September 2004

Compiled and written by
Gary Will
E-mail:
gary@garywill.com

Issue 91 -- October 4, 2004
In this digest:

1. Dspfactory to be acquired for $55M
2. RIM's quarterly profits top US$70M
3. Open Text becomes tenant #2 at UW park

4. Nuvation opens Waterloo design centre
5. MKS starts the year with record revenue, tepid profits
6. Virtek "embarrassed" by another weak quarter

7. STOCK REPORT: RIM's market value reaches $18 billion
8. Miscellaneous tidbits from Reqwireless, SlipStream, Navtech, Turbosonic, UW, Sirific, RSS, Jaywil

As part of Entrepreneur Week, the free "Chapter 2" event for early-stage and aspiring entrepreneurs will take place tomorrow afternoon at Fed Hall on the UW campus (see the ad between the first and second stories for details). I'll be there for a two-minute re-unveiling of WatStart, and as if that isn't enough right there, there will also be three keynote speakers and a giveaway of a trip to Boston where you will get to tour MIT and meet VCs and other entrepreneurs.

If you're thinking about starting a tech company or already have one in a very-early stage, along with attending Chapter 2, you should go to the WatStart site and register. After Entrepreneur Week, we'll be organizing our first informal get-togethers, and you can't get invited unless you've registered on WatStart so I can know you're interested. Just go to the site and click on "Register."

The seventh annual Record Technology Spotlight is coming out on October 21. I didn't hear if it's being distributed with all papers or just to subscribers again this year.

--Gary Will

Dspfactory to be acquired for $55M
September 9, 2004

About a third of Dspfactory's employees will lose their jobs after the company's investors accepted a bid from Idaho's AMI Semiconductor. AMI will pay US$25.9 million in cash and US$16.4 million in stock -- about CDN$55 million in total -- to acquire most of Dspfactory's assets, with an additional payment of up to US$8.5 million in stock contingent on achieving certain milestones by the end of 2006.

The announcement came almost a year to the day after Dspfactory told employees that the company was about to go public -- a plan that was abandoned within a few weeks.

AMI is the operational component of AMIS Holdings, a Nasdaq-listed company with a market value of US$1.2 billion. In the quarter ended June 26, AMIS reported net income of US$15.4 million on sales of US$134.5 million.

With the acquisition, 27 positions at Dspfactory in Waterloo and Switzerland have been axed. Most of the employees offered jobs with AMI are in R&D and sales and support. CEO Robert Tong will also join AMI.

Details of the offer haven't yet been disclosed -- a formal shareholders' meeting is scheduled for later this month -- but it doesn't look like there will be a financial payoff for the overwhelming majority of Dspfactory employees. AMI's offer is below the level where Dspfactory had been pricing its options since 2000 and is less than what the company thought would be a reasonable valuation when it was preparing to go public.

Seed investors and founders should do okay, even if they won't be receiving the return they were hoping for over the last couple of years. Dspfactory's largest shareholder is the Stork family -- former owners of Unitron, which spun out Dspfactory in 1998. Other seed investors were Val O'Donovan, chairman of Com Dev, Reg Petersen, former owner of the Versa-Care nursing home chain who now heads Southbridge Capital, and Bob McRae, who recently passed away. The Dspfactory release quoted chairman Mike Stork as saying that "investments made in companies such as Dspfactory will help fuel the next generation of local startups," and that would be a positive outcome from the deal.

After launching its first product in 2001, Dspfactory quickly blasted out of the gate and was repeatedly recognized for rapid revenue growth over the next two years. That included being listed by Profit magazine as the number-2 "hottest startup" in Canada in 2002. In 2002 and 2003, the company issued news releases celebrating its financial achievements, including 40% revenue growth in fiscal 2003.

But there was no similar release this year, and AMI said it expects the company will have revenue in fiscal 2005 of CDN$23 million, which is exactly where it was two years earlier. Unit sales are said to be up significantly, but the company has never commented on that publicly.

Although it launched just six years ago, Dspfactory traces its history back to the late 1980s when its founding president, Dan Murray -- then an R&D manager at Unitron -- began graduate studies at UW into the application of DSP technology in hearing aids. While at UW, he met Rob Brennan and Todd Schneider, who would become Dspfactory's co-founders and VPs of research and technology, respectively. Unitron provided funding for Brennan's post-doctoral fellowship in 1991 and hired him a year later. Schneider joined Unitron in 1996, and Murray, who had left the company and taken a Canadian government job in Korea, joined Brennan and Schneider at Unitron in 1997. Tong was brought in as Dspfactory CEO at the beginning of 2000.

It takes deep pockets to develop leading-edge semiconductors. Dalsa has managed to remain independent and profitable through the years, but Dspfactory, like VideoLocus before it, chose to become part of a billion-dollar semiconductor company when faced with the prospect of needing tens of millions of dollars for next-generation product development.

As a personal note and a matter of disclosure, I've done a lot of work with Dspfactory over the last three years, sometimes with the CEO but mostly with the marketing group that will cease to exist with this deal. The company's internal marcom capabilities were as good as any and better than most in town -- you can compare its website with that of AMI and not know which is the billion-dollar company. They may have all made other arrangements by now, but any company looking to strengthen their marketing communications resources would do well to bring some of the Dspfactory team on board.

RIM's quarterly profits top US$70M
September 30, 2004

Another strong quarter for RIM, with results at the high end of the company's revenue and profit guidance. In the period ended August 28 (Q2 05), RIM reported net income of US$70.6 million (US$0.36/share) on sales of US$310.2 million.

Sales were up 15% from the pervious quarter and 147% from last year. Sales of handheld devices again led the way in both dollar figures and growth rate, accounting for 71% of all revenue or about US$220 million. That's up approximately 20% from the previous quarter.

The number of BlackBerry subscribers grew to 1.7 million, up 317,000 in the quarter. That beats the record set in the previous quarter of 270,000 new subscribers.

RIM's guidance for sales in the current quarter remains unchanged at US$340-360 million, but it has increased its profit estimate from US$0.35-0.40/share to US$0.40-0.44/share, or about US$8 million more than previous guidance.

The US$70.6 million in profits was after a provision of US$18.3 million to cover the money RIM has to put aside as it appeals NTP's initial victory in their patent infringement dispute.

The company ended the quarter with US$1.6 billion in cash, up US$46 million from the end of Q1. Operations provided US$54.8 million in cash and an additional US$12.1 million was raised through the sale of shares.

After the end of the quarter, RIM announced that it had signed a letter of agreement with China Mobile -- the largest wireless carrier in China -- to bring BlackBerry to that country. China is the world's largest wireless market with over a quarter-billion mobile subscribers.

The new BlackBerry device I mentioned in the last digest was launched in September under the less charming name of BlackBerry 7100. This is a thinner device that combines a QWERTY keyboard with a telephone keypad by having two letters share a key. Software is used to guess which letter the user wants. RIM calls it the SureType keyboard. There are actually two very different looking devices: one for Europe and Asia-Pacific from Vodaphone and one for the U.S. from T-Mobile.

Open Text becomes tenant #2 at UW park
September 21, 2004

Open Text had a ceremonial ground breaking ceremony in September for its new 84,000 square foot headquarters that will be built at the UW Research and Technology Park. It expects to move into the building by the end of next summer, bringing together employees it now has at two sites in Waterloo. Open Text has about 300 employees in Waterloo.

The company evolved out of research undertaken at UW in the 1980s to develop software to index and search the New Oxford English Dictionary.

Sybase signed on as the park's first tenant in 2002 and started moving into its new building in September. Construction of an accelerator centre is scheduled to begin in the next couple of months.

Nuvation opens Waterloo design centre
September 27, 2004

San Jose's Nuvation has opened an engineering office in Waterloo. The co-founder and CEO of Nuvation is UW grad Mike Worry and there have been other UW graduates in executive positions with the company over the years.

Nuvation was formed in 1997 and provides FPGA and ASIC design, PCB development, and embedded software design services. At the beginning of 2001, it was acquired by Sweden's IAR Systems, but the marriage didn't work and the two companies split up two years later. Nuvation opened a Canadian office in the Toronto area in 2000, but that only lasted for about nine months before the tech bust caught up with the company.

The Waterloo office, in the Sirific building at 460 Phillip, is headed by Alex Leyn, formerly of VideoLocus/LSI Logic and PixStream. He is part of a four-person team in the office, and Nuvation says that number could double over the next couple of months and grow to 20-30 over time.

MKS starts the year with record revenue, tepid profits
September 9, 2004

MKS set a new record for Q1 sales in the quarter ended July 31 (Q1 05). Revenue of US$8.8 million surpassed the previous record of US$8.2 million recorded five years ago, in what is still MKS' best year for revenue. Sales were up 10% from a year ago and down 4% from Q4, which is traditionally its strongest quarter each year.

But even with record revenue and the absence of any extraordinary expenses, the bottom line was still lacklustre with a US GAAP net income of US$180,000 ($0.00/share). Under Canadian GAAP, the company reported its fifth consecutive money-losing quarter, with a net loss of US$221,000. SG&A expenses in the quarter were about 60% of revenue, while R&D expenses were 23% -- both within the company's recent ranges.

The core SCM business accounted for 76% of revenue, with sales of US$6.7 million -- up 17% from a year ago and down only slightly from the previous quarter. Net loss for the segment was US$202,000.

Operations consumed US$1.3 million in cash, which is well above usual levels. Of that, a pre-payment of royalties to a supplier used US$0.5 million and extended payment terms offered to customers also increased cash burn in the quarter. An additional US$0.3 million was used to purchase capital assets. MKS ended the quarter with US$4.5 million in cash, down US$1.9 million from the end of Q4.

The company has replaced the logo it's had through its entire history as a public company. The old one, with the Internet "at sign" stylized S, had been used since 1996 -- before that style became first a cliche and then an artifact of a long-passed era. (The logo anticipated the era; Vertical Sky trailed it.) The logo outlasted all but one of MKS' 8-person executive team from 1996.

Management consultant Howard Gwin has joined MKS' board of directors, replacing Robert Douglas. Gwin spent over five years at PeopleSoft, finishing as EVP of worldwide operations in January 2000.

MKS held its AGM last week. The new annual report contrasts the "uneven" results of fiscal 2004 with the "spectacular" results of fiscal 2003. Fiscal 2003 ended up being an okay year for MKS, but sales fell below the company's targets, it lost US$1.2 million, and its stock finished 5 of the 12 months under a dollar and in four of those months it traded at 70 cents or less. MKS did post a strong final quarter to save the year, but calling fiscal 2003 "spectacular" is a stretch. If it keeps its sales numbers up and becomes profitable this year, what will that be? Very very spectacular?

The report says MKS spent the year building relationships with large customers that "will form the foundation" of future growth.

Virtek "embarrassed" by another weak quarter
September 14, 2004

Virtek CEO Bob Sandness admitted to being "somewhat embarrassed" by the company's results for the quarter ended July 31 (Q2 05). Virtek lost $2.2 million ($0.08/share) on sales of $10.3 million. Sales were down 10% from what was a weak previous quarter and down 5% from a year ago.

Excluding losses in previous years related to Virtek's ill-fated biotech products, I think that's the worst quarterly bottom line in company history. The expansion of the marking & engraving business into North America hasn't happened the way Virtek hoped when it acquired 75% of Germany's FOBA last year. And its traditional imaging & templating business has been struggling.

The loss included $0.5 million in severance costs after Virtek shut its Missouri-based FOBA office and cut some positions in Waterloo and Germany (see previous digest).

About the only good news was that the company accelerated its collections, slashing 17 days off its DSO at the end of Q1 while also adding a net $1.3 million in deferred revenue. As a result, operations generated $1.8 million in cash in the quarter. Virtek spent $0.5 million on capital assets and paid off some bank debt, but still added $757,000 to its cash position over the quarter, ending Q2 with $5.7 million ($4.8 million net of bank debt).

It has abandoned its target of $56 million in sales for the year, and is now expecting the number to be about $50 million -- about the same as last year. Over the first half of the year, sales were $22.3 million, so Virtek will need about $13 million and $15 million in the next two quarters to hit its new target.

STOCK REPORT: RIM's market value reaches $18 billion
September 2004

RIM ended the month with a market value $18 billion and set new company records for highest day-end and month-end market value. The company's stock peaked at $98.50 in September and finished the month at $96.34. That's its second-highest month-end price ever, trailing only the split-adjusted $101 posted in February 2000. RIM shares are now up 833% since the end of 2002.

For the month of September:

Turbosonic [OTCBB: TSTA] +82%
RIM [TSX: RIM] +22%
Descartes [TSX: DSG] +7%
Dalsa [TSX: DSA] +7%
--S&P TSX VENTURE INDEX +7%
RDM [TSX: RC] +5%
--S&P TSX COMPOSITE INDEX +3%
===============================
Navtech [OTCBB: NAVH] -1%
MKS [TSX: MKX] -2%
ARISE [TSXV: APV] -3%
Com Dev [TSX: CDV] -7%
Virtek [TSX: VRK] -10%
ClearFrame [TSXV: CLF] -14%
Open Text [TSX: OTC] -23%

Dalsa stock had its first positive month since May. Open Text, on the other hand, continued its recent slide and has now seen its share price cut in half over the last three months. The company's stock did not trade above $25 for the entire month -- the first time that's happened in over a year.

Virtek shares are also struggling, falling to their lowest month-end price in a year and second-lowest ever. The shares have lost half their value over the last six months.

Companies with core operations outside the area:

SBS Technologies [Nasdaq: SBSE] +19%
Ansys [Nasdaq: ANSS] +10%
Senesco [Amex: SNT] +8%
Adobe [Nasdaq: ADBE] +8%
CVF [OTCBB: CNVT] +6%
Sybase [NYSE: SY] +3%
Agfa-Gevaert [Brussels: AGFA] +3%
McAfee [NYSE: MFE] +2%
CheckFree [Nasdaq: CKFR] +2%
Automated Benefits [TSXV: AUT] 0%
==================================
Siebel [Nasdaq: SEBL] -1%
Blue Coat [Nasdaq: BCSI] -1%
LSI Logic [NYSE: LSI] -11%

CVF -- shareholders in Biorem and SRE Controls -- has been relegated to the over-the-counter bulletin board after being delisted by Amex.

Miscellaneous Tidbits

• Reqwireless says that the new Chinese version of its WebViewer has become the top download of China Mobile subscribers. Reqwireless partnered with Enorbus, a Chinese distributor of wireless applications, to bring WebViewer to the Chinese market.

• SlipStream unveiled its "corporate solutions" product, SlipStream SE (Secure Enterprise). It promises to optimizes corporate network bandwidth and improve the performance of corporate Web-based applications by providing "the fastest secure access for remote and mobile users." SlipStream customer United Online is now selling its accelerated Internet service to broadband users, especially "lower-tier" DSL users.

• In August, Paul Eichinger, who had been the City of Waterloo's director of economic development for the last five years, left his job to join Coldwell Banker Peter Benninger Realty in Kitchener.

• Navtech reported net income of US$140,000 (US$0.03/share) on sales of US$2.0 million in the quarter ended July 31 (Q3 04). Sales were flat sequentially, but up 9% from a year ago.

• Turbosonic posted disappointing numbers for fiscal 2004, ended June 30, with a loss of US$781,607 on sales of US$4.7 million, but future prospects are looking up, as the company ended the year with an order backlog of US$5.3 million. Sales in 2004 were down 23% from the previous year.

• UW's Centre for Integrated Radio-Frequency Engineering (CIRFE) was launched last week. It evolved from NSERC/Com Dev Industrial Research Chair on RF Engineering. Com Dev is one of the financial backers of the new facility. Raafat Mansour is director of the centre. Also going through a transformation is the Agfa Research Chair in Health Informatics at UW, which is now the NSERC/Agfa Executive Industrial Research Chair in Health Informatics. NSERC and Agfa will each provide $500,000 in funding over the next five years. Dominic Covvey holds the new chair and was previously the holder of the Agfa chair, which was created in 2002.

• The Internet domain for the Waterloo Angel Group was allowed to expire in August and the site went dead last month. I was briefly involved with some of the very-early stage planning for the group --laying out the case for why it would be valuable to have a local angel group -- and it's disappointing that it never seemed to take hold. It's true that there aren't an abundance of great deals for angels but, run properly, an organized angel network would be an asset for the community. There seems to be a lot more interest today in nurturing and assisting startups than there has been in previous years, and an angel group could play an important role.

• Speaking of dead domains -- the plug was finally pulled on Finline's website in September. It hadn't been updated in years.

• Just noticed that Roy Gunter, who was very briefly the CEO of Sirific in 2001, is now the CEO of Qflicks, a UK-based DVD rental website. Very similar to Ottawa's Zip.ca, only a bit pricier. Sirific, meanwhile, has dropped Waterloo from the dateline of its news releases. Its last release was tagged "Santa Rosa, California." But it was referred to as a Waterloo company in the October issue of MIT's Technology Review. The magazine says Sirific hopes to have a mobile phone transceiver chip on the market by early 2006. Sirific announced the opening of a Texas R&D office in September.

• Also from the "where are they now" file: Colley Clarke, the former Descartes CFO who resigned in March, is now CFO of Mississauga's Redknee, a software company with UW grads as CEO and CIO.

• RSS Solutions' NaView planning and scheduling software is being used by Michigan-based manufacturer Trans-Matic.

• Guelph's Jaywil Software says its ResourceMate library automation software now has 3,000 registered users. Churches and schools account for 71% of users. Jaywil says the application had its best month ever for sales earlier this year.