Hammerbacher says the ATS subsidiary has recruited 115 people and has developed a marketing strategy. It says it expects to begin shipping product this summer. The news release emphasized that ATS sees this as a long-term project and isn't expecting breakthrough results coming out of the gate.

• No real update on the Descartes situation (see last digest). Another class action lawsuit has been filed against the company in the U.S. It makes essentially the same claims as the suit mentioned here last month. Descartes' AGM was a quiet affair hosted by Toronto law firm Blake Cassels & Graydon. Nothing of substance was said at the meeting.

• Reqwireless again took home the award for top Java productivity application at this year's Handango Champion Awards in San Diego. It won for its "value bundle" that combines the Reqwireless EmailViewer and its WebViewer browser. WebViewer on its own won the same award last year. Reqwireless also announced that a new mobile Web service in Thailand is based on the ReqwirelessWeb toolkit.

• FibreTech and Dallas' BelAir Networks have created a Wi-Fi network throughout the Waterloo Inn that they say will connect to the Internet anywhere in the hotel as well as on the grounds outside.

• Sandvine announced the launch of its "worm and denial-of-service traffic mitigation" product.

• PrinterOn says that the number of users of its in-room Web-based printing service for hotels has doubled since the beginning of the year. "If all of the pages printed by guests using the PrinterOn service in the past six months were stacked together, the number of pages printed would equal the height of a 10-story hotel," says the release. Well, at 4" for 1,000 sheets of paper, and assuming 10 feet per storey, that would be about 300,000 printed pages in six months. Of course, they could be talking about some cheap hotel with low ceilings.

• Kaparel was part of a tradeshow demonstration by San Jose's Xilinx which it said "shatters [the] 2.4 terabit PICMG 3.0 bandwidth barrier by demonstrating 10Gbps serial signaling over ATCA backplane." I take it that's notably fast. The system used Kaparel's ATCA backplane.

• SlipStream's Web accelerator is now available to Telus customers in Quebec. The service was launched in B.C. and Alberta in April.