October 2004

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

Issue 92 -- November 3, 2004
In this digest:

1. Open Text stumbles, misses on sales and profits
   
2. Dalsa revenue hits record levels
   
3. Dalsa to open digital cinema rental business in L.A. area
   
4. Meikle raises another $8M

5. Dspfactory shareholders approve AMI deal
   
6. RFTune to be acquired by Texas company
   
7. STOCK REPORT: Add another $2B to RIM's market value
   
8. Com Dev to take two charges totalling $5M

9. UW and Laurier create LaunchPad $50K competition
   
10. Miscellaneous tidbits from Kaleidescape, McAfee, Reqwireless, FibreTech, Symbility, IMS, Aruna, PrinterOn, Equitrac

Open Text stumbles, misses on sales and profits
October 28, 2004

Open Text got its fiscal 2005 year off to a poor start, reporting a net loss of US$986,000 (US$0.02/share) on sales of US$85.6 million for the quarter ended September 30 (Q1 05). The company had forecast sales of US$87-93 million. Sales were down 18% from the previous quarter. There is usually a significant drop-off in Open Text's revenue between Q4 and Q1, but this was a larger shortfall than had been anticipated.

To top off the bad performance, the Open Text then showed bafflingly poor judgment in announcing this as its "23rd consecutive profitable quarter." You see, it was profitable if you ignore a bunch of expenses, mostly relating to acquisitions. A needless credibility killer, and particularly ill-advised when your most vociferous critic is getting a lot of press accusing you of being less than forthright in your financial communications. In the conference call, CFO Alan Hoverd called it the "23rd consecutive quarter of positive operating cash flows" which is what should have been said all along.

Operations generated US$5.1 million in cash in the quarter and Open Text spent US$23.7 million to acquire Vista Plus and another US$5.1 million to acquire Artesia, with another US$2.7 million in cash spent on additional IXOS shares and US$3.8 million spent on acquisition costs. Open Text also used US$11.0 million in cash to repurchase shares in the quarter. It ended the quarter with US$111.5 million in cash, down US$45.5 million from the beginning of the quarter.

It is forecasting sales of US$100-106 million in Q2, which would be a sequential increase of 17-24%. It is sticking with its target of US$420-450 million in sales for the year, a number it first provided before making the Vista and Artesia acquisitions. Revenue from those acquisitions was said to be "immaterial" in Q1.

A lot of people in Open Text's sales and marketing group were let go -- possibly in the previous quarter. President John Shackleton blamed the poor quarterly numbers on execution (mentioning poor forecasting in particular) and said the company had taken moves to correct those issues, including shuffling the sales management team.

In June, Open Text quietly acquired Ottawa's BitFlash, which describes itself as a leading provider of mobile scalable vector graphics for wireless messaging. In October, BitFlash -- which is now a division of Open Text and not a separate corporation -- announced that its technology had been licensed by Qualcomm.

Dalsa revenue hits record levels
October 28, 2004

As the company forecast, Dalsa set a new revenue record in the quarter ended September 30 (Q3 04), with sales of $44.1 million. That was on the high end of its forecast of $42-44 million. It was the first time Dalsa's quarterly revenue was above $40 million and was an 11% improvement from the previous quarter, which had also been a record. Sales were up 34% from last year.

Both of Dalsa's business segments showed similar growth rates, both sequentially and year-over year. Digital imaging sales were up 11% from Q2 and 31% from 2003, while sales from the semiconductor business grew 10% from the previous quarter and 37% from last year.

Net income was $5.4 million ($0.32/share), up from $4.1 million and $3.9 million in the previous two quarters. Semiconductors provided 65% of the profits, with the balance coming from digital imaging.

New orders in the semiconductor business dropped off in the quarter, and Dalsa isn't expecting business in that segment to pick up over the next two quarters. It's forecasting a rebound in Q2 of 2005. By that time, the company should have completed a 12,000 square foot expansion of its wafer manufacturing facility in Quebec.

Operations provided $10.9 million in cash, with $5.1 million spent on capital assets. Dalsa ended the quarter with $14.0 million in cash, up $5.2 million from the beginning of the quarter.

Dalsa is looking to finish the year with revenue of $46-49 million in the current quarter, with a slight decrease in net income to the $4.3-5.3 million range.

For 2005, the company is expecting revenue growth in the 20-30% range, with digital imaging growing at a faster pace than semiconductors. About a third of the overall revenue growth will be provided by Dalsa's new digital cinema business (see below).

Dalsa to open digital cinema rental business in L.A. area
October 28, 2004

After looking for appropriate partners to rent its digital cinema camera to filmmakers, Dalsa has decided instead to open its own facility in January. It has acquired the assets of Broadcast Plus, a rental business in Woodland Hills, Calif. near Los Angeles that until now has specialized in providing video equipment for TV productions. Dalsa will convert Broadcast Plus into the Dalsa Digital Cinema Center, which will be part of its new subsidiary company, Dalsa Digital Cinema Inc.

Dalsa is expecting to invest US$20 million in the business between now and the end of 2006. A lot of that money will go toward inventory related to digital cinematography, including Dalsa's Origin camera. It expects DDC will generate $12 million in revenue in 2005 and $30-40 million in 2006. Operations are forecast to be break-even in 2005 and become cash flow positive in the second half of 2006.

Dalsa acquired Broadcast Plus for US$250,000 in cash plus up to 7.5% of the voting shares of DDC. It was a small business with revenue said to be running at about US$1.2 million a year. The founder of Broadcast Plus, Bob DaSilva, becomes the GM of the Digital Cinema Center. I believe DaSilva used to work on the Roseanne TV series. The Dalsa news release referred to him as an Emmy winner. He's an interesting choice to head a business targetted at the film industry, but Dalsa has been working with DaSilva for a few months and is obviously pleased by what it's seen.

DDC will hold the exclusive North American distribution rights for the Origin camera.

Meikle raises another $8M
October 5, 2004

Meikle Automation has closed an $8 million round of funding, led by Wellington Financial LP. Wellington is led by Mark McQueen of Orion Securities, who has been active in the Waterloo area for several years.

Dutch Canadian Investment S.A. also made a follow-on investment as part of this round. Two years ago, Meikle raised $10 million. Orion/Yorkton has been Meikle's financial advisor for both rounds.

Dspfactory shareholders approve AMI deal
October 18, 2004

It was only a formality, but Dspfactory shareholders approved the sale of the company's assets to AMIS Holdings, parent company of AMI Semiconductor at a meeting which doubled as the company's AGM.

The terms of the deal were disclosed in the circular. As reported in the last Tech Digest, AMI is paying US$25.9 million in cash and 1.314 million shares, with an additional $8.5 million in shares conditional on achieving sales targets in 2005 or 2006. Since the deal was made, AMI shares have gone up in value, but so has the Canadian dollar, so the total price AMI will be paying in Canadian dollars hasn't changed much since the deal was announced. With current prices, the total is about CDN$56 million (excluding the conditional earn-out).

Of that amount, $8 million will go to repay debentures, $1.5 million will be spent on severance payments and $1.75 million will be used for other expenses. In addition, US$2.6 million will be held in escrow for 18 months, US$1.5 million will be set aside for two years as a claims reserve and an additional reserve of $2.5 million will also be created.

The amount that will be distributed to Dspfactory shareholders at closing is about CDN$35 million or around $1.50 a share. The funds set aside for reserves and put in escrow will eventually be paid to shareholders, minus any amounts paid out of them.

On top of that, Dspfactory shareholders will receive an additional US$8.5 million in AMIS shares if the company's products generate US$22 million in revenue in the 2005 calendar year or US$26 million in 2006. For any earnout payment, DSP product sales will have to exceed US$20 million in 2005 or US$23 million in 2006. If the full earnout is achieved, Dspfactory shareholders could receive a little over $2 a share in total. Dspfactory had been pricing its shares at $2.60 for options and employee stock purchases.

For fiscal 2004, ended February 29, Dspfactory reported sales of CDN$18.0 million, down 21% from $22.8 million in 2003. Net loss for the year was $5.1 million ($0.24/share). The loss included an asset write-off of $1.6 million. Operations provided $684,000 in cash through the year and a customer prepayment of $2.7 million gave the company enough cash to repay $1.9 million in long term debt and spend $1.3 million in cash on capital and intangible assets. Dspfactory ended the year with $1.8 million in cash.

According to the circular, discussions with AMI began early in the year and a term sheet was delivered on April 5. Negotiations continued through the summer and Dspfactory's board approved the deal on September 8. Term sheets the company had received from VCs valued Dspfactory at less than what the board believed it was worth, based on a multiple of sales.

AMI is obligated to leave Dspfactory's operations within 50 km of Waterloo until the end of 2006, or until the full earnout entitlement is achieved, if sooner. It must also use "reasonable commercial efforts" to sell the DSP products since the DSP unit will no longer have its own marketing group.

RFTune to be acquired by Texas company
September 13, 2004

I missed this last month, but E-Mobile Information Technologies of Plano, Texas is acquiring RFTune, a company that is commercializing research performed at UW. According to its Web site, RFTune moved to Waterloo from Ottawa last year.

RFTune says it is collaborating with professor Safieddin Safavi-Naeini, whose research has led to the creation of a few companies in Waterloo developing antenna technologies. RFTune was founded by Nader Fayyaz, who was one of Prof. Safavi-Naeini's grad students.

RFTune calls itself a provider of multi-band smart antenna direct conversion CMOS RF transceivers for mobile handsets, laptops, and PDAs. According to E-Mobile, the company charges about US$2-3 dollars per phone for its chips. It says it received funding from Wicom Technologies and Singapore's Dynatech Venture in 2003.

Theoretically, E-Mobile is a public company, trading on the Pink Sheets for US$0.07 a share. Details of the acquisition weren't disclosed.

STOCK REPORT: Add another $2B to RIM's market value
October 2004

RIM shares set a new record for monthly closing price, finishing October at $107.35. That beat the old record of $101 (split adjusted) set in February 2000. RIM stock peaked in October at $112.07, which gave the company a $21 billion market value. RIM shares are up 450% over the last two years.

The increase in RIM's market value in October is equal to about twice the total value of Open Text, the second most valuable Waterloo-based tech company based.

For the month of October:

RIM [TSX: RIM] +11%
RDM [TSX: RC] +10%
Turbosonic [OTCBB: TSTA] +7%
MKS [TSX: MKX] +6%
--S&P TSX COMPOSITE INDEX +2%
Navtech [OTCBB: NAVH] +2%
--S&P TSX VENTURE INDEX +0%
ClearFrame [TSXV: CLF] 0%
===============================
Open Text [TSX: OTC] -5%
Descartes [TSX: DSG] -6%
Com Dev [TSX: CDV] -7%
Dalsa [TSX: DSA] -7%
Virtek [TSX: VRK] -12%
ARISE [TSXV: APV] -28%

Shares in Virtek and ARISE both matched their all-time low during October and had their lowest monthly closing price ever.

Dalsa may have announced record quarterly revenue, but investors didn't immediately care and the stock fell 4% the day after the numbers were released. The stock has bounced back in the first two days of November.

Com Dev ended its fiscal year with its shares at the same place where they began the year. The stock is down 30% over the last four months. Open Text shares are down 52% over the same period.

With two months left in the year, RIM and Navtech are at the top of the list for stock performance in 2004, while for the second straight year Descartes and ARISE are running neck-and-neck for worst performance. (But Descartes' shares came to life yesterday, gaining 30% following the announcement that it had settled the class action suits against it which claimed Descartes had violated U.S. securities laws. More on that next month.)

Companies with core operations outside the area had an excellent month:

Automated Benefits [TSXV: AUT] +58%
Siebel [Nasdaq: SEBL] +26%
Blue Coat [Nasdaq: BCSI] +21%
McAfee [NYSE: MFE] +20%
Senesco [Amex: SNT] +17%
Sybase [NYSE: SY] +15%
Adobe [Nasdaq: ADBE] +13%
CheckFree [Nasdaq: CKFR] +12%
Ansys [Nasdaq: ANSS] +11%
SBS Technologies [Nasdaq: SBSE] +9%
Agfa-Gevaert [Brussels: AGFA] +6%
LSI Logic [NYSE: LSI] +6%
==================================
CVF [OTCBB: CNVT] -15%

Com Dev to take two charges totalling $5M
October 13, 2004

Com Dev will be taking a $4.1 million charge in the quarter ended October 30 (Q4 04) to write off the full value of its investment in Gatineau's SpaceBridge Semiconductor, formerly SpaceBridge Networks (not to be confused with SkyBridge, which it had already written off).

SpaceBridge was formed by Newbridge and Com Dev in 1997, but in recent years its focus has shifted to designing semiconductors for broadband wireless applications. SpaceBridge raised $21 million dollars two years ago, and Com Dev says that gave the company's shares a higher value than they had when it had made its investment. But SpaceBridge is again looking to raise money and Com Dev says it will "reduce [its] ownership position to virtually zero."

At the same time, Com Dev will be taking an extra $1 million charge to increase its reserve for costs associated with its former wireless business facility in Dunstable, England. It had been hoping to sublet the property but hasn't been able to find a new tenant.

UW and Laurier create LaunchPad $50K competition
October 5, 2004

UW and Laurier have teamed up to create the LaunchPad $50K Venture Creation Competition -- a business plan and pitch competition, modelled after the one held each year at MIT.

The competition is targetted at current UW and Laurier students, although exactly who is eligible to participate isn't clear from the official handbook. It specifically mentions that all full-time students at either university are eligible, as are part-time MBA students from Laurier. But it then says that "in addition, students from other universities and non-students (faculty, staff, alumni, friends, former colleagues etc.) may participate." That would seem to open the door to pretty much everyone. It says each team "should" include a UW student and a Laurier student and that teams are "strongly encouraged" to have one of each, but it then calls this a "requirement" in the same sentence. I'm sure this will be clarified soon. Details are at http://www.launchpad50k.ca/

Registration deadline in February and the winners will be selected in May. The $50,000 in total prize value is split evenly between cash and in-kind services and will be divided by three teams. The winning team receives $12,500 in cash and services of an equal value. Half of that is provided on incorporation with the other half contingent on approval from the advisory board in the fall of 2005.

The goal of the competition is to create actual, operating businesses. Organizers of the MIT competition take credit for helping launch scores of new companies.

I've always had problems with the way many business plan competitions are organized -- not this one in particular, but all of them in general. In the real world, there is no guaranteed prize money and you don't get funded by having a better presentation than the next team. If you're going to hold a contest, then it's reasonable that you should give something to the winner. But keep the guaranteed prize small and have a competition with judges who have real money under their management who could choose to invest it -- at their discretion -- in any or none of the teams that make presentations. That money would only go to teams that real investors decide are truly worth funding. Of course, the teams would be under no obligation to accept the money -- just like in the real world.

And, along the same lines, I'd like the judging panel to consist solely of people who have practice in rejecting deals. That means primarily VCs and angels. Not lawyers, accountants, business plan consultants, academics, or well-known local business people -- and that's who usually dominates the judging panel with a VC or two thrown in. Make those people advisors and mentors to the teams, but not panellists. Some of them would make good judges (and nearly all of them would put themselves in that category), but most wouldn't, and I'd rather play the percentages by leaving them all off the panel. I'd want people who make these decisions every day.

If that means the judging panel consists of three people, none of whom are big names to a general audience, then that's fine. With LaunchPad $50K, I think I also would have left the division of the prize money up to the judges -- if one or two teams blow away the field, why not give them the whole thing?

I haven't seen a business plan competition organized that way, and so many of them end up being contrived exercises when the opportunity is there to be so much more. There's always going to be something artificial about a contest -- if you're going to obsess on verisimilitude, you'd just send everyone to meet real investors and wish them luck instead of holding a competition. But within those limits, I think it's useful to make it as real as possible. I know the organizers at UW and Laurier really want to see LaunchPad $50K become a catalyst for venture creation, and having that attitude is certainly the right starting point.

Miscellaneous Tidbits

• Some locals were pouting about a silly story in the Globe in October that called Waterloo "a city of surpassing ugliness" and a "dystopia." What didn't attract as much attention was a story in the same paper the next day which said that "Kitchener-Waterloo is chockablock with Dalsas and RIMs of various shapes and sizes -- about a thousand of them." At the Globe, it's apparently wanton hyperbole that comes in all shapes and sizes.

• Kaleidescape and McAfee have both moved into new and expanded offices on Kumpf Drive. They join Siebel, who moved there a few months ago, as three California-based high-tech companies with R&D offices on Kumpf. McAfee is in the building left vacant by Philips Analytical, while Kaleidescape and Siebel are at the other end of the street near Maplesoft and Dspfactory.

• Reqwireless says it has surpassed 5 million "unique activations" for its Web browser and email software.

• FibreTech is merging with its Hamilton counterpart, FibreWired. The combined company will have 1,100 km of fibre-optic cable in Hamilton and Waterloo Region. FibreTech is owned by Waterloo North Hydro, Kitchener-Wilmot Hydro, and Cambridge and North Dumfries Hydro, while FibreWired is owned by Hamilton Hydro. The name of the merged company hasn't been announced yet.

• Symbility Solutions has launched a three-month pilot project for its mobile claims estimating software with Allstate Insurance Company of Canada. It was also scheduled to be starting a similar project with Waterloo's Equitable Life.

• IMS announced that an unnamed North American car maker has selected its U.S. licensee to develop a "production-intent" occupant classification system for cars from model year 2008.

• The Waterloo office of Aruna, formerly Freedom Intelligence, was downsized in October due to a tight cash situation. There have also been rumours of a bunch of layoffs at PrinterOn early in the month, and some at Equitrac this week.

• In the Ontario legislature in October, NDP member Gilles Bisson was being razzed after his BlackBerry started ringing in the middle of his speech (Bisson in Hansard: "That's not mine. I don't know who the heck that is. Somebody's cellphone was ringing but it wasn't mine. Oh, hell, it is mine."). But he got the last laugh when one of the MPPs responding to his comments, Liberal member Maria Van Bommel, had her BlackBerry start to buzz on her desk as she was speaking (Bisson's interjection in Hansard: "This time it's hers. Never throw stones. You never know when it's going to come back to you." Van Bommel in response: "I have handed my BlackBerry over, and I apologize to the assembly for that. That is quite a sound when it comes across the [microphone], no question about it."). A few days later, PC MPP John Yakabuski had the same thing happen to him, so using a BlackBerry -- and being absentminded -- transcends party boundaries.