September 2005

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

Issue 103 -- October 3, 2005
In this digest:

1. RIM misses profit target while sales climb
   
2. Open Text ends year on a flat note, cuts 330 jobs
   
3. MKS sets Q1 sales record, earns small profit

4. Descartes records second profitable quarter
   
5. Navtech runs profitable quarter streak to 15
   
6. Virtek remains profitable but sales fall below expectations

7. STOCK REPORT: Investors punish RIM, reward Open Text
   
8. Miscellaneous tidbits from Microsoft, Christie, ARISE, ClearFrame, RIM, Alt, SBS

RIM misses profit target while sales climb
September 28, 2005

Investors apparently weren't impressed -- they shaved about US$2 billion off RIM's market value after the results came out -- but in the quarter ended August 27 (Q2 06) RIM reported net income of US$111.1 million (US$0.56/share) on sales of US$490.1 million. Revenue was up 58% from a year ago and 8% from the previous quarter,

Sales were on the high end of RIM's forecast, but it had been looking for GAAP profits in the US$113-125 million range, and the 620,000 new BlackBerry subscribers in the quarter were at the bottom end of the company's guidance (and only 540,000 subscribers were added to RIM's BlackBerry subscriber total as it discovered that the numbers it previously reported were too high).

It ended the quarter with US$1.9 billion in cash, not including the US$162.8 million RIM has put aside as part of the patent infringement judgment against the company. Cash balance was up US$115.9 million over the quarter. Operations provided US$174.4 million in cash and US$55.7 million was spent on capital assets.

RIM is expecting sales of US$540-570 million in Q3, up US$15-20 million from its previous estimate -- although it maintained its net income guidance of US$0.62-0.68/share. It expects Q4 revenue to fall in the US$590-620 million range.

On the NTP front, the U.S. patent office has now made initial rulings against all of the NTP patents on which RIM was found to have infringed ... but there are just early judgments that could all be changed or appealed. Would a U.S. court enforce an injunction against RIM for infringing on patents that the USPTO no longer believes are valid? I'm sure RIM hopes we'll never find out.

RIM also announced that it will use Intel's next-generation cellular processors, code-named Hermon, in future BlackBerrys that will run on high-speed EDGE networks. RIM co-CEO Mike Lazaridis called it a "fundamental architectural shift" in a release. There were no details about when RIM expects these devices will be available.

Open Text ends year on a flat note, cuts 330 jobs
September 8, 2005

Open Text issued a warning in July that its results in the quarter ended June 30 (Q4 05) would be disappointing, and the final numbers were released in September. Revenue in the quarter was US$109.4 million -- up 4% from both the previous quarter and last year, but well below the US$115-125 that the company had initially been expecting and on the low end of its July guidance of US$108-112 million. Net income was US$5.0 million (US$0.10/share), down slightly from US$5.3 million in the previous quarter.

Sales for the year were US$414.8 million, which was a 43% increase from the previous year, but that was largely due to acquisitions. At the beginning of the year, Open Text had expected sales of US$420-450 million. Profits for the year were US$20.4 million, down from US$23.3 million in 2004 and US$27.8 million in 2003.

The company ended the year with US$79.9 million in cash, down US$19.0 million from the end of Q3. Operations provided US$9.6 million in cash, US$5.3 million was spent on capital assets and US$16.1 million was paid to repurchase Open Text shares. Through the year, the company spent US$63.9 million to buy back its own stock.

Details were provided of the restructuring announced in July. Open Text is cutting 330 jobs, and, as expected (see July digest), few of the cuts were made in Waterloo. It is also closing 27 offices internationally. Open Text expects to save US$30 million in FY 2006 through this restructuring.

The company is forecasting Q1 revenue of US$85-95 million -- about the same as the US$87-93 million it predicted in Q1 last year. Open Text typically records a large quarter-over-quarter revenue drop in Q1.

MKS sets Q1 sales record, earns small profit
September 8, 2005

MKS reported the strongest Q1 sales in company history, exceeding the mark set last year by 22%. In the period ended July 31 (Q1 06) MKS had sales of US$10.8 million, topping by US$2 million its record-setting quarter last year. Sales declined 13% sequentially, as Q1 is traditionally MKS' weakest quarter each year.

Net income was US$536,000 ($0.01/share), almost all of which came from MKS' shrinking interoperability business, which accounted for only 18% of revenue in the quarter. ALM, MKS' other business segment, provided the remaining 82% of revenue, with sales up 32% from a year ago. It essentially broke even in the quarter.

Had MKS expensed stock options in its U.S. GAAP financial statements, as it will be required to do next year, net income for the quarter would have been US$153,000 ($0.00/share). Under Canadian GAAP, net income was just US$46,000.

Cash balance at the end of the Q1 was US$8.9 million, up US$1.1 million from the end of the previous quarter. Operations provided US$714,000 and an additional US$531,000 was raised through the sale of shares.

MKS has slightly increased its revenue forecast for the year to US$46-51 million, up from its previous guidance of US$45-49 million. It had sales of US$41.3 million in fiscal 2005.

Descartes records second profitable quarter
September 7, 2005

Descartes reported its second consecutive profitable quarter, but once again it was an asset sale that accounted for all the earnings. In the period ended July 31 (Q2 06), Descartes earned US$929,000 (US$0.02/share) on sales of US$11.4 million. Revenue has consistently been in the US$11 million range over the last year, and Q2 sales were up 1% from the previous quarter and 3% from a year ago. An improvement in margins provided a 5% sequential increase in gross profits.

Descartes sold the balance of its stake in UK online grocer Ocado for US$3.5 million in cash and recorded a gain of US$945,000 -- enough to put the company in the black.

Operations used US$1.2 million in cash and Descartes spent US$27.0 million to repay all of its outstanding convertible debentures. It ended the quarter with US$28.3 million in cash, up US$2.2 million from the end of Q1, net of the debentures, thanks to the Ocado sale.

Navtech runs profitable quarter streak to 15
September 8, 2005

In the quarter ended July 31 (Q3 05), Navtech earned US$127,000 (US$0.02/share) on sales of US$2.5 million. Sales were up 25% from last year but down 8% from the previous quarter. Gross margins declined from the previous quarter, creating a 14% drop in gross profits.

Operational expenses fell 17% from Q2, led by a 52% reduction in R&D expenses. R&D spending was down 17% from the previous year.

Navtech reversed its cash shortfall from the previous quarter -- which it had said was an invoice timing issue -- and generated US$472,000 in cash from operations in the quarter. It ended Q3 with US$594,000 in cash, up US$411,000 from the end of Q2.

Virtek remains profitable but sales fall below expectations
September 14, 2005

Virtek extended its string of profitable quarters to three, although this one was less impressive than the other two. In the quarter ended July 31 (Q2 06), Virtek earned $159,000 ($0.01/share) on sales of $12.6 million.

Sales fell 7.5% from the previous quarter and were below the company's expectations, but were up 22% from a disastrous quarter last year. Slipping margins in Virtek's marking & engraving business led to a 9.5% sequential decline in gross profits overall. Net income was down from $717,000 in the previous quarter.

Revenue from Virtek's traditional imaging & templating business was consistent with the previous quarter and up 30% from a year ago, but its marking & engraving segment reported a 16% drop from Q1

Virtek ended Q2 with net cash of $2.2 million, down $174,000 over the quarter. Operations provided $574,000 in cash while $720,000 was spent on capital assets.

It anticipates that sales will be soft in the current quarter, partly because of weakness in the transportation sector.

STOCK REPORT: Investors punish RIM, reward Open Text
September 2005

RIM shares fell to their lowest monthly closing price in 13 months after its financial results were announced late in the month. They started September out strongly, and even traded over $97 mid-month before falling to $79.30 at month-end. RIM's market value is now just over $15 billion.

The story for Open Text shares was just the reverse. They started out the month falling to their lowest point in over three years, but rebounded after the company's financial results were announced -- even though the results were poor -- and then jumped even more late in the month after Open Text received a clean Sarbanes-Oxley report from its accountants.

ARISE shares climbed to their highest level in a year and logged their biggest monthly gain ever after the company announced that it had hired a new president (see below).

For the month of September:

ARISE [TSXV: APV] +36%
Open Text [TSX: OTC] +18%
--S&P TSX VENTURE INDEX +12%
ClearFrame [TSXV: CFA] +9%
Descartes [TSX: DSG] +5%
Dalsa [TSX: DSA] +5%
--S&P TSX COMPOSITE INDEX +3%
Navtech [OTCBB: NAVH] +1%
MKS [TSX: MKX] 0%
RDM [TSX: RC] 0%
===============================
Virtek [TSX: VRK] -2%
Com Dev [TSX: CDV] -7%
Biorem [TSXV: BRM] -9%
Turbosonic [OTCBB: TSTA] -12%
RIM [TSX: RIM] -15%

There was no bad news at Com Dev -- or news of any kind -- but that didn't stop its shares from falling to their lowest month-end price in two years.

Investors initially responded well to Virtek's results, driving the stock to $1 for the first time since July 2004. But all those gains were given back over the second half of the month, and the stock ended up losing a couple of cents over September.

Dalsa shares are up 12% over the last two months after taking a big hit in July when the company slashed its revenue forecast for the year.

With one quarter left in the calendar year, the top performer so far in 2005 has been Turbosonic, up 129%, followed by Navtech's 112% gain. At the bottom of the list are Dalsa and Open Text, which have both seen their shares lose a third of their value in 2005.

Looking at the last three years, the only companies whose stock is worth less now than it was at this point in 2002 are Descartes (-25%) and Dalsa (-4%). The rest all show an increase, topped by Navtech's 1,004% gain and RIM's 976% increase.

Companies with core operations outside the area:

Leitch [TSX: LTV] +28%
Siebel [Nasdaq: SEBL] +25%
Adobe [Nasdaq: ADBE] +10%
Sybase [NYSE: SY] +5%
McAfee [NYSE: MFE] +3%
Ansys [Nasdaq: ANSS] +2%
LSI Logic [NYSE: LSI] +2%
==================================
SBS Technologies [Nasdaq: SBSE] -0%
AMIS [Nasdaq: AMIS] -1%
Senesco [Amex: SNT] -2%
Agfa-Gevaert [Brussels: AGFA] -6%
Blue Coat [Nasdaq: BCSI] -10%
Automated Benefits [TSXV: AUT] -17%

Miscellaneous Tidbits

• Microsoft chairman and high-tech nonpareil Bill Gates is coming to Waterloo this month, according to the Ann Arbor News. The newspaper reported on Thursday that Gates is making a tour of universities, including the University of Michigan, Princeton, Columbia, University of Wisconsin at Madison, and Howard University. Waterloo was the only Canadian stop on the list.

• Communitech issued a news release on Friday saying it had released a "ground-breaking report" showing that Waterloo Region is the best place to invest in Canada. As of the weekend, the report hadn't yet been added to Communitech's website (I assume it will be, although that wasn't said in the release), so I'll have to wait until it's publicly accessible before looking at it in detail.

• Christie Digital announced a deal with Disney that it says will see 2,500 to 4,000 of its digital projection systems being installed in theatres across the U.S. and Canada over the next two years.

• Bruce West is the new president, COO, and interim CFO of ARISE Technologies. He was previously VP and CFO for Sun Life Financial's Canadian operations (formerly Clarica). ARISE founder Ian MacLellan remains CEO.

• In August, ClearFrame Solutions announced that it had hired Barry Klett as its new corporate development VP. Klett was previously manager of the Canadian operations of Corum, a Seattle-based M&A consulting firm. While at Corum, he worked with JPH International in its acquisition by France's Ever. ClearFrame is one of two companies that has evolved out of the former JPH. ClearFrame has said that acquisitions are a key part of its growth strategy and Klett says he want to consolidate software companies selling to the local government market.

• Reports in the National Post and the CBC, among others, cited RIM as the shining example of what labour-sponsored investment funds (LSIFs) have helped to build in Canada. The only problem is, no one here can remember RIM ever receiving an investment from an LSIF. LSIFs -- many of which were already struggling because of generally poor returns delivered to investors -- received another blow at the end of August when the Ontario government said it would remove the tax credit for LSIF investors by the end of the year. Over the years, LSIFs have invested in several Waterloo companies, including Sandvine, PixStream, Sirific, INM, PrinterOn, Agile, Dalsa, and Virtek.

• Another troubled government initiative that has benefitted several Waterloo tech firms -- Technology Partnerships Canada -- is being scrapped and replaced by the Transformative Technologies Program. The feds say the new program will offer greater access for small and medium-sized companies. Companies in Waterloo Region and Guelph that received TPC funding include Sandvine, RIM, Dspfactory, IMS, Com Dev, Dalsa, ATS, Raytheon, TeleflexGFI, and GMA Cover.

• I don't usually report on these silly "fastest growing company" lists that typically feature companies that had a one-time jump in revenue when their first real product was released. But RIM just made the Canadian Technology Fast 50 list, measuring five-year revenue growth -- for the eighth year in a row, and that is a legitimate achievement. It is the only company that has been on the Deloitte-sponsored list every year since the Fast 50 began in Canada. As part of the Fast 50 program, Dalsa won the GrowthWorks Leadership Award for business performance in the hardware/semiconductor category. The winner in the software category was Mississauga's Redknee, whose UW-grad CEO will be speaking at the Chapter 3 event on Thursday.

• It may not sound like much of a Waterloo story when a Toronto company announces in Boston that it will be a supplier to a New Mexico company, but Albuquerque-based SBS Technologies has shifted most of its graphics work to Waterloo since acquiring Avvida Systems in 2003, and at the Embedded Systems Conference in Boston it was announced that SBS will be using drivers developed by Alt Software -- which does about half of its R&D work in Waterloo.