October 2005

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

Issue 104 -- November 7, 2005
In this digest:

1. Dalsa cuts jobs, reduces forecasts, sees markets softening
   
2. Symbility hires Jim Crocker as president
   
3. ARISE raises additional $254K through debenture sale

4. The myth of UW's "22%" spin-off record
   
5. STOCK REPORT: Investors lose patience with RDM, Com Dev, Virtek
   
6. Miscellaneous tidbits from Communitech, Google, UW, Atria, Ladybug, Christie, CheckFree, SlipStream, Maplesoft, Covarity, AMI, Meikle, IGLOO, Desire2Learn, RIM

Dalsa cuts jobs, reduces forecasts, sees markets softening
October 27, 2005

Dalsa is cutting 60 jobs, mostly at its Quebec-based semiconductor fab, and has again reduced its sales forecasts after seeing orders and deliveries fall below expectations in both of its business segments.

The company had already lowered its forecast by $35 million at the end of the previous quarter, and it's now looking at the possibility of showing no revenue growth in the year, despite acquiring Coreco about mid-way through fiscal 2005.

In the quarter ended September 30 (Q3 05), Dalsa earned $3.0 million ($0.16/share) on sales of $43.9 million. Revenue was well below the company's reduced forecast of $46.5-50 million. Sales were flat from the previous quarter and last year, but there was no Coreco revenue in last year's numbers. Coreco had averaged about $7.5 million a quarter in sales in the year before it was acquired by Dalsa. Earnings were up from $2.0 million in the previous quarter but down from $5.4 million a year ago.

Dalsa's digital cinema business, which the company had originally hoped would break even in the year, has reported a loss of $2.8 million over the first nine months of 2005. Modifications were made to the digital movie camera over the quarter to correct a technical problem, and Dalsa expects to have some cameras ready for rental early next year.

There was good news on the cash flow statement, as operations provided $11.6 million in cash, enabling Dalsa to improve its net cash position over the quarter by $7.7 million. It spent $3.4 million on capital assets, much of which went to buy digital cinema rental inventory.

Dalsa expects severance costs of about $700,000 in Q4 and says the job cuts will save $3 million a year. Following the layoffs, there will be 360 employees in Quebec, down from a high of 440 at the beginning of the year.

Revenue forecast for Q4 has been cut to $43.5-47.5 million, down sharply from the $53-58 million predicted three months ago.

Symbility hires Jim Crocker as president
October 21, 2005

Jim Crocker is the new president of Symbility Solutions, succeeding founder Eric Embacher, who becomes Chief Software Architect. James Swayze remains CEO of both Symbility and its parent company, Automated Benefits.

Crocker was previously president of LogiSense for nearly two years before leaving the company earlier this year. Before that, he was CEO of Virtek for five-and-a-half years.

Symbility has also hired Rod Theoret as product marketing VP. He used to work at Descartes. And it announced a new marketing manager and a new account executive.

ARISE raises additional $254K through debenture sale
October 20, 2005

ARISE has raised $254,300 through the sale of 6% convertible debentures. This is on top of the $111,000 the company raised through debentures in August (see August digest).

The debentures are convertible into units at 25 cents a unit, with each unit providing one common share and a warrant to purchase an additional share for a price between $0.25-1.00 depending on what milestones the company achieves over the next two years.

It has also converted another $195,468 in debt and payables into shares.

ARISE also announced a letter of intent from B.C.-based Day4Energy to purchase 5MW of ARISE photovoltaic cells ... when and if they become available. There is no product yet -- the technology is still under development at U of T and isn't expected to be ready to ship until 2007. Day4 is led by John MacDonald, who was a director and shareholder of the capital pool company that ARISE merged with in 2003. He's better known as co-founder of MacDonald Dettwiler. Day4 is still in its early stages and has received seed funding from the British Columbia Discovery Fund.

The myth of UW's "22%" spin-off record
October 2005

"[UW] is widely credited for the rapid growth of the local tech sector, accounting for 22 percent of all Canadian university spin-off businesses over the past 10 years."
Making Magic in Waterloo Region, October 2005

"A 1999 study showed Waterloo -- just one university out of 84 surveyed in Canada -- had produced 22 per cent of all the spinoff companies from university research."
Maclean's, October 18, 2005

"Waterloo and neighboring Kitchener and Cambridge, a region once dependent on the rubber, meat and button industries, are today credited with spinning off 22 percent of Canada's technology inventions."
Associated Press story, October 2005

"Notably, the University of Waterloo, which has been documented as the source of over 20 per cent of all successful technology-based spin-offs from Canadian universities."
Business Times, November 2005 edition

Those are just four recent examples of what has become Waterloo's most popular sound bite statistic. The 22% figure has been tossed around for a few years, but its popularity seems to have taken off in 2005. I've heard it said at events, read it repeatedly in print, and a Google search finds dozens of pages that repeat the claim.

I think we can make a great case for this area and its entrepreneurial achievements. A case backed up by facts -- real ones. Unfortunately, the 22% statistic isn't one of them.

The 22% figure isn't true, never has been true, and is unlikely ever to become true.

The origin of the 22% claim goes back four years to a report commissioned by the university and prepared by PricewaterhouseCoopers. The Regional Economic Benefits Study runs about 75 pages from cover to cover, and includes a wealth of meticulously researched data about UW and the impact it's had on the local economy in a variety of ways, with spin-off creation being only one component.

Mid-way through page 11, presented without much fanfare (although the claim is repeated in the executive summary), we find this single sentence -- which has now taken on a life of its own: "When compared with Statistics Canada's data, UW outperforms other universities by generating over 22% of all technology transfer based spin-offs."

To calculate the percentage of Canadian university spinoffs from UW, you would need to divide the number of UW spin-offs (the numerator) by the total number of university spin-offs across Canada (the denominator).

The 22% figure was computed using a numerator and a denominator from two different sources -- always a red flag when it involves terms with a wide range of definitions. And when it comes to defining what constitutes a university "spin-off," there's an array of possibilities. Fortunately, in this case, both sources were clear about what definitions they used.

SOURCE 1: The numerator came from a booklet published by UW's Technology Transfer and Licensing Office at the beginning of 1994. The TTLO tried to keep track of companies that had some affiliation with the university, ranging from a technology transfer to a company started by a former student or staff member.

The 1994 report identified 106 companies, 20 of which were said to involve technology transfer. The 20 included well-known spin-offs like Open Text, Dalsa, Virtek, Watcom (now absorbed into Sybase/iAnywhere), and Biorem. The remaining 86 did not involve tech transfer but had some kind of affiliation with the university. Many had UW grads as founders. Those 86 range from RIM (included because it "employ[s] University of Waterloo graduates primarily") to The Goodie Basket -- a gift basket store started by a UW grad.

SOURCE 2: The denominator for the 22% statistic came from a 2000 Statistics Canada report by Cathy Read (who continues to publish research on this subject -- an update was just released last week) called "Survey of Intellectual Property Commercialization in the Higher Education Sector, 1999."

In that report, a university spin-off was defined as a company established to 1) license technology from a university, or 2) fund research at the university, or 3) provide a service previously supplied through the university. It did not include companies just because they were started by grads or staff or faculty, or because they hired a lot of university students -- only companies that met one of the three criteria were included in the report.

From the 33 universities that responded to the question about spin-offs, the Statistics Canada report found 454 spin-offs. Nearly half were in biotech/agritech and health sciences and just under a third of the total came from Ontario.

So, if you wanted to combine statistics from those two sources using comparable -- but not identical -- definitions of spin-off, you might take the 20 companies said to be formed through tech transfer from UW, and divide that by the 454 spin-off companies reported nationwide, with some kind of fudge to make up for the five-year gap between the two reports and other factors.

That would suggest that UW accounted for about 4.4% of university spin-offs as of 1999, although you'd have to put a lot of caveats around that number. (We could solve part of this puzzle by asking what percentage of the 454 companies came from UW, but Statistics Canada won't release that information.)

But, in the economic benefits report, the nearly all of the 106 companies (at least 101 of them) were used in the numerator -- including the companies that the TTLO said did not come from technology transfer and which clearly didn't meet the narrower Statistics Canada definition of spin-off used to generate the denominator.

Now, 106/454 is actually 23%, so maybe someone decided that the Goodie Basket and a few others were beyond anyone's definition of a technology spinoff, but we know the UW report used at least 101 as the numerator. 101/454=22%, and that's the figure that gets bandied about to this day.

In the end, with the data available, I don't think we can come up with a percentage for the spin-offs that came from UW. But it will be a lot less than 22% and there's no reasonable basis for that number whatsoever.

A license-centred metric would almost certainly shortchange UW because of its inventor-owned IP policy. For a broader view, ideally, we would get reports from all universities on the total number of companies created by their graduates, staff, and faculty -- past and present. But those kinds of statistics just haven't been available.

But really -- other than for sound bite purposes (or for accurate research) -- it makes little difference whether the figure is 22% or 0.22%. The number doesn't change the tremendous impact that UW has had on this community. If it wasn't for UW there would be no high-tech cluster here. It's been the catalyst for just about everything that gets reported here -- there would no Waterloo Tech Digest without UW's influence. We don't need -- and shouldn't rely on -- bogus statistics like this to make our point. Every time we use that number, we damage the credibility of our case.

With any luck, we can now hang sweater #22 from the rafters, retire the number, and never speak of it again as a serious statistic.

If you're looking for a better -- if less ambitious -- statistic, NSERC just released a directory (with the inaccurate title "Research Means Business") showing that 9.9% of the 141 Canadian companies which formed around NSERC-funded university research came out of UW. That ties UW for second place with U of T, behind only UBC.

The 14 companies from UW in the directory are Biomedical Photometrics, Biorem, Certicom, Dalsa, EnviroMetal, iAnywhere (evolved from Watcom and is headed by Terry Stepien in Waterloo), Ignis Innovation, Maplesoft, Open Text, Powerlasers, Stantec, Sybase Canada (okay, that's a really a cheat to count it separately from iAnywhere), Turbosonic, and Virtek. If we eliminate the Sybase/iAnywhere double-dip, that gives UW 9.3%. I'll take that 9% over a phoney 22% any day.

STOCK REPORT: Investors lose patience with RDM, Com Dev, Virtek
October 2005

It's not a surprise to see that Dalsa stock had a poor month after the company announced disappointing quarterly results and a round of layoffs. What is surprising is that shares of RDM, Com Dev, and Virtek did almost as badly -- or even worse, in the case of RDM.

None of those three companies made any significant announcements during the month, and apparently that was part of the problem, as investors didn't take no news to be good news.

RDM shares suffered their worst monthly performance in over two years. You actually have to go back exactly five years to find the last time RDM shares finished a month below their October-ending price of 72 cents. It was just a brutal month for RDM shares, and for no obvious reason other than the company is taking far longer to grow its revenue than investors had hoped.

Com Dev shares fell to their lowest point in over two years, dipping under $2 a share for the first time since September 2003. Right after the plunge -- which coincided with Com Dev's year-end -- the company announced on November 1 two new contracts worth a combined $11.1 million plus another $6.4 million dollar order that had been announced in an earlier stage three months ago. That helped a little, but as of Friday's close Com Dev shares are still down 9% from where they were at the end of September.

Virtek stock, after some big gains in June and July, has now lost 21% of its value in the last three months. It's still up 12% in 2005, but after having risen as high as $1.00 in September, the stock fell to 75 cents by the end of October.

For the month of October:

ClearFrame [TSXV: CFA] +53%
ARISE [TSXV: APV] +17%
Biorem [TSXV: BRM] +15%
MKS [TSX: MKX] +5%
Navtech [OTCBB: NAVH] +1%
Turbosonic [OTCBB: TSTA] 0%
===============================
Open Text [TSX: OTC] -2%
--S&P TSX COMPOSITE INDEX -6%
--S&P TSX VENTURE INDEX -8%
RIM [TSX: RIM] -8%
Descartes [TSX: DSG] -9%
Virtek [TSX: VRK] -12%
Com Dev [TSX: CDV] -13%
Dalsa [TSX: DSA] -15%
RDM [TSX: RC] -26%

On October 18, with its shares trading at 85 cents -- and less than two weeks after they had sold for under 60 cents -- ClearFrame announced a $2.25 million private placement at $1.00 a unit. Each unit consisted of a common share and a warrant to purchase an additional share for $1.25 over the next two years. The announcement didn't actually say there was a buyer for the placement, so we'll have to wait for more details to see if this is money in the bank for the company. The number of outstanding shares listed on the TSX website didn't change during the month.

RIM shares fell to their lowest point since May 2004. As of Friday's close, the company's market value was $14.3 billion.

And speaking of market capitalization -- Navtech slipped by RDM during the month and is currently valued at $17.7 million, compared to RDM's $16.4 million value.

Companies with core operations outside the area:

Blue Coat [Nasdaq: BCSI] +8%
Adobe [Nasdaq: ADBE] +8%
Senesco [Amex: SNT] +2%
SBS Technologies [Nasdaq: SBSE] +1%
Siebel [Nasdaq: SEBL] +0%
==================================
Ansys [Nasdaq: ANSS] -3%
McAfee [NYSE: MFE] -4%
Sybase [NYSE: SY] -5%
AMIS [Nasdaq: AMIS] -6%
Agfa-Gevaert [Brussels: AGFA] -10%
LSI Logic [NYSE: LSI] -18%
Automated Benefits [TSXV: AUT] -20%

Miscellaneous Tidbits

• Communitech's 28-page report Making Magic In Waterloo Region: A Report On The Exceptional Investment And Entrepreneurial Potential Of Canada's Hottest High-Tech Location produced with PricewaterhouseCoopers, is available on the Web. I hope to have room in the next digest to say more, but there's lots of good historical and current information about the area's high-tech community and its achievements.

• If you're looking for more reading material, there's also the 8th annual Technology Spotlight from The Record and the resource guide from the Chapter 3 event. There were so many events, publications, and news stories during Entrepreneur Week that it ended up being pretty overwhelming.

• Rumours persist that Google is coming to Waterloo. That's been the scuttlebutt around town for at least a couple of months. Google has certainly been recruiting in Waterloo -- it ran an info session at UW on October 4 -- but so far the stories that it's opening an office here haven't gone beyond gossip level. (Google and Microsoft were actually scheduled to run UW sessions on the same day, but Microsoft's was postponed until November. Lots of companies run info sessions to recruit UW students. Amazon.com, for example, was also in town in October.)

• UW ran a three-quarter-page ad in the front section of Saturday's Globe & Mail featuring a big picture of Bill Gates in front of the UW coat of arms. The ad includes a comment Gates made to CTV News during his visit here in October: "Waterloo is a special relationship for us. Most years, we hire more students out of Waterloo than any university in the world."

• Atria Networks has converted all of downtown Waterloo into a Wi-Fi hotspot, called the Uptown Waterloo Wi-Fi Zone. Businesses through the area can subscribe to the service, and can provide access to their customers if they choose to. Fees start at $4.95 for an hour, and there are daily, weekly, and monthly rates. Wi-Fi service at the Waterloo Public Library remains free for users. Pay-per-use access is also available at the Rec Complex and RIM Park.

• In September, Ladybug Teknologies announced that it received funding from PNK Holdings, which is part of F.J. Stork Holdings. Mike Stork has joined Ladybug's board. Ladybug CEO Sherry Colbourne and COO Chris Montag both previously worked at Dspfactory, which was backed by the Stork family. The amount of the investment was not disclosed.

• Christie Digital has added Twentieth Century Fox and Universal to the list of movie distributors who will supply movies to the network of digital projection systems being installed by Christie/AIX. Last month, Christie announced a similar deal with Disney. Christie/AIX is a subsidiary of New Jersey-based Access Integrated Technologies, which will purchase equipment from Christie Digital.

• Waterloo's CheckFree site closed its doors early in the month (see July digest). I'm told that all but six employees were given severance packages, and those remaining six are working out of home offices. Some older equipment was auctioned to staff, with proceeds going toward an office closing party.

• In the last digest, I mentioned the Ontario government's plan to abolish the tax credit for LSIFs this year. After howls of protest -- some from Waterloo, but mostly from Ottawa -- the government decided to phase out the tax credit over the next few years rather than eliminate it all at once. There have been no changes to the federal component of the LSIF credit. Representatives from the Ontario Ministry of Research and Innovation -- which is headed by Dalton McGuinty -- came to Waterloo in October to get local feedback on what the government might do to improve access to early-stage funding and accelerate technology commercialization within the province.

• SlipStream is planning to release an image accelerator called NOW!Imaging that it says works with its existing accelerator to double its download speeds and deliver content at up to 14 times faster than regular dialup.

• Maplesoft says it activated over 795,000 users for its Maple 10 software in the back-to-school season of late August and early September. Maple 10 was released in May, and a PC Magazine reviewer in September said he was "blown away" by the improvements to the product.

• Covarity's loan monitoring software will be used by Vancouver City Savings Credit Union (Vancity), Canada's largest credit union.

• AMI Semiconductor -- the former Dspfactory -- has moved into the digital stethoscope market with the release of a reference design. It's a market that Dspfactory had been looking at for at least a couple of years.

• Meikle Automation announced that it received over $13 million in orders in the last week of September.

• IGLOO, the international governance research portal created by CIGI through a partnership with Open Text and financial contributions from the Ontario government, has launched.

• Desire2Learn's two largest competitors are merging, and the company is trying to take advantage of the disruption this might cause in the learning management systems market. Blackboard is acquiring WebCT in a deal valued at US$180 million. The merged company will become the dominant force in the LMS area, with market share estimates running between 65 and 80 percent. Desire2Learn is now calling itself the second-largest e-learning technology company, as measured by number of clients. According to a story in The Record, Desire2Learn hopes to double in size from 90 to 180 employees over the next 18 months.

• A new BlackBerry, the 8700, has been unveiled by RIM. In appearance, it mixes the best features of the traditional BlackBerry -- with its full keyboard -- and the thinner 7100. Inside, it uses a faster processor and EDGE technology. It's not available in Canada yet, although they are being used in Waterloo by some RIM employees.