November 2004
Compiled and written by
Gary Will
E-mail:
gary@garywill.com
Issue 93 -- December 8, 2004
In this digest:
- DiskStream raises $2M in seed funding
- Descartes records smallest operational loss in over 6 years
- MKS reports another quarter of record sales & low profits
- RDM hurt by delays, but reports profitable quarter and year
- ARISE sees summer orders dry up, raises cash
- WatStart Update: Over 150 members and growing
- STOCK REPORT: Descartes shares jump 50%
- Miscellaneous tidbits from Symbility, Slipstream, AMIS, Dalsa, EMJ
DiskStream raises $2M in seed funding
November 8, 2004
DiskStream, a Waterloo-based start-up founded by Jim Trainor and Tom Pike, has received $2 million in seed funding. All of the funds came from Waterloo's Tech Capital Partners.
DiskStream is developing a digital media management system for the film and video post-production and broadcast industries. The company has become one of 13 principal members of the AAF Association, along with such heavyweights as Adobe, Microsoft, Siemens, Time Warner, and BBC. Pike is one of the association's directors and Trainor was formerly the group's AAF developer. AAF is a cross-platform file interchange format developed to exchange digital media and metadata. The AAF Association was created five years ago to promote the use of AAF technologies.
Trainor told The Record that he hopes to grow the company from two people to 10 over the next year. (He also posted a note looking for software developers on the WatStart website. See the link in the WatStart update section below.)
DiskStream has moved into the old Bauer building on King Street South in Waterloo.
Descartes records smallest operational loss in over 6 years
November 30, 2004
For most companies, reporting a loss of millions of dollars on sales that were nearly a third below last year's level would be catastrophic, but for Descartes it was some of the best news its shareholders have had in a long time.
Descartes, which hasn't had a profitable quarter in seven years as a public company, reported a net loss of US$2.7 million on sales of US$11.0 million for the quarter ended October 31 (Q3 05). Loss from operations was US$2.3 million, the smallest in six-and-a-half years. And the company expects to cut an additional $1 million in expenses in the current quarter, which will take it closer to profitability.
Sales were down 31% from last year and flat from the previous quarter, but the company's exit from some low-margin business led to a 22% sequential increase in gross profits. That was still 44% below last year's levels.
New CEO Art Mesher -- the last surviving member of Descartes' old executive team -- has said that generating positive cash flow and becoming profitable are his priorities. Cash flow in the quarter was neutral, with the company ending the period with net cash of US$19.4 million (after deducting the US$27 million in debentures it will have to repay in a few months).
The company's new focus on cash flow and earnings comes after accumulating losses of over US$400 million under its two previous CEOs while burning through hundreds of millions of dollars in cash. In the conference call, Mesher talked about "relaunching" Descartes at its user conference next year.
At the end of the quarter, Descartes had 210 employees worldwide, down from 399 last year and 539 two years ago. Despite those layoffs, R&D, G&A, and COGS expenses in the quarter were almost identical to what they were a year ago. Only sales & marketing expenses showed a significant year-over-year reduction, down 68%.
The board has adopted a directors and management protection plan -- more commonly known under the euphemism "shareholder rights plan" or as a "poison pill." Shareholders won't be have the right to vote on the plan for seven months. Open Text shareholders will be asked to approve a similar plan later this week.
Descartes also announced that it had settled the class action law suit against it, agreeing to pay US$1.5 million. Most of that will be covered by the company's insurers. The company paid US$500,000 in cash to defend and settle the suit in Q2. The suit claimed that Descartes had violated U.S. securities laws by issuing false and misleading statements to the market. The suit was filed in May after Descartes fired CEO Manuel Pietra and subsequently discovered that its Q4 net income had been overstated by US$6.3 million.
MKS reports another quarter of record sales & low profits
November 24, 2004
Another quarter of record revenue and weak profits for MKS. In the period ended October 31 (Q2 05), the company reported the highest Q2 revenue in its history with sales of US$9.4 million. That edged out the previous record of US$9.3 million set five years ago.
Even with 85% gross margins, it didn't translate into anything interesting on the bottom line and the company only had breakeven results. MKS says it needs to spend money to build its sales and services organization and has been balancing that need with the need for profitability. Under U.S. GAAP, MKS reported net income of US$203,000 (US$0.00/share; the company says US$0.01/share but I get US$0.0049/share, which would round down). Under Canadian GAAP it was its sixth consecutive money-losing quarter, with a loss of US$199,000 (US$0.00/share).
Sales were up 6% from the previous quarter -- which was a Q1 record-setter -- and 24% above last year. Revenue from the core software change management business was up 9% from Q1. The business is not yet profitable, reporting a loss of US$187,000. North American sales were strong, up 35% from last year, but sales to Europe and the rest of the world were up only 5% from last year and down 13% from the previous quarter.
Thanks to an acceleration in the collection of receivables, operations generated cash of US$721,000 and MKS ended the quarter with a cash position of US$4.8 million, up from US$4.5 million at the end of Q1.
Revenue over the first half of the fiscal year was US$18.2 million, and MKS has a good shot at beating its five-year-old revenue record of US$40.3 million (in 2000, it announced record revenue in June, launched Vertical Sky in July, and then issued a profit warning in August as the wheels fell off). In the conference call, the company claimed that it had just set a new record for trailing twelve-month (TTM) revenue with sales of US$34.7 million over the last year. No company takes a back seat to MKS when it comes to rewriting history. The actual record remains the US$40.3 million recorded in the four quarters of fiscal 2000. The last four quarters would rank fifth in company history for TTM revenue, but the four above it are all more than four years ago.
RDM hurt by delays, but reports profitable quarter and year
November 22, 2004
When CEO Doug Newman referred to RDM's fourth quarter, ended September 30, as "a strong finish to a strong year" he was at least half right. It was a good year for RDM, which saw its sales jump by 38% to $17.3 million, and which reported a profit for the second time in the last three years, following about 10 straight years of losses. Net income for the year was $364,000 ($0.02/share).
As for the "strong finish," well, that wasn't the case on the top line, as delays in new product launches caused RDM's core digital imaging revenues to fall about $1 million below what the company had forecast at the beginning of the quarter. It had predicted that digital imaging sales would be flat sequentially, but they came in 35% below Q3 and 12% under last year (which itself was under target) at $1.8 million. Sales in RDM's electronic payments segment were down 20% from the previous quarter, and overall revenue fell 24% from Q3.
But, despite the revenue shortfall, RDM still reported net income of $341,000 in Q4 ($0.02/share), down from $405,000 in Q3. Coming off a cash-flow-positive quarter last quarter, operations in Q4 consumed $553,000 in cash and RDM ended the year with a cash position of $4.0 million, down $617,000 over the quarter.
It expects to see "double-digit" percentage revenue growth in 2005, led by increased digital imaging sales and by growth in its ITMS transaction processing system, which it says did not contribute significant revenue in 2004. By year-end, ITMS transaction volumes were averaging 300,000 items a week, up 20% from 250,000 at mid-year.
CFO Jim Kopperson said that for each cent that the Canadian dollar gains on the U.S. dollar, the company loses about $250,000 from its top line and $175,000 from the bottom. If the dollar climbs above 85 cents U.S. and stays there, he said it will be a challenge for the company to stay profitable in 2005 without cutting costs or significantly increasing revenue. The Canadian dollar closed yesterday at 82.85 cents U.S.
Another challenge for RDM's reported bottom line next year is that the company, like others, will be expensing stock options starting with its 2005 financial statements. When applied to its 2004 results, expensing options would drop RDM's reported profit from $364,000 to $114,000. Options expenses are expected to climb to $350,000 in 2005.
ARISE sees summer orders dry up, raises cash
November 29, 2004
It was another bleak quarter for ARISE, and this one came in the summertime, usually the company's strength. In the period ended September 30 (Q3 04), ARISE lost $398,000 ($0.04/share) on sales of $448,000. Sales were down 25% from the previous quarter and 46% from last year. The loss was an improvement on the half-million dollar losses in each of the last two quarters and was only slightly worse than the $355,000 loss recorded last year. ARISE cut its operating expenses by 28% from the previous quarter.
It ended Q3 with just $5,400 in cash and a working capital deficiency of $1.7 million. It has since converted $325,000 of its debt into equity and raised about $225,000 through private placements. Most of the converted debt was owed to directors and executives.
Operations used $74,000 in cash in the quarter, which is an improvement on the $282,000 used in the previous quarter.
ARISE says that it received written or verbal commitments in the quarter for the construction of six more solar homes, subsidized under the federal government's TEAM Project. The project expires in four months.
WATSTART UPDATE: Over 150 members and growing
November 2004
It's not news, but I'd again like to invite anyone who has a very-early-stage technology company, or who has thought about creating a startup to drop by, register, and participate on the WatStart website at http://www.watstart.ca/
WatStart is the community initiative to help cultivate technology startups in the Waterloo area. I'll talk more about it in the year-end issue next month, but we've started to have our first get-togethers with very-early-stage entrepreneurs -- they've have to be held in bundles because of the high level of interest -- and so far, we've brought together dozens of entrepreneurs, and we'll be adding some of the area's top service providers to the mix with our next meetings in January.
We've got over 150 registered members on the site, which has generated 100,000 page views over a very short period of time.
Some recent topics from the WatStart forums:
To get invited to WatStart events, you have to register on the site. Just click on "Register" on the home page.
STOCK REPORT: Descartes shares jump 50%
November 2004
Descartes shares had their biggest one-month percentage gain since the company's short-lived glory days five years ago. The announcement that the company had settled its securities class action suit first drove the stock up in November, and then the price jumped up again after Descartes reported promising quarterly results.
Descartes shares traded above $2 for the first time since May, but even with the gains, the stock is still the second-worst performer so far in 2004 among the locally-based companies tracked here.
For the month of November:
Descartes [TSX: DSG] +50%
MKS [TSX: MKX] +29%
Dalsa [TSX: DSA] +19%
ARISE [TSXV: APV] +19%
Open Text [TSX: OTC] +8%
--S&P TSX VENTURE INDEX +8%
Turbosonic [OTCBB: TSTA] +2%
--S&P TSX COMPOSITE INDEX +2%
Com Dev [TSX: CDV] +1%
Navtech [OTCBB: NAVH] 0%
===============================
RIM [TSX: RIM] -2%
RDM [TSX: RC] -12%
Virtek [TSX: VRK] -14%
ClearFrame [TSXV: CLF] -17%
MKS had its best month-end price since March and never traded below a dollar for the entire month -- the first time that's happened since June.
At the other end of the scale, Virtek stock fell to an all-time low for the second consecutive month. Its market value fell under $16 million at month-end -- about the same level as Automated Benefits, the parent company of Kitchener's Symbility Solutions, which is a pre-revenue startup. Virtek stock had a good day yesterday, gaining 10%.
The ARISE number is misleading, since the stock had its lowest trading range since the IPO last year. For the first time, ARISE shares never traded above 25 cents through November and matched their all-time low of 17 cents during the month. Barring something dramatic in December, ARISE will be the worst stock performer of 2004 among this group, duplicating its "achievement" in 2003.
RDM's result is also misleading. It traded in essentially the same range as it did in October. RIM shares hit their highest level since March 2000 in intra-month trading, but gave back the gains before the month was over.
Companies with core operations outside the area had an excellent month:
CheckFree [Nasdaq: CKFR] +20%
LSI Logic [NYSE: LSI] +16%
McAfee [NYSE: MFE] +19%
Ansys [Nasdaq: ANSS] +11%
Sybase [NYSE: SY] +9%
Adobe [Nasdaq: ADBE] +8%
Senesco [Amex: SNT] +7%
Siebel [Nasdaq: SEBL] +6%
CVF [OTCBB: CNVT] 0%
==================================
SBS Technologies [Nasdaq: SBSE] -2%
Agfa-Gevaert [Brussels: AGFA] -3%
Blue Coat [Nasdaq: BCSI] -4%
Automated Benefits [TSXV: AUT] -11%
Miscellaneous Tidbits
- Not only is little-old Waterloo home to Canada's most valuable high-tech company, it also is the site of the Canadian headquarters of Canada's most valuable corporation -- Manulife Financial.
- Automated Benefits, the parent company of Kitchener's Symbility Solutions, announced that it has received an investment of $280,000 from Laurence Capital Corp., headed by Peter Schwartz. The release referred to Schwartz's "experience in building enterprise software" but didn't mention Descartes. I think Schwartz is still on the board of Covarity, which has its office next to Symbility in the same Kitchener building.
- SlipStream is bringing its acceleration technology to smartphones based on the Symbian operating system. It has also integrated its accelerator with the new version of the Opera browser, from Norway's Opera Software ASA. SlipStream is also looking to expand its presence in Italy through a partnership with a system integrator in that country.
- Ray Simonson, the former Waterloo-based SVP of North American operations for CheckFree i-Solutions, has joined Verdexus, the consulting firm founded by Randall Howard after he left MKS. Simonson has also become CTO of Toronto's Software Innovation, which was acquired by Verdexus earlier this year.
- AMI Semiconductor closed its acquisition of Dspfactory in November (see previous two digests for details). The Dspfactory name has been dropped and its website now points to AMI.
- Dalsa completed its acquisition of California-based Broadcast Plus, which has now been converted into the Dalsa Digital Cinema Center (see last digest).
- EMJ is now part of Synnex Canada (see July digest) and is no longer listed in the TSX.
WATERLOO TECH DIGEST
Compiled and edited monthly by
Gary Will
gary@garywill.com
75 King Street South, Box 40005, Waterloo, Ontario, Canada N2J 4V1
